Commenting in the FSA’s report on the failure of Royal Bank of Scotland, Turner said the fact "no individual has been found legally responsible begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?”.
He said in a market economy, companies routinely take risks on behalf of their shareholders and if they make mistakes shareholders can take action and demand changes to the management and board.
In the case of banks, however, wider economic harm can be done in the event of failure, which means the public suffers as well as the bank’s shareholders.
"We should therefore debate policy options to ensure that bank executives and boards strike a different balance between risk and return than is acceptable in non-bank companies," Tuner added.
He suggested two approaches should be considered: Firstly, a legal sanction-based approach introducing ‘strict liability’ of executives and board members for the adverse consequences of poor decisions. This would make it more likely that a bank failure like RBS’ would be followed by successful enforcement actions, including fines and bans.
Secondly, an incentives-based approach, which would seek to ensure decision-makers in banks faced downside consequences if the bank failed, through banning them from future positions of responsibility and targeting their bonus packages. This would see that "a significant proportion of remuneration is deferred and forfeited in the event of failure".
RBS investigation
The FSA’s supervisory investigation into the Royal Bank of Scotland Group was launched in 2009 and looked specifically at three areas of RBS’ activities deemed most likely to warrant the potential for successful enforcement cases against senior individuals within the bank.
These were:
– issues relating to the expansion of RBS’s Global Banking and Markets Division and the conduct of its chairman;
– the decisions made by RBS during the acquisition of ABN AMRO in 2007; and
– the various investment circulars issued by RBS in connection with the acquisition of ABN AMRO, the Rights Issue of April 2008, and the open offer of November 2008.
Specialists from PricewaterhouseCoopers were brought in to assist with the investigation, which back in 2010 concluded there was not sufficient grounds to bring enforcement actions with ta reasonable chance of success against any individual at the bank.
At the time the FSA said decisions not to proceed with enforcement action were not normally published, but given the extent of public interest in the case it had decided to release some comment.
Following the announcement on 2 December concerns were raised that no charges had been brought and that evidence had not been published, so the regulator decided to publish as much detail as it could on the subject within legal constraints.
So while it could not release the underlying PwC reports, today’s summary was designed to fill any gaps the public felt needed to be addressed.
