While the regulator’s report concludes RBS’ failure ultimately resulted from "poor decisions made by the bank’s management and board", the FSA’s Enforcement Division decided there was not enough evidence to bring action against anyone with a reasonable chance of success.
In his foreword to the report, FSA chairman Lord Turner, said: "While many people will find this conclusion difficult to accept, I am confident the FSA’s Enforcement Division decisions were based on intensive investigation of the evidence, and driven by a strong determination to bring enforcement actions if evidence could be identified which justified it."
The Enforcement Division was started four years ago and, according to Turner, has transformed the FSA’s approach to enforcement, "pursuing cases far more aggressively" than before.
He said the number of major cases brought has significantly increased and the level of fines has more than trebled in the past three years.
Yet he thinks the FSA’s powers need to be extended further, namely so they can veto major acquisitions in the banking sector and use a combination of "strict liability" and remuneration penalties to make banking executives and boards take risk more seriously.
Double standards?
His argument goes that banks should be treated differently to non-banks because their actions do not just affect shareholder returns, but can also result in bank failure, taxpayer losses and wider economic harm.
Put simply: "Their failure is of public concern, not just a concern for shareholders."
Is Turner right to say banks and non-banks should be treated differently by regulators? How will this impact investments in British banks and isn’t there an argument for similar stringent rules surrounding insurers as they were also involved in the Global Financial Crisis?
Investors who are shareholders in UK banks and have been for years, are already sitting on substantial losses in most cases. If the banks are not allowed to pursue growth so aggressively in the future, perhaps these investors will never make their money back.
The FSA does accept partial blame for the meltdown that hit the banking sector in 2008, concluding that flaws in its supervisory approach provided an insufficient challenge in RBS’ case.
A failure of the regulatory system on a grander scale meant RBS’ takeover of ABN AMRO was allowed to go ahead, something the FSA said internationally agreed Basel III standards would prevent today.
Lord Turner admitted: "The FSA operated a flawed supervisory approach which failed adequately to challenge the judgement and risk assessments of the management of RBS.
"This approach reflected widely held, but mistaken assumptions about the stability of financial systems and existed against a backdrop of political pressures for a ‘light touch’ regulatory regime."
Lessons learned?
Is the FSA markedly different today than it was then? Turner argues yes. But no matter which incarnation the regulator might take, there has to be genuine political and corporate will to enact a lasting change.
A restructuring of the FSA is due to take place next year, which will see the organisation split into two regulators: a Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).
A separate Financial Policy Committee (FPC) has also been established to watch out for and respond to emerging systemic risks, with the aim of avoiding another CDS-type crisis.
Turner concludes: "The creation of the PRA, focused exclusively on prudential issues rather than spanning both prudential and conduct concerns, and of the FPC, will ensure that focus on prudential and systemic risks is maintained even when most of the world assumes, as it did before the crisis, that prudential risks are low."
Call me a cynic, but this could well be a case of ‘too many cooks spoil the broth’. What’s more, at such a vital point in the UK’s financial recovery, the wisdom of undergoing a mass restructuring of the regulator is surely questionable.
Knowing the scope for miscommunication in the civil service and the likelihood that there will be teething problems after the initial shift to the new system, doesn’t it follow that oversight of crucial regulatory issues could be even more likely?
In which case, the last thing the new regulatory bodies will need is greater load of responsibility!
