The City's watchdog met executives of Northern Rock only eight times in the
two years before the Newcastle-based bank imploded — with two of the
meetings done by phone and another five completed in a single day.
That was one of a catalogue of errors revealed by the Financial Services
Authority (FSA) yesterday as it published a
review of its dealings with the troubled bank.
Hector Sants, the FSA's chief executive, admitted that the regulator's
supervision of Northern Rock was unacceptable, but did not apologise for the
FSA's part in Britain's first bank run in more than a century.
Mr Sants and Sir Callum McCarthy, the FSA chairman, will appear before the
Treasury Select Committee on May 6. Yesterday John McFall, the Labour MP for
West Dunbartonshire, who chairs the committee, called into question the
abilities of the FSA's management. “This isn't just a failure of the
supervisors of Northern Rock, it's a failure of the management of the FSA,”
Mr McFall said.
Bankers and legal experts expressed amazement at the FSA's blunders. Simon
Morris, a partner who specialises in financial regulation at CMS Cameron
McKenna, the law firm, said: “The FSA's supervision of Northern Rock was
rubbish. If a major firm regulated by FSA were to operate with such poor
management oversight and such weak systems and controls, then FSA would have
shut it down by now.”
Sources compared the FSA's performance with that of Citigroup, which was fined
£1.3million by the regulator in 2005, in part because its managers had
failed to prevent traders from using a risky trading strategy. Mr Sants,
then managing director of the FSA's wholesale business, said at the time
that he expected Citigroup's top executives to have better systems and
controls over their underlings.
Yesterday Mr Sants admitted that the supervisors responsible for monitoring
Northern Rock had been below standard in their “engagement and oversight” of
the bank, that the regulator's heads of department had not actively sought
information from the supervisors and that the relevant FSA directors had
failed to monitor their department heads and supervisors.
The only senior head to roll over the debacle so far is that of Clive Briault,
the FSA's retail head, who left the watchdog by “mutual consent” last week.
David Cameron, the leader of the Opposition, used the regulator's embarrassing
report to call for the FSA to be stripped of responsiblity for monitoring
Britain's banks. The Bank of England should take over the job, he said.
However, the Prime Minister insisted that Britain was still better protected
against financial instability than other countries. Gordon Brown said: “If
you now look around the world and see what happened to Bear Stearns, see
that three banks have fallen in Germany, what happened to Société Générale
in France, then you will see we have been better protected than other
countries against the global financial turbulence.”
The internal audit of the FSA's dealings with Northern Rock looked at the
period from January 1, 2005, to August 9, 2007 — finishing shortly before
the bank begged the Bank of England for an emergency loan. The Rock has
since been nationalised and its £100billion in liabilities taken on to the
Government's books.
The raft of failures uncovered by the regulator's internal auditors were:
— For 12 months Northern Rock was monitored by supervisors with expertise in
insurance, not banking;
— Over the 2 years, three department heads had responsibility for Northern
Rock. The FSA's review found that only one other bank had experienced such a
high turnover in the same period;
— Formal records of supervisors' meetings with the FSA's risk assessment panel
to discuss Northern Rock were not kept, nor did supervisors give the panel
any “developed financial analysis” on the bank;
— The panel agreed to allow the supervisors to lengthen the period between the
bank's assessments from 24 months to 36 months;
— Northern Rock's supervisors did not understand what close and continuous (C&C)
supervision entailed and kept only one partial record from eight C&C
meetings with the bank;
— The supervisors failed to enter any details into the FSA's database on the
risks presented by the bank, or how those risks were worsening;
— The supervisors and the panel did not issue the bank with a risk-mitigation
programme (RMP) that would have forced it to address its risks. Northern
Rock was the only bank monitored by the FSA without an RMP.
In its defence, the FSA said that the bank had been an “outlier” with an
unusual business model. It admitted that the review had found similar
defects in the FSA's supervision of a few other mid-sized banks but said,
effectively, that the monitoring of the bank was unusually bad. “Our overall
conclusion is that the supervision of Northern Rock was at the extreme end
of the spectrum,” the review said.
Banks can expect supervisors to be more challenging about the “vulnerabilities
of their strategic plans”, while more time will be spent by FSA department
heads of looking at their supervisors' decisions.
The review also said that so-called “high-impact” companies, such as Northern
Rock, will have continuing assessment according to the risks identified by
the FSA risk panel and will be questioned by the panel on liquidity.
High-impact companies must submit to an annual review of their business plan
and the FSA will give specific individuals the task of comparing firms to
their peers, a role previously not assigned.
Successes and low points in a decade of regulation
1997 Financial Services Authority created. Takes the roles of nine
self-regulating bodies and gains new legal enforcement powers. It now
exercises powers given to it by the Financial Services and Markets Act 2000.
Took on responsibility for mortgage businesses in 2004 and general insurance
in 2005
2001 Ronnie Baird, FSA director of internal audit, criticises FSA and
Treasury handling of Equitable Life crisis, concluding that they failed to
spot key problems
2002 FSA fines Legal & General £1.1 million for widespread
mis-selling of mortgage endowment policies between 1997 and 1999
2002 Consumer group Which? accuses the FSA of being “asleep on the job”
over endowment mis-selling
2004 FSA fines Shell £17 million for mis-stating reserves
2005 Financial Services and Markets Tribunal ruled L&G fine too
high — reduced to £575,000
2005 The Association of British Insurers (ABI) calls on FSA to improve
its investigations after L&G has mis-selling fine cut.
2005 FSA fines Citigroup £13.9 million for involvement in controversial
Eurobond trade
2005 Tony Blair criticises FSA for harming businesses. Callum McCarthy,
chairman, asks Blair to explain or retract comments
2006 Which? criticises the FSA for failing to protect consumers 2006
FSA fines London investment banking arm of Deutsche Bank £6.3 million and
one its traders £350,000 for improper market conduct over Swedish lorrymaker
Scania
2006 Paul ‘The Plumber' Davidson wins appeal against FSA after it tried
to fine him for market abuse for a spread bet he made in 2002 on the shares
of Cyprotex, a company he was floating
2007 FSA closes five-year investigation into the split capital
investment trust scandal without charging or fining any companies or
individuals. However, in December 2004 it secured £194 million settlement
fund to compensate investors burnt by the scandal
2007 Alistair Darling, the Chancellor, criticises FSA over its
crisis-management of Northern Rock
2007 FSA fines Norwich Union £1.26 million after security failures
at its call centres allowed fraudsters access to policyholders' details and
put almost seven million customers at risk of financial fraud
January 2008 Treasury Select Committee criticises FSA over collapse of
Northern Rock
March The Times reveals that five of the seven FSA supervisors
responsible for flawed supervision of Northern Rock have quit
The investigation and its consquences for the FSA and its staff should follow the same procedures and rules the FSA applies when dealing with its supervised in the financial sector. It should be independent and lead to appropriate sanctions.
The investigation avoids the core question. The FSA not only needs to explain why it was not able to spot the forthcoming trouble and insist on and enforce corrective action in time. Above all, it has to tell us under what circumstances they would have been able to do so and what caused the discrepancy. If there is no satisfactory anwswer to this question than the whole concept of prudential supervision has proven useless.
Hans-Peter Bauer, Basel, Switzerland
put your trust in the fsa.now with hbos.the fsa has threatened to investigate the source of the rumoursthat spooked the market!oooer.how brave!fsa has said it would take "weeks"to ccomplete an investigation,even though there are 20 analysts from its marketing monitoring division looking for "unusual"trades.wise men at fsa say they are suspicious that the rumours were started by traders specialising in short selling to help force the price down!.lets blame the rock management seems a good idea,even though market "experts"still rated the stock a buy right up to the death.hopefully hbos might complete a sensible search of what went on and then send it to the fsa to file away.everbody is still sat in their comfy jobs,with no price for failure.am i cynical,you bet i am.
JD.SHEPPARD, TEESSIDE, U.K.
To anyone familiar with the equitable life fiasco this is hardly a revelation. Shut it down and apportion the running costs back to the pension holders whose money was squandered.
matthew, guildford,
The UK is headed for bankruptcy, with Mr Brown selling off gold for bargain prices, there are little or no foundations left and guess who gets to pick up the tab? while these politicians swan around later on living off fat pensions.
They all do as they please as regardless of the outcome it will never really impact on their own financial position. I predict Meltdown!!
C. Kroustis, London, UK
I like to know who employed these clowns to work at SFA. They and the people entrusted to perform their tasks with competence should resign immediately.
Question is, are they man enough to put their hands up that they were not up to their jobs and resign or are they staying to protect their pensions at the cost to the taxpayers?
V Tan, London,
Any news on the dual BoE / FSA role of Sir John Gieve, (formerly Permanent Secretary at the Home Office)?
MarkS, Leeds,
The FSA has become a "jobs for the boys" outfit and a bloated bureacracy too interested in chasing down the easy targets and little people. I recall doing my FSA exams way way back and the lecturere commented that the whole thing was to make little old ladies in Aberdeen think some-one responsible was looking after their money. No amount of regulation will ever stop deliberate fraud or incompetence so I am inclined to agree with the foregoing sentiment.
Sid, London, UK
Let's get back to basics here, since when does an industry (I use the term Industry loosely) justify having to be regulated and told which and what model and/or system to use. In any other industry, failure to implement the correct method is called incompetence and these companies eventually go to the wall because of it. No other industry has to be monitored for efficiency so why should banks and building societies be any different. The only element they should be scrutinised for is any fraud and corruption that breaks the law. The sooner bank return to being banks and building societies return to the function they were solely intended for, the better. However, there is no doubt in my mind this will never happen as the continual headlong pursuit for bigger profits will never allow it and it will be, as usual, Joe public who carries the can.
Thomas, Alicante, Spain,
Who regulates the FSA?
Fred, Bristol, UK
For any Equitable Life policy holder the recent failure of the FSA to spot a problem comes as no surprise. Just the failures get bigger...and now someone noticed.
Alan, Luton, UK
So who regulates the regulator? Very little confidence for the public who expec the regulator to watch out and provide consumer protection- where was FSA when the Equitable Life debacle appeared?- Mis -selling endowments? Barings Bank? Northern Rock? All lacks a bit of confidence and gives investors no comfort what so ever- perhaps it is time for the FSA to have a close look at itself.
Dougie Sussex, Sussex, UK
Sad to say you can't legislate or regulate against greed and selfishness.
DickW, Aberdeen, Scotland
The Treasury have not given the FSA enough money to do its job properly. This is implicit in the FSA's remediation plan to hire more staff to do improve its' future performance.
It was also let down by what many now feel was an unreasonable refusal by the Bank of England to support the inter bank money markets at the crucial moment.
To be fair if everyone else expected the BoE to intervene, it was reasonable for the FSA assume that it would.
Bob, London, UK
For years the FSA has been turning a blind eye to how banks rip off consumers with default charges, or struggling to pay off there debts.
The FSA model of meeting the management and befriending them is the core of the problem. The supervisers get captured, and start signing the banks tune.
How Lloyds TSB can increase defalt charges to over £200 for being over drawn by 1 month shows how broken the FSA is.
Jon, Richmond, England
Useless and an accurate reflection of this governments' incompetence and Browns tripartate regulatory system.
David Nammory, Liverpool,
It's high time the FSA jobs for the boys scheme was shut down what a farce, it brings to mind Bearings.
Dave Madley, Alicante, Spain
It seems the FSA may have allowed Northern Rocks directors to escape any responsibility for what happened. Surely this cannot be right, the management of any organisation should be held accountable irrespective of any management shortcomings. I hope we are not now going to see further examples of financial institutions blaming inadequate regulatory oversight for financial wrongdoings.
Mike, Suffolk, UK
Sants and McCarthy should fall on their swords.
SO, England,
As a Mortgage Broker I get the FSA's 'Treating Customers Fairly' (TCF) regime rammed down my throat every single day. That includes accurate record keeping, failure to do so will result in a fine when they do come out and check on my company's progress towards TCF sometime this year.
TCF Outcome 1 states 'Consumers can be confident that they are dealing with firms where the fair treatment of their customers is central to the coroprate culture'.
Seems like one rule for the banks, another for the little guys.
TCF Outcome 5 states 'Consumers are provided with products that perform as firms have led them to expect, and the associated level of service is both of an acceptable standard and also as they have been let to expect.'
Obviously Northern Rock did not receive the level of service required by the regulator.
The FSA's budget this year is going up by 6.9% as are my fees, yet how am I supposed to have confidence in my regulator when they don't follow their own rules?
Graham, Bradford, West Yorks
True, the watchdog failed to bark, but how many journalists or other commentators spotted the problem?
Frank Upton, Solihull,
"If a major firm regulated by FSA were to operate with such poor management oversight and such weak systems and controls, then FSA would have shut it down by now.†No, it wouldn't have. That's just the point.
Diane, New York,
No doubt The Crock was a "politically-protected bank" and close to the ruling clique. An Audit might show up some very inflated asset valuations and assorted malfeasance so best to park the bank in a dark corner of the FSA.
Why is it that competent people never get to the top in Britain, but politically-connected deadbeats seem to commandeer every directing role ?
Must be the inertia and sheer docility of the British as they watch their economic base vanish into future poverty
CCTV, Bristol, England
A bit RICH coming from MP's at present especially when they can't even sort out their own finances !!!!
Ian Payne, WALSALL,