FSA claims it 'worked hard' to rescue Dunfermline Building Society

Published on Tuesday 20 October 2009 13:32

A FINANCIAL watchdog today denied a charge by MPs that it failed to clearly warn a the Dunfermline Building Society of the risks it was taking.

The Financial Services Authority (FSA) accused a committee of MPs of producing no facts to back up the charge.

And the authority also denied it had failed to protect the interests of investors and savers in the now-defunct Dunfermline Building Society.

The FSA said: "No depositor lost money as a result of the collapse of the Dunfermline Building Society.

"Over the last six months before the society's demise, we worked hard with them to explore all avenues to protect the interests of investors and savers, including liaison with the Building Societies Association, other building societies including Nationwide, the Scottish Government and other retail deposit-taking institutions."

The FSA denial comes in its formal response, published today, to a Scottish Affairs Selection Committee report in July.

The MPs' report was fiercely critical of the FSA over its handling of the case of the Dunfermline, which was taken over by the Nationwide earlier this year when it emerged that the society had lost 24 million during 2008.

The committee, led by Labour MP Mohammad Sarwar, said the board of the Dunfermline bore the ultimate responsibility for the collapse, after moving into commercial real estate lending and buy-to-let mortgages.

But the MPs said that, in the years running up to the takeover, the FSA failed to provide the necessary level of supervision of the society and to issue "clear and specific" warning.

This view is challenged in the formal FSA response, which said: "We firmly reject the conclusion that we failed in our supervision of the society and failed to issue specific warnings about the dangers of commercial lending.

"The report claims we 'failed to provide the necessary level of supervision'.

"The report contains no facts to substantiate this assertion."

The authority said all modern banking regulatory systems allowed for the possibility that a bank or building society may fail.

And the actions that would be needed to completely exclude the possibility of failure would impose costs on the economy "far greater" than the occasional cost of bank rescue.

"This is why bank regulatory systems should include a special resolution regime, which in the case of the Dunfermline operated smoothly and effectively," it said.

The FSA said it gave "numerous specific warnings" to the building society sector over commercial lending and mortgage book acquisitions between March 2003 and May 2008.

This came in several forms, including speeches to the industry and letters to chief executives.

A supervisory visit to the Dunfermline in November 2005 also raised commercial lending as an issue with the management.

It said it had also voiced "concern" in July 2008 that the society's capital adequacy "stress test" – and in particular its provisions for bad debts – was not tough enough.

And the authority did not understand how it could have come as a "complete shock" – as claimed by former Dunfermline chief executive Graeme Dalziel – when the FSA told the Dunfermline board that it had to raise 20 million of capital.

The authority also defended not passing on to building society members the warnings that it gave to firms.

"We also cannot require firms to pass on these warnings to their members; it is for the firm to decide what level of information it should provide to them," it said.

"It is difficult to see how this could be done in a way that did not potentially cause a level of concern among members that the issue did not justify."

The Government's response to the MPs' report was also published today.

The Dunfermline collapse was the first time that the "special resolution regime" of the 2009 Banking Act had been used.

The MPs' report said the "tripartite authorities" – the Bank of England, FSA, and the Treasury – should review how the regime operated and the decision-making processes.

The response said: "The Government believes that the action taken by the authorities was effective and well co-ordinated, resulting in a successful resolution.

"However the Government will continue to keep all aspects of the operation of the Banking Act under review."