FSA ‘failed in its duty to public’ over crisis at RBS

The City watchdog was guilty of a “serious misjudgment” by failing to step in to block the takeover deal that sparked the near-collapse of Royal Bank of Scotland, according to the Treasury select committee.

A powerful committee of MPs has condemned the Financial Services Authority (FSA) for the part it played in the failure of RBS, which saw the taxpayer stump up £45.5 billion to prevent it going under.

In a damning report, the Treasury select committee said the FSA’s biggest fault was not intervening to stop the “calamitous” takeover of Dutch rival ABM Amro. It is urging the government to legislate to ensure the regulator is explicitly required to approve big bank acquisitions to prevent a repeat of the fateful deal.

In a report published today, the committee said the watchdog’s failures “amount to a serious indictment” of its management.

It said the FSA “should have intervened at an early stage” in RBS’s near-£50bn acquisition of ABN in 2007, just before the banking crisis struck. “It should and could have intervened at a late stage, albeit with more difficulty,” the report said. “We need a regulator with the self-confidence to intervene, even if it might cause some destabilisation in the short term.”

Andrew Tyrie, the Conservative chairman of the committee, said it was “crucial” the Prudential Regulation Authority (PRA), the coming successor to the FSA, recognised “an important lesson from this report – there is no substitute for the exercise of judgment”.

RBS raised £12bn in the summer of 2008 from shareholders, only a couple of months after Fred Goodwin – then RBS chief executive and architect of the ABN deal – said the bank did not need to raise capital. Soon after, the bank announced losses of £24bn for the 2008 financial year. This was followed by the taxpayer bailout and a complete clearout of the board.

Current FSA chairman Lord Turner – who took up his post in September 2008, the month Lehman Brothers collapsed, sending shockwaves around the financial world – also came under fire from MPs.

The committee hit out at the FSA for needing to be strong-armed into producing a report on RBS, which was published last December, and at Lord Turner’s decision in December 2010 that the FSA should issue a bare, 298-word, one-page statement on the bank’s collapse.

“This reflects serious flaws in the culture and governance of the regulator,” the report said. “It also reflects a fundamental misunderstanding of its duty to account for its actions to the public and parliament.”

It added that Lord Turner – one of the frontrunners to succeed Sir Mervyn King as governor of the Bank of England next year – “should have grasped the need for a public explanation of how that situation had arisen, something which he has subsequently acknowledged”.

It went on: “We would not expect the new chairman of the [new] regulators to repeat the error.”

Mr Tyrie said: “Without persistent pressure from the Treasury committee, the FSA’s report [in December 2011] would never have been published.”

Meanwhile, in a shot across the bows of the Bank of England, the MPs said its “belated” announcement of reviews examining its own performance during the wider financial crisis in 2007-8 “falls well short of what is required”.

The report said: “The Bank of England has been much more reluctant to undertake a similar ‘lessons learned’ review, despite multiple requests from the Treasury committee for them to do so.”

The MPs noted in their review of the FSA’s internal inquiry that the watchdog described “failures and inadequacies” in its regulation and supervision of RBS and a regulatory “failure appropriately to analyse the risks relating to the ABN Amro acquisition”.

They branded this a “serious indictment” of both the senior management and leadership at the FSA, particularly the then chairman and chief executive.

Callum McCarthy was chairman at the time of the ABN acquisition, which RBS undertook with Belgian-Dutch bank Fortis and Santander of Spain. Hector Sants became FSA chief executive in July 2007, as the ABN takeover neared completion, succeeding John Tiner.

The MPs registered “considerable surprise” that nobody at the Edinburgh-based bank – apart from its now-banned investment banking head Johnny Cameron – “has been held meaningfully accountable for the failure of RBS”.

The report is likely to be seized on by shareholder action groups considering legal action against the bank and its directors over allegedly misleading information and omissions in RBS’s rights issue prospectus in 2008. The closest to launching a writ is thought to be the RBOS Shareholders Action Group, which is backed by 8,000 individual shareholders and more than 90 institutional investors.

In its report, the committee said: “It is deeply regrettable that the current rules bias [regulatory] enforcement towards technical breaches to the detriment of attention to the most important regulatory failures.

“We request that the regulators report [to us] on what amendments to the statutory rules and to the general law they believe are desirable in order to improve the effectiveness of the enforcement regime.”

The MPs said they accepted the FSA was partly constrained in intervening at the time of RBS’s move on ABN by political pressures for “light-touch” financial regulation to keep the City of London’s competitive edge.

They also accepted the FSA was just one of a welter of global watchdogs that believed the regulatory system was adequate and had “ideological assumptions about the efficiency of markets”.

But they said “the regulatory scope for intervention, although difficult, already existed under existing legislation”. And they accepted the FSA’s operational and strategic changes since the crisis had made its supervision of financial institutions “more intensive and intrusive”.

An FSA spokesman said: “We welcome the committee’s conclusions that the FSA’s board report into the failure of RBS is comprehensive and a valuable contribution to understanding why RBS failed.

“The FSA has put in place a completely new model of supervision since the financial crisis, in addition to major changes to the capital and liquidity levels firms are required to hold.”

A Royal Bank of Scotland spokesman said: “RBS’s exit from the asset protection scheme this week is a reminder of the substantial progress made under a new management team.”

WHO’S WHO AT THE FSA

Lord Adair Turner

Lord Turner, 57, was appointed FSA chairman in September 2008 after a business career that included serving as a director at Standard Chartered Bank, vice-chairman of Merrill Lynch Europe and director-general of business lobbying group the CBI.

He is a visiting professor at the London School of Economics and at Cass Business School, at London’s City University.

Sir Callum McCarthy

Sir Callum McCarthy, 68, was chairman of the FSA from 2003 to September 2008, when Lehman Brothers collapsed.

He joined the watchdog after serving as chief executive of energy regulator Ofgem.

He currently serves as the non-executive chairman of Castle Trust, a mortgage and investment business backed by private equity giant JC Flowers.

Hector Sants

Investment banker Hector Sants, 56, joined the FSA as chief executive in July 2007, just before the Northern Rock crisis broke. He was recruited

by the organisation three years earlier from Credit Suisse First Boston, where he had been chief executive for Europe, the Middle East and

Africa. He left the FSA in June this year and a condition of his

contract means he his not able to take up any other

position until the beginning of next year.

John Tiner

Former Arthur Andersen partner John Tiner, 55, was chief executive of the FSA from September 2003 to July 2007. He joined the watchdog in 2001 as managing director of its consumer, investment and insurance arm.

After leaving the FSA, he was appointed a non-executive director at fund manager New Star and later became chief executive of the operations arm of insurance group Resolution. He is currently on the board of Swiss financial group Credit Suisse.