Dunfermline collapse: Savers in the dark while watchdog failed to act

Published on Thursday 30 July 2009 22:13

SAVERS in Dunfermline Building Society were kept in the dark over its risky position as the Financial Services Authority failed to give adequate supervision, MPs said yesterday.

The damning verdict was delivered by the Scottish Affairs Committee, which chastised the regulatory watchdog for not giving Dunfermline warnings about its high-risk commercial lending portfolio.

However, MPs said ultimately it was Dunfermline's board that had "dug the hole", that led to its collapse in March.

The investigation pored over the events that led up to the demise of yet another Scottish financial institution, becoming the first to be taken over using emergency laws for vulnerable banks and building societies.

To read further analysis of this story, go here

Over the last weekend in March, its core assets and 24 branches were given to Nationwide, which received 1.6 billion to take on about 2.35bn of deposits and absorb about 1bn of prime residential mortgages.

MPs questioned whether the authorities were justified in suddenly requiring the society to come up with an extra 60 million to stay in business.

The Financial Services Authority (FSA) met Dunfermline's chief executive, Graeme Dalziel, to raise concerns about its liquidity in May 2008.

But the requirement for additional capital foisted on the society was described as a "shock" by its former bosses, who had been previously told that 20m was needed.

Industry sources told The Scotsman that in the run-up to it being wound down, regulatory authorities had appeared to be raising the bar ever higher, in "panic" for fear of it turning into another Northern Rock.

At the time, Dunfermline had "100m of accumulated profit", the source said.

In their report, MPs also questioned whether the society could have remained independent had it not been kept at "arm's length" from discussions over its fate, particularly over how much capital was needed to ensure its survival.

"In the years running up to the transfer, the Financial Services Authority failed to provide the necessary level of supervision over Dunfermline Building Society and to issue clear and specific warnings. As a consequence, savers and investors were left unaware of the true position of the Dunfermline Building Society and of its possible implications," the committee concluded.

MPs were also critical of Dunfermline's management for investing millions in a floundering IT venture, and delving into risky commercial lending without adequately warning members.

"The anxiety and stress visited upon members as a result of misguided decision-making at board level and what was, at best, miscommunication in its annual report is of serious concern," the report said.

The FSA denied it had failed in its supervisory role. A spokeswoman said: "The report contains no facts to substantiate this assertion."

Specific warnings were issued to building societies in March 2003, May 2004, May 2006, October 2007 and May 2008 on the importance of managing the quality of lending books, she said. "These warnings covered the risks of commercial property, buy-to-let, self-certification and sub-prime lending as well as mortgage book acquisitions."

Jim Faulds, the former chairman of Dunfermline Building Society, said last night that it would have survived independently if the regulatory authorities had engaged with it more openly. He accepted criticism that the society should have done more to let its members know about the costs of its spiralling IT project and its riskier lending operations.

Mr Faulds said: "The board of Dunfermline Building Society were solely responsible for the status of the company up until October 2008. Thereafter, the fate of the society was influenced by the involvement of the tripartite authorities (the Bank of England, the Treasury and the FSA].

"The society's board proposed a number of suggestions and solutions which would have addressed the problems facing the society. These proposals were rejected by the tripartite."

Days before the society's collapse, the Scottish Government had offered Dunfermline 25m. The Building Societies Association had also offered 30m.

But the tripartite authorities decided that Dunfermline could not service the interest of such a loan.

Its assets were transferred to Nationwide by the Bank of England using a new law to deal with ailing institutions.

TAXPAYER-SUPPORTED BANKS 'NEED BAN ON RISKY TRADING'

A BAN on risky trading activities by large banks could be needed to stop them taking advantage of government support, MPs have said.

The Treasury Select Committee said bank profiteering on lucrative trading activities would be "intolerable" if taxpayers took the lion's share of the risk to protect savings deposits.

MPs also attacked recent changes announced to the overseeing Tripartite Authority – the Financial Services Authority, Bank of England and Treasury – as "largely cosmetic".

The Tripartite was criticised over its handling of the Northern Rock crisis but where final responsibility for decision and actions lay remained "a muddle", the committee claimed.

MPs welcomed proposals by the FSA to impose much higher capital requirements on 'casino' banking – but said the watchdog must not rule out a complete bar on such activities.

"A ban may not be necessary if firms are given sufficient incentive to separate their trading units from their retail banking activities of their own accord, but... should not be ruled out by the FSA as an option at this early stage," its report said.

MPs added: "Those banks which are too big to fail must no longer be able to take advantage of that fact for private gain."

The real test of the watchdog's more invasive approach to banking supervision to prevent a repeat of the banking crisis will be when the boom years return, the committee said.

Chairman John McFall said: "The FSA must develop sufficient teeth in order to be able to go against the tide in the future and take unpopular decisions."

Plans to rebrand the Tripartite's standing committee with a Financial Stability Committee (FSC) announced in a White Paper earlier this month would "achieve little by itself", when an improvement in cooperation and clarification of responsibilities was required.

"When the dust eventually settles on a new system, the question that we, and others, will ask is 'Who gets fired?' if and when the next crisis occurs.

"It is a blunt question, but one which is necessary," the report said.