RBS FSA report: Bank was warned about Fred Goodwin ‘8 years ago’
Sir Fred Goodwins assertive and robust management style was flagged up as a potential risk to RBS as early as 2003. Photo: Ian Rutherford
CONCERNS over Sir Fred Goodwin’s “assertive and robust” management style were flagged up as a potential risk to Royal Bank of Scotland as early as 2003, the Financial Services Authority (FSA) has revealed.
In a damning report on the bank’s downfall, the FSA said the former chief executive had aggressively expanded the institution over his eight-year tenure – culminating in the disastrous acquisition of ABN Amro in 2007.
It found RBS had been brought to its knees by “multiple poor decisions” and its £50 billion “gamble” on buying the Dutch bank.
The directors – led by Sir Fred and former chairman Sir Tom McKillop – relied for their due diligence during the disastrous takeover on two ring-binder folders and a CD.
The report also highlighted the strained relationship between the watchdog and Sir Fred before 2005, in particular over RBS’s reluctance to allow its non-executive directors to meet the FSA on an individual one-to-one basis. “FSA supervisory records from 2004 suggest that RBS management, and in particular the RBS chief executive, had been resistant to what they saw as unnecessary FSA interference,” the watchdog said. This eventually led to “clear the air” talks between the authority and Sir Fred in October 2004.
Download the full FSA report on RBS
Sir Fred could be among those disqualified from acting as a director following the FSA report. Business Secretary Vince Cable has asked government lawyers to investigate what course of action is open to him.
FSA chairman Lord Turner said a debate was now needed with a view to changing the rules to make bankers more accountable and making sure the right balance is struck between risk and return.
He suggested a “strict liability” approach, making it more likely that a failure such as RBS’s would be followed by “successful enforcement actions”, including fines and bans. Senior executives and directors of failed banks could be banned automatically from future positions of responsibility, or a significant part of their pay could be deferred or lost in the event of failure.
Lord Turner added: “By one means or another, there is a strong argument for new rules which ensure that bank executives and boards place greater weight on avoiding failure.”
Asked whether it was fair that Sir Fred had “got away” with his knighthood and £340,000-plus pension following RBS’s £47bn taxpayer bailout, Lord Turner said: “No, I don’t.”
He said the public “have a right to be absolutely furious” about the excessive risk-taking by some banks.
RBS – which is now 83 per cent owned by the UK government – has cut 27,500 jobs since the beginning of the financial crisis. The taxpayer currently stands to lose about £25bn on its investment.
Current RBS chairman Sir Philip Hampton said yesterday: “I think the culture of the bank, in terms of risk profiles, the businesses we are ready to do and not ready to do, again has undergone enormous change.
“We are not the finished article, we still need to make further changes, but I think this bank is very different now from what it was three or four years ago.”
The watchdog itself came in for criticism in its own report, over its “light touch” regulation. The regulator admitted it had failed to monitor adequately and challenge RBS, although it largely blamed the previous government for encouraging it to take a hands-off approach.
The FSA conceded its approach was flawed during the fall of RBS and that it had failed to challenge the management of RBS.
It did not put enough resources into managing big banks and was too focused on policing traders. It had only four members of staff supervising RBS at the time of its ABN Amro deal, compared with 23 this year.
This, it claimed, reflected the mood of light-touch regulation that was being extolled by the Labour government, with Gordon Brown as chancellor anxious for the FSA not to damage the City’s competitiveness.
The report reflected badly on shadow chancellor Ed Balls, who in a speech in 2006 said: “Nothing should be done to put at risk a light-touch, risk-based regulatory regime.”
The FSA recommended in its report that any future major acquisitions should require the backing of the regulator.
The watchdog identified six key factors in the failure of RBS, most significantly its weak capital position and over-reliance on risky, short-term funding in wholesale markets.
The FSA said a seventh factor in the bank’s demise was the management, led by Sir Fred.
It said: “The multiple poor decisions that RBS made suggest that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions.”
Last month, RBS reported pre-tax profits of £2bn in the three months to 30 September, compared with a £1.6bn loss in the same period last year. It warned of further job losses and said the global economic slowdown was delaying its recovery.
Conservative Party deputy chairman Michael Fallon said: “Gordon Brown and his right-hand man, Ed Balls, were putting pressure on the City regulator to turn a blind eye to the irresponsible risks banks were taking.
“This is why the government is right to reform both Labour’s broken system of financial regulation and the banking sector so that taxpayers aren’t landed with multi-billion-pound bills ever again.”
However, the report said many of the most important changes had already been made in the wake of the credit crunch.
It said that under recently introduced international banking rules, known as Basle III, the acquisition of ABN would not have been allowed to happen because banks were now required to hoard more money to help stave off a collapse.
And, while the regulator’s report admitted it had failed to do a good enough job monitoring the bank’s activities, it said the system had been changed, with the FSA being split to create two new regulators, a Prudential Regulation Authority and Financial Conduct Authority.
The government has also established a Financial Policy Committee, with the responsibility of identifying and responding to emerging systemic risks.
Labour’s shadow treasury minister and Kilmarnock MP Cathy Jamieson insisted the failures of RBS “lie squarely at the door of the firm”.
But she added: “It is critical to learn the lessons on regulation too.
“People are furious that, despite deeply irresponsible decisions and a multi-billion-pound bailout, nobody is being punished for the mistakes at Scotland’s two biggest banks.
“The law must be changed so incompetent bankers can be held properly accountable for the harm they can cause – and Labour is willing to bring forward amendments to the current Financial Regulation Bill if [Chancellor] George Osborne is unwilling to act.
“We also need other reforms on corporate governance, transparency for bankers’ pay, and audit – and to ensure we have a stronger negotiating hand with the European financial supervisors, who have the power to overrule the FSA.”
Another Labour Treasury spokesman, Chris Leslie, made a similar point. He said: “It is astonishing that deeply irresponsible decisions by these bankers could have forced a £45bn bailout necessary to save depositors, and yet no enforcement action is brought, and nobody is punished for this.”
He went on: “We need a change in the law to ensure that incompetent bankers can be held properly accountable for the harm they can cause – and if George Osborne does not amend the Financial Regulation Bill to introduce the concept of ‘strict liability’ for bank directors, then we will do so.”
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Comments
There are 97 comments to this article
Page 1 of 7
Hamilton2
Wednesday, December 14, 2011 at 01:44 PM"These "systemic failures" in the public and private sectors have existed for years. Why national politics has not addressed them is an intriguing question." [#95]. . . An answer would no doubt explain why the PM admitted at the start of 2009 that the banking regulations laid down by him as Chancellor were intentionally weak. Previously he had blamed the financial crisis on global forces and the collapse of the US sub-prime market. . . . And before that Holyrood was apparently concerned why public sector audit watchdogs didn't bark - but the official enquiry was kicked into the long grass.
Euphemia Groynes of that Ilk
Wednesday, December 14, 2011 at 11:53 AMYou can, I am sure, imagine how distressing it is to me, as his godmother, when dear Freddie Goodwin is disparaged and maligned like this. Having known him much longer than any of you are likely to have done, I simply do not recognise my kind, charming, high-spirited godson in phrases such as "multiple poor decisions", "assertive and robust", "monomaniac tendencies", "sociopathic desire", "horizontal jogging", "a bully, a thief and a conman", "Scotland's Biggest Crook", "epitome of moral and social collapse", "pure numpty heid", "bubonic plague on legs", "Transylvania's least popular family entertainer" and so on and so forth. I shall be writing a very pointed letter to the editor of whichever paper this turns out to be, advising him to delete your comments and ban you all. I hope you will all take it to heart and resolve to treat your fellow human beings in a more considerate way in future. Be off with you!
Hamilton2
Wednesday, December 14, 2011 at 09:46 AM"The watchdog itself came in for criticism in its own report, over its âlight touchâ regulation. The regulator admitted it had failed to monitor adequately and challenge RBS, although it largely blamed the previous government for encouraging it to take a hands-off approach." A crucial systemic problem here. The enquiry into the building project at Holyrood many years ago found this too. Lord Fraser's introduction to the inquiry report includes: "there has been a series of systemic failures and an unwillingness of those involved in the Project to call a halt and demand a re-appraisal. The few that tried were quickly shown the door." These "systemic failures" in the public and private sectors have existed for years. Why national politics has not addressed them is an intriguing question.
vistaero
Wednesday, December 14, 2011 at 08:32 AMComment removed by moderator
vistaero
Wednesday, December 14, 2011 at 08:03 AMComment removed by moderator
Billy Boy
Wednesday, December 14, 2011 at 03:42 AMSurely there is a clause in common Law that can be used to punish people like Goodwin who have endangered the Public Good.
sam321
Wednesday, December 14, 2011 at 12:19 AMEverywhere in UK it is the same story. People who can write their own pay cheques give themselves everything while the lower staff who worked very hard to achieve the success of the organisation get sacked. I feel sorry for the 30,000 or more employees of RBS and Lloyds TSB who got the sack instead of the directors and higher level management and the shareholders who supported bank fraud by cooking the books. Like Lehman brothers, the bank should have gone bankrupt. Instead the government put taxpayers money to bail the big fish like Fred Godwin and other directors and shareholders. True competition among banks can never happen as government chooses to support irresponsible gambling by the new aristocracy(i.e. bankers) using Joe public's money. In UK the higher level management is always able to blame someone else , mostly lower level employees and get away with it. The councils and the schools they run are another example of this terrible waste of taxpayers money to support the sky rocketing renumeration and bonuses of the top level management and directors. The new government is eager to kill genuine industry even further by allowing these spin doctors to sack older and experienced staff. Even now not even single manager or director in FSA got the sack for sleeping while being paid for work. I wish we support real industry which Britain used to known all over the world during industrial age instead of supporting swindlers and fraudsters owning the banks or being employed by them in high level management.
Willie Macleod
Tuesday, December 13, 2011 at 11:32 PMIt seems that failure is the new success if you are a banker like Fred Goodwin. You can mismanage and break the bank and be rewarded for it. __________________________________________________ Then after leaving the bank in you are headhunted in to another highly paid position. __________________________________________________ Strange days indeed.
" . . . two lever arch files and a CD" ?!!!
Tuesday, December 13, 2011 at 11:14 PMDue diligence lite, eh!
Russell M
Tuesday, December 13, 2011 at 10:57 PMSir Fred is a bully, a thief and a conman the RBS board should be ashamed they ever hired him.
bannerfield
Tuesday, December 13, 2011 at 09:05 PM#86 Do tell us what the price tag was.
brianwci
Tuesday, December 13, 2011 at 08:35 PM#73 Bader. ONE: I don't remember using the phrase' unionist plot'. TWO: Your posts only confirm how little you people know about the intricacies of the Financial and Political world. Next you'll be telling us that the 'injection of cash' as one of your unionist colleagues called the Qatari bailout of Barclay's came without a price tag to the UK tax payer.
bannerfield
Tuesday, December 13, 2011 at 08:24 PM#83 Would that be the regulation that Mr Salmond trumpeted in The Times?---------- "We are pledging light-touch regulation suitable to a Scottish financial sector with its outstanding reputation for probity, as opposed to the one like that in the UK, which absorbs huge amounts of management time in 'gold-plated' regulation". That was 2007. He's a disaster waiting to happen.
CauchyRiemann
Tuesday, December 13, 2011 at 06:34 PM#83 Really? Was he saying this before the crash? I think Salmond was clueless like other inept politicians. In 2008 he said: "Take financial services. With RBS and HBOS - two of the world's biggest banks - Scotland has global leaders today, tomorrow and for the long-term."
well informed
Tuesday, December 13, 2011 at 06:14 PM52 No the FM wanted real regulation in place of the pretend regulation under Liebour! He didnt want Westminster to sell the Scottish banks off to toxic English institutions and he was proven right! Westminster corruption and manipulation it hasnt changed in 300 years.
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