Leader: Only culture change can prevent an RBS repeat

Even allowing for legal redactions, the long-delayed Financial Services Authority report into the failure of Royal Bank of Scotland still runs to 452 pages.

That is a fair measure of the many questions raised by this debacle. Three are outstanding. First, why did the bank fail? Second, why has no-one been punished? Third, has enough been done to prevent a recurrence?

Many factors contributed to the downfall of Scotland’s largest company and one of the biggest banks in the world. Chief among them were errors of judgment and execution by the board and management. There was a failure to grasp the implications of the dramatic deterioration in US sub-prime debt and how this corroded derivative products up to and including those rated triple A. There was the decision to launch a massive hostile take-over bid for ABN Amro on the basis of due diligence “inadequate in scope and depth” and financed by short- term debt which stretched the bank’s capital ratios to breaking point. “The wrong price, the wrong way to pay, at the wrong time and the wrong deal” is the FSA’s crisp summation. Finally, there was an inadequate system of risk supervision within RBS itself.

Yet almost all directors walked away after being paid massive salaries and bonuses, and with staggering pension pots – in the case of the former chief executive Sir Fred Goodwin, scandalously so. Only one director, the head of the global markets division, has been barred by the FSA from holding a post of significant influence in the financial sector. Why such light punishment?

The FSA says its investigation into events at RBS was among the most intensive of all it conducted across banking failures during the 2007-8 crisis. But after detailed investigation, its officers concluded there was insufficient evidence to bring enforcement actions which had a reasonable chance of success in tribunal or court proceedings.

A successful case needs clear evidence of actions by particular people that were incompetent, dishonest or demonstrated a lack of integrity. Errors of commercial judgment are not in themselves sanctionable unless there was a clear deficiency in the processes and controls that governed how judgments were reached. There were many poor decisions by the RBS board – going ahead with the ABN acquisition on the basis of information extending to just “two lever-arch folders and a CD” ranked high. But an enforcement case, it says, would have minimal chance of success.

The report recommends that the successor regulatory body should have power of oversight in future hostile takeovers. And it might have made more of the apparent passivity of non-executive directors. But no amount of changes to supervision, architecture or process can of themselves prevent a recurrence. This also needs a wholesale change in culture and in corporate governance. Positive steps are being taken here. But arguably the greatest sanction of all will be the collective memory of this humiliating debacle.