RBS FSA report: Bank was warned about Fred Goodwin ‘8 years ago’

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.”