The House of Commons Treasury Committee has published its findings in respect of its inquiry concerning the Financial Services Authority Board's report into the failure of RBS.
Here are some of the tough or even shocking conclusions:
"The FSA Report paints a picture of a regulator that was severely unbalanced and with an insufficient focus on prudential issues. The prevailing assumptions about decreased risk in the financial markets, and political pressure, have been cited in mitigation of the regulatory and supervisory failures of the FSA. However, statutory independence was accorded to the FSA to enable it both to offer constructive challenge to established dogma and to resist political pressure. The FSA Report describes failures and inadequacies in the regulation and supervision of capital, liquidity, asset quality and a failure appropriately to analyse the risks relating to the ABN AMRO acquisition. This is a serious indictment of both the senior management and leadership, and in particular the Chairman and Chief Executive, in place at the time, and their predecessors, regardless of the prevailing assumptions and political pressures.
The argument put forward in the FSA’s Report, that the absence of a formal statutory basis to intervene was sufficient justification for regulatory inaction, was contradicted by the evidence, both of our advisers and of Mr Sants. We support Sir David Walker’s conclusion that the FSA should have done more to examine the risks of the deal. It should have intervened at an early stage. It should and could have intervened at a late stage, albeit with more difficulty. Early regulatory examination of such deals now takes place, in the absence of further statutory support. The FSA’s failure to assess the risks of the deal represents a serious misjudgement on the part of the supervisory team and the senior management. We need a regulator with the selfconfidence to intervene, even if it might cause some destabilisation in the short-term. We recommend that Government include an explicit requirement for the PRA to approve major bank acquisitions and mergers in forthcoming legislation.
Sir David Walker questioned whether contested takeovers are appropriate in the banking sector at all. In such cases, because only limited information on the takeover target may be available, anagement and the regulator both face difficulties in being able properly to understand, plan and manage capital and liquidity. We recommend that HM Treasury, working with the relevant public bodies, report on the legislative or other changes it proposes to make to the current regime regulating acquisitions in the banking sector.
It is a matter of considerable surprise to this Committee that nobody (with the partial exception of Mr ...) has been held meaningfully accountable for the failure of RBS.
We support the emphasis placed by our specialist advisers on the importance of the authority delegated by a bank CEO. Mechanisms are needed to ensure that the CEO of a failed bank can ultimately be held responsible for failures that occur within their organisation. We recommend that the FSA (and future PRA) examine the introduction of additions to the SIF screening process to ensure that a bank CEO is obliged to attest that he or she is satisfied with the performance of the executive team to which he or she has delegated authority.
In putting out a one-page, 298-word summary of their decision not to take enforcement action against the bank or any individuals after their investigation into RBS, the FSA showed an astonishing lack of appreciation of the understandable public interest in the failure of RBS.
There is a clear need in cases of bank failure of the magnitude of RBS for public accountability about how and why that failure has occurred. Where public—that is ultimately taxpayers’—money is used to support a business in the private sector there is a need for a full public explanation. In December 2010 the FSA initially felt that a 298-word statement about RBS’s failure was explanation enough. This reflects serious flaws in the culture and governance of the regulator. It also reflects a fundamental misunderstanding of its duty to account for its actions to the public and Parliament. In view of the vast amounts of public money committed to propping up RBS, Lord Turner’s comment that a Report into the demise of RBS “would add little, if anything, to our understanding of what went wrong” was inadequate. He should have grasped the need for a public explanation of how that situation had arisen, something which he has subsequently acknowledged. We would not expect the new chairmen of the regulators to repeat the error.