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FSA should have intervened in RBS takeover of ABN AMRO

19 October 2012

The Treasury Committee has today published a report - "The FSA’s report into the failure of RBS" - concluding that the FSA should and could have intervened in RBS’s takeover of ABN AMRO.

The report identifies issues arising from the FSA’s own report into the failure of RBS that may merit further legislative or regulatory change. The report also considers the value of the reporting process for understanding the causes of RBS’s failure and for ensuring that appropriate lessons have been learnt.

Committee recommendations

In its report, the Treasury Committee outlines a number of specific recommendations and conclusions (listed in full on pages 47-51) which include:

FSA and RBS’ acquisition of ABN AMRO (para 43)

The FSA should have intervened at an early stage. It should and could have intervened at a late stage, albeit with more difficulty. We need a regulator with the self-confidence to intervene, even if it might cause some destabilisation in the short-term.

Mr Andrew Tyrie MP, Chairman of the Treasury Committee, made the following comments:

It is crucial that the PRA takes on board an important lesson from this report – there is no substitute for the exercise of judgement. There are early encouraging signs that, in the PRA, judgement-based regulation is doing more of the heavy lifting than the FSA’s failed culture of box-ticking.

Ability of regulators to take action on acquisitions (para 44)

We recommend that Government include an explicit requirement for the Prudential Regulation Authority to approve major bank acquisitions and mergers in forthcoming legislation and 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.

FSA’s decision not to publish report on collapse (para 100)

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.

Andrew Tyrie MP said:

Without persistent pressure from the Treasury Committee, the FSA’s report would never have been published.

Lord Turner has subsequently admitted that he should have grasped at the time the need for more public explanation. He was right to do so. His personal commitment to the production and publication of the FSA’s report has been valuable.

We now have a comprehensive report that gives a better idea of what went wrong at both RBS and the FSA.

On the appointment of specialist advisers (para 115)

The work of the independent external reviewers appointed by the Treasury Committee enabled Parliament to scrutinise a powerful regulator in a new way. The approach sets a precedent for the Treasury Committee in the future, and it may also be of use to other select committees.

Andrew Tyrie MP said:

The content and objectivity of the report was greatly enhanced as a result of scrutiny by our specialist advisers Sir David Walker and Bill Knight. This innovation sets a precedent for the work of select committees in the future. The Treasury Committee has already undertaken to appoint specialist advisers who will oversee the FSA’s report on HBOS.

Bank of England’s failure to publish a review (para 129)

HM Treasury has published a review of its performance during the crisis, which the Treasury Committee will review in due course. The Bank of England has also belatedly announced a number of reviews examining aspects of its own performance in this period. While this represents some progress, it falls well short of what is required. A comprehensive review of the Bank’s role in, and response to, the crisis is needed and we will return to this issue after publication of the three reviews commissioned by the Court of the Bank of England. Moreover, by waiting so long before conducting any review, the Bank of England has diminished its value as a guide to better regulation for the future. Any lessons learned as a result of even these limited reviews will also only be available in a very late stage in Parliament’s consideration of the Financial Services Bill. Incorporation of them into legislation may therefore be more difficult and this is regrettable.

Andrew Tyrie MP said:

The Bank of England has still to produce a comprehensive review of the Bank’s role in, and response to, the crisis. Whilst the three reviews announced earlier this year represent some progress, they fall well short of what is required. A comprehensive review should already have taken place.

The Treasury Committee has been pressing for changes to the Financial Services Bill to ensure that reports such as this are produced by regulators. The Treasury Committee will return to the issue after the publication of the three reviews commissioned by the Court of the Bank of England.

A radical improvement of the Bank’s own governance is an essential part of regulatory reform.

On regulatory and supervisory failure (para 22)

The FSA Report describes failures and inadequacies in the regulation and supervision of capital, liquidity and asset quality and also describes 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.

On changes at the FSA since the crisis (para 50)

While there is a good deal of agreement that the FSA’s approach was flawed, there is less agreement about what should replace it, with criticism of some aspects of the new regulatory arrangements proposed by HM Treasury.

The Parliamentary Commission on Banking Standards should examine The PRA’s approach to banking supervision, published on 15 October 2012, in the light of the Treasury Committee’s recommendations.

On enforcement (para 74 & 75)

It is a matter of considerable surprise to this Committee that nobody (with the partial exception of Mr Jonny Cameron, RBS Executive Director and Chairman of RBS’s Global Banking and Markets Division) has been held meaningfully accountable for the failure of RBS.

It is deeply regrettable that the current rules bias enforcement activity towards technical breaches to the detriment of attention to the most important regulatory failures. We request that the regulators report to the Treasury Committee on what amendments to the statutory rules and to the general law they believe are desirable in order to improve the effectiveness of the enforcement regime. We also call on the Parliamentary Commission on Banking Standards to examine this issue.

On the SIF screening process (para 82)

We recommend that the Government consult on whether additional legislation is required to ensure that directors or other senior executives of failed banks cannot work in other regulated industries in future, or to make the system more certain.

On future regulation on sanctions against directors (para 93)

In financial institutions senior executives reaped large rewards, much of it paid as bonuses inflated by taking on what proved to be unsustainable risks. A great deal has been written about the misalignment of incentives embedded within the financial services framework. We support attempts to remedy this. The introduction of strict liability, however, would be a major change to the existing legal framework and would require full public debate. The Parliamentary Commission on Banking Standards should examine the options, including strict liability.