FSA admits major Rock-up

The FSA has admitted it made a complete pig's ear of supervising Northern Rock. No kidding...

Last Updated: 31 Aug 2010

The FSA's internal investigation of its handling of the Northern Rock debacle has identified several major cock-ups: it failed to appoint enough people to supervise the bank, it failed to make use of all the available risk information, it failed to engage sufficiently with the bank’s management (meaning that it wasn't challenged properly about the inherent risks in its business model), and it failed to review its own supervision process properly. So nothing too important then...

Even more embarrassingly, the FSA also admitted that its supervision of the Rock was ‘at the extreme end of the spectrum’. So despite the fact that commentators have long been suggesting that the Rock was operating a riskier business model than any other bank (because it was so reliant on the credit markets to fund its mortgage lending), it actually got an easier ride than almost anyone else. All in all, it adds up to a pretty wretched display from our official regulator.

Chief executive Hector Sants admitted the FSA’s supervision of the Rock ‘was not carried out to a standard that is acceptable’, and has announced a series of measures to get the regulator fit for purpose. The main focus will inevitably be on ramping up the level and the rigour of its supervisory activity, although it will also be looking to include improve its training, improve its analysis, and improve its internal review processes. Pity it didn’t think of all this 12 months ago.

Since Sants only took over the top job in July, he’s unlikely to pay for the Rock fiasco this with his job (he can pin most of this stuff on his predecessor) – although since he was previously the FSA’s managing director of wholesale and institutional markets, he can hardly wash his hands of all responsibility. But for the time being it looks as though the main scapegoat will be Clive Briault, the managing director of the FSA’s retail business unit. The regulator said last week he would leave his job ‘by mutual consent’ at the end of April – albeit with a £380,000 pay-off and a £870,000 pension (we might consent to leave our jobs for that).

The irony is, it wasn’t so long ago that the FSA was being lauded as the ideal model for a light-touch, common-sense regulator – Sants and co would travel around the world telling other government how to do it. Admittedly the review found no fault with the FSA's basic philosophy or modus operandi, but this was hardly likely to happen with an internal audit, was it? In the Rock’s case, the ‘light-touch’ approach clearly didn’t work.

Still, like the banks themselves, the FSA has probably learned more in the last six months than it has in the last six years. Let’s just hope it can use these lessons from the retail banking sector to address the problems in the wholesale markets...

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