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December 12, 2011

FSA on RBS: Bankers Should be Legally Accountable for Bank Failure

By Spear's

The Financial Services Authority report into the failure of Royal Bank of Scotland has criticised the poor decisions made by RBS’s management board, as well as the FSA’s own ‘inadequate’ supervision and ‘flawed approach’, but says that there was not sufficient evidence to bring an enforcement case against individuals within the bank

The Financial Services Authority report into the failure of Royal Bank of Scotland, published today, has criticised the poor decisions made by RBS’s management board, as well as the FSA’s own ‘inadequate’ supervision and ‘flawed approach’, but says that there was not sufficient evidence to bring an enforcement case against individuals within the bank.  The FSA chairman Adair Turner concluded that the failure to hold individuals legally accountable for the banking crisis points to the need to amend the rules as a further disincentive against excessive risk-taking.

‘The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?’ Turner said at an FSA press conference. He added that because of the far-reaching economic consequences of bank failure, banks represented a special case in that ‘their failure is a public concern, not just a concern for shareholders.’

The FSA’s report attributed RBS’s failure, which led to a  £45 billion bailout for the bank, to six factors:

–    Weakness of RBS’s capital position, caused by management decisions and permitted by a weak global regulatory framework
–    Over-reliance on risky short-term wholesale funding, permitted by an inadequate approach to the regulation of liquidity
–    Concerns and uncertainty about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA
–    Substantial losses in credit trading facilities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be.
–    The ABN AMRO acquisition, which proceeded with inadequate due diligence
–    An overall systemic crisis in the banks

It added that the pattern of poor decision making at the bank pointed to ‘deficiencies’ in the bank’s management, governance and culture.

The FSA also acknowledged its own role in RBS’s failure, saying that it provided ‘inadequate supervision’ and that its ‘overall philosophy and approach was flawed,’ as evidenced by its failure to adequately assess the impact of RBS’s take-over of failing Dutch bank ABN Amro. This weakness was not limited to the RBS case, it concludes, but was part of its ‘overall approach to prudential legislation.’

Despite the report’s emphasis on the importance of poor management decisions at RBS, it concluded that there was ‘not sufficient evidence’ for any individuals to be subject to enforcement cases. The FSA has already reached a settlement with the former head of RBS Global Banking and Markets, Johnny Cameron, who is now subject to a bar from any further full-time positions in the financial services industry. Using predictably vague language, the report deemed that former RBS chief executive Sir Fred Goodwin’s alleged affair — against which he took out an injunction to prevent press reports into his private life — was ‘irrelevant to the story of RBS’s failure.‘

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Turner responded to the report by calling for public debate into ways of increasing individuals’ legal accountability for poor financial decision-making, as a means of ensuring that ‘bank executives and boards strike a different balance between risk and return than is acceptable to non-bank companies.’ He suggested that two ways of achieving this would be through ‘a strict liability approach’ or through an ‘automatic incentives based approach.’ The first would mean that a bank failure like that of RBS would be followed by successful enforcement action including fines and bans, the second would either involve rules that would automatically ban senior executives and directors of failed banks from future positions of responsibility, or major changes of remuneration to ensure that a ‘very significant proportion of pay is deferred and forfeited in the event of failure’.

The FSA will be publishing a discussion paper on the options for ensuring that bank executives and boards place greater weight on avoiding failure in January. 

A copy of the FSA Report can be downloaded here

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