The FSA's mea culpa

[Legal Beagles]

You'd have thought the FSA bigwigs would read the financial press, says Paul Farrow

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[Amethyst]

Re: The FSA's mea culpa

Confidence in the banking system was shot to pieces in the aftermath of Northern Rock. I'm not sure you'll feel any less nervous in light of the report on the saga published by the Financial Services Authority last week.
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On one hand, you have to respect the regulator for its stark honesty that, among other things, it failed to pursue the bank over the vulnerability of its business model; that senior managers failed to oversee the work of the supervisory team - who themselves had limited understanding; and that it failed to minute meetings with the bank properly.

On the other, though, cynics may suggest that it could be so open because most of the failings occurred when the FSA was under the stewardship of John Tiner.
New boss Hector Sants was appointed just weeks before the crisis took hold.

The catalogue of errors made by the regulator is such a major concern that — as one lawyer said — if the FSA were being regulated by the FSA, it would have failed on all points.

It was also pointed out that the FSA always seemed to be behind the curve. Those who made that remark certainly have a point.

You would have thought that the bigwigs would read the financial press, but given its track record you have to wonder whether it does.

For example, it scoffed at early reports that thousands of people had been missold mortgage endowments — then years later fined several providers for endowment failings.

It was several months before the FSA heeded warnings in the press that precipice bonds, which promised generous levels of income but did not protect people's capital, were being mis-sold.

Likewise, split capital investment trusts were off its radar for some time after the collapse of the sector which caused misery for thousands . It is difficult to fathom why the regulator had just eight meetings with Northern Rock compared to the average of 74 for its peers over a two-year period.

After all, concern of Northern Rock had been bubbling in the press for sometime. He may be fast becoming a cult figure on the BBC, but business editor Robert Peston suggested that Northern Rock was vulnerable when he was City Editor at The Sunday Telegraph as far back as 2003.


Back then Peston wrote: "Northern Rock's executives will view me as a Neanderthal for questioning whether it can avoid horrible losses when it expands at this rate while returns are falling. And I don't doubt they sincerely believe their risk controls are impeccable (its CEO, Adam Applegarth, talks a good talk).

"But it looks too good to be true, which is a warning as old as banking itself. Sooner or later, the Rock will find itself in a hard place."

Someone at the regulator might have thought that Northern Rock was worth keeping a closer eye on given the mutterings in national newspapers. Obviously not.
Naturally, it is now hoped that lessons will be learnt. But again you have to wonder. Post Equitable Life, a review of the insurance industry said that the FSA should take steps to 2ensure that the supervisory team is properly constituted with persons with the necessary expertise and knowledge".


Fast forward and we discover that the supervisors looking after Northern Rock had insurance backgrounds —not banking. Mercifully, training and competency for staff will be upgraded.

That the FSA held its hands up was a breath of fresh air from an industry that is used to ducking and diving. Or so I thought, because for all its honesty, the FSA could not resist trying to admonish responsibility. Yes, the standard of its supervision was not up to scratch, Sants admitted, but it even if it had been, it might not have made any difference.


This was just another cop-out from the regulator, who might also want to consider ignoring the adage that you shouldn't believe all that you read.


Beware the market for saye
Save-as-you-earn schemes can be terrific value, giving staff the opportunity to buy shares at a significant discount and offering the chance of big profits. Yet most people who exercise the right to buy the shares at the cheaper price decide to hold on to them , year after year after year.
Northern Rock employees who did so will have lost just about every penny. SAYE schemes are risk-free — but only up to the date you exercise the options. Once exercised you are at the mercy of the stock market. It's worth remembering.