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26/03/2008
FSA Admits 'Failings' Over Northern Rock
The UK financial watchdog, the Financial Services Authority, has admitted to failings in its handling of the crisis at Northern Rock.
A review into the supervision of Northern Rock, carried out by the FSA's internal audit division, identified four key failings in the watchdog's handling of the crisis.
The report identified a lack of sufficient supervisory engagement with the firm, especially the failure of the supervisory team to follow up rigorously with the management of the firm on the business model vulnerability arising from changing market conditions.
It also highlighted a lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm's supervision; inadequate specific resource directly supervising the firm; and a lack of intensity by the FSA in ensuring that all available risk information was properly utilised to inform its supervisory actions.
Newcastle-based Northern Rock was eventually nationalised in February after it was forced to seek emergency funding from the Bank of England in order to remain in business. It currently owes the Bank of England around £25 billion and around 2,000 jobs - a third of the bank's work force - look set to lose their jobs as a result of the crisis.
The crisis saw many customers queuing outside branches across the country in order to withdraw their savings from the beleaguered bank.
The FSA said that there would be an overhaul of procedures following the report. The measures include the establishment of a new group of supervisory specialists to regularly review the supervision of all high-impact firm to insure that procedures are rigorously adhered to.
The number of supervisory staff engaged with high-impact firms, will also be increased, with a mandated minimum level of staffing for each firm and the current supervisory training and competency framework for FSA staff will be upgraded.
Hector Sants, Chief Executive of the FSA, said: "This programme is the response of the management of the FSA to the weaknesses identified in the particular case of the supervision of Northern Rock. It is clear from the thorough review carried out by the Internal Audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge. However, I am determined through the programme of work that I am announcing today, that proper standards will apply to all significant firms supervised by the FSA.
"This represents our specific supervisory contributions to the package of measures introduced by the Tripartite Authorities to prevent a similar situation to Northern Rock undermining financial stability. That does not mean a "no failure" regime. However, together with the proposed reform of the insolvency regime for banks - and an improved deposit protection scheme - it creates a platform to strengthen financial stability and better protect the interests of consumers.
"Demonstrating our willingness to examine ourselves critically and learn lessons is central to giving the financial services industry and consumers confidence in the FSA, although, like any organisation, we cannot and do not claim infallibility, and we cannot, and should not, attempt to remove all risk from the system."
The report was welcomed by the British Bankers' Association, which said in a statement: "The FSA needs to have people with comparable skills able to look clearly at the whole business rather than concentrating on one or two particular areas. The industry will work with the regulator to bring this about. However, the primary responsibility for any company lies with its management. No amount of regulation can ensure that wrong decisions are never made."
(KMcA)
A review into the supervision of Northern Rock, carried out by the FSA's internal audit division, identified four key failings in the watchdog's handling of the crisis.
The report identified a lack of sufficient supervisory engagement with the firm, especially the failure of the supervisory team to follow up rigorously with the management of the firm on the business model vulnerability arising from changing market conditions.
It also highlighted a lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm's supervision; inadequate specific resource directly supervising the firm; and a lack of intensity by the FSA in ensuring that all available risk information was properly utilised to inform its supervisory actions.
Newcastle-based Northern Rock was eventually nationalised in February after it was forced to seek emergency funding from the Bank of England in order to remain in business. It currently owes the Bank of England around £25 billion and around 2,000 jobs - a third of the bank's work force - look set to lose their jobs as a result of the crisis.
The crisis saw many customers queuing outside branches across the country in order to withdraw their savings from the beleaguered bank.
The FSA said that there would be an overhaul of procedures following the report. The measures include the establishment of a new group of supervisory specialists to regularly review the supervision of all high-impact firm to insure that procedures are rigorously adhered to.
The number of supervisory staff engaged with high-impact firms, will also be increased, with a mandated minimum level of staffing for each firm and the current supervisory training and competency framework for FSA staff will be upgraded.
Hector Sants, Chief Executive of the FSA, said: "This programme is the response of the management of the FSA to the weaknesses identified in the particular case of the supervision of Northern Rock. It is clear from the thorough review carried out by the Internal Audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge. However, I am determined through the programme of work that I am announcing today, that proper standards will apply to all significant firms supervised by the FSA.
"This represents our specific supervisory contributions to the package of measures introduced by the Tripartite Authorities to prevent a similar situation to Northern Rock undermining financial stability. That does not mean a "no failure" regime. However, together with the proposed reform of the insolvency regime for banks - and an improved deposit protection scheme - it creates a platform to strengthen financial stability and better protect the interests of consumers.
"Demonstrating our willingness to examine ourselves critically and learn lessons is central to giving the financial services industry and consumers confidence in the FSA, although, like any organisation, we cannot and do not claim infallibility, and we cannot, and should not, attempt to remove all risk from the system."
The report was welcomed by the British Bankers' Association, which said in a statement: "The FSA needs to have people with comparable skills able to look clearly at the whole business rather than concentrating on one or two particular areas. The industry will work with the regulator to bring this about. However, the primary responsibility for any company lies with its management. No amount of regulation can ensure that wrong decisions are never made."
(KMcA)
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