FSA Refers Ex-RBS Directors to Govt.

Exclusive: FSA Refers Ex-RBS Directors To Govt




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Exclusive: FSA Refers Ex-RBS Directors To Govt

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Mark KleinmanDecember 10, 2011 6:53 PM

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I have learned that the directors who took Royal Bank of Scotland (RBS) to the brink of collapse in 2008 have been referred to the Government to assess whether they should be disqualified from sitting on company boards.
The Financial Services Authority (FSA) is expected to say in its long-awaited report on the failure of RBS that it passed the details of its enforcement investigations into the bank to the Department for Business, Innovation and Skills earlier this year.
I’m told that the report says that this took place in order for BIS to examine whether any former RBS directors should face disqualification under the Company Director Disqualification Act. That said, it’s understood that the FSA has not done so in the belief that there actually is a case for the former directors to answer; if it had, it would be very odd in that the FSA has itself concluded that there are no grounds for further action.
The referral of the former directors of RBS, and the emergence of the City regulator’s decision to do so, is likely to put pressure on the Government to seek action against some of those erstwhile board members. They, of course, included Sir Fred Goodwin, the former chief executive, Sir Tom McKillop, the former chairman, Peter Sutherland, the former BP chairman, and Sir Steve Robson, the former Treasury official.
I’m told the report does not specify the names of individual directors and therefore the referral to BIS is likely to include the entire board of RBS in the run-up to the international banking crash of 2007-08.
In one sense, the FSA’s motivation for referring the former RBS board members is clear: it will enable Lord Turner, the regulator’s chairman, to declare that the two-and-a-half year inquiry is not a whitewash, despite the fact that it is not taking further action against Goodwin or any of the other then-RBS board members.
The FSA’s view, reiterated numerous times in its report, is that there is no basis for pursuing enforcement actions because while RBS’s culture and governance were questionable and boardroom decision-making was poor, there was nothing dishonest or fraudulent about any of them.
Consider this line from the FSA statement in December 2010 which announced that it was closing its initial supervisory investigation into RBS:
“The review confirmed that RBS made a series of bad decisions in the years immediately before the financial crisis, most significantly the acquisition of ABN AMRO and the decision to aggressively expand its investment banking business. However, the review concluded that these bad decisions were not the result of a lack of integrity by any individual and we did not identify any instances of fraud or dishonest activity by RBS senior individuals or a failure of governance on the part of the Board.”
That paragraph is crucial, in that it would have marked a huge (and, for some, welcome) u-turn to have decided a year later that enforcement actions were possible under the FSA’s remit after all.
I’m told that the FSA passed its enforcement material to BIS officials in February of this year. I suspect that given the Department’s silence on the issue since, any move now to disqualify the former RBS directors is unlikely.
If BIS does reach that conclusion (and I imagine it will issue a statement on Monday responding to the FSA report and confirming its receipt of the material), it will illustrate the legal difficulties of taking action to disqualify directors.
For many people, it will be extraordinary and baffling that Goodwin is free to serve on the boards of other companies; I imagine there will be quite a debate next week about whether misjudgements on the scale of those at RBS should not result in (at least) a company’s boss losing their ability to do that.
Yesterday, in two posts on my blog, I revealed many of the details that will be disclosed when the FSA’s report is published at 6.00 on Monday morning.
Partly, it will amount to a campaign from Lord Turner for a shift in the emphasis of the regulator’s powers to intervene in the decision-making of banks even when they are not technically breaching any rules.
The FSA said it would not comment ahead of the report’s publication. RBS declined to comment.

The British Government bailed out RBS to the tune of £45 billion......they should not have bothered..

The FSA Report says RBS failed on the ABN Amro deal due to lack of diligence. There was also flawed supervisory approach and significant weakness
in RBS Capital.

It also says the FSA did not monitor as well as it should and more stringent measures will be taken , perhaps even the monitoring given back to the Bank
of England.

The Government will not take action against the previous Directors of RBS but shareholders may.

Mark kleinman Sky News 12/12


There are not many people who emerge from the City regulator’s
inquiry into the failure of Royal Bank of Scotland (RBS) with credit.
But there are even more who emerge with a direct share of the blame than
might have seemed obvious.
Ed Balls, the shadow chancellor, probably won’t enjoy reading the report, published at 6.00 this morning, that’s for sure.
The
repeated references to speeches by the then economic secretary to the
Treasury (and to others by Gordon Brown during his time as chancellor)
underline the extent to which ‘light-touch’ regulation was the key
determinant in the Financial Services Authority’s approach to
supervising the UK’s big banks.
As I wrote on Friday, the designs
of the FSA chairman Lord Turner on the governorship of the Bank of
England are worth bearing in mind when you interpret this attempt by the
FSA to distance itself from the regulatory approach of the last
government (I’ll be asking him about it in this context later).
Sir
Callum McCarthy, the former chairman of the FSA, is another for whom
the report will probably not be on his Christmas reading list.
Lord
Turner’s foreword refers to a letter from McCarthy to Tony Blair, the
then prime minister, assuring him that the FSA “applied to the
supervision of its largest banks only a fraction of the resource applied
by US regulators to banks of equivalent size and importance”. Ouch.
The
more obvious scapegoats – the former board of RBS, including Sir Fred
Goodwin – won’t be happy either. Most of the words and phrases they
tried to have removed (criticism of the takeover of the Dutch bank ABN
Amro as “a gamble”, their “aggressive” expansion of RBS’s investment
bank) remain in there.
The report runs to 450 pages, so it’ll take me some time to digest. But here are some initial thoughts:
There
will be enormous pressure to change the various rulebooks governing
financial regulation given the apparent inability of the FSA to take
enforcement action. Take this paragraph on pages 7-8, for example:
“While
the Board can certainly be criticised for proceeding with such
inadequate due diligence, the professional judgement of the FSA’s
Enforcement lawyers is that an enforcement case for inadequate due
diligence would have minimal chances of success, given that there are no
codes or standards against which to judge whether due diligence is
adequate, and given that the limited due diligence which RBS conducted
was typical of contested takeovers.”
The FSA confirms the string
of recommendations I outlined on Friday, including that “major bank
acquisitions should be subject to formal regulatory approval. Arguably
the FSA, if really determined, could have blocked the takeover…but a
clear requirement for regulatory approval for major bank acquisitions
would reflect the underlying principle – that society has an interest in
the major risks which banks take, not just management, Board and
shareholders.”
The FSA confirms that it has referred the former
directors of RBS to the Department for Business, Innovation and Skills
to assess the potential for disqualification proceedings. “Over to you
Vince,” is the gist of the referral. The likelihood is, I’m told, that
no such action will be forthcoming.
In terms of future bank directors, though, the FSa does outline where it thinks it can make life tougher when banks fail.
“Two broad ways to achieve this could be considered:
A
legal sanction based approach, introducing a currently absent ‘strict
liability’ of executives and Board members for the adverse consequences
of poor decisions, and making it more likely that a bank failure like
RBS would be followed by successful enforcement actions, including fines
and bans.
An automatic incentives based approach. This would not
rely on bringing enforcement cases which proved personal culpability,
but would rather seek to ensure that executives and Boards automatically
faced downside consequences from bank failure. Options here could
include:
–– Establishing rules which would automatically ban senior
executives and directors of failing banks from future positions of
responsibility in financial services unless they could positively
demonstrate that they were active in identifying, arguing against and
seeking to rectify the causes of failure.
–– Regulating remuneration
arrangements of executives and non-executive directors so that a
significant proportion of remuneration is deferred and forfeited in the
event of failure. Regulations of this form have already been introduced
for executive directors: they could be strengthened by increasing both
the proportion of pay deferred and the period of deferral.
There are
pros and cons of these different ways forward. A ‘strict liability’
legal sanction based approach raises complex legal issues relating to
burden of proof and human rights. It might in particular cases result in
injustice, and might discourage some high quality and high integrity
people from being willing to work in banks, given the large personal
liability involved.”

That last acknowledgement is, Lord
Turner just told me, a "trade-off". Will it be one that future
non-executives are willing to accept?

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Mark Kleinman

December 12, 2011 12:27 PM

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The City grandees drafted in to review the City regulator's
report on the failure of Royal Bank of Scotland are to urge an immediate
change in the law that would enable it block hostile bank takeovers, I
have learned.
Bill Knight and Sir David Walker, who were asked to
supervise the Financial Services Authority (FSA) inquiry in May this
year, will make the recommendation in evidence that will be discussed by
the Treasury Select Committee later today.
Their call for such a
power to be handed to the FSA and future regulators echoes the FSA's own
demand in its report. The 14-page Knight and Walker evidence is
expected to be published this evening.
I won't go over the details
of the FSA report again, although as expected it has triggered a bitter
war of words between Conservative and Labour politicians.
Michael Fallon, the Tory deputy chairman, said:
“Today’s
report exposes how Labour share the blame for the regulatory failures
that led to the biggest bank bailout in history. Gordon Brown and his
right-hand man, Ed Balls, were putting pressure on the City regulator to
turn a blind eye to the irresponsible risks banks were taking.
“This
is why the Government is right to reform both Labour’s broken system of
financial regulation and the banking sector so that taxpayers aren’t
landed with multi-billion pound bills ever again, and to create a stable
and balanced financial system that works for everyone.
“You wouldn’t bring back Fred Goodwin to sort out the banks, so why would you bring back Ed Balls to sort out the economy?”
Chris Leslie, the shadow City minister, responded by saying:
“Today’s
report by the FSA into the failures at RBS makes it clear that
‘ultimate responsibility for poor decisions must lie with the firm’ but
also that the regulators didn't do enough – and we have to learn lessons
from that. It is astonishing that deeply irresponsible decisions by
these bankers could have forced a £45bn bailout necessary to save
depositors, and yet no enforcement action is brought, and nobody is
punished for this.
“We need a change in the law to ensure that
incompetent bankers can be held properly accountable for the harm they
can cause – and if George Osborne does not amend the Financial
Regulation Bill to introduce the concept of 'strict liability' for bank
directors then we will do so. We also need to ensure that any major bank
acquisition in future needs approval by financial regulators – and we
agree with Lord Turner that this change should also be made in law. The
Chancellor must also change the rules to ensure City adviser firms don’t
bias their advice because fees are larger if big takeovers get the go
ahead.
“There are other reforms needed, to corporate governance, on
transparency for bankers’ pay, on audit – and to ensure we have a
stronger negotiating hand with the European financial supervisors, who
have the power to overrule the FSA. We will be raising these matters
during consideration of the Financial Regulation Bill in the Commons.
"Governments
and regulators around the world, including here in Britain, should have
been tougher on the banks before the crash. We've apologised for not
being tough enough, but when will David Cameron and George Osborne say
sorry for calling for less regulation and complaining that Labour was
too tough?"
In truth, both main parties advocated a light touch
approach to regulating the City. It isn't a message you're ever likely
to hear from either of them again.
UPDATE 13:35: I'm told that the
evidence from Knight and Walker will also call for the tightening of
the relationship between the chief executives of banks and those who
hold what in the regulator's parlance are called Significant Influence
Functions. That's a response to observations in the FSA report about
Goodwin's delegation of decisions within RBS's investment bank.

















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