FSA Press Coverage March 2008

The FSA's mea culpa
You'd have thought the FSA bigwigs would read the financial press.

Sunday Telegraph, Paul Farrow 30th March, 2008

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.

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.

Light touch rockulation

John Lappin in Money Marketing, 28 Mar, 2008

One could wisecrack about how the only actual practical example of light touch regulation turned out to be light touch rockulation. One might demand that the FSA instead of politicking, spinning, manipulating and indeed reinventing the wheel and of course reinventing the model just got on with the day job of regulating. It has clearly not been doing that so well.

One might hurl abuse at McCarthy and Sants, question their abilities and demand more scalps than that of Briault and indeed the team concerned though to what end I am not sure. One might consider what it means for every other firm, the risk of overreaction - principle replaced by rule, light touch by heavy handed interference or indeed what it all means for a regulator under duress.

One might call for the FSA to be broken up. One day indeed like some overmerged conglomerate it probably will be.

But let’s leave those arguments for another day. One might muse that whilst the FSA was worrying about the failure of HSBC, Barclays, Lloyds TSB and HBoS, the salient, noisy, arrogant, stock market darling escaped scrutiny. What better warning sign is there than that - a bank achieving “growth” in a way that no-one else can replicate. And yet. I am still not sure that is the issue. Show me the contrarian investor or the astute journalist who warned about it all.

Northern Rock wasn’t engaging in fraud. It isn’t Enron or Parmalat. It was simply overly relying on one type of funding and growing too fast. It was reckless but no more than that. The FSA should have seen it coming but then so, arguably, should Money Marketing.

But it is not so much that the FSA failed to see this coming. It is that its systems and its processes are so poor that it maybe never had a chance of seeing this coming.

Take the issue of the paperwork. We need the reasons why and the reasons why not written down but we do not have them.

To recap. An arrow panel visit took place in February 2006. But the arrow panel was not provided with recorded details of meetings between Rock and other FSA staff - only their conclusions. As a result it obviously came to the wrong conclusion about the level of supervision required. Between then and the beginning of the crisis in August 2007, only one set of the now vital “close and continuous” meetings took place between the FSA and Northern Rock. This was in April 2007.

Out of five meetings the FSA’s internal auditors only found agendas and a typed record of one part of one of them, presumably stained with industry funded FSA coffee. Partial minutes? Did the minute taker doze off? How so? Where’s the filing cabinet, the computer disk, the post it note? Did anything find its way to the shredding machine in the last few months? Forgive me. But I have to ask because I assume that is an illegal act.

A few years ago, readers may remember, Money Marketing ran what proved to be a controversial story about the regulator. An IFA had taped an FSA supervisory team visit. Three FSA staff sat in his office and for a great deal of the time chatted to each other and achieved very little. We know. We had to transcribe hours of the stuff. Subsequently the FSA went into a mighty huff about all this.

One press officer suggested that Money Marketing was trying to suggest the FSA were a bunch of extra-terrestrial lizards. Actually what had happened was that one of their own team had suggested the FSA enforcement team were a bunch of Masons. Funnily enough, Money Marketing was saying nothing of the sort. We reported the comment. But we also heard conversations about Tim Henman and who amongst the team had the “gayest” ring tone.

But our coverage was nothing to do with lizards or Masons. The story revealed that the team from the FSA did not behave like regulators should. They were lackadaisical. They were shoddy. They were unprofessional. They acted like teenagers.

What I didn’t think at the time was that FSA teams covering something as important as one of the UK’s fastest growing banks would be behaving in the same way. The Tiners, Waters and Blands of this world actually present a very professional and competent face to the world but what on earth has been going on below them?

In the next year or so the FSA will be visiting IFAs across the country. They will be examining IFAs’ paperwork and considering in some detail whether they are treating their customers fairly. I suggest that IFAs make a few jokes at the visiting regulators’ expense. But when advisers ask the FSA have you found the paperwork yet, I suggest it should be a deadly serious question. Money Marketing is certainly going to keep asking. Indeed let’s start now. Have you found the paperwork yet?

Dr Andrew Goudie in The Times 27th March, 2008

Sir, After the collapse of Equitable Life in 2000, the FSA set up a review team on the regulation of the assurance society. Among the important “lessons to be learnt”, identified in 2001 were, and I quote verbatim, that “the FSA management take steps to ensure that the supervisory team is properly constituted with persons with the necessary expertise and knowledge”; and that “assessed financial risk must be an integral part of an overall risk assessment which is consistent, and consistently applied, across the FSA”.

From the recent internal audit by the FSA on its regulation of Northern Rock we learn (report, March 27) that the bank “was monitored by supervisors with expertise in insurance, not banking”; that “formal records of supervisors’ meetings with the FSA’s risk assessment panel to discuss Northern Rock were not kept, nor did supervisors give the panel any developed financial analysis on the bank”; and that “supervisors did not issue the bank with a risk-mitigation programme that would have forced it to address its risks”.

The issues identified in the recent internal audit were therefore all highlighted in the 2001 internal audit. What is the point of internal audits that are simply ignored?