Speech

Statement by the Financial Secretary to the Treasury, Mark Hoban MP, on the FSA Report on RBS

Statement by the Financial Secretary to the Treasury.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Mark Hoban

Mr Speaker, I would like to make a statement.

Today the FSA has published its report on the failures that precipitated the near collapse of the Royal Bank of Scotland.

It’s a thoroughly detailed report, listing the catalogue of management and regulatory failures that almost felled one of the world’s largest banks.

Given the billions of pounds of taxpayers’ money that was needed to bailout the bank, not once, but twice, and for a total sum of £45bn, it is right that taxpayers are told the full story.

And it’s fair to say, the report makes for depressing reading.

But for the Shadow Chancellor it’s as damning as it is depressing.

The report lays the bare the gross failures of the regulatory regime devised and driven by the Shadow Chancellor and his party.

Failure of regulation

It is now well known that the tripartite system set up by the last Government failed spectacularly in its mission to maintain stability. 

The decision to divide responsibility for assessing systemic financial risks between three institutions meant that in reality, no one took responsibility.

As the report laments, the FSA was solely responsible for the entire range of financial regulation issues - from the prudential soundness of major systemically important banks, to the conduct of some 25,000 financial intermediaries.

But along with a failure of institutional design, was the equally significant failure of regulatory culture.

As the report says, and I quote, “what was wrong in the case of RBS was the FSA’s overall approach to prudential supervision, rather than the execution of this approach in relation to RBS.”

But more than that, the Report says that it was an approach which, and I quote, “responded to political pressures for a ‘light tough’ regulatory regime.”

The Report even singles out the Shadow Chancellor as one of the three senior Labour politicians responsible for this “sustained” pressure, even quoting his first speech as City Minister where he said “nothing should be done to put at risk a light touch, risk-based regulatory regime.”

It was a political dogma at the cost of prudential regulation.

And it left us with a hamstrung, complacent regulator, powerless against the risks in the financial system.

It meant that the FSA failed to sufficiently challenge RBS management over its decisions, and was over-reliant on the firm’s own assessment of its position.

Rather than exercising judgement and foresight, the FSA adopted a tick box and reactive approach to regulation.

Management failures

Left to their own devices, without proper regulatory oversight, RBS got away with some of the most shocking decisions taken by any bank in the years and months leading to crisis in late 2008.

Poor judgement was fostered by a style of management and governance that promoted a culture of aggressive risk taking over prudence.

That was most clearly demonstrated by RBS’s decision to grow its investment bank by aggressively expanding its structured credit and leveraged finance activities.

A build up of risk that was compounded by RBS’s relentless pursuit and purchase of ABN AMRO. Quoting the current Chairman of RBS, the acquisition was “the wrong price, the wrong way to pay, at the wrong time and the wrong deal.”

As the House is aware, it was the losses in RBS’s investment banking arm that crippled the entire bank.

As the credit trading losses mounted, the bank’s excessive reliance on short-term wholesale funding and its weak capital position were brutally exposed.

Regulatory reform

Mr Speaker, the British economy is still recovering the near collapse of RBS, and the wider financial system just three years ago.

Recovering from that crisis is this Government’s number one priority, but at the same time, we simply cannot afford a repeat of the last crisis.

It’s why we have embarked on fundamental reform of our regulatory system.

As the House is aware, this Government is legislating to fundamentally reform the failed tripartite system.

We are establishing a permanent Financial Policy Committee inside the Bank of England. Its job will be to monitor overall risks in the financial system, identify bubbles as they develop, spot dangers inter connections and stop excessive levels of leverage before it is too late.

It is exactly the kind of judgment and foresight we needed in the years preceding the last crisis.

We are also abolishing the Financial Services Authority in its current form, and creating a new Prudential Regulation Authority with a focus on micro-prudential regulation. 

Prudential regulation of banks will go back where it belongs - under the auspices of the Central Bank, as a subsidiary of the Bank of England, bringing micro and macro regulation under one roof.

The PRA will be a focused, expert regulator. Whereas the FSA was responsible for thousands of financial services firms, the PRA will focus exclusively on the prudential regulation of deposit takers, insurers and investment banks.

And when regulating banks, it will have a single statutory objective of promoting the safety and soundness. Responsibility for protection of consumers and conduct of financial services firms will transfer to a new Financial Conduct Authority, leaving the PRA free to focus first and foremost on stability.

Enforcement action

We are also working closely with the FSA and the Bank of England to ensure that the new PRA has the powers it needs to ensure that banks do not take excessive risks, and that directors who act improperly face appropriate penalties.

We will consider carefully the further recommendations made in the report and in particular Adair Turner’s suggestion that it should be made easier for action to be brought against the directors of failed banks. 

I share the frustration of many Members that it has not been possible to bring action against those responsible for failures at RBS.  However, strengthening legal powers in this area would raise some complex issues and we will want to reflect carefully and listen to a range of views before deciding on any action.

ICB and RRPs

The Report into the failure of RBS fully complements our analysis on the faults of the previous regime. And it also supports our wider reforms to the banking system.

We will be responding to the recommendations of the Independent Commission on Banking next Monday.

But we have already said that we support in principle a ring fence around better capitalised high street banks, protecting against investment banking losses …

… and when things do go wrong, bail in of private investors, not bail out by taxpayers. Together with Recovery and Resolution Plans we are working to ensure that banks can fail in an orderly fashion without any recourse to taxpayers’ money.

Conclusion

We will not make the same mistakes as the previous Government.  We will ensure that we have a system of regulation that secures our financial stability, whilst protecting our competitiveness.

And we have already made substantial progress in that ambition.

I welcome the action already taken by the FSA to strengthen its supervisory capacity, become a more intensive and intrusive regulator and improve its ability to ensure that banks are well governed. 

And we continue to lead the international debate to impose higher capital requirements and tougher funding standards on banks across the globe. We will resist any attempt to unpick Basel III in Europe.

At a time when the world is focused on the strength of bank balance sheets this is not a time to pander to vested interests.

We will ensure Basel is implemented in full, and we will ensure that we can go further to impose higher capital standards where necessary to meet risks unique to our sector.

Yes the financial sector will continue to be a critical part of our economy and our recovery. And we are committed to supporting the sector, and protecting the open and competitive markets that have allowed the sector to flourish in the UK.

But that success cannot come at a cost to wider economy stability.

This means getting the structure and substance of regulation right - correcting the mistakes of the past.

This Report today serves to remind us of the gross failures of the previous regime and the previous Government.

This Government will not make the same mistakes.

We will reform to preserve the innovation that fuels the sector’s success without putting the wider economy at risk.

We will reform to build a successful but stable financial services sector.

And I commend this statement to the House.

[Ends]

Published 12 December 2011