FSA admits NR supervision not up to scratch

The Financial Services Authority has today admitted that its supervision of Northern Rock was \"not carried out to a standard that is acceptable\".

An internal report produced by the FSA, published today, says it failed to sufficiently keep tabs on the bank in the wake of the credit crunch.

It also says that there was a lack of adequate oversight and review by FSA line management “of the quality, intensity and rigour of the firm’s supervision” and that the FSA also failed to ensure that all available risk information was properly utilised to inform its supervisory actions.

The FSA revealed last week that Clive Briault, managing director of the FSA’s retail business unit and who was in charge of looking after NR, was leaving the regulator by “mutual consent”.

But Hector Sants, chief executive of the FSA, says it’s difficult to say whether better supervision of the firm could have stopped the events which led up to the run on NR.

He says: “It is clear from the thorough review carried out by the internal audit team that our supervision of NR 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.”

The FSA will beef up staff levels, training and keep a closer eye on major banks by creating a new breed of supervisor specialists to regularly review the supervision of what it terms ‘high-impact’ firms.

Sants adds: “This represents our specific supervisory contribution to the package of measures introduced by the Tripartite Authorities to prevent a similar situation to NR 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.”