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Regulator admits it made NR errors but says bank was an extreme case

More than half a year on from the spectacle of desperate savers queuing outside branches of Northern Rock waiting to withdraw their money, the Financial Services Au-thority has admitted its supervision of the bank was unacceptable and that the resources allocated to this were inadequate.

Specifically, the FSA admitted its supervisory teams had failed to follow up on the vulnerability of NR’s business model with the firm.

But it also argued that, overall, its supervision of NR was at the extreme end of the spectrum of firms reviewed in respect of this failing and that its work in this case did not reflect its general practice when it comes to the supervision of prominent firms.

As one pundit observed, the regulator is unlikely to be taking out an enforcement action and fining itself £1m.

The admissions, described as honest by the British Bankers’ Association, came with the publication on 26 March of an internal report on the failure of the bank.

The report also said there was a lack of adequate oversight and re-view by FSA line management “of the quality, intensity and rigour of the firm’s supervision” and that the FSA failed to ensure that all available risk information was properly used to inform its supervisory actions.

The report was published a week after the FSA revealed that Clive Briault, managing director of the FSA’s retail business unit and the man in charge of looking after NR, was leaving the regulator by what it termed mutual consent (see Movers & Shakers, page 42).

But Hector Sants, chief executive of the FSA, thought it would be difficult to say whether better supervision of the bank could have stopped the events that led to the run on NR.

He said: “It is clear from the re-view carried out by the internal audit team that our supervision of NR in the period leading up to the market instability of 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.

“But I am determined, through the programme of work I am ann-ouncing, that proper standards will apply to all significant firms supervised by the FSA.”

The regulator will strengthen staff levels and training and keep a closer eye on major banks by creating a new breed of supervisory specialists who will regularly review the supervision of what it terms high-impact firms.

Sants added: “This is our supervisory contribution to the pack- age of measures introduced by the Tripartite Authority to prevent another situation similar to NR undermining financial stability.

“That does not mean a no failure regime but together with the proposed reform of the insolvency re-gime 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 we do not claim infallibility and should not try to remove all risk from the system.”

Responding to the FSA’s report, the BBA said: “The regulator needs individuals who can look at a whole business rather than concentrate on one or two areas.

“The industry will work with the regulator to bring this about but the primary responsibility for any company must lie with its management.

It added: “No amount of regulation can ensure that wrong decisions are never made. NR is one of several casualties of the credit crunch.”Lending Strategy onlineVisit and you’ll find we are offering you an online version of your favourite monthly magazine and complementing this with a news update every Monday as well as updates on important events as they happen.

The online version includes all the regular features of the magazine plus an archive, a cartoon gallery, links to industry events such as trade body conferences and information about our Lending Excellence Awards, and editor John Murray’s ‘Just JM’ column that appears each week in our sister magazine Mortgage Strategy.

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