Bank bosses face crackdown after damning report on RBS

The Financial Services Authority firmly laid the blame on former RBS managers, such as former chief executive Fred Goodwin.

But the report was also critical of the FSA’s own actions and of former Labour Government for encouraging a “light touch” regulatory regime.

The report said there was no prospect of successful legal action against former RBS executives as there was no evidence of criminal wrongdoing, although they had made a series of bad decisions.

RBS was only saved from bankruptcy in 2008 by a £45bn Government bailout and the taxpayer still holds an 83 per cent stake in the bank.

The taxpayer is currently sitting on a £26.5bn loss at yesterday’s share price.

Which? chief executive, Peter Vicary–Smith, said: “The FSA report is a damning document. It reveals the inherent flaws in a corporate culture that focuses on bonuses and short-term profits.

“The Chancellor must confirm he will take tough action to protect consumers. It also has to be made easier to take enforcement action against senior executives when their poor decisions lead to bank failures and risks to consumers. People need to be reassured that this will never happen again and the failure of one bank will not be allowed to put the entire system at risk.”

FSA Chairman Adair Turner said bank directors could be banned or have pay clawed back if their company fails, as banks are different from other companies and need to pay more attention to risk than profits.

“In the years before the crisis we allowed the development of a financial system which was taking too many risks, in some cases doing activities that were socially useless, which had a set of remuneration structures that allowed people to make very large amounts of money,” he said.

The FSA said banks should face closer scrutiny of their takeover plans, pointing to RBS’s disastrous £10bn purchase of parts of Dutch bank ABN AMRO in 2007, just before the meltdown in the financial markets.

“The decision to make a bid of this scale on the basis of limited due diligence entailed a degree of risk-taking that can reasonably be criticised as a gamble,” it said, adding the information made available to RBS by ABN AMRO in April 2007 amounted to “two lever arch folders and a CD”.

In future banks should need formal consent from the regulator for a takeover and obtain independent advice from an adviser whose pay is not linked to a successful deal, it added.

ShareSoc, the body that represents small investors, said the report is useful in understanding what happened but the analysis “is limited with significant omissions”.

It said it was disappointed that there are no major new recommendations in the report.

“ShareSoc would like to see a more extensive revision of the legal framework in which company directors operate to ensure they are accountable both to the law, and to shareholders. The penalties proposed in the report are inadequate in our view.

“The FSA gets off relatively lightly, and the auditors to the company even more so. Their role and that of defective accounting standards that enabled RBS to conceal its true financial position are not even covered by the report,” it added.

Mr Turner admitted that the FSA had been “seriously flawed”, but was “very different now”.

The Government welcomed the FSA’s report, saying it showed its reforms of the banking sector were right.

The new management at RBS, which employs around 7,000 full-time employees in Yorkshire, said it had learned the lessons of past and is building a new bank.

The FSA said flaws in its own supervision “provided insufficient challenge” to RBS, but also argued it was under pressure from the Government to take a hands-off approach.

The report said that in both 2005 and 2006 the Government said it didn’t want “unnecessarily restrictive and intrusive regulation” to impair London’s competitiveness.

RBS rose to become one of the world’s biggest banks following a string of takeovers and aggressive expansion.

The bank’s Churchill and Direct Line insurance arm, which has four core sites in Yorkshire – three in Leeds and one in Doncaster – is up for sale to appease regulators following the bail out.

Regulator insists it is different now

The City regulator said it is a different organisation to the one that failed to rein in Royal Bank of Scotland prior to its rescue.

The Financial Services Authority admitted its own part in RBS’s downfall, saying that its approach was flawed and it provided “insufficient challenge” to the bank.

It said it had been too focused on policing the behaviour of traders rather than supervising the overall direction banks were taking or looking at whether they were taking on too much risk.

But the FSA claimed it is “a different organisation now” because it now has more resources, better skills and far greater focus on capital, liquidity and asset quality.