Watchdog’s failings let bank slide into crisis

Mar 27 2008 by Babette Decker, The Journal

THE crisis that engulfed Northern Rock was compounded by unacceptable failings by the country’s financial industry regulator, it yesterday admitted.

Hector Sants, chief executive of the Financial Services Authority (FSA), said the standard of supervision of Northern Rock was not carried out to an “acceptable” standard before it ran into trouble last year.

In a heavily anticipated report, the blundering watchdog admitted there were three different heads of department with responsibility for the Newcastle-based lender over a two-and-a-half-year period.

An FSA team with responsibility for an insurance group also initially covered the Rock and none of the heads of department had met the bank since January 2005, despite weekly meetings with other firms.

Last night, the FSA declined to comment on speculation that the lack of adequate supervision was due to the distance between its London base in Canary Wharf and Northern Rock’s headquarters in Gosforth – but admitted there had been a lack of overall engagement with the company.

It also insisted the unforeseen credit crunch and Northern Rock’s seeking of emergency help from the Bank of England, after its funding dried up amid the turmoil, ultimately led to the damaging run on the bank last autumn.

Thousands of panicked depositors queued up to withdraw money in the first run on a UK bank in more than 140 years.

But the watchdog’s shortcomings came under fire from Northern Rock shareholders campaigning for “fair” compensation after nationalisation of the bank.

“It is our view there was contributory negligence from the FSA, the Government and the Bank of England,” said Robin Ashby, from the Northern Rock Small Shareholders Group.

Berwick MP Alan Beith focused blame for the Rock’s problems on its former bosses but added the FSA was “culpable” in failing to apply pressure to change its business model – which was heavily reliant on raising cash from international money markets.

And Gordon Brown came under fire from Tory leader David Cameron who challenged the Prime Minister to admit failures in the regulatory system he introduced as Chancellor.

“The FSA report today is a remarkable report, which says the supervision of Northern Rock revealed the most significant combination of shortcomings,” said Mr Cameron, who called for the Bank of England to be given the job of rescuing failing banks rather than the FSA.

Mr Brown said the Tories had previously supported the Government’s backing for Northern Rock, adding: “It’s true that the FSA have been regulating for solvency and done a good job.

“The problem arose in terms of liquidity and that’s where further efforts have got to be made.”

Last night, FSA bosses promised an overhaul to win back confidence. They are planning to recruit 100 extra staff after admitting having too few regulators assigned to monitor Northern Rock and a “lack of oversight and review” by FSA line management.

The FSA’s report also outlined a number of failings in processes and staffing up to August 9 last year when the situation entered a crisis phase. The watchdog says a full version of the internal audit report will be available by the end of April.