FSA feels heat as another scandal hits City watchdog

Gideon Spanier
6 Mar 2009

Private Eye has memorably dubbed the City's regulator the Fundamentally Supine Authority.

That reflects the view of its critics that the Financial Services Authority is not up to the job. The argument goes that the watchdog, created by Gordon Brown in 1997, has been exposed by the credit crunch as toothless and ineffectual — if not quite supine.

The latest setback is the news that a group of investors are planning a multi-million pound claim against the FSA for failing to stop an alleged rogue trader, Terry Freeman.

The investors claim the watchdog failed to act despite two years of inquiries into Freeman's GFX Capital, which subsequently collapsed with losses of £44 million.The FSA will not comment but is working with police.

The regulator suffered another blow last month when deputy chairman Sir James Crosby was forced to resign from its Canary Wharf HQ.

A whistleblower claimed that while Crosby was chief executive of HBOS, he ignored warnings about the bank's risk management around 2004-5. The FSA came out of it badly too because it did issue warnings to HBOS at the time — yet the bank appeared to pay only lip service to the watchdog.

Sir James's resignation underlined the impression that the gamekeepers are too close to the poachers they are supposed to be policing. Other top brass such as Hector Sants, FSA chief executive since 2007, also used to work on the banking frontline.

There is a lot to be said for poachers turning gamekeeper — so long as they stop the rogues from poaching.

Unfortunately the woes in the City since 2007 — Northern Rock, HBOS, the Icelandic banks and so on — suggest the gamekeepers had been poking around in the wrong parts of the forest. Or in a case like HBOS, where they did identify a problem, they should have got out the shotgun.

John Tiner, who quit as FSA chief executive in 2007, and Callum McCarthy, who left as chairman a year later, don't emerge with huge credit.
Even recently, the FSA has struggled. Its ban on short-selling of banking shares last summer was heavy-handed and arguably did nothing to stop the collapse of HBOS and RBS.

When the FSA eventually lifted the ban in January, the watchdog reportedly gave one hour's notice to Chancellor Alistair Darling — just as bank shares tanked again.

McCarthy's successor, Lord Turner, acknowledged to MPs last month that mistakes on regulation were made. But he also made clear he felt the Treasury and the City shared some blame: “All the pressure on the FSA was not to say why aren't you looking at these business models, but why are you being so heavy and intrusive, can't you make your regulation a bit more light touch?”

Some FSA insiders say they knew this all along and were hugely frustrated and disillusioned. The wheels of bureaucracy, they say, often moved slowly and sometimes they felt they were chasing the wrong targets.

There was talk of morale slipping and staff defections. And like anyone who knew the inner workings of the civil service and regulatory machinery, FSA staffers were attractive to banks which wanted to know how the gamekeeper operated and paid handsomely to hire them.

“A lot of people working for the FSA only did two or three years and then went to the private sector,” says a recruitment expert.

Morale is one matter but claims that the FSA was chasing the wrong targets are more alarming. Arguably, the watchdog was damned whatever it did, for being too zealous or too lightweight. Just as GFX Capital appeared to escape censure, there are tales of others that felt they were treated harshly.

Bankas Snoras, one of Lithuania's largest banks, applied for a UK banking licence in 2006 and claims discrimination because it was refused. Those close to Snoras, which is controlled by Russian mogul Vladimir Antonov, believe the FSA was too ready to listen to political enemies in his native land.

The FSA counters that it had credible doubts about Snoras, which failed to provide all the information that the regulator asked for.

It's an interesting case because as a Lithuanian bank, and therefore part of the European Union, it should be reasonably straightforward for the FSA to give the green light. Antonov did have the opportunity to challenge the FSA's judgment but this week he dropped an appeal, scheduled for late April. That would appear to vindicate the FSA which says the "decision to intervene was fully justified in fact and law".

However, those close to Snoras, which had kitted out an office in Lombard Street in the City, insist they are pulling out because they were fed up that the saga had dragged on for three years.

They would rather take their investment elsewhere — so the UK will miss out, they say.
At a time when the future of the City has never looked so precarious, no-one wants the regulator to drive away business unnecessarily.

Yet everyone agrees regulation urgently needs change.

Shadow chancellor George Osborne certainly thinks the FSA needs a total overhaul. And Vince Cable, the Liberal Democrat sage, says the FSA must have “better staff who once worked in the banking industry and stronger leadership”.

It is possible the jobs cull in banking could prompt more high-calibre staff to join the state watchdog.

FSA chairman Lord Turner is due to publish a review into banking regulation on 18 March. So we will see what changes he proposes.

Having acknowledged that the FSA has been part of the problem, it is not yet clear how the regulator can be part of the solution.

History of FSA

1997 - Gordon Brown creates FSA as part of new Tripartite system of regulation, with independence of Bank of England and Treasury.

1998 - FSA takes responsibility for banking supervision from the Bank

2001 - Adds new role to prevent market abuse and takes over as UK Listing Authority from London Stock Exchange

2004 - Takes responsibility for mortgage regulation

2007 - Collapse of Northern Rock

2008 - FSA ban on short-selling; Lehman goes bankrupt in UK; Bradford & Bingley nationalised;
HBOS and Royal Bank of Scotland have to be saved by bailouts; Icelandic banks collapse in UK