A fundamental crisis of credibility

During the boom years, it was fashionable to say that London owed its success as a financial centre partly to the quality of its regulation. Thanks to the Financial Services Authority’s astonishing internal audit of its supervision of Northern Rock, published last week, we can now see what that means. For Northern Rock, the UK’s fabled light-touch regulation was very nearly no-touch regulation. Those charged with supervising the Newcastle-based mortgage lender barely bothered to call on it; when they did, they didn’t know what questions to ask; afterwards, they didn’t bother to keep proper records. With a watchdog like that, no wonder financial services firms flocked to London.

Of course, the FSA insists its failures over Northern Rock were a one-off. Take that with a pinch of salt. On its own evidence, the organisation is under-staffed, under-skilled and lacks appropriate expertise and experience. Take with another pinch of salt FSA chief executive Hector Sants’s promise that he will now hire people with the right skills to do the job. People with the right skills just don’t seem to want to work there: the FSA has been struggling for months to find a credible new chairman to succeed Sir Callum McCarthy.

But the real significance of this report is not what it says about the FSA, but what it reveals about the wider state of UK regulation. At this stage in the most serious financial crisis in decades, the FSA is something of a sideshow. The organisations that must steer us out of this mess are the other two members of Britain’s ‘tripartite’ regulatory system, the Treasury and the Bank of England. Sadly, neither plans to publish an audit of their own substantial failures over Northern Rock. If they did, it would soon become apparent that what Northern Rock exposed was more than just the inadequacies of a few duff regulators, but a fundamental crisis in the credibility of Britain’s financial authorities.