Your three-point guide to today’s RBS report

After months of delay, and much hounding by The Spectator’s Select Committee Chairman of the Year, Andrew Tyrie, the Financial Services Authority has finally released its report into the wheezing collapse of RBS in 2008. At 452 pages it is a behemoth of a document, and too much for me to have fully digested yet. But a few points stand out at first glance:

1) Don’t blame us, blame Gordon. The Tories are making much of the fact that only three politicians are mentioned in the report: Tony Blair, Gordon Brown and, most relevantly, Ed Balls. And they’re not mentioned in a particularly flattering context, either. All three are quoted to partially justify the FSA’s regulatory approach in the run-up to the RBS debacle. You’ve probably heard the quotations before — Brown’s ‘Not just a light touch but a limited touch’; Balls’s ‘nothing should be done to put at risk a light-touch, risk-based regulatory regime’; and so on — but they’re outside their usual setting of a speech by a Tory minister. That will lend them a little extra piquancy in tomorrow’s papers, at least. 
 
Whether this is buck-passing on the FSA’s part or not, it still cuts through to one of the most important questions arising from the financial crisis: just what does ‘independent’ mean? The FSA is, on the face of it, an independent body. But, as its report is keen to suggest, it has been influenced by a wider ‘context’ that includes everything from the words of politicians to a ‘global approach to capital adequacy, agreed by regulators and central bankers from all major authorities across the world, which was in retrospect severely deficient.’ Much as with the Bank of England and its 2 per cent inflation target, independence can be more constrained than we have been led to believe.     

2) But we did make mistakes. That’s not to say that the FSA doesn’t ‘fess up to some errors — just that they go out of their way to justify them. As they put it, towards the start of the report, ‘while less significant to RBS’s failure than the framework of regulatory standards, many aspects of the FSA’s approach to the supervision of systemically important firms in the pre-crisis period were inadequate.’ The report then goes on to distinguish between the errors in their ‘overall philosophy and approach’, which were plural and relate the wider context mentioned above, and the ‘material’ errors made in handling RBS, which numbered only one: a point relating to RBS’s capital position at end-March 2008. According to the FSA, most of the requisite changes to how they function have since been made: ‘This reflects the radical overhaul of the FSA’s approach to supervision, and of global regulatory standards, which had begun even before the failure of RBS and has continued since.’  

Despite the heavy air of mitigation, these admissions of past error could be more politically significant than the references to Brown, Blair and Balls. After all, the head of the FSA when RBS collapsed, Hector Sants, is in line to take charge of the Bank of England’s ‘Prudential Regulation Authority’ next year. I wouldn’t be surprised to see an anti-Sants campaign starting up, perhaps headed, unofficially, by certain Lib Dems.

3) And, erm, Fred Goodwin wasn’t great either. If Fred Goodwin was looking to piece together his shattered reputation, then this report won’t help him much. Beyond noting various ‘errors of judgement and execution made by RBS executive and management’, the FSA also dwells on the fluctuating relations between themselves and Team Goodwin. As they put it, ‘Overall, FSA supervisory records from 2004 suggest that RBS management, and in particular the RBS CEO, had been resistant to what they saw as unnecessary FSA interference.’ Even after a ‘clear the air meeting’ in October 2004, Goodwin is said to have suggested, and succeeded in implementing, changes to a draft letter from the FSA to the RBS board that might have had two effects:

‘The effect of the first of these may have been to obscure from the Board of RBS that the FSA had not always regarded the dialogue with RBS’s executive management as constructive. The effect of the second, described in Section 1.3.6, may have been that RBS’s Board did not appreciate the extent of the FSA’s concern about RBS’s management of the risks associated with its corporate lending, in particular its commercial property portfolios.’

One thing to highlight, however, when it comes to Goodwin and the RBS management, is that the FSA has not seen fit to ‘punish’ any of them. As Adair Turner puts it in his foreword to the document, ‘After detailed investigation, however, our Enforcement Division lawyers concluded that there was not sufficient evidence to bring enforcement actions which had a reasonable chance of success in Tribunal or court proceedings.’ The report does suggest that the rules could be changed to make delinquent financiers more culpable in future; a suggestion that has, understandably, been met with scepticism by the RBS Shareholders Action Group.  

I’m sure we’ll have more on the FSA report on the Business Blog in the next few days. If any CoffeeHousers feel like skimming through its pages, you can find it here. Please do shout out in the comments section if you find anything of note.