FSA admits inadequacy in dealing with failing banks

The FSA identified six key factors in the failure of RBS, most significantly its weak capital position and over-reliance on risky short-term funding in wholesale markets (PA)

Political pressure from senior Labour politicians – including the now shadow Chancellor Ed Balls – was partly responsible for the failure to regulate the Royal Bank of Scotland in the years leading to the banking crash, a critical report concluded yesterday.

The review by the Financial Services Authority blamed deficiencies in the management and culture at RBS and called for tougher rules to make bankers more accountable.

The regulator also admitted it had failed adequately to monitor and challenge the bank – but blamed the previous government for encouraging it to take a hands-off approach. It cited speeches by the former Prime Minister Gordon Brown and then Shadow Chancellor Ed Balls backing light regulation.

In a speech in 2006 quoted in the report, Mr Balls said: "We must keep the UK's regulatory system at the cutting edge ... At all times we will apply a system of risk-based regulation, without unnecessary administration burdens... Nothing should be done to put at risk a light-touch regulatory regime."

The report concludes: "FSA senior leaders were conscious of the need to reassure political leaders that the supervisory approach being pursued was not heavy-handed."

The report focused on poor relations between the FSA and RBS and said its chief executive Sir Fred Goodwin's management style was flagged as a potential risk in 2003. RBS management was resistant to what they saw as unnecessary FSA interference.

Labour yesterday said the party was clear that they had made mistakes over banking regulation but pointed out that it was not alone in calling for light-touch regulation. It quoted a speech by David Cameron in 2008 in which he referred to Labour's "excessive bureaucratic interventionism" and "too much regulation".

The Business Secretary, Vince Cable, said he was seeking legal advice about whether any of the directors should face disqualification proceedings.

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