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Business Comment

James Moore: FSA has learnt a lesson, but will it really make a difference?

What comes next is a nasty fight over the idea that bank directors should be subject to "strict liability"

There's one nagging question that isn't answered by the Financial Services Authority's 452-page masterpiece of self-flagellation: if it did such a rotten job why didn't heads roll at the regulator as they have at the banks it supervises?

It certainly raises questions, not least about the future role of Hector Sants, the FSA's chief executive.

In its exhaustive report, the watchdog notes that the failings in its approach to the Royal Bank of Scotland differed significantly from the failures of its handling of Northern Rock, detailed in an earlier and equally blood-soaked tome.

With RBS the issue was not so much the conduct of the team assigned to it as it was with the regulator's entire approach, the idea of "light-touch regulation".

In fact, Sir Callum McCarthy, previous FSA chairman, wrote to former prime minister Tony Blair to say "the FSA applied to the supervision of its largest banks only a fraction of the resources applied by US regulators to banks of equivalent size and importance".

It is worth heeding this point as banks and bankers scream about what they claim is a torrent of new regulation. Ironically, RBS' present chief executive Stephen Hester played this game at a recent Treasury Select Committee hearing when he said he believed this would make Britain "a dumb place to put more capital".

The report suggests that it may well be that Britain is simply being brought into line with its biggest international financial services competitors.

But although the last Labour government deservedly takes a good deal of flack (Gordon Brown's speeches are quoted) the FSA does admit it can't escape culpability for its own failings.

The regulating it was doing was, according to the report, too much focused on firms' conduct of business and too little on their prudential financial health.

RBS was desperately weak. It would have been banned from the ABN Amro acquisition and from paying dividends and would have had to "increase by between £125bn and £166bn its stock of high-quality unencumbered liquid assets" were current rules in force.

What comes next is a nasty fight over the idea that bank directors should be subject to "strict liability" which would impose fines and bans if their banks fail.

The report itself contains an argument that will be used a lot in the weeks to come – namely that such a move might "discourage high-quality and high-integrity people" from joining bank boards. It also admits there could be "human rights implications".

There are also questions about which firms such new concepts might apply to: only systemically significant banks such as RBS, HSBC and Lloyds Banking Group? Or bigger building societies too? Or any company holding a banking licence. How about fund managers – or insurers?

And is there, anyway, the political will in Westminster to force through such a plan, which no doubt will prompt howls of protest from affected firms?