There was a strongly cathartic element to yesterday's report on the near-collapse of Royal Bank of Scotland. For the British public, forced to stump up £45bn to save the bank and protect the economy, the 450 pages of explanation and finger-pointing from the Financial Services Authority serve two valuable functions. The report provides the authoritative account of what went wrong, and it helps to draw a line under the whole expensive affair. More important, however, are the proposed measures to stop the same thing happening again.
By itself, the litany of failings at RBS contains few surprises. Few would dispute, with hindsight, that the bank's management made poor decisions, took undue risks, and pursued the takeover of ABN Amro with grossly insufficient care and attention. The more interesting question is why none of them suffered anything more serious than the loss of their job. Even taking account of the risk-taking norms of the global finance industry and the unprecedented nature of the crisis, RBS was still peculiarly exposed, as the high price of saving it attests.
That there was not enough evidence to bring charges with any chance of success is a stark indictment of Britain's regulatory system. To remedy the situation, the FSA chairman is proposing that bank executives and directors be faced with direct personal consequences in the event that their bank fails – being stripped of their remuneration, for example, and banned from future directorships. Lord Turner is absolutely right and such measures must be put in place as quickly as possible.
The debacle at RBS also makes a broader point about corporate governance. While the FSA may be equivocal on the allegations that Fred Goodwin was unduly dominant over the RBS board, the now-disgraced chief executive's unchecked ambitions nonetheless add to the sense that boards too often simply rubber-stamp management plans rather than acting as a balance to their power. Ever-escalating executive pay is part of the same problem and the Business Secretary's efforts to boost the active role of shareholders deserve support.
That said, blame for the banking crisis cannot be restricted to banks and their mis-management. The FSA's report is also an extended mea culpa, criticising the regulator – entirely rightly – both for overlooking systemic threats to the banking system and for pursuing a flawed supervisory approach which left the banks' self-serving assumptions largely unchallenged.
An attempt has been made to resolve the situation, splitting the FSA into two separate regulators while creating a separate committee at the Bank of England to scan the horizon for long-term risks. All well and good. But changing the name plates will not be enough. The biggest problem at the FSA was the lack of detailed expertise, particularly in comparison with the quality of talent employed by the banks. With the gamekeepers so wholly outclassed by the poachers, it can be little surprise that their efforts proved ineffectual.
Part of the answer is, unfortunately in the current climate, to pay higher salaries. Part is to develop top-quality training programmes. But there also needs to be a change in the culture of the financial sector. To start with, the FSA needs more clout. Rule changes leaving bank executives personally liable would help, as would giving the regulator the power to sign off all major takeovers. Then there is the more nebulous issue of prestige. Until Britain's financial regulators receive the same kudos that they are accorded elsewhere, we will not attract the best talent to the job; and the financial crisis has proved that the best is desperately needed. Catharsis is an important step. But there remains much to be done to ensure there cannot be another RBS.