David Prosser: A watchdog that failed to bark or bite

Outlook The case of Deutsche Bank's irresponsible mortgage lending might be seen as a microcosm of everything that has been wrong with the UK's approach to protecting consumers from the financial services industry's sales sharks over the past few years. And the fact that the Financial Services Authority has now whacked the bank with a big fine and an even bigger compensation bill is no vindication of the regulatory system.

The significant date in this saga is 31 October 2005. That is the day on which the sale of mortgages formally became a regulated activity – and thus the day on which the FSA took on the responsibility of ensuring that borrowers were properly treated when they sought to arrange a home loan.

Note that the abuses for which Deutsche Bank was yesterday punished all dated from 2006 and 2007, well within the FSA's watch. And they were not subtle abuses. The fact that Deutsche was lending to those with poor credit histories ought, in itself, to have prompted closer scrutiny. That it was lending to people who weren't scheduled to be free of debt until well into their retirement really should have been picked up. It wasn't – nor were the swingeing penalties added to the accounts of those who fell behind with repayments.

Do not assume these were a handful of isolated cases. The bank arranged almost 8,000 mortgages during the period in question.

Why did Deutsche get away with such practices? Quite simply, because the FSA failed to put a stop to them, as it did throughout the mortgage industry. Tellingly, this is the first time the regulator has ever fined a company for irresponsible lending practices.

It is only a few months now until the FSA is due to be broken up. Thereafter, it will be the responsibility of a new watchdog, the Financial Conduct Authority, to stop these type of offences. We are promised a new approach, under which the regulator will have the power to ban products or limit their distribution should it judge they are being abused. The test for the FCA will be whether it is able to use such powers to preventcases like this Deutsche Bank affair in the first place – issuing big fines years later is not a substitute for doing the job of regulation properly in the first place.