Royal Bank of Scotland (FSA Report)

Chris Leslie Excerpts

Monday 12th December 2011 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

With permission, Mr Speaker, I should like to make a statement.

Today the Financial Services Authority published its report on the failures that led to the near collapse of the Royal Bank of Scotland. It is a thoroughly detailed report, listing a catalogue of management and regulatory failures that almost felled one of the world’s largest banks. Given the billions of pounds of taxpayers’ money that was needed to bail out the bank, not once, but twice, and for a total sum of £45 billion, it is right that taxpayers are told the full story.

It is fair to say that the report makes for depressing reading. For the shadow Chancellor, it is as damning as it is depressing. The report lays bare the gross failures of the regulatory regime that was devised and driven by the shadow Chancellor and his party.

It is now well known that the tripartite system set up by the previous Government failed spectacularly in its mission to maintain stability. The decision to divide responsibility for assessing systemic financial risks between three institutions meant that in reality no one took responsibility. As the report laments, the FSA was solely responsible for the entire range of financial regulation issues, from the prudential soundness of major systemically important banks, to the conduct of some 25,000 financial intermediaries.

The failure of regulatory culture was equally significant as the failure of institutional design. The report says:

“What was wrong in the case of RBS was the FSA’s overall approach to prudential supervision, rather than the execution of this approach in relation to RBS.”

More than that, the report says that it was an approach that

“responded to political pressures for a ‘light touch’ regulatory regime.”

The report singles out the shadow Chancellor as one of the three senior Labour politicians who were responsible for this “sustained” pressure. It quotes his first speech as City Minister in which he said

“nothing should be done to put at risk a light-touch, risk-based regulatory regime.”

It was political dogma at the cost of prudential regulation, and it left us hamstrung with a complacent regulator, powerless against the risks in the financial system. It meant that the FSA failed sufficiently to challenge RBS management over its decisions, and was over-reliant on the firm’s own assessment of its position. Rather than exercising judgment and foresight, the FSA adopted a tick-box and reactive approach to regulation.

Left to its own devices, without proper regulatory oversight, RBS got away with some of the most shocking decisions taken by any bank in the years and months leading to the crisis in late 2008. Poor judgment was fostered by a style of management and governance that promoted a culture of aggressive risk-taking over prudence. That was most clearly demonstrated by RBS’s decision to grow its investment bank by aggressively expanding its structured credit and leveraged finance activities. That build-up of risk was compounded by RBS’s relentless pursuit and purchase of ABN AMRO. The current chairman of RBS said that the acquisition was

“the wrong price, the wrong way to pay, at the wrong time and the wrong deal.”

As the House is aware, it was the losses in the RBS investment banking arm that crippled the entire bank. As the credit trading losses mounted, the bank’s excessive reliance on short-term wholesale funding and its weak capital position were brutally exposed, and led to its near collapse.

The British economy is still recovering from the near collapse of RBS and the wider financial system just three years ago. Recovering from that crisis is this Government’s No.1 priority. We simply cannot afford a repeat of it, which is why we have embarked on fundamental reform of our regulatory system. As the House is aware, the Government are legislating fundamentally to reform the failed tripartite system. We are establishing a permanent financial policy committee inside the Bank of England. Its job will be to monitor overall risks in the financial system, identify bubbles as they develop, spot dangerous interconnections and stop excessive levels of leverage before it is too late. It is exactly the kind of judgment and foresight that we needed in the years preceding the last crisis.

We are also abolishing the Financial Services Authority in its current form, and creating a new Prudential Regulation Authority with a focus on micro-prudential regulation. Prudential regulation of banks will go back to where it belongs, under the auspices of the central bank, as a subsidiary of the Bank of England, bringing micro and macro-regulation under one roof.

The PRA will be a focused, expert regulator. Whereas the FSA was responsible for thousands of financial services firms, the PRA will focus exclusively on the prudential regulation of deposit-takers, insurers and investment banks. And when regulating banks, it will have the single statutory objective of promoting safety and soundness. Responsibility for the protection of consumers and the conduct of financial services firms will transfer to the new Financial Conduct Authority, leaving the PRA free to focus first and foremost on stability.

We are also working closely with the FSA and the Bank of England to ensure that the new PRA has the powers that it needs to ensure that banks do not take excessive risks and that directors who act improperly face appropriate penalties. We will consider carefully the further recommendations made in the report, particularly Lord Turner’s suggestion that it should be made easier for action to be brought against the directors of failed banks.

I share the frustration of many Members that it has not been possible to bring action against those responsible for the failures at RBS, but strengthening legal powers in this area would raise some complex issues, and we will want to reflect carefully and listen to a range of views before deciding on any action.

The report into the failure of RBS fully complements our analysis of the faults of the previous regime and supports our wider reforms to the banking system. We will respond to the recommendations of the Independent Commission on Banking next Monday. We have already said, though, that we support in principle not only a ring fence around better-capitalised high street banks to protect them against investment banking losses but, when things go wrong, a bail-in of private investors, not a bail-out by taxpayers. Together with recovery and resolution plans, that means that we are working to ensure that banks can fail in an orderly fashion without any recourse to taxpayers’ money.

We will not make the same mistakes as the previous Government but will ensure that we have a system of regulation that secures our financial stability while protecting our competitiveness, and we have already made substantial progress in that ambition. I welcome the action already taken by the FSA to strengthen its supervisory capacity, to become a more intensive and intrusive regulator and to improve its ability to ensure that banks are well governed.

We continue to lead the international debate to impose higher capital requirements and tougher funding standards on banks across the globe, and we will resist any attempt to unpick Basel III in Europe. With the world focused on the strength of bank balance sheets, this is not the time to pander to vested interests. We will ensure that Basel III is implemented in full and that we can go further to impose higher capital standards where necessary to meet risks unique to our sector.

We know that the financial sector will continue to be a critical part of our economy and our recovery, and we are committed to supporting the sector and protecting the open and competitive markets that have allowed the sector to flourish in the UK, but that success cannot come at a cost to the wider economy. That means getting the structure and substance of regulation right and correcting the mistakes of the previous Government.

Today’s report reminds us of the gross failures of the previous regime and the previous Government. This Government will not repeat those mistakes. We will reform the regime to preserve the innovation that fuels the sector’s success without putting the wider economy at risk and to build a successful but stable financial services sector. I commend this statement to the House.

[Chris Leslie (Nottingham East) (Lab/Co-op)]

The report confirms that there was institutionalised dysfunction at the heart of the Royal Bank of Scotland and confirms what we all know—that there was a collective failure of regulation not just in Britain but around the world, and that there were failures not just of one individual, institution, political party or Government but failures that allowed irresponsible bankers to take excessive risks and cause a global financial crisis.

Labour Members have accepted our responsibilities, and as my right hon. Friend the shadow Chancellor said, for the part that the previous Government played in that global regulatory failure, we are deeply sorry. Acknowledging our part in those global failings is the right approach to take, so let me ask the Minister: does he accept that the Conservatives got it wrong too? During the 2007 debates on Northern Rock, he beseeched the Treasury

“to counter the pressure for greater regulation”,

and talked of

“the strength of our regulatory regime”

and how it was

“vital that this crisis does not erode that standing”.—[Official Report, 12 December 2007; Vol. 469, c. 391.]

It would be unparliamentary to call the Minister a hypocrite but perhaps he needs some medical advice about his selective amnesia. Let us have some contrition from the Conservative party, which never once called for more regulation or criticised the FSA for not having enough powers. In fact, it argued precisely the opposite. The Chancellor of the Exchequer, who is sitting on the Front Bench, complained constantly of burdensome and complex regulations.

The FSA is clear that there was a collective failure, but there was also clarity about how the regulator was at fault. Specifically, the report says that the monitoring of RBS’s capital position was “reactive”, and that “supervision of liquidity” was a “low priority”. The FSA did not scrutinise the trading book or loan impairments adequately, and the takeover of ABN AMRO was not questioned sufficiently. Can the Minister say, first, whether the FSA had the co-operation of all former RBS directors, and whether they were all interviewed? His statement was somewhat vague about action against those responsible—he says that he will reflect carefully. Can we take it then, reading between the lines of his statement, that the Government will not pursue action to disqualify former RBS directors from sitting on other company boards?

Secondly, the Minister says that he will “consider” tough action to ensure that bankers who jeopardise the solvency of our retail banks cannot escape responsibility. There should be a new strict liability requirement specifically for banking directors. If the Minister does not amend the draft Financial Services Bill to achieve that, we will table amendments to that effect. The report suggests that future bank takeovers should require formal approval by the regulator, which was not required when RBS took over ABN AMRO. That is sensible, so can the Minister say whether he will amend the draft Bill accordingly?

Thirdly, will the Government take steps to strengthen the corporate governance of large public companies, including banks? Regulators have to do a better job, but shareholders also need to be able to exert their authority. Fourthly, will the Minister agree to implement the legislation already approved in law to publish the pay deals of everyone working in the banking sector earning more than £l million? The Government have dragged their feet on this issue. A simple signature to a statutory instrument is all that is needed. Surely it is important to have transparency and accountability for all the high earners in the banks, not just the richest eight in each bank, as he has conceded so far.

Fifthly, the report highlights a culture of incentive fees for City advisers, whose rewards are greatest if large takeovers are completed. The report recommends ending that bias in the advisory fee structure. Why did the Minister ignore that recommendation in his statement? Does he agree that the proposal would make good sense? The FSA and the Government did not see the financial crisis coming, but neither did the Bank of England. Is the Minister certain that putting all the new regulatory powers in the hands of the Bank will work? Is there a risk that the accountability of the Bank of England—an important point—is substandard in his current proposals? Will he accept the suggestions from the Select Committee on the Treasury and others that those safeguards need to be significantly enhanced?

We of course support moves to enhance prudential regulation, but there is always a danger of fighting the last battle, especially when there could be a eurozone credit crunch just around the corner, so is the Minister not taking his eye off the ball? Will he acknowledge that the new European supervisory structures are incredibly powerful and that, by mishandling negotiations in Europe so badly, the Government have jeopardised our ability to influence and steer those European regulations, which can overrule the tougher capital buffers for our banks, as suggested by the FSA here in Britain?

The regulators did not do enough, and we have to learn lessons. However, ultimate culpability rests on the shoulders of the bankers involved. It is astonishing that deeply irresponsible decisions by those bankers should have forced a £45 billion bail-out, and yet no enforcement action is brought and nobody is punished. It is about time that this Government stopped pandering to the big banks and took action to speed up banking reform and rein in the excessive bonus culture.

[Mr Hoban]

The approach taken by the hon. Gentleman, who seeks to try to blame everybody for the crisis, overlooks the key role that the shadow Chancellor—who is not in his place today—played in the design of the regulatory system that led to the problems we saw at RBS. That design—driven by the shadow Chancellor, who took great credit for it—meant that no backstops were in place when RBS took those decisions.

The other point that the hon. Gentleman should bear in mind is that only three politicians are named in the report as having put pressure on the FSA to adopt a light-touch regulatory regime. One was Tony Blair, one was the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), and the third one—the person who is missing from the Opposition Front Bench today—is the shadow Chancellor, the person who in his first speech as City Minister called on the FSA to adopt a light-touch regulatory regime, a regime that, when confronted with the challenge of RBS, turned from a light touch to a soft touch. It is, of course, the taxpayer who has picked up the bill for the fundamental flaws in Labour’s regulatory regime.

The hon. Gentleman talked about disqualification of RBS directors. It is a pity that the previous Government did not think about that issue in the aftermath of the financial crisis. My right hon. Friend the Secretary of State for Business, Innovation and Skills has referred the report to counsel to see whether it is possible to disqualify the directors of RBS.

The hon. Gentleman talked about approval for acquisition. We will look carefully at the proposal Lord Turner made, but the reality is that the FSA had powers to intervene, but chose not to use them—partly as a consequence of the light-touch regime foisted on them by the previous Government.

When the hon. Gentleman talks about bonuses, let us not forget that it was under the previous Government that bonuses could be paid out in cash and taken straight away. Under the regime in place now, bonuses are deferred, paid out in shares and can be clawed back. Let us not forget that the moment that it was possible to exercise the maximum leverage on Sir Fred Goodwin—the banker Labour knighted—was the moment when it gave away his pension scheme. So I will take no lessons from the Labour party on the way in which we should deal with the problems of RBS.

The hon. Gentleman referred to the Bank of England and seemed to question whether it was able to take on the additional responsibilities. I thought he was moving away from his party’s position of supporting the package of reforms that we have put forward. Let me remind him that it was the Bank of England that identified the problem of the mispricing of risk in the financial markets. The problem was that the regulatory structure it had to deal with meant that the Bank did not have the power to tackle the problem—nor, indeed, did the FSA. What we are faced with is a problem of dealing with the regulatory regime left to us by the previous Government. They chose not to make these reforms when they were in government; we are taking action now to ensure that we have the right regime in place to tackle those risks and ensure that we have a stable, but successful, financial services sector.