15th December 2011

RBS and hindsight

George Orwell said in Animal Farm “"Man is the only creature that consumes without producing. He does not give milk, he does not lay eggs, he is too weak to pull the plough, he cannot run fast enough to catch rabbits. Yet he is lord of all the animals. He sets them to work, he gives back to them the bare minimum that will prevent them from starving, and the rest he keeps for himself”.

Now substitute the word Man with FSA and the animals with those they regulate.

So upon the release of the FSA report into the failings of the RBS, Lord Turner appearing on the BBC news replied when asked why nobody was being “put to the sword over the RBS disaster “You need to prove people were fraudulent, reckless or incompetent in a way you can pin down, precisely and on a personal basis, as having led directly to the failure that occurred. But you also have to show it was criticisable and outside the bounds of reasonableness, a key phrase, at the time and not with hindsight. Our lawyers went through it and believe they did not have a case that would stand up in a court of law.”

Not with hindsight eh?

Good regulation is ALL about learning from mistakes, applying the use of hindsight to ensure that regulation is fit for purpose going forward. As Mark Twain said “A man who carries a cat by the tail learns something he can learn in no other way”.

Hindsight is not necessarily the best guide to understanding what really happened. The past is often as distorted by hindsight as it is clarified by it. But hindsight means different things to different folks if you are the regulated.

For Bankers, especially failed ones, it means getting away with pretty much  everything after a 452 page seriously expensive report has found that nobody was to blame specifically except possibly Gordon Brown, Tony Blair and Ed Balls. And their blame was justified because they were attempting to pressure the FSA into a form of light touch banking regulation.

For IFAs hindsight means something very different. They are subject, it would seem, to jurisdiction and sanction in just about every case with the absolute benefit of hindsight.

If Lord Turner is saying that the advice from the FSA lawyers is that you cannot punish regulated wrongdoing using the benefit of hindsight, then what recourse do IFAs have who are finding that actually being applied to them on a daily basis and with extreme prejudice?

In June 2006 the FSA stated “The Financial Services Authority (FSA) today confirmed it will continue to judge firms' standards of product sales and financial advice by the standards and rules at the time of sale and not retrospectively. This policy will not be changed by the regulator's move towards more principles-based regulation”.

This was expanded upon in a speech by Stephen Bland, Director of Small Firms, FSA
on the 8^th June 2006 at the PIMS Annual Conference.

Stephen Bland is now the “director of the FSA's Wholesale Firms Division and has been since February 2008.  He is responsible for supervision of 2,500 firms, covering international banks and investment banks, investment firms, the Society of Lloyd's, insurers and brokers.

Before that he supervised small retail firms operating in the retail general insurance, mortgage and investment markets, and before that, he supervised what used to be called the "big four" banks and some major insurers.  He was the director responsible for the Retail Distribution Review”.

Prior to joining the FSA he worked at the Bank of England for thirteen years in a variety of supervisory and markets roles.

So back to RBS.

RBS's fate was sealed in October 2007, with the �£49 billion takeover of ABN Amro.

Weeks earlier, Northern Rock had suffered the first run on a British bank for more than 100 years, exposing the vulnerability of our banks to the worldwide credit crunch.

The RBS deal – now ironically it would appear with the benefit of hindsight as in the FSA report, was described by Gordon Brown as "irresponsible" – it left RBS dangerously overstretched as the worldwide banking crisis took its toll.

In April 2008 the cracks in the RBS hull were well and truly showing.  RBS announced it needed to raise �£12 billion setting a record, this time, for the biggest rights issue in Europe's history.

Then came the banking crisis October 2008, triggered by the fall of Lehman Brothers.

Confidence in British banks collapsed as a result and RBS was so weakened by its excessive borrowing/ gearing that it had no option but to accept a Government bailout.

The regulator identified six factors leading to the near death of RBS in the midst of the 2008 financial firestorm. “Among them were concerns and uncertainties about its underlying asset quality, which were subject to little fundamental analysis by the FSA”

So in 2008 RBS went into meltdown on the watch of Stephen Bland. He clearly has a lot of experience in and around the banking world and yet this was the FSAs finding.

Yes, the same Stephen Bland who was responsible for the RDR and the same Stephen Bland who said “Firms should indeed be judged by the regulatory requirements applicable when the advice was given and against the assumptions that were reasonably made at the time; there should be no retrospective application of later, more exacting, standards with the wisdom of hindsight. That has always been and will continue to be the FSA’s position”.

So could it be that in judging who should “stand trial” at the FSA and RBS that Lord Turner has recognised that with hindsight judgment, yes that very thing that IFAs state they are judged upon, it is “simply not cricket old boy” when it comes to us?

Could it also be that the man overseeing the RDR in 2007 got that wrong?

Never has it been more obvious that “all animals are equal but some are more equal than others”.

FSA/FCA, Panacea Comment