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FSA 'failed' in Rock supervision FSA 'failed' in Rock supervision
(20 minutes later)
The UK financial watchdog, the Financial Services Authority (FSA), has admitted that it failed to adequately regulate Northern Rock.The UK financial watchdog, the Financial Services Authority (FSA), has admitted that it failed to adequately regulate Northern Rock.
The FSA said there was "a lack of adequate oversight and review" by the agency of the troubled bank.The FSA said there was "a lack of adequate oversight and review" by the agency of the troubled bank.
It said too few regulators were assigned to monitor Northern Rock, which ran into trouble in August.It said too few regulators were assigned to monitor Northern Rock, which ran into trouble in August.
The FSA said it would be overhauling its procedures as a result of the weaknesses identified.The FSA said it would be overhauling its procedures as a result of the weaknesses identified.
Our supervision of Northern Rock in the period leading up to the market instability of last summer was not carried out to a standard that is acceptable Hector Sants, FSA chief executive See the FSA report here Read Robert Peston's blogOur supervision of Northern Rock in the period leading up to the market instability of last summer was not carried out to a standard that is acceptable Hector Sants, FSA chief executive See the FSA report here Read Robert Peston's blog
Newcastle-based Northern Rock was nationalised in February after the credit crisis forced it to seek a Bank of England lifeline to fund its mortgage loan book.Newcastle-based Northern Rock was nationalised in February after the credit crisis forced it to seek a Bank of England lifeline to fund its mortgage loan book.
Last week it said it would cut about 2,000 jobs by 2011 and reduce its residential mortgage lending by half under plans to turn around its fortunes.Last week it said it would cut about 2,000 jobs by 2011 and reduce its residential mortgage lending by half under plans to turn around its fortunes.
Northern Rock must also pay back Bank of England loans worth about £25bn.Northern Rock must also pay back Bank of England loans worth about £25bn.
CompetenceCompetence
Hector Sants, FSA chief executive, said that it was "clear that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable".Hector Sants, FSA chief executive, said that it was "clear that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable".
But he added that it was "impossible to judge" whether that would have affected the outcome in this case.But he added that it was "impossible to judge" whether that would have affected the outcome in this case.
"I am determined through the programme of work that I am announcing today, that proper standards will apply to all significant firms supervised by the FSA," he said."I am determined through the programme of work that I am announcing today, that proper standards will apply to all significant firms supervised by the FSA," he said.
BBC business editor Robert Peston Report called the FSA's report "a catalogue of mistakes, a tragedy of errors rather than a comedy".BBC business editor Robert Peston Report called the FSA's report "a catalogue of mistakes, a tragedy of errors rather than a comedy".
"In some ways, it was the riskiest bank in the UK," he said. He said the "most scintillating part of the FSA's review" was that the watchdog expected the Bank of England to bail out any malfunctioning banks when last summer, commercial lending froze, which is why it did not feel the need to supervise it more stringently.
"But here's what will shock many. It was treated by the FSA as though it was the least risky bank in the UK." "Which is formal confirmation that the FSA was urging the Bank of England to pump money into the markets over the summer, but the Bank refused, fearing that it would be in effect bailing out the banks for their past recklessness," he added.
ImprovementImprovement
The review, carried out by the FSA's director of internal audit, identified what it said were a number of areas for improvement in its supervision of banks.The review, carried out by the FSA's director of internal audit, identified what it said were a number of areas for improvement in its supervision of banks.
As a result, it plans to beef up its team with staff that will regularly review the supervision of what it called "high-impact" firms to make sure procedures are being adhered to.As a result, it plans to beef up its team with staff that will regularly review the supervision of what it called "high-impact" firms to make sure procedures are being adhered to.
It also planned to upgrade its training of FSA staff and put more focus on assessing the "competence of firms' senior management".It also planned to upgrade its training of FSA staff and put more focus on assessing the "competence of firms' senior management".
It is hoped that these measures will prevent some of the key failings identified in the case of Northern Rock from occuring again. It is hoped that these measures will prevent some of the key failings identified in the case of Northern Rock from occurring again.
These are listed below:These are listed below:
  • A lack of sufficient supervisory engagement with the firm, in particular the failure of the supervisory team to follow up rigorously with the management of the firm on the business model vulnerability arising from changing market conditions.
  • A lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm's supervision.
  • Inadequate specific resource directly supervising the firm.
  • A lack of intensity by the FSA in ensuring that all available risk information was properly utilised to inform its supervisory actions.
  • A lack of sufficient supervisory engagement with the firm, in particular the failure of the supervisory team to follow up rigorously with the management of the firm on the business model vulnerability arising from changing market conditions.
  • A lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm's supervision.
  • Inadequate specific resource directly supervising the firm.
  • A lack of intensity by the FSA in ensuring that all available risk information was properly utilised to inform its supervisory actions.
FSA framework upheldFSA framework upheld
Despite its shortcomings, the FSA review upheld the watchdog's philosophy of operating within a framework of principles-based regulation, rather than rules-based.Despite its shortcomings, the FSA review upheld the watchdog's philosophy of operating within a framework of principles-based regulation, rather than rules-based.
And it suggested that ultimately the blame for the collapse of Northern Rock should sit at the feet of the bank's senior management.And it suggested that ultimately the blame for the collapse of Northern Rock should sit at the feet of the bank's senior management.
"The boards and managements of regulated firms carry the primary responsibility for ensuring their institutions' financial soundness," the FSA said."The boards and managements of regulated firms carry the primary responsibility for ensuring their institutions' financial soundness," the FSA said.