Page last updated at 00:56 GMT, Monday, 3 March 2008

FSA warning on risk 'deficient'

FSA headquarters
The report calls for better regulation of financial market risk

The warnings given by UK regulators about potential risks in the financial markets are deficient, a report by a key parliamentary committee has said.

The Treasury select committee said the Financial Services Authority (FSA) and the Bank of England should flag up risks in letters to companies.

Those companies should then be obliged to discuss the risks at board level, and confirm they have done so.

The committee is keen that the current credit crisis is not repeated.

Committee chairman John McFall said: "It is clear that many market participants failed to heed warnings about a serious under-pricing of risk and the potential for impaired liquidity in financial markets, in the mistaken belief that the good times would go on and on."

He added: "The Bank and FSA can no longer hedge their bets, throwing potential risks out into the ether and then washing their hands of the consequences.

"We must ensure that in the future such warnings are heeded and acted upon by those at the top of financial institutions."

'Stupidity'

The report is part of a Treasury investigation into the causes of the global lending crisis that has seen multi-billion dollar losses at banks worldwide since last summer, pushed up credit costs for consumers and forced the nationalisation of Northern Rock.

It is clear that many investors were seduced into investing in products they did not understand by the alluring prospect of high returns
Treasury select committee report

The Newcastle-based bank had been regarded as one of the most reputable mortgage lenders until the collapse of its business model, which had relied mainly on the wholesale money markets to fund its mortgages, instead of deposits.

The Treasury committee report said an environment of low interest rates in the early years of the millennium had spawned the growth of complex investments, as US sub-prime mortgages - those given to the riskiest borrowers - were repackaged and sold on around the world.

It added that the search for income around this time encouraged many to invest in these products, which it turned out they did not fully understand.

"It is clear that many investors threw caution to the wind when making investment decisions and were seduced into investing in products they did not understand by the alluring prospect of high returns," it said.

The Treasury committee is concerned that investors "did not exercise sufficient due diligence" and relied too heavily on credit ratings agencies for their investment decisions.

Its report argued that investors needed to exercise "greater responsibility" in the future but points out, "unfortunately you cannot regulate against stupidity".

The credit ratings agencies also came under fire.

The report said the agencies should conduct "root and branch" reform of the way they do business - to tackle perceived conflicts of interest and correct flaws in the way they award ratings - or face tougher regulation.


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