Page last updated at 17:12 GMT, Wednesday, 25 February 2009

Bank regulation approach 'wrong'

Lord Turner on the FSA's function

The chairman of the Financial Services Authority has said its failure to spot the banking crisis in advance was partly due to the style of regulation.

A "light touch" approach at the City watchdog had been seen as politically preferred, Lord Turner said.

He told the Treasury Committee this had led to the regulator not asking enough questions about the strategies of certain banks which went on to fail.

Changes to regulation were needed which amount to a "revolution", he said.

MPs accused the FSA of "being responsible for supervising 10 big banks and allowing five to collapse".

Lord Turner said that the FSA would be "fit for purpose" but only after changes were made - which he would be recommending in a report next month.

"It's not just about a change at the margins. It's absolutely fundamental," he said.

Lord Turner and Mr Sants took over the FSA relatively recently, in September 2008 and July 2007 respectively.

'Light touch'

At the latest hearings into the banking crisis, Lord Turner said the regulator's most important failure had been to "not recognise systemic wide risk".

His report would overhaul the structure of banking regulation and style of bank supervision, he added.

Remuneration for bankers and proposals for regulating liquidity accounts and hedge funds would also be tackled.

To say that Lord Turner and Hector Sants admitted there were shortcomings at the City watchdog in the years before they arrived would be a bit like saying Nelson Mandela oversaw a modest change in the constitution of South Africa.
Robert Peston
BBC Business Editor

But Lord Turner said that the regulatory approach that encouraged a light touch at institutions such as Northern Rock, HBOS, and RBS had been affected by "a political assumptions".

"There was a philosophy rooted in political assumptions which suggested the key priority was to keep it light rather than to ask more questions," he said.

Regulators had not been asking enough questions about strategy at banks, or the products they dealt in, he added.

"Doubts were not as deep as they should have been."

"We were supervising people like HBOS within a particular philosophy of the way you do regulation, which I think in retrospect was wrong.

"I think [the FSA's actions were] a competent execution of a style of regulation and a philosophy in regulation which was, in retrospect, mistaken."

The comments may be seen as laying blame on Gordon Brown, who was responsible for setting up the regulatory system while chancellor.

But he added that the preference for light touch regulation "existed in speeches on both sides of the House".

Whether the watchdog should have this power to step in and exclude products being sold which were too risky was something that would be put up for discussion in the March report, Lord Turner said.

Responsible?

Lord Turner said he was "determined" the regulator would be able to act more independently.

"It's the nature of such a huge shock that has occurred round the world that regulators will be able to be more independent," he said.

FSA chief executive Hector Sants said he felt the watchdog had made great improvements.

Hector Sants
Mr Sants said improvement had been made at the FSA

At a previous hearing, HBOS was criticised for appointing a head of risk who had no experience of the field.

Mr Sants said the regulator would have greater say over who was appointed to senior roles at banks - something which previously had been handled by the institutions themselves.

In the past, when deciding whether someone was fit-and-proper to be a senior banker, almost the only consideration for the watchdog was whether they had a criminal record, he said.

Loretta Minghella, chief executive at the Financial Services and Compensation Scheme, is also giving evidence to the Treasury Committee.

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SEE ALSO
FSA boss admits watchdog's errors
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Brown 'very angry' about bonuses
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HBOS whistleblower probe demanded
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