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New financial regulator needs explicit power to block large bank mergers say MPs

The new financial regulator should be required to approve major bank mergers and acquisitions, following the failure by the Financial Services Authority (FSA) to intervene in a takeover that nearly led to the collapse of RBS, an influential committee of MPs has said.22 Oct 2012

In a new report, the Treasury Committee also criticised the FSA's original decision not to publish a report into what went wrong at the bank after it received a Government bailout worth £45.5 billion in October 2008. The regulator's decision to instead publish a 298-word statement in December 2010 reflected a "fundamental misunderstanding" of its duty to account for its actions to the public, the Committee said. The FSA ultimately reported in full the following year.

"Without persistent pressure from the Treasury Committee, the FSA's report would never have been published," Andrew Tyrie, chair of the Committee, said. "[FSA chair] Lord Turner has subsequently admitted that he should have grasped at the time the need for more public explanation. He was right to do so ... We now have a comprehensive report that gives a better idea of what went wrong at both RBS and the FSA."

In its own report (542-page / 5MB PDF), the regulator admitted that flaws in its supervisory approach provided "insufficient challenge" to RBS. In addition, deficiencies in global liquidity regulations at the time made a crisis "much more likely" when the bank proceeded with its takeover of Dutch investment bank ABN AMRO in 2007 "without appropriate heed to the risks involved".

Although the FSA had no specific power to stop the ABN AMRO bid, the Treasury Committee said that the regulator "could and should" have intervened indirectly, for example by setting higher capital requirements for RBS. That it did not do so was a "serious misjudgement on the part of the supervisory team and the senior management", the Committee said. It added that the new Prudential Regulation Authority (PRA), which is set to take over supervision of banks, building societies and insurers from the FSA next year, should be explicitly required to approve similar deals in the future.

"We support Sir David Walker's conclusion that the FSA should have done more to examine the risks of the deal," the report said. "It should have intervened at an early stage. It should and could have intervened at a late stage, albeit with more difficulty ... We need a regulator with the self-confidence to intervene, even if it might cause some destabilisation in the short-term."

Tyrie added that there were already "early encouraging signs" that the PRA's new judgement-based regulatory framework was "doing more of the heavy lifting than the FSA's failed culture of box-ticking". However, he called on the Parliamentary Commission on Banking Standards to examine the new regulator's approach to banking supervision (46-page / 411KB PDF), published earlier this month, in light of the Committee's recommendations.

The Committee expressed its "considerable surprise" that no individuals within the bank, with the partial exemption of Global Banking and Markets Division chair Jonny Cameron, had been held "meaningfully accountable" for what happened at RBS. However, holding directors to account under a 'strict liability' principle, as proposed by the FSA last year, would be a "major change to the existing legal framework" and would require full public debate, it said.

"It is deeply regrettable that the current rules bias enforcement activity towards technical breaches to the detriment of attention to the most important regulatory failures," the Committee concluded. "We request that the regulators report to the Treasury Committee on what amendments to the statutory rules and to the general law they believe are desirable in order to improve the effectiveness of the enforcement regime. We also call on the Parliamentary Commission on Banking Standards to examine this issue."

The report also criticised the Bank of England for having not yet reviewed its performance during the financial crisis. It commissioned three independent reviews on certain aspects of its role and performance at the time in May; however, as these have not yet been published the Committee said that it would be "more difficult" to incorporate any changes into the draft Financial Services Bill and the Government's current programme of regulatory reform.

"Whilst the three reviews announced earlier this year represent some progress, they fall well short of what is required," Tyrie said. "A comprehensive review should already have taken place. A radical improvement of the Bank's own governance is an essential part of regulatory reform."