For the taxpayer, the consequence of the bank’s collapse is stark – our current loss is over £25 billion with more than £45 billion of capital invested. That pays for a lot of nurses and teachers.
Lord Turner’s report into the collapse of RBS argues that the Financial Services Authority (FSA) could only succeed in enforcement action against ex RBS directors if they prove that they acted dishonestly – not if they were incompetent. In short, he is saying that the regulatory regime set up by the last Labour Government does not give them the powers to act over directors who failed to do their job. It is striking that in over 6,000 pages of rules in the FSA Handbook and legislation such as the Companies Act, there is no scope to enable regulatory action against a Chief Executive who does not understand their own balance sheet.
Lord Turner has pointed the finger of blame at Labour’s flawed regulation but must not be dismissed as an ‘anti Labour’ figure. To the contrary, he was appointed as Chairman of the FSA by Gordon Brown and carried out numerous projects for the Labour Party, including Climate Change, Pensions, Low Pay, as well as being Vice Chairman of the pro Euro group ‘Britain in Europe’.
Lord Turner’s report is backed up by Sir Nicholas Macpherson, the top official at the Treasury, who told the Public Accounts Committee just last week: “When we took on some parts of RBS it became clear that the company did not understand its balance sheet”. In fact, the Treasury were so alarmed at the time of the bank rescue that, despite ten months work on RBS, Sir Nicholas sought a letter of direction from then Chancellor Alistair Darling MP. (A letter of direction is when an official wants an explicit order from their Minister to go ahead with a decision over which they have concerns).
The reality is that while Sir Fred Godwin and other RBS directors did not understand their own balance sheet, they will nevertheless keep their massive bonuses without any regulatory action for their failure. Similarly, despite the biggest financial crisis in generations, only two directors of Northern Rock (not even the Chief Executive) have faced individual fines. In both cases their fines were less than their bonus for the previous year. Next time you hear Labour MPs blaming bankers for our national debt, perhaps you will ask why they failed to put in place legislation to enable bankers to be punished for failure.
What also surprises me is the lack of scrutiny in the political debate regarding the role of Pension Fund managers. They drove the short term strategy in banks in the pursuit of dividends and churned stocks to generate fees for themselves. Why are there no interviews today with the Pension Fund managers who approved the ABN Amro deal? Is it a co-incidence that Labour’s city minister, Lord Myners, was himself a fund manager?
Likewise why have RBS’s auditors not been interviewed today either? It is startling that the Coalition Government is currently employing the same auditors who signed off the RBS accounts, despite the Treasury telling Parliament that it could not rely on their work.
In light of the Treasury’s experience on RBS, there are three key questions which Parliament should consider:
1) What changes need to be made to the Companies Act following Lord Turner’s report?
2) What changes are required to the role of pension fund managers to (a) better align investors long term aims with their strategy, and (b) ensure they better challenge management?
3) What changes are necessary to the role of auditors?
Constituents are right to be angry that Sir Fred Goodwin – knighted by Labour in 2004 for services to banking – has been able to walk away from his failure without enforcement action. Lord Turner’s report highlights that, for all the changes made (such as more intrusive supervision by the FSA), the role of pension funds, auditors, and individual enforcement still requires work.