In perhaps the understatement of the year, the headlines about the FSA’s report into the failure of RBS said that it was caused by ‘multiple poor decisions’. So should bankers be held accountable when they fail?
Well, the Financial Services Authority (FSA) report was launched today and says that senior executives didn’t understand the risks they were taking and were focused on growing the business at all costs. The board of directors did not do enough to challenge the decisions of senior executives.
Just when they should have been more cautious, executives embarked on the largest takeover in banking history by purchasing ABN Amro, even though they had only done ‘limited’ investigations into the overall health of the bank.
RBS based its decision on access to ‘two lever arch folders and a CD’ about the bank.
The FSA goes on to admit that there were failings in its old methods. It says it previously focused too much on box ticking and even said that in 2006 and 2007 it had ruled that RBS was a ‘well-managed’ firm and would benefit from less scrutiny. All of this was encouraged by politicians who called for a ‘light-touch’ approach to regulation.
Taxpayers paying the price
Taxpayers are bearing the consequences of these decisions. As of today, we are sitting on a loss of £26 billion from our stake in RBS. Whilst senior executives were handsomely rewarded, taxpayers have ended up guaranteeing RBS on losses it made trading complex derivatives and on loans to hedge funds based in the Cayman Islands.
However, no individual RBS executive will be subject to disciplinary action for these decisions. While the regulator concluded that executives had fallen short of best practice, their actions were not unreasonable.
Hold banks to account
Today’s report suggests that in the future there should be greater opportunity for the regulator to take action against senior banking executives for failure, something our Chief Executive, Peter Vicary-Smith picks up on:
‘The FSA report is a damning document. It reveals the inherent flaws in a corporate culture that focuses on bonuses and short-term profits. The Chancellor must confirm he will take tough action to protect consumers when he publishes his response to the Independent Commission on Banking next week.’
The report also suggests that automatic bans should be handed out to failed banking executives and a greater proportion of their bonuses should be subject to clawback if the bank subsequently performs poorly.
Should we make it easier to hold senior management to account for failing banks? Would senior executives at RBS have taken a more cautious approach if they knew they would be subject to enforcement action if the bank collapsed?