FSA admits inadequate supervision

Last Modified: 26 Mar 2008
By: James Blake

The Financial Services Authority admits to a string of errors in its supervision of Northern Rock before the run on the bank last year.

Its own internal review did not pull any punches. The Financial Services Authority admitted to an unacceptable string of errors in its supervision of Northern Rock before the run on the bank last September.

Too few supervisers, failure to meet Northern Rock's management, and, despite recognising the bank was taking risks, a failure to follow through with a risk assesssment programme.

In a statement Hector Sants, the FSA chief executive, admitted its regulation of the bank had not been carried out to an acceptable standard, and he promised improvements.

The report specifically identifies four key failings. They are -

A lack of supervisory engagement with the Northern Rock in monitoring the bank's vulnerability to market conditions, given its business model
Inadequate oversight of "the quality, intensity and rigour" of Northern Rock's supervision
Inadequate specific resource directly supervising Northern Rock
A failure by the FSA to make proper use of the relevant risk information relating to Northern Rock

The report also contains a series of recommendations to improve future supervision. They are -

A new group of supervisory specialists to review regularly the supervision of all high-impact firms
The numbers of supervisory staff engaged with high-impact firms will be increased
The FSA's specialist prudential risk department is to be expanded
Supervisory training for FSA staff is to be upgraded
FSA senior management involvement with high-impact firms is to be increased
Greater focus on liquidity in the supervision of high-impact retail firms
Raised emphasis on assessing the competence of firms' senior management

Today's report was commissioned by FSA chief executive Hector Sants in the wake of the collapse of the Northern Rock bank.