Bank takeovers should face deeper scrutiny and directors be more accountable for their actions, the finance watchdog said in a long-awaited report into Royal Bank of Scotland's near collapse.
The Financial Services Authority (FSA) said in a 452 page report on Monday that RBS managers, like former chief executive Fred Goodwin, were most at fault in the bank's brush with bankruptcy, which was only averted by a 45 billion pound government bailout in 2008.
The regulator, due to be broken up next year with much of its remit returning to the Bank of England, was also critical of its own actions and of former Prime Ministers Tony Blair and Gordon Brown for encouraging a light touch regulatory regime.
The report, like earlier investigations, said there was no prospect of successful legal action against former RBS executives as there was no evidence of criminal wrongdoing, although they had made a series of bad decisions.
But it said they could still be disqualified from being directors in future, pending a decision by the government, and suggested the law could be changed.
FSA Chairman Adair Turner said bank directors could be banned or have pay clawed back if their company failed, as banks were different from other firms and need to pay more attention to risk than profits.
In the years before the crisis we allowed the development of a financial system which was taking too many risks, in some cases doing activies that were socially useless, which had a set of remuneration structures that allowed people to make very large amounts of money, Turner said.
Regulators were trying to unravel that, but did not want to go so far that no-one would want to be a bank director, he said.
Peter Wright, a litigation partner at law firm Fox Williams, warned of the risks of singling out bank directors. This could simply mean that individuals with the highest risk tolerance, rather than the most skilled, would be prepared to accept the most systemically important roles that affect us all.
TOUGHER TAKEOVER RULES
The FSA said banks should face closer scrutiny of their takeover plans, pointing to RBS's disastrous highly-leveraged 16-billion-euro purchase of parts of Dutch bank ABN AMRO in 2007, just before a financial markets meltdown.
The decision to make a bid of this scale on the basis of limited due diligence entailed a degree of risk-taking that can reasonably be criticised as a gamble, it said, adding the information made available to RBS by ABN AMRO in April 2007 amounted to two lever arch folders and a CD.
In future banks should need formal consent from the regulator for a takeover and obtain independent advice from an adviser whose pay is not linked to a successful deal, it said.
The ABN deal also raises very major issues about whether banks should be able to do large contested takeovers, Turner said, because the buyer will not get enough information.
The government welcomed the FSA's report, saying it showed its reforms of the banking sector were right, while RBS's new management said it had learned the lessons of past and was building a new bank.
We will not make the same mistakes as the previous government, financial services minister Mark Hoban told parliament.
We will ensure that we have a system of regulation that secures our financial stability, whilst protecting our competitiveness, he added.
RBS, which came within hours of running out of cash in October 2008, is 83 percent owned by the government following the bailout. The taxpayer is currently sitting on a 25 billion pound loss at today's share price.
MULTIPLE POOR DECISIONS
The FSA said flaws in its own supervision provided insufficient challenge to RBS, but also argued it was under pressure from the government to take a hands-off approach.
On several occasions in 2005 and 2006 the government said it didn't want unnecessarily restrictive and intrusive regulation to impair London's competitiveness, the report said.
Originally a small Scottish bank, RBS rose to become one of the world's biggest thanks to a string of takeovers and aggressive expansion. It was brought to its knees by a decade-long acquisition spree led by Goodwin and his strategy of running the bank with levels of capital that proved too low.
Goodwin has been slammed for a management style that discouraged dissent among senior staff -- his daily morning meetings became known as the Morning Beating -- but former board directors told the FSA they did not feel bullied.
As early as 2003 the FSA said its supervision team had identified that Goodwin's assertive and robust style might create a risk, but Turner said the regulator was not as tenacious as it should have been in assessing the impact.
In particular, it made a mistake in allowing Goodwin to change a letter from the FSA to RBS's board in 2005 on the bank's risk framework, he said.
The FSA also investigated a court injunction obtained by Goodwin to prevent publication of details of his private life, and concluded it is irrelevant to the story of RBS's failure.
(Reporting by Steve Slater and Sudip Kar-Gupta; Editing by Sophie Walker, Mark Potter and Jane Merriman)