FSA Weak Report on Northern Rock

FSA Weak Report on Northern Rock

The FSA yesterday published its findings following an internal review on its handling of the Northern Rock problem:

The Internal Audit review identifies the following four key failings specifically in the case of Northern Rock:

• A lack of sufficient supervisory engagement with the firm, in particular the failure of the supervisory team to follow up rigorously with the management of the firm on the business model vulnerability arising from changing market conditions.  
• A lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm's supervision.  
  
• Inadequate specific resource directly supervising the firm.  
  
• A lack of intensity by the FSA in ensuring that all available risk information was properly utilised to inform its supervisory actions.  

The FSA suggested the following to improve the position:

• A new group of supervisory specialists will regularly review the supervision of all high-impact firms to ensure procedures are being rigorously adhered to.  
  
• The numbers of supervisory staff engaged with high-impact firms will be increased, with a mandated minimum level of staffing for each firm.
• The existing specialist prudential risk department of the FSA will be expanded following its upgrading to divisional status, as will the resource of the relevant sector teams.  
  
• The current supervisory training and competency framework for FSA staff will be upgraded.  
  
• The degree of FSA senior management involvement in direct supervision and contact with high-impact firms will be increased.
• There will be more focus on liquidity, particularly in the supervision of high-impact retail firms.  
  
• There will be raised emphasis on assessing the competence of firms' senior management.  

Our view

The principal recommendations are sound provided they are applied correctly and fully understood by the team that applies them.  If each supervisory team does not include a highly qualified actuary, accountant, economist and a former CEO, all experienced in the running of larger institutions and with the skills set to unravel complex sets financial data and compliance procedures, then the recommendations are worthless.  

It is the team tasked with the direct supervision of high impact firms that will make these recommendations work and not the recommendations themselves.  Yes, it may cost a few million pounds in employee benefits but I am sure high impact providers with huge market shares can afford an extra £1 per client off their margins to fund the additional costs.  

We suggest the FSA does use ‘kids with an economics degree’, CEO’s and the advisers of large firms will run rings around them.

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