FSA admits it joined market mass delusion

THE FINANCIAL Services Authority (FSA) participated in a mass “delusion” that drove markets and underlay a flawed regulatory regime in the run-up to RBS’s collapse, the authority concluded yesterday in its long-awaited report on the collapse of the bank.

The FSA had “a tendency to share the delusions of the then conventional confidence”, the report says.

But the regulator also points the finger at RBS’s management and at pressure from the previous government.

FSA chairman Lord Adair Turner blamed “underlying deficiencies in RBS management, governance and culture” for causing bad decisions.

Those mistakes were left unchecked by regulators’ “inadequate” scrutiny due to pressure to run a “light touch” regime, the report suggests.

Ed Balls, now shadow chancellor and then economic secretary to the Treasury, is singled out as keen to promote a lightly resourced regulator.

In particular, under the regime Balls praised for its efficiency, Turner complains that the FSA had just five people responsible for supervising RBS in 2007, a job now done by 23 people.

The report also condemns RBS’s executives for overseeing an “aggressive” expansion of its balance sheet – fourfold in four years – while having little idea of its capital levels and vulnerability to high-risk asset classes.

Executives and the board “were not sufficiently aware” of their exposure, the report says.

As possible remedies, Turner suggests automatically barring directors of a collapsed bank from future finance jobs and beefing up the UK’s pay rules, already the world’s strictest.