A long-awaited report from the Financial Services Authority (FSA) on the catastrophic failure of the Royal Bank of Scotland (RBS) has concluded that poor management decisions were a major cause.
The report lists six key factors – including the bank being put under insufficient scrutiny from the FSA itself and inherent weaknesses in the ‘light touch’ regulatory framework that prevailed before the crash.
However, the report suggests that the reason RBS itself was relatively exposed, compared to other banks, during the financial crisis was poor management.
There was a significant weakness in RBS’s capital position that could be attributed to weak management, together with the ill-fated ABN AMRO takeover of 2007 which, the report damningly notes, “proceeded without appropriate heed to the risks involved and with inadequate due diligence.”
Fred Goodwin arrived at RBS in his role of CEO with barely six years’ banking under his belt, and inexperience was compounded by his reported attempts to evade regulation. Indeed, one could argue that the FSA’s monitoring failures with respect to RBS can, in part, be excused by the bank’s unwillingness to cooperate with the regulator. Its misjudgements on this front included refusing access to its ‘board pack’, which gave a full view of its finances.
As well as pointing the finger at management, the report laments the bank’s lack of internal capabilities to take action against those responsible. As regulation was so lax, the FSA’s Enforcement Division concluded that there was “not sufficient evidence to bring enforcement action which has a reasonable chance of success in Tribunal or court proceedings.”
The report is of huge importance to aspiring managers, as it reinforces the importance of good management (which includes a culture of viewing regulators as allies, rather than enemies) and suggests that, in future, the Fred Goodwins of the world will not be allowed to walk away from disaster with a fortune, while the public purse handles the bill.
The report suggests two broad ways to implement penalties: either a “strict liability” approach, making it more likely that enforcement action, including fines and bans, would be taken; or an automatic incentives-based approach, imposing rules that “automatically ban senior executives and directors of failed banks from future positions of responsibility, or major changes to remuneration to ensure that a very significant proportion of pay is deferred and forfeited in the event of failure.”
So, in future, it seems that prudent management will be required to succeed – and there will be strict, enforced penalties for failure.
Download the full report from here