"It is clear that our supervision of Northern Rock was not carried out to a standard that is acceptable”, Hector Sants, Chief Executive of the FSA, said referring to the FSA review carried out by its internal audit division into its supervision of Northern Rock. The review concluded that, overall, the supervision of Northern Rock was at the extreme end of the spectrum within the firms reviewed in respect of these failings and that its supervision did not reflect the general practice of supervision of high-impact firms at the FSA.
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 main features of the FSA's supervisory enhancement programme are:
- 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.
“This represents our specific supervisory contribution to the package of measures introduced by the Tripartite Authorities to prevent a similar situation to Northern Rock undermining financial stability. That does not mean a "no failure" regime. However, together with the proposed reform of the insolvency regime for banks - and an improved deposit protection scheme - it creates a platform to strengthen financial stability and better protect the interests of consumers”, Sants said.
The principal high level recommendations in the report are:
- FSA senior management to have increased engagement with high impact firms;
- FSA to increase the rigour of its day to day supervision;
- FSA to increase its focus on prudential supervision, including liquidity and stress testing;
- FSA to improve its use of information and intelligence in its supervision;
- FSA to improve the quality and resourcing of its financial and sectoral analysis;
- FSA to strengthen supervisory resources;
- FSA senior management to increase the level of oversight of firms' supervision.
A full version of the report, with redactions to protect commercial and individual confidentiality, will be made available not later than the end of April.
Press release
Executive Summary
Recommendations by Internal Audit
FSA Supervisory Enhancement Programme
© FSA - Financial Services Authority
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