Specifically, the report concludes that the failure of RBS can be explained by a combination of six factors: significant weaknesses in RBS's capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework; over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity; concerns and uncertainties about RBS's underlying asset quality, which in turn was subject to little fundamental analysis by the FSA; substantial losses in credit trading activities, which eroded market confidence. Both RBS's strategy and the FSA's supervisory approach underestimated how bad losses associated with structured credit might be; the ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence; and an overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank.
But it adds the multiple poor decisions that RBS made suggest, moreover, that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions.
FSA chairman, Adair Turner, said: "People want to know why RBS failed and why no-one has been punished. This Report aims to answer those questions. It describes the errors of judgement and execution made by RBS executive management, which, in combination, resulted in RBS being one of the banks which failed amid the global crisis. These were decisions for whose commercial consequences the RBS executive and Board were ultimately responsible.
"It describes, however, why 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 describes a historic approach to supervision, and one that has been radically reformed since 2007. The FSA is a different organisation now. We have more resources, better skills, a more intensive approach and far greater focus on capital, liquidity and asset quality.
Turner added: "The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?"
The report comes amid news that the Government has decided to split the FSA and create two new regulators, a Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).
It has also established a Financial Policy Committee (FPC), with the responsibility to identify and respond to emerging systemic risks. The creation of the PRA, focused exclusively on prudential issues rather than spanning both prudential and conduct concerns, and of the FPC, will ensure that focus on prudential and systemic risks is maintained even when most of the world assumes, as it did before the crisis, that prudential risks are low.
Many of the reforms required in response to the lessons highlighted in this Report have already been implemented. But in addition, Adair Turner proposed two key policy areas where further significant change should be considered. Firstly, he recommends that major bank acquisitions should in future, require explicit regulatory approval. And secondly, he calls for a public debate about changes to rules, laws or remuneration policies which would ensure that bank executives and directors face personal consequences as a result of bank failure.
