Farewell The FSA - You Won't Be Missed!

At long last the hapless FSA has been disbanded, and replaced by a three pronged system of governance (dare I say "Tripartite"?). As per the FT, the three prongs are:

1 The Prudential Regulation Authority, an arm of the Bank of England headed by Andrew Bailey, will supervise 1,700 banks, insurers and large investment firms.

2 The Financial Conduct Authority, an independent agency led by Martin Wheatley, will supervise behaviour at the same firms and have sole responsibility for 25,000 more, most of them brokers, investment advisers and money managers. The FCA’s multifaceted task includes protecting investors, policing the markets and promoting competition.

3 Mr Wheatley and Mr Bailey will also sit on the third new UK regulator, the Financial Policy Committee, a consensual body charged with spotting and disarming broad threats to financial stability.

Let's see how this all works then!

FSA Faces Legal Action

Two weeks ago I berated the toothless and useless FSA for kowtowing to the banks and giving them a "get out of jail card" for the rate swap mis-selling scandal, in the form of a £10M ceiling on the size of swaps for which compensation can be claimed.

The government, fearing that it will be associated with the failure of the FSA, has finally woken up to this mess. Greg Clark, Financial Secretary to the Treasury, has told the FSA that banks must allow businesses that could have been mis-sold an interest rate swaps to cease making premium payments.

The Telegraph reports that Clark privately told the FSA that its finding that more than 90% of interest rate hedging products had likely been mis-sold to SMEs was a “game changer”.

By way of "coincidence" the FSA faces legal action over its compensation scheme.

Law firm Manches is preparing to launch a judicial review against the FSA, which it claims “acted unreasonably in establishing and changing the criteria for businesses to be within the review”.

In particular, Manches will challenge the introduction of the £10M cap. Rich Eldridge, a partner at Manches, said the FSA had used its powers “improperly”:

“The cap is illogical. An indicator of mis-selling is a swap for more than the loan. If a business with a loan of £9m is sold a swap of £9m it can be within the review. If the same business is sold a swap of £11m it cannot. The £11m swap is worse as the swap is more than the debt, but the £10m cap allows the bank to escape the review procedure for this swap.” 

The sooner we are rid of the ineffective and useless FSA the better!

FSA Kowtows To The Banks

Last week the FSA stated that banks had mis-sold around 90% of rate swaps. Martin Wheatley, chief executive designate of the Financial Conduct Authority stated:

"We believe that our work will ensure a fair and reasonable outcome for small and unsophisticated businesses."

Was this statement an indication of a new tough approach by the FSA against mis-selling by the banks?

Unfortunately, for the hapless SME's who were sold these products, the answer is no.

The Independent reports that banks have been given a "get out of jail card" by the FSA, in the form of a ceiling on the size of swaps for which compensation can be claimed. What the FSA chose to hide in their statement last week was the fact that swaps of £10M and above will be excluded from the review that it has ordered banks to undertake, this exclusion will mean that banks will be exempted from compensating companies that took swaps of £10M or more out.

Aside from the fact that the FSA has yet again proved that it is weak and toothless when pressured by the banks, this exemption is a clear indication that banks are in a weak financial position (ie the industry cannot afford to take another £10BN hit akin to the PPI scandal).

The sooner the FSA is expunged from history, the better!

Banks Mis-sell 90% of Rate Swaps

In an unsurprising revelation it appears that banks have yet again been fingered for selling another "dodgy" financial product that was totally unsuitable for the hapless customers onto whom it was foisted.

This time the offending products were complex interest rate derivatives, sold to SME's.

The FSA is of the view that around 90% or more of these products, which did not comply with one or more regulatory requirements, were mis-sold.

Seemingly the banks structured these products in such a way that escape from them was prohibitively expensive.

Martin Wheatley, chief executive designate of the Financial Conduct Authority, accused lenders of selling businesses “absurdly complex products” and said many customers could now expect compensation from their banks.

Mr Wheatley is quoted in the Telegraph:

“This marks significant progress in our review of these products. We believe that our work will ensure a fair and reasonable outcome for small and unsophisticated businesses.”

Lenders have seemingly set aside over £700M against potential swap mis-selling claims, with Barclays making the largest provision of £450M. Whilst it is expected that the provisions will double, the final cost may in fact hit £10BN.

Allegations of Gas Market Rigging Akin To LIBOR

The FSA and Ofgem are looking into allegations that some of the UK's largest utilities have manipulated the UK physical natural gas markets.

Seth Freedman, a whistleblower, told them that he saw evidence that wholesale gas prices, used as the basis for domestic energy bills, were manipulated by some of the big power companies.

Mr Freedman, who worked at ICIS Heren (a firm which reports gas prices), said he saw what he took to be suspect trading on September 28 (the end of the gas industry’s financial year).

The fact that gas is traded like all other commodities makes it susceptible to speculation.

In the event that Mr Freedman's allegations are proven to be true, then this would be a scandal equivalent to the LIBOR rigging by the banks.

You can almost hear the lawyers rubbing their hands with glee at the thought of the lawsuits that are going to come from this.

Banks Issue Threat

Sky reports that Britain's banks have issued a thinly disguised threat to the FSA and other regulatory agencies, that if they are continually fined their lending capacity and ability to rebuild their capital bases will be severely jeopardised.

The warning was given at a meeting between bank CEO's and officials from the Financial Services Authority (FSA) last week.

Peter Cummings Fined £500K

The FSA has fined former HBOS director Peter Cummings £500K, and banned him for life from working in the City.

Tracey McDermott, director of enforcement and financial crime at the FSA is quoted in the Telegraph:

“Despite being aware of the weaknesses in his division and growing problems in the economy, Cummings presided over a culture of aggressive growth without the controls in place to manage the risks associated with that strategy.

Instead of reacting to the worsening environment, he raised his targets as other banks pulled out of the same markets." 

However, do not shed too many tears for Cummings, Cummings left HBOS in 2009 with a payout of £600K; so he's still £100K up on the deal!

Barclays Is Not Alone - Watch The Ducks Be Lined Up!

The FSA says that Barclays not alone in Libor case.

This will be an "interesting" week, watch as all the ducks are lined up in a nice neat little row!

Barclays Shuts The Stable Door

Barclays has now begun to realise that a simple fine from the FSA will not be quite enough to rebuild its shattered reputation. Therefore in order to atone it has sacrificed its chairman Marcus Agius, who has resigned.

Ironically the surname Agius means "a very old and wise person".

Agius is indeed very wise allowing himself to be removed from the eye of the storm in this manner. He might also care to consider his position with the British Bankers' Association (BBA), which only last week expressed "shock" at Barclays actions.

What is Agius's position within the BBA?

Why he is their chairman!

What was it the BBA said last week?

"The British Bankers’ Association is shocked by yesterday’s report about LIBOR." 

Don't the other members of the BBA ever talk to their chairman?

For good measure, in order to further appease the baying crowd, Barclays have launched an audit of its business practices. This will be conducted by an independent body and report to the new deputy chairman, Sir Michael Rake.

Barclays has promised:

• a "root and branch review" of its "flawed" past practices 
• a public report of the audit's findings 
• a new mandatory code of conduct for all staff

This presumably is being done in the hope that it doesn't have to sacrifice Bod Diamond, the CEO, who will appear before the Treasury Committee on Wednesday.

Bob and Barclays need to understand two things:

1 Shutting the stable door after the horse has bolted is too late, and

2 Diamonds are not forever!

The Stench of Corruption and Greed Overwhelms Britain's Financial Services Industry

Britain's tarnished financial services industry and banking sector seems intent on bringing about its own self destruction. Over the years there has been a litany of scandals eg:

- endowment mis-selling
- subprime mortgages
- PPI mis-selling
- LIBOR fraud
- NatWest computer meltdown
- Northern Rock, RBS etc etc to name but a few

However, it seems that the industry is determined to add to its list of self inflicted shame and dishonour. Step forward the usual suspects ie; Barclays (a familiar name), HSBC, Lloyds and RBS which have all admitted to mis-selling interest rate hedges to small and medium sized business customers.

Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have all agreed to immediately halt the sale of complex interest rate hedges to smaller businesses and have pledged to compensate potentially thousands of customers who have been screwed by them.

According to the Telegraph the FSA is of the view that about 28,000 businesses had been sold interest rate hedges.

Another nail in the coffin of the tarnished reputation of the UK's financial services industry.

The financial services industry is now fully immersed in its own self created shit, and quite clearly is on the verge of implosion.

FSA Grows Some Balls

In a rare display of balls, the soon to be disbanded FSA fined Ian Hannam, the Chairman of Capital Markets at J P Morgan Cazenove, £450K.

For good measure the FSA also published their decision:

"The Financial Services Authority (FSA) has today published a Decision Notice for Ian Hannam, the Chairman of Capital Markets at J P Morgan Cazenove. The Decision Notice indicates that the FSA has decided to fine Hannam £450,000 for market abuse.

Hannam has referred the matter to the Upper Tribunal (the Tribunal) where he and the FSA will each present their case.  The Tribunal will then determine the appropriate action for the FSA to take. The Tribunal may uphold, vary or cancel the FSA’s decision.  The Tribunal’s decision will be made public on its website.

In the Decision Notice dated 27 February 2012, the FSA set out its decision to fine Hannam for two instances of market abuse (improper disclosure).  In the FSA’s opinion, Hannam disclosed inside information in two emails sent in September and October 2008 to a prospective client.  The emails contained inside information relating to Heritage Oil Plc (Heritage), an existing J P Morgan client for which Hannam was the lead adviser. 

The September email contained information about a potential offer for Heritage and the October email contained information about a new oil find by Heritage.

The Decision Notice states that the FSA accepts that Hannam did not set out to commit market abuse but considers that Hannam’s failings were serious in view of his experience and senior position within J P Morgan. 

The FSA believes that the size of the proposed fine reflects the serious nature of the market abuse and should act as a deterrent to other market participants. 

Tracey McDermott, acting FSA director of enforcement and financial crime, said:

“Inside information is extremely valuable and must be handled with care to ensure that it is properly controlled and that appropriate safeguards are observed.  This applies to all market participants but is particularly important for senior practitioners who will regularly interact with a wide circle of contacts”.

Hannam is disputing the fine. However, he has today resigned from JP Morgan.

Hector Sants Resigns Again

Hector Sants (CEO of the failed, and soon to be defunct, FSA) has finally resigned from office.

He had resigned once before in 2010, and was due to leave in the summer of that year. However, he was persuaded by George Osborne to stay on to become deputy governor of a new regulator due to "go live" in 2013:

"As predicted on this site, George Osborne has sounded the death knell of the ineffectual and inept FSA (ironically, despite its lousy performance, FSA staff were paid nearly £22M in bonuses last year).

Osborne has stated that it will cease to exist in its current form, and a "Consumer Protection and Markets Authority" will be created.

Hector Sants, the CEO of the FSA, will stay to become the new deputy governor and chief executive of the new regulator. That announcement is to be treated with a degree of scepticism. The new body will be considerably less powerful than the FSA, and it is likely that as soon as the transition has occurred Sants will depart (as this in effect a demotion)."

As noted, this was in effect a demotion, as the Bank of England's role is to be considerably enhanced. Therefore it is not surprising that Sants has decided to step down this summer, his role in the new Prudential Regulatory Authority (PRA) body will be taken on by the Bank of England's Andrew Bailey.

Despite persuading him to stay on in 2010, Osborne doesn't seem to have offered official public thanks to Sants for his work.

RBS and Fred Goodwin Sued For £2.4BN

An RBS Action Group has been set up by 7,400 private shareholders and 80 institutional ones (including NatWest Stockbrokers - part of RBS) to sue Royal Bank of Scotland (RBS) and its former directors including ex CEO Fred Goodwin for £2.4BN.

The claim states that RBS misled investors in the prospectus for its £12BN rights issue to fund the takeover of the Dutch bank ABN Amro.

Mike Neill, chairman of the action group, is also less than impressed with the FSA whitewash of the sorry affair (as is everyone else!).

BIS To Prosecute Sir Fred Goodwin?

Not everyone is as content and as passive as the Financial Services Authority (FSA) when it comes to the RBS debacle and the stewardship of Fred "the Shred" Goodwin and other members of the board.

The Telegraph reports that the head of the Insolvency Service at the Department for Business Innovation and Skills (BIS), which is already investigating whether RBS's former directors could face civil charges, has asked his legal team to check the criminal allegations too.

The FSA report report into the collapse of RBS noted that:

 

"RBS appeared uncertain of its capital position at critical times.

 

So, at best, compliance was only established on a retrospective basis."

 
In theory this is a breach of the Companies Act, which states that directors must be able to "disclose [their company's] financial position with reasonable accuracy at any time".

The website of BIS says it "often" prosecutes "malpractice by company directors in relation to the keeping and preservation of company accounting records".

Penalties are "punishable by a maximum penalty of 2-10 years imprisonment and/or a fine."

How embarrassing for the FSA, if BIS launches a criminal prosecution.

The FSA's Report Into RBS

The long awaited, and much delayed, report by the Financial Services Authority (FSA) into the Royal Bank of Scotland (RBS) near collapse has finally been issued.

The FSA concludes there were “underlying deficiencies in RBS management governance and culture which made it prone to make poor decisions”.

The report highlights that Sir Fred Goodwin (the then CEO) lobbied to have a warning letter from the FSA altered, to remove references to the deterioration in his relationship with the FSA along with the FSA's concerns over RBS’s commercial property lending.

Incredibly only 6 members of the FSA were overseeing RBS in August 2007 (when it went ahead with the disastrous "dule diligence light" takeover of ABN Amro).

Lord Turner, chairman of the FSA, attempts to explain why, despite these failings, “no-one has been punished” for this failure of governance and oversight:

 

“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.”

Blaming the "rules" is not sufficient excuse for inaction, given that the governance of RBS clearly failed on a spectacular level and that the oversight of RBS by the FSA was woefully inadequate.

Why is the FSA still in existence?

HSBC Fined £10M

The UK financial services industry has yet again blotted its copybook. This time HSBC's name has been added to the "wall of shame".

The Financial Services Authority (FSA) have fined HSBC £10.5M, and ordered it to pay £30M in compensation, for mis-selling investment products to elderly customers needing long term care.

The FSA said that between 2005 and 2010, a subsidiary of HSBC, NHFA (previously known as the Nursing Home Fees Agency) advised 2,485 customers to invest in investment bonds, and other asset-based products, to fund long-term care costs.

The average age of these customers was 83, a sample review suggested that almost 90% of these cases were mis-sold.

The average amount invested per customer was about £115K.

The FSA ruled that this advice was unsuitable, because these products were designed to be held for a minimum of five years. However, many of these customers were not expected to live this long!

Coupled with the disgraceful mis-sale of this unsuitable product was the fact that the product had charges.

The Telegraph quotes Tracey McDermott, acting director of enforcement and financial crime said:

"NHFA was trusted by its vulnerable and elderly customers, It breached that trust to sell the unsuitable products. This type of behaviour undermines confidence in the financial services sector.

This penalty should serve as a warning to firms that they must have the right systems and controls in place to manage and identify risks when they acquire new businesses. A failure to do so can lead not only to detriment to their customers but to significant reputational and regulatory cost."

Well done HSBC for "enhancing" the reputation of Britain's financial services industry!

FSA Behind The Curve Again

In a staggering display of ineptitude, the hopeless and hapless FSA have taken umbrage at banks allowing some of their struggling mortgage debtors to switch to interest only deals, extend their mortgage term, or permit payment holidays (aka debt restructuring).

Why is the FSA so worked up over this?

It seems that the FSA is worried that banks are using this restructuring to flatter their bad debt provisions.

Maybe so.

However, the FSA may care to actually engage its brain before castigating the banks.

- Mortgages are secured on property.

- The property market is fucked!

- Were banks to sit back and allow struggling debtors to default on the mortgages, the banks only resort would be to either write the debt off and/or repossess the home.

- A repossessed home in a failing market is unlikely to clear the debt, plus the family that the bank dispossess from their home would still have to find somewhere else to live. This is not good for the economy, the bank or the family.

Why does the FSA not see this?

It is a rare occasion that banks are actually seen to be doing the right thing. However, the FSA has its head up its arse and refuses to see the bigger picture.

As I have asked before, why is the FSA still in existence?

The Ongoing Farce of The FSA Report About RBS

The ongoing farce of the FSA's report about the collapse of RBS continues.

The Treasury Select Committee has now published the terms of reference for the independent review of the FSA's report (which is still yet to be published). The review has been called for as MPs and others are heartily fed up with the FSA's handling of the matter.

Sir David Walker, a banker, and Bill Knight, a lawyer, will conduct the review which will have two aims:

- Assess whether the unpublished FSA report is "a fair and balanced summary" of the evidence gathered by the regulator and PricewaterhouseCoopers during their investigations into RBS.

- Assess whether the FSA's report does a good job of analysing its own failures in regulating RBS.

However, nothing can be done until the FSA have finalised their report.

Have they?

Of course not!

The hapless and hopeless FSA is still writing the report, which it was supposed to have finished in April, having agreed to an original deadline of March.

Citywire quote an FSA spokesman:

"It's taking longer than we'd originally hoped."

Hopeless and hapless!

Could someone please tell me why the FSA is still in existence?

FSA - F*cking Useless!

From today's Telegraph:

"Senior sources close to the FSA said that the report on RBS, originally promised by Lord Turner, the FSA chairman, in March, was now delayed indefinitely.

The FSA is now aware that the delay is doing it damage and wants to stave off criticism that it has not met its own deadline.

The sources said that such was the legal complexity trying to produce a report that would be cleared by RBS lawyers – fearful of possible legal action in the US – the project now needed a fundamental rethink."

I stand by what I wrote on 7 March 2011:

"The publication of the long awaited whitewash report by the FSA into RBS, originally intended to be published this March, has been delayed until at least April.

Unsurprisingly no one is happy with this delay, as it clearly makes the report look like even more of a whitewash and the FSA all but complicit in that whitewash.

The Sunday Telegraph adds weight to the increasing clamour for the FSA to come clean about this whitewash, by reporting that many current and former RBS managers have not been contacted by the FSA as part of its "investigation", despite their intimate knowledge of how the bank had been run.

Why would that be?

Does the FSA not know how to conduct an investigation, or was it trying to "investigate lite"?

Even more damning is the the Sunday Telegraph's assertion that Sir Fred "The Shred" Goodwin was only interviewed once by FSA officials, and even then only on broad issues and not the specifics of the bank's failure.

It seems that the FSA did not have "proper processes", according to one former senior Treasury adviser interviewed by the Telegraph.

The beleaguered and failed regulatory body, the FSA, has managed through further ineptitude to dig itself (as if that could be possible) deeper into the mire.

Having steadfastly refused to publish its report into RBS (the report that exonerated the directors and company of any wrongdoing), it then agreed (under intense pressure) to publish a heavily redacted version of the report.

Good enough?

Not really:

1 The report will be heavily redacted.

2 It won't be published until at least April.

The FSA really doesn't get it, and is demonstrating why it has become an irrelevancy.

Impressed so far?

I'm not!

However, this litany of incompetence does not not end here. The FSA exoneration of the RBS board may in fact be nonsense, and that the investigation nothing more than an incompetent whitewash.

For why?

WikiLeaks have published a cable that summaries a meeting between Sir Philip Hampton, the new chairman of RBS, and 3 US politicians.

During the meeting Sir Philip allegedly noted that he thought that the previous RBS had failed to live up to their "fiduciary duties", and did not conduct adequate due diligence before buying part of ABN Amro in 2007.

That hardly fits in with the FSA whitewash that exonerates the previous board.

Could someone please tell me why the FSA is still in existence? "

Gordon Brown's Mea Culpa

The Telegraph reports that Gordon Brown has admitted that he made a “big mistake” in the way he tackled financial regulation before the banking system collapsed.

As noted many times before on this site, the tripartite regulatory system set up by Gordon Brown failed primarily because no one body that belonged to it (ie Bank of England, Treasury and FSA) was deemed to actually be in charge of it.

Brown's admission is somewhat late in the day to be of any value!