FSA says Labour leadership had encouraged it to take a 'light touch' on banks and must take share of blame for financial crisis
Labour's lax regulation of the City contributed to the collapse of Royal Bank of Scotland and allowed the former bosses of the bank, including Sir Fred Goodwin, to walk away without being disciplined, according to the Financial Services Authority.
In a long-awaited report into the RBS scandal, Lord Turner, chairman of the FSA, said the regulator had been encouraged to take a "light touch" by Labour and that its creator, Gordon Brown, had left it with a "structural flaw".
Turner, who said the public had a right to be "absolutely furious" about the banking crisis, cited demands by Tony Blair, Brown and Ed Balls that the financial district be allowed to be competitive.
Ultimately though, Turner said, the blame lay with the board of the bank, which was bailed out with £45bn of taxpayers' money in 2008 after being kept afloat with emergency cash handouts from the Bank of England. The report says "multiple poor decisions" led to the bailout after RBS took a "gamble" on buying Dutch bank ABN Amro at the height of the 2007 credit crunch.
The Conservative party seized on the report as an endorsement of its decision to disband the FSA.
City minister Mark Hoban said the report was "as damning as it is depressing" for Balls. "The report lays bare the gross failures of the regulatory regime devised and driven by the shadow chancellor and his party," he said.
Asked whether it was fair that Goodwin had not faced disciplinary action from the FSA, which has powers to fine and ban individuals from working in the City, Turner said no. "In the years before the crisis we allowed the development of a financial system which was taking too many risks, in some cases doing activities that were socially useless, which had a set of remuneration structures that allowed people to make very large amounts of money," he said.
Business secretary Vince Cable, whose department is able to ban individuals from being company directors, admitted he had also ruled out taking action against former RBS board members. But he said that, having received the full FSA report, he was "immediately instructing counsel to provide further advice on what course of action is open to me".
The 452-page FSA report – which was only written after a public outcry last year when the regulator admitted it had shut its investigation into RBS – said the ultimate responsibility must lie with the bank. But the FSA also admitted it "failed adequately to challenge the judgment and risk assessments of the management of RBS". Turner also blamed a "woefully" deficient international regulation regime regarding how much capital banks should hold.
Turner called for a change in the rules to make it easier to discipline bankers and hold them to a different standard than other company bosses, although Hoban was cautious about this idea. He told MPs: "I share the frustration of many members that it has not been possible to bring action against those responsible for failures at RBS. However, strengthening legal powers in this area would raise some complex issues and we will want to reflect carefully and listen to a range of views before deciding on any action."
In the report, Goodwin is described by fellow RBS director Johnny Cameron as an optimistic person who had "had often in his life been proved right". Cameron, who was head of the investment bank and has agreed not to work in the City again, admitted to FSA investigators that he did not know how the complex loans structures linked to sub-prime mortgages – which eventually caused losses for RBS – worked.
Shadow Treasury minister Chris Leslie said Labour had already apologised for not being "tough enough". He added: "When will David Cameron and George Osborne say sorry for calling for less regulation and complaining that Labour was too tough?"