Posted by: Colin Wiles14/12/2011
The housing sector should learn from the report into the collapse of Royal Bank of Scotland, says Colin Wiles
As expected, this week’s FSA report on the collapse of Royal Bank of Scotland slams the “assertive and robust” management style of its chief executive, Sir Fred Goodwin, and the ineffective leadership of its 17-strong Board. But the FSA also attacks itself for the “light touch” regulatory approach that contributed to the disaster. According to the FSA, its supervisory philosophy at the time, “encouraged supervisors to place reliance on assurances from firms’ senior management and boards about strategy, business model and key business decisions.” At a time when regulatory engagement in the housing sector is retreating should the lessons of the RBS disaster be sounding any warnings for our industry?
Just to recap. It cost every person in the UK around £750 to bail out RBS – a total of £45 billion. That’s about 42% of the annual cost of the NHS. In the years leading up to its collapse, Sir Fred Goodwin repeatedly obstructed the regulator. He amended letters to the Board so that crucial warnings about risks and his deteriorating relationship with the regulator were watered down. He refused to allow the regulator to meet non-executive directors on a one-to-one basis. The RBS Board was unable to manage him, even though the Chair assured the regulator that the Board provided sufficient challenge to his ambitious expansion plans. The effect of “light touch” regulation was that RBS had only six FSA staff members overseeing its operations in 2007 when it was trying to acquire ABN Amro, compared to 23 today. Between 2005 and 2008 there were 511 meetings between RBS and the FSA, yet it still collapsed.
Can the housing sector learn any lessons from this debacle? I think it can. Of course no housing organisation is anywhere near the size of RBS, but our sector as a whole has assets of £100 billion and borrowings of £40 billion. The old Housing Corporation traffic light reports were often subject to the same kind of protracted negotiation between chief executives and the regulator that are revealed in the RBS report and I have no doubt that our sector contains several individuals with Fred Goodwin-like tendencies. Regulating the male ego is never easy! The warning signs of weak boards and headstrong executives need to identified and dealt with at an early stage.
It remains to be seen whether the TSA will be adequately resourced to handle the growing complexity of financial arrangements within the sector and whether the new arrangements for economic regulation will be sufficiently robust to expose and restrain chief executives who have too strong a grip on their organisations. But my advice to the TSA would be to read, learn and inwardly digest the RBS report.
From Inside out
An independent look at the housing sector and beyond from Colin Wiles