"FSA Light Touch Turns to Iron Fist as Interviews Rise (Update1)
By Caroline Binham
April 28 (Bloomberg) -- U.K. banks including Barclays Plc, HSBC Holdings Plc and Lloyds Banking Group Plc are having as many as four times more employees interviewed during routine inspections as the nation’s financial regulator’s “light touch” morphs into an iron fist.
As many as 150 people are being questioned by the Financial Services Authority during examinations at Britain’s biggest banks, according to lawyers and a person familiar with the visits. In previous years, the maximum for a major bank would have been 40 interviews, they say.
“The FSA is becoming nastier,” said Sara George, a former FSA prosecutor who is now a regulatory lawyer at Allen & Overy LLP. “There is a feeling that the FSA is now a lot more answerable to Westminster and to the taxpayer than to the City,” she said, referring to the home of Parliament, and London’s financial district.
The regulator, criticized by lawmakers for not doing enough to prevent the financial crisis, has broken with its past approach, promising more intrusive regulation and warning that people “should be frightened” of the FSA. It has pledged to become more involved in banks’ business, from scrutinizing strategy to influencing hiring and compensation.
The U.K. now owns stakes in Royal Bank of Scotland Group Plc and Lloyds, while Northern Rock Plc and Bradford & Bingley Plc have been nationalized. The International Monetary Fund last week estimated the total cost of bailing out British banks will be 175 billion pounds ($255 billion).
Prime Minister Gordon Brown, who created the FSA in 1997 when he was Chancellor of the Exchequer, had up until the credit crisis championed London’s “light-touch” regulation for being business friendly.
“Where more people are interviewed, that is in line with our more intrusive approach,” said Heidi Ashley, an FSA spokeswoman.
FSA inspections are known as ARROW visits, which stands for “advanced, risk-responsive operating framework.” Before this year, they consisted of assessments of financial companies’ compliance and risk-management.
“Whereas before an ARROW visit may have taken in 20 to 40 people, now it’s over 100,” said Carlos Conceicao, a former FSA enforcement director who’s now a regulatory lawyer at London- based Clifford Chance LLP.
The FSA interviewed about 80 people at one of Britain’s biggest banks in the final quarter of 2008, according to a person familiar with the visit. The bank was told that more than 100 will be interviewed next time, said the person, who declined to be identified because the inspections are confidential.
Non-executive directors are now being questioned more intensely and are being asked to provide evidence of where they disagreed with management and how they made their views known, said George at Allen & Overy.
“The FSA is doing two things,” said Jonathan McMahon, a former FSA bank supervisor who is now a regulatory adviser at the consulting firm Promontory Financial Group. “It’s asking more detailed, probing questions. It’s also interviewing people previously untouched by ARROW,” including more junior employees.
The FSA’s more intensive approach can also be seen in the time it takes to approve applications for roles of “significant influence” at companies, said Darren Fox, a regulatory lawyer at London-based Simmons & Simmons.
‘Far More’ Interviews
The regulator is undertaking “far more” interviews before signing off on such appointments, Sally Dewar, the FSA’s Director of Wholesale and Institutional Markets, said yesterday at a conference in London.
Overhauling the ARROW visits mirrors the “revolution” in regulation that its chairman, Adair Turner, promised last month.
ARROW “has embodied our principles-based approach, delivering a lighter regulatory touch for those firms that pose less risk,” an FSA paper said in 2006.
The light-touch approach was criticized by opposition Conservative Party lawmakers who have recommended that bank supervision be returned to the Bank of England should they win the next general election, which must be held by 2010. Turner, presenting his blueprint for regulation, said last month the era of light-touch regulation was dead.
Turner pledged that after a recruitment drive, as many as 20 supervisors will be assigned to each large bank to undertake more rigorous assessment.
More FSA Staff
“They’ve got 100-odd new supervisors and one of the great unknowns is how quickly they’ve been brought up to speed,” Conceicao said. “If they’re not the right caliber with the right experience, then you’ve got inexperienced people looking at vast amounts of information.”
The financial crisis has brought to light scams such as the $65 billion Ponzi scheme to which Bernard Madoff pleaded guilty on March 12. He faces as many as 150 years in jail for using money from new investors to pay off old ones.
“No one wants to be the one who misses the red flags of the next Ponzi scheme and so the FSA is adding a whole new layer of scrutiny,” said Simmons & Simmons’s Fox.
While the FSA is responding to politicians’ concerns by asking for more information, it could also be setting itself up for more problems, Fox said. “The more information the FSA asks for, the more risk they take that if something goes wrong, they will have missed it.”
To contact the reporters on this story: Caroline Binham in London at email@example.com"