The Financial Services Authority (FSA) has admitted its watchdog was mistaken and did not focus enough on the excessive risks currently being taken by banks.

Lord Turner, who took over as chairman of the City watchdog in 2008, has told the BBC that they “didn’t focus enough on that”, and that by 2004 the “whole system was risky,” stressing that regulators worldwide missed the problem as well.

Well-founded Criticisms?

Lord Turners deputy, Sir James Crosby, resigned from his position just last week after criticism of the decisions he made as the chief executive of HBOS.

Criticisms were also made at the decision to appoint Sir James to his job at the FSA, due to the fact that the watchdog had already warned about the problems of the risk regime he had set up at HBOS.

In My Defence…

However, Lord Turner made clear that it was the Treasury’s decision to appoint Sir James, but also said that the warnings about the risks at HBOS had been routine matters that related to the processed and structure as opposed to the risks Sir James was taking.

He has admitted that the FSA should have focused more on such things as these, another failure on their part. He said: “The FSA at that time was more focused on the processes, the structures, the reporting lines, rather than simply saying ‘when I look at this whole business model… it’s all too risky’.”

It was revealed on Friday that HBOS was expected to make a £10 billion loss. Lord Turner also commented on this, saying: “The losses that have been revealed this week, I would point out, are not huge surprises to the FSA,” claiming that the authority had predicted such numbers after stress tests were carried out on the bank in October last year.

What Will Happen Now?

On March 18th, Lord Turner will publish the findings of his current review of how the financial sector is regulated, but has said that it will bring about some “very major changes” to the way banks are currently regulated.

Example of such changes that are expected include: how much cash they have to hold in reserve; changes to the rules on credit rating agencies; and changes to how bankers are paid.

Lord Turner also defended his decision for FSA staff to take their bonuses, but hastened to add that the chief executive Hector Sants has refused to take his.

He added that if he were to take away bonuses from the rest of the staff, this would mean cutting pay by 15% on average at a time when politicians are saying that the regulator needs to take on better staff.

What Do You Think?

Is anyone to blame for the problems? Has the FSA made mistakes? If so, is it too late to rectify them? Should staff be allowed their bonuses? Leave your comments here.