FSA accused of ignoring warnings

Rhian Nicholson
17.04.09 14:21

The Financial Services Authority (FSA) has come in for heavy criticism from a whistleblower over its alleged "apathy and complacency" in its monitoring of building societies.

Liberal Democrat Treasury spokesman Vince Cable said he had been approached by a former FSA supervisor who said that the watchdog ignored warnings that the building societies were getting involved with riskier products involving buy-to-let and commercial property lending during the boom years.

The unnamed whistleblower added that the building societies were buying books of self-certified loans from other institutions in the mistaken belief they were conventional mortgages.

"I witnessed trusting and naive provincial building society executives and nonexecutives, who had no real understanding of securitisation or structured finance or any other aspect of the workings of global capital markets, being eaten alive by cynical, rapacious and short-termist investment bankers," the whistleblower told Dr Cable in a letter published in the Financial Times.

Dr Cable has now written to the FSA chairman Lord Turner calling for this latest set of claims, which he calls "a scathing indictment of FSA regulatory practice" to be thoroughly investigated.

The FSA denied the allegations of lax supervision, claiming the description of its approach to the regulation of the societies "bears no relation to reality" However, it added that its "general approach to supervision was less focused on business models leading up to 2007 than it has been since".

Read the full response from Lord Turner.

Earlier this week, credit ratings agency Moody's downgraded nine of the UK's biggest building societies following stress tests assuming a 40% plunge in house prices.

Nationwide, Chelsea Building Society, West Bromwich, Principality, Newcastle, Skipton, Yorkshire, Norwich & Peterborough and Coventry all saw their ratings drop by as much as three notches, making it significantly more expensive for them to borrow from the wholesale markets.

Last month, the Dumfermline Building Society went under with Nationwide taking on its savings arm and the Government forced to bail out its portfolio of risky loans - which included two loan books bought from sub-prime lenders.

FSA accused of ignoring warnings

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