HMG ACCUSED OF SEEING NO BLAME, HEARING NO BLAME, AND

UNCLAS SECTION 01 OF 02 LONDON 002829

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV UK
SUBJECT: HMG ACCUSED OF SEEING NO BLAME, HEARING NO BLAME, AND
TAKING NO BLAME FOR FINANCIAL CRISIS

LONDON 00002829 001.2 OF 002



1. (SBU) Summary: The Treasury Select Committee held an
unprecedented evidence session November 3 in which the Tripartite
Committee authorities responded to Parliamentary questions and to
questions emailed to the Committee by the general public. In their
responses, the Chancellor of the Exchequer Alistair Darling and Lord
Turner, Chairman of the Financial Services Authority (FSA),accepted
some responsibility for the financial crisis but said there are
several levels of blame. They acknowledged there are lessons to be
learned, particularly regarding greater cooperation between
regulators on an international level. Mervyn King, Governor of the
Bank of England, added that work needed to be done on capital
requirements and the regulation of liquidity. Lord Turner was keen
to emphasize that the FSA has already started internal reform. End
Summary.

"I accept responsibility" - Within Limits
-------------- --------------


2. (SBU) In an unprecedented evidence session held by the House of
Commons Treasury Select Committee, the Tripartite Committee
authorities appeared together to give evidence November 3.
Chancellor Alistair Darling, Bank of England Governor Mervyn King,
and Lord Adair Turner, the new Chairman of the FSA, answered
questions emailed to the Committee by the public. More than 5,000
emails were received on a range of issues including the banking
bail-out, the housing market, the international regulatory
structure, and compensation schemes.


3. (SBU) Michael Fallon, the Conservative Deputy Chairman of the
Committee, said that many emails concerned the question of
responsibility and said there was an impression of "see no blame,
hear no blame and take no blame." Chancellor Darling said "I accept
responsibility for everything I'm responsible for" but added that
there were several levels of responsibility. The national
regulators needed to take some of the blame; there needed to be a
stronger international framework, and the boards of banks needed to
take responsibility as the first line of defense of their own
institutions. Lord Turner said that responsibility was shared on a
global level as there was a global failure to see enormous risks
developing in the financial system.

Lessons to be learned
--------------


4. (SBU) While individual regulators focus on events within their
own areas of responsibility, the financial system was deficient in
spotting problems that were building up across several countries,
stated the Chancellor. The UK, therefore, will argue for greater
cooperation between regulators. He said it was important to have
greater surveillance and far better monitoring of the problems that
are building. As the world became smaller, the Chancellor added, it
was more important than ever that regulators maintained a global
view.


5. (SBU) There were three areas where work needed to be done,
according to Mervyn King. First was on the level of capital
requirements. He said this was being looked at by the Financial
Stability Forum. He said the immediate need was not to force banks
to have higher capital requirements but to have more capital.
Second was on the regulation of liquidity and the amount of capital
that needed to be put aside. King said the UK was taking a strong
lead in the Basel fora to bring the discussion back to the
regulation of liquidity. Finally, on counter-cyclical capital
requirements, he said this needed to be worked on in an
international forum and would take time.


6. (SBU) Compensation structures were mentioned in a large number
of the emails submitted to the Committee. Lord Turner said that the
FSA has the ability to tell firms that their bonus structures were
inappropriate and also had the ability to reflect inappropriate
bonuses in a higher level of capital requirement. He said they
would consider these options during international regulatory
discussions. The Chancellor added that we should avoid a situation
where institutions have bonus structures that drive people into
taking extreme risks. One Committee member suggested that when the
FSA did its assessments on firms, it should take into account the
bonus payments and incentives of the firm.


7. (SBU) Sally Keeble, a Labour member of the Committee, questioned
the Chancellor about credit rating agencies. Darling said that any
regulation would need to be on an international level to avoid
regulatory arbitrage. He said that at the last meeting of the
European Finance Ministers in September, they made substantial
progress and he was optimistic that something can be agreed by the
end of 2008 or early 2009 (on a Europe-wide level). The regulation
is likely to be stronger than voluntary regulation. The Chancellor
added that CRAs will be discussed at the G20 meeting later this

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month.

Action taken by the FSA
--------------


8. (SBU) Since the FSA's mea culpa in March, which admitted that
there were inadequate resources devoted to high impact firms, too
rapid turnover of key staff, and a failure to document and stick to
procedures, the FSA has instituted a 'Supervisory Enhancement
Programme.' Lord Turner said this entailed the hiring of 218
additional people focused on relationship management. Of these
positions, 38 percent have been filled. The FSA anticipates the
completion of this program by spring 2009. In addition to
recruiting more staff, the FSA is focused on the quality of people
employed. It has designed a new induction program for all new
supervisors, consisting of a nine-week course in core supervisory
skills.

TUTTLE