Yesterday the FSA published a Final Notice publicly censuring Kaupthing Singer and Friedlander Limited (KSFL). The FSA's covering statement also notes that Sigurdur Einarsson (the former non-executive Chairman), Hreidar Mar Sigurdsson (the former non-executive Director) and Armann Thorvaldsson (the former CEO) have undertaken to the FSA that they will not perform any significant influence functions requiring the approval of the FSA at any UK authorised firms for a period of five years from 8 October 2008.
After KSFL went into administration in October 2008, the FSA began an investigation into KSFL and its senior management during the period immediately prior to the bank's failure. The FSA has not investigated the wider issues around the solvency of KSFL's Icelandic parent company or the group as a whole (these entities were not regulated by the FSA).
The FSA has concluded that KSFL breached Principle 2 of the FSA's Principles for Businesses between 29 September and 2 October 2008, because it failed to consider promptly and properly whether liquidity stresses in its Icelandic parent would have a detrimental effect on its own liquidity position. In particular, KSFL did not give proper consideration to, or properly monitor, a special financing arrangement with its parent company in Iceland, under which it could draw up to £1bn at short notice. KSFL assumed it could rely on receiving this £1bn 'Liquidity Transformation Arrangement' (LTA), if needed, and did not test that assumption.
The FSA also suggests that when it started to have concerns about the LTA, KSFL failed to discuss these concerns with the FSA "in a timely manner". The FSA says KSFL should have realised by 29 September 2008 that there was a risk that the £1bn value of the LTA might not be recoverable in full on an overnight basis, or within 0-8 days, but that it only communicated its concerns about that to the FSA at a meeting in the late evening of 2 October 2008. However, KSFL had told the FSA on 30 September 2008 that it was implementing its liquidity contingency procedures.
The FSA considers these failings to be serious as they occurred at a critical period for the financial markets and at a time when the FSA was particularly concerned to ensure it was fully informed about all banks' liquidity.
No findings of regulatory breach have been made against the individuals, and they have not made any admissions.
The FSA's action against Kaupthing appears a little pointless.
They have presumably expended considerable resources to produce a narrow set of findings on a very narrow issue years after the event. The reaction "is that it?" comes to mind. Yes, it serves to re-emphasise the importance of keeping the FSA promptly informed of liquidity issues during times of stress. Of course, in principle, no one can argue with that.
But there is no indication in the FSA's notice as to what the impact of the breach was - the Final Notice confirms that the ultimate insolvency of KSFL cannot be attributed to the failure to monitor promptly and properly the Liquidity Transformation Arrangement.
As a result the FSA's action begs more questions than it answers:
- What could the FSA or the bank have done or considered doing had the bank informed the FSA of its concerns a day or two earlier?
- Given that the FSA were already aware of the Liquidity Transformation Arrangement, why were the supervisors not scrutinising the position more closely?
- Why has the investigation taken so long to reach such an uninformative and narrow set of findings?
- And is it really right that senior individuals' careers should effectively have been ended as a result of alleged errors of judgement on this isolated issue during a period of unprecedented market turmoil?
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