Critics rush to point finger of blame at 'Culpability Brown'

GORDON Brown was last night facing an unprecedented barrage of criticism over his role in the UK's financial crisis amid claims he was responsible for massive gaps in the regulatory system and that he failed to maintain stability in the country's finances.
Derided as "Culpability Brown" by the SNP and berated by the Tories for "destroying" the previous regulatory system when he became chancellor in 1997, the Prime Minister also had to endure detailed and damning critiques from financial experts and regulators.

Lord Turner, chairman of the Financial Services Authority, the City watchdog created by Mr Brown to regulate the banking industry, admitted his organisation had failed to recognise the way the banking industry was developing.

And Paul Moore, the banking whistle-blower who claims he was sacked for warning of excessive risk-taking at HBOS, said Mr Brown should resign for failing to oversee the stability of the country.

Their comments came amid speculation that the government might have to intervene to nationalise the Lloyds Group because of the massive liabilities it inherited from HBOS – a takeover encouraged by Mr Brown and Alistair Darling, the Chancellor.

It also emerged last night that the UK economy might shrink further and faster than Mr Darling has forecast. The CBI said GDP output would shrink by 3.3 per cent in 2009, compared with its November forecast of a 1.7 per cent decline, and well below the current Treasury forecast of between -1.25 per cent and -1.75 per cent.

To add to the Prime Minister's problems, an opinion poll yesterday showed Labour 16 points behind the Tories, evidence that the public believe the Prime Minister is not performing well in getting Britain out of its economic crisis.

At the heart of the criticism is the decision taken by Mr Brown, as chancellor, to create a new regulatory framework for the banking industry when Labour came to power in 1997.

He created the Financial Services Authority (FSA) as part of the move, which saw the Bank of England stripped of responsibility for overseeing the banks.

A "tripartite" system was introduced, involving the Bank of England, the Treasury and the FSA, each of which had some role in regulating and overseeing the industry. But none had the power the Bank of England used to possess.

Political opponents claim Mr Brown's creation of the tripartite system has been fundamental to the crisis and that he can no longer carry on claiming he is a victim of world events.

Shadow business secretary Kenneth Clarke claimed yesterday the system had been a "complete failure".

He said: "Gordon destroyed the previous system – we don't know whether that would have worked – but the one he put in place was totally useless, and it is important to get back to regulation."

David Cameron, the Tory leader, added: "We need a government that's able to wipe the slate clean. It is difficult to get out of where we are when we have a Prime Minister who won't admit boom and bust is still with us and won't accept some of the mistakes made ."

Lord Turner, who became FSA chairman in September 2008, admitted that regulators around the world failed to recognise that by 2004 the banking system was developing in a way which created a "large systemic risk".

He said: "We didn't focus enough on that – the FSA, the Bank of England, the Treasury, and the Fed and Office of the Comptroller of the Currency in the US didn't focus enough on these issues and we have to get that right in the future."

It was a "legitimate criticism" of the FSA that over the past decade it focused on the nitty-gritty of individual banks' processes without standing back and recognising that the expansion of credit was "too risky" for the economic system as a whole, said Lord Turner.

He said: "With hindsight, the FSA – like other authorities throughout the world – was focused too much on individual institutions and the processes and procedures within them, and not adequately focused on the totality of the risks across the whole system and whether there were entire business models, entire ways of operating, that were risky.

"That's with hindsight, and there weren't many people who got it right at that time. That's a legitimate criticism."

Meanwhile, Mr Moore added fuel to the controversy when he went public in calling for Mr Brown's resignation.

Following his explosive evidence to the Commons Treasury Select Committee last week, Mr Moore said he was planning to send the MPs a further dossier of 30 documents which would point the finger of blame for the economic turmoil at Mr Brown. After Mr Moore's revelations forced the resignation of Sir James Crosby, the deputy chairman of the FSA, Mr Brown told another parliamentary committee that HBOS's massive losses – estimated at more than £10 billion – were caused not by government policy but by the bank's flawed business model.

But Mr Moore, who was head of risk at HBOS from 2002-05, said: "The failure goes to the heart of the system – to the internal supervisory system and right to the top of government.

"Brown must go. He cannot remain in office. He has presided over the biggest boom in the history of the country as well as one of the biggest busts.

"He promised no more boom and bust. He must be held accountable for his failure to oversee the stability of the country."

Angus McNeil, the SNP MP for the Western Isles, described the past few days as a "black weekend" for the Prime Minister, claiming Labour was in "meltdown".

He said: "The evidence is piling up against 'Culpability Brown'. There can be no escape from his responsibility for the recession and the recurrent problems of the financial sector."

• Bill Jamieson's analysis: What an appalling mess – and Lord Turner may have pressed the ejector button that could catapult Gordon Brown out of Number 10


HOW IT WORKS

THE Financial Services Authority is an independent body set up to regulate the financial services industry in the UK.

It is a company limited by guarantee and financed by the financial services industry. It was created from the Securities and Investments Board by Gordon Brown, then the Chancellor, as part of the realignment of financial regulation he adopted in 1997.

The Treasury appoints the FSA board, which currently consists of a chairman, a chief executive officer, three managing directors, and nine non-executive directors (including a lead non-executive member, the deputy chairman).

The authority has confirmed that it will be paying out bonuses to staff this year equivalent to around 15 per cent of their salaries. Reports suggest that the total bonus bill could reach £33 million. But FSA chief executive Hector Sants will not be taking a bonus. He was paid £662,000 last year, including a £114,000 bonus.

The chairman of the FSA is Lord Adair Turner while the post of deputy chairman is vacant following the resignation of Sir James Crosby.


BACKGROUND

THE tripartite system of financial regulation was set up by then Chancellor Gordon Brown in 1997, soon after the election. From the outset, it was controversial. Then Bank of England governor Eddie George was outraged and very nearly resigned over it.

Under the system, supervision of the banks was taken away from the Bank and entrusted to the Financial Services Authority. The Treasury was made responsible for legislation and the Bank for financial stability.

From the first, it was never clear who was in overall charge, what systems were in place for regular liaison and what happened when a crisis involved more than one of the parties.

Thus, while Northern Rock was supervised by the FSA, when it ran into trouble it sought help from the Bank of England. The Bank was not at all keen to inject cash into the financial markets to get individual banks out of a hole – the "moral hazard" problem.

Also, it seemed odd to have the Bank responsible for supervising the system overall, but not the banks and financial companies that made up the system. Some preferred the Dutch model where there is a single regulator.


Finding fault

This is the tripartate system, with No 10 at its heart regulating banking. Bill Jamieson follows the blame trail and gives his ratings

FINANCIAL SERVICES AUTHORITY

JOB: To supervise banks and financial markets.

FAILING:Too focused on individual institutions and did not spot the risks which existed across the system. This was admitted yesterday by FSA chairman Lord Turner, pictured.

BLAME RATING: 7/10

10 DOWNING STREET

JOB: Overall responsibility.

ALLEGED FAILINGS: PM Gordon Brown (pictured) was behind the 'failed' regulatory system; made appointments to the FSA and the Bank of England's Monetary Policy Committee; and promoted the Lloyds TSB takeover of HBOS.

BLAME RATING: 8/10

HM TREASURY

JOB: To carry the can in parliament for problems, and to design the overall structure for regulation.

ALLEGED FAILING: Under chancellors Gordon Brown and Alistair Darling (pictured), it did not identify the growing macro-economic risk in the bank lending surge.

BLAME RATING: 7/10

BANK OF ENGLAND

JOB: To scan the money markets for problems, to make money available to lenders, and to act as a lender of last resort.

ALLEGED FAILING: The Bank, headed by governor Mervyn King (pictured), is accused of keeping interest rates too low, for too long, fuelling boom and bust.

BLAME RATING: 6/10