HM Treasury: The Asset Protection Scheme - Public Accounts Committee Contents


Conclusions and recommendations


1.  In challenging circumstances, the Treasury achieved its overriding aim to maintain financial stability. By avoiding the huge economic and social consequences of the failure of a major bank, the Asset Protection Scheme (the Scheme) was an important part of a wider package of measures to support the UK's financial system.

2.  The Treasury conducted extensive investigations of the assets put forward for inclusion in the Scheme, but both banks encountered major difficulties in providing all the data requested. Two of the UK's major banks could not provide basic information on their assets and sufficient assurance that their assets were not linked to fraud or other criminal activity. As the Treasury did not have a complete picture of the risks the taxpayer would be taking on, it was put in a difficult position and the Accounting Officer had to ask for a Direction from Ministers before proceeding with the Scheme. The Treasury should take steps to ensure the banks address these gross deficiencies in basic data and, when considering the future role of financial services regulators, make sure that arrangements are in place to test whether this has been done.

3.  The gaps in information on the banks' assets also begs questions about the role played by the auditors of banks ahead of 2008, when the full impact of the financial crisis became apparent. The Treasury and the Department for Business, Innovation and Skills have been working with organisations in the banking sector to improve the audit framework. They should now expand discussions to include the major professional audit and accountancy bodies. The Treasury should report back to us within a year on specific actions to ensure that professional audit standards and practices are up to the task of providing robust assurance on the internal control and governance of financial institutions, and on the valuation of assets.

4.  The Treasury lacked effective sanctions against RBS and Lloyds when they failed to meet their lending targets. In the first year, the mortgage lending targets were met but lending to businesses fell short of the targets by £30 billion. Under the lending commitment the Treasury considered a range of sanctions against RBS and Lloyds, should the second year target be missed, but decided that each sanction had a downside that outweighed the benefits. This is not satisfactory, and the Treasury should consider the precise mechanisms by which it will exert influence, including assessing progress and the application of appropriate sanctions. In giving the lending commitment, the banks wanted to highlight the constraints of demand and risk. Nevertheless there appears to be a reduction in the supply of credit, and we expect the lending commitment to be met, and a determination to achieve it to be shown by the banks.

5.  There were gaps in the Treasury's analysis of how much RBS should pay for the Scheme. The Treasury accepted that more could have been done to analyse the range of possible fees. However, the Treasury considered that such an analysis would not have resulted in a higher fee as that could have risked the viability of the scheme in providing assurance to the financial markets. Given the huge sums at stake, however, it remains unsatisfactory that a comprehensive analysis was not undertaken and we expect to see such analyses in the future where there is a significant exposure to the taxpayer.

6.  Following the announcement of the Scheme in January 2009, the Treasury retained flexibility to make changes and revisited earlier decisions to check whether they still provided value for money. Just ahead of signing the deal in November 2009, the Treasury reconsidered its options in the light of market changes, but considered that the Scheme remained the best way to ensure financial stability. Lloyds was allowed to leave the Scheme and raise capital in the markets and the terms of RBS's participation were recast. Reviewing decisions in the context of changing circumstances was good practice and the Treasury should ensure its guidance to departments requires this in all cases.

7.  While the prospect of the Treasury making payments to RBS has receded since 2009, there remains a risk that a further and severe economic downturn might result in RBS remaining in the Scheme for the foreseeable future. Such an outcome would lead to significant and long-term costs for the taxpayer. The Treasury, through the Asset Protection Agency, must make sure that RBS properly prioritises and complies with the requirements of the Scheme to maximise the returns on the insured assets in the interests of the taxpayer, its largest shareholder. The interests of the taxpayer must not in any way be sacrificed for the interests of the bank.

8.  The Treasury took the lead role in developing the Scheme and has accumulated valuable knowledge and experience in doing so. When Northern Rock got into difficulty in 2007 and had to be nationalised, the Treasury was severely stretched in terms of resources and experience but its capacity and capability have since grown. Current changes in the regulatory landscape mean that much of the day to day management of any future banking crisis will fall to the Bank of England. The involvement of public funds will, however, require the Treasury's prior approval. The Treasury will therefore need to make sure that in reducing its staffing it retains sufficient capability to understand and challenge proposed interventions should its approval be sought in the future.


 
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Prepared 20 April 2011