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Northern Rock collapse unavoidable

The Financial Services Authority (FSA) could have done little to avert the collapse of Northern Rock bank, lawyers say.

Although the FSA has admitted to a series of failings over its regulation of the bank, Richard Burger, senior solicitor at Mills and Reeve LLP, does not believe that the regulator can be held accountable for the bank’s failure. “The FSA’s evidence to the Treasury Select Committee attributes the collapse, first and foremost, to the Rock board and executives’ failure to create a business model which could withstand instable market conditions.

Although, the FSA accepts that its supervision of the bank lacked the intensity to challenge them on their risk management practices and understanding of risks, such an admission does not equate to culpability on the part of the regulator for the collapse of Northern Rock.”

Burger believes the FSA’s management of banks is unlikely to change fundamentally in light of its admissions. “Had the FSA made specific demands of the banking sector in 2006–07 to reduce their exposure to the credit crunch, I doubt this would have received a warm welcome from the industry. In the short term there may be calls for ‘heavier touch’ supervision, but the reality is that such regulation will not avert future crises in the financial services industry nor ensure absolute stability. Any attempt by the FSA to impose such a regime would be met with significant opposition,” he adds.

However, Simon Morris, partner and financial services regulatory expert at CMS Cameron McKenna LLP, says the FSA’s supervision of Northern Rock was inept. “If a major firm regulated by FSA were to operate with such poor management oversight and such weak systems and controls, then FSA would have shut it down by now.

“The fundamental FSA supervisory model was workable...but Northern Rock got appallingly low quality supervision so that the aggressive Northern Rock funding and liquidity management model went largely unchallenged with disastrous results,” he adds.

Judicial discretion key to sentencing

Criminal lawyers have defended the sentencing decisions of judges in firearms cases after it was alleged that the judiciary was guilty of soft sentencing. Bernard Hogan-Howe, chief constable of Merseyside Police, suggested last week that judges are imposing overly lenient sentences for firearm possession, an offence that carries a minimum of five years’ imprisonment. Hogan-Howe said that in order to provide a consistent and palpable deterrent, judges need impose lengthy prison terms, potentially above and beyond the minimum. Sally O’Neill QC, chairman of the Criminal Bar Association, says that fears over the availability and use of firearms are justified, but should not be used to ratchet-up Draconian sentencing levels for those who come before the courts. “It is not possible to anticipate any exceptional circumstances which may apply in any case which is why the provision is framed as it is. It gives the sentencing judge, the person best placed to make the decision, discretion to decide whether such circumstances apply in that particular case. It is wrong to criticise sentencing judges for applying the law without a knowledge of the basis for imposing less than the minimum sentence in any one case”, she says.

O‘Neill says the police should beware of corrupting the sentencing exercise through a desire to see provisions applied rigorously as the sentences handed down are severe and may not, in any case, provide the desired deterrent effect. Tan Ikram, president of the London Criminal Courts Solicitors’ Association, suggests that England and Wales could learn from the US experience of rigid mandatory sentences which has faced considerable criticism. He says the imposition of such sentences in the US has had little deterrent effect and has resulted in inequitable and irrational sentences.

Ikram also warns that any attempt to interfere with judicial discretion could result in unfair sentencing.

“Mandatory minimum terms should result in all offenders being dealt with in the same way irrespective of culpability or circumstance. “The ‘exceptional circumstances’ proviso in the Firearms Act 1968 provides a safety valve that allows judges to do justice to the particular circumstances of the case within the framework set by Parliament. Undermining that discretion would result in the punishment not fitting the crime and would fundamentally undermine the ability of judges to their job,” he adds.