David Ruffley has questioned Hector Sants and Adair Turner, the Chief Executive and Chairman of the Financial Services Authority, over why the FSA has taken no formal disciplinary action against fred Goodwin and other bankers whose management resulted in the collapse of the Royal Bank of Scotland (RBS) during the financial crisis. Here is the transcript of David's exchange with Messrs Sants and Turner:

Q91 Mr Ruffley: Mr Sants, the criteria for assessing whether individuals had acted in a way that could lead to formal disciplinary action rested on whether it could be demonstrated that they had acted in a dishonest, reckless or incompetent way. Can you point to the page in the report where incompetence is defined?

Hector Sants: The decision as to whether we should take enforcement action rests on the recommendation of the enforcement department, which in itself is a separate process accountable through the RDC to the board. If you don't mind, I think it would actually be better if Margaret could answer the question.

Q92 Mr Ruffley: No, I would not be happy with that, because you are going to be taking a job as chief executive in the Prudential Regulation Authority, which is going to be the premier authority for supervising banking. The report says there were a series of bad decisions in the years immediately before the crisis, and I want to get to the bottom of this. I want to hear your view on how incompetence is defined in this report.
Hector Sants: Well, as-
Mr Ruffley: It's not, is it?
Hector Sants: Incompetence, per se, is not defined in the report. What we would have to demonstrate is a breach of our regulatory rules and, as the enforcement section of the report lays out, the enforcement department found that there was no basis to proceed against that framework. The executive committee personally listened to, challenged and engaged with the enforcement department to satisfy itself that that conclusion was thoughtfully reached, and I believe it to be. But to your point, absolutely, there is not. We would have had to demonstrate a failure to comply with the FSA's procedures, rules and framework in order to have taken an action.

Q93 Mr Ruffley: What most people are amazed at in this report is that, with the exception of Johnny Cameron, there are no serious sanctions against significant individuals. Fred Goodwin emerges relatively unscathed, and I just want to pursue this question of what you think competence and incompetence is in the case of the RBS debacle. The report says, 'The substance of decision-making by the board in relation to ABN Amro was defective at the time, whatever the subsequent deterioration in the market and wider financial environment'. Would you not agree that making a decision as significant as the ABN Amro acquisition, even without the benefit of hindsight, was judged to be poor? Does that not imply a very large degree of incompetence? I want to understand-and I think people listening to this will want to understand-why no one has been fingered for that in this report. It is a pretty useless report in that sense, isn't it?

Hector Sants: I entirely agree with you.

Q94 Mr Ruffley: You agree with that?

Hector Sants: The substance of the report is to make clear that we considered the board and the senior executives of RBS, which includes Goodwin, to have made a series-a series; there was more than one-of very poor decisions, which led to the bank failing. I would also agree with you-and Adair has discussed this in his foreword, but I entirely endorse his comments-that, going forward, we should change the regulatory regime to allow the regulator to take those sort of assessments into account, to ensure that people who have shown that sort of serial misjudgment are not allowed to run financial institutions again. That is absolutely my view, so I entirely support Parliament making changes to the regulatory framework so that we can stop people like this working again, without any confusion or any risk that that would not be the case.

Q95 Mr Ruffley: That is a very useful disclosure you have made, Mr Sants. Could I sum up your reply there as saying that the FSA did not have the enforcement powers under the FSA regime to bring Mr Goodwin, in particular, to book in terms of enforcement proceedings? Is that what you are saying? You are blaming the structure of the way the FSA was set up and the powers it was given by Parliament at the end of the 1990s?

Hector Sants: I am absolutely saying that, in my personal judgment, the depth of failings demonstrated over a prolonged period-there was more than one here; I think you have to build a track record, just to be clear-amounted to a clear track record of a series of misjudgments by the executives of RBS, and in my judgment that means they are not fit to run a regulated institution. I would like to see the framework under which regulators operate changed, so that in future if people demonstrate that type of serial misjudgment, which demonstrates they are not competent, we are able to take action against them.

Q96 Mr Ruffley: In the announcement of the outcome of the enforcement regulation, the FSA said, 'the competence of RBS individuals can, and will, be taken into account in any future applications made by them to work at FSA regulated firms.' Is the implication of that that you would deem some of them to be incompetent, and if some of them were incompetent why could you not have taken enforcement action against them?

Hector Sants: Yes, to your first question-absolutely. I should make it clear, by the way, that I am giving my personal opinions.
Mr Ruffley: No, they are very interesting.

Hector Sants: Strictly speaking, we are not allowed by the rules under which we operate to make a judgment unless somebody reapplies. I should be quite clear that I am speaking to the Committee in a personal capacity because, as the FSA, we are not allowed by the rules under which we are set up to say upfront what would happen if somebody applied.

Chair: You are speaking under parliamentary privilege.

Hector Sants: But I am making clear that, as far as I am concerned, if any of those individuals applied, I would not consider them to be competent on the basis of the track record demonstrated. If I could draw a distinction, which again is an issue around the regulations-and I would be keen to allow Margaret to contribute to this discussion, as I know she feels strongly about this also-and just explain that the threshold for barring somebody's authorisation is lower, is less demanding, than the threshold for enforcement action. While I can say with confidence that, in my opinion, these people will not work again in the regulated sector in an executive role, it does not automatically follow from that that it means we should have been able to take enforcement action. I am entirely in agreement with you: in order to get the type of result that you would like to have, and I think we should have, we need changes to the framework under which we operate.

Q97 Mr Ruffley: I know he wants to get in, so can I just put my final question to Lord Turner, Chairman? The report quite clearly says that the FSA cannot, 'Take action against the CEO'-in this case, Fred Goodwin-'of a firm simply on the grounds that there were a number of failures at the firm, even though the CEO is ultimately responsible for the actions of the firm.' Don't you think that is a grotesquely inadequate system of regulation that a man like Fred Goodwin can pretty much walk away from this mess scot-free?

Lord Turner: That is why in my foreword I deliberately put on the table the fact that we need to explore whether there should be a change in the law. The point I wanted to come in on is this issue of what is competence, and was there not a case for competence. I have to assure you that that was something the board sub-committee that oversaw the production of this spent a long time quizzing enforcement about, and it is something I have considered. The way the law works at the moment, in the best judgment of our enforcement lawyers as to what they would be successful in in appeal to the upper tribunal, is that the way it is interpreted at the moment, competence has to relate not to a broad set of decisions. You cannot accumulate lots of decisions and say, 'If 10 of them were bad, there must be some incompetence.' You have to say, 'Look, you didn't follow the procedures here; you did that wrong; you clearly didn't have a technical competence in that very specific effect.' That, bluntly-and this is something that has worried me-may bias our enforcement activity to zero in on very specific things that we can prove, even if, seen widely by most reasonable people, they may not be the most important things to what led to a failure.
That is one of the reasons why I raise the question in my foreword as to whether we should have a different structure of law to say that, where something on this scale has gone wrong, there should be some category of automatic sanction that applies to the people who were responsible, whether or not we can prove that in some procedural or specific fashion they did something wrong. That is precisely why I put those issues on the table in my foreword.

Q98 Mr Ruffley: One final one-line question and one-line answer, if you would, Lord Turner. In your judgment, in its new Financial Services Bill, has the Government addressed the problem you have just explained and which is in your foreword to this report?

Lord Turner: Not yet. At the end of March, the FSA and the Treasury will produce a joint discussion paper on this issue putting forward options, which is intended to be consulted on, so that the Government could then put it in-as my understanding of their intention is-as part of the legislation that will also implement the Vickers recommendations, on which I believe a White Paper may be forthcoming before the summer.