By Mark Kleinman, City editor
The City watchdog risks breaching rules on shadow directorships in relation to the size and shape of Royal Bank of Scotland (RBS), institutional investors in the taxpayer-backed lender warn today.
A number of leading shareholders in the bank have contacted me to say they believe that the Financial Services Authority (FSA) is "treading a very fine line" over the bank's strategy and the execution of that strategy by Stephen Hester, RBS chief executive.
The intervention of these powerful institutions follows a letter sent by Andrew Bailey, managing director of the FSA, to Mr Hester a couple of weeks ago that encouraged the RBS boss to consider selling Citizens, its US arm, and further shrink its investment banking arm.
I revealed the existence of this letter last week.
A senior investor said today that the RBS board should only consider selling Citizens if it was deemed to be in the interests of all shareholders.
It is not clear that that would be the case at the moment, this investor said, because of the valuation attributed to Citizens and the impact that a discounted sale would have on RBS's capital position.
The shadow directorships issue is important because it would mean that the FSA, the custodian of stock market rules, could potentially be in breach of them itself. It would also make FSA employees personally liable for the decisions of the bank – although many would argue that that would be a virtue rather than a vice given the scale of the financial crash that took place under the watchdog's nose four years ago.
It also underlines the dilemma confronting the City regulator as it migrates its role from a passive supervisor of banks towards being an intrusive inquisitor of bank executives' strategic decision-making.
Sources at the FSA tell me that they do not agree with the institutional investors that there is an issue over shadow directorships because the letter from Mr Bailey to Mr Hester was a suggestion about what the RBS board might like to consider rather than a direct instruction.
It is not the first time since its £45bn rescue in 2008 that this issue has been raised in relation to RBS.
George Osborne, the Chancellor, was accused of acting as a shadow director of the bank last year when he announced in the House of Commons that RBS would be scaling back its presence in investment banking.
UK Financial Investments, the body which manages the taxpayer's 81 per cent stake in the bank, has also been forced to tread carefully in its engagement with RBS.
And in a report last week on the FSA's probe into RBS's near-collapse, the Treasury Select Committee also addressed the subject.
"Mr [Hector] Sants [former FSA chief executive] has maintained that for the FSA to have interfered with the running of banks would have risked acting as a shadow director. We agree that were this to transpire, boards of banks would be less accountable. Boards might attempt to deploy the argument that the regulator had become a shadow director as a defence in any subsequent enforcement action against them.
"The PRA's use of judgement-based regulation in the future may, at times, also lead to the appearance that the PRA is acting as a shadow director. A similar risk is run by the FCA in undertaking product intervention. We expect both the PRA and the FCA to examine how they will minimise the risk of appearing to act as shadow directors under their new approaches to regulation, and publish their findings."
RBS declined to comment, while the FSA could not be reached for comment.
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