FSA boss admits errors in HBOS regulation

LONDON (Reuters) - The chairman of the Financial Services Authority (FSA), Adair Turner, said on Wednesday he believed that the way it regulated banks such as HBOS HBOS.L before its near collapse last year was wrong.

"We were supervising people like HBOS within a particular philosophy of the way you do regulation, which I think in retrospect was wrong," he told a cross-party group of British members of parliament.

He said changes were underway at the FSA to improve the way it approached regulation, and that the body would be "fit for purpose" when the modernisation was complete.

"It was not the function of the regulator to cast questions over overall business strategy of the institutions ... You may find that surprising," he added, saying there was pressure in the UK, before the extent of the financial crisis was known, for regulators to be more "light touch".

"All the pressure on the FSA was to say why are you being so heavy and intrusive? Can't you make your regulation more light touch?" he said.

HBOS was taken over by rival Lloyds TSB (LLOY.L) to save it from collapse last autumn, while other banks such as Royal Bank of Scotland (RBS.L) are now majority owned by the government.

TECHNICAL COMPETENCE

FSA Chief Executive Hector Sants told the same committee that the regulator would now play a greater role in the appointment of senior bankers.

"The 'fit and proper' process was primarily focused on probity," he said, adding that historically it had been left up to bankers to decide whether executives were competent enough.

"We will be taking a view on competency ... an ability to understand the data, the types of accounts we have been referring to," he said.

On pay bonuses, Sants defended the right for FSA staff to receive bonuses for 2008, even though he himself had waived his pay-out amid controversy over so-called rewards for failure at Britain's stricken banks.

He said there was a pool of 21 million pounds to hand out, amounting to around 7,000-8000 pounds per employee.

"I don't think any other people in the organisation will be voluntarily giving up bonuses," he said, adding that it was payment for work spent trying to mitigate the crisis.

Sants also said he was in favour of greater regulation of credit rating agencies, as they had been a major contributor to the banking crisis.

Turner and Sants are the latest senior members of the financial industry to appear before Britain's Treasury Select Committee. Fred Goodwin and Andy Hornby, departed heads of RBS and HBOS, apologised for their role in the crisis before a meeting earlier this month.

(Editing by Will Waterman and Simon Jessop)