FSA failed in building society collapse

By Avril Ormsby

LONDON (Reuters) - The financial services regulator failed in its supervisory role in the run-up to the collapse of the Dunfermline Building Society, but ultimate responsibility lay with the lender, a report said Thursday.

The Financial Services Authority failed to give clear warnings on the risks of commercial lending to Scotland's biggest building society, parliament's Scottish Affairs Committee said in its report on the society's downfall in March.

However, Dunfermline's shortcomings in communicating the risks with its members and certain management decisions, especially in connection with a 9 million pound loss-making IT project, were to blame, the committee said.

"One of the primary concerns for any building society must be effective and transparent communication with its members," the report said.

"This clearly was not the case at Dunfermline Building Society and the anxiety and stress visited upon members as a result of misguided decision-making at board level and what was, at best, miscommunication in its annual report is of serious concern.

"It is also apparent that the FSA failed in its duty adequately to warn Dunfermline of the dangerous path it was taking."

The Dunfermline board told the committee it had diversified away from traditional building society business of loans secured on residential property into commercial lending in response to members' wishes to compete effectively in the market.

After failing to secure a government rescue, Nationwide, Britain's biggest building society, took over Dunfermline's core assets in March in return for a 1.6 billion pound payment from the government.