FSA fines Northern Rock FD £320,000

Just to refresh our memories - http://companyinfo.northernrock.co.uk/downloads/results/res2006PR_AnnualReportAndAccounts.pdf

Basic salary, pension benefits and other benefits in kind;

• An annual cash bonus worth up to 100% of salary;
• A Deferred Share Scheme – with awards of shares equal in value to the cash bonus (i.e. up to 100% of salary) subject to the Company achieving real Earnings Per Share (“EPS”) growth of 3% p.a. over a three year period;
• A Bonus Matching Plan – where Executives could invest their cash bonus in shares and receive an award of Matching Shares of an equivalent value subject to the Company achieving real EPS growth of 3% p.a. over a three year period;

So presumably now that these people have been found guilty and fined - there has been a 'claw back' of all their benefits outlined above in addition to the fine. It is not clear how many years are involved however, one would assume that this 'claw back' would refer to all relevant years?

Discount for early payment - what is this all about? Surely it should be no discount and interest at 10% pa on the outstanding balance in keeping with the Banks approach to their own customers?
'Jones received a 20% discount to his fine for settling early. Were it not for this discount, Jones would have been fined £400,000'

No Contrition - disgraceful
Jones said he would now "pursue opportunities either in an advisory or full-time basis" as the ban by the City regulator only stops him taking on roles in any position that requires the FSA's authorisation

How has Adam Applegarth managed to avoid the FSA?
http://business.timesonline.co.uk/tol/business/movers_and_shakers/article7096705.ece
(2006 paid nearly £1.36m, including a £660,000 bonus) £760,000 payoff
Former Northern Rock chief executive has been appointed as a senior adviser to US buyout specialist Apollo Management 

JC asks "How has Adam Applegarth managed to avoid the FSA? " and follows this with a link to an article which says that Applegarth was unaware of the fact that David Jones was obfuscating the mortgage arrears figures. So, there's your answer, JC. Read your own links.

But for a fuller and more informed answer, try this link:

http://tinyurl.com/m7mtj4

@keithas

Interesting article which addresses a great many issues - some right & some wrong. Undoubtedly the Government, BOE etc. all had a part to play in the downfall of NR but ultimately it was liquidity.

'.. It has hardly been mentioned in the media or by the politicians that the limit on Together was a mortgage loan of 95%, plus a maximum 30% unsecured loan up to a maximum of just £30,000. Hence it is obvious that on a property purchase valued at say £200k – only just over the national house price average - the maximum Together mortgage was £190k plus £30k unsecured, equals £220k – i.e. a 110% mortgage - not a 125% one ..'

It is all down to interpretation - on a £100K house it would indeed be 125% whereas on a £1m deal it would be 98% - nevertheless encouraging customers to use their property as an ATM machine (Marc Faber) is hardly the action of responsible bankers.

As the article quite rightly says, one of the major issues was securitisation and in this respect nearly all UK banks were equally guilty, but does that really mean that it was acceptable? Cooking up ever more ingenius instruments in order to make a turn and pass on the bundled risk, with questionnable ratings agencies placing an arbitrary value on the instruments (note: nothing has really been done about those who rated these instruments - why not?)

But all this ignores the comment '.. When I worked at the Rock I used to sign off the documentation for hugems of pounds transfers of money and was involved with regular costing of product launches, producing data on almost a daily basis to fully update Mr Applegarth and his Board ..'

So what happened - did the process change (if so why) and how was it possible to hide the exposure?

Chief Executive Report (Adam Applegarth) - Annual Report & Accounts 2006

'.. However, we have not sacrificed quality of lending and saw three month plus arrears numbers fall in the second half of the year to 0.42% - less than half the industry average. The proportion of “together” lending, our highest risk product, fell from 35% in the first 6 months of the year, to 26% in the second half of 2006 and the proportion of lending over 90% LTV fell from 30% to 22% in 2006 ..'

FSA - '.. From 2005, NR staff were under pressure to report arrears figures at half the CML average ..'. Under pressure from whom (Mr Applegarth?)

Finally '.. "capitalisation of arrears", a tool used to rehabilitate poorly performing loans. The bank allowed staff to use their own discretion, which led to the rules being bent and the number of reported arrears reduced improperly. An average 6,870 "manual" capitalisations took place each month during the relevant period. The FSA said it was unable to ascertain how many were contrary to Northern Rock's lending policies, but "evidence suggests that the proportions were significant" ..'

So the questions have to be:

• Is ignorance an excuse? - (try it next time you get stopped for speeding & see the response)
• Mr Applegarth was surely aware of the "capitalisation of arrears" and the inherent flaws therein (risk assessment etc) - so why was nothing done about it and surely that was tantamount to negligence?

Frankly Mr Applegarth was in charge and for whatever reasons (incompetence, negligence, blind-eye, not wishing to know or plain fraud etc) NR encountered difficulties; for which he should be held accountable