The UK’s Financial Services Authority promised to beef up its supervisory practices following a review of its handling of the collapse of Northern Rock plc.

The FSA published a summary of a review carried out by its internal audit division into its supervision of Northern Rock. The review identifies a number of areas for improvement in supervision, which it says will be “advanced urgently” by the FSA’s management.

The review identifies four key failings specifically in the case of Northern Rock: a lack of sufficient supervisory engagement with the firm; a lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm’s supervision; inadequate resources directly supervising the firm; and, a lack of intensity by the FSA in ensuring that all available risk information was properly utilised to inform its supervisory actions.

The review concluded that, overall, the supervision of Northern Rock was at the extreme end of the spectrum within the firms reviewed in respect of these failings and that its supervision did not reflect the general practice of supervision of high-impact firms at the FSA.

To enhance supervision at the FSA: a new group of supervisory specialists will regularly review the supervision of all high-impact firms to ensure procedures are being rigorously adhered to; the number of supervisory staff engaged with high-impact firms will be increased; the existing specialist prudential risk department of the FSA will be expanded; training will be upgraded; the degree of senior management involvement will be increased; there will be more focus on liquidity; and more emphasis on assessing the competence of firms’ senior management.

“This programme is the response of the management of the FSA to the weaknesses identified in the particular case of the supervision of Northern Rock. It is clear from the thorough review carried out by the Internal Audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge. However, I am determined through the programme of work that I am announcing today, that proper standards will apply to all significant firms supervised by the FSA,” said Hector Sants, chief executive of the FSA.