By CivilServiceWorld

25 Apr 2012

A new report raises concerns over the Treasury’s handling of the financial crisis, and sets out ways in which it should be equipping itself to face the eurozone crisis. Colin Marrs explains and tests its key recommendations.

With events in the eurozone representing the biggest current threat to the UK economy, HM Treasury has 50 staff working on domestic financial stability – quite a change from 2007 when, in the run-up to the collapse of Northern Rock, that team comprised just three people. A Treasury report into the department’s response to the financial crisis, published last month, concludes that officials were complicit in a global consensus that “the regulatory approach and new methods of securitising debt had substantially reduced systemic risk in the financial sector”.

The scale of this error has been well documented. Reports into the Northern Rock collapse by the Public Accounts Committee and the National Audit Office in 2009 found severe shortcomings in the Treasury’s preparedness to deal with the situation – the department implemented a number of their recommendations during its strategic review in 2010. However, in October last year, permanent secretary Sir Nicholas Macpherson appointed Sharon White, who became director general of public spending in the department in December, to conduct a further review of the Treasury’s response to the crisis.

Her detailed report finds that the Treasury was slow to react both to the Northern Rock crisis in 2007, and then to the collapse of Lehman Brothers the following year. Resources were eventually ramped up in both situations, but initial delays meant that officials faced unprecedented stress. One senior civil servant told White that between July 2008 and January 2009 he was working from 7am to after 10pm seven days a week, with just three to four hours’ sleep.

Officials with relevant background were thin on the ground and most of those handling the crisis were ‘generalists’, who faced a steep learning curve. White says that Treasury HR systems, which do not record people’s skills and background, meant that officials who did have deeper knowledge of the sector were often not called upon. “It was not necessarily the people with the right skills and knowledge that were brought in,” according to another official quoted in the report.

Short of the necessary experience, the Treasury called on the services of external experts – including investment bankers Goldman Sachs and law firm Slaughter and May. Here too, there were some difficulties. White says it took time for the department to become an “intelligent customer” and consider critically the advice that it was given. Jill Rutter, programme director at the Institute for Government, says: “The Treasury got by, but it could well have been done at a lower cost. Effectively, the government gave Slaughter and May a blank cheque.”

Although White does praise the way the department eventually got its act together, she voices serious concerns about the Treasury’s high turnover of staff, the rate of which currently stands at around 25 per cent a year. She recommends that the department reduce this rate to between 15 and 20 per cent annually, saying: “High turnover and short job tenure can hamper the Treasury’s ability to develop relationships with stakeholders and grow the skills and expertise of its workforce. These trends also have implications for knowledge and risk management.”

White suggests improving senior pay, which her report says is lower than in other Whitehall departments. Salaries at the Bank of England can be up to 100 per cent higher for equivalent roles, and there is also demand for Treasury experience from the private sector, she finds. The call for better renumeration is welcomed by Keith Cuthbertson, professor of finance at Cass Business School, who says: “The department needs to take a leaf out of the book of the private sector – they identify what skills they are missing, and ensure they pay an adequate amount to fill the gaps.” But White also suggests that better career structuring, including secondments to other financial organisations, could play a role.

Rutter points outs that the issue of staff retention in the Treasury is nothing new. She says: “During the 1980s, civil servants often went to the Treasury, worked on a privatisation, and then moved into the private sector to work on the next one that came along.” The department already promotes faster than other departments in order to attempt to retain staff, she says. “When I worked in the department, I was a grade five aged 33, but it is a trick that you can only play up to a certain level because there are far fewer jobs in more senior positions.”

White’s report also addresses organisational issues, calling for better planning for future bank failures, including clearer structures and functions for crisis teams. It’s important that the department identify key figures from inside and outside government who can be called upon in future emergencies, she says, and it must plan out their roles and emergency benefits such as child care costs. She also calls on the Treasury to identify within six months the number of specialists and generalists that it needs to retain in house.

Rutter welcomes the findings, and says the fact that the Treasury has published such a self-critical report is refreshing and provides grounds for optimism that future crises can be handled better. And Andrew Tyrie, chairman of the Treasury Select Committee, agrees, commenting that the report provides a lesson for other departments and bodies involved in the financial crisis. “The Treasury’s decision to publish its internal review reinforces the need for the Bank of England to undertake this work at the soonest appropriate time,” he says.

Cuthbertson provides a note of caution, expressing disappointment that White’s review was not more specific in its recommendations. He says: “She could have put more pressure on in terms of suggesting numbers of staff that were needed in specific areas, and identified levels of pay which would be necessary to achieve her aims.” In a climate of Whitehall cuts, he fears, the lack of targets makes it easier for the report to be kicked into the long grass.

However, Macpherson warmly welcomed the report, saying that it will help “ensure the department has the right capability to fulfil its duties in relation to financial services in the future”. And a Treasury spokesman is adamant: “This report will not be swept under the carpet.” The department has promised a detailed response, with action points, in the summer. It remains to be seen how these changes will affect the operation of the department – but as Rutter points out, all parties are praying that we won’t have to find out how effective the new crisis arrangements are.

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