The FSA has been accused of being a toothless watchdog following its appalling handling of the Northern Rock collapse.

Now in a bid to get itself back on course, the regulator has made some crucial appointments. One of the watchdog’s most significant new appointments is that of forensic acc-ounting expert David Smith.

Smith is one of its three new senior advisers or ‘grey panthers’ as they are colloquially referred to by the regulator.

What's happened?

Smith, who was formerly senior partner of KPMG Forensic Accounting, will act as the FSA’s sounding board for accountancy matters.

Smith brings to the beleaguered regulator more than 20 years of forensic experience of leading major financial investigations for the Bank of England and the FSA. He also has extensive experience of audits in the oil and gas, banking and insurance industries.

He retired from KPMG in 2003 but has stayed keenly in touch with market movements, working on a major compliance issue for a global bank in 2007.

‘The senior advisers are appointed to give us insight into the markets that we regulate,’ said FSA spokeswoman Teresa La Thangue. ‘They come in and talk to us about how any policy we might be planning would be perceived and work in the external world.’

The FSA’s recruitment of Smith is a tacit admission of how ignorant it may have been of the accounting-related challenges facing the market participants in the banking and financial institution sector.

The regulator’s role in the collapse of Northern Rock has been called a ‘systematic failure of duty’.

What's going to happen?

Smith has his work cut out with the FSA. His forensic experience will probably be key in helping the regulator understand and foresee the systemic weaknesses of financial institutions, so as to prevent a Northern Rock-like repeat.

Part of this will involve bringing the regulator up to speed with the issues in the current climate of illiquid markets, resulting in assets that are difficult to value and trade. But the challenges also concern rebuilding the FSA’s credibility.

But there remain challenges ahead. The regulator needs to utilise the most important skill that Smith brings to the table and take a cold hard look at financial institutions and the way in which they have accumulated their damaging positions. Much work is needed to formulate strategic policy, which will not allow another contentious rescue.

As a starting point, the regulator is expected to step back, actively enforce its rules and allow the market to correct the issues that plague some of the financial institutions.

This might mean allowing some to die a natural death instead of rushing in with vast quantities of taxpayers’ money to rescue them.

Taking this approach would help reinstate public confidence in the FSA’s ability to regulate the financial services market.

But if the FSA fights shy of this sort of ruthlessness, it could cement the perception that it is nothing more than a gummy old mutt.