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HBOS Report – risky business?

Eleena Misra, Littleton’s Head of Professional Discipline & Regulatory Law Group, discusses the joint report into the near collapse of HBOS.

The long awaited joint report
into the near collapse of HBOS, co-authored by the Prudential Regulation
Authority (PRA) and Financial Conduct Authority (FCA) came out yesterday,
causing ripples of concern within the banking sector and, more particularly, a
raft of senior executives who may yet face sanctions, including former Chief Executive
Officers, James Crosby and Andy Hornby, both of whom are described as having
had “limited banking experience”.

Brief Overview

In the summer of 2007, not
long after the FSA appointed Sir Hector Sants as its new CEO, it identified
HBOS, formed from the merger of Halifax and the Bank of Scotland back in 2001, as
being particularly vulnerable to the market disruption occasioned by stress in
the US sub-prime market. In August that year, the European Central Bank (ECB)
provided ninety-five billion euros in liquidity support to the euro area
banking market amidst grave fears that there would be a sub-prime credit

In April 2008, the Bank
of England launched its Special Liquidity Scheme. In August 2008 the FSA
increased HBOS’ overall risk rating to the highest level possible. The
following month, with panic setting in globally, Lehman Brothers filed for

On 1 October 2008, HBOS
sought Emergency Liquidity Assistance from the Bank of England. The government
responded with £11.5 billion in support. HBOS was ultimately saved by the
Lloyds Banking Group.

In March 2009 the
Financial Services Authority (FSA) commenced enforcement investigations. In
2012 Peter Cummings was banned from senior banking positions and fined
£500,000. As Head of Corporate Lending (CEO Corporate), he was the only Board
executive to face such censure.

While one may not wish to
describe the very brief overview above as the ‘highlights’ of an extremely
turbulent episode in UK banking history, one which was itself entrenched in
global market crisis, those few stark milestones serve to remind us of how
acute the HBOS problem became.


The joint report of the
PRA and FCA (‘the joint report’), which is called “The failure of HBOS plc (HBOS)”, makes the overarching point that the
ultimate responsibility for the failure of HBOS rests with the Board. However,
of equal importance and significance are the criticisms and concerns stated in
respect of the regulatory oversight and enforcement action taken by the FSA, considered
to be a product of the times and of the ‘light touch’ regime of regulatory
oversight in the City. Indeed, HBOS is being held out as the paradigm of what
can go wrong when the regulators do not roll their sleeves up and overly trust
organisations to put in place adequate safeguards in terms of risk compliance
at a senior level: a justification, if you will, for the new Senior Managers
and Certification Regime. 

A feature of the HBOS Board was its
lack of knowledge and experience of banking, which hindered its ability to
challenge the firm’s Corporate and International Divisions effectively.?A
bank’s Board of Directors should include non-executives with a diversity of
experience, from inside and outside the banking sector. Moreover they must,
between them, have the capacity and motivation to explore and challenge key
business issues rigorously with the executives.
” ?

If the joint report feels
like it has been a long time coming, that is probably because it has been. In April 2013 the Parliamentary
Commission on Banking Standards (PCBS) got in first and produced its report on
HBOS, “An Accident Waiting to Happen”.
However, it is worth bearing in mind that the joint report was produced under the previous
legislative framework governing the FSA. The framework was changed by the
Financial Services Act 2012, which established the FCA and PRA although the
first six or so months of work were done under the FSA. The change has,
perhaps, allowed for a searing level of honesty in relation to the part played
by the FSA and may in future allow for a more agile response to a crisis of
this nature. Further, the delay has meant that the joint report was able to
respond to issues raised by the PCBS (as invited to by the PCBS).

The conclusion of the joint report is best
summarised as follows:

“Ultimate responsibility for the
failure of HBOS rests with its Board. However, another striking feature of
HBOS’s failure is how the FSA did not appreciate the full extent of the risks
HBOS was running and did not take sufficient steps to intervene before it was
too late.” ?

Fairly, the joint report
acknowledges the power of hindsight and is at pains to point out that the
regulatory finger of blame is not pointed at any particular individual(s):

“Finally, while this Report contains
some judgements about the quality of decisions made, those statements carry no
implication that either HBOS or any individual was guilty of any regulatory
breach, other than as stated in the Final Notices. The judgements reached in
this Report are views expressed in an attempt to understand and describe the
causes of HBOS’s failure for the purposes of satisfying a legitimate public
interest. They can reasonably be subject to public debate.”

In the parallel report, also
released yesterday, Andrew Green QC reviewed the FSA’s enforcement actions
after the failure of HBOS, robustly criticising the failure by the FSA to
investigate the senior management of HBOS more extensively, and suggests that
the PRA and FCA give consideration to starting fresh investigations against
former executives now. A considerable amount of time has now elapsed, removing
fines as an option due to limitation, but it would seem that those who were not
investigated before may not be entirely out of the woods in terms of the
reputational and career damage that would result from being barred from senior
banking positions. As was widely reported at the time, James Crosby voluntarily
returned his knighthood and surrendered part of his pension in 2009 and has now
retired while others continue to hold prominent positions in companies such as
Waterstones and Gala Coral. Press reports yesterday referred to a number of
them, including Lord Stevenson, the former Chairman, having instructed the law
firm Ashursts.

At a reported cost of around £7 million, the reports have
come at considerable expense. It
is to be hoped that the PRA and FCA will also reflect carefully on the lessons
learned and monitor the efficacy of the new regulatory regimes in the City
without, in time, becoming complacent.

It remains to be seen
whether the new Senior Managers and Certification Regime will give rise to
problems of its own, leading to a nepotistic culture in recruitment and
promotion practices. After all, if a person is to vouch for a colleague is it
not human nature to seek out individuals he or she can truly trust and are
those individuals likely to be people who come from the same backgrounds
(whether educational or otherwise) and City pedigrees? That begs a separate and
interesting question, which has also attracted some government and press
attention in recent times, which is whether the culture of risk taking is
modified or ameliorated where decisions are made by mixed groups, that is to
say mixed female and male decision makers or, indeed, those from differing
ethnic or socio-economic backgrounds. That is certainly one other way of
looking at the issue of risk management and compliance, though the City is far
from being a truly diverse mix in terms of senior management in financial
institutions at this time.

A copy of the joint report
can be found HERE.

copy of the parallel report into the FSA’s enforcement actions after the
failure of the HBOS group can be found HERE.

The government’s paper ‘Women on Boards’ and 2015 update can be found HERE and HERE.

Eleena Misra
Head of Professional Discipline & Regulatory Law Group
Littleton Chambers

The Professional Discipline and Regulatory Law Group offers
breadth and depth of expertise in regulatory matters and has its own
investigations team comprising experts in employment & equalities, commercial,
regulatory and public law, particularly adept at dealing with urgent and
sensitive matters at the intersection of Littleton’s core practice areas, as
well as injunctive relief.

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