HBOS report slams FSA over ‘flawed’ investigation

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The long-awaited report into the failure of HBOS has criticised the FSA for its “flawed” investigation into the bank.

The report concludes that ultimate responsibility for the failure of HBOS rests with the board and senior management. It says the FSA failed to give proper consideration to investigating other senior individuals and the bank itself.

Only one former HBOS director, Peter Cummings, was fined in the aftermath of HBOS’ failure.

The FCA was criticised this week after admitting it will be unable to fine any former HBOS executives because the bank’s failure will fall outside the six-year statute of limitation on fines.

The regulator remains able to ban ex-HBOS directors from the financial services sector. However, former HBOS chief executives Andy Hornby and James Crosby and former chairman Lord Stevenson no longer hold an active registration as an approved person.

In the report, Andrew Green QC recommends that the PRA and FCA should now consider whether any former senior managers of HBOS should be the subject of an enforcement investigation with a view to enforcing bans.

Green says the FCA’s enforcement investigations into the failure of HBOS were “not reasonable”, and its decision-making process “materially flawed”.

He says the only person whose possible misconduct was given proper consideration for investigation was Cummings. He says the FSA gave no proper consideration to the investigation of any other individuals including former members of the board, or to an investigation of HBOS itself.

In an interview for the report, one senior former FSA employee said “the people most culpable were let off”. In his view these were Hornby and Lord Stevenson.

The report found HBOS’ senior management and board failed to set an appropriate business strategy and failed to challenge a flawed business model which placed inappropriate reliance on continuous growth without due regard to the risks involved.

It also says flaws in the FSA’s supervisory approach meant it did not appreciate the full extent of the risks HBOS was running and was not in a position to intervene before it was too late.

In his report interview, former FSA chief executive Hector Sants said the regulator’s resources were “stretched almost to breaking point” during the period of HBOS’ failure and the financial crisis.

The report argues the regulatory regime was “ill-suited” to taking enforcement action against individuals where a bank had failed. This is because of the difficulties of proving personal culpability in such a large organisation.

The regulator’s investigation into the HBOS collapse was first launched in 2012, and was delayed with the introduction of the FCA and the Prudential Regulation Authority in 2013.

In a scathing report published in April 2013, the parliamentary commission on banking standards called for Lord Stevenson, Hornby and Crosby to be banned from financial services.