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Peter Hamilton: Sense and accountability

Peter Hamilton MM blog

The Parliamentary Commission on Banking Standards recently published its report on the failure of HBOS. The commission was clearly appalled by the level of incompetence it had discovered – not only at HBOS itself, but also at the FSA. The title of the report gives an indication of that depth of feeling: An accident waiting to happen: the failure of HBOS.

Ironically the phrase “an accident waiting to happen” was taken from a January 2004 report to the HBOS board by its then Group Finance Director, Mike Ellis. He said that in the view of the FSA, the Group’s growth had outpaced the ability to control risks. The Group’s strong growth, which was markedly different than the position of the peer group, may have given rise to “an accident waiting to happen”.”

Disastrously for all concerned, neither HBOS nor the FSA paid any proper attention to this warning. The accident happened. In September 2008, shortly after the collapse of Lehman Brothers, HBOS failed.

We are still waiting for the FSA’s own report on the failure of HBOS. That delay is in itself a scandal, and is yet another indication of the FSA’s incompetence. In the meantime, we should be grateful to the Parliamentary Commission for its report and the many issues it raises.

Those issues include the incompetence of the HBOS board, and in particular the incompetence of Lord Stevenson, James Crosby and Andy Hornby; the total inadequacy of the FSA; the failure of KPMG, the auditors of HBOS, to spot what was going on; the failure of the FSA to take effective action; knighthoods for incompetence. Then there is the question of whether there should be a Leveson-type inquiry into the collapse of the financial systems in general, including the accountability of the regulators.

True and proper accountability of the regulators has been an issue for years. Note that accountability is not the same thing as having a duty to report on various matters. The Shorter Oxford Dictionary defines “accountable” as being liable to be called to account; responsible (to somebody, for something). And the government is not willing to take responsibility for the regulation of the financial services industry. When the industry was first made subject to regulation in 1988, the system was based on self-regulation. In other words, the various parts of the industry took responsibility for themselves. The task of ensuring that the self-regulatory organisations did a proper job was delegated by the government to the Securities and Investments Board. So the government put two layers of regulators between it and the industry.

Then in 1997 the Chancellor of the Exchequer announced that the system would be changed by combining all the then existing regulators into one: the FSA. The FSA was established by the Financial Services and Markets Act 2000 (“FSMA”) as a body independent of the government, and was “not to be regarded as acting on behalf of the Crown”; and its members, officers and staff were “not to be regarded as Crown servants”. Indeed, except in the case of bad faith, neither the FSA nor its staff could be “liable in damages for anything done or omitted in the discharge, or purported discharge, of [its] functions”. It is difficult to think of a more independent body.

The FCA is the successor to the FSA, and its status as independent of the government and as exempt from liability for damages, except in cases of bad faith, is the same as it was for the FSA. In recent years, much has been said and written to try to persuade the government that the FCA should be made formally accountable to the government, and through the government, to Parliament. All to no avail – despite the evidence of the FSA’s ineffectiveness and incompetence.

There are at least two probable reasons for the government’s refusal to require the FCA to be accountable to it. The first is the simple desire not to be seen to be responsible for things that go wrong. The government was always careful to point out that the FSA was independent, and therefore the government could not be blamed for things that went awry.

The second reason is that if the government were to accept responsibility for a regulator, it would be difficult for it to avoid responsibility for the consequences of a failure of regulation. The Equitable Life case illustrates the point. In about 1999 the FSA became responsible for the Treasury’s regulation of life insurance companies, including Equitable Life. The FSA acted on behalf of the Treasury in that capacity until December 2001, when the FSMA came into force and the FSA acquired its independence. Equitable Life closed to new business in December 2000, due largely to its guaranteed annuity rate liabilities. As the Parliamentary Ombudsman’s investigation showed, the FSA was guilty of maladministration in its prudential regulation of Equitable Life. She recommended that the government should compensate those Equitable Life policyholders whose losses were caused by that maladministration. Eventually, and after much argument in court and Parliament, the government did accept its responsibility and a scheme of compensation was devised and is now being implemented. One of the government’s arguments for not accepting liability for maladministration carried out on its behalf was that it should not have to pay for failures of financial regulation – presumably on the grounds of the potential cost.

It is easy to understand that no government would be happy to accept liability for the serial failures of the FSA since 2001. But surely it is the function of government to regulate those industries whose activities have the potential to cause harm and loss to citizens. And surely the government should stand behind the regulator to make sure that its citizens do not suffer loss up to at least a reasonable limit – as in the cases of bank deposits. It is an incomplete step by the government to set up a system of regulation centred on a regulator which is independent of the government and not generally liable for its failures.

We really are all in this together. The regulators need to be effective, and somebody needs to see to it that the regulators are indeed doing a proper job, and to insist that the regulators, and through them the government, take responsibility for the losses caused by regulatory failure. It goes without saying, of course, that the government should be able to recover those losses from the firms that caused them.

If the Treasury Committee of the House of Commons were to have a formal role in holding the government to account for the performance of the FCA and the other regulators, and if the government were liable for losses caused by regulatory failures, the system of regulation would stand a much better chance of preventing a repeat of the type of serial failures we have seen in the last 25 years. The government would take a much closer interest in developments in financial services, and be more aware of the harm that can be caused by a failure to think things through properly. Misselling would be stopped more quickly. Those who work for the regulators would feel that their jobs were on the line if their failures were to be exposed in public in the way in which the Parliamentary Commission on Banking Standards exposed the failures of Stevenson, Crosby, Hornby and others.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Soren Lorenson 7th May 2013 at 3:02 pm

    I always think its a shame when a brilliantly written piece such as this gets no comments so here’s mine.

    I agree with every word and am puzzled why the Government is not listening to people such as Peter who clearly know what they are doing.

    Instead they prefer to take the word of the theorists and consumer champions – and look where that has got us.

  2. @ Soren

    The shock of such a well-written, concise and incisive article is just too much!

    The upshot is that the Government won’t listen for the same reason turkeys don’t vote for two Christmas’s…

  3. I suppose the irony is we all post to have a vgo back at Nic C because he talks 80% rubbish and 20% sense whereas Peter does the reverse!

  4. While I usually agree with you Phil, I think you may be wrong this time. 100% rubbish from nic & 100% sense from Peter is more accurate.
    The reason we do not comment is because we believe it will never happen

  5. An excellent article but there is another very important reason why the regulator needs to be at arm’s length from Government. Government is incapable of taking decisions which are painful and difficult and therefore risk alienating the voter. By definition, Government has a short term view focussed on the next election which is never more than 5 years away. The FCA needs to take action which may be politically unpopular, has a long term aim and at a tactical level needs to be able to recruit staff who know that they will not be hounded by the next Government that comes in because of those difficult decisions that had to be made. The problem comes in deciding at what point the regulator became incompetent and more importantly who is going to make that assessment!
    Generally, where regulators fail the public is when they fail to apply the rule of common sense, to ask the simplest of questions, to treat everyone fairly and to recognise that although their day to day experience may be that everyone is trying to defraud the investor most companies and individuals actually work very hard to ensure that they provide a professional service with dignity and respect shown towards their clients.
    My golden rule – do not allow 90% of the population to impose on the other 10% what the 90% would never accept if they were in the shoes of the 10%! The FSA failed to take into account the interests of the decent advisers when looking at the interests of the consumer and should have spoken more often with the 10%. PPI, dodgy mortgage market – these were signposted long before they became real issues.

  6. Simon Kershaw 8th May 2013 at 8:44 am

    What a brilliant article. Would that there was anyone in government to whom I could forward it who had the wit to understand it.

  7. Julian Stevens 8th May 2013 at 12:47 pm

    The conclusion of the article should have been that what is needed more urgently than ever is an Independent Regulatory Oversight Committee, created by the government, with absolute power of veto (if and when appropriate) over what the FCA proposes doing and equally absolute power to punish individuals within the FCA if and when it screws up. There should be no more hiding behind “collective failure”, as cited by Hector Sants when he appeared before the TSC in March 2011, at which he refused repeatedly to name any names, as a result of which all the individuals responsible got off scot-free and he got a knighthood.

    So what are you trying to get done about this APFA? You have a member of the House of Lords on your council. What influence is he trying to bring to bear with his fellow peers? Or, as increasing numbers of people suspect, is APFA nothing more than a talking shop, peopled by a bunch of impotent men in suits?

    Perhaps, if asked very nicely, David Cameron will undertake to consider such a proposal provided we all vote for him at the next GE.

  8. There are numerous questions which demand answers but are likely to be left hanging.

    Did Crosby’s position as Deputy Chair of the FSA compromise any effective monitoring of HBOS?

    How did FSA staff continue to receive annual 30% bonuses for performance when by any reasonable standards their capability is proven?

    It is only those with a real understanding of financial services, regulation and with a functioning moral compass that can pick out the errors and describe them with clarity and precision.

    Keep at it Peter.

  9. I agree with the very good post from Sam Caunt. Plus now RDR is here, I would not it reversed, but I do want it tidied up. If I could turn back time I would still have been as critical as RDR and the lack of RDIP (Retail Implantation Plan) which dissapeared much like weapons of mass destruction in IRAQ and any plan for Peace! The war is the easy bit, rebuilding the bombed infer structure is the hard bit. Unfreeze, change, refreeze anyone?

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