[to oversee the FCA’s investigation], they remained free to interpret their terms of reference as they saw fit. Both confirmed this in their written evidence to the Committee, noting that they had seen no evidence to support the view that the Committee had “orchestrated” the review. They similarly stated that they had received “no direction from the Chairman”, on how to carry out their work or how to reach their conclusions. Both independent reviewers also sought to emphasise that, despite the earlier [Parliamentary Commission on Banking Standards] study into the failure of HBOS, their conclusions were based solely on the evidence that they saw themselves, noting that this “extended beyond that available to the [Parliamentary Commission on Banking Standards]”.

34. The Financial Services Authority failed to instigate a full review into the collapse of HBOS and RBS. This is extraordinary in itself. They resisted doing it even after strong prompting from Parliament. The unacceptability – not just to specialists following this issue, but also to a wider public – of their original decision not to undertake a full review eluded them for too long.
35. It is regrettable that the FSA (and subsequently PRA & FCA) agreed to undertake these reviews only following sustained pressure from the Treasury Committee over a number of years. In the case of the HBOS reports, the Treasury Committee insisted on the innovative arrangements originally used for the RBS review, with Committee appointed independent reviewers given the task of overseeing the regulators’ drafting of the reports.”

[Emphasis added by MB]As can be seen, this is fairly strong stuff.  The Committee and the FCA have “butted heads” a number of times.  This has not, clearly, reduced in the last few years.  However, the Committee is seen as being very powerful, and they usually get their way when they demand something.
The independent reveiwers, who were imposed by the Committee, drafted a highly critical report into how the FCA/PRA undertook their review.  The current report states at paragraph 37 page 13:

“[T]he independent reviewers identified more problems in the early drafts of the review,particularly in section four of the report, which covered the FSA’s supervision of HBOS. This included instances when the early drafts were structured in a way that appeared inappropriately to “soften” the report’s conclusions regarding FSA supervision. The independent reviewers also highlighted that the evidence-gathering process for the section on FSA supervision was not always consistent with that for the sections on HBOS. One example was the fact-finding interviews, conducted by the PRA/FCA team working on the HBOS review, with former FSA staff. The independent reviewers felt these interviews had a more “sympathetic” tone compared to those conducted with former HBOS staff by a third party for the other sections of the report.”

[Emphasis added by MB]

This is pretty strong suggestions that the FCA/PRA purposefully tried to manipulate the process to soften the criticism of the regulator and the regulator’s staff.  You can read their original report HERE[1].

The report confirms the greatest concern of the independent experts was the manner in which the FCA and PRA undertook investigations of the enforcement actions and activities of the FSA.  At paragraph 38 on page 13 it says:

“This reflected their disquiet over the proposed scope of the chapter on enforcement and concerns over whether it would address the central issue of whether the original enforcement process had considered a wide enough range of HBOS executives for potential investigation. In evidence, Iain Cornish stated:

‘The first draft was very superficial. Even a cursory look at the underlying raw material highlighted the issues that Andrew Green has highlighted. It was not obvious at all why decisions had been reached. That was the only section of the first draft that we saw that had been written not by the review team but by members of the enforcement team, so we felt very queasy about that’.”

As a consequence of this concern, a barrister was brought in to independently investigate the FSA’s enforcement actions in regards to the collapse of HBOS.  This became known as the Green Report, issued in November 2015^[3].  In regards to this, the Committee confirms at paragraph 43 and 44:

“43. The decision to appoint Stuart Bernau and Iain Cornish as independent reviewers proved to be of great value. The independent reviewers revealed that the first drafts of the HBOS reports had been superficial. In the case of the enforcement section, they had such grave concerns that they argued this particular section should be written independently of the regulators. An impartial assessment of the FSA’s actions with respect to enforcement has been essential. Without it, the regulators would have been marking their own homework.

44. The independent reviewers also made numerous requests for further analysis and detail. They carried out quality assurance on both the regulators’ report and the Maxwellisation process. Consequently, their input was crucial, both in raising the standard of the HBOS reports and in providing assurance that the reports’ findings are a fair and balanced reflection of the available evidence. Parliament and the public can now have more confidence that these final reports give a full summary of the causes of the failure of HBOS.”

That lasts sentence says a lot about what the Committee thought of the FCA’s and PRA’s efforts.  It appears to be saying that they had little confidence that the report would have given a full and clear summary of what happened at HBOS.

This reiterates what experts in the financial litigation field have been saying.  Firms like Muldoon Britton are heavily critical of the soft touch regulation and enforcement of banks.  Not one person has been prosecuted for PPI, despite that there has been very clear evidence of fraudulent activities, especially at Lloyds.  Not one person has been prosecuted or removed from the financial services register as a consequence of the huge manipulation and, at times, fraud perpetrated against SMEs in the UK.  The evidence uncovered by those in the field and groups such as Bully banks shows that certain people in the industry undertook practices that were vastly out of step with the regulatory requirements.  But not one of them has been prosecuted, criminally or regulatory.

Only one person has been prosecuted (in a regulatory sense) for the collapse of the UK’s banking system, which cost the UK between £1 trillion and £1.5 trillion.  One person.

This current Committee report reiterates what we have long said.  The regulators are too friendly with the Banks.  We need to see tougher action where the Banks step out of line.  Giving fines that are a minor fraction of the fines imposed in the US simply shows the UK as the soft touch regulator, and this report reiterates this.

At paragraph 50 the Committee criticises the FCA for delaying and delaying the report into the collapse of HBOS.  It says this:

“50. It is likely that a future bank failure would result in subsequent enforcement action, which may be a lengthy and complex process. It is unacceptable, however, that the public should have to wait so long for an explanation of what went wrong in cases of major bank failure. In the light of legislative changes since HBOS’s collapse, the Treasury and the regulators need to explain to the Treasury Committee what steps they can take to ensure that reviews of this type – which in future will be led by independent persons – can be run, at least in part, alongside enforcement investigations. An arrangement where the public must wait several years for a review even to start would be wholly unsatisfactory.”

In regards to the role of the regulator and what it did in the 2007/08 period, the Committee is scathing in its rebuke.  We say rightly so.  The Committee states at paragraphs 72 and 80:

“72. The PRA/FCA HBOS report contains findings similar to those of the original regulatory report into the collapse of RBS. Both illustrate the extent to which the FSA paid insufficient attention to prudential matters in the lead up to the financial crisis. In its own report into the failure of RBS, the Treasury Committee in the last Parliamentconcluded that this was a serious indictment of the FSA’s senior management and leadership, in particular the Chairman and Chief Executive in place at the time. The evidence seen by the current Committee regarding HBOS strongly supports this original assessment.”

…

80. The FSA’s senior leadership, in particular Sir Hector Sants, claimed to want to pursue an ambitious enforcement strategy in response to the financial crisis. Andrew Green’s report demonstrates that such a strategy was not implemented successfully. This is deeply concerning. It is also of considerable concern that, at the time when the FSA’s Enforcement division was first considering enforcement action, it failed to consider the full range of relevant individuals (formerly employed by HBOS), that is those for whom the statutory threshold test for conducting an investigation had been satisfied. The only person that it considered for investigation was Peter Cummings. Responsibility for these omissions and failures, and for the procedural failures summarised in paragraphs 150 and 151, rests with Sir HectorSants, as CEO of the FSA.”

Muldoon Britton re-emphasises these findings.  It is outrageous that these people cost the UK over £1 trillion, yet only one person was forced to defend themselves publicly.  Every other banker simply retired or moved to another firm and kept their huge, bloated pensions.  That the CEOs of HBOS and RBS lost nothing more than their titles should be seen as the worst excesses of favouritism being shown in the history of financial regulation.

At paragraphs 85 and 86 the Committee also critics that the FCA chose not include the names of employees that were found to have done wrong or been ineffective.  The Committee recommends that this should not happen, but flexibility should be retained to ensure where appropriate someone is not named in a future report.  But, for HBOS it is too late.  People were not named, and they can now go off into the world and not have their failures staining their character, allowing them to continue as they were with no damage done to their CV.

On page 24 the Committee looks at the conflicts of interest that were found at the regulator.  The worst excessive of the 2001 to 2008 period is typified by the fact that the CEO of HBOS was allowed to join the FSA board.  The regulated became the regulator.  No one found that he abused this opposition, but it was available to him to have done so.  Who thought that it was a sensible idea to have the banks sitting on the regulator’s board?

Chapter 4 looks at the FSA’s approach to supervision.  Many observers have suggested that the regulator is pushed into doing things by Treasury or the Government.  This was seen with the unexpected and shocking sacking of the FCA’s CEO.  The Committee state at paragraph 120 & 123:

“120. The regulators have repeatedly asserted that they operated in an environment which encouraged ‘light touch’ regulation. This point may have merit but it does little to justify the severe flaws in the supervision of HBOS. In its report on RBS, the Treasury Committee in the last Parliament correctly identified that the FSA was given statutory independence to enable it to resist political pressure. The FSA’s past recourse to political encouragement to promote ‘light touch’ regulation does not inspire confidence in the new regulators’ capacity to demonstrate the independence required by their statutory mandates. In future, if the regulators do feel under such pressure, it is their duty to inform Parliament. The Treasury Committee will expect them to do so.

…

123. Both the new powers gained by regulators and their poor performance prior to the crisis increases the need to ensure that regulators are challenged and required to explain their actions and decisions. This is primarily a duty for Parliament in general, and the Treasury Committee in particular. The new accountability arrangements – including new powers for the Treasury Committee over the appointment of the Chief Executive of the FCA – are an improvement. But it is not yet clear that the current framework is satisfactory. The Treasury Committee will need to consider this issue further in the light of the changes made by the Bank of England and Financial Services Act 2016.

Chapter 5 consider the way forward for the regulator, and it is here that we find the best parts of the report.  Enforcement is an area in which the FCA is regularly criticised, sometimes rightly sand sometimes not so.  For instance, the failings in the Interest Rate Hedging Product Review have led to the FCA simply refusing to do anything despite the mounting evidence that one bank in particular, but potentially three, manipulated the review in order to refuse to give any redress where redress was properly due.  The FCA has simply said it will not review, then suggested it might hen said it will, but has not.  The Committee’s report is music to the ears of practitioners like Muldoon Britton.  SMEs were ripped off by their banks and the banks then, with the blessing of the FCA, were ripped off again.

At paragraph 150, the Committee makes the following finding:

“150. The scope of the FSA’s original HBOS enforcement investigations were not reasonable. There were also significant procedural failings. In particular, the FSA’s Enforcement division formed the view in early 2010 (having not considered the position in 2009) that the statutory threshold test for starting an investigation had been met in the case of Andy Hornby (CEO of HBOS 2006–09), but it decided not to investigate him. However, because of a failure in communication, the Enforcement division never informed Sir Hector Sants of its view that the statutory threshold test for investigating Andy Hornby had been met.”

The FSA could have investigated him.  It found it could, it decided not to.  It never told him that they would not.  A total failure.

Paragraph 153 onwards looks at whether enforcement should be hived off into another unit, separate from the FCA.  Muldoon Britton would 100% back this idea.  A team that undertakes nothing but enforcement might actually make enforcement happen, and in doing so might make a few bankers stop and think about what they are doing.

The Committee’s recommendations in full are as follows:

“158. In its final report, the Parliamentary Commission on Banking Standards identified some of the problems that arose as a result of keeping both the enforcement and supervision functions within a single regulator. The PCBS noted that both functions had different objectives which, at times, could be a source of tension, especially if the Enforcement division had to reach judgements about matters in which supervisors were involved at the time. There was also the danger that insufficient priority would be placed on enforcement within a larger organisation, reducing its effect as a credible deterrent. One solution discussed by the PCBS was to place the enforcement function into a separate statutory body.This option was subsequently rejected by a Treasury-led review.

159. Nonetheless, the findings of the Green report reveal that the relationship between enforcement and supervision within the FSA was indeed highly problematic. Keeping both functions within the same organisation did not result in a high degree of cooperation, undermining the argument that the two functions should remain under the same roof. In the light of this, the Committee believes the merits of structural separation bear re-examination.
160. First, the Committee notes that the collapse of HBOS, along with other UK financial institutions during the crisis, was the result of prudential failings. It is far from satisfactory that the bulk of enforcement staff and expertise still lies within the FCA, which has no role in prudential supervision of banks. An independent enforcement function could and should sit equidistant between the PRA and FCA.
161. Secondly, a separate statutory body would bolster the perception of the enforcement function’s independence. The current system, whereby the same organisation both supervises, applies and prosecutes the law is outdated and can be construed as unfair. By moving enforcement away from supervision, it can focus independently on undertaking its key functions: interrogating evidence and assessing whether a regulatory breach has been committed. This could increase confidence in the impartiality of regulatory enforcement decisions, and facilitate objective scrutiny of supervisors’ actions by enforcement staff.
162. Thirdly, separation would allow all three regulators – the FCA, PRA and an enforcement body – to enjoy much greater clarity over their objectives. There is a danger, especially with the FCA, that its multitude of objectives and initiatives are leading to regulatory overload. An FCA with fewer objectives, and a single separate body responsible for enforcement, would probably result in better accountability and better outcomes.
163. The Committee concludes that the case for structural separation has merit.The Treasury Committee expects the Treasury to appoint an independent reviewer to re-examine the case for a separate enforcement body.”

Resources:

[1] November 2015 Independent Report into the FCA/PRA investigation into the collapse of HBOS:

http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/independent-review-of-the-report-into-the-failure-of-hbos/written/35021.pdf

[2] Treasury Select Committee interview with the independent experts; 15 December 2015

http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/independent-review-of-the-report-into-the-failure-of-hbos/oral/26149.pdf

[3] November 2015, Andrew Green QC “Report into the FSA’s enforcement actions following the failure of HBOS”

http://www.bankofengland.co.uk/pra/Documents/publications/reports/agreenreport.pdf