PRA and FCA have published a joint report into the failure of HBOS plc. The review seeks to explain why HBOS failed in October 2008 and sets out conclusions and recommendations. The review examines the cultural, structural and managerial failings of the firm, identifies positive changes made to the regulatory framework made at national and international levels, and makes further recommendations for both firms and regulators. While the report stresses ultimate responsibility for the bank’s failure rests with its Board, it criticised the then FSA for not appreciating the full extent of the risks the bank was running and not taking intervention action before it was too late. The report notes the significant changes to regulation that have taken place since HBOS’ failure, which have addressed many of the regulatory failings, including the move to twin peaks regulation, the creation of the Financial Policy Committee and the introduction of the Senior Managers Regime (SMR). Further recommendations include:

  • firms maintaining individual and collective accountability of boards of directors;
  • that board members should have diverse experiences, including non-executives;
  • persons under the SMR should have a relationship with the regulators and a culture of adherence to relevant requirements;
  • regulators must be able and willing to intervene when necessary;
  • regulators should have a better understanding of the scope of international oversight; and
  • regulators should recognise risks of conflicts of interest arising from the composition of boards.

Andrew Green QC’s independent assessment of whether the then FSA’s decisions on enforcement were reasonable has also been published. He recommends that PRA and FCA should consider whether any former senior managers of HBOS should be the subject of an enforcement investigation with a view to prohibition proceedings.

The Treasury Select Committee heard evidence relating to the review. They concluded that a flawed business model resulting from strategic failings by the Board was the root cause of the failure of HBOS. The Committee also considered whether HBOS’ auditors were unduly influenced during the exercise of their audit.

Chairman of the Treasury Select Committee, Andrew Tyrie, said FSA should have started investigation proceedings based on the information in 2009. He asked the regulators to provide an answer to this observation over the next few months. (Source: PRA and FCA Review Failure of HBOS)