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HBOS Group failure: independent review published

19 November 2015

The Treasury Committee releases an independent review - conducted by its own specialist advisers - of the FCA (Financial Conduct Authority)/PRA's (Prudential Regulation Authority) report into the failure of the HBOS Group.

Chair's comment

Commenting on the evidence of these parliamentary advisers, as well as on the FCA/PRA report on the collapse of HBOS, and Andrew Green QC's independent review of the FSA's enforcement action, Rt Hon. Andrew Tyrie MP, Chairman of the Treasury Select committee, said:

On the recommendations of Andrew Green Q.C.

"The Parliamentary Commission on Banking Standards asked the regulators to consider whether any former members of HBOS's senior management should be subject to investigation proceedings with a view to prohibition. At the request of Parliament's specialist advisers, the job of responding was passed to Andrew Green QC. We now have his clear answer. They should be.

Better late than never. What's more, Mr Green concludes that the FSA should have got on with this in 2009. And he has come to this view, not with the advantage of hindsight, but by basing his conclusions on the material available to the FSA at that time.

The FCA and PRA should get on with this immediately. Parliament will expect an answer from them within months, not years. This has gone on long enough, to put it mildly.

The lion's share of the investigatory work should already have been undertaken in the preparation of the regulators' report in to the failure of the bank."

On the role of KPMG

"It's clear from both this report, and the conclusions of the PCBS, that the audit process was an important part of the story of HBOS's failure.

Parliament's specialist advisers have concluded that the circumstances surrounding the audit process certainly bear thorough scrutiny by the FRC. I will be writing to the FRC about the misjudgement made of the scale of impairments on the balance sheet, and about whether the auditors allowed themselves to be influenced by undue pressure from senior executives and the Board of HBOS.

They will need to consider afresh their original conclusion that there were no grounds for an investigation of KPMG, relevant senior KPMG people, and relevant senior HBOS management in relation to the audits of HBOS's financial statements for 2007 and 2008.

It is surprising that the FRC didn't conclude - and a long time ago - that this work was needed, not least to provide greater public confidence about bank audits after the catastrophe of 2008. Albeit belatedly, they should now do so."

On the practices of the board

"These reports provide some very important lessons for the way these large institutions run themselves. It is in the nature of banking that they carry large risks, not just for their customers and their shareholders, but also for the economy as a whole, on their balance sheets.

Parliament's specialist advisers have reminded us of the shocking state of HBOS's Board and Committee meeting minutes. Andrew Green Q.C has told us a similarly sorry story about the quality of ExCo minutes in the FSA.

I will be writing to the Institute of Chartered Secretaries and Administrators to ask them what steps they have taken since the crash to ensure that Company Secretaries have the necessary guidance on the production of adequate record keeping. Ultimate responsibility lies with the Chairman of the Board. This is also a regulatory matter and Parliament will also be asking the PRA and the FCA to provide assurances that this work is now better done.

The Committee, on behalf of Parliament, will also be seeking assurances from the regulators that their own board practices and minutes are of a high quality. If the regulators are to be capable of keeping an eye on banks' own board practices, Parliament and the public need to have confidence that they are applying the same standards to themselves  and their record keeping.

We will be seeing those in overall charge of this report, Andrew Green QC, and Parliament's own specialist advisers, in separate hearings before the end of the year. The Committee is also likely to want to see the FCA and the FRC with respect to the further action, suggested by these reports."

On the reports overall

"Seven years after taxpayers were forced to bail out HBOS at a cost of £20.5bn, Parliament and the public are finally getting to know exactly what went wrong. And about time. This was the second worst failure in British banking history, after RBS, and with impairments in the loan book – as a proportion of the balance sheet – twice as bad.

The Parliamentary Commission on Banking Standards concluded in 2013 that the collapse of HBOS was the result of catastrophic failures of management, governance and regulatory oversight. Ultimate responsibility for this lies with the Board. The regulators' report appears to confirm almost entirely those conclusions.

The FSA was asleep at the wheel, and even the start of the crisis failed to wake them. The FSA did not appreciate the full extent of the risks facing HBOS. A small number of relatively junior staff were left to do the job at the time, a shocking reflection of the FSA's lack of awareness.

The Treasury Committee has been instrumental in ensuring that the public finally gets the explanation it deserves about the twin failures of RBS and HBOS. It was persistent pressure from the Committee that ensured that these failures weren't swept under the carpet. At their first try, on RBS, all the regulators could offer was a 298-word press release concluding that no further action was necessary. This was a completely inadequate assessment of the actions of a set of institutions that helped generate the UK's biggest recession since the Second World War.

It was Parliament's job to ensure that both reviews were completed with enough independence to reassure the public that the regulators conducting it did not pull their punches on the failures of their predecessor institution, the FSA. The Committee therefore also welcomes today the publication of evidence from its own specialist advisers. They have had the task of ensuring that the regulators' report is a fair and balanced reflection of the evidence.

It was the Committee's own specialist advisers that demanded, with the support of the TSC, the appointment of Andrew Green Q.C."

Further information

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