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HBOS failure: lessons for the regulators

26 July 2016

The Treasury Committee publishes 'Review of the reports into the failure of HBOS'. 

The report

The report draws together the findings of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority's (PRA) review into the failure of HBOS, Andrew Green QC's review of the enforcement decisions taken by the regulator, the independent review of these two reports by the Treasury Committee's specialist advisers and oral evidence taken from the publishers of all three reports.

Chair's comments

Commenting on the report, Right Hon. Andrew Tyrie MP, Chairman of the Treasury Select Committee, said:

"The regulators failed, both before and after the HBOS crisis. Seven years after the bank's collapse, we now know just how badly. And not because the regulators showed a spirit to learn the lessons of the past. It took persistent pressure from the Treasury Committee to ensure these failures weren't swept under the carpet.

So the HBOS experience calls for the FCA and the PRA to exhibit greater vigilance and energy if they are to win public confidence. This has on occasion been lacking.

A lot is at stake. The plain fact is that the FSA did not succeed in protecting consumers from spectacular regulatory failures. The creation of the FCA and the PRA has been an opportunity to build something much better. This is still work in progress, particularly at the FCA."

Lessons for the regulators

"The regulators have frequently sought to mitigate their responsibility for being asleep at the wheel by referring to pressure from politicians to engage in ‘light touch' regulation. But the FSA was given statutory independence precisely to ensure that it resisted calls for weak or inadequate regulation.

The new regulators – the PRA and FCA – know that they must do better in future. They are on the case.

Nor was Parliament alert enough, prior to the crash. Scrutiny of the regulators failed to flag up these weaknesses. The Treasury Committee intends to do what it can to ensure that the regulators do a better job.

Notwithstanding their own failings, prior to the crisis the regulators also lacked some of the tools they needed to supervise the banks. As a result of Parliamentary pressure, not least from the Treasury Committee and the Parliamentary Commission on Banking Standards, the regulators now have these tools. These include major new powers, over the leverage ratio and with the electrification of the ring-fence. The Committee expects the regulators to demonstrate a very high degree of independence, and transparency, in their use."

The Financial Reporting Council

"The Financial Reporting Council's decision not to investigate the auditing of HBOS prior to the completion of the PRA/FCA report was a serious mistake. The process by which it reached its decision suggests a lack of curiosity and diligence on the part of the FRC. Having seen the final PRA/FCA report, the FRC's belated decision to launch an investigation into the auditing of HBOS is welcome. Better late than never. The Committee will be keeping a close eye on the FRC's work."

The case for a new enforcement body

"The case for placing the FCA's enforcement function in a separate body – proposed by the PCBS in 2013 and later rejected by the Treasury – has been strengthened by the findings of Andrew Green's report. A separate body would bolster the perception of the enforcement function's independence, and provide the regulators with greater clarity over their objectives. The case for separation merits serious re-examination. The Treasury should appoint an independent person to undertake a review."


On 1 October 2008, HBOS was approaching a point at which it was no longer able to meet its liabilities as they fell due and so sought Emergency Liquidity Assistance (ELA) from the Bank of England. 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.

Initially, the regulators did not plan to undertake a review into the failures of either RBS or HBOS, despite the significant amount of money invested in both institutions by the taxpayer.

The Treasury Committee at the time viewed the FSA's approach as inadequate, as it did not acknowledge the significant public interest in the RBS case. Consequently, the Chairman of the Committee wrote to Lord Turner, then Chairman of the FSA, to seek a commitment from the regulator that it would agree to conduct a more in-depth study into the failure of RBS. The FSA accepted this view. In a later evidence session, Lord Turner acknowledged that the decision not to undertake a full review had been flawed and that the FSA should have realised that the cases of RBS and HBOS deserved a 'public accountability review'.

The Treasury Select Committee appointed two specialist advisers (Stuart Bernau and Iain Cornish) in 2013 to review the report that the then FSA was preparing on the failure of HBOS.  These were then re-appointed by the current Committee in 2015.

The review of the report had the following terms of reference (PDF 26 KB), to which the FSA agreed:

  • To review and report on the extent to which the FSA report on the failure of HBOS is a fair and balanced reflection of the available evidence.
  • To review and report on whether the FSA's report is a fair and balanced summary of the Authority's regulatory and supervisory activities in the run up to the failure of HBOS.

The appointment followed a similar exercise with respect to the FSA's report into the failure of RBS in 2011, when the Treasury Committee appointed two (other) senior, experienced independent advisers to Parliament to provide the public with assurance that the regulator's report was a fair and balanced assessment of the evidence. The Treasury Committee regarded this innovative approach to scrutiny of the regulator as necessary, in particular because the FSA was assessing the quality of its own supervisory work.

On the advice of the specialist advisers, the regulators commissioned a separate review and report by a QC specifically of the enforcement decisions taken by the regulator. Andrew Green QC was appointed to lead this work in 2014. His terms of reference were published with those for the HBOS report (PDF 89 KB)

On 19 November 2015, the FCA and the PRA published a review into the failure of HBOS (PDF 8 MB). Andrew Green QC also published his review of the enforcement decisions taken by the regulator (PDF 3 MB).

The PRA/FCA report recommended that the regulatory authorities should 'review their conflict of interest policies to ensure that the risks associated with including serving industry practitioners as non-executive directors on their Boards are adequately managed'. Mr Tyrie wrote to Dr Mark Carney, Governor of the Bank of England, and John Griffith-Jones, Chairman of the FCA, to ask whether the PRA and FCA Boards intend to review their conflicts of interest policy, in light of this recommendation.

Key conclusions

The FSA's approach to supervision

  • The case of HBOS demonstrates that detailed rules are no substitute for high-quality supervision. The challenge now for regulators is to rely less on bureaucratic processes and instead to demonstrate that they can exercise more balanced judgement across a complex financial system. This is no easy task. (Paragraph 115)

Resisting political pressure

  • 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. (Paragraph 120)

Regulatory accountability

  • The financial crisis exposed major shortcomings in the existing approach to financial regulation. While there was a consensus that reform was needed, it nevertheless took significant pressure from the Treasury Committee and the PCBS to ensure that the Government followed through with a number of much needed changes. This included securing powers over the leverage ratio for the Bank of England and the provision to electrify the ring-fence. As a result, the regulators now have a better set of tools at their disposal. The Treasury Committee expects the regulators to demonstrate independence in their use. (Paragraph 122)
  • 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. (Paragraph 123)

Structural reform

  • 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. (Paragraph 158)
  • 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 co-operation, 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. (Paragraph 159)
  • 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. (Paragraph 160)
  • 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. (Paragraph 161)
  • 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. (Paragraph 162)
  • 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. (Paragraph 163)


  • The Financial Reporting Council (FRC) decided not to investigate the auditing of HBOS in 2013, well before the completion of the final HBOS report. This was a serious mistake. The process by which it reached its decision suggests a lack of curiosity and diligence. These failures are all the more concerning given the scale of the problems at HBOS, and the clear public interest at stake. It is extraordinarily unhelpful that the FRC has taken so long and has belatedly reconsidered its position, only after considerable pressure from Parliament and the Treasury Committee. Following its preliminary inquiries, the FRC has now finally commenced an investigation into the auditing of HBOS. (Paragraph 182)
  • The auditing of HBOS is the one major element of the HBOS affair that has yet to be subject to adequate scrutiny. The Committee will expect the FRC to undertake an extremely thorough analysis of the HBOS case. Regardless of the outcome of the FRC's investigation process, it is likely that the Committee will want to consider its work and regulatory approach in more detail. The investigation announced on 27 June 2016 is better late than never. But the very tardy response by the FRC appears to be as inexplicable as it is unacceptable. (Paragraph 183)

Individual responsibility at the regulator

  • Both the independent reviewers and Andrew Green concluded that the HBOS reports should have named some employees below the level of Director. The Treasury Committee agrees with them. The evidence in the reports shows that less senior employees can have a significant impact on regulatory strategy and outcomes. (Paragraph 85)
  • The policy of naming individuals should be flexible. In most cases it may be appropriate to offer anonymity to employees below the level of Director. There should, however, be scope for exceptions. In future, those leading a review should have the freedom to determine if the public interest would best be served by naming particular employees. (Paragraph 86)

Further information

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