Thursday 19 November 2015

UK: PRA/FCA review into the failure of HBOS plc

The long awaited review into the failure of HBOS plc (now part of the Lloyds Banking Group), begun by the (now) disbanded Financial Services Authority and completed by the Prudential Regulation Authority and Financial Conduct Authority, was published this morning: see here (pdf).

The review concluded that the board and senior management of HBOS failed to set an appropriate strategy and failed to challenge a flawed business model which relied on continuous growth without due regard to the risks involved. Ultimate responsibility for the bank's failure rested with the board and senior management. This said, there were flaws in the FSA's supervisory approach which meant that it did not appreciate the full extent of the risks being taken by HBOS and which meant that it was not in a position to intervene before it was too late.

Part 3 of the report focuses on governance and culture; it notes how the board's performance was impaired by its composition (in particular the fact that the non-executive directors lacked sufficient experience and knowledge of banking, and there did not appear to be a systematic process in place whereby the NEDs were updated on banking, regulatory or governance matters on an ongoing basis). The review also saw no evidence - for 2005, 2006 and 2007 - that board evaluations had been undertaken, despite statements that this had been done in the annual report and accounts.

Accompanying publication of the review is a separate report by Andrew Green QC into the FSA's enforcement actions following the failure of HBOS: see here (pdf). Mr Green concludes that the scope of the FSA's enforcement investigations was not reasonable - it should have been wider - and that it's decision-making process was materially flawed.

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