HBOS: Why the Regulators Will Make Sure Things Go Differently Next Time

Much has been written in the last week about the long-awaited report into the reasons behind the collapse of Halifax Bank of Scotland (HBOS). This is hardly surprising given the size of the collapse and the report’s hard hitting conclusions, including the findings that:

  • Its board failed to instil a culture within the firm that balanced risk and return appropriately, and lacked sufficient experience and knowledge of banking.
  • There was a failure by the board and control functions to effectively challenge executive management in pursuing this course or to ensure adequate mitigating actions.

The report itself is over 400 pages long, is based on testimony of over 80 witnesses, cost over £7million and goes into a lot of detail about all of this.

More Interesting: The Green Report

Of more interest to me though were the findings of the linked report prepared by Andrew Green QC into the regulators’ enforcement actions following the failure of HBOS.

The days of adopting a risk-averse approach to the investigative process are already over

The Green Report weighs in at a more modest 93 pages plus appendices. It provides some illuminating insights into the approach taken by the Financial Services Authority to the question of enforcement and sheds light on the way in which its successor the Financial Conduct Authority will (and will be able to) do things differently in future.

The overall conclusion of the Green Report is that, “the scope of the FSA’s enforcement investigations in relation to the failure of HBOS was not reasonable.”

You may remember that the only senior individual to be subject to specific investigation and regulatory sanction at the relevant time was Peter Cummings the head of HBOS’ corporate division.

More specifically, the Green Report concludes that:

“The FSA gave no proper consideration to the possibility of investigating any additional individuals including other members of the Board at the date of failure, such as the CEO and Chairman, even though it was apparent to the FSA (certainly to Supervision) that there had been significant problems within the failed bank extending beyond the Corporate Division (including problems in the International and Treasury Divisions)….”

The “Problem” of Collective Board Responsibility

As to the reasons for this failure, the Report concludes that it occurred:

“in the context of a regulatory scheme that was ill-suited to the identification of appropriate subjects for enforcement action in circumstances where a banking institution had failed. …. the FSA’s regulatory guidance stated that it would only take disciplinary action against an individual where there was evidence of ‘personal culpability’. In the context of a substantial multi‑divisional company such as HBOS, where strategy was frequently the result of collective decision-making over an extended period of time, it was inevitably difficult to identify a particular individual whose conduct evidenced ‘personal culpability.”

With a finding like that, it is not hard to see why politicians and regulators alike are putting so much faith in the Senior Managers Regime. The express purpose of the new regime is of course to facilitate the process of identifying individuals who are to be held personally accountable in the event of a serious failure.

Whilst the legal principle of collective board responsibility survives, the regulatory focus on individual responsibility is new and may not turn out to sit comfortably with it when the senior managers regime comes into force in March 2016.

The Fear of Failure

But it is not simply evidential difficulties to which the Green Report directs attention. It also highlights an attitude prevalent in the enforcement division of the FSA in 2009 that “enforcement against big bankers had become virtually impossible” (Para 347).

The Report goes on to draw attention to the practice at the time of seeking to assess in advance the outcome of any subsequent disciplinary proceedings before the decision to investigate was made. The problem with this approach, according to the Report was:

“accurately evaluating the prospects of success in disciplinary proceedings before an investigation had even begun. This approach…had a tendency to discourage the FSA from starting investigations even though the threshold test for investigating was met and even though the public importance of investigating was high.”

What’s interesting about that is how starkly different the approach of the FCA is already now even before the implementation of the Senior Managers Regime. The days of adopting a risk-averse approach to the investigative process are already over as anyone who has been caught up in one in over the last five years can testify.

The Luxury of Time

Yet another factor, according to the Report, which played on minds of FSA enforcement division, was time. In 2009 the FSA only had two years (and later three) in which to institute proceedings before they became time barred. By contrast the FCA will now have up to six years in which to institute such proceedings.

By contrast the FCA will now have up to six years in which to institute such proceedings.

That is likely to make a big difference in practice. It will enable the FCA to deal with the regulatory sanctions for the entity first, before turning to the individuals. It will also allow it more time to adopt the classic “bottom up” approach to investigation starting with the more junior members of management whilst leaving enough time to pursue more senior managers in appropriate cases.


All in all it is hard to imagine that the regulatory outcome of another major bank collapse in the UK would be remotely similar to what occurred at HBOS and elsewhere in 2008. The Green Report, seen against the reforms implemented since 2008, makes that even less imaginable.

I suppose the real question though is whether anyone can predict how, when and why the next big collapse will come. If not, finding any individuals personally culpable may still prove a challenge.


About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
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