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Further to our earlier statement, the Financial Services Authority (FSA) has issued the following fuller account of the issues relating to the risk function at HBOS, raised at the Treasury Select Committee on 10 February 2009.
1. Having examined carefully the files relating to this issue, the FSA can confirm that specific allegations made by Paul Moore in December 2004 regarding the regulatory risk function at HBOS were fully investigated by KPMG and the FSA, which concluded that the changes made by HBOS were appropriate. This statement gives an account of the actions taken by the FSA in relation to concerns expressed in 2004 by Mr Moore, former head of Group Regulatory Risk at HBOS. It is focused on these specific concerns rather than providing a complete description of the regulatory relationship with HBOS.
Risk assessment
2. As background to the specific set of allegations made by Mr Moore, we set out below relevant developments in relation to the HBOS risk framework:
- the FSA conducted a full risk assessment of HBOS (known as an ARROW assessment) in late 2002 which identified a need to strengthen the control infrastructure within the group;
- we then decided to commission a “skilled persons report” from PWC on the HBOS risk management framework, using formal information gathering powers under section 166 of the Financial Services and Markets Act 2000: their extensive report revealed a need for improvements in the HBOS risk management environment;
- the FSA then conducted a further full risk assessment of the HBOS group to cover all of the group’s business, formally recording its assessment in December 2004, the assessment was that the risk profile of the group had improved and that the group had made good progress in addressing the risks highlighted in February 2004, but that the group risk functions still needed to enhance their ability to influence the business, which we saw as a key challenge.
Changes at HBOS
3. Other key events took place in 2004:
- following the departure of the Chief Financial Officer, who had been responsible at Board level for regulatory risk, and as part of a wider restructuring, HBOS decided to upgrade the risk function by appointing a new group risk director as the senior executive responsible for regulatory risk in the group;
- following that appointment, the then head of group regulatory risk, Paul Moore, was informed on 8 November that he would leave as part of this restructuring; he subsequently approached FSA to express concerns about HBOS and in particular about the suitability of the new appointee as the group risk director;
- in his view, the new group risk director was not ‘fit and proper’ to be approved by the FSA to hold that post, by reason of lack of integrity, lack of experience in risk management, and of general attitude and approach;
- he also made other allegations about HBOS’s overall risk framework.
Action taken by the FSA
4. Urgent action was taken to follow up these specific allegations:
- following consultation with the FSA, the HBOS Group Audit Committee commissioned an external review on the fitness issues from its auditors KPMG: the FSA satisfied itself about the skill and independence of the individuals selected to conduct the report for KPMG and about the scope of the report;
- KPMG undertook around 80 hours of interviews and meetings with 28 individuals including the HBOS CEO, CFO, and then Head of Retail, as well as the former head of regulatory risk himself;
- the FSA suspended its decision on whether or not to approve the appointment to the new role, pending receipt of the results of the KPMG investigation;
- the FSA approved that individual only when it had received those results, which indicated that KPMG ‘did not believe that the evidence reviewed suggested that the candidate was not fit and proper’, that ‘the process for the identification and assessment of candidates for the GRD position appeared appropriate’, and that ‘the structure and reporting lines of Group Regulatory Risk are appropriate’;
- the KPMG report also indicated that there was no evidence in the report that Mr Moore was dismissed due to being excessively robust in the discharge of his functions. (It should be understood that the KPMG report concerned the allegation that the new director was not fit and proper rather than the more general issue of HBOS’ risk control framework identified in the skilled persons report. The KPMG report did not extend to these issues.)
- The FSA also followed up Mr Moore’s concerns by meeting him independently and separately discussed the KPMG report directly with KPMG.
Subsequent relevant events
5. The FSA continued to pursue concerns about the risk management framework. As a consequence, we wrote to HBOS again on 29 June 2006 with a further interim ARROW risk assessment. In that letter we made clear:
- that whilst the group had made progress, there were still control issues. We made clear that we would closely track progress in this area;
- the growth strategy of the group posed risks to the whole group and that these risks must be managed and mitigated.
Conclusion
6. In conclusion, the FSA confirms that the allegations made by Mr Moore were taken seriously, and were properly and professionally investigated. It should also be noted that the FSA’s concerns about HBOS’ risk management framework considerably pre-dated the allegations by Mr Moore.
