New regulator will 'speedily chuck out' future HBOS-esque failings

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An insurance regulation expert has said the newly-formed regulator looks set to "speedily chuck out" failed industry individuals, following the HBOS report condemnation of the FSA's slow enforcement action.

The Parliamentary Commission on Banking Standards' investigation into HBOS failings demands the regulator to consider barring three former HBOS bosses - Sir James Crosby, Andy Hornby and Lord Stevenson - from any future in financial services given widescale management failures.

The two-volume report stated: "The combination of higher risk assets and risky funding represents a fundamentally flawed business model and a colossal failure of senior management and of the Board.

"The Commission therefore considers that the FSA should examine, as part of its forthcoming review of the failure of HBOS, whether these three individuals should be barred from undertaking any role in the financial sector."

Branko Bjelobaba, founder of UK insurance compliance consultancy Branko, said the new twin peaks regulator - the PRA and FCA - looked set to stamp out any future failings of this nature at the outset.

He said: "I am hopeful that any investigations will be conducted speedily and individuals found wanting in terms of conduct, leadership and ethical matters will be chucked out of the industry.

"This report is unusual in that Parliamentarians are demanding action against former HBOS senior executives which is really down to the regulator to do following, what has been under the FSA, incredibly slow enforcement actions against firms."

The FSA's six-strong team responsible for HBOS supervision reported to a head of department located in the major retail groups division, who was also responsible for the supervision of around 15 groups, spanning large banks, insurance firms and asset managers.

The team comprised a manager and five staff, although it increased in size from late 2007 in response to the financial crisis.

According to the report, the team - responsible for the oversight of prudential and conduct issues - supervised other smaller retail groups, but the majority of time was spent on HBOS.

But the report highlighted that those at the most senior levels within the FSA, such as the managing director and director with responsibility for the supervision of HBOS, had very little direct contact with the firm.

The document stated: "The picture that emerges is that the FSA's regulation of HBOS was thoroughly inadequate. In the three years following the merger the FSA identified some of the issues that would eventually contribute to the Group's downfall, notably the risk that controls would fail to keep pace with aggressive growth and the Group's reliance on wholesale funding.

"The FSA failed to follow through on these concerns and was too easily satisfied that they had been resolved. The FSA took too much comfort from reports prepared by third parties whose interests were not aligned with those of the FSA."

It added from 2004 until late 2007 the now-defunct FSA was not so much "the dog that did not bark" as "a dog barking up the wrong tree".

Chris Hulme, director at advice firm The Clayton Hulme Partnership, said trust would be a major barrier for the new regulator to rid of "a lot of bad history" with the FSA.

He said: "With the HBOS failings there was an element that the regulator knew what was going on for how long but did not act. It is not all about the banking individuals and what they did."

The Bankign Standards Commission report stated the FSA's requirements of the Basel II framework weakened controls on capital adequacy by allowing banks to calculate their own risk-weightings and distracted supervisors from concerns about liquidity and credit.

It added the framework may also have contributed to the "appalling supervisory neglect" of asset quality.

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Nicola Culley

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