The PRA and FCA recently concluded their joint investigations into the performance of senior managers at HBOS plc (“HBOS”) in the years leading to its failure. The investigations considered whether or not those individuals should be prohibited from performing specific roles within financial services. The regulators conducted ‘rigorous and forensic investigations’ to assess whether these individuals lacked fitness and propriety.
Both regulators decided not to take further action against these former HBOS senior managers.
This was the final chapter of a series of investigations following the demise of HBOS in 2008.
Background
HBOS, which operated as Halifax and Bank of Scotland and was at one point the UK’s largest mortgage lender, became insolvent in 2008 during the financial crisis. Lloyds Banking Group plc rescued HBOS in a government-engineered takeover.
Notable Milestones
2001 |
HBOS was formed by the merger of Halifax plc and the Bank of Scotland plc, becoming the UK’s largest mortgage lender and a company of comparable size and stature to the established Big Four UK retail banks. |
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2002 |
The Financial Services Authority (FSA) examined the bank and warned about failings in its control infrastructure. |
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2004 |
The HBOS head of Group Regulatory Risk warned its senior directors about excessive risk-taking. He was dismissed, and his concerns were not acted upon. |
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2008-2009 |
Amidst the credit crunch, HBOS became insolvent and was taken over by Lloyds Banking Group plc. This led to a £20bn taxpayer bailout for the acquirer. HM Government acquired, through HM Treasury, approximately 43.4% of the enlarged ordinary share capital of Lloyds Banking Group plc. |
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2012 |
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The FSA issued Final Notices and fined:
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2013 |
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2015 |
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2016 |
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2022 |
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Takeaways and Conclusions
There are many lessons to be gleaned from this historical case study.
- Weaknesses in the management, governance and culture were the primary causes behind HBOS’s financial issues.
- The board failed to provide an effective challenge to executive management.
- The Non-Executive Directors lacked sufficient experience and knowledge of banking.
- The firm’s ‘weak risk culture was evident at all levels of the firm, with the Board-approved emphasis on growth setting the tone for the rest of the organisation’.
- Internal controls were ineffective and did not keep up with the rapid growth.
The UK regulators’ decision not to take further action against the senior managers has been met with some outrage. Some perceive it as yet another indicator that regulators fail to take to task those who mismanage financial institutions appropriately. Iceland remains the only country which sentenced bankers to imprisonment after the financial crisis. Other recent examples cited in the UK are the AML process deficiencies at HSBC and NatWest, where significant financial penalties were imposed without any senior managers facing regulatory action.
Way forward
The Senior Managers & Certification Regime (SM&CR) was introduced as part of the regulatory response to restore trust and confidence in the financial services industry. It is at the core of the FCA’s and PRA’s culture and conduct agenda. It has been viewed as a catalyst for change in financial services to strengthen healthy cultures and effective governance in firms through promoting greater individual accountability and enhanced standards of personal conduct.
SM&CR came into force in 2016 for banks and did not apply to HBOS. However, in light of the regulators’ latest conclusions about the fitness and propriety of the senior managers involved, it is not inconceivable that, on paper, the governance arrangements in place at HBOS might have complied with SM&CR requirements. Therefore, it is paramount that firms comply with the substance and spirit of these requirements, not just the letter. This being said, conduct rule notifications and senior manager enforcement actions under SM&CR remain scarce, raising questions about the effectiveness of the regime in practice. Xcina Consulting published a survey report in Q1 2021 taking stock of SM&CR practices and their effectiveness at financial services firms.
To what extent do you consider that SM&CR has been achieving its objectives and positively affecting governance and behaviour across financial services? Please join Xcina Consulting to discuss this topical issue and many others on 22 September at the City of London Club.