On 19 November 2015, the FCA and PRA published Andrew Green QC's Report into the reasonableness of the enforcement decisions taken by the FSA following the failure of HBOS.
The Report provided a very detailed assessment of the steps that the FSA took and failed to take in relation to enforcement and why that was the case. In addition, the Treasury Committee took evidence from Andrew Green QC on 14 December 2015 which, in substantial part, was an exposition of certain aspects of the Report.
In broad terms, the Report considered that the scope of the FSA's enforcement investigations in relation to the failure of HBOS was not reasonable. In particular, it described the decision making process adopted by the FSA as "materially flawed" and it suggested that the FSA should have conducted an investigation, or series of investigations, wider in scope than merely into the conduct of Mr Cummings and the Corporate Division. At a minimum, Green said that Andy Hornby (CEO at the time) should also have been investigated in relation to the failure. We shall have to see what action, if any, the PRA and FCA decide to take.
Perhaps more interestingly than that, the Report sets out some of the reasons why it appears that mistakes were made by the FSA. It says that these became apparent during the interviews conducted with 14 former FSA employees. The reasons cited are:
- The regulatory scheme made it difficult to bring successful enforcement action against bankers. It is notable that one of the interviewees said that the general view within the FSA at the time was that "enforcement against big bankers had become virtually impossible". The regulatory scheme did not therefore encourage, so it said, "an ambitious approach to the bringing of enforcement action in the context of a failed bank.". This of course provides the backdrop to the new Senior Managers Regime. We shall have to see whether the regulators prove themselves to be more "ambitious" in the future.
- As a result of the need to establish "personal culpability" in misconduct cases, when considering whether or not to conduct an investigation of an individual, the FSA would attempt to assess the likelihood of winning subsequent disciplinary proceedings against the individual. In other words, they looked to assess the prospects of ultimate success, but before an investigation had even begun.
- The FSA's internal procedures as to how decisions were to be made for the referral of subjects for investigation were inadequate.
- The FSA's internal procedures related to the monitoring of the scope of on-going investigations were also inadequate.
- From at least 2008 onwards, the FSA was under "enormous pressure" as a result of the credit crisis. Sir Hector Sants is reported as having said "the FSA were stretched almost to breaking point in terms of its resources in this period."
- There appears to have been inadequate communication between Sir Hector Sants and Enforcement as to the enforcement action being taken in relation to the failure of HBOS.
The Report in essence provides some damning criticisms of the FSA. It makes four recommendations arising from its findings. Given that the FCA and the PRA have inherited the FSA's enforcement powers, it directs its recommendations to both those regulators. Those recommendations are broadly sensible, and plainly reflect a number of the shortcomings found with the FSA process.
In broad summary, these are:
- Pre referral decision making: recommendations are made for the logging of the decision making that takes place. In essence, the Report describes a two stage process. First, an identification of each Firm or individual in respect of whom the statutory threshold tests for conducting an investigation is met. Second, a consideration, by reference to the referral criteria, which of the potential subjects should become the subject of an investigation. It adds that an identified individual at an appropriate level of seniority should be made responsible for this pre referral decision making process.
- On-going dialogue between Enforcement and Supervision during the investigation: following a referral to Enforcement, the decision maker should meet regularly with a representative of Supervision and a representative of the Enforcement Investigation Case Team. During that meeting, the appropriateness of the scope of the on-going investigation should be discussed. Such meetings should take place, at least, quarterly and should be recorded with a record being made of the reasons why any new potential subject is either being referred, or is not being referred, for investigation.
- Informing the subject of an investigation about matters under investigation: the recommendation is that the Memorandum of Appointment of Investigators should, unless there are compelling reasons not to do so, include a succinct summary of the potential breaches and a succinct explanation of the matters that are said to give rise to those breaches.
- Accuracy of ExCo Minutes: the Report recommended that the Regulators put in place a system whereby Minutes of ExCo meetings are properly reviewed and approved. It drew attention to those which caused some difficulty in the HBOS matter.
The Report was wide ranging, and it points to future enforcement in a number of respects. We shall have to see how these recommendations find their way into future decisions to investigate and, if we get to see it, how the Regulators conduct themselves internally.
You can read the report here.