Wednesday, July 27, 2016

Parliament report on HBOS failure outlines lessons for regulators

By Amanda Maine, J.D.

A committee of the U.K. Parliament has issued a report on the failure of HBOS bank, which was bailed out with U.K. taxpayer funds during the financial crisis in 2008. The Treasury Committee’s report details lessons to be learned from the bank’s collapse and recommends the creation of a new financial enforcement authority that is separate from the supervisory authority of the Financial Conduct Authority (FCA).

Key conclusions. The report advised that regulators had been encouraged to use “light touch” regulation and recommended that, in the future, if regulators feel that they are under such political pressure, they should inform Parliament. The report also pointed out that while the financial crisis had exposed shortcomings in financial regulation which eventually lead to several reforms, it is not yet clear that the current framework, even after the reforms, is satisfactory.

Separate enforcement body. A 2013 report from the Parliamentary Commission on Banking Standards (PCBS) had recommended that that the enforcement function of the financial regulator be placed into a separate statutory body. However, in December 2014, the Treasury completed a separate review into enforcement and decided against separating the roles of enforcement and supervision. The new report recommends re-examining the merits of structural separation. It noted that the FCA does not have prudential supervision of banks, even though it has the bulk of enforcement staff and expertise. A separate statutory body for enforcement would help bolster its independence. The three financial regulators—the FCA, the Prudential Regulation Authority, and the new enforcement regulator—would provide clearer objectives between the three bodies, according to the report.

Other recommendations. The report called the decision of the Financial Reporting Council (FRC) not to investigate the auditing of HBOS in 2013 a “serious mistake” and recommended that the FRC to undertake a thorough investigation of the HBOS case. In addition, the report agreed with earlier reviews that concluded that the HBOS reports should have named responsible employees below the level of the Director, although it recommended that the policy of naming less-senior employees be flexible.