Banking Crisis - Treasury Contents

Further memorandum from Paul Moore, Ex Head of Group Regulatory Risk, HBOS Plc


  1. I provided my initial evidence to the Treasury Select Committee (TSC) on Friday 6 February 2009 and before I set out my substantive additional evidence, I need to make some important preliminary points.

  2. The purpose of my original testimony was not (as some of the media reports have suggested) to reek a personal vendetta against those who acted to my detriment (see 2.17) in dismissing me from HBOS. Nor was it to obtain a re-hearing of the fairness or otherwise of that dismissal. It was solely to provide what I considered to be relevant evidence to assist the TSC and Parliament to learn the lessons from my personal experience because, as I said, I believe "... it draws into sharp focus the lessons about the crucial importance of really effective governance" (see 2.3 and 2.4) in the financial sector.

  3. Unfortunately, it has turned out to be impossible to deal with the policy points that can be learned without also dealing with the personal even though I would have preferred to have avoided that.

  4. The allegations I made in my original testimony have been denied by Lord Dennis Stevenson, Andy Hornby, Sir James Crosby and the FSA.

  5. All parties have relied on a report produced by KPMG to deny the truth what I said in my original testimony.

  6. The Committee will recall that I did not seek to avoid the issue of the KPMG report and actually referred to it myself in sections 2.20—3.21 of my original testimony. For ease of reference, I repeat what I said there:

    (a) 2.20  "A supposedly "independent report" by HBOS's auditors said HBOS were right but failed even to interview key witnesses'.

    (b) 3.21  "As I stated above in section 2 above, a supposedly "independent report" by HBOS's auditors said HBOS were right but failed even to interview key witnesses. No doubt they and the FSA would rely upon this report. In relation to this report, you should be aware that, following the very first response to the report from my lawyers and me which challenged it vigorously, HBOS settled within a very short time".

  7. Notwithstanding the vigorous denial of my allegations, I made the following statement last Wednesday at about 2.00pm and repeated it to ITN, BBC and Sky News on Thursday on camera:

    "I read with interest that Sir James continues to refute the allegations I made in my evidence to the Treasury Select Committee and I want all those interested to know that I continue stand firmly and confidently behind what I have said.

    I have a significant body of detailed additional evidence which will corroborate what I said. I am confident that the `independent report' to which Sir James has referred will not bear up to any proper independent scrutiny. I described that report as "supposedly" independent in my evidence to the committee and I strongly stand behind that statement. No doubt I shall be given the opportunity at an appropriate time to disclose my evidence and demonstrate what I am saying is true".

  8. This memorandum of additional evidence is provided in response to the evidence now produced by [HBOS, Sir James Crosby, Lord Stevenson, Andy Hornby] and pursuant to a request by the Clerk of the TSC, Dr John Benger to provide the TSC with the additional evidence to which I referred in this statement and elsewhere.

  9. At first, the intention was to provide the TSC with all relevant corroborative documents. However, following correspondence and discussions with the Clerk of the Committee last week, it was agreed that it would be impractical, confusing and, (having regard to the specific terms of reference of the TSC) unnecessary to provide the Committee with all the documents.

  10. To put this in perspective, on an initial tally by myself and my advisers, the minimum number of relevant documents totalled 53 and amounted to approximately 4.5 megabytes of written material ie literally hundreds of pages.

  11. In these circumstances, my advisers and I have agreed with the Clerk of the Committee that the most useful approach to the provision of additional evidence is to write a detailed resume and history of events which are relevant to the terms of reference of the TSC but without supplying all the underlying corroborative documents.

  12. I have already said in my original testimony that I strongly believe that the prime or underlying cause of the banking crisis (ie what permitted the symptoms of over-lending (including sub-prime), excessive credit and liquidity risk to occur without adequate restraint) was a completely inadequate "separation" and "balance of powers" between the executive and all those accountable for overseeing their actions and "reining them in".

  13. When I refer to "... all those accountable for overseeing their actions and "reining them in", I want to be absolutely clear that I mean every constituent that has a part to play in oversight ie internal control functions such as finance, risk, compliance and internal audit, the non executive directors, external auditors, The FSA, the shareholders and the analysts and, very importantly, the politicians.

  14. The terms of reference of the TSC state that: "The Treasury Committee is seeking to identify lessons that can be learned from the banking crisis". In particular, it seeks to identify lessons relating to securing financial stability, protecting the taxpayer, consumers and shareholder interests.

  15. I strongly believe that a detailed resume of my personal story from HBOS, without supplying all the underlying documents, is the most appropriate approach for all key stakeholders and will draw out the key lessons for all these areas which are the subject of the TSC's enquiry. I also believe that it will show that the importance of the points I made in section 4 of my original testimony: "Some recommendations for policy analysis and development".

  16. Finally, it may very well be that it is in the public interest for there to be a more detailed enquiry/investigation in a different "tribunal" than the TSC into what happened in the lead up to the current crisis and who did or did not do what and what it teaches us about what the future policy should be.


  17. The simplest way to make my evidence, which is complex, understandable and digestible, is to deal with it in chronological order and this is what I do below.


  19. It is important for the TSC to understand in some detail how the internal operations of the bank worked as it will inform their final report. There are three key "chapters" to the evidence:

    (a) The lead up to my appointment as Head of Group Regulatory Risk at HBOS.

    (b) What happened during my tenure as Head of Group Regulatory Risk at HBOS.

    (c) My dismissal and the KPMG investigation and report.


  20. I joined HBOS in 2002 as Head of Regulatory and Operational Risk for HBOS's Insurance and Investment Division (IID) as well as for the Retail Division in respect of their sales of IID products and services. I reported to the CEO of that Division, Phil Hodkinson. I believe that IID was the second largest division in terms of profit at HBOS. Phil Hodkinson later became the CFO of HBOS after I left and effectively retired when the Board decided to re-appoint Mike Ellis as CFO. I think this was announced in the summer of 2007.

  21. During 2003, the FSA carried out a full Arrow risk of Retail, IID, Corporate, Treasury and HBOS Group Functions. The key objective of FSA Arrow (which stands for Advanced Risk Responsive Operating frameWork) supervisory visits of firms is to assess the risks that the firm poses to the FSA's four statutory objectives which are:

    (a) Maintaining confidence in the financial system.

    (b) Promoting public understanding of the financial system.

    (c) Securing the appropriate degree of protection for consumers.

    (d) Reducing the extent to which it is possible for a business carried on by a regulated person ... to be used for a purpose connected with financial crime.

  22. Given the limited resources available to the FSA, there is only a limited amount of work which they can perform during any visit to establish the risks that exist. In a real sense, what the FSA do is to carry out a fairly limited review of the operations in each division, arrive at preliminary conclusions and then set out and agree a "Risk Mitigation Plan" (RMP) for the bank to follow. If the FSA have a suspicion of key risks, they will normally ask the bank itself or an external expert (what is called a "Section 166" review) to carry out additional work to establish the final view and assessment of the risks. If the bank itself is required to carry out the additional work, this will normally be assigned to one of the two Group Risk functions that existed at the bank, either Group Regulatory Risk or Group Financial and Operational Risk.

  23. Until the additional work is carried out the FSA do not actually "know" in any final sense that the risks are as they suspect them to. That final decision must await the more detailed work carried out after the Arrow visit itself and in accordance with the agreed RMP.

  24. Arrow visits are carried out over several months and the general view of what the FSA thinks is known well in advance of the final report which itself is sent in draft for the bank to comment on in advance—certainly in a factual sense.

  25. By about early September 2003, it was clear that the FSA were going to issue a very serious risk assessment on HBOS but the final report was not issued until either November or December.

  26. While this was going on, during 2002 and 2003 my team and I in IID had set a new strategy for risk management in that division and had been carrying out rigorous oversight of the regulatory and operational risks in that division. My appraisal from Phil Hodkinson for our work in 2003 read:

    Your vision for risk management within IID was clearly articulated 18 months ago and now through execution is producing solid results, leading to extremely good feedback from the IID Risk Control Committee and the IID Exec ....

    "Success through delivery" was the key theme for your personal development plan in 2003 and I'm really pleased that this has not only paid off in very tangible results within IID and Retail, but also was endorsed via your appointment to your new role. You have also made significant strides in building relationships (through delivery and a conscious effort on your part) and I very much hope that your success in 2003 will give you a platform to build on.

  27. From their Arrow work, it was clear that the FSA were concerned that risk management was not being carried out effectively at HBOS and in late September or early October 2003, I was asked if I would accept a promotion to the most senior regulatory risk management role at HBOS as Head of Group Regulatory Risk. This meant that my accountabilities would be not only to oversee the IID compliance with FSA requirements but also the compliance of all other divisions within HBOS.

  28. I have put in bold and underlined the words in paragraph 26 above because they are important in the story. I was asked if I would accept the promotion to Head of Group Regulatory Risk not only because I had already received excellent feedback for the work my team and I had been doing in IID but also because of my long track record and experience in regulatory risk management and especially because of the confidence that I had developed with the FSA over many years of carrying out difficult regulatory work as a Partner at KPMG.

  29. I was phoned by Mike Ellis, the then CFO, and I told him that before I accepted the role, I wanted to be sure he understood how I would carry out the role because I knew that the level of enquiry and rigour in our oversight was going to have to increase substantially if we were going to regain the confidence of the FSA and mitigate the key risks at the bank. I knew that such an increased level of enquiry was vital and that this was bound to lead to discomfort in areas that had not hitherto been subjected to strong challenge.

  30. I met Mike Ellis privately and told him this and said that I would only be able to take on the role if he was going to provide his full support to the very difficult work we were going to have to carry out. He said he would and, therefore, I accepted the promotion.

  31. Although my formal start date was 1st January 2004, my appointment was announced on 8th October 2003 and I set to work immediately as there was a huge agenda of work that we were going to have to carry out and a significant reorganisation the existing GRR department in order to facilitate this.

  32. I made my first formal announcement to the GRR team on 5 November in which I said:

    "We need to build deep and long term relationships with our business colleagues which allow us to be truly challenging in a way that genuinely and lastingly improves performance. Our most important accountability at the moment is to carry out business and performance improvement focused oversight".

  33. I do not have a full copy of the FSA's final Arrow risk assessment report from that year, although I am sure this can be obtained from the FSA. However, I provided two key quotes in my original testimony which I will repeat here for ease of reference.

    "By November 2003, the FSA had assessed key parts of the Group as posing high or medium-high risks to the achievement of its statutory objectives of maintaining market confidence and protecting consumers. They wrote that they were concerned that "...the risk posed by the HBOS Group to the FSA's four regulatory objectives is higher than it was perceived".

  The FSA also wrote in relation to the Halifax (called "Retail") "There has been evidence that development of the control function in Retail Division has not kept pace with the increasingly sales driven operation..." and "There is a risk that the balance of experience amongst senior management could lead to a culture which is overly sales focused and gives inadequate priority to risk issues."

  34. I thought that the operational staff at the FSA had done a good job on the Arrow visit they had conducted and that they almost certainly had identified the key risks at the bank at that stage in its development. I would not necessarily consider staff at that level to be accountable in for what followed.

  35. I wrote in the following terms in HBOS's December "Blue Book" which is the report provided on a monthly basis for the top fifty or so executives in the company and all the non executives:


    The Arrow risk assessments and the accompanying Risk Mitigation Programmes for Retail, IID and HBOS Group have been received as well as a more specific assessment by the FSA relating to Corporate's credit risk management of its commercial property lending.

    There is a great deal of detail to be digested and one always needs to be careful of simplification. However, a reasonable summary of the key points might be as follows:

      —  We have been growing more rapidly than our peers and we have aggressive plans for continued growth.

      —  We have a retail bank that feels and is different to our peers ... it has a sales culture and a very different style of management!

      —  We have a substantially larger commercial property loan book proportionately than our peers and our approach to credit risk management on that book is very a matter of business philosophy.

      —  We have one of the biggest With Profits life businesses in the UK.

      —  We are doing a lot of other things all at once and there's a lot of change forced on us from mandatory regulatory change ... so we must suffer from management stretch.

      —  The FSA has yet to be convinced that our risk management and control framework is effective or keeping pace with our growth. In particular, they are clearly concerned with the way Group Risk functions relate to the Divisions and whether they are really able to carry out their oversight role effectively.

    The upshot of all this and taking all of the general and specific points together, has lead the FSA to conclude "... that the risk posed by HBOS Group to the FSA's four regulatory objectives is higher than it was perceived...".

    Although we can agree with many of the detailed points the FSA makes, we do not agree that the points they make support a conclusion that HBOS" control environment has deteriorated or that the risk to the FSA's objectives have increased.

    Indeed, it is quite difficult to determine whether the FSA have actually drawn conclusions or whether they have arrived at perceptions, which will become working assumptions until further work is done; they do use the word "perceive" on quite a number of occasions in their letters. In any event, as Mike Ellis commented in his paper to the Audit Committee—"We will tackle the risk mitigation programme with gusto and determination to satisfy the Audit Committee, Board and FSA that risk management is firmly under control in HBOS".

    The only other point worth re-emphasising is that management should not underestimate the importance of demonstrating unequivocally and visibly to the FSA that the understandable difficulties of establishing the roles of the specialist Group risk functions (the second line of defence), are in reality behind us now. This will essentially depend on the Group Risk functions agreeing with the operating divisions and then carrying out to a very high standard a well designed programme of specialist oversight work with the obvious and active support of local management.

  36. I wrote a draft business plan for GRR which was presented to the Group Audit Committee on 9th December. The theme for the year was "The regulatory environment—a key strategic challenge".

  37. Because that document laid the foundation of the work we were going to do, it is necessary to quote a sizeable extract from it to put the work were obliged to carry out to fulfil our Approved Persons accountabilities into perspective.

  38. In this regard, it is important to note that Approved Persons have a direct contractual relationship with the FSA and if they do not carry out their accountabilities in accordance with "The Principles for Approved Person", they can be personally liable. The first two principles require the Approved Person to carry out his or her control function with integrity and due skill, care and diligence and Principle 7 states that "An approved person performing a significant influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system." As Head of GRR my AP function was treated as "performing significant influence". The extract from the business plan is below.

  39. Below I set out the key extract from the GRR Business Plan:


    With our regulatory risk profile arguably as high as it has ever been, it is clear that managing our regulatory risks over the coming year (and maybe more) will be a major challenge.

    It is, of course, a major tactical challenge to manage the existing list of regulatory risks and issues we face in the current environment. But it needs to be seen as even more important than that. It needs to be treated as a strategic challenge. If we treat it with that importance, we will not only deliver the tactical successes we must achieve but also a real competitive advantage in the market place.

    As Dennis Stevenson will say in his statement in the Annual Report and Accounts 2003: "Regulation represents both society's consent to our activities and an opportunity to create advantage over our competitors".

    Conversely, the impact on the Group's Business Plans of not meeting the challenge we face could be material if senior management's attention is forced to be diverted from its growth ambitions—which are such a prominent feature of our message to the market place—to its systems and controls for ensuring regulatory compliance. This could not only impact on existing markets but may make the FSA reluctant to see HBOS undertaking any material expansion into new markets or any significant M&A activity.

    More directly, the quality cost of failure or re-work will hit the bottom line—the £2m of fines we received in 2003 mask the very much larger other direct and indirect costs associated with resolving these failures. If this means we don't hit our published targets, the financial impact will not just hit the P&L and our crucial ROE target but could well have a magnified impact on shareholder value. Furthermore, if we don't get the implementation of the Integrated Prudential Source Book right, we may very well be required by the FSA to set aside more regulatory capital.

  So, how can we meet this crucial strategic challenge?

    At the heart of overcoming the challenge, GRR believes that there are three key pre-requisites for success on which we should focus:

      —  The strength, depth and quality of our relationships and communications with the FSA. This requires much more work so that all the requisite parts of the group are working in harmony, with one strategy and a completely different level of coordination. It also needs the FSA to agree how important this is and how much work needs to be done in this area.

      —  The credibility of Group Risk functions operating as a truly effective second line of defence. This depends on the standards and policies they set, the depth and quality of the oversight they perform and the strength of the relationships they have which allow them to provide functional and technical leadership. But even more important, it will depend crucially on the FSA's confidence in this work.

      —  The demonstrable and enthusiastic engagement of the operating divisions in the work carried out by Group Risk functions: This business plan is designed support the achievement of these key pre-requisites.

  40. It is fair to say that the role into which I was now moving as Head of GRR was going to be at the very difficult end of the very difficult scale. It is also fair to say that I had made it more than abundantly clear both orally and in writing that the number one priority to solve the regulatory problems facing the bank was more rigorous and in depth oversight activity but that this could not be achieved without the full support of the most senior executives.

What happened during my tenure as Head of Group Regulatory Risk at HBOS

  41. As a result of the Arrow visits each of the key HBOS operating divisions had to agree a final "Risk Mitigation Plan" (RMP) with the FSA.

  42. These plans were subject to discussion with the FSA and that discussion would be intense.

  43. As a result of the RMPs during the first few months of 2004, HBOS Board agreed to carry out the following key pieces of work. There were many other pieces of work that we had to carry out at the same time. But those set out below are of fundamental importance to my evidence as they involved reporting to the Board as well as the Group Audit Committee:

    (a) A review of the selling practices relating to Corporate Bond Funds. This was to be carried out by GRR.

    (b) A review of the balance between sales and controls within Retail. At first and because of the seriousness of their concerns, the FSA had said they were considering requiring this review to be carried out by an independent expert (S166) but after discussions with my team and me, they agreed to allow GRR to do the work.

    (c) Review of the degree of independent challenge in Corporate Banking credit approvals and why the process is "atypical" and if and how this can be justified. This was to be carried out by the Group Financial and Operational Risk department headed by Dr Andrew Smith.

    (d) A review of HBOS With-Profits Strategy (Clerical Medical) in different market circumstances. This was to be carried out by the Group Financial and Operational Risk department headed by Dr Andrew Smith.

    (e) A group-wide review of risk management effectiveness to be carried out by PwC and as a Section 166 expert report. In particular, the FSA had expressed concerns about the level of oversight, challenge and functional leadership being carried out by Group Risk functions of the risk management in the operating divisions. Therefore, one of the key areas this review had to cover was the strength and effectiveness of challenge from Group Risk Functions. My department's strategy, approach and operations were obviously to be reviewed as part of this work as was the department of Dr Andrew Smith.

  44. The detailed terms of reference for all of the above work were agreed over the first few months of 2004 in discussions with the FSA and formed the basis of the most important oversight work that my and Dr Andrew Smith's departments carried out during 2004. But I repeat that there were a great many other oversight reviews which were also carried out at the same time, for example a review of the way Halifax were handling mortgage endowment complaints as well as a review of the way Jo Dawson's area (sales of regulated investment products and insurance) checked the suitability of the investment advice given by the direct sales force she managed. We also started to question the suitability of creditor insurance sales (also known as PPI or Payment Protection Insurance sold along with personal loans and mortgages. This potential miss-selling comes in various forms. Because there is such significant profit generated by creditor insurance that I witnessed a huge amount of management attention in HBOS GI and in Retail paid to hitting sales targets in this area; this type of sales pressure could drive front-line branch staff towards marshalling clients towards taking on a personal loan rather than, say, a short-term overdraft or use of revolving credit card facility; it can also potentially drive staff to "encourage" customers to take out a larger loan than they really needed, wanted or should really take on because that way the creditor premium is larger as well. Apart from this creditor premiums were incredibly high and paid upfront so that even if a personal loan was repaid half way through its term no premium was refunded. Also it appeared that many customers who bought PPI were never able to claim as they were in an excluded class.


  45. When I was in IID in mid 2003 I had already discussed with Jo Dawson, who ran the sales force that gave advice on insurance and investment products, the importance of reviewing corporate bond fund (CBF) sales, the volumes of which were very high indeed.

  46. A corporate bond fund is a collective investment scheme which uses investors" money, as its name suggests, to purchase bonds ie corporate debt. Depending on the debt purchased it can be higher or lower risk and the capital value of an investment can go up or down depending on a range of factors including the view taken by the market of the risk relating to the bonds held by the fund as well as the direction in which interest rates move.

  47. There was resistance from the word go to this suggestion from Jo Dawson and other senior management and nothing actually happened until the FSA made it clear in September and October that they were going to require such a review as part of the RMP.

  48. It was Jo Dawson who ultimately became Group Risk Director on my dismissal.

  49. As the yields went down on standard deposit accounts, many customers were switched into CBF and GRR and I were not confident that customers who were switched out of deposit accounts into CBFs would really understand the additional capital risks they were taking on and we wanted to ensure they did. What was clear was that the advisers were strongly targeted to sell CBFs to deposit account customers whose deposits matured and the margin HBOS made on CBFs was very much higher than on deposit accounts. This obviously increased the incentive to sell them.

  50. To give you some idea of the sales culture in operation, I quote an extract from an email sent by the MD of Halifax Financial Services (the product "manufacturer" of CBF) to Jo Dawson about the time I was originally suggesting we needed to carry out a risk review of CBF sales. Note the attitude of a senior executive to important risks suggested by the publisher of the Fund Sales Report in question. I am not clear as to what a PJF means but the general gist can be understood.

    "Nice one Jo!.

    Our best ever showing in the Fund Sales Report (the Pridham report). Headline was "Fidelity and Halifax enjoy healthy sales in first quarter while many other managers see their business dry up".

    HFS was:

      —  2nd for total net sales (we were double L&G, Fidelity top).

      —  1st for total net retail sales (equal to total of 2nd,3rd and 4th places added together!).

      —  1st for gross ISA sales.

      —  1st for corporate Bond ISA sales.

      —  1st for best selling ISA fund (Corporate Bond).

    Also—top 10 for funds under mgt. Only negative was a swipe at "it must be hoped Halifax customers truly understand the potential risks to their capital" re CBF. I am taking this up with Press Office as we need to treat Pridham like a PFJ.

    Copies available from Sandra."

  51. Indeed, the volume of sales were so high that I actually received a warning from the CEO of Insight Investment Management (HBOS's asset management division) to the following effect: "The reality is we are being forced to invest in lower quality bonds because the client [Jo Dawson and her sales force] wants to sell more product. Now that's what I call risk!"

  52. My final attempt on 8th June 2003 to persuade Jo Dawson to carry out a review read as follows:

    "But I still recommend you do what I originally suggested below [a thorough review of CBF sales]. Clearly the temperature is rising around this issue and the reasons I suggest for independent validation still exist. If James C[rosby] is interested, it probably makes it an even more advisable way to keep everyone happy. Let's have a chat about it. What do you actually think? I guess it probably feels overkill to you; I can only advise you in the best way I know how. I am definitely not going to tell you what to do. But if you want to know what I would do if I was you, I would do it".

  53. Of course, as soon as it became clear, as I had always expected and advised, that the FSA would pay special attention to CBF sales and would actually require a review as part of the RMP, Jo Dawson and the management team had no choice but to permit GRR to carry out the review and we started our field work in late November 2003 and completed the field work in March 2004.

  54. To say that doing the work was like going behind enemy lines might be an exaggeration but it certainly was not far off and the extreme "argy bargy" that took place in trying to finalise the report itself was upsetting to my team and to me and generated some of the emails I quoted in my original testimony. On quite a number of occasions, my team carrying out the work reported that they were being threatened.

  55. To keep the explanation of what happened as simple as possible, I set out below an extract relating to the CBF review from the Outline Case prepared by my Barrister, Peter Hamilton of 4 Pump Court, after my dismissal from HBOS. For ease of reference, I have inserted the key parts of supporting documents to which he referred after the relevant paragraph.


  56. From November 2003 to August 2004 there was a review of Corporate Bond Fund ("CBF") sales. In the course of this review GRR found that there were potentially serious issues of suitability in relation to sales. Mr Moore and GRR raised their concerns about actual or potential breaches of FSA rules; for example, relating to the systems and controls to ensure that sales were suitable. This document was provided both to HBOS and the FSA at the time of my dismissal.

  57. On 5 March, Mr Moore and Mr James Davies (Deputy Head of GRR) had a meeting with Mr Andy Hornby to give him an early briefing to warn him of emerging findings of regulatory systems and controls failures.

  58. Those warnings were repeated on 9 March at an Audit Committee meeting. [See GRR quarterly report and extract of minutes of that meeting set out below.]


  Review of Corporate Bond Fund Sales—Substantial volumes of Corporate Bond Funds were sold during 2003. Group Regulatory Risk are currently undertaking a review of the adequacy of the controls in place and the overall effectiveness of the risk management arrangements within Retail Regulatory Risk, designed to ensure the suitability of these sales. FSA have shown an active interest in this work. The report is currently being finalised and an update will be provided orally at the meeting


  Paul Moore advised that GRR was close to completing a review of Corporate Bond Funds (CBF) sales within Retail. This was an important piece of work, given the substantial sales volumes of CBF in 2003 and the focus that the FSA was currently giving to products of this type. Of particular importance was the degree to which customers understand the risk of the product. There is evidence to suggest that some customers may not fully understand the risks and this could expose HBOS should there be unfavourable market conditions.

  59. On 21 March 2004, Mr Moore sent an email to the CFO, Mr Mike Ellis, attaching the executive summary of a report on CBF sales and suggested a meeting to discuss its contents. This report set out instances of likely unsuitable sales. [See extract below and excuse typos!]

    Corporate Bond Fund Sales—VERY IMPORTANT You will know that this is a hot topic ... much comment in the press and the FSA about to come in a do a themed visit. We have now completed our oversight review and I attach here the executive summary of a very much longer report. We cancelled a meeting with Retail Reg Risk Management on Friday because we decided it was important enough a matter that your involvement was required—there are some very important issues which we need to discuss and on which we need your review and input—eg on the day of launch of the Fund the extra income provided by a £10,000 investment into CBF in comparison to the Guranteed Reserve Account in return for the extra risk was on 50p per week ... do you consider that recommending someone to switch—irrespective of the strength of the disclosure—would be suitable/fair for that marginal benefit....this sames scenario happened at other times throughout the sales history ... and with interest rates on the way up there are increased risk that customers wont get there capital back? Also Retail Reg Risk Management set no limits on how much of a persons savings could be switched so customers were recommended to switch veruy substantial percentages of their savings. Anyway, read the exec summary and we can discuss—we have prewarned Andy on this and the Audit Committee but are supposed to briefing Jo Dawson on Wednesday, so we need to speak urgently—password for the doc is oliver. Might be best to have a conference call with James Davies on this and other Retail matters .... We have a session with Andy Hornby on Monday at 3.30...I will be with him at the Mound.

  60. [Added by Paul Moore—Following a programme carried out by the GRR review team of contacting customers to establish whether or not they understood the risks associated with investing in CBFs, the initial assessment was that as many as 23% of customers did not understand that a CBF carried any capital risk at all; they thought it was a deposit account with a higher interest rate. This exceptionally high initial finding was reduced after the normal bruising encounters in trying to finalise the report. But this made no difference to the actual finding that the systems and controls had failed in a material way and that all customers had to be re-contacted to explain the capital risk prominently and to be offered a free switch back to a deposit account.]

  61. On 22 March, Mr Moore met Mr James Crosby and briefed him on early findings in relation to the CBF sales review.

  62. On 23 March 2004, GRR discussed CBF compliance issues with Mr Ellis. He failed to provide any or any appropriate support to GRR.

  63. On 24 March, Ms Dawson and her team met the GRR team and were antagonistic and threatening to the GRR team.

  64. On 26 May, Mr Moore and Mr Davies attended the Retail Risk Control Committee. Ms Dawson was also present. She shook her head vigorously in disagreement and threateningly as Mr Moore was updating the committee on his important concerns about failures in compliance by CBF. The minutes did not reflect accurately what Mr Moore had said and had to be corrected after they had been signed as a true record by Charles Dunstone.

  65. On 28 May, Ms Dawson sent an email to Mr Moore in which she attacked GRR repeatedly for its work. [See the attached bundle of email correspondence from Mr Moore to his team and Mr Ellis.] Mr Moore brought this to Mr Ellis" attention. It became evident from the correspondence that individuals in the Retail Division were lobbying Mr Ellis for support against GRR. In emails written on 6 and 7 June, Mr Moore appealed to both Mr Ellis and Mr Andy Hornby for support. [See the attached bundle of email correspondence between Mr Moore and Mr Ellis.][Extract repeated from original evidence below—excuse typos]


  We have spoken at some length this morning on this and more generally about the current issues in dealing with Retail. We really do have to do something...and you may wish to lead change the whole tone of engagement. This is not a battle of wits but a joint attempt to do what is right for the organisation. Yes, now that people with a huge amount of external experience are now accountable in GRR for oversight, it is not surprising that the level of enquiry is going to be more detailed—that is to be expected...and actually welcomed.

  Some behaviours are going to need to change, particularly the sentiment that constantly questions the competence and intentions of GRR carrying out its formal accountabilites for oversight plus the ever present need to be able to prove beyond reasonable doubt as if we were operating in a formal judicial environment. The more we adopt this approach, the more adversarial it all becomes, the more emotional it becomes, the more personal it becomes and the worse the relationship becomes. It becomes a viscious circle which needs to be broken. We need you and Andy to intervene here to create a watershed here so we can move on from the issues of the past (from which we can learn but not blame) to the brave new world of the future. Actually, the responsibililties for getting into the current position are held all around the organsiation and not just in Retail...and I include Group Risk functions in this. What would be absolutely fatal would be if there was ever a perception—explicit of implicit—that different parts of GF&R took different views. Then you get the "divide and rule" happening. We must all be asa one and communicate as such.

  We will get there but there will also be some pain in the process of change.


  66. There is significant correspondence on the file in which Ms Dawson and her team made clear their resistance to responding positively and appropriately to matters of non-compliance raised by GRR.

  67. [Added by Paul Moore—During the course of the review was that the regulatory requirement for "suitability" did not apply when switching between a banking product and an investment product ie the strict rules against "churning" did not apply; this was particularly worrying.Principle 6 of the FSA's Principles for Business states explicitly—"A firm must pay due regard to the interests of its customers and treat them fairly.".

  68. On 8 June, there was a meeting of the Group Audit Committee. Mr Moore decided that having not received any support from Mr Ellis, he was duty bound to alert the committee to the relationship difficulties he and GRR were experiencing with the division managed by Ms Dawson. Mr Moore said: "I would not want the Committee to be under any illusion as to how strong the tensions were as GRR carried out its oversight work and I have to say that there have been some behaviours which I would consider to be unacceptable."

  69. The chairman asked if Mr Moore had direct access to him as chairman. Mr Ellis and Mr Moore disagreed, the latter saying that he thought that he should have a direct line in to the chairman. [See GRR quarterly report and extract of committee minutes.][Key extracts inserted below]


Review of Corporate Bond Fund Sales

  A report produced by GRR following a review of CBF Sales within Retail was issued during April.

  The report raised a number of very important issues. In particular, there were questions raised about systems and controls and just how robustly product design and suitability considerations were considered and especially so as to incorporate non-regulated products. This again is an absolutely key element of treating customers fairly. It is crucial that the strongest possible focus is applied to ensuring and assuring that we do not have any systems and control weaknesses which could lead to potential customer detriment, even though to date we have not found evidence of widespread customer detriment in the sale of CBFs by Retail Regulated Sales.


  The Committee was advised that there were strong tensions between Group Risk Functions and Divisions and some intervention may be appropriate. The Chairman asked for this matter to be discussed at the July private meeting with the Committee.

  70. On 10 June, Mr Ellis emphatically, and without justification, criticised Mr Moore for what he had said at the Audit Committee meeting and warned him not to do it again.

  71. One of the last emails about this matter from Jo Dawson was as follows:

    "On CBF, I thought he might have mentioned it at dinner on Monday? I know he has spoken of it with both Mike E and Andy H—probably because of the considerable heat the GRR report caused internally ... I know ray spoke with John Edwards too re the process.

  72. Jo Dawson in saying "he might have mentioned it" was actually referring to James Crosby whom she had been clearly lobbying in the background to try to have the report adjusted. Members will note the reference to "the considerable heat the GRR report caused internally" demonstrating her indisposition to legitimate and expert challenge.

  73. The very final part of the story relating to the review of CBF sales was extraordinary. I arranged a meeting with Jo Dawson in an attempt to settle our relationship difficulties. That meeting took place on 30 July. Before we had begun to discuss any of the issues, Jo Dawson lent across the table and pointed her finger at me and said, "I'm warning you, don't you make a f****ing enemy of me". Later in the meeting she taunted me by asking if I would be embarrassed to learn that my report on Sales Culture was being re-written over the weekend by Mr Ellis and Mr Hornby.


  74. The review was commissioned to enable GRR to make an assessment of the effectiveness of the controls in operation in Retail when compared to the strength of its marketing and sales culture.

  75. The review had particular regard to the FSA's Arrow assessment and Risk Mitigation Programme ('RMP') in respect of the Retail Division, dated 1st December 2003, and specifically the following comments:

    (a)  "There has been evidence that development of the control function in Retail Division has not kept pace with the increasingly sales driven operation".

    (b)  "There is a risk that the balance of experience amongst senior management could lead to a culture which is overly sales focused and gives inadequate priority to risk issues".

  76.  It should be noted that early in 2004 and before the review was commissioned by the Board, Andy Hornby went to see the FSA and strongly denied that the FSA were correct in their views.

  77.  The key objectives of the review were as follows:-

    (a) To provide a formal assessment of whether the risks to customers, and the wider prudential and regulatory risk associated with the marketing and distribution of financial products by HBOS's Retail Division are being managed in a control / governance framework and cultural environment which will ensure that key risks are identified, assessed and mitigated in a manner which will meet the FSA's and HBOS's requirements and policies.

    (b) Where applicable, to identify priorities and to provide recommendations for change in the culture, organisational structure and control framework.

    (c) To identify, in the process of the review, any other issues of regulatory concern.

  78.  The GRR review focused on four areas for investigation:

    (a) The overall risk culture and the alignment of business and risk strategies.

    (b) The development of the sales culture and its practical implementation.

    (c) Assessment of the Governance framework and key high-level systems and controls.

    (d) The effectiveness of the Risk Management Framework.

  79.  A key extract from the formal terms of reference read as follows:

    "The review is to enable GRR to provide a formal assessment as to whether the risks to customers and the wider prudential and regulatory risk associated with the marketing and distribution of financial products by HBOS's Retail Division are being managed in a control / governance framework and cultural environment which will ensure that the key risks are identified, assessed and mitigated in manner which will meet the key FSA and HBOS's requirements and policies."

  80.  I personally led the review which was managed on a day to day basis by my number two James Davies. My department was assisted by additional resources that we seconded to GRR from Ernst & Young.

  81.  The "field work" for the review took place between about mid April and June 2004. You will recall that this was one of the four key reviews commissioned by the Board as explained above. I was due to report formally to the main Board on 27th July 2004.

  82.  A vast number of documents have been reviewed covering all the key processes associated with sales management throughout the Division.

  83.  In total (including the initial Ernst & Young work), the review team have conducted over 40 interviews with senior management within the Retail business, Non-Executive Directors and senior management in Group functions.

  84.  I personally interviewed Andy Hornby, the CEO of Retail at the time, Jack Cullen, the Head of Risk of Retail and Charles Dunstone who was the non-executive Chairman of the "Retail Risk Control Committee". I was accompanied on these interviews by James Davies to ensure that we could corroborate our notes.

  85.  Along with the management interviews, the team visited thirty one branch visits across eight Regions, five Regional Contact Centre visits, and three BoSIS branch visits were conducted. Furthermore, we have conducted seven Culture Study focus groups. Each focus group comprised between six and eight colleagues at similar grades (eg Banking Advisers, Branch Managers, PFAs) with the purpose of exploring typical scenarios relating to sales, risk and compliance. In total, it is estimated that over 135 customer-facing colleagues participated in the review.

  86.  We decided to take such substantial measures in evidence gathering to be sure that there could be no "push-back" on any conclusions we came to for lack of evidence.

  87.  To keep the explanation of what happened as simple as possible, I set out below an extract relating to the sales culture review from the Outline Case prepared by my Barrister, Peter Hamilton of 4 Pump Court, after my dismissal from HBOS. For ease of reference, I have inserted the key parts of supporting documents to which he referred after the relevant paragraph. This document was provided both to HBOS and the FSA at the time of my dismissal.

Extract from Outline case by Peter Hamilton re GRR review of retail sales culture and systems and controls review

  88.  In May 2004, GRR began a review of the retail sales culture and systems and controls. Mr Jack Cullen was interviewed on 25 May. His analysis of the culture in the Retail Sales Division was bleak. [See attached interview notes.] [Key extracts inserted below]

    JC showed us the action plan which stated that:-

    "Leadership and focus on risk matters has had no priority."

    "Sales regarded as more important than anything else."

    "Risk not seen as a core business imperative or competency."

    "[Note—we subsequently asked for a copy of the plan and were sent a new draft which had deleted some of these points. We were not told that the later version had been changed.]

    "Lets step back and look back to where we have come from in April 2002... David Walkden had 15 direct reports; organisation had not settled down; the focus was on merger; new people with new jobs; it "was all about growth and making the business succeed"; "the culture was of "don't tell me the bad news". "you always had to prove things beyond reasonable doubt".

    For a BOS person it all felt uncomfortable; the Halifax skills were rewarded—sales and promotion... BOS was not so good at sales but was good at "professional banking. Used the eg of the discussions around the bad debt charge|recommended £31m and was told "that's not acceptable"... so he said, well put whatever number you like|.so the whole focus was on growth...and so the bad debt charge ended up being £25m.

    Andy tried to make it a merger but it was a takeover. JC and three others moved down from Scotland... JC was the only one left..."and you know they are animals around here and unless you can prove it|.its always good new reporting"

    PM asked if he thought his position might be affected if he spoke up... pause "...Well there is that... but... not just that..."

    JC described them (management) as Gungho...

  89.  [Comment inserted by me—I think it is fair to say that James Davies and I were literally flabbergasted by our interview with Jack Cullen.]

  90.  On 11 June, GRR briefed Mr Hornby on the early conclusions of potentially serious regulatory failings in the Retail Sales Division reached by GRR, including evidence of inappropriate behaviour that would need to be investigated further. [See the attached GRR briefing paper for Mr Hornby.] [Three key slides from the aide memoire are inserted below.]

  91.  On 4 July, Mr Moore sent an early draft of the GRR report on the Sales Culture review to Mr Ellis together with copies of selected notes from branch visits. [See attached notes from branch visits.] Mr Moore was concerned that the notes of the branch visits should be disclosed to the Board, Audit Committee, or FSA. He sought to discuss this with Mr Ellis and Mr Hornby, but Mr Ellis made it clear that those notes were not be disclosed.

  92.  Mr Ellis prepared a paper on the Sales Culture review for the Board meeting held on 27 July. Neither the full report nor the notes of branch visits were attached to his paper.

  93.  At the Board meeting, Mr Moore made four important points. They did not appear in the minutes. Mr Moore questioned whether the minutes should be changed to accurately reflect the points he had made. Mr Ellis was not prepared to support a request to change the minutes. [See the bundle of emails between Mr Moore and Mr Ellis from 1 to 5 October—copied below for ease of reference.] The TSC should be aware that I was never actually sent the minutes to check accuracy and I had to follow up with the secretary after I came back from holidays in early September and that is why it took so long to raise the point.

-----Original Message-----

From: Ellis, Mike (Executive Director)

Sent: 03 October 2004 12:44

To: Moore, Paul (Executive—Group Regulatory Risk)

Subject: RE: Extract of HBOS Board—27th July 2004


    HBOS minutes are not a record of verbatim comments as this would be incredibly time consuming and repeat a lot of what is in the agenda papers and, therefore, a matter of record. We encourage open discussion at meetings and wouldn't wish people to be speaking—just for the record. If there is something important that is said and not covered in documents of record—then it should be minuted—but I thought that the Board minute was OK. You should be under no doubt that we do and always will adopt proper procedure. I can't comment on the Retail RCC as I wasn't there.

    If you have concerns, I suggest that you discuss the same with the Company Secretary (ie Harry Baines not his secretary Pamela) who can advise you more fully on the minuting process. The Board minutes for July were approved at the September meeting.

-----Original Message-----

From: Moore, Paul (Executive—Group Regulatory Risk)

Sent: Friday, October 01, 2004 10:34 AM

To: Ellis, Mike (Group Finance Director)

Subject: FW: Extract of HBOS Board—27th July 2004


    I asked to see the minutes of the Board meeting I attended on 27 July when the Retail Sales Culture Review was discussed. I was sent the attached extract and I was a little surprised at the difference between what I had actually said and the minutes|..see my note below which I have not yet sent to Pamella. Shall I send it?

By the way James and I had a similar issue with the Retail RCC we attended and I have had the same issues in relation to the one I attended on 23 September|.I will blind copy you in on my response to the secretary of that committee. It is obviously very important that minutes do accurately reflect the key points which were made.


    Thanks for this. I just wanted to check that the minutes covered the points I made. I am still not sure as to the exact protocols associated with minute writing at HBOS but they dont quite follow my own notes of what I said. You will remember that Andy Hornby positioned the sales culture review before I made my comments and I said that I only had a few key observations to make which were as follows:-

    —  That the Board should be aware that, although not stated explicitly in the report, the review had shown that the FSA were justified in having concerns as to the balance between the sales culture and the controls in Retail.

    —  That key to correcting the balance was the set up of a well considered, robust and achievable action plan led by the DCE which did not destabilise the major consumer benefits which Retail have so successfully brought to market with their product strategy aimed at simplicity, transparency and price. GRR will support, advise and oversee Retail's plan on a "close and continuous" basis.

    —  That in the context of that action plan very careful consideration should be given to exactly what standards and policies we consider to be consistent with "Customer Champion" strategy, The Way We Do Business and the current, as well as anticipated, regulatory standards. It will be this thinking that will underpin process design, risk and control management systems and the MI needed to monitor current performance. This will require a review of RMS.

    —  That from a strategic perspective, very careful consideration should be given in the development of Retail's operating and strategic plans as to exactly what level of sales growth is achievable, given current capacity, without putting customers and colleagues at risk.

    Not sure whether you want to do anything about this? Perhaps you should have a quick word with Mike Ellis.



  94. Mr Moore decided that the full report ought to be tabled at the October meeting of the Audit Committee. At the meeting on 11 October, the chairman said that now that he had read the full report he realised more clearly how serious the situation was.

  95. Mr Ellis strongly reprimanded Mr Moore in writing for tabling the full report. [See the email correspondence between Mr Moore and Mr Ellis.] [I quoted from part of this email trail in my original testimony but re-quote it in greater detail here for ease of reference—obviously you need to start at the bottom and work upwards to follow the story]

From: Moore, Paul (Executive—Group Regulatory Risk)

Sent: 11 October 2004 15:57

To: Brian, Tony (Group Regulatory Risk); Davies, James (Group Regulatory Risk)

Subject: FW: Additional document for Audit Committee on Monday

    I thought you might be interested in reading this correspondence. The GAC were clearly pleased to have had the opportunity to read the full report| so all's well that ends well!


-----Original Message-----

From: Ellis, Mike (Executive Director)

Sent: 10 October 2004 19:59

To: Moore, Paul (Executive—Group Regulatory Risk)

Subject: RE: Additional document for Audit Committee on Monday

    I'm available before the GAC but am in the private session from 10.00am. Your full report was made availbale to anyone who wanted it at the main Board meeting. It was also given to the FSA. Possibly it should also have gone to the RCC but not to GAC and effectively the full Board again. I didn't review your paper before it went as I didn't have time and it didn't go to GMB. If Group Secs misprinted—then this didn't help—but in reality it wasn't necessary to send the paper.

-----Original Message-----

From: Moore, Paul (Executive—Group Regulatory Risk)

Sent: Sunday, October 10, 2004 6:42 PM

To: Ellis, Mike (Group Finance Director)

Subject: RE: Additional document for Audit Committee on Monday

Importance: High


    I am sorry you feel so strongly about this but, with all due respect, this document (ie the full GRR report) has not been seen or formally put on the record as you state. Your short paper presented to the Board has been seen but not the full repor.

    Having discussed it with James Davies we decided that it should be formally put on the record in this GAC report and copied in full. We did this by referencing it in the main body of the text and copying into the Appendix. If you had not wanted this, you could have instructed us otherwise when reading our report in advance of it being sent to the full Committee and the GMB. Our rationale for copying the full report was that we felt strongly that the FSA would have expected a report of this importance to be referenced formally at the senior risk committee in full.

    Although referred to as such in Isabella's email, the document is not, in fact, "an additional paper" but simply a paper which was referred to in our report which had failed to be copied into the papers in the first place. I only picked this up on Thursday when I first scanned the papers and noticed it was missing. As it was officially referred to in the text, I felt it was important that it should be circulated as, no doubt, someone woulf have noticed it missing.

    I also dont think it is entirely fair to blame only us for the error (indeed at the moment I am not even sure we did make an error in sending our docs to companyt secs|but I will find out)... the fact that a document which was clearly cross referenced in the main text of our report was not there, should have been picked up by at least someone reading the papers in advance eg Company Secreatary's, GMB|.I find it a little surprising that not a single person did so...

    I have a couple of other points I would like to make about the situtation which I think are better dealt with face to face. Is there any chance of speaking for a couple of minutes after the Audit Committee tomorrow?


-----Original Message-----

From: Ellis, Mike (Executive Director)

Sent: 10 October 2004 12:35

To: Moore, Paul (Executive—Group Regulatory Risk)

Subject: RE: Additional document for Audit Committee on Monday


    This really looks bad and just look at the circulation list! There was no need to attach the appendices to your report in the first instance as they have already been seen/made available to all Board members. But if you were going to do so we ought to have got it right. People will be wondering why we are circulating seperately a document they've already seen—its looks like we're making an issue of it when we're not.

-----Original Message-----

From: Owen, Alison (Company Secretaries)

Sent: Friday, October 08, 2004 2:28 PM

To: Moorhouse, Robert (Company Secretary's); Anthony Hobson (E-mail); John Maclean (E-mail); Coline McConville (E-mail); Kate Nealon (E-mail); Coyle, Jim (Executive); Ellis, Mike (Executive Director); Fryatt, David (Group Internal Audit); Smith, Andrew Dr (Group Risk); Tucker, Mark (Group Finance Director); Guy Bainbridge (E-mail); John Ellacott (E-mail)

Cc: Lord Stevenson (E-mail); David Shearer (E-mail); Charles Dunstone (E-mail); Ron Garrick (E-mail); Brian Ivory (E-mail); Keith Nicholson (E-mail); Crosby, James (Chief Executive); Hodkinson, Phil (Executive); Hornby, Andy (Executive); Matthew, Colin (Executive); Mitchell, George (EXECUTIVE); Beadle, Tony (Executive); Biggins, Steve (Group Financial Accounts)

Subject: Additional document for Audit Committee on Monday

Importance: High

    Please see below additional paper for Monday's meeting.

-----Original Message-----

From: Acklam, Isabella (Group Regulatory Risk)

Sent: Friday,08 October,2004 12:23

To: Owen, Alison (Company Secretaries)

Cc: Moore, Paul (Executive—Group Regulatory Risk)

Subject: Additional document for GAC boardpapers

Importance: High

    Dear Alison,

    As discussed yesterday, there is an additional document (called Retail Division Sales Culture & Systems & Controls Review) to be included with the paper being presented by Paul Moore at the GAC on Monday. Please find it attached. I hope it is not too late to circulate it round to all the attendees in advance of the meeting.

    Please note that the order of the Paul's GAC paper (with this additional document) is:

    1st: Group Regulatory Risk Update Report (presenter: Paul Moore)—the main paper

    2nd: Retail Division Sales Culture & Systems & Controls Review (presenter: Paul Moore)—1st part of the Appendix 1 docs referred to in the Main Paper

    3rd: Review of Sales and Control Culture within Retail Banking (presenter: Mike Ellis/ Paul Moore)—2nd part of the Appendix 1 docs referred to in the Main Paper

    I hope this makes sense & that this doesn't cause you any inconvenience.

    Many thanks in advance and kindest regards,


    Isabella Acklam

    Exec. PA to Paul Moore

    Head of Group Regulatory Risk

    HBOS plc

    <<File: Retail Division Sales Culture Systems Controls Review Final 230704.doc

  96. For those not familiar with the banking world it probably makes sense to explain the effect of a sales culture being significantly out of balance and why I told the Board—"That from a strategic perspective, very careful consideration should be given in the development of Retail's operating and strategic plans as to exactly what level of sales growth is achievable, given current capacity, without putting customers and colleagues at risk".

  97.  The effect is two fold:-

    (a) The risk to customers is that they are missold / oversold credit of all types—credit cards, personal loans, excessive mortgages, creditor insurance, investment products such as CBFs which are not necessarily suitable to their needs or affordable.

    (a) The risk to colleagues (which is a reference to the bank as a whole) is that for every loan made above the deposit base, more wholesale funds are required with the consequential increased credit and liquidity risks. Ultimately, of course, it was the liquidity risk in the wholesale markets that crystallised but the underlying cause of this was a whole market place in which the sales culture got out of balance with the controls and risk management.

  98.  I have already explained in my original evidence the remark made by Charles Dunstone when I went to see him and interview him for this review ie "Even more extraordinary than this, Charles Dunstone himself admitted to me and my colleague one day words to the effect that he had no real idea how to be the Chairman of the Retail Risk Control Committee!".

  99.  Another extraordinary thing that happened during this review relates to the inter-play between my interview with Andy Hornby and Charles Dunstone.

  100.  I interviewed Andy Hornby only a few days (maybe a week) before I interviewed Charles Dunstone. When I interviewed Andy, he told me that the sale of creditor insurance (sometimes called "payment protection insurance") "kept him awake at night". I agreed with him. Creditor insurance was the most profitable line of business in the entire bank—I recall that it accounted for about 12% of group wide profits when I arrived and I was very concerned about the selling practices that had been adopted.

  101.  When I was interviewing Charles Dunstone, I asked him what he thought about creditor insurance sales. He vigorously lent forward in his chair and said that he had no ethical concerns about creditor insurance sales as he had been assured only a week ago of this by Andy Hornby!

My dismissal and the KPMG investigation and report

  102. I quote from Peter Hamilton's Outline Case again.

  103. "The process leading to the decision to dismiss Mr. Moore has departed from all the requirements of fairness as well as the express procedures set out in, inter alia, Group HR policies.

  104. Prior to being informed on 8 November that his position was redundant, Mr. Moore had received no warnings or consultation. This in itself makes the dismissal unfair.

  105. It is not accepted that the position held by Mr. Moore as Head of GRR is redundant. Indeed, it is not accepted that this post could ever be redundant and it is inappropriate for the Group to suggest otherwise.

  106. Whilst Mr. James Crosby has failed to provide any adequate explanation as to why Mr. Moore is to be dismissed, he has contended that the decision was his own personal decision. This is in breach not only of statutory requirements and compulsory procedures, but in breach of the Group's own HR policies. Mr. Moore has been informed that he is redundant and that his activities will be taken over by Ms. Jo Dawson with effect from 1 January 2005. Such a decision falls within the Group's Recruitment and Selection Policy. The procedure outlined in that policy has been ignored in full. [See the attached copies of the correspondence between Mr. Crosby and Mr. Moore.]

  107. The role held by Mr. Moore included CF10 responsibilities. This makes it even more important that appropriate and transparent procedures are followed. There should have been a meeting of the Board of Directors or alternatively a meeting of the Group Audit Committee before any decision to contemplate the termination of Mr. Moore's position was made. Instead James Crosby has confirmed that it was his personal decision.

  108. As well as the failure to consult, there has been no fair selection process despite the explicit Group HR policies concerning selection. In any decision to dismiss, there should be consideration of reasonable alternative employment. As part of the reorganisation announced on 11 November by Mr. Crosby, one post filled was that of Head of Risk for Retail. At no stage has there been any indication that Mr. Moore was considered for this post (or indeed any alternative posts) even though having regard to his experience and skills, he would have been an exemplary candidate.

  109. It is an overwhelming inference from the above facts that the process leading to and the reason for Mr. Moore's dismissal is not because the role is redundant but because he has done his job well. He has challenged unacceptable practices and the conduct of others in fulfilling their obligations under the Principles for Approved Persons. He has made one or more "qualified disclosures" as defined in s.43B of the Employments Rights Act 1996 by reporting, as his job required, regulatory failings against the wishes of senior management.

  110. As an approved person, Mr. Moore is required by the principles applicable to all approved persons to raise the matters set out above with the management of HBOS. But he also has an obligation to disclose appropriately any information of which the FSA would reasonably expect notice. He has received legal advice that he must disclose all the facts and matters summarised in this outline to the FSA. He ought to make that disclosure soon—and in any event before the 31 December 2004 when his role as Head of GRR is due to come to an end.

  111. The following points are of particular concern:

    (a) Against the background of the above matters, including the fact that Mr. Moore and GRR repeatedly expressed their concerns about actual or potential regulatory failures and their recognised excellent performance, Mr. Moore's imminent dismissal itself is something that should be reported to the FSA.

    (b) Further, the failure to follow proper procedures in the course of the dismissal must also be reported to the FSA.

    (c) The general inference to be drawn from all the matters set out above is that the concerns expressed by the FSA about the high regulatory risk profile of HBOS at the beginning of this year and which resulted in the requirement under s.166, have not in fact been dealt with. The individual whose excellent performance directly contributed to a reduction of the HBOS regulatory risk profile, is being dismissed for his good work.

  112. It must follow that the facts and matters set out above are serious and should be investigated and appropriate action taken. Proper corporate governance as well as obligations to the FSA require a full investigation and consequential action. Such an investigation should be independent and with terms of reference that include the making of all appropriate recommendations for action by HBOS as a result. The FSA should be consulted on the terms of reference, and should be given a copy of the full report in due course."

  113. The KPMG investigation that followed departed from all principles of fairness and drew conclusions which would not withstand any fair, independent public tribunal of fact.

  114. The TSC has a copy of the first rebuttal letter that my advisers and I sent to HBOS. This must be read in detail. However, for simplicity, I will list the key points.

  115. We never agreed the terms of reference notwithstanding significant correspondence to the effect setting out all the areas that should be covered. An extract from our letter complaining about this is set out below.

    We welcome your positive indications. However, in fairness to Paul, we have now been waiting for some period of time for confirmation that he will be entitled to a copy of the Terms of Reference and the final report. Whilst recognising the legitimate point about commercially sensitive material, there seems to us no reason at all for simply now confirming that a copy of the Terms of Reference will be supplied at the earliest opportunity as soon as it has been finalised and further, that we will be provided with a copy of the Report (less any commercially sensitive material).

    KPMG have already undertaken a number of steps in the investigation and therefore it seems odd if they are doing so without the Terms of Reference having been finalised. If it has now been finalised, then please confirm that we will be provided with a copy. If this decision needs to be made by the Audit Committee, then please let us know when the decision will be made by this Committee. I have indicated to Paul that until such time that he receives the Terms of Reference, he should not take any further steps to co-operate with the investigation (whilst he is unable to know what exactly the investigation is tasked to carry out).

  116. I was treated as a defendant and unfairly. See attached letter referenced BZ. Key extract

"There is nothing in the terms of reference which would suggest that KPMG treat Paul Moore as the "Defendant".

    Indeed it is clear from the terms of reference that KPMG's task is an open-ended one where establishing the facts in an impartial and uncontentious manner forms the first stage.

    KPMG need to establish the facts of this case. Whistle-blowing issues have been raised in relation to the regulatory compliance of some of the most senior executives at HBOS. Having regard to the subject matter, and the nature of the investigation that is required, it is essential that the investigation is carried out in all times in a way that is totally beyond reproach. KPMG need to act with the intention of gathering facts. It is essential the investigator must maintain a neutral viewpoint and suspend judgement until all the facts are established. It follows that questions should always be asked in a non judgmental and certainly non accusatory manner. This is not what happened on 18 February."

  117. The final findings were reported to the HBOS Audit Committee on 8th March—see KPMG Report a full ten days before my final evidence was sent to KPMG.

  118. KPMG failed to interview key witness that were vital to my evidence. I quote from our final rebuttal letter:

    "The second example is the feedback received from Dougie Ferrans, Operating Division CEO of Insight Investment Management. Paul had specifically requested that KPMG interview Mr. Ferrans during the investigation and indeed provided, along with a number of other people who have not been interviewed, the contact details. At Paul's second interview with KPMG (page 59 of the transcript) Alan Bates, in response to Paul asking about Dougie Ferrans, stated,

    "We have not seen him yet".

    It is not clear why KPMG never have interviewed him. Mr. Ferrans said,

    "I thought I would drop you a line to say how sorry I was to see you were departing HBOS. I fully understand why. You have achieved so much in such a short space of time, often unrecognised by those around you. I have thoroughly enjoyed working with you and having you as a trusted colleague. The same can be said about you by all of the Insight team."

    On learning of Paul's dismissal, Mr. Ferrans told our client that his was the worst decision James Crosby had ever made. In these circumstances, he was a relevant witness for the investigation.

  119. Finally and very importantly, KPMG simply failed, notwithstanding repeated requests by me to corroborate the crucially important notes of my and James Davies' interview with Jack Cullen during the sales culture review. Jack Cullen was the Head of Risk Management in Retail and I referred in some detail to this above in paragraph 88 above. In short Jack Cullen was a key witness and the notes of the meeting were crucial but KPMG never checked their veracity with James Davies who was present and said that they were irrelevant. I would not have thought that comments about the culture in Retail such as those set out below were irrelevant.

    JC showed us the action plan which stated that:-

    "Leadership and focus on risk matters has had no priority."

    "Sales regarded as more important than anything else."

    "Risk not seen as a core business imperative or competency."

    It "was all about growth and making the business succeed"; "the culture was of "don't tell me the bad news". "you always had to prove things beyond reasonable doubt".

    For a BOS person it all felt uncomfortable; the Halifax skills were rewarded—sales and promotion... BOS was not so good at sales but was good at "professional banking... "and you know they are animals around here and unless you can prove it|.it's always good new reporting"

Final points

  120. Obviously, there is a large amount of detail to digest in this evidence. But the purpose of digesting it is not to arbitrate between myself and HBOS / Crosby and the FSA but to show how banks should not be run in the future or rather, help the policymakers decide what policy changes need to be made. I have made recommendations in that regard already in my original testimony.

19 February 2009

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