5 Barclays and the FSA
Introduction
109. Barclays is subject to prudential and conduct
regulation by the FSA. Under the terms of the Financial Services
Bill it will in future be regulated by the new microprudential
regulator, the Prudential Regulation Authority (PRA), which will
be part of the Bank of England, and the new conduct regulator,
the Financial Conduct Authority (FCA).
110. Barclays' own guidance on corporate governance
states that its directors must act in accordance with the principles
issued by the FSA under the terms of the Financial Services and
Markets Act 2000 and, in particular, must:
2. act with due skill, care and attention;
3. observe proper standards of market conduct;
4. deal with the FSA and with other regulators
in an open and co-operative way and must disclose appropriately
any information of which the FSA would reasonably expect notice;
5. take reasonable steps to ensure that the business
of the firm for which they are responsible is organised so that
it can be controlled effectively;
6. exercise due skill, care and diligence in
managing the business of the firm for which they are responsible,
and
7. take reasonable steps to ensure that the business
of the firm for which they are responsible complies with the relevant
requirements and standards of the regulatory system.[171]
The fourth of these principles is particularly important
in relation to the evidence we have heard about the relationship
between the FSA and Barclays.
111. Mr Diamond raised the bar for the conduct of
Barclays as a whole even higher in the Today Business Lecture
he delivered in 2011. He said:
[...] the single most important thing for banks
and for businesses now is to focus on helping to create jobs and
economic growth; and being able to do that requires us—banks
in particular—to rebuild the trust that has been decimated
by events of the past three years; and that rebuilding trust requires
banks to be better citizens.
I believe in this passionately.
That is why since I became chief executive of
Barclays, at the beginning of this year, the management team has
focused on four strategic priorities—one of which is citizenship.
For me becoming a better citizen means three
things:
First, it's about how we behave, especially with
our customers and clients; second, it's about what we do, and
in particular how we help those customers and clients create jobs
and economic growth; and third, it's about how we contribute to
the communities we serve in many other ways.
I know how angry customers are about issues such
as Payment Protection Insurance. That's why we are working hard
to clear claims as quickly as possible.
We want to put things right. But we know it's
not enough just to apologise. We have to try to make sure that
things like that don't happen again.
In part that comes down to culture.
It's a very personal thing, but throughout my
career—from my time as a teacher, to my time as a banker—I
have seen just how important culture is to successful organisations.
Culture is difficult to define, I think it's
even more difficult to mandate—but for me the evidence of
culture is how people behave when no-one is watching.
Our culture must be one where the interests of
customers and clients are at the very heart of every decision
we make; where we all act with trust and integrity.
But it's not just about how we behave towards
our customers and clients. It's also about how we work together
with our colleagues, because if you have to deliver for customers
with 150,000 colleagues around the world, as we do, you better
be able to work as a team.
As far as I'm concerned, if you can't work well
with your colleagues, with trust and integrity, you can't be on
the team.
Culture truly helps define an organisation.
To the question "can banks be good citizens?"
the answer must be "yes". But I'm mindful of what was
said to me three years ago: "Bob, think about the fact that
no-one will believe you."
We're in the early stages of working to restore
trust.
I'd like to be able to say we're achieving that,
but I know that for you, seeing is believing.
You may not be able to see what's different today,
but over time I very much hope you will see that and more.[172]
Mr Diamond's comments about culture echo the Group
of Thirty report on corporate governance, which said that "Values
and culture drive people to do the right thing even when no one
is looking."[173]
112. We endorse
Mr Diamond's view, which echoes that of the Group of Thirty, that
the culture of an organisation is demonstrated by how people behave
when no-one is watching. In this case, however, the culture of
the Barclays allowed people to do the wrong thing quite openly
over a long period, with the attempted manipulation being shouted
about across the dealing room floor. Barclays was found to have
fallen lamentably below the standards that the former Chief Executive
suggested should be set for his own firm.
Appointment of Bob Diamond as
Barclays chief executive
113. In September 2010 the board of Barclays appointed
Bob Diamond as chief executive of the company to succeed John
Varley. The FSA is required to review such appointments under
its Significant Influence Function (SIF) procedures. The purpose
of the SIF regime is to assess the suitability of an individual's
competence to undertake a role, and to ensure that a robust and
rigorous appointment process is undertaken by the firm concerned.
The FSA approved the application from Barclays for Bob Diamond
to become chief executive, and he took up the post in January
2011.
114. When informing the Chairman of Barclays of this
approval in a letter of 15 September 2010, Hector Sants, then
Chief Executive of the FSA, said that "an integral part of
our approval process is to set out any appropriate issues that
we expect the Board to address in its ongoing governance and oversight
of Bob Diamond in his role as Group CEO". These were as follows:
l. The FSA expects Bob Diamond to continue to
develop a close, open and transparent relationship with his regulators
both here in the UK and globally. It has already been identified
that this will require an increased level of engagement from Bob
Diamond and we have made our expectation known to him. As discussed,
we would also expect Bob to be based in the UK.
2. The succession plan announced in respect of
Barclays Capital has Jerry del Missier and Rich Ricci as Co-Chief
Executives. We will want to seek ongoing assurance that this managerial
structure remains effective. We will also require that there is
appropriate clarity in oversight and responsibilities and that
independent challenge is provided by Bob Diamond in his role as
Group CEO.
3. As you would expect, we place considerable
emphasis on the CEO setting the right culture, risk appetite and
control framework across the entire organisation. It is essential
that a prudent balance is struck, in delivering the group's financial
and strategic objectives and desirable consumer outcomes; alongside
consideration of broader reputational risks for the group.
4. You have identified Bob Diamond's relative
lack of direct retail banking experience notwithstanding his role
on both the Group Executive and Board. We appreciate the depth
of other Executive Committee members' relevant experience but
will look to be satisfied that the required focus on the retail
banking business and consumer outcomes is maintained by him.[174]
115. The Committee asked Bob Diamond about the contents
of this letter:
Chair: But it is true, isn't it—at
least I have been told—that the FSA were concerned about
your appointment as chief executive? They sought assurances from
the board at the time of your appointment that there would be
a change of culture at Barclays. Is that not correct?
Bob Diamond: That's the first I've
ever heard that there was any question about my appointment as
chief executive. I certainly went through, as a chief executive
appointment would, interviews with the Financial Services Authority,
and I got very strong support for my appointment to chief executive.
Chair: And you know nothing of
any written submission by the FSA to the board at that time, setting
out the need for an improvement in the corporate governance of
Barclays, an improvement in the culture, a need to look better
at how you were assessing the risk appetite, and to improve the
control framework? You know nothing about this whatsoever?
Bob Diamond: I knew nothing about
it at the time that I was appointed. Correct. I don't know anything
about it.
Chair: We're talking about September
2010 here.
Chair: And you know nothing at
all about the suggestion that you were asked to provide assurances
that you would challenge your long-term colleagues at BarCap not
to take excessive risks?
Bob Diamond: I don't remember any
specific comments, but I am sure there were discussions with the
regulators during the process of my succession. My memory is more
around whether, having been associated with the investment bank
for a number of years, I would be able to disassociate myself
so, as a group chief executive, I would be able to leave the running
of the investment bank to—at the time—Rich [Ricci]
and Jerry [del Missier].[175]
116. Before his appearance, we took the unusual step
of requesting that Mr Agius send us the correspondence between
the FSA and Barclays which related to the points that we had raised
with Mr Diamond. On the subject of the September 2010 letter,
he wrote to the Chairman of the Committee as follows:
As you will see from the enclosed letter from
the FSA, dated 15 September 2010, the FSA approved the bank's
application for Mr Diamond to be Barclays Group CEO. The FSA made
it clear that they wanted an increased level of engagement from
Mr Diamond with regulators in the UK and globally and that they
would want him to be based in the UK. (This reflects the fact
that he was, at that time, based in New York and that, until then,
he had naturally not had as much engagement with the FSA as would
be expected on his assuming the role of CEO). They also wanted
to ensure that independent challenge to those reporting to him
was provided by Mr. Diamond in his role as Group CEO. Neither
of these desires can fairly be interpreted as expressions of concern
about his appointment.
Furthermore, as at 10 September 2010 the FSA
investigation into Barclays LIBOR submissions was ongoing. The
FSA had been informed by the bank of the trader requests, the
actions of the bank during the financial crisis and the instructions
to submitters after Mr Diamond's conversation with the Bank of
England. These matters were not raised by the FSA at that time
as casting doubt on his suitability as CEO.
There is a paragraph in the letter detailing
the FSA's emphasis on the CEO setting the right culture, risk
appetite and control framework across the organisation. These
are areas of focus that you would expect the FSA to require any
CEO to have in mind—there was no suggestion that these expectations
were particular to Mr Diamond either in the letter or in any discussions
that were had between the Board and the FSA at the time. Most
significantly, there was no request for assurances from the Board
that there should be a change of culture at Barclays.[176]
117. When he gave evidence we asked Marcus Agius,
to whom the letter was addressed, for his views about it and for
his recollections of his exchanges with Mr Diamond on the subject:
Chair: Why don't we take
the 2010 letter first? What did you take from the FSA's
description of what they expected from Bob Diamond as Chief Executive,
that they wanted a "close, open and transparent relationship",
and their specific expression of concern that there be appropriate
oversight of his immediate subordinates, especially del Missier?
Marcus Agius: There are two points
together in that. The first point I believe is a statement they
would have made in respect of any Chief Executive.
Chair: Do you think that is the
sort of thing they put in every letter and they just lift that
as some kind of cut and paste?
Marcus Agius: It would be surprising
if they did not make that statement to any Chief Executive coming
in.
Chair: It is worth reading: "The
FSA expects Bob Diamond to continue to develop"—not
keep—"a close, open and transparent relationship with
his regulators." Do they come out with that line to every
Chief Executive?
Marcus Agius: Bob Diamond prior
to being appointed as Chief Executive of Barclays was the President;
he was not the leading executive in the bank. That was John Varley.
John Varley did have a close relationship with the FSA; Bob
Diamond was at one remove, so for them to expect him to develop
a close relationship coming into the job is exactly what I would
have expected them to have said.
Chair: And on Del Messier and his
team? "We will also require that there is appropriate clarity
in oversight and responsibilities and that independent challenge
is provided by Bob Diamond in his role as Group CEO"
to them.
Marcus Agius: Yes, and that was
a point that we made separately to Bob, selfevidently because
he had grown up—if that is the right expression—in
the investment bank. Jerry Del Messier and Rich Ricci were his
lieutenants. When any person makes the move from one division
into the centre, it is vital that he dissociates himself or becomes
more objective in his treatment of that division than he would
otherwise have been hitherto.[177]
118. Mr Agius also told us that he had approached
the FSA shortly before the end of the appointment process to ensure
that the regulator would have no difficulty with the appointment.
He told us that Mr Sants of the FSA had said that it would not
cause difficulty:
Marcus Agius: [...] As I said before,
conducting the search for a Chief Executive is one of the most
important things a Chairman can do. You need to get it right and
you need to get it right in every respect. As the process was
nearing its conclusion I thought it prudent to go and have a conversation
face to face with Hector Sants just to make sure that there was
going to be no difficulty with the FSA. I called on Hector Sants
and I said, in effect, "It's looking as if we are going to
conclude that Bob Diamond is the person we should appoint
as Chief Executive. I assume that's not going to cause you any
difficulty." His response was, "Not only is that not
going to cause me any difficulty, I can tell you now that, if
it were, I wouldn't be happy with him where he is now in his present
role."
Mr McFadden: So you never,
as Chairman of the company, relayed any of these three or four
specific points in the Hector Sants letter to the Chief Executive?
Marcus Agius: As I said in earlier
exchanges, I believe that at least two of the comments are generic
and would be made of any Chief Executive, and two of them are
specific to Bob, namely: "You need to distance yourself from
your former colleagues," which is an absolutely right thing
to say; and secondly, "You need to improve your knowledge
of the side of the bank that you don't know so much about"—absolutely
right. I would have relayed those to him.
Mr McFadden: It is quite simple:
did you relay these concerns to him?
Marcus Agius: I would have relayed
those things to him.
Mr McFadden: So why does he tell
us: "I knew nothing about it at the time that I was appointed.
I don't know anything about it."
Marcus Agius: I can't speak to
his testimony.
Mr McFadden: Do you accept that
what he told us and what you have just told us are hard to reconcile?
Marcus Agius: I can't speak to
his testimony.
Chair: Well, you could offer a
view on that.
Marcus Agius: I could offer a view
on that, but the challenge was that the FSA had problems with
his appointment and, as I said, from my earlier exchange with
Hector Sants they had anything but.
Mr McFadden: But it is your job
as Chairman to reflect the concerns of the FSA to the prospective
appointee, is it not?
Marcus Agius: Yes. I would challenge
the word "concerns". That letter raises four issues
and they are called "issues". The word "concerns"
I do not believe appears. I am not being pedantic but there is
a difference between "these are issues which I would like
to raise with you" and "concerns", which means
"I'm worried".
Mr McFadden: Did you reflect any
of this to him or not?
Marcus Agius: Yes, I did.
Marcus Agius: Yes, I did.[178]
Mr Agius wrote to the Chairman of the Committee on
25 July 2012, after his appearance before the Committee. In this
letter he stated that "the FSA were not concerned about Mr
Diamond's appointment as chief executive". He also said that
his own answers to the Committee had been able to provide more
clarity and detail than Mr Diamond because he—unlike Mr
Diamond—had had the chance to refresh his memory of correspondence
between the FSA and Barclays, including the September 2010 letter
from Mr Sants.[179]
119. We asked the Chairman of the FSA, Lord Turner,
and the Head of the FSA's Prudential Business Unit, Andrew Bailey,
for their perspective on their exchanges with Barclays on the
subject of Mr Diamond's appointment:
Chair: [...] May I take you straight
away, Lord Turner, to the letter of appointment that was sent
to Barclays? What were you signalling in that letter, and was
it of a generic type—the type you normally send out?
Lord Turner: I think it is a relatively
generic type, in that a letter of about that length would be sent—
Chair: I am not talking about length;
I am talking about substance. Come on, let's go straight to the
point. Do you normally give these sorts of sets of instructions
that are set out in that letter?
Lord Turner: Yes, there is a list
of comments that are specific and issues that have been identified
in the interview process. Obviously, the particular ones here
were of particular importance, and I know that Hector Sants, in
conversation with Marcus Agius, drew attention in addition to
particular issues that he was concerned about.
Chair: Okay; and those concerns
were?
Lord Turner: I know that he explained
the FSA's historical concerns regarding Barclays' risk appetite
and control framework, and that he drew attention to the fact
that Bob Diamond was managing the area of the group where those
concerns were foremost, and that it was therefore particularly
important, in his new role as CEO, that he ensured continued progress
in addressing those concerns.
Chair: So you were expressing concerns
about the way Bob Diamond would approach the job?
Lord Turner: I don't think it was
necessarily specifically about Bob Diamond; it was more that we
had a set of concerns about an attitude to risk and a tendency—as
we subsequently spelt out in the board meeting and in my letter—to
push the limits of approaches to particular issues, and those
had tended to come in particular in the areas where Bob Diamond
was directly involved.[180]
CONCLUSIONS ON MR DIAMOND'S APPOINTMENT
120. Mr Diamond told the Committee that the occasion
of his giving evidence was "the first I've ever heard that
there was any question about my appointment as chief executive",
and that he did not know about the FSA informing the Barclays
Chairman in writing at the time of his appointment. Yet Marcus
Agius told the Committee that he raised with Bob Diamond the issues
referred to in the letter to him from Hector Sants of the FSA.
121. Mr Diamond was also unable to remember "specific
comments" about the need for him to offer challenge to his
former long-term colleagues at Barclays Capital, although he was
"sure that there were discussions with the regulators during
the process of my succession". He said that his memory was
"whether, having been associated with the investment bank
for a number of years, I would be able to disassociate myself
so, as a group chief executive, I would be able to leave the running
of the investment bank" to Mr Ricci and Mr del Missier.
122. We appreciate
that Mr Diamond may not have recently read the letter of September
2010 from Mr Sants to Mr Agius in connection with his appointment
as Chief Executive when he appeared before us, or have had the
discussions about his appointment as chief executive at the front
of his mind. However, we find it difficult to accept Mr Diamond's
evidence with respect to his apparent unawareness of the matters
raised by the FSA with the Chairman of Barclays in connection
with his appointment as chief executive in September 2010. The
evidence of the Chairman of Barclays is that he did raise them
with Mr Diamond, as one would expect. It seems unlikely that they
were not raised with him. If they were appropriately raised, it
seems unlikely that they would be quickly forgotten.
123. Mr Agius said that the matters raised in Mr
Sants's letter were described by the FSA as "issues",
rather than "concerns".[181]
He also believed that "at least two" of the four matters
raised were "generic and would be made of any Chief Executive".[182]
The FSA says, however, that the issues in the letter constituted
"a list of comments that are specific and issues that were
identified in the interview process. Obviously, the particular
ones here were of particular importance". The FSA told us
that the Mr Sants also raised with Mr Agius in conversation "the
particular issues that he was concerned about".[183]
Mr Agius went to see Mr Sants about the appointment "to make
sure that there was going to be no difficulty with the FSA",
but went away reassured.[184]
Lord Turner told us that he did not think that the FSA's concern
"was necessarily specifically about Bob Diamond: it was more
that we had a set of concerns about an attitude to risk and a
tendency—as we subsequently spelt out in the board meeting
and in my letter—to push the limits of approaches to particular
issues, and those had tended to come in particular in the areas
where Bob Diamond was directly involved".[185]
124. The FSA expressed
concerns in connection with the appointment of Bob Diamond as
chief executive to Barclays. The concerns were about an attitude
to risk and a tendency to "push the limits" in areas
where Mr Diamond was directly involved. The concerns were not,
however, serious enough to prevent the regulator from approving
his appointment. Barclays appears to have regarded the points
raised by Mr Sants as "issues" rather than "concerns".
On the basis of the evidence it is unclear whether Barclays 'got
the message'. To avoid the scope for misunderstanding in future,
we recommend that the regulator set out clearly for firms any
concerns it has about a senior appointment, listing any actions
that it requires. It should ensure that a response is obtained
in writing from the firm, undertaking to meet each of the requirements.
Failure by the firm to show evidence that the regulatory messages
have been seen and acted upon should be considered a serious matter.
125. The FSA's concerns about Barclays did not go
away. On the contrary, they were to be raised by the regulator
more forcefully with the Barclays board within eighteen months,
little more than a year after Mr Diamond became chief executive.
Mr Diamond's evidence on the
FSA letter of February 2012 and subsequent communications between
Lord Turner and Marcus Agius
126. On 9 February 2012 Andrew Bailey, head of the
FSA's Prudential Business Unit, attended a Barclays board meeting.
Such visits to boards are customary annual events for firms such
as Barclays.[186] Lord
Turner subsequently met Marcus Agius and in April followed that
meeting with a letter to the Barclays Chairman, to which Mr Agius
responded.[187] Our
witnesses had different recollections of these exchanges between
the regulator and Barclays. While they were not concerned specifically
with the LIBOR issue, they reflected both the culture within Barclays
and the state of the relationship the FSA had with Barclays at
the time. They also had implications for the subsequent resignation
of Barclays chief executive Bob Diamond.
127. The Committee questioned Mr Diamond about the
February 2012 board meeting, which he attended, and the subsequent
letter from the FSA to Marcus Agius. This was before the Committee
had seen either the minutes of the board meeting or the exchange
of correspondence in question:
Chair: Is it true that, in February
this year, the FSA came to the board and expressed their concerns?
Bob Diamond: I think it's every
year, Chairman, in that February meeting that the FSA comes, so—
Bob Diamond: The context of the
discussion when it got to controls, which I think is what you
are asking about—I should call it the control environment—was
that the focus and the tone at the top was something that they
were specifically happy with. In particular, they talked to the
board about Chris and I and our relations with the regulators,
how we dealt with any situation that came up. I am thinking of
PPI—
Chair: Isn't it a bit more specific
than that, Mr Diamond? Didn't they tell you that trust had broken
down between the FSA and Barclays?
Bob Diamond: I don't recall that
in the February meeting.
Chair: Didn't they tell you that
they no longer have confidence in your senior executive management
team?
Chair: And wasn't all this followed
up with a letter?
Bob Diamond: There was a discussion
that, as it got down into the organisation, they felt that there
were some cultural issues—that people sometimes push back;
that some of the push-back wasn't always filtered up to the top—so
there was an overall discussion on culture. We took some of this
as, "This is the annual review from the FSA", and—
Chair: This is the sort of thing
they say every year?
Bob Diamond: No, I didn't mean
it that way at all, sir—apologies—but it was part
of an annual review, so it is always going to have some things
that they are going to be critical of and that we can do better.
But they were specifically pleased, and said so to the board,
with the tone at the top, referring in particular to Chris Lucas
and myself and our colleagues on the executive committee.
Chair: Isn't it true that there
were challenges from them about your stress tests, your accounting
practices, the handling of the Protium deal? Of course, we have
subsequently had the debt buy-back scheme, the interest rates
swaps problems and of course now LIBOR. Isn't this all part of
a pattern?
Bob Diamond: I don't remember anything—I
didn't brief before this on the February meeting, so I don't mean
to skip over anything, if I am. There was a conversation, I think.
There had been a series of things, such as Protium, which became
quite an issue between the FSA and ourselves. Without going into
the versions of that transaction, because it was a transaction
that was approved by the FSA, I think, to be fair—I wasn't
the chief executive at the time, so I'm probably speculating a
little bit—it was a transaction that created more debate
between the FSA and Barclays than probably anyone anticipated
when the transaction was done. I remember Protium coming up during
that meeting in the context of, "Let's not have these types
of situations."[188]
BARCLAYS BOARD MEETING, 9 FEBRUARY
2012
128. The minutes of the 9 February 2012 Barclays
board meeting say the following about what was discussed with
Andrew Bailey and subsequently:
There was a perception in the market and amongst
some regulators that Barclays was not all that it should be. Barclays
is seen as relatively aggressive sometimes and Protium would be
an example of being on the wrong side of the line. Mr Bailey emphasised
that the relationship with senior management was good. However,
at lower levels in the organisation there was a desire to engineer
solutions rather than find real answers to regulatory issues.
An improvement in attitudes at lower levels would help the relationship
with the FSA. Mr Bailey also noted that it was important that
external attitudes to Barclays improved.
The Chairman thanked Mr Bailey and his team for
presenting these issues to the board and noted that all the issues
raised had occupied a lot of the board's time. Significant effort
has been directed at improving the relationship with the FSA.
There was a debate on the board's approach to Protium [redaction].
It was noted that the FSA received significant pressure from the
Financial Policy Committee (FPC) in relation to Barclays. Barclays
was continuing to improve disclosures but seems to receive little
credit for that.
The board discussed the results of the EBA stress
test. Mr Bailey noted that traction on the issues raised by the
initial results was only obtained when Bob Diamond and Chris Lucas
became involved. [Redaction]
After Mr Bailey and FSA colleagues left the meeting,
the board minutes record:
Barclays was generally perceived as being too
aggressive for a number of historical reasons. The senior leadership
team took responsibility for the interactions with the FSA at
a more junior level and the frustration that that was causing
for the FSA.
The board discussed the need to get the tone
from the top right so that all interactions with regulators are
appropriate at all levels. The issue could and would be addressed.
The Group needed to be consistently on the right side of the line
to rid itself of the perception of being too aggressive. Resolving
this was critical to the future of the Group. [189]
In a letter to the Chairman of the Committee of 25
July, after our evidence sessions, Mr Agius said that he had "taken
the opportunity to revisit recollections of that February board
meeting with fellow Non Executive Directors, and all, to whom
I have spoken, recall it precisely as the minutes record it".[190]
LORD TURNER'S SUBSEQUENT MEETING
WITH, AND LETTER TO, MARCUS AGIUS
129. Lord Turner subsequently met Marcus Agius to
reinforce the message to the board that Andrew Bailey had delivered.
That meeting was followed up by a letter from Lord Turner to which
Mr Agius responded. Lord Turner told us:
Well, after Andrew had been to the board, and
before it, in the regular briefing sessions that I would have
with Andrew and Hector, we had, on a number of occasions, discussed
this pattern of behaviour from Barclays, and we had discussed
the fact that it would be good for Andrew to talk about it at
the board; but subsequently we decided we should reinforce that
by a meeting and a letter from myself.[191]
130. The letter from Lord Turner and the reply from
Marcus Agius are set out in full in the Annex to this Report.
Lord Turner's letter included the following messages to Barclays:
As promised, this letter follows up our recent
meeting and sets out FSA concerns relating to aspects of Barclays'
approach to regulatory and other issues.
Obviously where we have specific areas of concern
which merit it, our Supervisory Team will directly make those
concerns known at the appropriate level, and require any appropriate
action in response. The purpose of my meeting with you was therefore
not to focus on any one specific issue which requires remedial
action. Rather I wished to bring to your attention our concerns
about the cumulative impression created by a pattern of behaviour
over the last few years, in which Barclays often seems to be seeking
to gain advantage through the use of complex structures, or through
arguing for regulatory approaches which are at the aggressive
end of interpretation of the relevant rules and regulations. Andrew
Bailey also expressed these concerns at your Board meeting on
9th February.
Clearly these examples vary in both currency
and importance. And it is of course acceptable for a bank to argue
for a favourable approach on any one specific issue, even if the
regulator does not immediately agree. But the cumulative effect
of the examples set out above has been to leave us with an impression
that Barclays has a tendency continually to seek advantage from
complex structures or favourable regulatory interpretations. These
concerns are sufficiently great that I felt it was appropriate
to communicate them directly to you, and to urge you and the Board
to encourage a tone of full co-operation and transparency between
all levels of your Executive and the FSA.
I know from our conversation that you take these
issues seriously.[192]
131. When Mr Agius wrote back to Lord Turner he said:
It is a matter of regret for us that you have
the concerns outlined in your letter. Barclays has invested significant
effort and time in building and improving its relationship with
the FSA. It is very important to us to have a strong, open, cooperative
and transparent relationship with the FSA and with all of our
regulators globally. The Board and I took note of Andrew Bailey's
comments in our February meeting and, while he specifically excluded
Bob Diamond and Chris Lucas from his comments, it was clear that
"tone from the top" is one of the FSA's concerns. Our
objective is and has always been to have a strong and mutually
beneficial relationship with the FSA and you have my commitment
that we will work harder in the future to procure this outcome.[193]
ASSESSMENT OF BOB DIAMOND'S EVIDENCE
TO THE COMMITTEE
"Tone from the top"
132. We asked Mr Diamond what was said when the FSA
came to the February board meeting. He said:
The context of the discussion when it got to
controls, which I think is what you are asking about—I should
call it the control environment—was that the focus and the
tone at the top was something that they were specifically happy
with. In particular, they talked to the board about Chris [Lucas]
and I and our relations with the regulators, how we dealt with
any situation that came up.[194]
The minutes of the board meeting record that "The
board discussed the results of the EBA stress test. Mr Bailey
noted that traction on the issues raised by the initial results
was only obtained when Bob Diamond and Chris Lucas became involved."
Mr Agius, referring to his own letter to Lord Turner which said
that the "it was clear that 'tone from the top' is one of
the FSA's concerns, told us that by this "I meant, in the
context of what we were told by the FSA at the Board meeting,
that those at the top, including Mr Diamond, needed to ensure
that those at lower levels were not acting in the way noted by
the FSA".[195]
133. Lord Turner and Mr Bailey of the FSA responded
to the Committee's questions on these points as follows:
Chair: Did you say to them that
the tone at the top was of concern?
Andrew Bailey: Yes, and I think
they have now provided you with a summary of the board meeting.
I've only seen that in the last few days, and the interesting
thing for me was to see the summary of the discussion after I
left. I gave, as I tend to do, a reasonably short presentation
in which I highlight usually only three or four things that are
material to us, and members of the board then ask me questions;
and then I left. You will have seen it but to recap, it says that
the board discussed "the need to get the tone from the top
right".
Chair: And you don't distinguish
between tone at the top and from the top—they mean the same
thing, do they, Lord Turner?
Lord Turner: I would have thought
they are pretty much the same. I don't know whether Andrew intended
any distinction, but I can't see a particular distinction there.
Andrew Bailey: It finishes by saying
that resolving this was "critical to the future of the group."
Let me make one point that I think has come up in a number of
your hearings. I did make the very clear point in my presentation
that while we had a whole series of issues with the firm, I did
not have evidence that Bob Diamond personally was involved. This
was about the behaviour of the firm, of which he was obviously
the chief executive.
Chair: And therefore responsible.
Andrew Bailey: Yes. And I was very
careful about this, because had I gone into the board and levelled
an allegation about Bob Diamond personally, then I think the board
would have reacted very negatively. They would have challenged
me on the evidence, and I did not have the evidence. So I was
very careful to make that distinction.[196]
Mr Bailey added later in our evidence session with
him in response to questioning:
Chair: Perhaps we could turn to
the evidence that Mr Diamond gave to us. He said that the "context
of the discussion when it got to controls … I should call
it the control environment—was that the focus and the tone
at the top was something that they"—you, that is—"were
specifically happy with." This is in answer to question 15.
Andrew Bailey: Yes. I think this
comes back to the point I made a few minutes ago, which is, I
was very careful—I didn't use the term "tone from the
top"; that's the term that Barclays have used—to make
this distinction between the behaviour that I could observe, the
direct behaviour that I could observe of Bob Diamond, and the
behaviour of the firm.[197]
Jesse Norman: Okay. What were your
specific concerns, Mr Bailey, about Mr Diamond?
Andrew Bailey: My specific concern
was exactly this point about the tone from the top. Although I
could not find the evidence that he personally had his hands on
these things, you really could not escape the fact that the culture
of this institution was coming from the top. Frankly although,
interestingly, the relationship with Bob Diamond was not antagonistic,
this was not something where he would come in and shout at me—or
indeed, I think Hector Sants—and he would often say, "I
hear what you are saying", I could not see a pattern where
that was leading to the action that we needed.[198]
134. Mr Bailey
does not recall saying that he was "specifically happy"
about the tone at the top—in fact he says that the phrase
"tone at the top" is Barclays' own. Mr Diamond, however,
told us that the regulator was specifically pleased with his relationship
with the FSA. The FSA told us that it had concerns about its relationship
with the firm, but was not able to point to evidence directly
linking those concerns to the behaviour of Mr Diamond. However,
as Chief Executive he was responsible for the state of his firm's
relationship with the regulator, and for demonstrating to the
regulator that the necessary action was being taken to remedy
shortcomings. The fact that the Barclays board discussed the need
to get the "tone from the top" right, and how important
this was to Barclays, after Mr Bailey left the board meeting,
suggests that the Barclays board did appreciate his message. This
appreciation was lacking in Mr Diamond's evidence. We do not accept
Mr Diamond's evidence on this point. It stands in contrast to
the evidence of Mr Bailey and the minutes of the discussion at
the board meeting. It seems certain that Mr Bailey did express
concern to the board. It is possible that Mr Diamond did not appreciate
the significance of what was said. If so, this lack of appreciation
could be considered part of the problem which the FSA was seeking
to address.
Trust or distrust between the FSA and Barclays?
135. Mr Diamond told us that he did not recall the
FSA saying to the Barclays board that trust had broken down between
the FSA and the company.[199]
Mr Agius told us that the statement that "trust had broken
down between the FSA and Barclays" was not made by FSA officials
at the board meeting.[200]
Mr Bailey, however, when asked whether he had said at that meeting
whether that he felt that trust had broken down between the regulator
and Barclays, told us that:
I did, certainly in respect of at least one of
the issues that I used to illustrate it, to say that it had led
to—I think I used the word "distrust".[201]
The severity of the issues discussed
136. Mr Diamond told the Committee that at the board
meeting with the FSA:
Bob Diamond: [...]We took some
of this as, "This is the annual review from the FSA",
and—
Chair: This is the sort of thing
they say every year?
Bob Diamond: No, I didn't mean
it that way at all, sir—apologies—but it was part
of an annual review, so it is always going to have some things
that they are going to be critical of and that we can do better.[202]
137. We asked Mr Bailey for his views on this part
of Mr Diamond's evidence:
Chair: Could they have mistaken
all these exchanges to be what goes on in any annual review?
Andrew Bailey: I don't think so,
for two reasons. First of all, I can say that in all the ones
I've done in the last about 15 months, this is the only time that
we've followed it up with a letter from Adair, and a meeting with
the chairman. Secondly, when I saw, as I quoted earlier, the minute
of the board meeting, it left me, I think, convinced that there
was no question that they understood the point.
Chair: So when Mr Diamond said
to us "it was part of an annual review, so it is always going
to have some things that they are going to be critical of and
that we can do better"—that was his reply to me on
this point—would that have struck you as somewhat misleading?
Andrew Bailey: I don't think that
in any sense conveys the severity of the issue, and I think that's
reflected in the board minutes. I don't think that captures the
severity of the point we were making.[203]
138. The impression
that Mr Diamond gave to the Committee as to the significance of
the FSA's message to the 9 February 2012 board meeting sits uneasily
with Barclays' own board minutes. Mr Bailey of the FSA has also
told us that in his view the evidence from Mr Diamond to the Committee
failed to convey the severity of the matters under discussion.
The April 2012 letter from Lord Turner
139. Lord Turner expressed surprise that Mr Diamond
had not mentioned Lord Turner's letter of 10 April 2012 to the
Committee when giving evidence:
Chair: You've read the evidence
overall. Do both of you consider it to be a reasonable and fair
assessment of their relationship with you at this time, or one
that left gaps which could have led Parliament to be misled?
Lord Turner: The bit of the evidence
which I was most surprised at was the bit that you have just focused
on, where you asked, was there a letter and was this an issue
of importance, because, let us be absolutely clear: Mr Diamond
knew that there had been that letter. Indeed, at a subsequent
meeting, which was on another subject—with myself, Hector
Sants and Andrew, with the chairman, Chris Lucas, the finance
director, and Bob Diamond—at the end of it, he said, "We
would like to talk about the letter" and he said, "I
am extremely concerned to receive this letter and we take very
seriously what you said." And he said how distressed they
were to have received a letter.
Lord Turner: So that was the bit.
Quite a bit of the evidence—people sometimes do mis-talk
under the pressure of your questioning. But that was the bit that,
frankly, surprised me.
Chair: I have never noticed you
do that, Lord Turner. But in any case, you are basically saying
that we were not left with a full and fair impression of what
went on in those exchanges as a consequence. Is that correct?
Andrew Bailey: Yes, it's a highly
selective choice, in my view.
Chair: Yes, and, taken together,
could be construed as misleading, which seems to have some similarity—does
it not?—with the accumulation of concerns at the regulatory
level which you find of concern, where any individual one might
not be. Is that fair?
Andrew Bailey: Well, you can see
a sort of similar strain of pattern of behaviour, yes.[204]
140. We raised the letter from Lord Turner with Mr
Agius. He told us that the letter was discussed by the board of
Barclays:
Chair: You remember the letter
very well, don't you?
Chair: And it made an impact on
you.
Marcus Agius: It did.[205]
Mr Ruffley: [...] when this FSA
letter on 10 April was received by you—the "Dear Marcus"
letter—what discussions did you have with Mr Diamond thereafter?
What day and how long did it last?
Marcus Agius: I cannot remember
what day it was, but I remember discussing it with him and with
other relevant officials inside Barclays.
Mr Ruffley: And what did Mr Diamond
say when you informed him of it? No doubt you gave him a copy
of this letter, didn't you?
Marcus Agius: I would certainly
have given him a copy of this letter.
Mr Ruffley: You would or you did?
Marcus Agius: I would have.[206]
141. Mr Diamond wrote to the Committee on 10 July
following his appearance before us, referring to the meeting with
Mr Agius:
Having watched the Committee's session today,
I was dismayed that you and some of your fellow Committee members
appear to have suggested that I was less than candid with the
Committee last week. Any such suggestion would be totally unfair
and unfounded.
The focus of your concern appears to relate to
correspondence between Messrs. Turner and Agius in April 2012.
The questions asked of me, however, concerned the period of my
promotion in September 2010 and the board meeting I attended in
February 2012. As the letters of April 2012 make clear, those
letters followed an April meeting between Messrs. Turner and Agius
which I did not attend. I was not asked about the April 2012 meeting
nor was I asked about nor shown follow up letters to that April
meeting at our session.[207]
142. Mr Agius wrote to the Committee on 25 July and
said in respect of Mr Diamond's evidence on the letter from Lord
Turner:
You also questioned Mr Diamond about whether
the FSA's comments at the February Board meeting were followed
up with a letter. It appeared from the questioning during Mr Diamond's
appearance that there was a misunderstanding about the nature
of that letter. In particular, the questions put to Mr Diamond
implied that the letter followed the Board meeting directly. As
you now know, the letter in question was sent by Lord Turner to
me on 10 April 2012 to follow up on a meeting between Lord Turner
and myself in March 2012—separate from, and two months after,
the Board meeting.
Based on the information given to Mr Diamond
in the question asked, he explained his position clearly in his
response to the Committee: "I don't remember anything—I
didn't brief before this on the February meeting, so I don't mean
to skip over anything, if I am. There was a conversation, I think.
There had been a series of things, such as Protium, which became
quite an issue between the FSA and ourselves."[208]
143. Lord Turner's
letter to Mr Agius was described by the former as a follow up
to the meeting between them which was itself a follow up to the
February 2012 Barclays board, meeting at which Mr Bailey spoke.
The fact that it was not described to Mr Diamond as a follow up
letter to the April meeting between Lord Turner and Mr Agius is
scarcely relevant. What matters is that it was part of a process
of following up a board meeting which he attended and about which
he was prepared to tell us virtually nothing in evidence.[209]
We accept Mr Bailey's conclusion that Mr Diamond's evidence on
this point was "highly selective". We also note that
Lord Turner was "surprised" at Mr Diamond's apparent
ignorance of the letter. Our conclusion is that Mr Diamond's evidence
was unforthcoming and highly selective on this point.
CONCLUSION ON BOB DIAMOND'S EVIDENCE
144. We have considered
the evidence of Mr Diamond and other witnesses on Barclays' relationship
with the FSA. His evidence denying that the FSA felt that trust
had broken down between itself and Barclays is inconsistent with
that of Mr Bailey. We are unable to accept Mr Diamond's assessment
of the seriousness of the matters discussed at the February 2012
board meeting: in the light of all the circumstances, it seems
to us inconceivable that Mr Diamond could have believed that the
FSA was satisfied with the tone at the top of Barclays when the
evidence from the FSA is that this was not the case. He did not
mention the important and trenchant letter of Lord Turner to Mr
Agius, setting out major concerns of the FSA, when he had ample
opportunity to do so. It is very unlikely that he was unaware
of that letter, or its significance as a follow up to the firm
messages given to the Barclays board by Mr Bailey in February
2012.Having heard the evidence of Mr Diamond and the FSA on these
points, the Committee prefers the evidence of the FSA. Select
committees are entitled to expect candour and frankness from witnesses
before them. Mr Diamond's evidence, in the Committee's view, fell
well short of the standard that Parliament expects.
Relations between Barclays and
the FSA
THE FEBRUARY BOARD MEETING
145. Mr Agius was asked by the Committee about the
board meeting that Andrew Bailey of the FSA attended in February
2012 and the subsequent exchange of letters between Lord Turner
and Mr Agius. He said that:
Every year when the FSA comes to see us, they
do not, as you would expect, say, "Everything that you are
doing is absolutely perfect." They seek to find those areas
where they think further attention needs to be paid, and that
is what they tend to review with us. That is what tends to happen.[210]
When they come and do our annual reviews, what
they always do is say, "These are the areas where we think
you are doing well, and these are the areas where we think you
need to try harder," like any other annual review. I do not
mean to trivialise them, but that is the essence of what happens.
When the FSA visits us and they say, "Here are areas where
we would like to see progress," we take that as being part
of the normal course of the interchange.[211]
146. The impression he was trying to give, however,
that the February 2012 board meeting was part of the normal course
of interaction with the regulator, is not borne out by the evidence
we heard from Mr Bailey himself. Mr Bailey also noted that the
Barclays board minutes had shown that the board had grasped the
seriousness of what he had told them:
Chair: Mr Bailey, may I turn to
your appearance at the board? What led you to go to the board
in February 2012 this year?
Andrew Bailey: I aim to go to the
boards of all major institutions around once a year, so in that
sense it was not a special event. What led me to raise the points
that I did, and particularly the point concerning our view on
the behaviour of the firm, was—this was set out subsequently
in a letter to Marcus Agius—a series of events, quite a
few of which had occurred before I moved to the FSA, and some
of which occurred subsequently. Those events led me to be concerned
about the behaviour of the firm in relation to us, and there was
a repeated pattern of such behaviour that was not showing signs
of changing.[212]
Chair: [...] Did you make all the
points that were set out in that letter much later?
Andrew Bailey: I think I made a
number of those, and I think the letter then actually gives a
complete set of the issues.
Chair: I'd be reluctant to ask
too many leading questions, but let's just try a few. Would you
say that it would be an unreasonable summary of the letter that
you felt Barclays were trying it on?
Andrew Bailey: Yes. The sort of
words that we would frequently use were that there was a sort
of culture of gaming—gaming us.
Chair: And that the regulator had
had enough.
Chair: And you were reading the
Riot Act at that meeting in February.
Andrew Bailey: Yes. Bear in mind,
this was very much consistent with the changes that we want to
make in the style of regulation—that is judgment-based—and
I always say to the boards when I go to see them, we are here
only to highlight the big issues of concern in our judgment.
Chair: And you were saying to them,
basically, "This is no way to run a bank".
Andrew Bailey: That it had to change.
Chair: You would agree with that
phrase.
Andrew Bailey: Yes, I would.[213]
Chair: Could they have mistaken
all these exchanges to be what goes on in any annual review?
Andrew Bailey: I don't think so,
for two reasons. First of all, I can say that in all the ones
I've done in the last about 15 months, this is the only time that
we've followed it up with a letter from Adair, and a meeting with
the chairman. Secondly, when I saw, as I quoted earlier, the minute
of the board meeting, it left me, I think, convinced that there
was no question that they understood the point.[214]
Jesse Norman: The FSA followed
up your appearance on 9 February with a letter which was sent
to Marcus Agius on the 10th. Now, you've suggested to us that
just Mr Agius's characterisation of the relationship as, as it
were, normal cut and thrust, or some concerns about Jerry at the
top, was actually misleading. Is that right, Mr Bailey?
Andrew Bailey: Well, I think that,
as the board minutes suggest, this is a wholly different magnitude
of issue to the sort of things—we normally discuss big issues,
but this was a wholly different magnitude.
Jesse Norman: Right. It's a different
scale.
Jesse Norman: You're going in there
and you're giving them a bollocking.
Jesse Norman: Because a whole series
of things have gone wrong and you're angry about it.
Andrew Bailey: I'm angry about
it and I'm also very clear that we had to grasp this nettle. This
pattern of behaviour had been going on. You look at the cases
in Adair's letter to Marcus Agius: they go back over a period
of time. We had to grasp this issue.[215]
Mr Bailey also said that he had "never had a
conversation of this type with a board" and that Barclays
was an "outlier" compared with other institutions.[216]
EXCHANGES WITH LORD TURNER
147. The FSA followed up Mr Bailey's comments to
the board with a meeting between Lord Turner and Mr Agius and
the subsequent letter of 10 April. This, Lord Turner said, was
in order to "reinforce" Mr Bailey's visit to the board.[217]
He would expect the bank to take such a meeting "very seriously"
and for the chairman to talk to the chief executive about it.[218]
His letter of 10 April was the only such letter he had sent in
his time as Chairman of the FSA.[219]
148. We asked Mr Agius for his interpretation of
his meeting with Lord Turner and the letter to him from Lord Turner
of 10 April. He told us that:
When any bank deals with its regulator, it has
to deal with very complex matters. It is not like a speed cop
catching you for going more than 30mph in a 30mph speed limit.
Very often the points that are raised and the issues that are
discussed are complex and capable of interpretation and are capable
of debate. We have historically chosen to debate with our regulators
whenever we thought it appropriate in order to ensure that whatever
regulatory decision arrived at was the appropriate one in all
the circumstances.[220]
[...] we invariably seek to try to achieve the
best regulatory outcome with our regulators by engaging them,
not with a view to doing anything we should not do but just trying
to manage the process. Very often we say, "Fine, we understand
what you are trying to do and we are happy with that." Sometimes
they say, "No, I see your point," and a different outcome
is reached. What that letter is saying is that we overdid it.[221]
I think that Lord Turner was interviewing me
as Chairman of Barclays, as he should have done, to say, "Look,
when we deal with you, you try too hard." He does not say
that anything we are trying to do is improper or anything we are
trying to do is incorrect, but that in trying to seek the best
outcome for the bank we are testing the goodwill of his staff,
and I understand that.[222]
In his letter to the Chairman in advance of his appearance
before the Committee Mr Agius referred to his reply to Lord Turner:
Robust expressions of particular concerns by
a regulator in relation to regulated institutions take place in
the normal course and do not of themselves merit the conclusion
that there has been a breakdown of trust. You will see, however,
from my reply, that Barclays accepted the importance of Lord Turner's
comments and undertook to act upon them.
Mr Agius denied trying to play down the letter from
Lord Turner, and told us that it was "a very serious letter".[223]
Mr Agius did not accept that relations with the FSA were "desperate",
but conceded that they could be described as "strained".[224]
149. Mr Agius attempted to draw a distinction between
the message received from Mr Bailey at the board meeting and the
exchanges with Lord Turner. Mr Agius said that "the letter
from [Lord] Turner was separate".[225]
He told us that "when Mr Bailey came to see us, he said the
tone at the top was satisfactory". His response to Lord Turner's
letter, however, said that "it was clear that the 'tone from
the top' is one of the FSA's concerns".[226]
The difference was because "that is a different exchange
from the visit to the board, and it was as a result of my interview
with Lord Turner and his subsequent letter".[227]
He thought that the concern about the tone from the top was "a
forward-looking statement".[228]
Mr Bailey, however, told us that his concern in February was specifically
about the tone from the top: "the culture of this organisation
was coming from the top".[229]
A NEW APPROACH BY THE FSA?
150. In 2009 Lord Turner said:
[...] we are imposing at firm level a far more
assertive style of supervision, no longer willing to assume that
market discipline and incentives will always lead bank management
to make optimal decisions; more willing to make judgements on
whether business models and business strategies create undue risks
for the whole financial system.[230]
The Governor of the Bank of England in his Mansion
House speech in 2011 assessed the new system of financial regulation:
The style of regulation will also change with
the PRA. Process—more reporting, more regulators, more committees—does
not lead to a safer banking system. [...] I believe that we can
operate prudential supervision at lower cost than hitherto by
reducing the burden of routine data collection and focussing on
the major risks to the system. It is vital that we collect and
process data only where the supervisors have a need to know. Targeted
and focussed regulation, allowing senior supervisors to exercise
their judgement, does not require ever-increasing resources. For
example, we will reduce the number of people subject to the intensive
regulatory interview process before appointment by limiting such
interviews to the most senior people.[231]
Lord Turner and Andrew Bailey told us that their
dealings with Barclays represented a different approach to regulation
on the part of the FSA from that of the recent past:
Jesse Norman: In your view, was
the FSA tough enough before you came in, Mr Bailey?
Andrew Bailey: You have to put
this in the context of the change in approach to supervision over
the last year since the crisis. This is exactly where we are taking
it to now. This is the most dramatic intervention but it is consistent
with—Adair and Hector were very much on side with this—what
we are doing with supervision, to respond to the identified problems
of the past.
Lord Turner: I think the honest
answer, Mr Norman, is that we would never have done this back
in '07 and '08. We have been on a journey towards a tougher style
of supervision in all sorts of ways. That has a tougher style
in relation to issues of substance like capital liquidity asset
quality. But more recently and, indeed, Hector Sants signalled
that in 2010 when he made a speech about culture, we have been
saying, "Do we have to reinforce those tougher messages on
the specific quantitative issues of capital liquidity asset quality
with tougher messages on culture as well? It is the accumulation
of a change in the style of FSA supervision which really began
six months before I joined the FSA. I joined in September 2008
but a change had been launched initially in about April 2008 but
it takes time to drive those changes through.[232]
VIEW OF THE BANK OF ENGLAND
151. Lord Turner copied his letter of 10 April to
the Governor of the Bank of England, Sir Mervyn King.[233]
Sir Mervyn told us that "Adair Turner and Andrew Bailey had
shared with me for many months their concerns about Barclays.
If you read Lord Turner's letter of April to Mr Agius it could
hardly be clearer. It is a very powerful and strong letter".[234]
He also said that "I think that all of us involved have built
up a genuine concern that it is possible to sail close to the
wind once; you can sail close to the wind twice—maybe even
three times—but when it gets to four or five times and becomes
a regular pattern of behaviour, you have to ask questions about
the navigational skills of the captain on the bridge. That is
what Lord Turner and Andrew Bailey made very clear to the board".[235]
He believed, however, that the Barclays board "was deeply
reluctant to face up to the concerns that Lord Turner and Andrew
Bailey suggested. I think it thought that it might be able to
tough it out. It was not convinced that the regulators had lost
confidence". The senior non-executive director told Sir Mervyn
that only at their meeting on 2 July had he been fully aware of
the loss of confidence of the regulators in the senior management.[236]
FSA GOVERNANCE REVIEW
152. Mr Agius told us that the FSA had recently undertaken
a "governance review" of Barclays and that Barclays
had received a letter saying that its governance was deemed "satisfactory".
He added that the official conducting the review had said told
him that she had ranked Barclays "best in class".[237]
Mr Bailey told us that the governance review was part of the FSA's
recently-introduced "core prudential programme" which
focused on what he called "form of governance", and
in particular the board and its committees. He contrasted this
with his concerns about the substance of Barclays' governance,
which was "not working".[238]
153. Barclays subsequently sent us the correspondence
between the FSA and Mr Agius following this governance review.
The FSA told Barclays that:
[...] both the design and the effectiveness of
the Board and Board Committees are satisfactory [...] Board members
have a sound understanding of the role of the Board in setting
the tone from the top [...] our conclusion was that the Board
acts as a cohesive group and we saw no evidence of individuals
trying to dominate the Board [...] In our assessment, the current
Board is an effective counterweight and challenge to executive
management.[239]
The FSA did raise "a handful of vulnerabilities",
covering: "effective governance over a global investment
bank"; "some growing tensions in the way that the Board
process is managed"; "reliance on key individuals";
and "decision-making under pressure". The last point
was in relation to the impairment and buy-back of Protium assets.
The FSA was concerned that "the strengths we have seen throughout
our Governance Review have the potential to turn into weaknesses
when certain pressures are brought to bear". The FSA thought
that specialism on the board meant that NEDs looked to one NED
for comfort, who in turn worked closely with the finance director.
It questioned how much challenge was provided by the board and
its committees to the Executive on this matter.[240]
154. Mr Agius responded to the FSA on these points
on 10 February, the day after the board meeting that Mr Bailey
attended. He told the FSA that Barclays was determined "to
build a world class corporate governance system that delivers
outstanding results for our stakeholders. I am pleased that you
have found the system to be both designed and operating effectively.
We shall, of course, consider very carefully the issues raised
in your report and how to address them". He disagreed with
the FSA on Protium: "the governance over this issue was extremely
thorough ... effective challenge was provided by the Board and
its Committees and I do not accept that the decision-making on
impairment was made primarily between two people".[241]
155. The FSA's report into the failure of the Royal
Bank of Scotland raised questions about the former chief executive
of that bank's capability, style and impact on the business. These
included "whether his management style might have discouraged
robust and effective challenge from the Board and senior management
team", although it said that, based on interviews with RBS
board members, the picture that emerged "was clearly more
complex than the one-dimensional 'dominant CEO' sometimes suggested
in the media".[242]
As the FSA said, a dominant CEO "can result in a lack of
effective challenge by the board and senior managers to the CEO's
proposals, resulting in risks being overlooked and strategic mistakes
being made".[243]
In the case of Barclays, the FSA raised issues at the time of
Mr Diamond's appointment and subsequently expressed concerns about
the leadership of the bank to the board. As described in the next
chapter, the regulators lost faith in the Barclays Chief Executive.
The Parliamentary Commission
on Banking Standards' examination of the corporate governance
of systemically important financial institutions should consider
how to mitigate the risk that the leadership style of a chief
executive may permit a lack of effective challenge or to the firm
committing strategic mistakes.
APPOINTMENT OF JERRY DEL MISSIER
AS CHIEF OPERATING OFFICER
156. On 22 June, only a week before the FSA published
its Final Notice, Barclays appointed Jerry del Missier as its
Chief Operating Officer. Mr del Missier was responsible for passing
his instruction in October 2008 that Barclays should make LIBOR
submissions that were 'within the pack' of other banks (see section
4 of this Report). Given this involvement, we asked Mr Agius about
the decision. He replied:
We debated that very carefully, as you would
imagine. The factors that were in our mind were, first of all,
whether it was a genuine misunderstanding or not, and secondly,
because it was even better for them to ask whether the FSA concluded
the same thing. The FSA specifically said there was no issue to
raise in respect of Jerry del Missier's behaviour.[244]
When asked about the FSA's role, Lord Turner told
us:
It is important to realise that there was no
formal approval process required for Mr del Missier, because the
nature of the job that he was moving from to did not involve a
change in status in terms of what he had already been approved
for. I know that this is an issue to which Andrew Bailey gave
consideration. It was not something that he and I discussed in
detail. I trust Andrew's judgment and I left it to him. We did
not have a discussion about it. [...] But his point of view I
know, because he talked to me this morning and said, "If
this question comes up, here's what I did." I know he did
talk with Bob Diamond about it and say, "Look, do you want
to do this, given what is about to happen on LIBOR, given that,
although there is no case being found against Mr del Missier,
there may be a lot of public comment?" But Andrew did not
believe that it was sufficiently clear what had to happen there
that he should stop it occurring at that stage, though I think
he had doubts about it. But the crucial thing is, because he was
not changing the definition of the role that he was doing, it
did not involve a change of status. If he had been going to a
chief executive role, it would have been a different position
in our hierarchy of significant influence functions, and therefore
there would have had to have been a formal approval process. But
there did not need to be a formal approval process in this case.[245]
Mr del Missier resigned as Chief Operating Officer
on 3 July 2012, just 11 days after his appointment.
CONCLUSIONS ON FSA RELATIONSHIP
WITH BARCLAYS
157. Mr Agius denied
misunderstanding the seriousness of relations with the FSA, and
sought to give the impression that the February meeting was one
that might be expected between a regulator and a bank. He also
drew a distinction between the messages delivered by Mr Bailey
in February 2012 and that from Lord Turner in April. Both of these
interpretations are contested by the FSA, who said that the Bailey
visit and the Turner exchanges arose from the same concerns and
were part of a single process, and that the visit of Mr Bailey
was quite different in character from normal regulatory exchanges.
For Mr Bailey the minutes of the Barclays board were significant.
He considered that the board had realised the seriousness of affairs.
Yet, according to Mr Agius, the Chairman only realised it when
he later met and then, in April, corresponded with Lord Turner.
This looks implausible, but the senior non-executive director
told the Governor of the Bank as late as 2 July that he had not,
until that moment, appreciated the loss of confidence on the part
of regulators in the senior executive management of Barclays.
158. Barclays has told us that at the same time it
was receiving the comments of Mr Bailey, it received more positive
comments arising from the FSA's governance review. The FSA's governance
reviewer reportedly described Barclays as "best in class"
to Mr Agius for its forms of governance. Mr Bailey drew a distinction
between the forms of governance that this review examined and
the substance of governance he was concerned about. However, the
evidence of the correspondence between the FSA and Barclays following
the governance review is that the FSA did judge both the design
and effectiveness of Barclays' governance structures to be satisfactory.
The review fell short of giving Barclays a completely clean bill
of health: it pointed out potential vulnerabilities in the firm's
governance. The picture is therefore more nuanced than described
either by Barclays or by the FSA in oral evidence, but it
is at least possible that the message from the FSA's governance
review may have obscured some of the messages that Mr Bailey and
Lord Turner thought they were hammering home to the Barclays board.
159. The messages
that Lord Turner and Mr Bailey gave to the Barclays board this
year provide evidence of the evolution of a more judgement-led
approach on the part of the FSA. Lord Turner said that the change
to this approach began as long ago as 2008, and it featured in
his Mansion House speech in 2009. Judgement-led regulation is
welcome: the FSA has concentrated too much on ensuring narrow
rule-based compliance, often leading to the collection of data
of little value and to box ticking, and too little on making judgements
about what will cause serious problems for consumers and the financial
system. In February, though, the FSA judged that it was the overall
culture, rather than just a particular behaviour, of Barclays
that represented a risk, and so took steps to address this directly.
This intervention was not routine or coded. It was a loud and
clear expression of the concerns the FSA had about the culture
at Barclays and should have been clearly understood by the board.
This innovative action is also welcome. The episode shows, however,
that judgement-led regulation will require the regulator to be
resolutely clear about its concerns to senior figures in systemically
important firms.
171 Corporate Governance in Barclays, Barclays
Corporate Secretariat, February 2012 Back
172
Bob Diamond, Today Business Lecture, 3 November 2011 Back
173
Toward effective governance of financial institutions,
Group of Thirty, 2012 Back
174
Letter from Hector Sants to Marcus Agius, 15 September 2010 Back
175
Qq 10-13 Back
176
Letter from Marcus Agius to Andrew Tyrie MP, 9 July 2012 Back
177
Qq 511-4 Back
178
Qq 577-85 Back
179
Letter from Marcus Agius to Andrew Tyrie MP, 25 July 2012 Back
180
Qq 1037-40 Back
181
Q 583 Back
182
Q 578 Back
183
Q 1038 Back
184
Q 577 Back
185
Q 1040 Back
186
Q 1041 Back
187
Q1052. For the text of the letters, see Appendix Back
188
Qq 14-20 Back
189
Extract from Barclays board meeting held on 9 February 2012 Back
190
Letter from Marcus Agius to Andrew Tyrie MP, 25 July 2012 Back
191
Qq1052 Back
192
Letter from Lord Turner to Marcus Agius, 10 April 2012 Back
193
Letter from Marcus Agius to Lord Turner, 18 April 2012 Back
194
Q 15 Back
195
Letter from Marcus Agius to Andrew Tyrie MP, 25 July 2012 Back
196
Qq 1042-4 Back
197
Q1056. It is interesting to note that the Group of Thirty report
Toward effective governance of financial institutions refers
to "the tone set at the top" or "tone at the top"
on pp 21, 49, 65 and 66 Back
198
Q 1078 Back
199
Q 16 Back
200
Letter from Marcus Agius to Andrew Tyrie MP, 9 July 2012 Back
201
Q 1045 Back
202
Qq 18-19 Back
203
Q 1057-8 Back
204
Qq 1059-61 Back
205
QQ564-5 Back
206
Q 620-2 Back
207
Letter from Bob Diamond to Andrew Tyrie MP, 10 July 2012 Back
208
Letter from Marcus Agius to Andrew Tyrie MP, 25 July 2012 Back
209
It is true that Mr Diamond was not shown the follow up letters
"at our session", but that was because they had not
been seen by or sent to the Committee until Barclays supplied
them to the Committee at our request on 9 July, five days after
Mr Diamond's evidence. Back
210
Q 554 Back
211
Q 561 Back
212
Q 1041 Back
213
Qq 1046-51 Back
214
Q 1057 Back
215
Qq 1062-5 Back
216
Qq1075-7 Back
217
Q 1052 Back
218
Qq1054-5 Back
219
Q 1081 Back
220
Q 522 Back
221
Q 525 Back
222
Q532 Back
223
Q549 Back
224
Q531 and Q 534 Back
225
Q 553 Back
226
Letter from Marcus Agius to Lord Turner, 18 April 2012 Back
227
Q 591 Back
228
Q 594-6 Back
229
Q 1078 Back
230
Speech by Adair Turner, Chairman, FSA, The City Banquet, the Mansion
House, London, 22 September 2009 Back
231
Speech by Sir Mervyn King, Governor of the Bank of England, Lord
Mayor's Banquet for Bankers and Merchants of the City of London,
the Mansion House, 15 June 2011 Back
232
Q 1079 Back
233
Q 1074 Back
234
HC 535, Q28 Back
235
HC 535, Q38 Back
236
HC 535, QQ 39-40 Back
237
Q 543 Back
238
Q 1161 Back
239
Letter from FSA to Marcus Agius, 11 January 2012 Back
240
Ibid Back
241
Letter from Marcus Agius to FSA, 10 February 2012 Back
242
The failure of the Royal Bank of Scotland, FSA, December 2011,
paras 612, 610 Back
243
Ibid, para 609 Back
244
Q 793 Back
245
HC 535, Q 84 Back
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