Appendix 3: PRA/FCA report - Summary of recommendations
Management, governance and culture–Board responsibility
1)HBOS’s business model was inherently vulnerable to an economic downturn or a dislocation in wholesale funding markets. This was the product of a flawed strategy which was implemented without due regard to basic standards of banking and risk management. Every member of a bank’s Board of Directors must take responsibility as part of a collective for ensuring that its business model is sustainable and that the principle of safety and soundness is embedded in the organisation’s culture; and directors who hold roles under the Senior Managers Regime will have specific accountabilities within this.257
Board composition
2)A feature of the HBOS Board was its lack of knowledge and experience of banking, which hindered its ability to challenge the firm’s Corporate and international divisions effectively. A bank’s Board of Directors should include non-executives with a diversity of experience, from inside and outside the banking sector. Moreover they must, between them, have the capacity and motivation to explore and challenge key business issues rigorously with the executives.
Senior management relationships with regulators
3)While the Senior Managers Regime will clarify accountabilities within a bank, it is vital that persons approved under this regime take ownership of their regulatory responsibilities and for executives to establish within their business areas a culture that supports adherence to both the spirit and letter of relevant requirements. They should proactively seek to identify threats to the firm’s safety and soundness, and notify regulatory authorities where issues arise - not simply assume that risk management systems are adequate if regulators do not intervene.
Will to act
4)The PRA and FCA have both adopted forward-looking and judgement-led approaches to supervision in seeking to meet their statutory objectives. While it is not the role of the regulators to ensure that no bank fails, where the risks to their objectives are high they have statutory powers to intervene, for example to require a bank to change its business model. Where intervention is warranted, the regulators must be willing and able to do so free from undue influence, in particular when markets are benign and in the face of changing public policy priorities.
Supervision of international groups
5)A significant proportion of HBOS’s balance sheet was derived from its overseas operations which grew rapidly during the review period, in particular in Australia and Ireland. While it is necessary for UK regulators of a consolidated international group to place reliance on local regulatory authorities, the UK regulators should understand the scope of the oversight provided by the local regulator in determining the extent of that reliance. UK regulators should also have the level of understanding of the international businesses to be able to engage effectively with the firm and the local regulators as consolidated supervisor.
Conflicts of interest
6)UK financial services regulators should also guard against the risks of actual or perceived conflicts of interest arising from the composition of their Boards. The PRA/FCA report found no evidence that Mr Crosby exercised undue influence over the supervision of HBOS from his position as a member of the FSA’s Board. However, relevant regulatory authorities should review their conflicts of interest policies to ensure that the risks associated with including serving industry practitioners as non-executive directors on their Boards are adequately managed.
257 All text in Appendix 3 from PRA and FCA, The failure of HBOS plc (HBOS), 19 November 2015, pp 38-39
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22 July 2016