Appendix 5: Independent reviewers - Summary of recommendations
Recommendations
1)We support the recommendations for firms contained in the Review and think it is important that they find their way into relevant supervisory communications and guidance so that they receive proper attention. However, we note that many regulatory changes have already been made as a result of the financial crisis and collectively these changes intend to address many of the failings identified in the Review.259
2)We also support the recommendations for regulators. In our view the ‘will to act’ where it is warranted, even in benign times and against apparently successful firms, is perhaps the most difficult and important future regulatory challenge and in our view this should be a constant area of vigilance for the Boards of the regulators.
3)We also make two additional observations which in our view arise from the Review:
(a)Stress testing is rightly a key pillar of the current approach to prudential regulation. However, as the Review illustrates, neither HBOS nor the FSA understood the quality of the firm’s assets until it was too late to make any difference. Asset quality encompasses quantitative, qualitative and judgemental elements, and without an accurate understanding of asset quality, stress testing is of fundamentally limited value. We would suggest therefore that it is essential for Boards of firms to ensure that their capital planning and stress testing processes are built on a comprehensive and accurate view of underlying asset quality.
(b)As well as a ‘systemic’ failure of regulation and supervision, the Review identifies operational failings in the delivery of supervision which might have been identified by better engagement and more effective oversight on the part of the Board and senior management of the FSA. Whilst regulatory governance has changed significantly with the introduction of the PRA and FCA, we nonetheless think it important that Boards of regulators reflect on the lessons which the Review holds for their own risk management and oversight frameworks to ensure that operational failings of the type identified in the Review do not occur again. The PRA and FCA have recently, and rightly, raised the standards against which Boards and senior management of banks and insurers will be held to account and it could be argued that many of those standards are equally relevant to those charged with governance and oversight of regulators.
4)Our final recommendation is that in the unfortunate event that a Review of this type is required in the future, it should be conducted completely independently, begun as quickly as possible after the event and resourced and managed so that it can be completed within a far shorter timescale.
259 All text in Appendix 5 from HBO001
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22 July 2016