The Financial Services Authority was 'deficient' and 'inadequate' in its regulation of HBOS, which contributed to the collapse of the bank in 2008, according to a new report.
A report published today by the Financial Conduct Authority and the Prudential Regulation Authority said the old regulator, the FSA, failed to prevent the collapse of HBOS because it employed 'a deficient regulatory approach' which did not take challenge the lender’s board of the bank.
The bank collapsed in 2008 when it was unable to meet its liquidity requirements after pursuing a strategy of issuing risky loans.
The FSA was the regulator at the time. It split into the FCA and PRA in 2013.
The regulator commissioned a report into the collapse of the bank in September 2012. However, the report’s publication was delayed by the process of Maxwellisation, whereby all parties mentioned in a report are given the chance to reply to the findings.
After years of delay the report has now been published and it is highly critical of the regulator’s supervisory approach towards HBOS.
It found the FSA did not step in early enough to stop the collapse of the bank.
It said the regulator did not want to criticise the bank's business model because it did not want to be seen to be influencing it.
'The FSA did not see its role as being to criticise a firm's business model in case it was perceived to be acting as a "shadow director",' the report said.
It said the FSA’s supervisory framework at the time was 'inadequate' as it did not devote enough resources to the regulation of large banks.
'This gave rise to a supervisory framework with inadequate resources devoted to the prudential regulation of large systematically important banks,' it said.
In a foreword to the report, PRA chief executive Andrew Bailey said: 'The FSA failed to establish an appropriate standard of safety and soundness.
'Prolonged economic growth and the appearance of financial stability created a prevailing view that the prudential regulation of financial firms should be "light touch", thus limiting the challenge provided to firms including HBOS.’
The report said a FSA report into the management of HBOS in 2005 found the management of the board was 'good', meaning it escaped further scrutiny.
'This judgement, together with the benign economic outlook and resource constraints, had implications for the intensity with which HBOS was supervised , with much reliance out in HBOS's senior management and control functions,' the report said.
HBOS chief executive James Crosby was deputy chairman of the FSA until February 2009. The report said there was no evidence that Crosby used his position on the FSA board to exercised undue influence over the way the watchdog regulated HBOS.
'The review found no evidence that Crosby exercised any undue influence as a member of the FSA board or its committees on the decisions of the FSA in relation to the supervision of HBOS,' it said.