The Financial Reporting Council’s (FRC’s) failure to take regulatory action sooner following the failure of HBOS has been strongly criticised by the Treasury select committee, which says its original decision not to investigate the auditing of the bank was ‘a serious mistake’, labelling its response ‘inexplicable’ and ‘unacceptable’
The committee’s latest report on the collapse of HBOS in 2008 reviews previous investigations and looks specifically at the role of the regulators, including the Financial Services Authority (FSA) which was the predecessor to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
It points out that the FRC originally decided not to investigate the auditing of HBOS in 2013, well before the completion of the final HBOS report from the other regulators involved, describing this as ‘a serious mistake’ which suggested ‘a lack of curiosity and diligence’.
The report goes on to claim that the auditing of HBOS is ‘the one major element of the HBOS affair that has yet to be subject to adequate scrutiny’, and said it expects the FRC to undertake an extremely thorough analysis of the HBOS case.
The FRC announced in January this year that it was making preliminary inquiries into the conduct of KPMG, the bank’s auditor at the time of its collapse. Subsequently in June, the regulator said it had begun an investigation into KPMG’s audit of HBOS for the year ended 31 December 2007, which would look at issues around going concern assumptions.
The Treasury select committee report said: ‘It is extraordinarily unhelpful that the FRC has taken so long and has belatedly reconsidered its position, only after considerable pressure from Parliament and the Treasury committee.’
The report goes on to state: ‘Regardless of the outcome of the FRC’s investigation process, it is likely that the committee will want to consider its work and regulatory approach in more detail. The investigation announced on 27 June 2016 is better late than never. But the very tardy response by the FRC appears to be as inexplicable as it is unacceptable.’
MPs are also critical of the FSA’s ‘light touch’ approach to regulation, saying its supervision of HBOS was severely flawed. While some of the issues of accountability have been addressed in the setting up of the FCA and PRA, the committee said it was ‘far from satisfactory’ that the bulk of enforcement staff and expertise still lies within the FCA, which has no role in prudential supervision of banks.
The report recommends considering the establishment of an independent enforcement function, which would sit equidistant between the PRA and FCA, saying this would give all three bodies greater clarity of purpose. The committee wants the Treasury to appoint an independent reviewer to re-examine the case for a separate enforcement body, which it says increase confidence in the impartiality of regulatory enforcement decisions, and facilitate objective scrutiny of supervisors’ actions by enforcement staff.
Andrew Tyrie, chair of the Treasury select committee, said: ‘A lot is at stake. The plain fact is that the FSA did not succeed in protecting consumers from spectacular regulatory failures. The creation of the FCA and the PRA has been an opportunity to build something much better. This is still work in progress, particularly at the FCA.’
An FRC spokesman said: 'The FRC has opened a formal investigation in response to issues raised in the FCA's report. We recognise the strong public interest and welcome the Committee's focus on the issues. We have committed to release a full report once the disciplinary process is complete.'
The Treasury select committee Review of the reports into the failure of HBOS is here.
