Page last updated at 13:12 GMT, Thursday, 12 February 2009

Watchdog's early warning for HBOS

Gordon Brown
The Treasury would not normally be told of these interactions between a bank and the FSA
Gordon Brown

The Financial Services Authority (FSA), the City watchdog, has said it raised concerns about the way HBOS was being run as far back as 2002.

It said it looked at the risks before and after a sacked HBOS risk manager warned about the bank's business model.

Prime Minister Gordon Brown said the Treasury was not made aware of the FSA's communications with HBOS.

"There were probably 20 or 30 similar discussions going on with other institutions at the time," he said.

Paul Moore says he was sacked in 2005 for blowing the whistle on the risks being taken by HBOS.

But the regulator said it had investigated the way the bank was being run in 2002 as part of its usual operations.

Sir James Crosby, the former head of HBOS, stepped down as FSA deputy chairman on Wednesday, although he maintained that Mr Moore's allegations had no merit.

Facing questions

The prime minister was asked about Sir James when he appeared before the chairmen of all the House of Commons' committees on Thursday.

Gordon Brown says the whistleblower's allegations were fully investigated

"The Treasury would not normally be told of these interactions between a bank and the FSA," he said.

He also stressed that Sir James' appointment had been recommended by a panel, which included the chairman of the FSA and one of its non-executive directors, who would have known if there had been serious concerns about him.

'Posed risks'

The FSA said that in the light of the allegations it was taking the unusual step of issuing a statement about its regulation of HBOS, which was bailed out with taxpayers' money last year.


Two substantive allegations made by Paul Moore remain on the table and need to be answered by the FSA

Paul Mason
Economics editor, Newsnight

In the statement, the FSA stressed:

• It first carried out a full risk assessment of HBOS in 2002, which found the bank needed to strengthen control infrastructure within the group

• After another full risk assessment in December 2004, the FSA found that progress had been made, but HBOS still needed to improve its group risk functions and ability to influence the business

• In June 2006, the FSA wrote to HBOS with a further risk assessment, making it clear there were still control issues and the "growth strategy of the group posed risks to the whole group and that these risks needed to be managed and mitigated"

• It also said it backed the findings of an inquiry conducted at the time Mr Moore made the allegations, which found his concerns were unfounded.

'Toothless'

Banking expert Peter Hahn from Cass Business School said the affair showed the FSA was not strong enough.

"I think the FSA up until today has largely been a toothless tiger," he told the BBC.

Vince Cable and George Osborne discuss Gordon Brown's problems

"I think the regulators took it as too procedural - they didn't wave the red flags high enough."

There has been much criticism of the government by the opposition following Sir James' resignation.

The Liberal Democrats' treasury spokesman Vince Cable said it was "a completely absurd decision" to appoint Sir James to the job, when the FSA had been warning about the way HBOS was being run.

"The government must have known all this and yet the head of the bank that ultimately collapsed was appointed to a major role supervising the banks," he told the BBC.

Shadow chancellor George Osborne said the prime minister had questions to answer.

"The key question is did Gordon Brown know?" he said.

"Increasingly it's difficult for him to hide the truth that he was the man in charge and he let the banking system collapse on his watch."

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SEE ALSO
Timeline: The FSA and HBOS
12 Feb 09 |  Business
Sir James Crosby resigns from FSA
11 Feb 09 |  Business
Sir James Crosby's full statement
11 Feb 09 |  Business
Brown under pressure over Crosby
11 Feb 09 |  UK Politics
HBOS whistleblower probe demanded
11 Feb 09 |  UK Politics

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