FSA warned HBOS of risks in 2002

The Financial Services Authority has revealed that it had concerns about HBOS as far back as 2002 and identified that it needed to ‘strengthen the control infrastructure within the group’.

The revelations follow the departure of the FSA’s deputy chairman and former chief executive of HBOS Sir James Crosby yesterday.

During a Treasury Select Committee hearing into the banking crisis it emerged that Paul Moore, former head of group regulatory risk at HBOS, tried to alert Crosby to the fact that HBOS was growing too fast too quickly back in 2004.

The FSA has confirmed that it looked into HBOS’s risk both before and after they were warned about the bank by Moore.

Moore voiced his concerns to the regulator and claimed the new group risk director, Jo Dawson was not ‘fit and proper’ to be approved by the FSA to hold that post.

Moore claimed he had a lack of integrity, lack of experience in risk management, and of general attitude and approach.

He also made other allegations about HBOS’s overall risk framework.

Following consultation with the FSA, the HBOS Group Audit Committee commissioned an external review on the fitness issues from its auditors KPMG.

The regulator continued to pursue concerns about the risk management framework. As a consequence, it wrote to HBOS again on 29 June 2006 with a further interim ARROW risk assessment.

In that letter it made it clear that whilst the group had made progress, there were still control issues and said it would closely track progress in this area.

KPMG ‘did not believe however that the evidence reviewed suggested that the candidate was not fit and proper’, that ‘the process for the identification and assessment of candidates for the GRD position appeared appropriate’, and that ‘the structure and reporting lines of Group Regulatory Risk were appropriate’;