10 May 2013

By Catherine Hobby, Senior Lecturer, School of Law & Social Sciences, University of East London

On 5th April 2013, the Parliamentary Commission on Banking published a report into the events leading to the rescue of HBOS by Lloyds TSB in 2008. The title of the report, ‘An Accident Waiting to Happen’: The failure of HBOS, reflects the findings of the Commission that the collapse of HBOS was the result of senior management failings and not the global banking meltdown. The Commission reported that the losses of HBOS were caused by ‘a flawed strategy, inappropriate culture and inadequate controls’, for which successive Chief Executives, the Chairman and the Board were responsible. The Commission report confirmed allegations made by the HBOS whistleblower, Paul Moore, who was dismissed by the Bank in 2004 for raising protected disclosures in respect of breaches of law or regulation by the Group. His concerns raised internally were that the Bank was ‘going too fast’, had a ‘cultural indisposition to challenge’ and ‘was a serious risk to financial stability and consumer protection’.

The Commission report commences with a warning given in January 2004 to the board of HBOS by its Group Finance Director, Mike Ellis. Ellis warned the Board that the Financial Services Authority (FSA) were of the view that HBOS’s growth had ‘outpaced the ability to control risks’ and this ‘may have given rise to an accident waiting to happen’. This warning was not heeded by HBOS with the result that the ‘accident happened’. HBOS dramatically failed in 2008, resulting in significant financial loses for its shareholders, employees and the taxpayer. The Government provided £8.5 billion directly to HBOS, and Lloyds TSB also received £12 billion from the taxpayer to assist with its acquisition of HBOS. The total of £20.5 billion was all injected into HBOS and if these funds had not been provided HBOS would have become insolvent. The Commission found that the HBOS business model of combining higher risk assets and risky funding was ‘fundamentally flawed’ and a ‘colossal failure of senior management and of the Board’.

The highly critical Commission report states the principal agent of the downfall of HBOS was Sir James Crosby, Chief Executive Officer (CEO) until 2005, as he was the ‘architect of the strategy that set the course for disaster’. Responsibility was also said to lie with Andy Hornby who was ‘unable or unwilling to change course’ when he became CEO, and Lord Stevenson who was the Group’s Chairman throughout the relevant period. The strategy set by the Board is stated to have ‘sowed the seeds of its destruction’. The ‘aggressive’, asset-led growth strategy was coupled with a ‘brash’ culture, the effects of which ‘were all the more corrosive when coupled with a lack of corporate self-knowledge at the top of the organisation'. Further, the report records corporate governance at HBOS as a ‘model of self-delusion’ and that the risk function in HBOS was a ‘cardinal weakness’ in the Bank. The weakness of the management of group risk in HBOS was stated by the Commission to be a matter of ‘design, not accident’ with Crosby responsible for this design and Hornby failing to address the matter when he became the CEO. The report stated that their misjudgements were ‘toxic’ for HBOS:

The problems of solvency were a direct consequence of the strategy set by the Board and the failure of controls on the practices that were fostered by its commitment to an asset-led, high-risk approach to growth

When Paul Moore gave oral evidence to the Commission in October 2012, its Chair, Andrew Tyrie, commended him as a ‘valuable whistleblower’. Moore was head of Group Regulatory Risk at HBOS from 2002 to 2004. As the most senior manager in charge of regulatory compliance, he warned the HBOS board in July 2004 that:

Careful consideration should be given in strategic plans to exactly what levels of sales growth is achievable without putting customers and colleagues at risk

The HBOS board did not recognise or even minute his concerns, nor was the full report he drafted, which detailed regulatory failings, presented to the board. Moore was dismissed by the then CEO, Sir James Crosby in November 2004. Crosby claimed it was ‘his decision and his alone’. It is ironic that, at the time, Moore was the Good Practice Manager at HBOS for whistleblowing practices. Moore brought a claim for unfair dismissal against HBOS under the whistleblowing provisions enacted by the Public Interest Disclosure Act 1998 (PIDA), but his case was settled before it reached an employment tribunal. Moore received over half a million pounds in settlement of his action in 2005, but was bound by a gagging clause. Despite this he decided to speak out in the public interest when Lloyds TSB subsequently acquired HBOS on its collapse. He first spoke of his concerns publically when he was interviewed as part of BBC Money Programme, Credit Crash Britain: HBOS, Breaking the Bank in October 2008. In the programme he spoke of his experience in a senior management role:

Being an internal risk and compliance manager at the time felt a bit like being a man in a rowing boat trying to slow down an oil tanker

In 2009, Moore gave written evidence in the form of a memorandum to the Treasury Select Committee in its investigation of the banking crisis. After Moore presented his evidence, Sir James Crosby resigned from his position as deputy chairman of the FSA, to which he was appointed after he stood down as CEO of HBOS. In resigning, Crosby claimed there was ‘no merit’ in Moore’s allegations, but raised no evidence to refute Moore’s claims.

In his memorandum to the Treasury Committee, Moore expressed the view that the financial crisis was caused by a complete failure of all key aspects of governance and also considered:

The real problem and cause of this crisis was that people were just too afraid to speak up and the balance and separation of powers was just far too weighted in favour of the CEO and their executive

In his role as Head of Group Regulatory Risk Moore was required to ensure HBOS complied with FSA requirements. Moore stated in his Memorandum that failure to ensure compliance with the FSA conditions would not only be a dereliction of duty but could also have resulted in personal disciplinary action against him by the FSA. Despite this, Moore complained of threatening and abusive behaviour towards him and his team as they sought to perform their compliance duties. Moore was obliged to raise ‘numerous issues of actual or potential breach of FSA regulations’ and to challenge unacceptable practices and conduct. In doing so, he records an adversarial culture at HBOS that constantly questioned and resisted all attempts to carry out legitimate and required oversight activities.

At the end of his 2009 Memorandum, Moore recommended that:

Further development of whistle blowing rules to make sure that those who raise legitimate concerns are not just “bought off” with shareholders money … the case should be reviewed by the regulator and action taken if necessary to ensure those responsible cannot get away scot-free

Moore believes the lessons from his personal experience at HBOS, and the banking crisis in general, are the ‘crucial importance of really effective governance’. In its 2013 report, the Parliamentary Commission on Banking makes it clear that it examined HBOS as a case study of banking failure to recognise lessons as part of its wider work on banking standards and culture. The investigation into the banking crisis and collapse of HBOS again demonstrates the importance of worker knowledge and the dangers of organisations ignoring employee concerns. Those employed within the banking sector, and particularly those in risk assessment and compliance, should be able to raise concerns without suffering retaliation from management.

The Commission report and its revisiting of Moore’s claims coincided with the Enterprise and Regulatory Reform Act 2013 (ERRA) receiving Royal Assent on 25th April. As discussed in my article, The Coalition is putting already vulnerable whistleblowers in an even worse position with its ERR Bill, published on the IER Blog on 6 March 2013, section 17 of the ERRA presents another hurdle to workers victimised for raising concerns by requiring a protected disclosure to be ‘made in the public interest’. As shown above, whistleblowing is an activity in the public interest but requiring workers to satisfy a statutory definition of it is problematic. PIDA is a complex piece of legislation and the amendment will operate as an additional barrier to whistleblowers seeking to make a claim under it. The overlap between the public interest condition and other legislative requirements will only generate further confusion about the protection offered by PIDA.

It is clear that the concerns of Moore regarding the management of risk at HBOS were in the public interest, indeed it was his justification for breaking his gagging clause by speaking out. By reason of his appointment to the role of Head of Group Regulatory Risk he was in possession of knowledge that could have prevented the collapse of HBOS. PIDA failed to encourage an internal reporting culture at the Bank that would have promoted and acted upon Moore’s concerns regarding risk management. The Act also did not deter Sir James Crosby from dismissing Moore from HBOS. The danger with the new ‘public interest’ amendment inserted by ERRA is that it further restricts the protection provided by PIDA and so important warnings such as those expressed by Paul Moore will not be heard as workers fear speaking up.