FSA was concerned about HBOS for years

Watchdog found in 2002 risk controls needed boosting

The Financial Services Authority revealed last night that it had been concerned about HBOS's risk management for many years and that it told the bank its growth strategy posed risks just before Sir James Crosby left the bank.

But the watchdog rejected allegations made by Paul Moore, the bank's former head of regulatory risk, that he had been fired by Sir James for doing his job in challenging strategy and that his replacement was unsuitable. Sir James, who was chief executive of HBOS until July 2006, resigned yesterday as deputy chairman of the FSA.

As part of its regular assessment of HBOS, the FSA found in late 2002 that risk controls needed to be strengthened. It also commissioned PricewaterhouseCoopers to produce an independent report that confirmed the need for better risk management. The FSA's next assessment of HBOS in 2004 found improvements, but said risk functions still needed to have more influence over the business. Mr Moore was dismissed in a restructuring at the end of 2004 when Mike Ellis, then finance director, left the bank.

The regulator wrote to HBOS at the end of June 2006, shortly before Sir James's departure the following month. The FSA said last night: "In that letter, we made clear that whilst the group had made progress there were still control issues [and] the growth strategy of the group posed risks to the whole group and that these risks must be managed and mitigated."

The FSA's statement rejects Mr Moore's accusation that the watchdog relied too heavily on a report by KPMG, HBOS's own auditor, into Mr Moore's specific allegations about his sacking.

The FSA said it took urgent action in response to Mr Moore's allegations. It suspended its judgement on whether Jo Dawson was "fit and proper" to replace Mr Moore until after the report by KPMG, which the FSA said was conducted by people sufficiently independent for the task. The FSA said KPMG did 80 hours of interviews with 28 people including Sir James and Mr Moore. Mr Moore had attacked the KPMG report for not interviewing key people.

The FSA's disclosures about a single firm were extraordinary, but were driven by the furore over Mr Moore's allegations to the Treasury Committee and Sir James's resignation as deputy chairman of the watchdog yesterday. The watchdog is also jumpy about allegations it failed to monitor HBOS properly after being forced to admit major failures in its scrutiny of Northern Rock.

Andy Hornby, who replaced Sir James as chief executive, told the Treasury Committee on Tuesday he had slowed down the bank's growth and halted share buy-backs soon after taking the job. Mr Moore told the committee the near collapse of HBOS was down to Sir James's high-growth strategy and not Mr Hornby.