The reputation of the City’s former regulator, the Financial Services Authority, was comprehensively demolished by the report into the collapse of HBOS.
The report found that the FSA, which was established in 1997 by the then Labour government to regulate the financial sector, had comprehensively failed in its supervisory responsibilities with regard to the bank.
“Flaws in the FSA’s supervisory approach meant it did not appreciate the full extent of the risks HBOS was running and was not in a position to intervene before it was too late,” it concluded.
“The FSA board and executive management failed to ensure that adequate resources were devoted to supervision of large, systemically important firms such as HBOS.”
The report argued that “a more probing, sceptical and interventionist stance in the pre-crisis period could have delivered different outcomes”.
Andrew Tyrie, the MP who chairs the Commons Treasury Select Committee, said the FSA was “asleep at the wheel and even the start of the crisis failed to wake [it]”. He added: “A small number of relatively junior staff were left to do the job at the time, a shocking reflection of the FSA’s lack of awareness.”
The report suggested the FSA was unduly influenced by the Government in its approach. It noted: “There was… a sustained political emphasis on the need for the FSA to be ‘light touch’ in its approach and mindful of the UK’s competitive position.”
The FSA has been widely accused of being intellectualy “captured” by the sector it was supposed to be supervising. For a significant period before the financial crisis, James Crosby was both chief executive of HBOS and a member of the FSA’s board.
However, the report said the committee had found “no evidence that Mr Crosby exercised any undue influence… on the decisions of the FSA in relation to the supervision of HBOS”.
The FSA’s chief executive during the financial crisis was Sir Hector Sants, who took up the post in July 2007. He left the watchdog in 2012 and was knighted in the 2013 New Year Honours list for “services to financial services”.
Sir Hector worked for a brief spell at Barclays as head of compliance and government and regulatory relations.
Earlier this month, he wrote a report on behalf of the British Bankers’ Association lobby group calling for the current City regulator – the Financial Conduct Authority – to be stripped of its power to set penalties and redress for misconduct, citing concerns about the UK’s global competitiveness.
Sir Hector’s predecessor was John Tiner, who was chief executive between 2003 and 2007. Mr Tiner went on to become chief executive of the insurer Resolution Limited.