Gordon Brown distanced himself from his former adviser Sir James Crosby yesterday, who resigned suddenly from the City's regulatory body amid claims he was responsible for the collapse of HBOS.
The word in Whitehall was that Sir James had jumped before he was pushed. His resignation as deputy chairman of the Financial Services Authority (FSA) was announced just 30 minutes before Mr Brown answer-ed Prime Minister's Questions.
Sir James insisted he would defend himself against allegations by a sacked whistleblower that he ignored warnings about HBOS's reckless expansion when he was its chief executive. It is thought the Government made it clear he should stand down while he tried to clear his name to ensure public confidence in the FSA.
Opposition MPs claimed he was pushed to spare Mr Brown's blushes. Sir James, knighted on the Government's recommendation, was made a non-executive FSA director by the Prime Minister and carried out two independent reviews for the Government. "He is no longer an economic adviser to the Government," Mr Brown told the Commons. Although Sir James had said there was "no substance" to the allegations, the Prime Minister said it was the "right course of action" for him to step down.
Mr Brown sidestepped a call by David Cameron to admit that appointing him as the FSA No.2 was "a serious error of judgement". The Tory leader told him: "Taxpayers have poured billions into [HBOS] and not only was Sir James appointed as one of the top regulators in the country, you have been relying on him for economic advice. Sir James Crosby has had the decency to resign. Why can't the Prime Minister have the decency to admit he got something wrong?"
Mr Brown's official spokesman said later: "I'm not going to get into the specifics about any contact between the Government and the FSA."
He added: "Both the decision and the timing were entirely matters for James Crosby."
Paul Moore, the whistleblower, said he stood "firmly and confidently" by his claim that Sir James was responsible for the demise of HBOS, which was taken over by Lloyds TSB. He said he had a "significant body of detailed additional evidence" to back his claims.
Last night, the FSA revealed it had been concerned for many years about HBOS's risk management. It told the bank its growth strategy was risky just before Sir James left. But it rejected Mr Moore's claim that he was fired for doing his job – by challenging HBOS over its strategy – and that his replacement was not up to the job.
As part of its regular assessment of HBOS, the FSA found in late 2002 that risk controls needed strengthening. 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. The regulator wrote to HBOS at the end of June 2006, just before Sir James left. 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."
In his resignation letter, Sir James said Mr Moore's allegations had been "independently and extensively investigated on behalf of the [HBOS] board, the results of which they shared with the FSA". He added: "That investigation concluded that Mr Moore's allegations had no merit." Sir James added: "While I am totally confident there is no substance to any of the allegations, I nonetheless feel the right course of action for the FSA is for me to resign from the FSA board."
Vince Cable, the Liberal Democrat Treasury spokesman, said: "The fact Sir James has fallen on his sword is beside the point. He should never have been appointed to such an important role in the first place."
The official report into Mr Moore's claims, carried out by accountants at KPMG, concluded he was not sacked for raising concerns about risks taken at HBOS, but because of personal differences with "key stakeholders".