Further to our earlier statement, the Financial Services Authority (FSA) has issued the following fuller account of the issues relating to the risk function at HBOS, raised at the Treasury Select Committee on 10 February 2009.

1. Having examined carefully the files relating to this issue, the FSA can confirm that specific allegations made by Paul Moore in December 2004 regarding the regulatory risk function at HBOS were fully investigated by KPMG and the FSA, which concluded that the changes made by HBOS were appropriate. This statement gives an account of the actions taken by the FSA in relation to concerns expressed in 2004 by Mr Moore, former head of Group Regulatory Risk at HBOS. It is focused on these specific concerns rather than providing a complete description of the regulatory relationship with HBOS.

Risk assessment

2. As background to the specific set of allegations made by Mr Moore, we set out below relevant developments in relation to the HBOS risk framework:

the FSA conducted a full risk assessment of HBOS (known as an ARROW assessment) in late 2002 which identified a need to strengthen the control infrastructure within the group;

we then decided to commission a “skilled persons report” from PWC on the HBOS risk management framework, using formal information gathering powers under section 166 of the Financial Services and Markets Act 2000: their extensive report revealed a need for improvements in the HBOS risk management environment;

the FSA then conducted a further full risk assessment of the HBOS group to cover all of the group’s business, formally recording its assessment in December 2004, the assessment was that the risk profile of the group had improved and that the group had made good progress in addressing the risks highlighted in February 2004, but that the group risk functions still needed to enhance their ability to influence the business, which we saw as a key challenge.

Changes at HBOS

3. Other key events took place in 2004:

following the departure of the Chief Financial Officer, who had been responsible at Board level for regulatory risk, and as part of a wider restructuring, HBOS decided to upgrade the risk function by appointing a new group risk director as the senior executive responsible for regulatory risk in the group;

following that appointment, the then head of group regulatory risk, Paul Moore, was informed on 8 November that he would leave as part of this restructuring; he subsequently approached FSA to express concerns about HBOS and in particular about the suitability of the new appointee as the group risk director;

in his view, the new group risk director was not ‘fit and proper’ to be approved by the FSA to hold that post, by reason of lack of integrity, lack of experience in risk management, and of general attitude and approach;

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