Making sense of the Crosby case
Sir James Crosby resigned. But the FSA released a statement saying that Paul Moore's allegations concerning HBOS "were taken seriously, and were properly and professionally investigated". It also revealed this about a KPMG report commissioned by the FSA into the case:
"the KPMG report also indicated that there was no evidence in the report that Mr Moore was dismissed due to being excessively robust in the discharge of his functions".
On the basis of this some newspaper commentators have declared Mr Moore's charges, first made on the BBC2 Money Programme and amplified on Newsnight, "without merit".
Today, Mr Moore has hit back. He has sent me the original response his lawyers drew up to the KPMG report. It states:
"the [KPMG] Report is imbalanced and has arrived at conclusions which, if reviewed by an external independent tribunal, would not be supported".
And he has issued a new statement through his lawyers:
"The KPMG Report itself was limited in scope. Indeed KPMG have accepted this themselves, so we would argue it never covered the essential issues raised by our client."
Mr Moore says that, 10 days after he responded to the KPMG report, HBOS settled his claim for compensation.
None of this is conclusive, but it means that two substantive allegations made by Paul Moore remain on the table and need to be answered by the FSA, the government and anybody concerned with the fiasco that happened at HBOS. They are:
a) That HBOS was at risk of breaching banking regulations because its aggressive sales culture, developed to expand the retail bank (i.e. the Halifax) in the early part of this decade, was running faster than the internal checks and balances designed to protect customers. So, in a document NOT released by the FSA last night, but which I can reveal, the regulator told HBOS:
"There has been evidence that development of the control function in the Retail Division has not kept pace with the increasingly sales driven operation...There is a risk that the balance of experience amongst senior management could lead to a culture which is overly sales focused and which gives inadequate priority to risk issues." (FSA Arrow Assessment and Risk Mitigation Programme, 1 December 2003)
b) That his attempts to raise his concerns were met with "adversarial, emotional and personal" responses at senior level. That there was a "cultural indisposition to challenge". Ultimately, he claims, he was forced to circulate himself comments that the official distribution mechanisms to the board had failed to distribute. I have seen evidence that his managers were annoyed about the "cc list" of the relevant email.
Moore's third charge was that he was sacked by Crosby on the pretext of the restructuring of his role and replaced by somebody who was not competent to do the job. This was what the KPMG report considered and it concluded that the selection of his replacement was handled correctly and that she was suitable for the job.
I have seen the letter James Crosby wrote to Paul Moore, in which it says the decision to abolish Moore's role and consider replacing him with somebody else "mine and mine alone". (Letter from James Crosby, 23 November 2004). We have it in black and white that Crosby initiated the process that led to Moore being sacked. What we are left with is "no evidence" that this was due to Moore being "excessively robust". And note the FSA's precise language:
"The report concludes that the report contains no evidence..."
Clearly the dispute between the two men will continue, as will Moore's criticism of the FSA. But the episode poses a wider question.
Last night's FSA statement outlined the chronology of its involvement with HBOS. Let's be clear the risks identified were to customers, because of the danger of mis-selling products through high pressure. However, this was an alarm bell that could have also flagged up the problem that eventually sank HBOS: to find the money to lend so aggressively, they went to the money markets and borrowed it.
Here's the timeline:
Late 2002 the FSA identifies the problem.
1 December 2003, the FSA's report identifies the problems that Paul Moore has to sort out.
18 December 2003. Gordon Brown appoints Crosby to the post of non-executive board member of the FSA itself, saying:
"I am delighted to announce these appointments. James Crosby is a leading industry practitioner with a wealth of experience in banking, fund management and the insurance field, and will bring a new perspective to the Board."
8 November 2004. Paul Moore is told he'll be sacked.
16 June: Crosby is knighted and asked to head a taskforce overcoming opposition to the introduction of ID cards.
29 June 2006. FSA writes again to HBOS saying there are "still control issues" and that "the growth strategy of the group posed risks to the whole group and that these risks must be managed and mitigated".
December 2007: Crosby is made deputy chairman of the FSA*
Thus, for three years Sir James Crosby was simultaneously in charge of a bank known to be at risk of breaching its regulatory obligations, and a member of the board of the regulator, indeed its deputy chairman.
The first question for the FSA is: how was this handled? What internal mechanisms were put in place to acknowledge that FSA operational staff may have to deal with problems arising with a bank run by a member of the board.
The second question is: when Sir James Crosby was originally appointed to the board of the FSA, was Gordon Brown personally made aware of the FSA's concerns about the bank's strategy?
* Thanks to those who pointed out this was in the wrong place in the original chronology.