The following APER Statements of Principle are relevant to this matter:
• Statement of Principle 5: An approved person carrying out a significant influence function must take reasonable steps to ensure that the business of the firm for which he is is organised so that it can be controlled effectively.
• Statement of Principle 6: An approved person performing a significant influence function must exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his controlled functions.
• Statement of Principle 7: An approved person performing a significant influence function must take reasonable steps to ensure the business of the firm for which he is responsible in his controlled functions complies with the relevant requirements and standards of the regulatory system.
this right?
Commented [A8]: Cla rification of the history of the control failures would be helpful.
Commented [A9]: Ar e these the control failures referred to above on page 2?. May need to expand to demonstrate Cummings’ awareness / involvement at the time.
6 Issue identified by the FSA Relevant APER SIF non-compliant behaviour
1 The nature of the Division's business means there is a significant exposure to credit risk. Where policies and procedures around credit risk are not sufficiently comprehensive or robust there is the risk that the firm is unable to properly understand and control exposures.
APER 4.6.4
Permitting transactions without a sufficient understanding of the risks involved
Permitting expansion of the business without reasonably assessing the potential risks of that expansion;
Inadequately monitoring highly profitable transactions or business practices or unusual transactions or business practices;
Accepting implausible or unsatisfactory explanations from subordinates without testing the veracity of those explanations;
Failing to obtain independent, expert opinion where appropriate.
2 Data used in the credit process, such as property valuations and ratings should be up to date. Where gaps or lags occur appropriate conservatism should be applied in the use of the data
3 HBOS Corporate to enhance its processes for on-going sector risk management – and ensure sector risks within Corporate are effectively managed
4 HBOS Corporate to enhance its early warning indicator framework
It is important for an approved person performing a significant influence function to understand the risks of expanding the business into new areas and, before approving the expansion, he should investigate and satisfy himself, on reasonable grounds, about the risks, if any, to the business. (4.6.12)
5 High levels of concentration in the book could leave the firm over exposed to market fluctuations. It is unclear the extent to which this concentration risk has been assessed for example, across the asset classes
Permitting transactions without a sufficient understanding of the risks involved (4.6.4)
6 Whilst such concentrations may be a consequence of the chosen RE strategy it is not evident that such concentration limits have been robustly challenged both within the Division and by Group
Strategy and plans will often dictate the risk which the business is prepared to take on and high level controls will dictate how the business is to be run. If the strategy of the business is to enter high-risk areas, then the degree of control and strength of monitoring reasonably required within the business will be high. In organising the business for which he is responsible, the approved person performing a significant influence function should bear this in mind.
7 Given market illiquidity and volatility there is a need to adopt an appropriate and robust approach to valuing equity held on the balance sheet.
Where unusually profitable business is undertaken, or where the profits are particularly volatile or the business involves funding requirements on the firm beyond those reasonably anticipated, he should require explanations from those who report to him. Where those explanations are implausible or unsatisfactory, he should take steps to test the veracity of those explanations
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cases not applied and in others ineffective. Additionally the Joint Ventures asset class has experienced a rise in impairments that have highlighted potential control failings.
identification of significant breaches (whether suspected or actual) of the relevant requirements and standards of the regulatory system relating to its regulated activities, falls within APER 4.7.2 E (see APER 4.7.13 G).
9 A resource shortage and pattern of incomplete reporting by counterparties led to backlogs (6,234 items in July 2007 peaking at a backlog of over 14,000 in May 2008). Development of a strategic solution was only presented to the FSA in July 2008
Failing to take personal action where progress is unreasonably slow, or where implausible or unsatisfactory explanations are provided (4.6.9)
10 There have been several instances where HBOS's charge over property has not been registered by the acting solicitors and the loan therefore is not in compliance. Lack of due diligence in this area may result in financial loss to the firm.
Failing to take reasonable steps to implement (either personally or through a compliance department or other departments) adequate and appropriate systems of control to comply with the relevant requirements and standards of the regulatory system in respect of its regulated activities(4.7.3)
11 There is a multiplicity of Committees to manage specific aspects of risk at the expense of integration across the piece.
Failing to take reasonable steps to apportion responsibilities clearly amongst those to whom responsibilities have been delegated falls within APER 4.5.2 E (see APER 4.5.11 G).
12 For instance, where information is privileged to equity investors there may be a tension with duties towards debt syndicate members especially where HBOS may also be acting as Agent. Whilst the conflicts policy notes this possibility and recognises potential triggers (e.g. impairment), it is unclear how these risks are being managed
Permitting expansion of the business without reasonably assessing the potential risks of that expansion (4.6.4)
13 The firm has demonstrated that it has someway to go to meet ongoing requirements of the Basel models. Reviews of PIM in January and June 2008 showed the model to be non-compliant while the GCM review has been subjected to several delays generated in part by the absence of documentation and adequate performance of the model to support the review.
Failing to take reasonable steps to monitor (either personally or through a compliance department or other departments) compliance with the relevant requirements and standards of the regulatory system in respect of its regulated activities falls within APER 4.7.2 E (see APER 4.7.12 G).
Unreasonably failing to implement recommendations for improvements to systems and procedures in a timely manner.(4.7.8)
The issues set out above demonstrate that Mr Cummings, as CEO of HBOS’ Corporate division, may have failed in his duties as a significant influence function holder under the FSA’s approved persons regime.