To be published as HC 1780-ii




Treasury Committee

Independent Review of the Financial Services Authority's Report ON the Failure of the Royal Bank of Scotland

Monday 30 January 2012

Lord Turner, Hector Sants and Margaret Cole

Evidence heard in Public Questions 88 - 191



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Oral Evidence

Taken before the Treasury Committee

on Monday 30 January 2012

Members present:

Mr Andrew Tyrie (Chair)

Michael Fallon

Mark Garnier

Andrea Leadsom

Mr Andrew Love

Mr Pat McFadden

Jesse Norman

Mr David Ruffley

John Thurso


Examination of Witnesses

Witnesses: Lord Turner, Chairman, Hector Sants, Chief Executive Officer, and Margaret Cole, Managing Director, Enforcement, Financial Crime and Markets, Financial Services Authority, gave evidence.

Q88 Chair: Thank you very much for coming before us this afternoon and producing a voluminous report. We have quite a bit to get through, as you would expect with a 500-page report. I would like to begin by asking you, Lord Turner, a question. You saw that Sir David Walker said your original decision to publish a one-page document was driven by a desire to say no more than you absolutely had to. Isn’t that a reflection of just how cut off the FSA had become, and indeed has become?

Lord Turner: I entirely accept that what we, and I personally, failed to focus on at the time was that it is important when something has gone wrong that there is a public account of it. We stuck too narrowly to our existing procedures. In fact, we went a little bit beyond them, because our normal procedure, when we decide not to bring an enforcement action, is that we don’t actually say anything. Even putting out a one-pager was a deliberate decision that this was sufficiently important that we ought to say something, but I wish that back in 2009 I-or other people might have suggested it-had realised that the failure of RBS was such a big thing that we should have a public accountability report. That is what I now believe.

Q89 Chair: Why did you put out a one-page note?

Lord Turner: As I say, our normal procedure, when the enforcement division decide not to bring an enforcement action, is not to put out anything. Obviously, at any one time, month by month, there may be many situations-

Q90 Chair: You scarcely could have thought that a one-page note was much of an improvement, Lord Turner.

Lord Turner: We felt that we had to comment on the fact. Given that people had speculated that there was almost certainly something going on in an enforcement investigation into RBS, we felt that we had to say that it had reached conclusions. But I entirely accept that we were sticking to the existing procedures and not being imaginative enough in realising that this would require a wider accountability. That was a mistake.

Q91 Mr Ruffley: Mr Sants, the criteria for assessing whether individuals had acted in a way that could lead to formal disciplinary action rested on whether it could be demonstrated that they had acted in a dishonest, reckless or incompetent way. Can you point to the page in the report where incompetence is defined?

Hector Sants: The decision as to whether we should take enforcement action rests on the recommendation of the enforcement department, which in itself is a separate process accountable through the RDC to the board. If you don’t mind, I think it would actually be better if Margaret could answer the question.

Q92 Mr Ruffley: No, I would not be happy with that, because you are going to be taking a job as chief executive in the Prudential Regulation Authority, which is going to be the premier authority for supervising banking. The report says there were a series of bad decisions in the years immediately before the crisis, and I want to get to the bottom of this. I want to hear your view on how incompetence is defined in this report.

Hector Sants: Well, as-

Mr Ruffley: It’s not, is it?

Hector Sants: Incompetence, per se, is not defined in the report. What we would have to demonstrate is a breach of our regulatory rules and, as the enforcement section of the report lays out, the enforcement department found that there was no basis to proceed against that framework. The executive committee personally listened to, challenged and engaged with the enforcement department to satisfy itself that that conclusion was thoughtfully reached, and I believe it to be. But to your point, absolutely, there is not. We would have had to demonstrate a failure to comply with the FSA’s procedures, rules and framework in order to have taken an action.

Q93 Mr Ruffley: What most people are amazed at in this report is that, with the exception of Johnny Cameron, there are no serious sanctions against significant individuals. Fred Goodwin emerges relatively unscathed, and I just want to pursue this question of what you think competence and incompetence is in the case of the RBS debacle. The report says, "The substance of decision-making by the board in relation to ABN Amro was defective at the time, whatever the subsequent deterioration in the market and wider financial environment". Would you not agree that making a decision as significant as the ABN Amro acquisition, even without the benefit of hindsight, was judged to be poor? Does that not imply a very large degree of incompetence? I want to understand-and I think people listening to this will want to understand-why no one has been fingered for that in this report. It is a pretty useless report in that sense, isn’t it?

Hector Sants: I entirely agree with you.

Q94 Mr Ruffley: You agree with that?

Hector Sants: The substance of the report is to make clear that we considered the board and the senior executives of RBS, which includes Goodwin, to have made a series-a series; there was more than one-of very poor decisions, which led to the bank failing. I would also agree with you-and Adair has discussed this in his foreword, but I entirely endorse his comments-that, going forward, we should change the regulatory regime to allow the regulator to take those sort of assessments into account, to ensure that people who have shown that sort of serial misjudgment are not allowed to run financial institutions again. That is absolutely my view, so I entirely support Parliament making changes to the regulatory framework so that we can stop people like this working again, without any confusion or any risk that that would not be the case.

Q95 Mr Ruffley: That is a very useful disclosure you have made, Mr Sants. Could I sum up your reply there as saying that the FSA did not have the enforcement powers under the FSA regime to bring Mr Goodwin, in particular, to book in terms of enforcement proceedings? Is that what you are saying? You are blaming the structure of the way the FSA was set up and the powers it was given by Parliament at the end of the 1990s?

Hector Sants: I am absolutely saying that, in my personal judgment, the depth of failings demonstrated over a prolonged period-there was more than one here; I think you have to build a track record, just to be clear-amounted to a clear track record of a series of misjudgments by the executives of RBS, and in my judgment that means they are not fit to run a regulated institution. I would like to see the framework under which regulators operate changed, so that in future if people demonstrate that type of serial misjudgment, which demonstrates they are not competent, we are able to take action against them.

Q96 Mr Ruffley: In the announcement of the outcome of the enforcement regulation, the FSA said, "the competence of RBS individuals can, and will, be taken into account in any future applications made by them to work at FSA regulated firms." Is the implication of that that you would deem some of them to be incompetent, and if some of them were incompetent why could you not have taken enforcement action against them?

Hector Sants: Yes, to your first question-absolutely. I should make it clear, by the way, that I am giving my personal opinions.

Mr Ruffley: No, they are very interesting.

Hector Sants: Strictly speaking, we are not allowed by the rules under which we operate to make a judgment unless somebody reapplies. I should be quite clear that I am speaking to the Committee in a personal capacity because, as the FSA, we are not allowed by the rules under which we are set up to say upfront what would happen if somebody applied.

Chair: You are speaking under parliamentary privilege.

Hector Sants: But I am making clear that, as far as I am concerned, if any of those individuals applied, I would not consider them to be competent on the basis of the track record demonstrated. If I could draw a distinction, which again is an issue around the regulations-and I would be keen to allow Margaret to contribute to this discussion, as I know she feels strongly about this also-and just explain that the threshold for barring somebody’s authorisation is lower, is less demanding, than the threshold for enforcement action. While I can say with confidence that, in my opinion, these people will not work again in the regulated sector in an executive role, it does not automatically follow from that that it means we should have been able to take enforcement action. I am entirely in agreement with you: in order to get the type of result that you would like to have, and I think we should have, we need changes to the framework under which we operate.

Q97 Mr Ruffley: I know he wants to get in, so can I just put my final question to Lord Turner, Chairman? The report quite clearly says that the FSA cannot, "Take action against the CEO"-in this case, Fred Goodwin-"of a firm simply on the grounds that there were a number of failures at the firm, even though the CEO is ultimately responsible for the actions of the firm." Don’t you think that is a grotesquely inadequate system of regulation that a man like Fred Goodwin can pretty much walk away from this mess scot-free?

Lord Turner: That is why in my foreword I deliberately put on the table the fact that we need to explore whether there should be a change in the law. The point I wanted to come in on is this issue of what is competence, and was there not a case for competence. I have to assure you that that was something the board sub-committee that oversaw the production of this spent a long time quizzing enforcement about, and it is something I have considered. The way the law works at the moment, in the best judgment of our enforcement lawyers as to what they would be successful in in appeal to the upper tribunal, is that the way it is interpreted at the moment, competence has to relate not to a broad set of decisions. You cannot accumulate lots of decisions and say, "If 10 of them were bad, there must be some incompetence." You have to say, "Look, you didn’t follow the procedures here; you did that wrong; you clearly didn’t have a technical competence in that very specific effect." That, bluntly-and this is something that has worried me-may bias our enforcement activity to zero in on very specific things that we can prove, even if, seen widely by most reasonable people, they may not be the most important things to what led to a failure.

That is one of the reasons why I raise the question in my foreword as to whether we should have a different structure of law to say that, where something on this scale has gone wrong, there should be some category of automatic sanction that applies to the people who were responsible, whether or not we can prove that in some procedural or specific fashion they did something wrong. That is precisely why I put those issues on the table in my foreword.

Q98 Mr Ruffley: One final one-line question and one-line answer, if you would, Lord Turner. In your judgment, in its new Financial Services Bill, has the Government addressed the problem you have just explained and which is in your foreword to this report?

Lord Turner: Not yet. At the end of March, the FSA and the Treasury will produce a joint discussion paper on this issue putting forward options, which is intended to be consulted on, so that the Government could then put it in-as my understanding of their intention is-as part of the legislation that will also implement the Vickers recommendations, on which I believe a White Paper may be forthcoming before the summer.

Q99 Chair: Isn’t this a huge mess? We have a piece of legislation that is amending another hugely complicated piece of legislation, and now you are telling us that, with the Bill now published already, that is effectively redundant, at least on this point, because that is going to be further amended, even before we have had a chance to read the document.

Lord Turner: Given that in any case, because of Vickers, we are going to have two Financial Services Bills, I don’t think there is a huge disadvantage in that, as long as at the end of the day we have an effective way forward.

Q100 Chair: The measures that we are discussing here are pertinent to the legislation-

Lord Turner: They are clearly pertinent.

Chair: -and are nothing to do with or secondary to Vickers.

Lord Turner: No, they are clearly pertinent to it. If we had started on this debate a year ago it might have been part of pre-legislative scrutiny and gone into this Bill.

Chair: They should have been subject to pre-legislative scrutiny.

Lord Turner: I think it would be unfortunate now to rush this.

Chair: Absolutely.

Lord Turner: There are a set of very complicated pros and cons of the different approaches that I have put on the table, which-

Q101 Chair: This Committee has been arguing that this legislation is being rushed for many months and has already published that view, as you know. You are saying you support that and if we leave this open for a few more months we might get to a better place, is what you are saying?

Lord Turner: We have a procedure now to put all the issues on the table. They are very important ones. The pros and cons of the different approaches need to be carefully analysed and the next step will be this joint FSA/HMG discussion paper to actually widen the debate.

Chair: All that is going to have to go on while the Bill is actually in the Committee.

Lord Turner: That is true. That is true, but we-

Q102 Chair: Do you think that is a good way to legislate, having just got it manifestly seriously wrong, and you are saying we did, 10 years ago where we rushed it then?

Lord Turner: I don’t think it is for us to comment on the parliamentary timetable and the management of the legislative process.

Chair: All right, you have gone as close as you can to commenting on it.

Q103 Jesse Norman: Mr Sants, you have spoken about the serial incompetence of members of the RBS management. Let us not forget this was a contested, mainly cash takeover for another institution with a value of €71 billion, shortly after which the Royal Bank raised its dividends before throwing up its hands with the loss of £40 billion. Last week when we saw them, the reviewers said that the due diligence done by Merrill Lynch in advance of the transaction, who were the advisers to the Royal Bank of Scotland, consisted of two lever-arch files and a CD. When you were in your position as managing director of wholesale institutional markets in April 2007, can you take us through the kind of deliberations inside the FSA at that time as to whether or not you should have intervened? What were the kinds of things that you were talking about and thinking about?

Hector Sants: I will make a general introductory comment. I will answer your specific question, but just as a general point I would like to say something upfront on this. I can see a number of questions in this space, so I would like to make clear that I agree that the general approach to supervision, and the policy framework that accompanied it that was in place in the FSA before the crisis, before the summer of 2007, in relation to overseeing UK institutions, UK banks, was inadequate. As soon as I could, once I took over as chief executive, I changed that.

Q104 Jesse Norman: Would it not be fair to say grossly inadequate?

Hector Sants: Grossly inadequate; totally unacceptable to me. That is why, as soon as I could, I introduced changes. I waited for the Northern Rock report, which I think was right and proper, but I would have effectively made many of those changes anyway. From March 2008, as you know, we embarked on a radical change to the entire approach to supervision and a wholesale change to the people involved. I might point out in passing that, of the supervisors intended to transfer to the Bank of England, at whatever date that is in the future, which we have already identified, three-quarters of them did not hold relevant supervisory posts at the time back in the summer. That is, we changed three-quarters of the supervisory staff. I am not in any way trying to defend the approach taken to supervision in that period.

To your specific question, I have to say-and I am sure you will find it somewhat strange to hear, but it is true-that the FSA under the previous executive management operated in a very silo manner and we did not discuss specific major supervisory issues in our executive committee. We were not encouraged to question or debate the management approach across the silos, across the areas. To answer your specific question, there was no discussion, and the then chief executive did not convene any discussion, on the merits of the deal.

Jesse Norman: I must say I find that absolutely astounding.

Hector Sants: I agree with you.

Q105 Jesse Norman: I am grateful for your frankness on this issue. As far as you are aware, was there any discussion among the members of the board of the FSA?

Hector Sants: To the best of my knowledge there was not. I think the existence of the takeover was reported by the then managing director responsible for it, but you would not describe there being any substantive discussion at the board level. I should perhaps, in fairness to the people involved, indicate that, although there was no discussion in the executive committee, I understand from those who prepared the report that there were some bilateral conversations between the chief executive and the relevant managing director that I was not party to. I should be a little careful as to the degree of discussion, but there was no formal consideration of it in the executive committee or the board.

Q106 Jesse Norman: A very large chunk of the Royal Bank’s business fell under your remit as managing director of-

Hector Sants: If I may interrupt, that is completely untrue.

Q107 Jesse Norman: Could you tell me how much did?

Hector Sants: None.

Jesse Norman: None at all?

Hector Sants: None at all.

Jesse Norman: No part of the RBS at all?

Hector Sants: No part. I had no involvement in any way whatsoever in the supervision of RBS. The way that the then chief executive had organised the FSA was to place those institutions that were domestically located in the United Kingdom inside one division, and in the other we placed the markets activities, i.e. overseeing stock exchanges and so forth, and overseeing wholesale foreign institutions. It was an integrated, holistic approach, so the investment banking division of RBS was regulated and overseen by those people who looked at the rest of RBS, all of which sat within the responsibility of the managing director, retail. I had no involvement whatsoever. I had no knowledge of what those supervisors were doing. There was no cross-discussion in the FSA. At no point in my tenure did I ever discuss RBS.

Q108 Jesse Norman: You are painting a picture of a wildly dysfunctional organisation. Can I just ask you then, as I understand it, therefore, the investment banking part of the business was treated under the retail side and, therefore, you had no visibility to that?

Hector Sants: Correct.

Q109 Jesse Norman: Was this the position that you complained about?

Hector Sants: Yes.

Q110 Jesse Norman: Did you push for some ability to have oversight into the RBS at that time?

Hector Sants: I did, but the offer was not taken up. It probably does fall into the category of the things where, if you look back on it, maybe I should have shouted louder, but I did raise the question with the then chief executive.

Q111 Jesse Norman: You sound like the Governor of the Bank of England-sounds like everyone should have shouted louder.

Hector Sants: I cannot speak too loud when I say that. I am sure you appreciate that I have gone back over these events many times in my mind to see if they could have been done differently. Given what happened, it would be nice if I could point to some document where I laid out all the risks of that. I cannot, but I can tell you in all honesty I did raise the issue.

Q112 Jesse Norman: This really, then, is a question for Lord Turner. Obviously, you were on the board of the FSA at the time-am I right about that?

Lord Turner: No, I joined the board of the FSA on 20 September 2008.

Q113 Jesse Norman: When you came in, this was already an organisation that had been in some transition?

Lord Turner: Yes.

Q114 Jesse Norman: You have made certain further proposals to this Committee for the board of the FSA to be improved in various different ways or, as it were, scouted them. Do you think similar concerns could be expressed and addressed through improvements to the Court of the Bank of England, in terms of its own supervisory arrangements since, as you may know, we have been very critical of its inability to act as a genuine board of supervision?

Lord Turner: Can I start, as a background, by saying that the FSA board, like the FSA, does a very wide span of things-too many? One of the things that has made me a strong supporter of what is now intended is a realisation that just the sheer span, from the prudential regulation of major banks to the conduct regulation of IFAs, is just too much to do and produces a diversion of approach.

Secondly, in terms of the way that the FSA board operates and reports, in the future we will be heading in three different directions, one of which is the FCA board, which I think should probably be more open about the debates it has on things, like the RDR and the mortgage market review, illustrating to a greater extent than we do at the moment the arguments put for and against because, often there, there is not sensitive supervisory information. There are public policy debates. There is another bit that will head to the PRA, which is the supervisory side. It is always quite difficult to be open and accountable on any current basis about the discussion on actual prudential supervisory cases because they are of their nature highly confidential. We are now having detailed conversations, as you would understand, about the eurozone, which it would not be reasonable to put into the public domain.

The third category, which we should have been doing but were not doing much at all, was the macro-prudential, "How is the whole of the system operating?" That in future will be the responsibility of the Financial Policy Committee, and there I think the shadow Financial Policy Committee has already started with a high degree of openness as to the debates that are going on there. There is an ability looking there-

Q115 Jesse Norman: Yes. I will make another point, which is what we are seeing today is a description of an utterly dysfunctional board of the FSA. The board is allowing this institution to do these things that Mr Sants has described so eloquently, failing to intervene and failing to organise, and the result in part is a catastrophe. The question is, being that dysfunctional, is there a danger of replicating this absence of proper scrutiny in institutions such as the Bank of England?

Lord Turner: I don’t think so. Because I am on the Court of the Bank of England, I was a party to the document on bank accountability, which I know this Committee had some concerns about, but I think it was a reasonable set of suggestions. I felt, if I may, that you may have not appreciated the way that that could develop. What that document was saying was that an oversight committee could exist that would produce an annual report on process. We have in the Monetary Policy Committee and the Financial Policy Committee-

Q116 Chair: We are not here to discuss this. I know the question was asked-

Lord Turner: The question was asked. I am very happy to-

Chair: -so let us have a quick go and get back to the report we are discussing.

Lord Turner: The question is on the Court of the Bank of England.

Chair: Let us have a quick go on it and then-

Lord Turner: Oh, you want a quick go? Okay.

In the substance of its activity, there is a high degree of openness of its nature within the Bank of England on the Monetary Policy Committee, and we can see the debates going on there. There is a high degree of openness now on the Financial Policy Committee, and that is appropriate. What is proposed is an oversight committee that would produce an annual report, and to my mind this is not simply two paragraphs in the general annual report-it would be a serious annual report of the oversight committee, which would be seeking to ensure, and to ensure that you were satisfied, that there was no groupthink going on, that the individuals who had counterpoints of view were able to put them forward, and that the processes of analysis had been driven by the external members as much as the internal members. That would help ensure process.

Then there is also a proposal in there that, where there has been a set of developments that are controversial, a trusted external body, such as the IMF, would be asked to give a report on substance. So, for instance, if one went through a period-

Chair: We have read the report, so let-

Lord Turner: My point of view is that it could be made to work. It depends on the details.

Chair: We may take further evidence on that in due course.

Q117 Mr McFadden: Mr Sants, can I take you back to the judgment the FSA made about the ABN Amro takeover? In autumn 2007, you considered the question of whether the FSA should intervene in the takeover, and you concluded that, from a capital perspective, RBS would be able to deal with it. Given that this was the view that ended up sinking the bank, was that not a disastrous misjudgment?

Hector Sants: First of all, can I make clear that I do think when you read the press there can be some misunderstandings on this point? But at no point in the process at all was the FSA required to approve the acquisition. There was no formal requirement-

Mr McFadden: No, but you did have the power to intervene.

Hector Sants: -to sign off or to approve it in any way. There was no-

Q118 Mr McFadden: But you did have the power to intervene, didn’t you?

Hector Sants: Come on, there was no specific decision point. I decided-and I might point out that the previous chief executive had not-that it would be a good and proper idea to assess the risks in the transaction, which I and the Chairman did do a number of times in late September, early October. But you need to be quite clear that at that point, once the offer document was published, which it was on 20 July, the only basis under which we could have intervened would be if we had concluded that the bank, on completion of the transaction, would not meet threshold conditions.

I am absolutely clear-and again, I have been over this in my mind a number of times, and I remain completely clear-that there was no regulatory basis for an intervention. So no, on the information available at that time, it was not possible to intervene at that point after the offer document was published. I did not have the power to intervene.

Q119 Mr McFadden: Do you regret the judgment that you made about the capital strength of RBS being able to handle that deal?

Hector Sants: I think you misunderstand what we were doing. We were not making a judgment. We were assessing whether the bank met threshold conditions. That is a very specific test that requires us to conclude that the bank will imminently fail; will fail, with near complete certainty. The bank did not fail for over a year. It did not fail until there was a significant deterioration in market conditions, which occurred from the summer of 2008 onwards, and until after Lehman Brothers collapsed, which dramatically changed the liquidity framework for the marketplace as a whole. You could not have concluded it did not meet threshold conditions in September 2007. You can go back over that judgment. I have been back over that decision many, many times, but the facts remain the facts: there was no basis to intervene.

Q120 Mr McFadden: Are you not saying you were guilty of the same misjudgment as the RBS board, in that you thought that they would be able to handle this?

Hector Sants: No. It was not a judgment in the way you are describing it. It was not a judgment about the future. It was a decision on whether it met threshold conditions. In order for it not to meet threshold conditions, you would have had to have been able to say it would fail. It did not fail immediately the acquisition took place. Therefore, the event demonstrates that was the only conclusion you could reach. We are talking about the board making judgments about risks, which might or might not have happened, and saying they took an unreasonable degree of risk. That is not the same as assessing the test of threshold conditions. The time for the FSA to have intervened, as the report clearly says, was before the offer document was published. I entirely agree, as to the earlier discussion, that they should have made an assessment of risk at that point, and I would like to think, if we had done so, we would have intervened. I cannot say whether we would or we would not, because that is obviously a hypothetical question, but I would like to think we would have done as the report says.

This is not the same as what the board was doing. This is a regulatory conclusion based on a set of facts. The RBS was meeting its regulatory capital at the time of the deal. It was going to meet its regulatory capital immediately after the deal closed, which it did. It was funding itself in the marketplace. In fact, it was telling us that it was benefiting from a flight to capital. It had succeeded, despite the fact-I accept-that it had essentially a cash offer, in finding funding for its cash offer. A regulator could not have warranted an intervention. If a regulator had intervened at that point, people would have said, "You can’t do that; it’s totally irresponsible; it’s not in any way linked to the powers that you have."

What we would like, which is back to the earlier questioning in terms of different powers, is a different sort of power, a power to actually make the judgment that you are saying I should have made, which is: "There is a reasonable risk that it will fail, therefore it cannot go ahead." That is the power we would like. If we had had that power-back to the earlier question-you could then hold the PRA to account in the future as to whether it successfully makes those sorts of judgments. But the threshold condition test is an entirely different sort of test. I think it is really important you understand that. It is in no way analogous to the judgments the board of the RBS was making, but we would like a power. We are prepared to take on that responsibility, which no doubt will produce some very difficult decisions in the future, which you rightly will then wish to hold us accountable for.

Q121 Mr McFadden: Let me take you through what you did on capital over the next few months, because the FSA started to get much more concerned about capital and liquidity issues at the end of 2007, beginning of 2008. You met with the chief executive of RBS in April 2008 to discuss the bank’s capital position. You asked for further work on this to get the definitive position. We understand that work was not done. Why was that?

Hector Sants: You are right. In practice, it did not make any difference to the outcome, because the reason I asked for further work was that they had indicated to us that their capital might have fallen by some 0.1 of a percent below our internal guidelines, which is a very, very small amount, but nevertheless an issue of concern that triggered a debate with us. I had the conversation with the chief executive on 9 April. As related in the report, I specifically required him to have a rights issue, which certainly, as far as I could judge from that meeting, he was not intending to do when he came into the meeting with me. I asked him to raise as much capital as he possibly could. I also asked him at that point to complete that capital calculation and return that information to the supervisors. Unfortunately, RBS’s systems did not allow them to do that. I have to say that is a criticism of RBS, but in terms of the outcome, in terms of future events, it did not make any material difference, because we required them to raise as much capital as possible, and to have a rights issue, which I think was one of the largest in European corporate history, and certainly in the UK banking sector, and they did everything they possibly could to bolster their capital position at that point. But of course, in the light of events, it proved not to be enough. So you are absolutely right, they did not comply with our request to give us the detailed information. It does reflect the very poor state of their systems and controls, which was a major issue throughout this period. Their systems and controls were extremely poor, as the report demonstrates.

Q122 Mr McFadden: At the end of 2007, you put them on a watch list for capital risk. You put a danger sign over RBS.

Hector Sants: Yes.

Mr McFadden: They then increased dividend payments two months later by 10%. Can you tell us, did you have any power to press the pause button or stop that increase in dividend payments after putting them on a capital watch list?

Hector Sants: No. In order for us to intervene on the dividend, they would have to be noncompliant with our regulatory rules. When they raised their final dividend- and actually they raised the final dividend by 4%, not 10%; it was the total dividend for the year and the final was up 4%-we were not required to give approval for that increase, and they were still complying with their capital and liquidity rules at that point. We were not required to give a formal approval to that dividend increase. We were notified the day before but there was no dialogue on that dividend issue.

Q123 Mr McFadden: Can I just ask you one final thing? There were 13 months between the run on Northern Rock and the collapse of RBS, and these issues were at the top of the national agenda. We then find that there was no contingency plan throughout that period for a bank that could not meet its overnight funding, despite the fact that RBS and one or two others were hugely dependent on that kind of funding. Looking back on that 13-month period, do you not think the FSA was asleep at the wheel?

Hector Sants: There was a contingency plan, so I don’t recognise that statement. As the report says, we should recognise that if there is no liquidity in the market a bank is not going to be able to find liquidity in the market. Therefore, for banks of this size, the contingency plan is provisioned by the central authorities, by the central bank. As the documentation makes clear, from the end of November onwards, which as you rightly point out is when the FSA became concerned about potential capital and liquidity risks for the larger banks, we were pressing-as I think I have mentioned in earlier Treasury Select Committee hearings-for the Bank of England to put in place long-term liquidity facilities, and the chairman of the FSA, Callum McCarthy, was very active in that dialogue. We were seeking to put in place the appropriate contingency plan for a liquidity failure of a bank of the size of RBS. The FSA does not itself have any liquidity that it can provide. When marketplace liquidity disappears, the contingency plan has to be one for the central bank. We were clear about that from the moment that we saw deterioration in the liquidity position of the larger banks, which we saw from the end of November, and we put that in writing to the tripartite authorities repeatedly from then on.

Q124 Mr McFadden: Does your report not say, at paragraph 550, and is this not a quote from it, that there was no FSA "contingency plan in the event that a particular bank can’t fund its overnight position"?

Hector Sants: No. What that says is that there was a director in the FSA, who was not party to the tripartite and senior discussions that I referred to, who sent me an email asking whether there was one. That doesn’t mean there wasn’t one. It just means that he was not party to the tripartite discussions, in particular the discussions between the Chairman, the Governor, the Treasury and the Chancellor.

Q125 Mr McFadden: He was wrong?

Hector Sants: He was asking me a question, to which I answered, "Yes, there is a contingency plan."

Q126 Chair: Mr Sants, can I take you back to this question of what you describe as the poor systems and controls in RBS that prevented them from doing the work on the capital position, which you requested of the chief executive in April 2008? What does it say about the FSA’s systems and controls, that you demanded it but did not get it and did not follow up on it?

Hector Sants: I think it says that we were extremely stretched during this period. Maybe I will come back a little bit to the opening discussion we had with Jesse Norman.

Chair: You are all very busy and, therefore-

Hector Sants: No, if I could finish the question. I am entirely agreeing that the quality and quantity of the supervisory staff that I inherited in the summer of 2007, as well as the procedures and philosophy they were operating to, was inadequate, and that is why we-

Q127 Chair: It does sound as though you are dumping on your predecessor.

Hector Sants: We started with, as you know, some seven people on RBS. We currently, as a dedicated supervisory team, have 23. On major issues, such as stress testing, we use between 50 and 100. As you say, we were notified that there was uncertainty over the March year-end return, but first of all, I would like to say, even efficient banks don’t necessarily know the absolute final number within a couple of days; secondly, the difference was only between 0.1 of a percent on 9; and thirdly, once we had requested them to have as large a rights issue as possible, our focus was on maximising their capital position. Would it have been better if the supervisory team had followed up to close that out? Yes, although I do know the report finally notes that actually RBS believe they may not have breached the ICG. But it made no substantial difference to the outcome here. As a general point, are you saying, yes, the FSA was understaffed and lacked enough quality staff to address the enormity of the crisis that broke from October onwards? Absolutely, and that is why we have added some 600 more supervisors, changed the way we operate, changed three-quarters of the staff, and adopted an entirely new model-so it was working in a very stretched environment.

Q128 Chair: Mr Sants, I am not asking you whether it made a difference that they did not follow it up. I am asking you what it told us about the FSA at the time that you were managing it, and you-

Hector Sants: It told us that it was very stretched and needed to focus on the essentials, and this was not an essential point. This was an important point in the context of trying to ensure RBS did not fail.

Q129 Chair: Can I take you back to some questions that you answered about your role as head of wholesale? During your time as head of wholesale, the investment side, the side that plausibly would fall under wholesale, was growing very fast in RBS, was it not?

Hector Sants: The investment bank of RBS? Yes, between 2005 and 2007. There are statistics in the report.

Q130 Chair: Yes, which I have in front of me here. It was growing very fast and was the best part of two-thirds of the bank’s capital base by 2007. You have said that you raised it. Have you any evidence at all that you raised it to show us?

Hector Sants: I did not raise the specific issue of the growth on the investment banking side. The concern I raised-

Chair: But you raised your concern about the silos.

Hector Sants: Yes. The concern I raised, which was highlighted to me by my staff on the investment banking side that looked at Morgan Stanley and Goldman Sachs and others, was that they had considerable expertise in investment banking activities and they were not able to share their expertise easily with the supervisors in the UK Banks Department.

Chair: Yes, but the question is, do you have any-

Hector Sants: I am afraid I don’t have anything in writing that can demonstrate that. You have to decide-

Chair: None at all?

Hector Sants: No. I could ask other individuals in the FSA whether they are happy to corroborate that. I can think of one or two who might well be, and if you would like me to do that I can certainly do that.

Q131 Chair: You were on the Executive Committee at the time. An Executive Committee will have minutes. Bearing in mind the gravity of the situation, did it not cross your mind that you should at least get your reservations into those minutes? You said you were very upset about it.

Hector Sants: I think that is a fair point, and I did not read it into the Executive Committee minutes. I have to say the Executive Committee minutes for the FSA are action point minutes. They are not actually verbatim.

Q132 Chair: Well you wanted some action taken, didn’t you?

Hector Sants: Yes, I agree. I acknowledge that point.

Chair: So they were exactly what you would expect.

Hector Sants: I am acknowledging that point. With hindsight, I should have ensured it was fully documented, that I expressed my views. I also expressed my views about the limitations of the management in that area. I think Margaret Cole did the same, so she may wish to corroborate the general concerns we had about the weak management in the retail area of the FSA.

Q133 Chair: This is something that you felt was wrong at the time, raised in the corridors, or privately or informally. Do you remember how you did this?

Hector Sants: I raised it in my regular bilateral meetings with John Tiner. We also raised the question of the general quality of management in that area, informally, in the margins in a number of the executive meetings.

Q134 Chair: What did Mr Tiner do when you mentioned this to him?

Hector Sants: He made it clear that the model he had set up for the FSA was of autonomous business units, and that was how he envisaged it being run. On the question of the individual-

Q135 Chair: He was saying, "It’s none of your business, really; let the retail side get on with it"?

Hector Sants: It would be for you to ask him, but I think he took the view that he had set up an autonomous business model arrangement and that was the way he wanted it run. But as I say, I might invite Margaret to join in, because she was part of the executive committee. You are asking for some corroboration, and she could-

Chair: I don’t think there is any need, because it is your replies that matter on that point, since it was you who were head of-

Hector Sants: Yes. I should also point out at this point that I did ask for the resignation of the managing director, retail, which I hope demonstrates my views on that subject.

Q136 Chair: When did you do that?

Hector Sants: As soon as I reasonably could, which was after the completion of the Northern Rock report.

Q137 Andrea Leadsom: Ms Cole, I would just like to ask you, as a legal person at the FSA, I certainly recall John Tiner talking very much about principles-based regulation and not about very narrow definitions. Mr Sants says that it would not have been possible, once the offer document had come out, for him to do anything other than to shut it down if the merged bank was absolutely imminently then going to go bankrupt. Would you say that that is true, from a legal perspective, at the time of that report coming out, and bearing in mind the FSA supposedly was working under principles-based regulations?

Margaret Cole: I would say that it was certainly true. The legal advice that was given to Hector on that subject was given by the general counsel’s division, so not by me. I do endorse the fact that there were very strict legal requirements for the test of not meeting threshold conditions. I have to say that I don’t think the principles-which are a set of principles that govern the behaviour of firms and individuals within firms, which you quite rightly say overarch the detailed rules-were operationally relevant to that particular decision. There was a very strict legal test for that.

Q138 Andrea Leadsom: You agree that it would not have been possible for Mr Sants, coming in as the new CEO, to have been able to stop that deal going ahead at that point on any grounds other than its being imminently about to be bankrupt?

Margaret Cole: I agree with Hector’s explanation about how we had to consider whether threshold conditions were met, and that was the pertinent and relevant test at that time, and that principles were not applicable to this.

Q139 Andrea Leadsom: I have to say, it does seem to me astonishing that somebody who is earning more than five times the Prime Minister of Britain can only express a view if it’s going to be the imminent collapse of a bank, where clearly you had very grave concerns. Were there no other hook or by crook measures you could have used to make clear your concerns about this merger?

Hector Sants: I would like to say, in passing, I am not earning five times the Prime Minister. I have no final salary pension or defined benefit pension, but that is by the by. It is not correct, what you just said.

I would make the point here that we are unelected officials and, as I have said many times before, I believe it is important that we work within the rules set by Parliament, the laws. We should operate within the law. The general principle that still prevails, and was certainly prevailing at that point, was that boards take responsibility for running their own firms, and that ultimately the decision for running the firms well rests with the boards and their executive. For the FSA to act as shadow directors, and second-guess the judgments that executives and boards have made, was absolutely not the philosophy prevailing at the time. To have intervened in a bid that had been nearly unanimously-95%-approved by the shareholders, which would have required the triggering of the MAC clause by the firm to pull out of, unless we had the power to do it, it does not seem to me that I should be seeking to intervene in a way that I was not mandated so to do. I think you would consider that a misuse of my position if I had merely just sought to disrupt the deal in an irresponsible fashion.

Q140 Andrea Leadsom: Yes, but Mr Sants, even the Governor of the Bank of England found a way to talk publicly about the need to sort out our deficit during the period in the run-up to the General Election, and got into trouble for that, but he found a way to get his view known. What we are talking about here is the extent to which you really were genuinely concerned and felt completely unable-and you were legally unable-to act and reflect your concerns, versus you were just going along with it because you were caught up in the herd mentality of the RBS board and the shareholders.

Hector Sants: I certainly was not caught up in the herd mentality. I draw your attention to the point earlier that the previous chief executive had not even thought that he should consider the issue. Surely, the point at which the issue should have been considered was before the offer document. I had the guts to consider the issue, I actually did what nobody else did, including my executive chairman, with whom the final decision ultimately rests, not me, to get out there and take a look at the question.

Q141 Andrea Leadsom: But you did not act in any way other than to say, "It is not going to imminently go bankrupt."

Hector Sants: It is not actually for me to act, I just repeat that. We do have a system here where there is an executive chairman in the FSA. If I had sought to act capriciously or unreasonably, I am absolutely sure the board and the chairman would have told me I could not do that. Your line of questioning is implying this was a decision solely for me. It was not a decision solely for me. There is clearly the fact that there is an executive chairman of the FSA who was party to the deliberations. Nevertheless I would like to restate that, yes, I did look at it responsibly and I concluded within my powers I could not act. I consider that I was doing my utmost to address a very difficult situation.

Q142 Andrea Leadsom: In conclusion, from everything I have heard, you are utterly blameless, innocent, there is nothing you could have done differently or better, and you have no regrets about anything of your part in this whole fiasco? There is nothing that you feel you could have done differently?

Hector Sants: No. Look, I am answering the very specific narrow question of: could we have done something different after the offer document was published in relation to the ABN Amro deal? I am saying I have been over that many, many times in my mind, and the answer is no. Does that mean there are other things I could have done differently? Absolutely; we have referred to a number already.

Q143 Michael Fallon: Let us just have a look at the timeline again. You took over at the end of July 2007. In appendix 2C, the timeline tells us that you had three assessments of the impact of this acquisition: 19 September, 28 September and 4 October. This is two months after you took over. It then took another four and a half months before you even met the Chairman of RBS, which was then by far the biggest bank you were dealing with. Why was there a four-month delay?

Hector Sants: Because in that period, up until the end of November, we were extremely focused on the risk posed to the mortgage banks of the United Kingdom: Northern Rock initially, HBOS, Bradford & Bingley, and Alliance & Leicester. They were clearly the most at-risk institutions. I think the Northern Rock report has already indicated we were aware from the onset of the crisis in August that these four institutions were at risk. We had almost no investment banking expertise in the FSA. We had very limited risk analysis expertise in the FSA. We had a very small number of supervisors; as I say, six or so on RBS and one to two on these other banks. I thought it was the best use of my resources to concentrate on those institutions most at risk. Would it have been ideal if I had also spent some time with RBS in that period? No doubt, but I think you underestimate the stress that was placed on the organisation, and I made the judgment, which I think is a reasonable one, to deploy my resources where we had institutions most at risk.

As we indicated earlier, RBS was complying with its capital and liquidity guidelines throughout September/October. It was actually benefiting on the liquidity side from a flight to quality at the end of September and early October. The risk to the larger banks in the United Kingdom did not become apparent to us until the end of November, early December, which was the time it was placed on the watch list. So the answer to the question is: I cannot be everywhere at once. We had a very, very small number of competent professionals. I think you underestimate the strain and the stress under which the organisation was being put at that time.

Q144 Michael Fallon: Yes, but I am not talking about the organisation or your resources. I am talking here about you-you are in charge.

Hector Sants: Yes, well, I have told you what I was doing.

Michael Fallon: But you were in charge-hang on a minute. Hang on a minute-

Hector Sants: I was addressing the principal risks facing the United Kingdom financial sector at that time, which was the risk to those banks I have outlined. That is where I put my personal effort. We had a supervisory team, and they were on the case of RBS in that period, but they were making the judgment, which they were advising me on, that it was not materially at risk until the November period.

Q145 Michael Fallon: Yes, but it was not until 13 February that you deigned to meet the chairman of your biggest bank, the one they said might be at risk. Why was that delayed? In October/November-

Hector Sants: I have answered the question, because at that time I judged that my time was best used addressing the near and present danger to the other institutions, and that was what I was doing.

Q146 Michael Fallon: Do you now regret not seeing the chairman or chief executive of RBS a little bit earlier?

Hector Sants: I think it would have been better, certainly it would look better for this discussion, if I had done so, and that falls into the category of a number of procedural issues that I think with hindsight I could have done differently. But may I make a general point about all the actions that took place between November 2007 and September/October 2008? At the end of the day, we realised that RBS was short of capital. It was me personally in a meeting with Fred Goodwin that pressed him to have a rights issue. I have no doubt that he would not have had a rights issue of that size without my personal intervention. The firm raised as much capital as it possibly could. There is no evidence that if we had intervened earlier they would have raised any more capital-if they had had the rights issue in November or December. At the end of the day, the largest rights issue in the UK financial sector proved not to be enough; whether that rights issue had occurred in November, or whether it had occurred in April, it would not have made any difference to the bank failing.

Similarly, on the liquidity point, it went into the summer of 2007 structurally deficient on liquidity, as the graphs point out. There was no way that it was going to be able to alter that liquidity profile, given the market conditions from November onwards. So, the nuances of what we did one day, by that day, does not alter the substance of the point that we pushed them throughout to improve their liquidity position. We engaged with the central bank to put in place contingency facilities. We pressed them to raise as much capital as we possibly could. It would not have made any difference when they raised that capital, and the amount of capital they raised was not sufficient to stop them failing.

Q147 Michael Fallon: You still don’t think it is odd that there was a four-month delay of you seeing the RBS chairman?

Hector Sants: I am saying, for the purposes of dealing with this discussion, it would have been preferable if I had seen the RBS chairman, but I do remind you again that it was the tradition in the FSA at that time that the chairman of the FSA engaged with the chairmen of banks. I actually was the first chief executive to get interested in having regular dialogues at the senior executive level. I now have regular meetings every month with the chief executives of the major banks. Again, that is a question you could partially address to the former chairman of the FSA.

Q148 Michael Fallon: You keep trying to offload the blame. If you were changing the culture-

Hector Sants: No, I am not offloading. I have taken full-

Michael Fallon: -why did it take six months for you to meet the chairman?

Hector Sants: I have answered the question. With hindsight, it would have been better if I had. I said that once. I said it twice.

Q149 Michael Fallon: Okay. In the report, at 446, it says that once the crisis period started there was limited action that the FSA could take to improve the firm’s liquidity position, given market conditions.

Hector Sants: Yes.

Michael Fallon: When, for the purposes of that sentence, did the crisis period start?

Hector Sants: As I have indicated, from November onwards it was apparent that the RBS and the major banks were under some liquidity pressure. I think we have a timeline of in here-bear with me-the liquidity graph on page 197, paragraph 471. It demonstrates that the material deterioration in the liquidity of RBS began to occur in July 2008 and then accelerated, obviously after the Lehman Brothers incident, and as the report makes clear to that effect. There was pressure, as I indicated earlier, on the major banks from November onwards, which is when we were pressing the authorities to put in place their contingency plans.

Q150 Michael Fallon: But there were liquidity issues brought to the fore by the mortgage bank issues back in October/November 2007. Why would it take another year for some action to be taken in respect of RBS?

Hector Sants: No. I am sorry, I said in November 2007 we were pressing the central authorities to put in contingency. The assessment that I received from the supervisors in September/October, on which we based our threshold condition conclusion, made very clear that RBS was not actually suffering liquidity pressure at that time. In fact, quite the contrary, the supervisory group advised me that the firm had made very clear to it that in that period it was benefiting from a flight to quality, and was actually gaining deposits because of the pressure on the smaller banks in the period described. In September/October, there were no signs of increased liquidity pressure on the major banks, as reported to me by the supervisory group, and I think the report found no evidence that that report was inaccurate. From November onwards we did have concerns, and as I said, that was the point at which the chairman of the FSA started pressing the central bank and Treasury to put in place contingency facilities; that is, from the end of November 2007.

Q151 Michael Fallon: It was then still a further year before RBS disintegrated.

Hector Sants: Yes. The point of the paragraph you drew attention to was that we should not think the firm was not aware that it had a wholesale liquidity risk. It was very apparent it had a wholesale liquidity risk. It was seeking to improve its position in the marketplace but was not able to do so, so there is a difference between conditions under which you can improve your liquidity profile and conditions under which your liquidity profile is deteriorating. I am explaining that under the conditions that prevailed, as that paragraph-I did not write that paragraph, it is an independent report, so again we could check; maybe ask Adair to comment here-in the report is highlighting, the ability of the bank to improve its position was not there. That does not mean that the bank’s position was deteriorating and, as that graph shows, it did not markedly deteriorate until July. As I say, I think you should be aware that these are conclusions in the report. I did not write the report.

Q152 Michael Fallon: We are testing this conclusion. The conclusion is that there is limited action that either you or the bank itself could have taken, actually over a year.

Hector Sants: That is not my conclusion. That is the conclusion of the independent report I am presenting to the Chairman.

Michael Fallon: Of course, but what we need to test is whether it is right-

Hector Sants: In my judgment it is.

Michael Fallon: -that there was limited action that you could have taken over a period, as much as a year, to improve the firm’s liquidity position.

Hector Sants: Correct. And I believe that judgment of the independent report to be correct.

Q153 Mark Garnier: You are painting a pretty staggering picture of institutional incompetence at the FSA in the run-up to when you took over. You also told us at great length how you were trying to raise the issues, the fact that you thought there were a number of things that were not right about the organisational structure of the FSA. Who were you raising that to?

Hector Sants: I think I covered those points earlier. I acknowledge that we did not raise them formally, and with hindsight I wish I had done.

Mark Garnier: No, I want to know who did not take the action.

Hector Sants: I raised them with the chief executive.

Q154 Mark Garnier: The Chief Executive, and would he have referred that back to the board?

Hector Sants: I cannot tell.

Mark Garnier: Should he have referred it back to the board?

Hector Sants: It is an interesting question that, and again Adair might like to comment. Historically-and I think there is the material there in the report on the board’s role-in general, the board primarily restricted itself to its policy role of rule making, and took relatively little interest in the supervisory model. In my view, there was very little challenge by the board of the executive on the way we went about supervision. Clearly, in my view, that was a failing of the board, which has since been rectified, and in bringing in the new supervisory enhancement programme, the board rigorously engaged with the executive team as to the nature of that model and whether that model would address the shortcomings of the past. But traditionally, no, the board did not engage with the executive on these sorts of issues.

Q155 Mark Garnier: In Lord Turner’s 2009 review, he identified seven causes of the financial crisis. Were any of those discussed at board level, do you know, prior to the financial crisis? Would you like me to remind you what they are?

Hector Sants: You might be advised to do so. That would be helpful.

Mark Garnier: I will go through them one by one.

Hector Sants: Thank you very much. I am sure Lord Turner can remember them.

Q156 Mark Garnier: "The massive growth and increasing complexity of the securitised credit model", was that discussed?

Hector Sants: Not to my knowledge.

Q157 Mark Garnier: "Extensive commercial bank involvement in trading activities."

Hector Sants: Not in the way that that report describes.

Q158 Mark Garnier: "High leverage in multiple forms."

Hector Sants: No.

Q159 Mark Garnier: "Expanded maturity transformation dependent on the marketability of assets." No? "The complexity and opacity of the structured credit and derivatives system."

Hector Sants: There was some discussion on that, I think. But I have to say we would have to double check the minutes.

Q160 Mark Garnier: Apparently they were not. "Hard-wired procyclicality."

Hector Sants: I know there was some discussion of that, because that would have fallen into the category of discussing rule making, and obviously the board did approve the Basel II rules, and therefore, where you have policy issues, which manifest themselves in regulatory rules, then the board engaged with those topics. To your general point-just to wrap it up as a clean answer, to avoid us having to come back in detail-you are entirely right, that the FSA did not give any consideration to financial stability in any material way, or the risk in the system as a whole. So of course, to be fair to the board, there was no specific and clear mandate so to do, and indeed, the MOU says that is the responsibility of the Bank of England.

Lord Turner: If I can just quote from paragraph 691, because we did look through the board minutes: "It is noticeable that during the period between January 2006 and July 2007, of the major topics discussed at the FSA board only one out of 61 related in some way to bank prudential risks and issues."

Q161 Mark Garnier: One out of 61?

Lord Turner: One out of 61. The focus was very strongly on Equitable Life, split capital trusts, RDR, treating customers fairly, and so on. That was the skew of the focus of the board at that time, against the background of a widely held assumption-but in retrospect, complete delusion-that the world had become a safer place, precisely because of all these complicated things, which in retrospect we know have made it less safe.

Q162 Mark Garnier: In the report, the FSA puts a great deal of emphasis on the performance of the non-executive directors of RBS, and yet the non-executive directors of the FSA were sorely lacking in scrutinising what was going on. There is a suggestion that there is a conflict of interest between having people with direct industry experience on the board of the FSA, and yet it is absolutely because of the lack of that direct industry experience that you managed to hard-wire procyclicality and other things, if the system had only examined one out of 61 problems that were identified.

Lord Turner: Can I comment-I think it goes back to the comment I made earlier-it is my belief that the FSA was set up as a job to do far too wide a span? I have been continually aware of that at board meetings over the last few years, that we have enormously long agendas, enormously long meetings. We have to go in detail through mortgage market review, retail distribution review. We now go through in great detail what is going on, particularly in the reports from the CEO and from Andrew Bailey now, the director in charge of bank supervision. We go through in very considerable detail the risks and how we are addressing them, but at the time that was squeezed out by other elements of the agenda. I think it reflects the fact that that was not an intelligent way to set the system up, and that in the future we will have dedicated people on the Financial Policy Committee who will simply be focused very extensively on the macroprudential, on the overall systemic risks. We will have people on the Prudential Regulatory Authority, both in respect of its executive and its board, who are simply focused on the supervision of major banks. It is too much to expect somebody to be dealing with these incredibly complicated issues of capital and liquidity, if you also ask of them half of their time to be expressing a point of view on key data or arch crew or retail distribution review or mortgage market review, it is too wide a span of control.

Hector Sants: If I can add briefly, with regard to the PRA and looking forward, there are some recommendations from David Walker, with which I entirely agree, that it is vitally important for the independence that the PRA board do come with current industry experience, and I recognise the point about conflict. We all have to think through: how do we avoid conflict-particularly if we want to involve the independent board members, as we do-between individuals who provide the decision-making, so they would be part of the assessments for these important questions we have been talking about today? Basically, we do have to have current experience involved with the independents on the regulatory boards. But, as Adair said, that is an argument, in particular, for specialisation, because the wide span of the FSA set of responsibilities clearly proved too much for the board to be able to effectively oversee, and I agree with the points you are making.

Q163 Mark Garnier: Lord Turner, on a number of occasions you made the point that the board should have quite detailed minutes coming out, in order to make each individual member more accountable and perhaps to air their views a bit more enthusiastically. I have not read it in detail, but I understand that the Financial Regulation Bill does not make any requirement that the FCA publish its minutes, and merely leaves it up to them to decide what they should or should not do. Do you think that is a mistake in the Bill?

Lord Turner: I would not be against it being put into the Bill. I think the FCA board may well-and I will recommend-think very carefully in future about the style of minutes. What has struck me is that, on the Monetary Policy Committee side and the Financial Policy Committee side, we have a style where you see the people who are responsible for making the ultimate decision expressing alternative points of view. You have a minute that says, "Some people said this. Some people said that. They considered this data. At the end of the day they concluded X". We have not previously provided that openness in relation to, for instance, the debates about the RDR, so we have not been transparent as to whether there was a variety of points of view or what factors were considered. I cannot see a problem with doing that, and indeed I think, as we move to a new structure and think about it, that that would be my recommendation, that we do have that degree of explicitness. It is very important when you look at an issue, like the RDR or the mortgage market review, that people understand that these are not technical decisions where there is necessarily one right answer. They are a balance of different points of view, and those different points of view and how it was resolved should be open.

Indeed, I would also suggest-and I think I recommended this when we talked before you on the issue of the FCA governance-that you have never previously asked non-executive directors of the FSA to come before you, in the way that you ask the external members of the MPC and the FPC to. I think in future, where we have major retail conduct policy issues-like MMR or RDR-that would be a perfectly legitimate thing for you to do.

Q164 Mark Garnier: My very final question. Hector Sants, in the light of everything you said to us a bit earlier about the fact that you were raising these issues, do you feel that, having published minutes of boards would give an opportunity for people such as yourself in your previous position to be able to air those concerns publicly, or at least to get them down on the record? So that the person who is talking about the next crisis-which I hope does not happen under your watch, but should it do-rather than having to rely on good friends to come up and fly your flag, would actually have minutes recording that?

Hector Sants: Yes. I sincerely hope the next crisis is not on my watch. But yes, I am broadly in favour of public minutes and entirely endorse that general sentiment.

Chair: Jesse Norman wants to come back with a point.

Q165 Jesse Norman: A very quick question. Mr Sants, you said that having an early rights issue in November 2007 would have made no difference, versus when it actually took place in 2008. I wonder if that can be true, because of course there was a raised dividend in between, and if RBS had done a rights issue they would hardly have raised their dividend.

Hector Sants: That is possibly true. But the amount of the raised dividend, I think from memory, was about £210 million. It was the difference between the one penny extra; the final went from 22-odd pence to 23 pence. Sadly, I don’t think that £210 million would have made any difference to the outcome for RBS.

Q166 Jesse Norman: When Michael Fallon asked you about funding for the building society market, you responded by saying that RBS had benefited by getting deposits. But was it not true that the failure of the building societies was pointing to a drastic shortfall in money market wholesale funding, on which RBS was itself extremely reliant?

Hector Sants: At that stage, on the supervisory information I was given, there was no evidence of that. In fact, my recollection is that the general comment about flight to quality, which the firm made to us, covered both wholesale and retail.

Q167 Chair: Could I just take you to paragraph 433 to clarify one point. This is September and October when you were in charge. It says "While the FSA senior management was concerned by liquidity conditions in the markets at that time, the scenario under which those risks could crystallise for RBS was considered very unlikely". Did you agree with that judgment?

Hector Sants: That was the judgment that the supervisory assessment paper presented to us.

Q168 Chair: Yes, but you were chief executive, so I am asking whether you agreed with it.

Hector Sants: Did I agree with it? Yes. People were asking earlier when I look back on events what do I think about them, and I absolutely acknowledge I did not envisage Lehman Brothers failing in the way that it did and I did not envisage a catastrophic collapse in market conditions and confidence that occurred in late-

Q169 Chair: But the markets were already tightening by that time, were they not?

Hector Sants: I come back to the point earlier, which we have just touched on, that the supervisory team clearly stated, and the firm was clearly stating to them, that they were a beneficiary of these tightened markets, and that did not seem to me to be an unreasonable scenario, whereby major global institutions would be a gainer from pressure primarily on smaller institutions dependent on the securitisation funding model. I entirely agree that the FSA was not envisaging the events that transpired in autumn 2008.

Q170 Chair: Can I just take you further on to paragraph 435 where it seems that adequate attention was not paid to the information that might have been available from the Dutch Central Bank, the DNB. Were you aware of this at the time?

Hector Sants: I was not aware of that detail. That was the responsibility of the supervisory team and the managing director, retail to engage-

Q171 Chair: It is a bit more than the management, isn’t it? Just to clarify, Mr Sants, it is far more than detail. This is going to the central bank, and the bank which is about to be taken over in the biggest banking deal in history, to find out whether they have anything to say that you ought to know.

Hector Sants: Yes, absolutely.

Chair: It is not a detail.

Hector Sants: No, obviously. I said I was not in receipt of the detail. I am sorry if I was clumsy in my wording. I was in receipt of the general feedback from the DNB, and I do indeed have memorandums with that material on it, and the DNB were not giving us any material risk warnings at that time, and I believe this paragraph says that-that the DNB did not communicate significant risks to us.

Q172 Chair: What they said was they were relying on you, is it not? The DNB informed the review team it believed the FSA would supplement the answers provided by RBS.

Hector Sants: That was in regard to RBS. I assume what you are discussing was the DNB’s information with regard to ABN, and as I am saying they did not highlight to us any major risks in relation to ABN. What they said to us, however, which was perfectly reasonable, is they were relying on us for the analysis to the risk in RBS, which was perfectly reasonable.

Q173 Chair: Could I also take you to paragraph 439, which is, I suppose one could say, the exoneration paragraph, where it says, "In the context of the time, the decision by the FSA CEO and Chairman not to intervene"-that is you-"in the period after the offer had been published, was reasonable". The paragraph then continues, "given the low probability of extreme liquidity stresses emerging". That is the point we have just discussed, and then it says, "and the FSA CEO’s and Chairman’s judgment that the intervention could itself have destabilised RBS." So you were taking into account the risk that if you intervened, you yourself could create a financial contagion, is that right?

Hector Sants: Not exactly, no. That sentence could run to misinterpretation. I think there are two different issues, and I did try to draw that out in the earlier discussion. Perhaps we can just return to that. There was a clean decision on threshold conditions, which we have covered and, as I say, I have been back over that many times. As Margaret has said, I-we-remain clear there was no regulatory basis for an intervention. So we could not have intervened. But, even if we did not think we had any grounds for intervention, it did cross my mind a little bit in some of the earlier questions that maybe I should just be saying, "This is an irresponsible deal, you should not be doing it," and making some public pronouncements, or maybe even trying to intervene, at which point the firm would have pushed back and said, "You can’t do it." But maybe that whole furore would in itself have been a useful intervention and I concluded-and I think David Walker in his remarks agreed with me on that point-that being just disruptive was irresponsible and could in itself have destabilised RBS. The board might well have responded very negatively to that. So that is certainly a different point to the straight judgment on threshold conditions.

Q174 Chair: Just to get back to clarity on this point, you are saying you could not intervene?

Hector Sants: Correct.

Chair: Whatever happened, you could not intervene?

Hector Sants: On the information available at the time.

Chair: What you could have done is smashed the furniture, but you could not intervene. That is correct?

Hector Sants: Yes.

Q175 Mr Love: Lord Turner, before you published this report it went through the Maxwellisation process. There has been lots of speculation in the newspapers. Indeed Sir David Walker, when he came to speak to us last week in a session, confirmed that there were changes made to the report. Can you detail for us the changes that were made during that process?

Lord Turner: I can absolutely confirm that there were no changes that made a material change to the overall thrust of the report. It is part of the agreed process that reports of this nature should go through a process-to which the name of Mr Maxwell is forever connected, Maxwellisation-where they have the right to look at it and make comments on it. Those comments, as you will probably understand, are voluminous, and they often contest lots of different points, and they contest them as being unreasonable or not supported. We then have to go through and see whether there were any of those that we thought were legitimate. As we went through-and this was a careful process with myself, Sir David Walker and Bill Knight-there were a small number where we said, "Yes, look, on reflection, we don’t have a strong support for that point." Indeed, I have to say that one of the things that Bill brought to the process, as a lawyer, was a very strong focus that we should only put into reports things for which we had an evidential basis, that if you did not have an evidential base for it we would be detracting from the quality of the report by putting stuff in that was not there.

In relation to the specific one that Bill Knight mentioned, I draw your attention to paragraph 612 of the report, on page 234, where it sets out four questions. It says that there are four questions about Goodwin’s "capability and style". Those are: "Whether his management style may have discouraged robust and effective challenge from the Board and senior management team"; "Whether the levels of remuneration paid to RBS executive directors"-that is, those that report in to him-"may have played any part in discouraging robust and effective challenge of the CEO"; "Whether the CEO was overly focused on revenue and profit" targets himself, because of the way he had been incentivised; and "Whether his response to the emerging losses"-and I consider this a very important one-"in structured credit, monoline insurance" and so on "reflected a bias towards optimism."

In the earlier version of this we had a fifth question, which Bill Knight referred to: whether he had a focus in his own experience towards retail banking rather than to investment banking. That was a fifth question, posed as a question not a fact, which was in an earlier version. When we went through it-and you can take it that every one of these was challenged-we thought that that was the only one where we were not convinced that it was highly material or clearly evidence that that was relevant to the story and therefore we changed that.

Q176 Mr Love: That is a very detailed response, but what I want to focus on is the claim that originally the description was made of the report about the ABN Amro takeover as being "a risky gamble". Can you confirm or deny that those words were used and changed and, if they were changed, what do you think is an adequate description of what went on in terms of a takeover?

Lord Turner: We still have the word "gamble" in there somewhere, if I remember rightly. I am afraid I have not memorised it, but the word "gamble" is in there. If I am honest, telling stories, I think we had a slight difference between our two external reviewers and their appetite for whether the word "gamble" was absolutely the best word to use or not, and we debated it. But the word "gamble" is put in there. I think it was a gamble actually, in the sense of it was a-

Q177 Mr Love: Would you accept a "risky gamble"?

Lord Turner: It was undoubtedly a risky gamble, but I think all gambles are risky-I mean, aren’t they?

Chair: Oh, just a-

Lord Turner: Well, the Chairman is not sure, in which case I want him to tell me of these non-risky gambles, because I will start wagering on them.

Chair: Carry on, then.

Q178 Mr Love: What is coming through to me at this stage is that there was an acceptance in the FSA, at the time of this takeover, that, while there were no grounds under current conditions-and we have gone into this in some detail-to intervene, there was a very strong feeling that this was-and I use the words that Mr Sants used earlier on-"an irresponsible deal"-that was the word that you have used, or other similar phrases. In your view, Mr Sants, is that adequately reflected in this report? Again, I want to ask Mr Sants because, as I understand it, he did not have anything to do with this report, but the report is on many things.

Hector Sants: Yes, well I think we used the words "risky" and "a gamble". I apologise, I don’t immediately have it to hand, but I think it is in there-but certainly highly risky.

Michael Fallon: Paragraph 415.

Hector Sants: Thank you very much. It is consistent with the wording I have used and, as you rightly say, it is reasonable to conclude that it was a highly risky transaction, and events showed it to be.

Lord Turner: Can I just clarify? What this report shows is that, sadly, prior to the point at which this offer had already gone out and been given a 95% vote by the shareholders in August 2010, there was not adequate focus within the FSA, that this was a highly risky thing to do. As you go through the months of April, May, June, July 2007 we are not finding evidence of anybody in the FSA at that time saying, "This is a highly risky gamble; we had better try and stop it." That is what the report says, that there was a failure to recognise that the sheer scale and nature of this thing should have provoked a change to the classic non-interventionist way of the FSA dealing with a major acquisition. I think there was a failure to understand, or to focus on or to consider, that it was part of the role of the FSA to focus on the risks involved in this acquisition.

Hector Sants: Certainly, when we have deals now notified to us in advance, we have now demonstrated, we have a visible track record, of intervening at a very early stage before offer documents are published, to minimise the risk or even sometimes to try to dissuade management from acting. In those cases, it won’t have been visible to the marketplace at all. That approach is one that we now take as part of the new proactive supervisory approach. I entirely agree with Adair that was lacking. The report is clear that it was lacking. I entirely agree it was lacking in the FSA’s approach in the past.

Q179 Mr Love: Lord Turner, was that highlighted? There is plenty in this report, and I am talking here now about getting the proper balance. There is plenty of criticism in here of RBS and its management. Indeed, there has been even more this afternoon. But did you balance that against the responsibilities of the FSA? I am now highlighting the fact that there were shortcomings, and indeed Mr Sants has gone into this in some detail about the shortcomings. Do you think the report gives a balanced position in relation to responsibilities vis-à-vis RBS management and the FSA executive?

Lord Turner: I think it does, in particular, in relation to this. If you look at paragraph 420 it says, "The FSA’s supervisory approach to the acquisition of ABN Amro did not entail adequate assessment of the risks which RBS was taking. This reflected that…approval was not required…Supervision lacked a defined approach…the prevailing FSA philosophy and approach" believed that you should leave these things to senior management. It says clearly-

Q180 Mr Love: Let me ask you a question that is very clear to me. You have to get to page 342 of the report before Mr Sants is mentioned. He was second-in-command, if I can call it that, because I cannot remember offhand his title when he first came to the FSA.

Hector Sants: I am one of three managing directors.

Mr Love: One of three managing directors and, subsequently, chief executive during part of this. I think you would accept that it is not unreasonable for this Committee, recognising that Mr Sants will have a continuing and very important role when the PRA is finally established, to question whether or not this report adequately ventilates the issues for which he was responsible. There are many who have commented that that is not happening. What is your defence of ensuring that there is an adequate reflection of the role of Mr Sants since coming to the FSA?

Lord Turner: I honestly think there is. I am not sure about your reference, do you say page 344?

Mr Love: Yes, page 342.

Lord Turner: There are lots of references. I am just randomly looking on 182 to 183. He is not referred to as "Hector Sants", he is referred to as "the FSA CEO", but in that period the FSA CEO is Hector Sants. So there are lots of references before that where he is named by title and, on the whole-and it was one of these sort of issues of style that we went for-we decided to go more for titles rather than names, that is a stylistic choice you make, but it is clear who it refers to. So we have carefully considered, and the review team considered, and I considered and the external reviewers considered, what exact words we should use, in particular, about the decision not to intervene in relation to ABN Amro, and that is something that we gave very careful consideration to, what should be the exact balance of the words.

My own belief is, and I have to say, that if I had been there as chairman or chief executive at the time, I would have reached the same decision, which, in retrospect, knowing what we know now, we all regret. I feel that, with the information available then and the legal powers available then, I would have ended up making the same decision. What we also describe in this is an organisation that, from autumn 2007 onwards, is beginning to get a grip on the faults that it previously had. It is leading the way with new liquidity standards, leading the way with new capital standards, doing the drains up on Northern Rock and putting in place a supervisory enhancement programme. It is the nature of such things that, if they had been put in place about three years beforehand, they might have helped prevent some aspects of the crisis. They were of the nature that if you start there you cannot prevent the crisis that then occurs. But I do think that Hector led that transformation, and that is the judgment that I have made that he has been the right person to lead the FSA and to stay on and lead the transition to the PRA.

Q181 Mr Love: I understand that, and this Committee has gone through many sessions trying to understand all of the changes that you are talking about, but I think at the time when the new regulatory structure was introduced Mr Sants, along with many other people, commented that it is the quality of the staff that will be the final arbiter of how well you do as a regulator. It is on that that I want to put my final question to Mr Sants. You have gone through a baptism of fire, if I may say so; what do you think you have learned that better equips you now for doing the job as PRA chief than perhaps you did when you first came to the FSA?

Hector Sants: Three points on that, I think. First of all, I should say-and you are asking the question and I will answer it-I do think the right people to ultimately answer that question are the people who make the appointment. But I realise you have asked me, so I will try to answer that. I would like to make a couple of points. I genuinely believe, but I accept it is for others to judge, that in the period after I took over the FSA, during the crisis, that in the circumstances, given the whole legacy that we took into it, the FSA did its utmost in that period. Of course, I am not saying at the end of the day it is the outcome we would have liked. Obviously it was not what anybody would have liked, and the crisis has been a major, major crisis. But I genuinely believe, in the round, over that period we did our utmost, and I will be more than happy at any time to sit in front of this Committee and go through in detail, in more detail than we have managed to do today, every decision we have made. I would like to think, if you were faced with the information we were faced with at that time, with the resources we had at the time, you would recognise that we have done our utmost.

As to your specific question, it might be worth just reminding ourselves that I was leaving. I was asked to stay on. I decided it was the right thing to do to stay on, on the basis that I accepted the argument made to me that I was the best person to take forward the regulatory reform programme and leave the regulatory regime in a good shape. That is what I think I should be judged on. Talk about judging people, the quality of people, I have been given a specific task that I was persuaded to take on; that is what I am currently delivering. I would be more than happy to spend more time with this Committee on whether I am delivering against that reform programme. At the moment that reform programme is on track. I think we have learned a lot from the experiences, and we are using all that experience to make a better regime for the future, which will significantly diminish the probability of these types of crises happening again.

The final point is, when I look back over, particularly those early months-and there has been much discussion about it, September/October, and could the judgment have been different, could we have intervened earlier?-when you look around that whole process of decision making I am sure, in the round, the authorities as a whole would have made better judgments if we had more people who had direct and immediate experience of a crisis of that nature, and we did not, for obvious reasons. We are still in one of the most severe financial crises in modern times, and I think a very sensible judgment has been made by those who asked me and others to stay on, so that people could have the benefit of that searing learning experience. Let us not underestimate how extremely unpleasant a time that was. I think everybody who knows me, and I have been in front of this Committee many times, will not have doubted that I have always acted with the best of intentions. I have 30 years of experience in investment banking. I have always done my very best, and I think that from what I learned in that period there is value in me imparting that to the system.

Q182 Chair: Mr Sants, you have described several issues with your differences between you and your predecessor prior to taking the post in July. He announced he was going in January, I think. When did you find out that you were going to be taking over from him?

Hector Sants: Again, I have to say, it was not a job I particularly wanted to take on. I was persuaded to apply for the job. I cannot recall precisely. I think it was in early July, pretty much around the time the press announcement was made. I am afraid I cannot recall the precise date, but it was in July.

Q183 Chair: Were you intending not to stay on?

Hector Sants: The original arrangement with John Tiner was that I would do three years as one of the three managing directors. He told me when I joined that he would be doing a longer period than in the event he turned out to do, and I made it very clear that I had no interest in staying for that longer period to put myself forward for the chief executive post. I did not join the FSA with the intention of being the chief executive. I did not expect John Tiner to leave. I was not originally intending to apply for the job, I was persuaded so to do.

Q184 John Thurso: Can I just ask you one point of clarification? RBS was in the retail section, so you were not covering it; were all the British universal banks in retail?

Hector Sants: Yes, I had no responsibility for any of the UK banks. It is not a sensible structure, and I just remind you that I changed that structure as soon as I possibly could, to a unified supervisory unit. If you are an integrated regulator it makes no sense not to have a unified supervisory unit.

Lord Turner: If I may just throw one light on-

Q185 John Thurso: Can I make one further point? I will come back to you on that. On several occasions and in several answers, you prayed in aid what you did on the rights issue with RBS in pushing it through with Fred Goodwin. Can I just tell you that for quite a number of small investors-the Dowager Lady Thurso being one of them-the rights issue was not unalloyed joy. What do you say to all the small shareholders who lost out as a result of that?

Hector Sants: I am truly sorry that the bank failed. We genuinely believed at the time, if we could raise capital of that type of magnitude, unless there was a further dramatic deterioration in market conditions, that that would be sufficient. Unfortunately, that proved not to be the case. I am truly sorry for all the small shareholders who have been caught up in this financial crisis.

Q186 John Thurso: Can I come to you, Lord Turner? There are two parts to this report. There is RBS and what they did, and frankly it is not often that one reads reports of this nature and finds them as gripping as that one was. It sets out very clearly what went wrong, and I don’t want to rehearse that bit. But the other strand in it is obviously how the then FSA reacted, and that is largely what we have been rehearsing today. Obviously we are looking at this with the benefit of 20/20 hindsight, but there are many places in the report where the approaches and decisions of the FSA have been criticised, were even wrong with that hindsight. Do you think this was because of the culture in the FSA or the structure of the FSA or a combination of both?

Lord Turner: I think it was a combination of the structure of the FSA and the entire intellectual philosophy of the time. As I have said, the structure of the FSA, the fact that it had been given responsibility for this enormous span, from the capital and liquidity of major banking groups through to all wholesale conduct issues in markets, but then also retail conduct, I think was too wide a span. There is an intellectual affinity between thinking about the capital and liquidity of banks and central banking that makes that logically better to reside within the central bank, and there is a different set of disciplines to do with retail conduct, and that is why I believe that the future structure is better. I think the structure was problematic.

Even more importantly, the FSA had fallen but it was not alone in this. Indeed, a lot of the cleverest economists and authorities in the world had ended up believing that the global financial system had become safer because of innovation, liquidity and ability to distribute risk. We have to put ourselves back in a mindset where people had simply come to the belief that we were in some great moderation of low and stable inflation and that a lot of these problems of the past had disappeared. After all, that was the completely overt Greenspan document that there was a more efficient way to distribute risk. As I quoted in my own Turner Review, if you look at the April 2006 Global Financial Stability Report of the IMF you will find an extraordinary statement, which says that, because of the development of CDS, of structured credit and distribution and securitisation, the world financial system had become safer, and-I cannot remember the exact quote-the likelihood of commercial bank failure had declined. It is an extraordinary quote in retrospect.

Can I just say one final thing, which is reflected in paragraph 691, about why these banks were given to the retail side of the FSA? It was assumed that what we had to worry about them was whether they were treating customers fairly, and of 229 items reported in the 18 months before July 2007 by the managing director of retail markets, only five related in any way to "bank prudential issues." That was just the mindset of the time. It is extraordinary in retrospect, but that is the way it was.

Q187 John Thurso: As you rightly say, it is quite extraordinary that we could have had such a collective failure of commonsense across all the regulators. This report says a lot about the FSA. It says very little about the other two wings of the tripartite system. To what extent should this report have also covered what the bank did or did not do and what the Treasury did or did not do?

Lord Turner: It is quite interesting in the US to look at a thing like the Financial Crisis Inquiry Commission-I forget the precise word-the FCIC, which is a very large analysis looking at the totality of what has occurred. We have not had that in the UK. You could argue that if we could all roll it back to 2009, we ought to have launched a Royal Commission, which would have looked at absolutely everything, including each of the banks that failed, all together rather than one by one, and at the role of all three authorities. I think there could be merit in that at some stage.

Q188 John Thurso: I will take that as you saying, "Yes, somebody ought to have a look at them at some point". Hector, can I end with a question to you? This is to ask a fairly direct question that follows on from the comments that Andy Love was making, and only you can answer it. Do you think it is appropriate that account should be taken of your particular actions, as set out in this report previously, in making a proper assessment of your future in regulation?

Hector Sants: Yes, entirely, but I come back to the comment I made earlier. What I have undertaken to do is to deliver the regulatory reform agenda. I believe I am doing that very effectively. I am happy to debate that with you and answer questions on it, and when I have completed that I will have completed the job I committed to do.

John Thurso: Better the repentant sinner than the untried evangelist. Thank you.

Q189 Chair: Lord Turner, has the production of this report improved the quality of the work that the FSA does, or prejudiced it?

Lord Turner: The process of the report itself or, going forward, the lessons learned from it?

Chair: I am talking about whether people working in the FSA are likely to be more alert to the dangers than they were before you produced this report, and to perform better than they would otherwise have done, or has it prejudiced their performance? I am asking the question in a neutral way.

Lord Turner: I think it is favourable. If we go back to what the lessons learned from this report are, many of them we knew already. The basic fact that the capital and liquidity regimes were, to be blunt, rubbish, we knew already, and we were putting them right. The supervisory approach was wrong and we were putting that right.

When we produced this, I strongly urged all staff members to read it, particularly those going to the PRA. We have something here that all prudential supervisors, at least for the next 10 years, ought to read as part of their training programme. Indeed, all non-executive directors of banks ought to read it, because I think, when you have a lengthy and, I believe, high-quality report of what went wrong, there are a lot of lessons that you can get out of it, and they just tell you the story of a bank that made a collection of mistakes that reached a failure. That is very important for people to read.

Hector Sants: Could I just add, because we have obviously had a robust exchange of views, I also strongly believe-and this report and this process is part of it-that the regulators should be accountable for what they have done and the actions they have taken? They should be transparent and explain the basis and the thoughts behind what they did.

Chair: That is what we have been trying to do this afternoon-

Hector Sants: The whole process is one we ought to embed going forward, and I hope the PRA-going back to some of the earlier points-are at the forefront of being willing to go down that road.

Chair: Again, as you know, we are trying to improve the transparency and the accountability of these bodies in a couple of reports we produced recently.

Q190 Michael Fallon: Are we going to get an equivalent report on the failure of HBOS?

Lord Turner: As I wrote to the Chairman, sometime in early July, it is our opinion that we should produce a report, or somebody should produce a report on HBOS. In timing terms, we have the complication, as we did with RBS, as is publicly known, that we have an enforcement process in place-which of course can take some time, and if it was to conclude that there was a case, and if somebody then appealed, it could get delayed-and until that is produced we cannot produce the report.

However, what we have done is put in place a small data gathering team. They will not write down anything that is a judgment, because we cannot do that without potentially prejudicing the enforcement process, but we are going through the process of gathering together the files, doing some of the straightforward calculation analysis that we did with RBS on capital and liquidity, having done it before, so that as and when we get beyond the enforcement case-but I do stress we have no control over the overall timescale of that-we will be in a position to launch it.

At that stage there are a set of pros and cons, and they were touched on by David Walker in front of you, as to whether one does that with an external or internal review process. One of the problems on the whole-although I think this process has been incredibly successful, the combination of an internal process with external reviewers has produced a high-quality report-it is very time consuming for a lot of our best people. It is time consuming at a senior level. It has been very time consuming for myself. So a bit of me thinks that the best thing would be simply to pay somebody else to do it at that stage. But there are very strong pros and cons on that, which relate to the wider issue going forward for the PRA as to whether reviews should be done externally.

In summary, I believe that we should produce something on HBOS which is equivalent to this. The good news is it should be shorter, because it is a simpler business-it was not in lots of different businesses in the way that RBS was.

Q191 Michael Fallon: It is over three years since HBOS failed. If we are going to get a report like this, should we not have it fairly soon?

Lord Turner: We are in a legal position where we cannot, without prejudicing the enforcement case, launch a separate public accountability. Within the Bill there are, quite appropriately, and again this is something that I flagged in various letters to the Chairman-

Chair: Which I have raised with you as well privately.

Lord Turner: -yes, issues as to who should be the arbiter, and I think it can only be the Treasury, and of whether one thinks that with the strong publication interest we should be willing to prejudice an enforcement approach. I think it would be unreasonable for us to do that, because if that resulted in prejudicing an enforcement case we would then be criticised, and that is why we welcome the idea that, going forward, there is somebody who is responsible for making that balance in the timetable.

Chair: Thank you very much, all three of you, for coming this afternoon. It has been quite an interesting hearing, quite important for transparency, and very much along the lines of the sentiments that were being expressed a moment ago by Mr Sants. We are very grateful to you. We have a lot to digest now, and that is what we will do. Thank you very much indeed.

Prepared 3rd February 2012