The whistleblower’s lament

When Paul Moore, the HBOS whistleblower, broke his silence just over four months ago to expose the inner machinations of one of the main protagonists of the banking crisis, it sparked a media storm which sent shockwaves through Britain’s financial centre and seat of government.

Never before had an insider at such a high level (he was the bank’s head of risk management) spilt the beans on a major corporate scandal. The accusations led to the resignation of Sir James Crosby, the deputy head of the City’s regulator, and forced the Government to rethink a major investigation into the causes of the crisis.

But as Moore sees it, that investigation has failed in its principle task. In an exclusive interview with Strategic Risk, Insurance Times’ sister publication, he accuses the government and regulator, the Financial Services Authority (FSA), of withholding his vital evidence and raises fundamental questions about the role and responsibilities of a risk manager.

Moore would like lawmakers to use his evidence and experience to inform a new regulatory policy for the financial services industry – one that will offer more support to risk managers. “My evidence demonstrates what the new regulatory policy should be on governance, risk management and compliance,” he says.

In the future he would like risk managers to be formally backed by non-executives and regulators so they feel more confident when standing up to well paid, and sometimes self-interested, executives. “I’m convinced that most risk managers feel constrained to say what they need to say,” he says.

Moore’s allegations first hit the headlines in February this year after he received Parliamentary privilege on the grounds that his evidence was in the public interest, which freed him from a gagging clause with his former employer. He accused Crosby, then head of HBOS and deputy chairman of the FSA, of sacking him after he warned that the bank was exposed to too much risk. He also accused senior HBOS management of fostering a sales-focused culture with little concern for the risks associated with it.

In particular he raised worries about the potential for the bank’s staff to miss-sell consumer investment products and payment protection insurance. This resulted in “a material percentage of clients not understanding the risks”, in the products they were buying. When it came to the crunch neither the non-executive directors nor the supervisory authorities supported or protected him, said Moore at the time. He also claimed that he was replaced by a sales manager with no experience of risk management. This lack of respect for risk management frameworks was the fundamental cause of the banking crisis, he claimed.

He said there was an inadequate separation and balance of power between the executive and all those accountable for overseeing their actions and reining them in.

Even though Crosby resigned, Moore’s accusations were dismissed by the government and HBOS. They claimed that an independent auditor, KPMG, had investigated the claims. “The allegations made by Mr Moore were found not to be substantiated,” said Gordon Brown.

Moore says now that the KPMG report is a whitewash, and claims to have the evidence to prove it. “I am confident the KPMG report will not bear up to any properly independent scrutiny.”

At the beginning of May, a Treasury Select Committee, set up to investigate the banking crisis, used Moore’s testimony when it reported on the cause of the financial disaster. It corroborated much of what Moore said in his original statements and pinned most of the blame for the financial disaster on the culture of risk-taking within banks and their misplaced faith in financial innovation.

“'My evidence arrived just too late for it to be used to interview the FSA. How very convenient for them'

Paul Moore

Top bankers had made an “astonishing mess of the financial system” and were the “authors of their own demise” because “risk management and due diligence were seemingly ignored”, reported the committee.

John McFall, its chairman, said: “The banks have failed to govern themselves effectively: senior managers failed to understand the investments being made in their name; risk management and due diligence were seemingly ignored; and the non-executive directors, often eminent and hugely experienced individuals, failed in the proper scrutiny of the banks’ activities.”

The committee also found that low real interest rates, a search for yield, and apparent excess liquidity were all contributing factors to the financial meltdown. “These ingredients combined to create an environment rich in overconfidence, over-optimism and the stifling of contrary opinions,” said its report.

But following its publication, Moore continues to cry out for a broad ranging commission of inquiry. He is unhappy that the report calls for the regulators, which played such a big part in the financial failure, to rebuild the supervisory system.

“Whilst we would hope that the nature of banking, and bankers, would change in response to what has happened, the responsibility also falls on the regulator to create a more durable framework for finance in the future,” said the parliamentary inquiry. In the same breath the MPs blamed the rule-makers for not preventing the crisis. Commenting on this Moore says: “That’s like asking the inmates of an asylum to sort themselves out.”

He says that no one is being held to account – and that is why he has demanded an in-depth inquiry. He is convinced that a coalition of powerful forces is working hard to hide the truth and accuses Gordon Brown, the FSA and former HBOS directors of blocking a tranche of his detailed evidence from being used as a reference by the inquiry to interrogate the main protagonists in the banking crisis.

This is due to trivial and “mystifying” delays in the inquiry process, which Moore claims are the work of a powerful clique of vested interests. “I was told by the clerk of the committee to wait for HBOS to submit a copy of the infamous KPMG report to the committee before I sent in my further detailed evidence. I had offered to send it in myself! Over two weeks later HBOS finally sent in a copy of the KPMG report. I then immediately sent in my further detailed evidence within one hour. My evidence arrived just too late for it to be used to interview the FSA. How very convenient for them,” he says.

When Moore’s allegations hit the headlines, Gordon Brown said: “It is right that when serious allegations are made, they are properly investigated.” But Moore is disappointed with the quality of the investigation so far. “None of my allegations has been fully investigated by the Treasury Select Committee because none of the relevant parties has been cross-examined by reference to my more detailed evidence,’ he says.

He would like to see Crosby, the FSA, Dennis Stevenson, the former chairman of HBOS, Andy Hornby, Crosby’s successor, and other key executives and non-executives at HBOS held to account for “probable wrongdoing”. The only way to achieve this is with a broad ranging commission of inquiry, he says.

Moore will keep on fighting for his evidence to be heard. In the meantime, the financial services industry can learn a valuable lesson – and risk managers have a new hero.

The full interview with Paul Moore will appear in the June issue of Strategic Risk.