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Solid structure

28 September 2015

Solid structure - read more

HBOS whistleblower Paul Moore speaks to Pooja Kondhia about the need to build a stronger system of investigation and enforcement

Paul Moore was dismissed as Head of Group Regulatory Risk at HBOS in 2004 for calling out the bank’s excessive risk taking. Despite being unfairly dismissed at the time, forced to enter into a settlement agreement and sign a gagging clause, Moore decided to speak out about his experience on 15 September 2008 – the morning after Lehman Brothers failed.

Although progress has been made in the banking sector since then, the UK regulatory system is still investigating numerous cases of misconduct.  

Weak regulators

Moore believes that the current regulatory climate is not robust or proactive enough because ‘we have not got nearly enough quantity or quality of investigative and enforcement individuals in the regulatory system. You will never change the system unless, when people do wrong, you investigate them and hold them to account.

‘It is perfectly clear that numerous people should have been held to account in the banking crisis – there is an overwhelming amount of evidence of a breach of the Principles for Approved Persons in the financial sector and yet, so far, almost nobody has been held to account.’

A clear message

Moore says that in contrast, enforcement action across the Atlantic happens more frequently: ‘There seems to be a much greater urge to hold people to account in America. Although, probably because the system is such that the attorney generals are rewarded by reference to successful prosecutions.’

Speaking about the lack of UK enforcement and the difficulty of prosecuting big corporations, Moore concedes that: ‘Nobody would say that fighting big, powerful individuals and organisations is an easy job. They have almost unlimited financial resources to employ the cleverest and most Machiavellian lawyers. We have to find a way of holding people to account because otherwise the system does not work and people just monetise their illegality.

‘Take PPI for example – there is very strong evidence that there has been a breach of section 397(2) of the Financial Services and Markets Act, but not a single director of any company has been charged with a criminal offence.’

The lack of investigation and enforcement hurts the economy and does the public a great disservice, Moore adds. If there is no consequence, it gives a clear message that the regulators do not take the crimes seriously.

Visible consequences

Moore explains that people need to see consequences to their actions in order to refrain from wrongdoing. He describes this as ‘the Austin theory of justice and is a part of jurisprudence.

‘Orders backed by threats must be accompanied by adequate policing. There are two reasons why people follow the rules: firstly, because they see there is something in it for them and, secondly, because they know that there is a consequence if they do not do it.’

Currently, it is a lose-lose situation because not only is the regulator failing to hold people to account, but this lack of action is encouraging people to bend the rules. As this service continues to operate ineffectively, it does so at great cost to the public and government.

The role of whistleblowers

Regulators have been slow to recognise the importance of whistleblowers in helping to ensure compliance with the regulatory regime, according to Moore.

‘My experience of whistleblowers and regulators is that regulators are often part of the problem. In fact, I have not seen any particular evidence that demonstrates that regulators have got to grips with using the value of people who speak up in order to … investigate, deal with, and solve problems.

‘Whistleblowing policy and support needs a complete review. In America they now reward whistleblowers financially when it leads to fines. In the UK, we haven’t sorted this out. I am not a believer that people should be incentivised by money to speak up and give evidence of wrongdoing, but the legal structures and the non-legal structures are inadequate to enable, educate and protect whistleblowers. Whistleblowers must be entitled to appropriate compensation because they act as the unpaid officers of the rule of law. Whistleblowers also almost never get jobs after they have blown the whistle.’

Adequate resource

Moore stresses that ‘when the other side has unlimited financial resources, the top lawyers and are playing every game in the book’, one of the best ways to fight back is to have adequate resource; the right people – both in terms of quality and quantity – who know how to take those people on.

It is easy to say that regulators should hire better people and allocate more resource. But this need not be as arduous as it sounds as regulators could resource investigations at a lower cost. Moore explains: ‘Barristers are an under-utilised resource and the investigative authority could have a range of employees and a large pool of associates that they can call upon when they need to carry out this work on an ad-hoc basis.

‘For example, I would set up a group of 100 barristers who have outstanding forensic skills and who are trained in regulatory investigation. So when an investigation needs to take place, you have immediately got the resources but you do not have to employ them full time.’

Moore adds that these people need not all be barristers – there are all sorts of other investigators that can do the work. ‘They come in on a secondment contract for the purpose of the relevant investigation. They do not get paid the sort of advisory fees that they would normally be paid because, if they enter into a secondment contract, they are taking no legal risk and are under the management and control of the regulators themselves. They are working effectively as a subcontractor of the regulator. They get given business cards stating they are an associate of the investigators and so you get access to a resource that knows what it is doing and can hit the ground running, at a good price. You can have a smaller group of people who handle the day-to-day management and oversight of that group and you have got access to resources for whenever you need.

‘When I was a partner at KPMG, I used barristers to do work as associates for us. They were first rate – analytically competent, extremely well trained in the laws of evidence and write very well. 

Better supervision

More robust regulation and enforcement requires an efficient regulatory structure. Moore believes that for regulators ‘we need to separate out the day-to-day policy making, rule making and supervision, from the less pleasant investigative and enforcement. They should be in two separate organisations; the supervisory people should be obliged to pass on any matter where there is a case to answer of a serious breach and the investigative authorities should then take the relevant action.

‘The day-to-day supervisors need to develop close relationships with the firms that they supervise. Having the investigative and enforcement authorities within a different organisation will allow the necessary relationships to develop without the supervisors needing to be responsible for the nasty stuff.’

Conflicts of interests are another reason for needing to separate out supervision and enforcement – the current relationship between firms and regulators is too friendly. It leads to conflicts of interest which then have the possibility of hampering how well investigations are carried out.

Moore says that ‘the revolving door between the regulator and regulated firms is clearly a problem. It is one of the reasons that there is not sufficient investigative and enforcement action. However, it can be solved by making it illegal – by creating rules by which people who work in regulatory agencies cannot just walk out the door and go straight to Goldman Sachs, or any other big financial institution, for example.’

He says that these conflicts of interest occur frequently: ‘If you think that your nest is feathered because you can move from the regulator to the regulated very easily and double your salary, it is no surprise that you may be lenient on them. If you are harsh on one firm, it might have an effect on you getting a job with another – it is not just that company that you are taking action against. This is why you need to have a separate organisation that deals with investigation and enforcement and then you need to pay these people properly.’

Salaries of those enforcing the regulation are important, explains Moore: ‘Regulators need to be paid more as better people need to be recruited. What happens in the regulatory system is very simple – people stay [working] there because they are not that good, with the greatest of respect. The really good people go to [work at] the regulatory agency in order to get themselves some kudos. They then leave very shortly thereafter and double their salary by going to the firm they were supervising.

‘It becomes a case of poachers turned gamekeepers turned poachers.’

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