Oral evidence: The work of the Court of the Bank of England, HC 1068

Oral evidence, 7 March 2017.

Witnesses

Anthony Habgood and Bradley Fried.

Chair

Thank you for coming to see us this morning. We were going to have a fairly wide‑ranging canter around the responsibilities that the Court has been undertaking over the past year or two since you last saw us, but that has been somewhat superseded by the receipt of a letter from Charlotte Hogg, the newly appointed Deputy Governor, with respect to her declaration of potential conflicts of interest. This has now been put in the public domain and I would be grateful if you could just begin by saying what your overall assessment is of this business, Mr Habgood, as Chair of Court responsible for compliance.

Anthony Habgood

Thank you very much for asking us in. It was a huge disappointment to me when I listened to the hearing to hear that when she said she was fully compliant with the code.

Chair

Sorry, did you already know that she was? I am sorry to interrupt so early on. Did you already know that she was not fully compliant?

Anthony Habgood

No, I did not. No, I did not. I heard her say she was fully compliant with the code. My reaction to that was, “We better make sure that is right”. We checked whether or not she had disclosed her brother as a relationship and she had omitted to.

Chair

We are talking about her brother’s job at Barclays.

Anthony Habgood

Her brother’s job at Barclays. There is a conflict bit and there is a relations bit. You have to submit everyone with whom you have a relationship by the code, which can lead to an awful lot of people, depending on how you define relationship. A brother clearly is included in that. When she joined in 2013 she clearly did not—there is no note on the record that she declared that. I was not there. She may have said to the chairman, but there was no note on the system that she had complied. As far as I can tell, that was an honest mistake. She joined as Chief Operating Officer, and as Chief Operating Officer there was no conflict there. There could be the perception of the possibility of a conflict because she had a brother in a regulated firm. Whether there was or not, she was obliged to declare that and she did not declare it. It was just an honest mistake that she made in not declaring that then. That gets trickier with the next job, because as Deputy Governor of Markets and Banking she clearly is going to sit on the committees with the newly formed PRC, in particular, and for that such a relationship unambiguously should be declared for obvious reasons, as opposed to should have been declared because of the code rather than for other reasons. We were very concerned to find that. We had various conversations about it. I do not think she realised herself. In fact, I am sure she did not realise herself that she had not declared that relationship four years ago. When she saw that, she said, “What do I do?”, and everyone said, “The best thing to do is just to straightforwardly write to the Committee and say you are very sorry; you made a mistake”.

Chair

Just to be clear, you came to her and said, “Do you realise you are not compliant?”

Anthony Habgood

As to what exact order that was in, I am not sure, but certainly I was concerned about it. She, I am sure, was concerned about is as soon as we asked the company secretary to look into the records.

Chair

The reason I am asking is you just said a moment ago she did not realise herself.

Anthony Habgood

I do not think she had realised. When she applied for the job, I do not think she realised that she had not complied in the system. But obviously I do not know that. She knows that.

Chair

Okay. When you approached her and said, “What about this compliance issue?”, did she realise it at that time?

Anthony Habgood

She did.

Chair

Okay. How did she come to realise it at that time?

Anthony Habgood

I think she just did not consider that her brother’s role was important enough to create a conflict.

Chair

Yes, I understand that. I am just trying to get the sequence. By what means did she discover that she was not compliant after that hearing?

Anthony Habgood

I am not 100% sure of that, but when we raised it with the company secretary he would have raised it with her.

Chair

I am just trying to clarify this. As far as you are aware, the sequence is that as soon as you watched that hearing—tell me if I am in any way getting this incorrect—you said, “We better check that with the company secretary”.

Anthony Habgood

I spoke to Brad straight away after the hearing.

Chair

Between you, you concluded that you needed to check this with the company secretary.

Anthony Habgood

Yes, just to make sure it was right, because it sounded a little awkward.

Chair

Because it sounded a little awkward. What happened next? Somebody then told Charlotte Hogg.

Anthony Habgood

The company secretary checked through the records.

Chair

And discovered that it was not correct.

Anthony Habgood

He discovered that it was not on there. I then spoke to Charlotte directly. She already knew by then, but I had a meeting with her on I think the Thursday morning or something like that.

Chair

Her letter to us says that she checked, but I do not think she did, did she? “Following my hearing, I checked the Bank’s records”.

Anthony Habgood

She may well have in parallel. I would not be at all surprised at that. She could easily have done that in parallel. In fact, if I was her I probably would have. I spoke to her as well on that Tuesday afternoon. Was the hearing on Tuesday? I think it was.

Chair

I know, but that is what I am trying to clarify. I will just have one more go. Did she find out about this via you or the company secretary or did she initiate the need to check this?

Anthony Habgood

I cannot say hand on heart what the answer to that is. My guess is she was uneasy about it. My guess is she would have checked as well and the Bank checked. We are not isolated. There would have been conversations going to and fro.

Chair

You have said that you are very concerned to find this. Why are you very concerned? Could you just elaborate a bit more for people who perhaps do not follow these things so closely on the potential for a perception of conflict between what the PRC does, a board of which she has now become a senior member, and Barclays Bank? Can you just describe what that perception of conflict consists of?

Anthony Habgood

Sure. The PRC is concerned with microprudential regulation, which means it is concerned with the major banks more than anybody else. It is also concerned with starter banks and all the insurance industry as well, but the big banks are a major regulatory focus of the PRC. Therefore, people who are involved with those banks are potentially in conflict.

Chair

Therefore, a perception of a conflict is quite feasible.

Anthony Habgood

A perception of a conflict is feasible there, yes. The reality of a conflict is slightly different. This is a relationship, which is why we try to specify these relationships, because a relationship can cause the perception of a conflict.

Chair

The reason I ask this question is that in the letter you are effectively quoted as saying that, “Both the secretary and the chair”—that is you—“acknowledge that no actual or potential conflict has arisen to date in relation to any decisions taken in my role and that the perception of a conflict would have been most unlikely”.

Anthony Habgood

That is looking backwards. That is looking backwards to the COO role.

Chair

You now think that a perception of a conflict is likely.

Anthony Habgood

Looking forward, the perception of a conflict is much more likely. This becomes a real issue to my mind. By saying that, if I am not careful I am denigrating the fact that she did not disclose, which she should have, which is an issue in itself.

Chair

Perhaps that should be my last question to you before I ask a question of Bradley Fried. When you say this becomes a real issue, of course it becomes, I think we have both agreed, a much more serious issue.

Anthony Habgood

A much more serious issue—yes.

Chair

But from the point of view of Bank staff, if we want Bank staff to be compliant with these rules, is it not essential that the most senior people in the Bank are compliant and are seen to be compliant? This is after all somebody of Deputy Governor status who was already Chief Operating Officer prior to these appointments. Therefore while there might have been no clear likelihood of a conflict, still the importance of avoiding a substantial breach over a run of years—and we are talking about several years—is very significant in signalling how the Bank approaches its compliance work. Would you agree with that?

Anthony Habgood

I absolutely would agree with that, yes. It is a very serious breach. The point I was trying to make was it moves from a compliance issue, which is very serious but is a compliance issue, to a perception-of-conflict issue, which is also very serious but of a different nature.

Chair

It is of a more serious nature still, judging by what you said at the beginning. Is that correct or not?

Anthony Habgood

Yes.

Chair

I only have one question for you, Mr Fried, although both of you have very extensive private sector experience. Indeed, that is why you were appointed in a sense, because ultimately this Committee took the view that the Court needed to be beefed up with private sector experience and needed to be something much more akin to a proper board capable of performing governance functions. That is why you exist on the Court now with your current powers and responsibilities. You have worked extensively in a bank. You were chief executive officer of a sizeable bank, Investec, for a considerable period.

Bradley Fried

That is correct.

Chair

You have held other very senior positions in that bank. How in the private sector would a bank in the regulated community react to the discovery of something like this among one of its most senior employees? That is the first question.

Bradley Fried

The breach of a compliance matter in a regulated institution is taken very seriously at the highest level of institutions. The starting point is to consider the matter immediately. They are considered on a case-by-case basis. Any serious institution would take a proportionate approach to breaches and they would consider all circumstances in thinking about any compliance breach. The starting point was, and remains, was the breach deliberate or inadvertent? That is the starting point and is a key question. The second is: was the breach an administrative breach or was it something more substantial? The third would be to take account of the track record of the person having committed that breach.

Chair

That is the mitigation.

Bradley Fried

I do not want to get to mitigation yet, because in fact this could be the point of inquiry and everything would be laid out in a very fact-based way. We will get to the mitigation later. I suspect, Chairman, you are not yet asking about the mitigation. I would like to concentrate on the process.

Chair

Just keep going. We have got the wilfulness, whether it is administrative and the track record.

Bradley Fried

There is administrative and track record. The fourth one is a very crucial issue. As you would expect, all stakeholders would be mindful of the question about whether any individual profited as a result of the breach. Clearly, as you can imagine, in a regulated bank thinking about issues of market abuse, insider trading and so on and so forth, those would be critical issues. That was the framework. You asked about the framework we followed as an institution. That was the framework that we followed as an institution. I should also say for the sake of completeness that we expected our most senior people to lead by example and to encourage compliance by those that they managed. The seniority of the managers or any of the people breaching anything would also clearly be a consideration.

Chair

What do you expect would have happened in a case like this internally before the regulator was ever involved? In the absence of any regulatory involvement, what would have happened in a well‑run bank?

Bradley Fried

Should I apply that framework to this case or would you like to me to be more general for the moment?

Chair

Let us suppose it is not wilful, that the track record is exemplary and no money was made. Administration is a difficult term.

Bradley Fried

I think it is something more substantial than administration—actually probably not for the period 2013 up until the period for which I applied for deputy governorship. I would probably have differentiated between those two periods. In the first period as Chief Operating Officer, I would have regarded the lack of disclosure as more of an unwilful act of omission. The question of commission/omission is clearly very important. As an unwilful act of omission, it remains an unwilful act of omission, but the point at which the application went in for deputy governorship should have been potentially a point of rethinking all disclosures. What would have happened in a bank? I will answer with the benefit of a couple of seconds of forethought, but I would say the following: if it had been a senior person, the senior person would have had a discussion with their line manager. In my case it would have been the chairman of the institution. If it had been any other executive, it would have been with me. If it had been one of my direct reports, I would have been grumpy about it. I would have been grumpy about the idea that it had not been thought through and that we were in that position. My reaction would have stopped at grumpiness because of all the other factors. I do not think it would have been extended to a written warning. It would have been a verbal warning. It would have been a point of grumpiness.

Chair

There would have been nothing on his or her record.

Bradley Fried

It could have been on a file, but it would not have escalated into an HR written warning.

Chair

It would have gone on the file, but it would not have been a formal written warning. Just to be clear, in a bank a formal written warning is notifiable to the regulator. Correct?

Bradley Fried

Correct.

Chair

That is the distinction between those two things.

Bradley Fried

If it had been me and I had committed that, I would have expected the chairman to have raised it with the board and it would have probably been board minuted that a stern discussion had been had with me.

Chair

How would you expect the regulator coming in, having a look at this, to have reacted?

Bradley Fried

I would be most surprised if a proportionate regulator did not apply substantially the same framework that I have just discussed to this topic. They would have applied substantially the same framework.

Chair

What we are saying is it is something that merits a note on a file, but it is not a hanging offence.

Bradley Fried

I definitely do not believe it is a hanging offence. It is terribly unfortunate, and clearly in the context of this it is very unfortunate. It warrants grumpiness and it warrants a discussion about what it really means for the optics of it all, but it is not a hanging offence, no.

Chair

While you are discussing this issue with the staffer grumpily, as you have put it—while you are giving them a ticking off and putting a note on their file—how would you feel about promoting them to the second most senior position in the bank at the same time?

Bradley Fried

I really do not believe, Chairman, that is a linear question and warrants a linear answer—A goes to B. It is a factor, but to make it more general without becoming specific, I would say, “Is this person really suited to the role?” That would be the fundamental question. The fundamental question would be, “Do they have an exemplary track record on all other matters? Are they distinctive in pretty much everything that they do? Do they have a followership? Do they have a terrific mind for this? Will they have impact in their role?” If the answer to all those questions is yes, and I do believe in Charlotte’s case that the answer is yes, I would look at this issue, which is most unfortunate, in the context of that and conclude within the context.

Chair

Okay. That sits slightly oddly with your suggestion that this person should lead by example, bearing in mind that the chief compliance officer answers directly to the chief operating officer normally in a bank.

Bradley Fried

They should. You ask about private sector experience. In the spirit of absolute candour, I would say I do not think I have encountered a distinctive chief executive or chairman or very senior executive that has not had similar ups and downs in their careers, where there may have been oversights or may have been issues. I simply have not encountered such people.

Chair

That is very helpful.

Helen Goodman

Mr Habgood, you were saying that you thought there might be a perception problem up to the point at which Ms Hogg applied to be Deputy Governor but not an actual conflict for her role as Chief Operating Officer. As Chief Operating Officer she has attended the Court, hasn’t she?

Anthony Habgood

She has, yes.

Helen Goodman

The Court has regular discussions and updates on the work of the PRA, doesn’t it?

Anthony Habgood

It does.

Helen Goodman

Can you rule out that any commercially sensitive regulatory information may have been disclosed at those meetings?

Anthony Habgood

No, I could not rule that out.

Helen Goodman

Does that not cast some question mark over your neat and tidy distinction between what has happened up until now and the potential for conflicts as Deputy Governor?

Anthony Habgood

I was not trying to make it a neat and tidy distinction. I was trying to say that I did not think there was a real conflict. I thought that you had to go quite a long way to find a perception of conflict in the Chief Operating Officer role, because she was not involved in policy decisions, and it is the policy decisions taken in the now PRC that she would not have been involved in the making of. Does that mean that in an ideal world that would have been disclosed? Yes. If it had been disclosed, would our behaviour have changed in Court? I do not think so. My guess is she would not have been excluded from those discussions. What will happen now, which is entirely in compliance with the codes, is that the PRC at its first meeting will decide whether or not there are any real conflicts here, and then decide whether or not there are any parts of the PRC debates from which she should be recused. The same will go for the FPC. That is how the process works.

Helen Goodman

Mr Habgood, you just said there that you do not think that any decisions would have been different, but it is presumably possible that she was privy to information on the assumption that she had no conflicts of interest, whereas what we have discovered in the letter of 2 March is that she may have had.

Anthony Habgood

With respect, I have not said I think she has conflicts of interest. I think she has a relationship that is reportable, which is a different thing. There are lots of people around who have relationships with other people who fit into that broad category, and so the fact that you have a relationship does not per se mean you have a conflict. It means that you should declare that relationship, and the PRC and the FPC will decide whether or not that relationship could constitute a conflict. There is a distinction to make between, as I say, a relationship and a conflict.

Helen Goodman

But those committees did not have the opportunity on this occasion at any point to question—

Anthony Habgood

She has not yet taken up the role. They will have the opportunity.

Helen Goodman

Sorry, I was asking you—

Anthony Habgood

Historically, no.

Chair

I thought she had taken up the role.

Anthony Habgood

Yes, but they have not had a formal meeting since then. They had a joint meeting, but they have not had a formal meeting. It will be at the first meeting. That is how the policy works—the first full meeting.

Helen Goodman

How many opportunities has she had to declare that her brother works at Barclays?

Anthony Habgood

When she joined, whenever she has attested to that code, which I guess we brought in 18 months ago or something like that, so probably two or three and she has not attested to that. She did voluntarily put it in answer to the written questions you, the Committee, asked her.

Helen Goodman

You are saying that she did that voluntarily.

Anthony Habgood

Absolutely.

Helen Goodman

You are saying that responding truthfully to questions from a select committee is something that you volunteer to do if you want to do it, and if you do not want to do it you do not need to do that?

Anthony Habgood

No, no, no.

Helen Goodman

Why did you use the word voluntarily?

Anthony Habgood

Because she had responded. She responded of her own volition. Maybe that is the wrong word to use—voluntarily. She just responded.

Chair

There is a rather less attractive construction of it, is there not, which is that we went through several hoops when she first arrived in the Bank and then these two or three further opportunities to address this on a code that she herself had written. In evidence to us she said she knew she was compliant because she helped write the code. But it took parliamentary scrutiny and the requirements of parliamentary scrutiny to elicit a response that she should have given several years ago. It does not look good, does it, Mr Habgood?

Anthony Habgood

It does not look good. I agree with you—it does not look good.

Chair

To use the phrase of Mr Fried, it does not look like leading by example, does it, Mr Habgood?

Anthony Habgood

It does not look like leading by example, no.

Helen Goodman

There was the occasion when she took up her initial appointment. There were the annual attestations—there might be a couple of those—and then there was the application for the job. She said in evidence to us that prior to the hearing she discussed the fact that her brother works for Barclays with the company secretary. When did that discussion take place with Mr Footman?

Anthony Habgood

That would have taken place sometime before she submitted the written evidence to you, so let’s say 10 days or two weeks or something before her hearing.

Bradley Fried

I understand, Mrs Goodman, that that took place during the preparation time for those documents.

Helen Goodman

Did Mr Footman make a note of that discussion?

Bradley Fried

I do not know of him making a note. I do not believe so.

Helen Goodman

Would you like to write to us with the answer to that question?

Bradley Fried

I think the answer is no, but should it be different we will write to you. You can take it as a no.

Helen Goodman

Do you know what the company secretary advised?

Bradley Fried

Yes, I do know. The company secretary advised that all disclosures should be made. Charlotte showed him, as I understand it, what disclosure she was going to make, which were full and comprehensive, and the company secretary advised that that was the only thing to do and her submission would be entirely correct.

Helen Goodman

Okay. Turning to the appointment process for the Deputy Governor, was that led by the Bank or the Treasury?

Anthony Habgood

It was led by the Treasury.

Helen Goodman

The candidate pack for the appointment notes that the panel, on which I think you sat—

Anthony Habgood

I did, yes. Dorothy Thompson and I sat there for the Bank.

Helen Goodman

The panel was to recommend those candidates that it deemed appointable to the Chancellor of the Exchequer.

Anthony Habgood

Yes.

Helen Goodman

Did you provide more than one name?

Anthony Habgood

We did.

Helen Goodman

Did you provide them in rank order?

Anthony Habgood

I do not know how the Treasury then put them on. We were not asked to rank order. My guess is yes, but I do not know the answer to that.

Helen Goodman

Do you know whether any additional commentary on the appointable candidates was given to the Chancellor?

Anthony Habgood

I do not.

Helen Goodman

Do you know whether it was suggested that one person would be more suitable than other people?

Anthony Habgood

I do not know that because, again, I was not part of the process of the Treasury transmitting to the Chancellor.

Helen Goodman

The Governor and the Chancellor, according to the candidate brief, may choose to meet with the shortlisted candidates. Do you know whether either of them did?

Anthony Habgood

I do not. It is not a case of meeting with Charlotte, because the Governor would have been meeting her fairly regularly. In terms of a formal meeting on this subject, I do not know the answer to that.

Helen Goodman

The Chancellor would not be meeting her on a regular basis, would he?

Anthony Habgood

He would not, no.

Helen Goodman

Did the Governor have any input into the selection process?

Anthony Habgood

Yes, certainly, because he is very knowledgeable about the field and this is somebody who is going to be working directly with him. Yes, I would expect any senior person, when we are talking about somebody who is going to be working directly for them, to have an input on that process, but he was not a member of the panel.

Helen Goodman

Do you know if the Governor provided any advice to the Chancellor on the appointment?

Anthony Habgood

I do not. Do you mean directly? I do not know that.

Helen Goodman

This might be going back to where we were before, but applications were supposed to include a conflict-of-interest form.

Anthony Habgood

They did.

Helen Goodman

Did Ms Hogg’s not include that?

Anthony Habgood

They did include those forms, but those forms very specifically when they are submitted to the Treasury have a note on them that they are not going to be shared with the panel. I have only seen that form because I asked for it in this process.

Chair

What was the purpose of the declaration if it is not going to be shown—

Anthony Habgood

I assume, to the people who are going to be making the ultimate decision—

Chair

To whom was that information shown?

Anthony Habgood

That I do not know.

Chair

We better find out.

Anthony Habgood

The form has a line it that says, “This is not for the panel”.

Chair

We better have a very full and detailed note elucidating how exactly this appointment and other appointments to the post of Deputy Governor are followed in much more detail than at present is available in the exchange of documentation that currently exists in the public domain. I would be grateful if, on behalf of Parliament, you, as Chairman of the Court, could ensure that that is done and provided for us.

Anthony Habgood

Yes, I can certainly try to do that.

Chair

Just do it. You are the Chairman of Court. You instruct the Bank to do it.

Anthony Habgood

The appointment, however, is a Treasury appointment. It is not a Bank appointment.

Chair

If you get any obstruction from the Treasury, let us know.

Anthony Habgood

I will let you know.

Chair

And we would like to see the form.

Anthony Habgood

You would like to see the form. Yes, I am sure we can—

Helen Goodman

You do not know whether she declared that her brother worked as a director.

Anthony Habgood

I do know that she did not on that form, because I have looked at it since. Sorry, I was not clear on that.

Helen Goodman

Okay. That was not quite clear to me. Mr Fried, if you were in the private sector previously, what would your normal position be on a candidate who failed to disclose material relevant to their application?

Bradley Fried

Mrs Goodman, that is a terribly important question and there is a point of differentiation in the answer between candidates that are new and candidates that are well known and tried and tested, so an internal candidate versus an external candidate. In the private sector, I would certainly have a different reaction to one from the other. If it was a candidate I did not know who had approached us fresh from the outside and had failed to make a disclosure, I would question judgment. I would not have a good sense as to whether that was an act of commission or an act of omission. I would not have a sense for it, because I would not have known the candidate. I would have to differentiate that from an internal candidate, where I would then go through a very serious process with my colleagues and in my own mind as to whether or not that candidate acted wilfully or whether there was any intent or not. That could lead to one or another outcome, depending on the answer.

Helen Goodman

You are saying that the rules should apply to outsiders but not to insiders.

Bradley Fried

Definitely not.

Helen Goodman

That is what you just said. You said on a failure to declare you would treat an insider differently from an outsider.

Bradley Fried

You asked me what I would do in the private sector. If somebody made a non‑disclosure in the private sector, without knowing any context at all for that person or for their behaviour—I am answering you absolutely directly—I would find that troublesome. If the candidate was an internal candidate, I would want to find out more and I would want to know more, because it would appear out of character. There is an out-of-character moment in respect of everything else I know about that candidate.

Chair

You would agree that it does make it very difficult to have a fair and independent application process where internal candidates effectively have a leg up in the system that you are applying in the private sector over the external candidates.

Bradley Fried

Chairman, I do not think so.

Chair

They might get absolution or heavy mitigation for a minor breach.

Bradley Fried

I do not think so, Chairman, for the reason that Mr Habgood just mentioned to you. He told you that the conflicts were not known to the panel. The decision that the panel made as to the electable candidates, as I understand it, Anthony, were made without reference to conflicts of interest.

Anthony Habgood

Correct.

Chair

Did she have to make a declaration when she applied for the job of Chief Operating Officer?

Bradley Fried

Yes, she did.

Chair

What you seem to be saying, Mr Fried, since you make that differentiation between internal and external candidates, is at the time that she was an external candidate she would not have got the job.

Bradley Fried

No, not at all.

Chair

Or that you would have considered it a very serious matter—much more serious than for an internal candidate.

Bradley Fried

Interestingly, at the time of her applying for the job—and I need to check this—I am not quite sure if the Bank’s Our Code was in action in relation to very detailed disclosures of brothers at Barclays etc. Charlotte’s role for the years since she joined in 2013 was a deeply operational role. She had no microprudential or macroprudential decision-making role at all.

Chair

That is not the same point that I am making. I make the point about disclosure.

Bradley Fried

You make the point about disclosure. I would have regarded that at that time as immaterial. Candidly, Mrs Goodman, as I reflect on my answer to you earlier on, for an external candidate for Chief Operating Officer at that time not disclosing a brother at Barclays, I would have struggled to have got too exercised about that. I would differentiate that very clearly from the position of applying for a deputy governorship and a position therefore on the PRC. I would differentiate that.

Chair

The Chief Operating Officer attended Court, did she not?

Bradley Fried

She did, but Court was not a decision-making body when it came to regulatory judgments.

Chair

Therefore, she is privy to the decision-making of the Bank at the highest level.

Bradley Fried

She was.

Chair

Therefore, even though she had no decision-making authority, the scope for the conflict would be just the same, because she was already seeing the paper flow.

Bradley Fried

There are two levels for that, Chairman. You are absolutely correct. The scope for the optics of a conflict were as high, and that is entirely correct.

Chair

Therefore, the distinction that was made at the beginning of this hearing between the events up to this appointment and subsequent to it is really much less significant than it initially appears?

Bradley Fried

I guess, Chairman, there may be two parts to this. One is regulatory decision-making and the other is regulatory knowledge of what those decisions were. Perhaps Mr Habgood was referring to the decision-making process, of which she had no part, versus the knowledge of the decision.

Chair

The question is what is a minimum necessary condition for a perception of or actual conflict to arise, and I think you would agree with me that knowledge is a sufficient condition.

Bradley Fried

I would.

Helen Goodman

Mr Habgood, do you agree with the distinction that Mr Fried has put forward between internal and external candidates and how they should be treated?

Anthony Habgood

It is a very specific issue. Whenever you make an appointment, you think about the integrity of the individual and so on. When you are doing an external candidate in my world, you would take a lot of references on them. With an internal candidate, you would not on a lot of that side. There is inevitably a distinction, because you know the individual and you have a track record of them, but I have always gone for the best candidate when it has been my decision. Here it is not. It is more complex. It is a Treasury decision. It is not the decision of the Bank. You inevitably take into consideration what you know about an individual when you make an appointment. That leads to the external candidates being favoured, as the head‑hunters of this world will say to you quite often, because you also know the things that people are weak at, and with an external candidate, if they present themselves well, you do not know those. You cannot have an exactly equal assessment from an internal to an external.

Helen Goodman

You cannot have an exactly equal assessment, but you can have an exactly equal process, can’t you?

Anthony Habgood

I am saying that with an external candidate I would make a lot more enquiries about them and take a lot more references. In my other lives, you take many more references. That is a difference in process. In principle do I agree with you though that the internal candidate should comply with the code? They should. We are saying she did not and we think it is an honest mistake. That is our assessment, rightly or wrongly.

Helen Goodman

Mr Fried, do you agree that in principle failure to disclose information requested during an application process is grounds for rescinding an appointment?

Bradley Fried

It could be, but it depends on the materiality of that disclosure, Mrs Goodman, and the intent behind it. In principle the answer is it could be.

Helen Goodman

How can you judge what somebody’s intention is?

Bradley Fried

It is a very difficult question. It is a function of the data points that one has about a person. If one has worked with a person for three and a half years and has a sense of that person’s absolutely unimpeachable integrity, approach to life, straightforwardness in respect of all things and putting out bad news very quickly as soon as it becomes known, it is a question of one’s track record. That gets to the question of external versus internal candidates. It is completely legitimate for you to question the difference between the two. I will make it very personal. In Charlotte’s case, I have been on Court. I have worked with her and I have seen an utterly distinctive candidate emerge and grow over three and a half years, and this is out of character. Can one be definitive about an act of omission or commission? No. Could I be as definitive on this one as I have been on any one? I would answer yes. Terribly unfortunate, very aggravating, very grumpy inducing and clearly it is having consequences, but is it the grounds for rescission? I struggle mightily with that one.

Helen Goodman

Do you, Mr Habgood, believe that not providing information requested in an application process might ever be grounds for rescinding an employment?

Anthony Habgood

Might that ever be? The answer has to be yes, because you have to say why it was omitted. I used the word voluntary before, which I should not have and you rightly picked me up on, but she put it in to the form to you and she did not put it in to the form to HMT, which is grounds for suggesting that she did not deliberately leave it out.

Helen Goodman

Do you think it might be because there is more public scrutiny of public documents that come to a Select Committee? Is that possible? You yourself said that when those papers are handed over to the Treasury, it is promised that they will always be in private, whereas when papers come to a public Select Committee in the House of Commons, there will be lots of people—presumably—who know that her brother is a director at Barclays. If she does not tell the truth in a public document, there will be people who say, “That is not a truthful document”. But in a private document, people may not know. Is that a possible explanation of what has gone on?

Anthony Habgood

Of course it is a possible explanation, but, from what I understand, she has not ever tried to hide the fact that she has a brother at Barclays. I have never asked her what her family situation is.

Kit Malthouse

*inaudible* [10.55.32]

Anthony Habgood

Sorry?

Chair

No, do just carry on. Other colleagues will come in.

Anthony Habgood

Okay, okay.

Chair

Ignore the noises.

Kit Malthouse

I apologise.

Anthony Habgood

Not at all. I am sorry. Where were we?

Helen Goodman

I was suggesting to you that being truthful when everything is in public is absolutely essential, because, if you are untruthful, there will be a lot of people who can see this is untruthful—whereas being untruthful in private, where nobody knows where private documents go, is another matter.

Anthony Habgood

There is maybe another explanation: that, when the form came from you, she went to the company secretary and talked about it and said, “What should I put down in here? What are the things that I should put down?”

Helen Goodman

But one would have thought—

Chair

Did she? Did she do that?

Anthony Habgood

I understand she did, but I do not know. I imagine she filled it in. That is certainly what I would do.

Chair

Why did the company secretary not identify all these earlier breaches at that time?

Anthony Habgood

I do not know the answer to that.

Helen Goodman

Turning to the code of conduct, for which she was responsible and which she introduced to the Court in order to raise professional standards—

Anthony Habgood

We all asked for a code of conduct and a compliance function. It was something the Bank desperately needed.

Helen Goodman

The extract from the Court minutes on 20 May 2015 say, “Ms Hogg introduced the Bank’s proposed Code for staff. This was part of the work to ‘professionalise’ the Bank”.

Anthony Habgood

Yes.

Helen Goodman

She introduced it and it was intended to be a first step in building the new compliance function.

Anthony Habgood

Yes, which has since been built up.

Helen Goodman

Is it the case that adherence by employees of the Bank to the code of conduct is essential to public trust and to fulfilling the Bank’s mission?

Anthony Habgood

The purpose of the Code is exactly that, of course, yes. It is important that people comply with the Code. Some parts of the Code are obviously more important than others, but, yes, absolutely, it is the case.

Helen Goodman

As well as drawing up the Code and introducing it to the Court and moving policy on in order to improve the management at the Bank, the Chief Operating Officer is responsible for policing the Code. Is that right?

Anthony Habgood

There is a compliance officer who reports through to her, yes.

Bradley Fried

The compliance officer has a dual report. The compliance officer reports dually to Charlotte and to me, as the Head of the Audit and Risk Committee—in addition to my Deputy Chairman role.

Helen Goodman

Is it not rather odd that the compliance officer and the person to whom the compliance officer reports do not ensure they both have fulfilled the Code?

Bradley Fried

It is.

Chair

How grumpy would you be about that?

Bradley Fried

We are disappointed, Chairman.

Chair

Are you disappointed or very disappointed?

Bradley Fried

Grumpiness has degrees. We are grumpy about that.

Chair

We should treat grumpy as an understatement. Is that correct?

Bradley Fried

Yes, we are upset about this, because, given the quality of this candidate, this is really not—

Chair

It is out of character.

Bradley Fried

Yes, completely out of character. It is so out of character.

Chair

Yes, as you put it before. Perhaps we can go back to the reasons for the exclusion of this declaration, about which we were speculating earlier, partly because Mr Fried said—and I think you agreed in different language—that it was not wilful and there was no attempt to conceal anything here, as far as you are aware. Let’s run through some other possibilities. Is it because the Bank is a bit casual about this sort of thing or has been, historically? Did that culture infect the approach to senior people filling in these forms, including Charlotte Hogg?

Anthony Habgood

The Bank is not casual about it now. “Casual” is probably the wrong word for back when she was doing it, but it was—

Chair

It was less than rigorous.

Anthony Habgood

It was less than rigorous, but there was not a code all in one place. There were various bits and pieces to which you were meant to adhere. The purpose of the Code was to bring it together and make it a focus and to comply. It is difficult. If you take the thing to its full and you talk about relationships and the potential for perceptions of conflict, you can end up with an awful lot of people on everybody’s declaration—or you could do.

Chair

I understand that. I am just trying to go through a series of things, unless this is a particular point you wanted to make. I understand the point you are making is that there is quite a lot of work to do here and it can be quite involved. Is that the point you are making?

Anthony Habgood

Yes, that is one of the points. You then have it recorded in a database, but then somebody has to assess whether or not there is the potential for a real conflict in any of those, as opposed to a relationship.

Chair

That is the compliance officer’s job, taking advice, if necessary, from the Chief Operating Officer, is it not?

Bradley Fried

No, it would be taking advice from me in that instance.

Chair

Can I just stick with Mr Habgood for a moment? Sorry, do go ahead. I am just trying to clarify whose responsibility that is. It starts with the compliance officer, doesn’t it?

Anthony Habgood

Yes, the compliance officer indeed, but the line managers are also meant to know about these relationships of the people who are reporting to them. It goes down the organisation, as it should, because there is not a lot of point in somebody at the top knowing all these things if—

Chair

I am just trying to run through the possible reasons for the exclusion of this over so many years that you are giving us. You are saying you put the likelihood of it being wilful at a heavy discount and the likelihood of it being a consequence of a culture of casualness—that is how I have described it, but you have used other language—as unlikely. This is a very tough job. What about overload? There is a lot to do.

Anthony Habgood

Yes, for the individual there is a lot to do. These things are a prioritisation. I would guess that every senior person in the Bank worries, if they invest in an ISA, “Have I declared that?” There are a lot of ongoing relatively small compliance things, which you have to worry about. Some people are good at doing that and some people are less good at doing that. Everybody probably finds it difficult.

Chair

This is not a small thing, is it? This is not failure to report an ISA. It is a bit bigger than that, is it not?

Anthony Habgood

It is bigger than that, but it is not as if we are talking about a brother and sister who are 21 years old, living at home and watching the telly together every evening. These are people who are individual—

Chair

I have asked you whether overload could be part of the explanation.

Anthony Habgood

It could.

Chair

I have asked you whether it is plausible that it was. There has to be an explanation. If we are ruling out wilfulness and casualness, we have to find some explanation.

Anthony Habgood

Yes. I honestly think her perception is that her brother works at a level that is unlikely to cause a conflict, which is psychological. That does not help with the Code, but—

Chair

In other words, she formed a judgment about it off the top of her head without consultation with others, which has turned out to be wrong. She has made a misjudgment.

Anthony Habgood

That is possible, yes.

Chair

That is what you have just said. You said you “honestly think” that is what might have happened.

Anthony Habgood

“Might have” is what I am saying. It is possible.

Chair

Is that correct? Is that possible, plausible or likely?

Anthony Habgood

It is possible. I think it is possible.

Chair

Okay. I will ask you the overload question again. Are you saying that this is a case of overload or not?

Anthony Habgood

That may have contributed. I do not know.

Chair

We now have that she made a misjudgment in underestimating the importance of the declaration, possibly allied to not having enough time to think about it.

Anthony Habgood

That misjudgment—

Chair

Are you agreeing with that assessment?

Anthony Habgood

Broadly yes, subject to the fact that that misjudgement is much greater when you come to the new role than it was in the old role.

Chair

Okay. I want to come on to one more thing. In her assessment of whether there was a conflict, she will have presumably tried to find out a little at some point, once she realised she needed to declare it, what her brother did, if she did not already know. Would you say that was a sensible thing to do?

Anthony Habgood

Yes, I think she did try to find out what her brother did.

Chair

After all, if he is running the Bank’s security to make sure they are invulnerable to terrorism or something, that is very different from being a job very closely related to what regulators may be interested in. Would that be fair?

Anthony Habgood

Certainly that would be fair, yes.

Chair

Beyond what you have said today, have you made any assessment of whether a potential conflict might arise?

Anthony Habgood

As I say, it is not for me. It is now for the individual policy committees to make those assessments. That is how our current set‑up is.

Chair

But in terms of forming a judgment about whether this appointment is suitable in the light of this event, have you looked at that issue at all? I mean you personally.

Anthony Habgood

Have I looked at whether or not she would be in a position of not being useful in that role?

Chair

No. I mean whether the job that her brother does specifically might have a bearing on whether there is a potential for a conflict.

Anthony Habgood

We could not rule out anyone who has a relation in one of these organisations from joining. You need to declare it; you need to be clear on it; but it per se does not constitute a conflict.

Chair

The letter we have received says, “I have spoken subsequently with both the Secretary of the Bank and the Chair … [They] acknowledge that no actual or potential conflict has arisen”. You are saying that was retrospective.

Anthony Habgood

That was retrospective. That was written in the context of the COO.

Chair

Now, yes. You formed that judgment retrospectively. What about going forward? What about for the new appointment? Have you formed that judgment?

Anthony Habgood

As a Member of Court, she would be absolutely fine. In terms of the positions with respect to the policy committees, they have to make that judgment and make the judgment as to whether or not she would need to be recused from certain parts of those committees.

Chair

But you have not formed that judgment.

Anthony Habgood

I have not formed that judgment, and it is not for me to form that judgment.

Chair

Do you know what her brother does at Barclays?

Anthony Habgood

I understand he works in the strategy department.

Chair

Do you know what that is or what it does?

Anthony Habgood

No.

Chair

I have here from the website that a core part of his function is the examination of various regulatory changes, including: UK and US ring‑fencing; capital changes; Basel IV; TLAC, which, for people who do not know, is the loss‑absorbing capacity structure put in place by the regulator; the net stable funding requirement; and capital charges such as the UK bank levy. You cannot get more central to the role of the regulator than those functions.

Anthony Habgood

I think he has moved on from that role, but nevertheless I accept what you are saying.

Chair

You have looked at what he does.

Anthony Habgood

I am sorry.

Chair

To be fair, Mr Habgood—

Anthony Habgood

I said I thought he was in the strategy department, but I do not have any—

Chair

Okay, so he used to do this and he has now moved on.

Anthony Habgood

I believe so, but, again, I have not checked that.

Chair

I am just going back a step. Here we have someone sitting on board in receipt of all these papers who for years has had a brother working on this, which has not been declared. How do you feel about that as Chairman of the Board?

Anthony Habgood

As I say, it is very regrettable—but I, at least, do not feel there has been a conflict there. It is extremely regrettable that she did not declare that.

Chair

But it is not the conflict that counts, is it? It is the potential for conflict and the perception of conflict.

Anthony Habgood

Yes.

Chair

We are now agreed that it is not just a perception of conflict but a potential for conflict, aren’t we? She has access to documents. She has been having access to documents that clearly could be of interest to a commercial bank on a big scale.

Anthony Habgood

Yes, no, absolutely, and I am sure she and many other people have friends in commercial banks and so on and so on—probably to whom they are a lot closer than a grown‑up brother.

Chair

We are not talking about that. We are talking about the brother and the declaration requirement for the brother here.

Anthony Habgood

Yes. No, we are; we are. I am just putting it into—

Chair

We are not talking about friends or who you meet at dinner parties.

Anthony Habgood

No, absolutely.

Chair

I am going to bring in Steve Baker, who has to leave shortly.

Mr Steve Baker

Yes, very good morning. I have justice question number 1, so I shall have to go. I want to pick up on this word “casual”, which the Chairman used and which you said was the wrong word. I am just looking at the transcript, where Mr Malthouse asked, “Obviously you have family connections in the industry, so what measures have you agreed with the Bank to manage those?” Ms Hogg answered, “My only connection at the moment, which you are referring to, is my brother, who is part of Barclays’ strategic planning group. He has been for a number of years”. This is the important part. “I do not discuss work with him and he does not discuss it with me. We mostly talk about his children”. Is that not a casual response?

Anthony Habgood

That is not her judgment to make, in my view.

Mr Steve Baker

Whose judgment is it? Is it yours?

Anthony Habgood

That judgment should have been made by declaring it as a relationship, initially by the company secretary and wherever it then goes after that.

Mr Steve Baker

To what would you attribute this quite, if I may say so, casual reaction to this point? Why would she be so willing to wave away this relationship?

Anthony Habgood

What do you mean by “wave away” the relationship?