Bank of England deputy governor resigns over conflicts of interest

What should have been a promotion for a rising star in the United Kingdom’s banking world suddenly turned into her resignation letter when it was revealed that the candidate for one of the Bank of England’s top jobs forgot to obey the rules that she helped devise and declare that her brother was strategy director for one of the world’s biggest banks.

Charlotte Hogg, who took charge as deputy governor for Markets and Banking at the Bank of England on 1 March and had been chief operating officer since 2013, was forced to resign within two weeks of her appointment for breaching the organisation’s Code of Conduct, which she helped put together.

During her near four-year tenure at the bank she had failed to disclose that her brother Quintin worked as a director of group strategy at Barclays Bank, whose operations come under the central bank’s scrutiny. In her new role, Hogg would have had responsibility for markets and banking—effectively overseeing her brother’s area of business.

The omission came to light when Hogg failed to disclose her brother’s position on her application for the role of deputy governor on 3 December 2016. It was only in response to a questionnaire sent out by Parliament’s Treasury Committee, returned on 22 February 2017, that she finally declared it.

In her subsequent oral evidence to the Treasury Committee which convened to check her suitability or the role, Hogg told MPs: “I do not discuss work with him and he does not discuss it with me. We mostly talk about his children.”

MPs were not impressed. “Were it not for the Committee’s questionnaire and subsequent scrutiny, the clear perceived and potential conflicts that would arise in her new role may never have come to light. Nor would the perception of conflict in her current role of chief operating officer,” said MPs in a damning report published on 14 March into Hogg’s appointment.

In the Bank’s Code of Conduct under the section titled “Acting With Integrity,” there is a paragraph that specifically talks about “personal relationships.”

It says that “close personal relationships with others in the Bank, and in some cases externally, could be perceived as creating unfair advantages,” adding that “we may not directly supervise, negotiate, approve, or otherwise participate in the hiring, retention, promotion, or compensation of spouses, partners, immediate family members, or others with whom we have a close personal relationship.” The paragraph goes on to state that “we must always disclose these relationships with Bank colleagues so that the Bank can take steps to avoid any potential or actual conflicts of interest arising.”

While the Code recognises that it can be “a little more difficult to know what to include and where to draw the line” with regard to personal relationships outside the Bank, the document does list some specific job types that would need to be disclosed if a family member was working in such a role—and lo and behold, “banker” is on the list of just three professions named, which ought to have been unsurprising given that part of the organisation’s remit is to regulate and supervise the country’s banking sector. It states: “Close personal relationships with those active in financial, economic, or political journalism, bank-regulated financial institutions and significant dealings with counterparties of the bank or bank suppliers, such as banknote printers or caterers, should all be disclosed.”

“The question for Mark Carney is why the set of standards wasn’t being adhered to. He needs to be very clear now on what the bank’s going to do to address this. It’s clearly a systemic issue in the bank.”

John Mann, an MP on the Treasury Committee

It was not as if there had not been ample opportunity for Hogg to declare the potential conflict of interest, and MPs criticised her for systematically waiving the rules. The Treasury Committee said that she should have made a declaration to the chair of the Bank’s Court of Directors, which sets the organisation's strategy and budget and takes key decisions on appointments, on 20 May 2013 shortly before being appointed chief operating officer. Furthermore, she could have—and should have—made the declaration on at least two other occasions: on 17 September 2015 and 30 September 2016, in which she stated that she had read and understood the Code of Conduct and had made the appropriate disclosures.

Hogg had offered her resignation the week before she jumped, but the bank hesitated, perhaps thinking that the issue would either blow over or be resolved. By 13 March, she “insisted” that the bank accept her resignation for her “honest mistake.”

Minutes after the Treasury Committee released its report on 14 March, the bank announced Hogg’s resignation. Her resignation letter, published on the bank’s Website, is a mixture of apology and clarification.

For example, Hogg admits that “it was incumbent on me to get all my own declarations absolutely right” and that she had, “in the course of a long hearing, unintentionally misled the committee as to whether I had filed my brother’s job on the correct forms at the bank.” She also fully accepts it was a “mistake” not to declare her brother’s vocation earlier—an error “made worse” by the fact that she was involved in drafting the policy in the first place.

THE REASONS WHY MPS SLAMMED HOGG

Below is an expert from the House of Commons Treasury Committee Twelfth Report of Session 2016-17.
The Treasury Committee’s report released on 14 March said that it “has seen nothing to suggest that Hogg deliberately concealed her brother’s role from the Bank, nor is there any evidence to suggest that any conflict has to date arisen, still less that anybody has profited from such a conflict.” Furthermore, the Committee said it “has no reason to suppose that Hogg intended to mislead it when she gave incorrect evidence on 28 February” or that “an isolated failure to declare the role of a sibling in a commercial bank is, of itself, necessarily serious.”
However, the Committee lists four reasons why Hogg’s failure to declare was serious and why her position at the Bank was untenable.
Firstly, she failed to comply with the Code of Conduct over a period of nearly four years, despite numerous procedural reminders and opportunities to do so. Nor was she compliant with the Bank’s values and ethics policies that existed prior to the Code coming into effect.
Secondly, her status at the Bank, and the responsibilities of her position (including the drafting and implementation of the Code) meant that she needed to exemplify high standards of corporate governance and set the tone. But “in failing to adhere to the Code, Hogg did not lead by example,” says the report.
Thirdly, a letter Hogg sent to the Committee on 2 March revealed “a failure to appreciate the seriousness of that history of non-compliance during her tenure as the Bank’s chief operating officer”, especially since her brother was in a senior role at Barclays dealing with important regulatory matters for at least some of that period. The Committee was also unimpressed with Hogg’s assertion that there had been no actual or potential conflict of interest in terms of the “decisions” she directly made as chief operating officer: she neglected to comment on potential conflicts of interest arising from the role itself (and information she was privy to).
Lastly—and most seriously, according to the Committee—was her failure to understand how potential conflicts of interest could arise in future in her position as Deputy Governor, where she would be involved with the Bank’s policy committees, particularly the Financial Policy Committee and the Prudential Regulation Committee, which is concerned with direct micro-prudential regulation of Barclays.
The report found that “Hogg’s conclusion in this respect was a serious error of judgement” which was “compounded by the fact that it was expressed in a letter whose purpose—after her non-compliance had been revealed, and she had been given cause to reflect seriously upon it—was to reassure Parliament that she is capable of reaching sound judgments on matters relating to compliance and conflicts.”
MPs made it very clear that Hogg was an unsuitable candidate to be considered for Deputy Governor. “Professional competence for this role includes an ability to follow the rules, particularly those that one has had a hand in writing and enforcing; an understanding of why those rules are important; and an awareness of the risks arising from actual and potential conflicts of interest, and the perceptions of conflict. Hogg’s oral and written evidence has given the Committee grounds for concern on all three counts.”
Source: House of Commons Treasury Committee

But she also says that she had never made a secret of her brother’s job, and that it was she who had informed the Treasury Select Committee of it before her hearing. She also says that she had “not shared confidential information or misused it in any way,” does not have any financial relationship with her brother, and was “utterly committed to the safeguarding of confidential information and the separation of a home and work life.” “Furthermore, my integrity has, I believe, never been questioned throughout my career,” she wrote.

Despite this, Hogg recognises that being sorry is not enough. “We, as public servants, should not merely meet but exceed the standards we expect of others. Failure to do so risks undermining the public’s trust in us, something we cannot let happen.”

The statement published on the Bank’s Website on 14 March gives the impression that the bank would not have pressed for her resignation if there had not been any political pressure for her to do so.

Anthony Habgood, chair of Court, said “no one who knows her [Hogg] doubts her track record or her integrity.” Habgood is also quick to say that there would have been no similar expectation for Hogg to fall on her sword if such a potential conflict of interest had arisen while working for a company or in any other area of public service. “Charlotte’s decision by any measure exceeds the standard that would be expected in the private sector or would be required under statute,” wrote Habgood, adding that her decision to resign was “taken … with the best interests of the bank at heart.”

Mark Carney, governor of the bank, said: “While I fully respect her decision taken in accordance with her view of what was the best for this institution, I deeply regret that Charlotte Hogg has chosen to resign from the Bank of England.”

Following Hogg’s resignation, the bank has announced some immediate governance changes. It is reconfiguring reporting lines and internal structures in order to safeguard more effectively the governance of its Code of Conduct, compliance, and disciplinary processes.

The new configuration will involve senior management responsibility for Bank-wide risk management moving from the chief operating officer (Hogg’s previous position) to Deputy Governor for Prudential Regulation Sam Woods in his capacity as chair of the executive risk committee. Woods will report to the Court’s audit and risk committee (ARCO) on risk matters.

Meanwhile, the bank’s head of compliance will report to the general counsel (who in turn reports to the governor), as well as the chair of ARCO (Bradley Fried, deputy chair of the Court) who is tasked with ensuring the independence of the bank’s compliance function. The general counsel will also have senior management responsibility for the Bank’s Code of Conduct and is tasked with ensuring that the policies under the Code are fully understood and adhered to and will report on these matters to Fried.

The Court has also commissioned a review by its non-executive directors (excluding the chair, Habgood) to ensure adherence to the Code of Conduct at the most senior levels of the bank. With the help of the bank’s Independent Evaluation Office—which reviews the organisation’s performance—its internal audit function, and the National Audit Office (the U.K. watchdog for government department spending), the review will examine the lessons from Hogg’s case; the extent to which the recent changes to reporting lines and internal structures are adequate; and what the bank should do to ensure full and timely compliance now and in future, especially among senior members of the bank.

The bank will make the findings and recommendations of this review public, although it has not specified a date.

John Mann, an MP on the Treasury Committee, said it was “appropriate” she had resigned, but raised questions about Carney’s stewardship, given that Hogg had been with the bank for over three years and had helped develop the Code of Conduct that she chose to ignore. Also, in her oral evidence to the Treasury Committee, Hogg said that Carney was aware of her brother’s position.

“She wrote the code of conduct for the Bank of England … it’s an explicit set of standards that she wrote and didn’t comply with and that made her position totally untenable,” said Mann.

“The question for Mark Carney is why the set of standards wasn’t being adhered to. He needs to be very clear now on what the bank’s going to do to address this. It’s clearly a systemic issue in the bank.”