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HBOS collapse: report recommends formal investigation into executives HBOS collapse: report recommends formal investigation into executives
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A damning report into the near-demise of HBOS has laid the blame on the bank’s former board and called for formal investigations into the management team, seven years after the lender was bailed out with £20bn of taxpayer money. Former top managers of HBOS could be banned from working in the City after a damning report into the near collapse of the bank seven years ago laid the blame squarely on its former board and senior directors.
As a 400-page report was published into the country’s biggest mortgage lender and savings institution, the prospect of investigations and banning orders into as many as 10 former executives was raised. At least 10 former executives - including chairman Lord Stevenson and chief executives Andy Hornby and James Crosby - could be subject to formal investigations after a decision not to pursue them then before now was described as “materially flawed”.
These include former chairman Lord Stevenson, former chief executives Andy Hornby and James Crosby, as well other former-executives such as Mike Ellis, former finance director and current chairman of Skipton building society, Colin Matthew who ran the international division, and Lindsay Mackay who ran the Treasury operation. Business secretary Sajid Javid has also been handed a copy of the report prepared by City regulators - to reconsider whether there are grounds to strike off any of the executives as directors of any type of business.
Related: HBOS report: Executives could be banned over bank's collapse - live updates Others who could face investigation include former finance chief Mike Ellis, who is now chairman of Skipton building society, Colin Matthew, who ran the international division of HBOS, and Lindsay Mackay, who ran the Treasury operation.
“Ultimately responsibility for the failure of HBOS rests with its board,” the long-awaited and much-delayed report said, which also criticises the former heads of the now-defunct Financial Services Authority, adding that the FSA’s initial investigation into whether executives should be punished was too narrow and mistakes were made.
The official report – published two years later than expected – describes a boardroom that lacked banking experience and a management team which drove a culture of growth at all costs. It is published by the FSA successor bodies, the Bank of England’s Prudential Regulation Authority and the Financial Conduct Authority.
It is published alongside a highly critical assessment of the FSA’s decision to only investigate one former HBOS executive, Peter Cummings, despite concluding that there were grounds for an investigation into Hornby, now the chief operating officer of Gala Coral.
There is no formal record of the decisions inside an over-stretched and under-resourced FSA about the decision to focus on Cummings, who was banned and fined £500,000 in 2012. He complained of “tokenism” at the time.
“It is my view appropriate that the FCA and/or the PRA should now take the opportunity to give proper consideration to the investigation of individuals other than Mr Cummings and thereby do that which their predecessor failed to do. There is plainly a public interest in the FCA and/or the PRA giving proper consideration as to whether to investigate any other former members of HBOS’s senior management in the light of the failure of this systemically important bank,” said Andrew Green QC, who conducted the review of the FSA’s decisions.
But a decision on whether to heed his advice has not yet been taken as regulators will conduct a review into whether enforcement action should be taken “as early as possible next year”.
Related: HBOS report: a damning indictment of failed bankers and regulatorsRelated: HBOS report: a damning indictment of failed bankers and regulators
The report quotes Clive Adamson, the former FSA director of enforcement, saying that “the people most culpable were let off” and in his view those people were Hornby and Stevenson. It is the second time an official investigation has pointed the finger of blame for the near-collapse of HBOS on its bosses. A previous parliamentary report said it was the result of a “colossal failure of management”.
Green has left the door open for a wide investigation into former executives, although the report concludes that the FSA was right not to investigate Crosby, who gave up his knighthood in 2013 along with 30% of his pension. Green said that it was not unreasonable for the FSA not to have investigated Crosby – who left in mid- 2006 - from early 2009. The much-delayed 400-page report into the collapse of the country’s biggest mortgage lender and savings institution describes a boardroom that lacked banking experience and a management team which drove a culture of growth at all costs.
Lack of communication between Margaret Cole, the then-head of enforcement at the FSA, and Sir Hector Sants, the chief executive, is among the reasons cited for the mistakes over the initial investigation into who was culpable. Sants was never told that the threshold for an investigation into Hornby was reached. The end result of the bank’s ill-judged lending spree was that HBOS faced bad debts of £45bn - far more than the £38bn of losses racked up by the far larger Royal Bank of Scotland.
“It appears that because enforcement could not be certain of winning disciplinary proceedings against Mr Hornby, the decision was taken not to investigate him. This was a misguided approach in that placed excessive weight on a view of the prospects of success formed at such an early stage,” said Green. The bank - which had to be rescued by Lloyds TSB and then bailed out with £20bn of taxpayer money during the height of the crisis - “failed to set an appropriate strategy, and also failed to challenge a flawed business model that placed inappropriate reliance on continuous growth without due regard to the risks involved”.
The official report also criticised their predecessors at the FSA, the chairman Sir Callum McCarthy and John Tiner, now at insurer Towergate and a non-executive at Credit Suisse. “The FSA’s approach was too trusting of firms’ management and insufficiently challenging. The FSA executives management, led by chief executive John Tiner, designed (and failed to redesign) this deficient approach to supervision. Further the oversight of the executive by the FSA board, led by the chairman Sir Callum McCarthy, was insufficient,” the report said. At one point in 2008, when HBOS was facing meltdown, it was reliant on a £25bn Bank of England lifeline to stay in business.
It also acknowledges that the regulatory regime at the time was one of “light touch” which had been accepted in the City. Related: HBOS collapse: where are the main players now?
The most stinging criticism is aimed at the ability of the board to devise a clear strategy and focus on growth – which is denied by both Crosby and Hornby – and its lack of banking experience. The now defunct City regulator, the Financial Services Authority, was also criticised, both for its approach to overseeing banks in the run-up to the crisis and for the way it decided to only punish one HBOS executive, Peter Cummings, in the wake of its near collapse.
There was a flawed strategy and it was too late and too impossible to change course as the crisis hit because of: But the report, first scheduled for publication two years ago and which cost £7m to produce, concluded: “Ultimate responsibility for the failure of HBOS rests with its board.”
• inappropriate risk taking It was published alongside a highly critical assessment of the FSA’s decision to investigate only Cummings, who ran the corporate division, which also revealed there were grounds for an investigation into Hornby, now the chief operating officer of Gala Coral.
• the management of credit in the corporate division There is no formal record of why the FSA targeted only on Cummings, who was banned and fined £500,000 in 2012. He complained of “tokenism” at the time.
• expansion into Ireland and Australia Andrew Green, the QC who conducted the review of the FSA’s decisions, said it was plainly in the public interest that the decision not to investigate any other former HBOS bosses was reconsidered.
• the reliance of the bank on wholesale markets However, a decision on whether to heed his advice has not yet been taken. Regulators will conduct a review into whether enforcement action should be taken “as early as possible next year”.
Andrew Bailey, head of the PRA, said: “The story of the failure of HBOS is important both to provide a record of an event which required a major contribution by the public pursue, and because it is a story of the failure of a bank that did not undertake complicated activity or so-called racy investment banking. HBOS was at root a simple bank that nonetheless that managed to a create a big problem”. The Green report quotes Clive Adamson, the former FSA director of enforcement, saying that “the people most culpable were let off”. In his view those people were Hornby and Stevenson.
Related: HBOS timeline: the countdown to collapse
While Green has left the door open for a wide investigation into former executives, he concludes that FSA was right not to investigate Crosby, who gave up his knighthood in 2013 along with 30% of his pension.
Green’s report also reveals a breakdown in communication between the City watchdog’s enforcement division, then run by Margaret Cole, and its chief executive Sir Hector Sants, who was not told that there were grounds for a full investigation into Hornby.
Sants’ predecessors, the chairman Sir Callum McCarthy and chief executive John Tiner, are also criticised for their approach in the run up to 2008 crisis. “The FSA’s approach was too trusting of firms’ management and insufficiently challenging” the report said.
The report acknowledges that the regulatory regime at the time was one of “light touch” and Andrew Bailey, head of the PRA, described HBOS and the FSA as “creatures of the time”.
“HBOS was at root a simple bank that nonetheless managed to a create a big problem,” Bailey said. It was not one that embarked on risky trading activities but overly focused on growth - which is denied by both Crosby and Hornby.
Hornby refused to comment but his employer Gala Coral, the betting business, stood behind him. Skipton building society also backed Ellis, saying he had the “wholehearted confidence of the board”.
In a statement issued by law firm Ashursts, eight former directors rejected the suggestion that an investigation into their conduct was warranted. The eight included Stevenson, who the report said bore “responsibility individually and, collectively and as board member for the failings of the board”.
The former directors said they “disagree with a number of the conclusions of this report, particularly the way in which it downplays the unforeseen and unforeseeable effect of the financial crisis on HBOS”.
But Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, urged the regulators to press on with investigations: “Better late than never ... The FCA and PRA should get on with this immediately.”
He also called for further action on auditors KPMG, after the Financial Reporting Council, which polices the accountancy profession, said there were no grounds for an investigation. “The audit process was an important part of the story of HBOS’s failure,” said Tyrie.