The Sunday Times
Published: 22 November 2015
Light-touch regulation let the lender run amok. Will George Osborne’s sops to the City spell the start of a new era of lax controls?
Former HBOS chief executives James Crosby, left, and Andy Hornby (Andre Camara)
FOR the truth as to why none of the directors of HBOS was pursued after the near-collapse of their bank in 2008, we have to rely on Mr Jones.
Over the course of three years, the Queen’s counsel hired to dig into the regulatory shambles, Andrew Green, interviewed 14 former and current officials at the Financial Services Authority (FSA), the now-defunct City watchdog, as well as the bank’s top brass.
Most of the FSA team fought tooth and nail to defend their records. But Mr Jones, an enforcement manager whose identity was protected by Green, was scathingly candid in his assessment. The general view at the financial regulator at the time, he told Green, was that “enforcement against big bankers had become virtually impossible”.
Only one person, the banker Peter Cummings, was censured over HBOS, while others, including chief executive Andy Hornby, his predecessor James Crosby and the chairman, Lord Stevenson, faced no action.
The untouchable mood had been set long before HBOS began unravelling. As chancellor, Gordon Brown famously promised in 2005 to ensure regulation was not just “light touch” but “limited touch”.
The name of the game was to make sure the City was the most competitive place in the world to do business.
Last week’s long-awaited report by Green, which accompanied a review by the Financial Conduct Authority, successor to the ill-fated FSA, and the Bank of England, makes it clear that lax regulation contributed to HBOS’s downfall.
The “deficient” regulator was “too trusting of firms’ management and insufficiently challenging”, said the review.
So much so that on September 17, 2008 — just one day before Lloyds stepped in to save the business — the FSA told the stock exchange that HBOS was a “well-capitalised bank that continues to fund its business in a satisfactory way”.
HBOS was born in 2001 from the merger between a West Yorkshire building society that had become a FTSE 100 lender — the Halifax — and Bank of Scotland, Scotland’s first bank, founded in 1695. HBOS aggressively expanded and binged on risky assets in the following five years. When the pair merged, HBOS had a stock market value of £28bn, but by the end of 2006 that figure had ballooned to more than £42bn.
Former HBOS chairman Lord (Dennis) Stevenson (Graham Hamilton)The result of such relentless growth was an apocalyptic crash and the rescue of HBOS through a takeover by Lloyds TSB. This triggered a £20bn bailout, with the taxpayer taking a 43% stake in the merged lender.
In the wake of the financial crisis, regulators have tightened regulation, forced banks to raise tens of billions of pounds of capital — cash for a rainy day — and curbed the bonus culture. However, there are signs today that tough new rules to prevent a future crisis are being watered down.
Aggressive lobbying by the banks has forced George Osborne to row back on a multibillion-pound bank tax, punishments for senior executives and a plan to break up the big banks.
Martin Wheatley, the chief executive of the FCA, was unceremoniously removed by the chancellor in July. Wheatley had made enemies in financial services by being too aggressive and tough on the City. It is not known who his replacement will be.
“Banking regulation is much tougher now than it was in 2008, but this should not lull us into a false sense of security,” warned Oliver Parry, senior corporate governance adviser at the Institute of Directors.
Last week’s report — published alongside Green’s verdict on the FSA’s handling of the HBOS investigations — came seven years after the bank nearly collapsed. The two reviews cost £7m.
The Bank report castigated management and regulators, saying the latter were stretched “almost to breaking point”. “The board and senior management of HBOS failed to set an appropriate strategy, and also failed to challenge a flawed business model,” it said.
Regulators are now going after the top brass who were at the helm when HBOS collapsed. As many as 10 executives could be banned from working in the City.
Hornby, now the chief operating officer of leisure company Gala Coral, and Stevenson were both named in the report. The former chairman, who is today a non-executive director at Waterstones, is accused of having “lost the objectivity” his role required.
Andrew Bailey, deputy governor of the Bank of England, said there would be a rapid review of City bans for the 10, which is expected to be completed by next year. “It’s not the intention to have a lengthy investigation. We will do this piece of work as soon as possible,” he said.
The 56-year-old regulator said it was right that the report would recommend “looking again at the question of prohibition of people who haven’t been prohibited”.
Sajid Javid, the business secretary, will determine whether individuals should be banned from being directors of any British company.
Like Osborne, however, Javid has recently spent his time waving the flag for the City, calling for an end to “banker bashing”.
His tough-talking predecessor, the Liberal Democrat Vince Cable, did not ban any of the directors involved in the other great British debacle of the banking crisis — the near-collapse of Royal Bank of Scotland.
Top executives at HBOS have so far escaped largely unscathed: Hornby has returned to corporate life while Cummings, the man who led HBOS’s relentless dealmaking, was the only executive to be punished. He was banned for life from banking and fined £500,000. Cummings has long argued that he was “singled out” by the regulator.
The FSA considered launching a probe into Hornby but pulled back, thinking it would be too difficult to pin down personal culpability, last week’s report revealed.
Green said that the decision- making process at the FSA was “materially flawed”. He said the regulator should have conducted an investigation wider in scope than merely into the conduct of Cummings and HBOS’s corporate division. The QC suggested that such a restrictive investigation was not “reasonable”, even with the benefit of hindsight.
None of the three leaders of HBOS now works in financial services. However, a City ban would hit the likes of Mike Ellis, the former finance director of the bank who is now chairman of Skipton building society. Lindsay Mackay, who was the bank’s head of treasury, could also come under pressure as he is now a director of Greek lender Alpha Bank.
Paul Moore, the whistleblower who alerted the HBOS board to the bank’s excessive risk-taking, said that Ellis, his former boss, was at the “heart” of its collapse.
“He was the henchman of Crosby and Lord Stevenson, and has serious questions to answer. His position as chairman of Skipton is untenable,” he said.
Eight of the former HBOS non-executive directors issued a statement through City law firm Ashurst last week. They said that the report “downplays the unforeseen and unforeseeable effect of the financial crisis on HBOS”, and that it “does not contain evidence that would justify any further enforcement action against executives”.
Cummings was the architect of HBOS’s aggressive expansion. He ensured that it was the bank of choice for many of Britain’s top entrepreneurs, including Sir Philip Green, the Reuben brothers, Nick Leslau, Robert Tchenguiz and the Barclay brothers.
While all banks were falling over themselves to lend money at the time, HBOS took things a step further. Through the so-called Integrated Finance model created by Cummings and his right-hand man, Graeme Shankland, the bank would also buy a stake in almost every big company to which it lent money.
Peter Cummings, formerly head of the bank’s corporate division, is the only banker to have been censured over HBOS (Wattie Cheung)The report said that Cummings had failed to consider the risks of certain transactions and the expansion of the business, and had accepted “implausible or unsatisfactory” explanations from subordinates without testing the veracity of their explanations.
Andrew Tyrie, the chairman of the influential Commons Treasury committee that conducted an earlier probe into HBOS, said regulators should decide on bans “within months, not years”. He also added that the role of HBOS’s auditor, KPMG, needed further investigation.
In 2015, many would argue banks are in a much safer place.
“Both the strategy of the bank and the FSA were creatures of their time,” said Bailey at the Bank of England. “Much has changed since that time.” But excessive regulation has come at a price. Britain’s top lenders are buckling under the weight of increased capital requirements and some, including HSBC, are threatening to quit this country in search of a friendlier regulator.
In June, Osborne sought to prevent a City exodus. Speaking at the annual Mansion House dinner, he vowed to make Britain the “best place for European and global bank headquarters”.
He added: “We can raise our ambition and ensure we have . . . the most competitive financial services in the world” — an echo of Brown’s fateful promise of light-touch regulation.
Fate of the HBOS 10
The most common question in the wake of the HBOS inquiry is simply: why haven’t those involved been banned as directors?
Andrew Green’s report into the FSA’s investigation lambasts the regulator for going after only Peter Cummings, the former head of the corporate division. He was fined £500,000 and banned from working in financial services — but not from being a company director.
Green suggests that regulators now examine similar City bans for up to 10 others, including former HBOS chief executive Andy Hornby.
Andrew Bailey, the head of the Prudential Regulation Authority, said last week that City bans would be considered for all those named.
More punitive would be bans from serving as directors of any companies, not just financial services. This is the preserve of the Department for Business, which has a broad test of “unfit conduct”, including insolvent trading, improper accounting and not paying tax.
The Insolvency Service, part of the Department for Business, normally has to persuade a court to ban a director, but some — including the so-called Phoenix Four, who owned car maker MG Rover when it went under — decide to accept a voluntary ban to avoid a court appearance.
The HBOS report has been sent to the Department for Business, which will assess whether any of the HBOS leadership should face ban proceedings.