A damning 94-page report into the failure of the lender by the Parliamentary Commission on Banking Standards highlighted failures by regulators and individuals at the bank.
The report said it was not enough that only corporate division head Peter Cummings had been sanctioned for failings at the bank and described former chief executive Sir James Crosby as the “architect of the strategy that set the course for disaster.”
It claimed a strategy set by Sir James following the merger of Halifax and Bank of Scotland in 2001 - creating a public target for the group to increase the return on equity from an underlying figure of 17 per cent in 2001 to 20 per cent by 2004 - launched a “strategy for aggressive, asset-led growth” focused on the corporate, international and treasury divisions.
Sir James’ successor Andy Hornby was criticised for being “unable or unwilling to change course”, as was Lord Stevenson, chairman, who “presided over the bank’s board from its birth to its death.”
The MPs called for the regulator to consider in its forthcoming report on the bank’s demise whether all three should be banned from future roles in the financial sector.
The report said: “Apart from allowing their Approved Persons status at Hbos to lapse as their posts were wound up, the FSA appears to have taken no steps to establish whether they are fit and proper persons to hold Approved Persons status elsewhere in the UK financial sector. In cases of this importance the Commission believes that simply allowing Approved Persons status to lapse is insufficient.”
MPs estimated that there were impairments of £25bn on the Hbos coporate loan book for 2008 to 2011, but said it was wrong to blame this on the financial crisis. The report said: “The lending approach of the Corporate Division would have been bad lending in any market. The crisis in financial markets was merely the catalyst to expose barred from undertaking any role in the financial sector.”
The FSA did not escape criticism, with MPs questioning why the regulator expressed concern about the Hbos strategy and business design in 2004, but failed to follow up on this.
According to the report, on 27 January 2004 the board of Hbos plc was told by the group finance director, Mike Ellis, that, in the view of the FSA, the group’s growth had outpaced the ability to control risks. Its growth, which was markedly different than the position of the peer group, may have given rise to “an accident waiting to happen,” according to the report.
The report showed that the FSA commissioned PwC to undertake a ‘skilled persons review’ in July 2004, making a number of recommendations for change, and an Arrow review in late 2004 noted that Hbos’ risk profile had improved and that it had made good progress in addressing the risks highlighted previously, but the group risk functions still needed to enhance their ability to influence the business.
However, MPs said the FSA then switched its focus onto Basel II and its treating customers fairly intitiative.
The City watchdog was described as “not so much the dog that did not bark as a dog barking up the wrong tree.” MPs said between 2004 and the latter part of 2007, the FSA focused on the requirements of the Basel II framework, which not only weakened controls on capital adequacy by allowing banks to calculate their own risk-weightings, but they also distracted supervisors from concerns about liquidity and credit.
Andrew Tyrie, chairman of the Commission, said: “The Hbos story is one of catastrophic failures of management, governance and regulatory oversight.
“The sums would never have added up: the Commission has estimated that, taken together, the losses incurred by the corporate, international and treasury divisions would have led to insolvency, regardless of funding and liquidity problems, had Hbos not been bailed out by both Lloyds and the taxpayer.”
In March 2012, the FSA censured Bank of Scotland, now part of Lloyds Banking Group, over serious misconduct in the lead up to its taxpayer bail-out in 2008, but stopped short of a fine because it would mean the taxpayer was paying twice for the same actions committed by the bank.
