Report on HBOS collapse may lead to bans for executives

Up to 10 former senior managers of the Halifax Bank of Scotland (HBOS) could be banned from working in financial services following the publication on Thursday of a damning report on the bank's £20.5 billion collapse in 2008.

Britain's financial regulator will now conduct a new investigation into whether former chief executives James Crosby and Andy Hornby, chairman Lord Stevenson, and other executives should face further penalties.

Formed in 2001 through a merger of Halifax building society and the Bank of Scotland, HBOS had to be bailed out by the British taxpayer seven years later on account of disastrous, reckless lending. Only one of the bank's executives, Peter Cummings, has ever been sanctioned.

The report, part of which was authored by Andrew Green QC, laid the blame for the collapse on the bank's management but said the City regulator, the Financial Services Authority (FSA), had been deficient in its handling of the bank.

“The FSA’s enforcement investigations in relation to the failure of HBOS was not reasonable. The decision-making process adopted by the FSA was materially flawed. The FSA should have conducted an investigation or series of investigations wider in scope than merely into the conduct of Mr Cummings and the corporate division,” Mr Green said.

He said the FSA’s successor bodies, the Bank of England’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) should now look at investigating others.

“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,” he said.

The report is scathing about the board of HBOS, which it said was lacking in banking experience and failed to devise a clear strategy and focus on growth.

It identifies the factors that led to the crisis as: inappropriate risk taking; the management of credit in the corporate division; expansion into Ireland and Australia; and the reliance of the bank on wholesale markets.

Andrew Bailey, deputy governor of the Bank of England and head of the PRA, said the report's account of the collapse of HBOS was of more than historical significance.

“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 purse, 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 managed to create a big problem,” he said.

Former non-executive directors of HBOS condemned the report, complaining that it “downplays the unforeseen and unforeseeable effect of the financial crisis on HBOS”.

In a statement issued through a law firm, they said the report “acknowledges that its judgements have been reached with the benefit of hindsight. The report does not contain evidence that would justify any further enforcement action against executives”.