A review into the failure of HBOS has concluded that its previous senior management should now be considered for enforcement investigations, including the man that led the bank’s boom-time drive into real estate, chief executive of corporate, Peter Cummings.
The FCA and PRA review found that the senior management, along with the board, established a business model that was predicated on continuous growth, ignoring the cyclical nature of certain markets, including real estate, and the risks that involved.
Despite warnings from regulator the FSA, management continued with a business model that was “unsustainable in the long-term”.
One of the fateful decision by management, the report claims, was to expand its commercial property lending book even though it had become evident the market had turned.
Some 60% of all loans on HBOS’s books between 1999 and 2008 were made between 2006 and 2007 with what the report describes as significant “control failings”.
Eventually 38%, or £68bn, of the bank’s total loan book was held against commercial property, well above the banking average of 23% at the time.
A significant minority, £14bn or 20.6%, of its real estate book was development finance.
The report found that in many cases the level of security taken against loans was inadequate and that controls were lacking.
In addition to the management of HBOS, the supervisory approach of the FSA was also found to be flawed and was therefore unappreciative of the risks that HBOS was running in its business model.
As a result, the FSA was not in a position to intervene in the running of HBOS until it was too late.
In addition to the review, Andrew Green QC was appointed to give an independent assessment of previous enforcement action. He gave his opinion that the scope of any enforcement investigation should include more than Peter Cummings, previously the only individual investigated as part of the bank’s demise, but also should consider other senior management including previous chief executive Andy Hornby and chairman Lord Stevenson.
Green also concluded that the FSA investigation had been flawed in part because the regulatory regime at the time made it difficult to take enforcement action against senior bankers.
The review also considered that the FSA took too much care on the issue of whether it would win individual cases and therefore decided not to proceed with an examination of Hornby, believing it might not win any subsequent case, without even beginning an investigation.
Green also concluded that with just 282 staff covering 209 investigations, the FSA was inadequately staffed to be able to carry out the necessary investigations at the time.
