Why has it taken seven years for an official inquiry to reach the common sense verdict that the board and senior management of HBOS were ultimately to blame for the bank’s failure?
The short answer is that the HBOS board had a rival in the incompetence stakes in the form of the old Financial Services Authority. The regulator’s post-crash probe into the conduct of bank’s top individuals should have delivered a proper investigation back in 2009. Instead, the FSA – via a combination of timidity, confusion and overwork – flunked it.
Andrew Green QC, reviewing the FSA’s enforcement actions, used more legal language in his report but some of his revelations are astonishing. In March 2010, Green says, the FSA decided that the statutory threshold test for investigating former HBOS chief executive Andy Hornby had been met, but the FSA nevertheless decided not to investigate him. Why?
“On the basis of the available documents, it is not possible to determine who in fact took the decision, how it was taken, what were the factors taken into account, or for what precise reasons it was decided not to investigate,” says Green. He calls the decision-making process “highly unsatisfactory”. He’s being generous.
The result in 2010 was that only the actions of Peter Cummings, head of corporate lending, were investigated, resulting in a £500,000 fine and a ban from the City. Cummings called it “tokenism at its most sinister” and one can now sympathise.
The former trainee, who had worked his way through the ranks to become the so-called “banker to the stars,” made grotesque errors but it was always hard to believe that his gilded bosses – notably chairman Lord Stevenson, former chief executive James Crosby, still a knight at the time, and Hornby – should not have faced fuller investigation. It smelled suspiciously like the financial establishment closing ranks. It is still too soon to reach that conclusion but we now know, thanks to Green’s report, that the process that led to Cummings alone being investigated was “materially flawed”.
That is why a fresh investigation into HBOS’ bosses is the right outcome. Yes, it is late in the day. Yes, the new Prudential Regulation Authority, successor to the failed FSA, will take yet more time to assess whether the old standard of personal “culpability” – as opposed to the post-reform standard of “responsibility” – has been met. And, yes, a ban from the City would feel a modest punishment for most of the individuals since many have left the industry; only the business secretary can pursue a ban from all company directorships.
But the public interest, as Green put it, will be served by casting the net wider and re-examining the actions of at least 10 former HBOS officials. The principle of accountability has to be seen to applied even-handedly and competently. It never happened in 2009 and late is better then never.
Meanwhile, the former non-executives of the bank, including Lord Stevenson, continue to complain that the PRA has downplayed “the unforeseen and unforeseeable effect of the financial crisis on HBOS.” That plea looks less and less convincing as one re-reads the tale of the bank’s catastrophe.
Andrew Bailey, head of the PRA, was careful in his criticism. It was not that management failed to predict the global financial crisis. Rather, it was that HBOS’ directors “should have put in place strategies that could in combination accommodate and respond to, in a timely way, changes in external circumstances.”
Stevenson & Co may regard the distinction as fine but it is fundamental. HBOS was pursuing a strategy of chasing growth while failing to manage the inevitable risks. Its funding model, which relied on raising vast sums in wholesale markets, was inherently vulnerable in any downturn and, when crisis arrived, it was too late to change course. This, remember, was a bank that wasn’t even in the riskier investment banking game.
