Up to 10 former HBOS executives could be banned over collapse, damning report finds

Officials say the ex-chairman and chief of the bank failed to understand they ran huge risks in growing a bank recklessly, resulting in disaster

HBOS office
The former directors of HBOS have been heavily criticised

HBOS's top bosses including former chairman Lord Stevenson and ex-chief executives Andy Hornby and James Crosby could be banned from the finance industry or even from directing any company, as a pair of damning reports found their failures ran the bank into the ground.

The bank collapsed in 2008 and was bought by Lloyds, but the scale of its bad loans was such that the government had to step in to bail out the combined pair at a cost of £20.5bn.

But only one executive, former corporate bank boss Peter Cummings, was punished by regulators. He was fined £500,000 and banned from senior jobs in financial services.

The financial regulator of the day, the Financial Services Authority (FSA), failed to take records on the crucial meeting in January 2009 when the decision to investigate Mr Cummings alone was taken, and no former regulators were able to recall what happened at that meeting or why he was the sole target of the probe, rather than including other executives.

James Crosby, Chief Executive of the banking group HBOS
James Crosby, the former chief executive of HBOS

The main report, from the Prudential Regulation Authority and the Financial Conduct Authority, the FSA's successors, blames the bank's executives for its failure, as well as being critical of the FSA.

But it is a parallel report, from Andrew Green QC, which is perhaps the most damning, suggesting the two regulators should consider banning as many as 10 former HBOS executives from the City.

Mr Hornby in particular should be re-investigated by the authorities, the report found, alongside the entire senior management team.

"HBOS's weak risk culture meant that controls could be overridden when convenient"
PRA/FCA report

Too much time has elapsed for regulators to fine those responsible, though they could still be banned from the industry, Mr Green says.

In addition the Department for Business, Innovation and Skills could bar them from being a director in any company. The Insolvency Service, which operates under the Department, looked into the case in 2013 but decided there was too little evidence to act - a position which may be changed by the latest report.

“Once the FCA and PRA have conducted their review into enforcement action, we will establish whether there is any new information to consider," said a spokesman at the Insolvency Service.

The study from the Bank of England and the Financial Conduct Authority also found then-regulator the Financial Services Authority failed to identify the risks that the bank was running, and that when it did spot problems, it failed to act.

That was partly because of "a sustained political emphasis on the need for the FSA to be 'light touch' in it's approach," said the report, pointing the finger at the government of the day.

Lord Stevenson was responsible for running a board with little banking experience and little ability to challenge the bank's executives, the report said.

Meanwhile chief executives James Crosby and Andy Hornby pushed the bank's staff to grow lending constantly with little regard for risk.

They "played a fundamental role in reinforcing a culture within the firm which leaned heavily towards growth", the report said, and placed only "a low priority... on risk."

When bosses did worry about growing risks it was "purely as a threat to growth" rather than as a threat to the bank's survival or the wider economy.

"HBOS's weak risk culture meant that controls could be overridden when convenient," the report said, adding that even when the bank's bosses wanted to slow lending 2007 and 2008, the culture was such that staff continued to smash lending targets.

Read the reports in full

There was a repeated failure to appoint directors with experience of risk management, the report said.

Combined with a lack of board experience in the industry - only one non-executive had experience in banking, and he joined in May 2007 - this led to a culture in which external auditors were "kept under pressure" and their most dire warnings on bad loan levels ignored.

As a result, former FCA enforcement boss Clive Adamson told the new report's authors that the bosses who were most "culpable" for the crash had yet to be punished.

The joint PRA/FCA report said HBOS collapsed due to a lack of liquidity, with the failure explained by a number of reasons including:

  • the board failed to instil a culture within the firm that balanced risk and return appropriately, and lacked sufficient experience and knowledge of banking;
  • a flawed and unbalanced strategy and a business model with inherent vulnerabilities arising from an excessive focus on market share, asset growth and short-term profitability;
  • the firm’s executive management pursued rapid and uncontrolled growth of the Group’s balance sheet, and led to an over-exposure to highly cyclical commercial real estate (CRE) at the peak of the economic cycle;
  • a failure by the Board and control functions to challenge effectively executive management in pursuing this course or to ensure adequate mitigating actions;
  • and the fact that HBOS’s underlying balance sheet weaknesses made the Group extremely vulnerable to market shocks and ultimately failure as the crisis of the financial system intensified.

The authorities have asked accounting regulator the Financial Reporting Council to investigate HBOS' auditor KPMG. To date the FRC has declined, awaiting the publication of this report, reiterating that stance in a statement today, following another review of its own.

"Based on the findings from this review of the relevant audit work the Conduct Committee of the FRC has concluded that there were not reasonable grounds to suspect that there may have been misconduct as defined under the disciplinary scheme for members of the accounting profession," the FRC said.

"This report clearly shows that the collapse of HBOS was caused by those running the bank and those regulating it"
George Osborne

The joint PRC/FCA report was due to be published two years ago, but was delayed as those criticised were given a chance to respond. Around 35 individuals took the opportunity to challenge the report's contents.

Andrew Tyrie MP, chairman of the House of Commons Treasury Select committee, said the regulators should proceed with haste on a renewed enforcement investigation: “The FCA and PRA should get on with this immediately. Parliament will expect an answer from them within months, not years. This has gone on long enough, to put it mildly.

“The lion’s share of the investigatory work should already have been undertaken in the preparation of the regulators’ report in to the failure of the bank," he continued.

George Osborne, the Chancellor, commented: “This report, from one of our most respected regulators, clearly shows that the collapse of HBOS was caused by those running the bank and those regulating it. It demonstrates that the system of regulation created by the last Labour government failed. In the end, this led to a £20 billion bailout of Lloyds Banking Group, funded by the taxpayer.

"I welcome the fact that the report notes that this Government’s steps have addressed many of the failings that led to the collapse of HBOS. Next spring we will complete the sale of Lloyds Banking Group, putting the bank back into the private sector - its rightful place.”

The history of HBOS
1695
Bank of Scotland founded
1853
Halifax founded as a building society, owned by its members
1997
Halifax turns into a bank
It lists shares on the stock market. The move allows it to raise more capital to expand rapidly.
2001
Halifax and Bank of Scotland form HBOS
Picture: Christopher Furlong/Getty Images
Halifax and Bank of Scotland agree to a £30bn merger, forming HBOS. Halifax’s chief executive James Crosby becomes CEO of the combined bank.
2006
HBOS booms
At the height of the bank’s boom years as the UK’s biggest mortgage lender, Mr Crosby’s lieutenant Andy Hornby takes over as chief executive. Crosby is knighted.
July 2008
Investors asked for help
HBOS asks investors for £4bn as it reveals growing book of bad loans
September 2008
Lloyds buys HBOS
CEO of HBOS Andy Hornby (L) shakes hands with Chief Executive of Lloyds TSB Eric Daniels after agreeing deal (Picture: AFP/Getty)
Funds from investors are insufficient as losses balloon. Lloyds buys HBOS in attempted rescue
October 2008
Government bail out
HBOS' losses overwhelm Lloyds and the government steps in with a bail out. Eventually the combined entity receives £20.5bn of taxpayers’ money
September 2012
Ex-director fined £500,000
The Financial Services Authority fines ex-HBOS director Peter Cummings £500,000 and bans him from the industry
April 2013
Former chief executive surrenders his knighthood
James Crosby (Picure: AFP Photo/ PRU)
The Parliamentary Commission on Banking Standards criticises HBOS’ ex-chairman Lord Stevenson as well as Mr Crosby and Mr Hornby. Mr Crosby surrenders his knighthood.
September 2013
Government starts selling its shares in Lloyds Banking Group
November 2015
Report into HBOS' collapse is published
The Bank of England and Financial Conduct Authority’s reports into HBOS’ collapse and regulators’ responses to it are finally published, two years after the original target date

A group of former non-executive directors at HBOS including Lord Stevenson said that they "understand the justified anger" directed at them, but could not have seen the financial crisis coming.

The directors "disagree with a number of the conclusions of this report, particularly the way in which it downplays the unforeseen and unforeseeable effect of the financial crisis on HBOS. Indeed 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," said the group in a statement.

"Equally, they understand the justified anger about what happened. The former Chairman and CEO resigned, apologised, waived contractual entitlements and lost their investments in HBOS. Their only wish now is that current and future bank boards learn to avoid the mistakes that they and others undoubtedly made."

Those directors are Sir Ron Garrick, Anthony Hobson, Lord Stevenson, Sir Charles Dunstone, Coline McConville, John Mack, Kate Nealon and Sir Brian Ivory.