Ian Fraser: UK Bank Regulator, FSA, Protects Powerful Cronies and Undermines Proper Bank Reform

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser.

The UK’s failed regulator, the Financial Services Authority, is up to its old tricks again. Last week, it sought to scapegoat just one of the 16 directors who drove the awesomely badly managed British bank Halifax Bank of Scotland into the ground. And all he received was a £500,000 fine and a lifetime ban from working in the financial sector.

The Edinburgh-based HBOS was formed from the ill-starred merger of former building society Halifax (est.1853) and Bank of Scotland (est.1695). Their union was consummated one day before the terror attacks of 9/11. After a crazed lending spree and some distinctly dodgy and corrupt practises across all of its divisions, the bank came within hours of total collapse following a weeks long “silent run” on 16 September 2008. The government sought to keep it afloat through a shotgun marriage with rival bank Lloyds TSB, which Britain’s then prime minister Gordon Brown forced through even though it was hugely anti-competitive and recreated the oligopoly in British banking.

But even this wasn’t enough to keep the truly disastrous institution afloat, so Brown, who had championed the bank for years and is said to have been a close friend of its chief executive Sir James Crosby, gave it a no-strings-attached UK taxpayer-funded bailout the following month. Without this the bank, with its 2 million private shareholders, 60,000 UK employees and 1,300 branches and “assets” of £681bn would definitely have gone bust.

Four years on from those gut-wrenching days of September and October 2008, British regulator the FSA is seeking to pin all the blame on the bank’s former head of corporate lending, Peter Cummings.

Studiously ignoring the roles of “establishment” figures like Sir James Crosby and Lord Stevenson in the demise of disastrous Edinburgh-based bank HBOS, the Financial Services Authority is seeking to heap all the ordure on the less establishment Peter Cummings.

Now I am not suggesting that Cummings is in any way innocent — he most certainly is not — but this is a travesty of regulation. The wholly conflicted regulator has addressed the problem with a pre-ordained mindset — one of “wagon circling” and “let’s exonerate our friends and those who still wield political influence”.

It only interviewed Crosby’s successor Andy Hornby for four hours and only interviewed the HBOS chairman Lord Stevenson for two hours. It failed to interview any of the finance directors responsible for the carnage at HBOS (respectively Mike Ellis, Paul Tucker, Phil Hodkinson and … Mike Ellis), nor did it interview the head of the risk panel in the corporate division Sir Ron Garrick, nor the finance director of the corporate division Alistair Webster. It’s approach to covering up crimes and misdemeanours in Britain’s failed banks really has to stop. It is outrageous, nauseating, morally repugnant and makes proper reform impossible.

Here’s what the former Financial Times journalist and author Ray Perman had to say about it in today’s Scotsman:-

It is inconceivable that [Cummings] caused the collapse of the bank on his own. The FSA’s own investigation showed that his own profit targets were constantly being pushed upwards by the bank’s top management in their quest for relentless growth. Yet none of his superiors is even named by the FSA, let alone criticised or fined … It wasn’t only corporate loans that brought down HBOS. Billions were lost in mortgages which could not be repaid, in American securities which turned out to be worthless, in Irish property deals, and in compensation … paid to people mis-sold Payment Protection Insurance. Cummings was not responsible for any of them, yet the people who were have not been held to account.

The Canary Wharf-based regulator attempted something similar with its December 2011 report into the failure of the much bigger Royal Bank of Scotland (see my Huffington Post article).

I believe the time has come to tell the body’s chairman Lord Turner (pictured above) that we’re no longer prepared to tolerate its “three monkeys” approach to regulating the banking sector or its kneejerk attempts to sweep the crimes and misdemeanours of banks and bankers that it failed to regulate during its “captured” years under the carpet.

As the so-called HBOS whistleblower Paul Moore and others have made clear, we are never going to get to the bottom of the UK banking failures if the FSA — a 100% conflicted regulator given its complicity in every UK banking failure, and given the fact that the former HBOS chief executive Crosby was on its board from January 2004 until February 2009 — has anything to do with it.

We need an independent, judge-led public inquiry. The inquiry must examine and bring out all the key public policy points — including the failures of the bank’s boards, audit committees, other corporate governance and risk management structures, auditors (especially Deloitte, KPMG and PWC), the FSA, the Bank of England, H.M. Treasury (which is was also largely “captured” by the investment banking industry under New Labour) and the British Government. Only then will these tawdry cover-ups and attempted whitewashes stop.

It’s time the UK authorities learnt the lessons of Hillsborough. Eventually, the truth will out.

If you agree with me on this, please sign this epetition on the DirectGov site. We need a few more signatures as, in its wisdom, the government has said the petition will be taken down by the end of September.

In an email to the Financial Times, Karl Capp, whose media business suffered as a result of HBOS’s rampant abuse of the Small Firms’ Loan Guarantee Scheme last decade, said:-

“The person who actually set the strategy, before he unexpectedly ‘retired’, was Sir James Crosby. Ironically, Crosby had become a non executive of the FSA in 2004 and FSA deputy chairman in 2007. It beggars belief but he was able to view HBOS from his FSA position in parallel with running the bank.

Cummings’ fine relating to the two year period 2006 and 2008 is farcical. This is actually when the bank started foreclosing on businesses after they had saddled them also before 2006 with calamitous products and loan conditions. In his book Hubris: How HBOS Wrecked The Best Bank in Britain Ray Perman cites Andy Hornby for the HBOS debacle, yet Hornby was only appointed CEO in July 2006 as Crosby retired (somewhat early as I indicate) and Cummings had been appointed by Crosby in January 2006. The culture and calamitous strategy was deep-rooted. Hornby has much to answer for but the design had been signed off and set some years before. Hornby had been saddled with a monster and I do agree that he outsourced his regulatory risk nicely.

Those that will be charged and prosecuted through the ongoing Thames Valley Police investigation [into massive fraud in Cummings’s divison] will be individuals where it can be proved they criminally and financially gained from this disastrous strategy and corporate environment. In addition to this, senior executives at the bank profited in other ways. Gain was through bonuses, careers and taking perceived permitted advantage out of a fabricated lending environment — there is a comprehensive list.

Corporate recklessness ruined great businesses and business models and compensation is due. Analysing the Cummings decision in this regard will take some time to evaluate. Has the regulator, and therefore the bank, found its scapegoat? I think not as it further incriminates the bank. Cummings was oiling the bank, fuelled by board pressure and it was tough for him to find the stop button and this is why he accuses FSA of ‘tokenism.’ An unscrupulous man but he’s spot on.”

Separately, Paul and Nikki Turner, whose music businesses were among the 50-200 companies that were wilfully destroyed as a result of Bank of Scotland Corporate Reading fraud, wrote a letter to FSA managing director Martin Wheatley on September 6th. In it they said:-

We would like to know why the FSA, in the full knowledge of the gravity of this situation, has taken no action whatsoever against any authorised person from HBOS or LBG who has had any involvement in [the BoS Reading fraud, where charges are due to be pressed following a two-year investigation by Thames Valley Police imminently]? And why the FSA appears content to let the Bank continue to leave its customers in limbo and without the compensation they are clearly due?

We were definitely led to believe our personal situation would have been over before the summer of 2012. Instead the summer is over and we are in a worse position than we were in even in April, while all the parties who have wilfully caused this situation to continue post the resignation of Lynden Scourfield in April 2007, have faced no penalty from the Regulator at all.

It is a fact that Peter Cummings, Lord Stevenson, Andy Hornby, the Board of HBOS (2007), Eric Daniels, Philip Grant, Sir Win Bischoff and, more recently, Juan Colombas and Antonio Horta-Osorio, have not only breached the FSA Principles by acting without integrity and refusing to treat customers reasonably and fairly, they have also attempted to pervert the course of Justice, by concealing criminal activity in their Banks.

While we appreciate you cannot do anything about the latter situation and this will have to be dealt with by the police after the conclusion of the present investigation, we would like to know what, if anything, the FSA intends to do about the breaches of the FSA Principles? By doing nothing, the FSA are currently allowing this scenario to get much, much worse for the victims and we do not understand how the FSA can either sit on the side lines or/and seemingly condone such conduct?

I covered the token punishment meted out to Cummings in more detail in an article published yesterday in the Sunday Herald (see McColl and Hunter attack FSA’s ‘disgraceful’ treatment of HBOS’s Cummings). Here are some excerpts from other Sunday newspaper coverage of the FSA’s attempt to scapegoat Cummings.

The Observer (leader article)

The public … could be excused for wondering whether it can possibly be true that Cummings is the only man to blame … It shows a serious flaw in the system set up by Gordon Brown that the regulator is responsible for producing a report into what went wrong at a firm it failed to regulate properly.

For all that Brown did to bring Britain’s banks back from the brink of collapse, he made a mistake in not launching a full-blown inquiry into the debacle. Yes, the Treasury select committee, then chaired by John McFall (since ennobled), did what it could to call Goodwin et al to account. Yes, Lord Turner conducted his review of regulation. But the public’s need for top bankers to pay a price has not been satisfied.

The FSA’s tome on the collapse of HBOS … must do more than rehash the investigation into Cummings and the Bank of Scotland corporate division he ran. There is an outside chance it could lead to the FSA embarking on more regulatory actions, but it seems unlikely. Nonetheless, this is probably the FSA’s last chance to salvage some credibility before it disappears in the coalition’s carve-up.

The Sunday Times (Ben Laurence)

Intriguingly, it was on Crosby’s watch that a whistleblower within HBOS was sacked for warning that some of the bank’s activities were becoming too exposed to potential defaults by borrowers.

Crosby was a non-executive director of the FSA from 2004, and became its deputy chairman in November 2007. He quit the watchdog in February 2009. It was almost exactly around this time, in early 2009, that the FSA started its proceedings against Cummings. What about Andy Hornby, the Oxford and Harvard Business School-educated whizzkid who took over from Crosby as HBOS chief executive and held the post until the Lloyds takeover? Hornby was pushy and ambitious for the bank. While he was in charge, Cummings was being pushed to increase lending and profits from his part of the HBOS empire.

And then there is Lord Stevenson, who chaired HBOS from its creation until its takeover — the entire time that HBOS was building a reputation as a lender that was prepared to be bold and then falling into ruin as that boldness was revealed as recklessness. None of these men has been subjected to the disciplinary action that Cummings found so irksome.

Mail on Sunday (Jeff Prestridge)

Although there is no doubt he was responsible for engendering at HBOS a ‘culture of aggressive growth without the controls in place to manage the risks associated with that strategy’ (the regulator’s words), Cummings is carrying the can, not just for his own failings but for others. What about the role of the HBOS board, which sat idly by while this aggressive growth culture was allowed to breed faster than a colony of rabbits? Isn’t it culpable? Shouldn’t it be fined?

More important, what was the FSA doing while Cummings handed out corporate loans like confetti? Wasn’t it meant to be regulating the bank? As a result, isn’t it also partly to blame for HBOS’s aggression? As Cummings said, the FSA acts ‘as lawmaker, judge, jury, appeal court and executioner’. He’s dead right. A theme in recent financial scandals (Arch Cru and Keydata especially) has been the regulator’s willingness to blame everyone else for their part in the ensuing chaos. If the regulator had been doing its job properly, Arch Cru and Keydata would not have become the damaging affairs they grew into (it should never have allowed the products to get off the ground).

Similarly, an effective regulator would have reined in Cummings’ lending excesses long before they began to harm HBOS. Regulators must be effective, which the FSA isn’t. They also need to admit their mistakes, which it is incapable of doing. Finally, and crucially, they must be accountable for their (lack of) actions. As Cummings says, the FSA isn’t. It’s a law unto itself.