Gladstone Brookes | HBOS collapse – the result of management failure while FSA was ‘deficient’

HBOS collapse – the result of management failure while FSA was ‘deficient’

HBOS collapse

The collapse of Halifax/Bank of Scotland (HBOS) in 2008 was the result of management failure and the City regulator – the Financial Services Authority (FSA) – was ‘deficient’ in its handling of the crisis.

These are the findings of two damning reports into the catastrophic collapse of HBOS which was rescued from collapse by Lloyds TSB – an action which later resulted in Lloyds being bailed out by £20.5 billion of taxpayers’ money.


Up to 10 top  executives now face the possibility of being banned from working in The City while the former director of supervision at the FSA told the inquiry: “The people most culpable were let off.”

Only one person has been banned so far.  He is Peter Cummings – previously head of corporate lending at HBOS – who was fined £½ million and banned from senior positions in banking back in 2012.


There was a furore last week when it emerged that it is unlikely anyone else would face a fine for their part in the affair because the collapse happened so long ago it is outside the six year statute of limitations.

The twin reports into the bank collapse – which cost £7 million and took three years to complete – were produced seven years after the event after being delayed for a year by legal wrangling over their content.


The main report – prepared jointly by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) – places the blame for the collapse firmly on the executives, calling them ‘ultimately responsible’ for the bank’s collapse.

The report was also highly critical of the part the then regulator, the FSA, played, saying it failed to identify the risks the bank was running and, after it did spot the problems, failing to act.

This was said to be because of ‘sustained political emphasis for the need for a light touch in its approach.’


HBOS chairman Lord Stevenson was characterised as the man responsible for running the board with little banking experience and little ability to challenge the bank’s executives.

The report also claims that the two former chief executives – James Crosby and Andy Hornby – pushed the bank’s staff to grow lending constantly with little regard for the risk.


It says: “They played a fundamental role in reinforcing the culture within the firm which leaned heavily towards growth and placed only a low priority on risk.

“HBOS’s weak risk culture meant that controls could be over-ridden when convenient.”

The report concludes HBOS collapse due to a lack of liquidity caused because:

  • 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.


But it is the second report by barrister Andrew Green QC, which is even more damning.  It contains the recommendation that the entire senior management team of 10 executives should be re-investigated by the authorities with a view to possibly banning them from holding any other post in The City.

Those executives include former chairman, Lord Stevenson, and former chief executives Andy Hornby and James Crosby.

The FCA and PRA will now consider further action, but there will be no decision before 2016 and it could be another 12 to 18 months before any bans could be enforced.

Rapid progress

Andrew Bailey, deputy governor of the Bank Of England, has promised rapid progress.

In an interview with the BBC he said: “It is not the intention to have a lengthy investigation.  We will do this piece of work as soon as possible.  It’s quite clear primary responsibility lies with the board and senior management of HBOS.”

Further action

Eight of the former executives have issued a statement through their lawyers saying they believe there is no reason to take further action.

It says: “The report does not contain evidence that would justify any further enforcement action against executives.”


Andrew Green’s report is highly critical of the UK’s financial regulator at the time.  It says the FSA’s failure to investigate senior management more broadly was ‘not reasonable’ and the decision not to take action against anyone other than Mr Cummings was ‘materially flawed.’

It has emerged that no record has been kept of the FSA meeting which discussed the enforcement action on Mr Cummings.   The report says: “None of the people who attended that meeting could remember anything about it in their report interviews.”


But in his interview, former FSA enforcement boss, Clive Adamson, said he believed ‘the people most culpable were let off.’

The report also confirms the shock leak from earlier in the week that the bank’s auditors – KPMG – were ‘effectively leant on’ to sign off lower bad loan write-offs in 2008 to ease concern about HBOS’s finances.

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