BREAKINGVIEWS-UK rules that HBOS was a fiasco but not a fraud

Thu Sep 13, 2012 2:28am IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By George Hay

LONDON, Sept 12 (Reuters Breakingviews) - HBOS was a fiasco, but not a fraud. That’s the message from the Financial Services Authority’s investigations into the collapse of the UK bank in 2008. But even without a smoking gun, the judgment still raises questions.

The fall guy is HBOS’s former head of corporate lending, Peter Cummings, who has received a life ban from senior roles in UK financial services and a 500,000 pound fine. Cummings’ division kept recklessly lending even as the credit crunch loomed, says the FSA. If that is the case he may well deserve the highest-ever fine levied by the FSA solely for management failings.

But in basing its ruling solely on executive incompetence, the regulator has muddied the picture. The FSA’s own report in March into failings at HBOS’s Bank of Scotland arm cited failures in oversight by the group, which at the time of the financial crisis was headed by Andy Hornby. Cummings, who rejects the Sept. 12 ruling entirely, may wonder why he is the one singled out.

It could be that Cummings outperformed his colleagues in the scale of management failings. The FSA’s 92-page ruling certainly marshals plenty of evidence of unwise banking, not least Cummings’ move to increase the exposure to commercial property between 2006 and 2008.

Politics may have played a part too. Given no fraud has been identified, the FSA could have treated Cummings more like Johnny Cameron, the former head of Royal Bank of Scotland’s (RBS.L) investment bank, who agreed not to again seek a senior City role in 2010. Cameron made no admission of guilt and received no fine. In the current febrile political climate, a fine-less penalty for Cummings may have looked insufficiently harsh on bankers.

It is hard to be sure. But that is a result of the UK's decision to resist calls for a full public inquiry into what went wrong. If it had such an investigation, the upshot might be the same – that in the run-up to the crisis many financial sophisticates took leave of their senses and lent recklessly, but not fraudulently. But at least it would be more transparent.

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CONTEXT NEWS

- The Financial Services Authority has fined the former head of the corporate arm of HBOS, Peter Cummings, 500,000 pounds and banned him from holding any senior position in a UK financial firm.

- The FSA’s fine, the highest ever imposed on a senior executive for management failings, relates to the period between January 2006 and December 2008. The UK regulator ruled that Cummings failed to exercise due skill, care and diligence by pursuing an aggressive strategy within the Corporate Division without suitable risk controls in place.

- The FSA also found that between April and December 2008 Cummings failed to ensure that his division properly managed high-value transactions showing signs of stress.

- In a statement, Cummings said he rejected the FSA’s ruling in its entirety. He said the decision had been arrived at through “a fundamentally flawed, one-sided and oppressive process”.

- Cummings added that he had decided not to dispute the matter due to the enormous potential costs involved and the further strain on him and his family.

- FSA final notice on Peter Cummings, Sept. 12: link.reuters.com/myj62t

- Cummings statement: link.reuters.com/pyj62t

- Reuters story: Former top HBOS banker gets record UK fine, ban [ ID:nL5E8KCLFJ]

- For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Robert Cole and Martin Langfield)

((george.hay@thomsonreuters.com)) Keywords: BREAKINGVIEWS HBOS/CUMMINGS

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