An Almost-Open Letter to the CEO and Chairman of the UK’s Financial Services Authority

By Richard Smith

Continuing this blog’s august tradition of tangling with dodgy Scottish financiers, we turn our attention away from RBS’s ex-CEO, adulterous failed banker Sir Fred Goodwin, (pausing only to note that his wife has at last thrown him out, and high time too), and towards the equally inexplicably Teflon-coated architect of another Caledonian banking trainwreck: former HBOS director, and now youthful pensioner, Peter Cummings.

The meat will be in future posts; first, some background, and then a swipe at the Financial Services Authority, which was the UK’s banking regulator when HBOS was doing its dirty business, and is now muffing the clean-up.

Like RBS, the HBOS collapse is another variation on the endless 2008 theme in which precarious short-term funding models combine with crummy assets to produce a combined liquidity-and-solvency crisis. HBOS was initially “rescued” by way of a government-sponsored shotgun marriage with Lloyds Bank; it soon turned out that HBOS’s funding problems were sufficient to overwhelm its new parent, too. The UK taxpayer stepped in, taking a 43% stake; which isn’t going to be easy to sell on, just yet.

But it got a lot worse. Once the semi-nationalization deal was done, “problem loans” surfaced pretty quickly. Cummings ran HBOS’s Commercial lending division, with execrable results. And deeper down in his division, it went well beyond imprudence, to alleged large scale fraud, as documented in posts at “Naked Capitalism” by Ian Fraser, for instance:

The allegations concern money-laundering, corruption and fraud activities between 2002 and 2007 involving Reading-based bank executives and consultants from a corporate turnaround specialist called Quayside Corporate Services…

Many of the allegations are from companies that were forced to use the services of Quayside and were then loaned large sums of money, much of which was removed in Quayside fees. From 2007, after fraud allegations surfaced, scores of companies were put into administration. The suspects, which include numerous Quayside consultants, then allegedly expropriated physical assets worth scores of millions and, in administration deals from April 2007, were permitted by the bank to take ownership of many surviving assets.

And where there’s alleged fraud on this scale (the total involved seems to be around £1Bn), any cover up would have to be massive:

Whistleblower Paul Moore, who was ousted as group head of regulatory risk at HBOS in 2005 after he sought to alert its board to self-destructive behaviour in its retail sales arm — plus many of the owners of the 50-plus companies that got sucked into the fraud and were put into administration as part of an alleged cover-up — believes that board-level directors at HBOS including former chairman Lord Stevenson, former chief executive Andy Hornby and former head of corporate Peter Cummings ought to be investigated.

They claim that senior executives at the firm failed to notify the whole HBOS board and the Financial Services Authority (FSA) about the criminal nature of the activities. Senior sources from the impaired assets divisions of other leading banks claim that at their organisations, it would be inconceivable for large numbers of loans worth many millions of pounds to be extended to companies with debt problems without board-level executives being aware.

Moore said: “There are inferences from the evidence of the involvement of senior executives and board members either in the fraud itself or in a conspiracy to pervert the course of justice – in other words in a cover up.”

HBOS senior managers have always denied any knowledge of wrongdoing.

Well, actually. they would, wouldn’t they?

The contrast between the life styles of the perpetrators and the victims is striking, too:

The most sickening thing about the whole sordid debacle is that the alleged perpetrators wre able to buy an fund the running costs of two mega-yachts in the Mediterranean Sea, having siphoned funds out of a state-rescued bank. And secondly, that the decent company directors, whose businesses and indeed lives have been destroyed, or harmed, as a result of the bank’s behaviour, continue to be persecuted, with one couple having been through 22 separate court hearings as the bank seeks to repossess their home, in the apparent hope of silencing them.

To judge by the energy and promptness with which it has pursued its investigations, the FSA, the UK’s financial regulator, is fine with all of this.

In fact, according to the Sunday Times of 24th July, FSA is keen to do a nice little deal with Peter Cummings (who was, incidentally, the director of 149 of the companies to which HBOS lent, many of which were joint ventures between the bank and its favoured clique of property tycoons, though none of these appear to have been beneficiaries of the Reading branch’s largesse). The proposed FSA deal is this: Cummings agrees to a lifetime ban from the securities industry, and the FSA in return drops its investigation into his tenure as director of corporate banking at HBOS. That’s an investigation which could only embarrass the great and good on the HBOS board at the time, and, indeed, would leave the FSA itself struggling to explain the quality of its banking supervision during the period in question. So pretty much a win-win, then: unless you are one of the fraud victims; or believe, quixotically, naively, that such cataclysmically bad oversight (or is it plain malfeasance?) ought to be investigated, and if appropriate, prosecuted.

Unfortunately for the FSA’s cosy proposal, the uncooperative Mr Cummings suspects his assailant is brandishing nothing more threatening than a wet noodle, and has invited the FSA to either produce evidence of wrongdoing, or clear his name.

Irrespective of that, Nikki Turner (one of the fraud victims) was sufficiently incensed by the reported deal proposal to draft an open letter to the Chairman and CEO of the FSA, respectively Lord Turner (former vice-chairman of Merrill Lynch) and Hector Sants (former CEO of Credit Suisse in Europe).

Here are some highlights of the letter:

  • The loans made by Reading-based bank executives vastly exceeded the control limits supposedly applied by HBOS’s Commercial Lending  wing.
  • The “extraordinary transaction” of British Linen Properties may be the subject of a future post here at Naked Capitalism.
  • The payment of £29Mn by HBOS, to  companies that were already in administration, surely cannot have been authorised by any of the HBOS executives now on fraud charges, but by someone more senior.

To avoid prejudicing the existing fraud investigation, which involves more junior HBOS types, this open letter appears with redactions. This must be a first. It is the sort of contorted gambit one adopts when working one’s way around regulatory inertia, British legal protections, libel suits, and police process. All of this has slowed down the delivery of the letter by several weeks, as you see.

Readers in jurisdictions with less cockeyed attitudes to civil liberties and fraud investigations are welcome to chuckle, or sigh. Of course, Thames Valley Police may contact me via if they feel they need to set me straight on anything.

Before I finally hand over the microphone to Nikki T., please be assured that I’ve seen enough to be happy that the allegations below are well documented: the deeply suspicious dealings of Mr Cummings, the improbable obliviousness of other HBOS board members, and the inertia, prevarication (and connivance?) of the FSA.

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  1. Jo

    I’m told that interview, under caution, of the Reading bad actors, is forthcoming by Thames Valley police.

    Tick-tock, tick-tock – that’s the sound of their comfortable regime slipping away…..

  2. cian

    The BBC investigated this a few years back (File on 4) and essentially concluded massive fraud.

    In part I think this arises from the dreadful banking services offered by UK banks to SMEs. I mean why should it even be legal for a bank to force a company to use a consultancy firm? Or the other crap that banks force on SMEs (not to mention pulling their entire credit line whenever there’s a hint of a recession).

    1. Richard Smith Post author

      Indeed they did. One of the alleged bad actors they identified is now suing the BBC for defamation.

  3. appointmetotheboard

    That’s a shocker. I’ve been pretty brutal about US ‘justice’ in the financial sector, but it seems that the UK’s FSA is just as useless as the SEC. With such a serious allegation, it seems remarkable that it has not been investigated.

  4. pj

    It should be obvious to anyone and everyone that our leaders robbed us all blind.
    I used to be partners with folks who had secret, closed door meetings. Imagine my surprise when it turns out they were in collusion to defraud and steal from the company, and by extension, me.
    Sort of like all those G7 and G20 meetings, etc..
    Secrecy is generally best for those that secrecy benefits.

  5. Clive

    The particularly worrying thing is that the newly christened Lloyds Banking Group now insists (and I suppose it has to, what else can it do?) that is has implemented newly toughened internal operational oversight and risk management regimes. I have some degree of inside knowledge about the reality of the situation and it is quite different from what is spun by the PR people.

    Now of course, ‘bank senior management says one thing in public and either through ignorance or tacit approval does another thing in private’ would hardly be a revelation to this blog’s regular viewers. But given the part public ownership as Richard states in his article, you would maybe think that HM Treasury or the auditors would dig a little deeper and refuse to accept soundbites alone as enough to signify Mission Accomplished. Perhaps, for now at least anyway, the odd body from the falling from the collection of skeletons in the closet of the Reading office doesn’t cause that many new problems and can be tolerated. It would also serve to keep attention away from the mass graves that are Ireland and Spain. Or perhaps it is only the really obvious fraud or obfuscation that went on – and is still going on – that has come to the surface.

    While Yves’ blog routinely – and correctly – contains posts which emphasise the need to clear out all the old, discredited top management at the failed banks (and this has largely happened at Lloyds) what sometimes escapes more in depth scrutiny is the necessity to look wider and deeper. It is from what I can tell an urgent requirement to see exactly how the bad practices permeated lower down the ranks. Actually, were the middle and lower middle management layers perhaps in truth the training grounds for the criminality which eventually seized control? It is easy and comforting to think that looting was accomplished by a single individual or small cadre at the top and everyone else in the organisation simply went along with it for the ride. But what if over a period of time, maybe 10 years or more, a company’s rank and file becomes inherently criminogenic? Its leadership team would then have a choice which from what I believe has only three options – it either becomes outright or tacitly supportive of the frauds being perpetrated, it leaves quietly not wanting to make a fuss or it takes and stand and tries to fight it. It is merely luck which of those happens. My hunch is that the old management team in HBOS and Lloyds ended up doing the tacit support thing. So long as the returns and income kept coming in, nobody asked too many questions.

    Without a – dare I say it – a guilty until proven innocent mentality the whole enterprise remains vulnerable to further looting or at least continues coverups. That is because is wasn’t only the odd rotten apple that cause the problems. A significant proportion of the apples were – and are – unfortunately a little squishy if not outright fermenting.

    A fat tail risk is also that the bank and the UK government has gone through the motions of chucking out all the old management and replacing them with a new lot – but that the new lot knows exactly what the game is (continued concealment and drip feeding out the truth in small sanitisable pieces) and plays it very well. Could they really be quite that cynical ?

    1. patrick

      Excellent points. The entire banking sector in the past decade has been infected with a belief that customers are sheep to be fleeced and slaughtered. And that each unchecked crime results in more outrageous behaviour in the future.

      This meme has been inculcated into those organizations at all levels, removing a few top executives will not automatically eradicate it. Prosecutions and jail time are need to vaccinate the financial classes, retirement and a comfortable exile are not the answer.

  6. Linus Huber

    Sure they could be that cynical.

    Legislation and regulation has been corrupted to such a high degree that they simply do not believe to be presecuted for looting the system. Their failure has very little downside risk until now (mainly loss of the job) and until we find the way back to the spirit of the rule of law, little will change.

    Those who violated the basic functions of a bank, namely being prudent in the evaluation of credit risks and making sure that interest will be paid and capital paid back over time as well and who in the process of this negligence enriched themselves should be made accountable. Nothing less will do.

  7. nowhereman

    The question that keeps coming to mind is, Why the great reluctance to investigate the regulators?
    Sir James Crosby held executive positions at HBOS and the FSA simultaneously. The revolving door at the SEC.
    Why is it so hard to see the ethical and moral problem with this, and why is nothing being done about it?

    Have little faith all ye who enter here!

  8. patrick

    The FSA is another Potemkin regulatory facade who’s sole role is to deceive investors that financial markets are “policed” for their protection. What this episode further illustrates is that criminal behaviour is global in scope and regulatory capture is the global rule rather than the exception.

    Our leaders bang on about how one of the defining principles of the free markets is the “Rule of Law”. Whereas the truth is that Justice is not just blindfolded, it has been blinded by the financial classes.

    The conclusion one can draw is that the key difference between bank robbers and bankers is that the robbers run the risk that the police will investigate and they face the risk of going to jail. Bankers on the other hand… pass.

  9. strateshooter

    the uk fsa is toothless…it has nowhere near the bite or competence of the sec.
    also since uk gov now owns hbos they will never pursue this.
    fraud is ok if committed bt the political/banking class….thry protect their own.
    the uk is a banana republic in all but name.
    incomptence plus immorality at the top is causing it to implode.
    the folks in power think we don’t undrstand. we do.
    tipping point soon i think.our forefathers wouldn’t put up with this bullshit…and their sons won’t either.

  10. lifea after debt

    I am one of Antonio Horta Osorio’s (Lloyds banking group’s newish CEO) skeltons in the closet that HBOS is refusing to own up to. I am being repeatedly bludgeoned by this banking giant for money they know I haven’t got as they have already stripped our family of everything. This continued harrassment is legitamised because of their deny deny deny culture. My only hope, and short term release, has been to blog about my predicament and try to attract media support to stop their continued persecution of my family for sport.
    This article is a brilliantly clear account of the behaviour of a feral elite that do not believe they are answerable for their actions and do not care what impact their greed has on anyone.

  11. Nick

    Justprovide an extreme incentive not to game the financial sector. Make it life in prison. In exchange for the lives these bankers ruin with their over leveraged irresponsible wagers.

    1. William C

      There is much cause for concern about what has happened and not happened in the UK. As a close observer, what particularly amazes me is that, in contrast to the 1980s and 1990s when the failures of Johnson Matthey, BCCI and Barings lead to investigations into the causes of the failures, with much information being made public, the far more serious failures of the last four years have been the subject of very limited enquiries. Both the current and previous Governments should have required thorough and rigorous investigations with public findings into the failures of 2007-2009 but neither has. Suspicious minds will think that it is because they prefer to leave stones unturned. I was in conversation with a former top FSA executive (retired several years before the disaster)a few weeks ago. We agreed that neither of us knew with confidence why either RBS or HBOS had failed.

  12. Graham Milne

    Of course the Parliamentary Ombudsman concluded in her report on the Equitable Life crisis that the FSA had ‘actively misled’ policyholders. But the FSA’s criminality goes much deeper than that. Equitable Life was a £1.5 billion tip of a £15 billion iceberg because ALL the major life companies in the UK had problems similar to (if not larger than) Equitable Life. The FSA actively concealed this problem from the policyholders, in connivance with the Government, the Treasury, the life companies and their auditors. The current value of the estimated losses to policyholders (i.e. the amount they would need to be paid to put then back in the position they would have been in had they not been misled) is £40 billion. Had ANY of the 13 inquiries into the Equitable Life crisis revealed the true scale of this problem then not only could the policyholders have been compensated but action could have been to reform the FSA into an effective regulator of the banks – and had the FSA been an effective regulator of the banks then the banking crisis may have been far less damaging than it was.


  13. Nathanael

    The UK has private prosecutions. Why haven’t they been used? It’s clear that the government agency which is supposed to run the prosecution is in on the crimes…. but unlike in the US where only DAs can prosecute, that doesn’t prevent the criminals from being prosecuted in the UK.

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