The FSA has fined former HBOS executive director Peter Cummings £500,000 and banned him from holding a senior position within the UK financial services industry in what is the highest fine levied on an individual for management failings.
Cummings was chief executive of HBOS’ corporate division between January 2006 and 2008.
The FSA says under Cummings’ direction, HBOS’ corporate division pursued an “aggressive growth strategy” which focused on high-risk lending despite knowing the bank’s systems and controls were not robust enough.
The corporate division, the riskiest part of HBOS’ business, focused on several business areas, including real estate, structured and acquisition finance and joint ventures. Its exposure to commercial property was “significantly higher risk” than equivalent books at other UK major banks and left HBOS heavily exposed to an economic downturn.
The corporate division’s exposure to large single name borrowers also meant any default would have a high impact on the book.
HBOS’ corporate division approved 199 loans in excess of £75m in 2006, representing £56bn of lending, which increased to 361 loans in excess of £75m in 2007, representing £96.2bn of lending.
The FSA says Cummings failed to exercise due skill, care and diligence in managing HBOS’s corporate division.
The FSA will now begin work on a report into its supervision of HBOS and the bank’s collapse.
The Treasury select committee has requested oversight of the FSA’s report into the failure of HBOS to ensure it is “fair and balanced”.
ValidPath director and financial planner Kevin Moss says: “Cummings is symptomatic of a more prevalent and alarming culture within HBOS. However, the FSA has identified pretty horrendous stuff that went on, so even if he is a convenient focus as the head of the corporate division, it is right he has been targeted.”
FSA’s findings against Peter Cummings
Staff focused on revenue rather than risk. Cummings’ pay structure included a special incentive scheme that paid an additional 100 per cent of his salary if the corporate division’s pre-tax profit targets were met, and up to 200 per cent if targets were exceeded. Cummings waived a £1.3m bonus he was due to receive in 2010.
Cummings failed to take steps to improve the credit quality of the portfolio and pursued an “aggressive growth strategy” .
Cummings increased the profit growth target from 10 to 12 per cent to 22 per cent, then to 35 per cent despite concerns within HBOS about the finance market in 2007.
The corporate division failed to recognise the impact of the financial crisis on the portfolio.
Cummings and HBOS senior management ignored advice to make provision for losses of between £4.5bn and £6.4bn and instead set a provision of £2bn.Cummings failed to act with due skill, care and diligence and failed to discharge his regulatory obligations.