The FSA has publicly censured Bank of Scotland and judged that the firm was guilty of “very serious misconduct” which contributed to the Government having to bail out HBOS.
The regulator has said today that it has concluded its investigation into HBOS which examined its failure during the financial crisis.
The censure is against HBOS subsidiary Bank of Scotland, owned by Lloyds Banking Group, and relates to the conduct of its corporate division between January 2006 and December 2008.
The FSA has not levied a fine against HBOS, but says the severity of Bank of Scotland’s failing would normally have merited a fine. However, it says because public funds have already been used to address the consequences of Bank of Scotland’s misconduct, levying a penalty on the enlarged HBOS Group means the taxpayer would effectively pay twice for the same actions committed by the firm.
The regulator says that between January 2006 and March 2008 Bank of Scotland’s corporate division pursued an “aggressive growth strategy” that focused on high-risk, sub-investment grade lending. During the period the division’s transactions increased in size, complexity and risk. Its portfolio was high risk with highly concentrated exposures to property and posed risk to significant large borrowers.
Rather than evaluating its business model in the wake of deteriorating market conditions in 2007, the division pushed for a great market share as other lenders started to pull out of the market.
The FSA says Bank of Scotland was focused on revenue rather than assessing risk.
It says that from April 2008, as it became apparent that high value transactions were demonstrating signs of stress, it should have been apparent to Bank of Scotland that a more prudent approach was needed to mitigate risk, yet it was slow to move such transactions to its high risk area within its corporate division. There was a significant risk that this would have an impact on the firm’s capital requirements.
It also meant the full extent of the stress within the corporate portfolio was not visible to the group’s board or auditors.
The FSA adds Bank of Scotland’s provisions in relation to the corporate division were consistently more optimistic than prudent.
The FSA has closed this enforcement action against HBOS, but says other enforcement proceedings in connection with the failure of HBOS are ongoing.
It says it will produce a public interest report into the causes of HBOS’ failure once these other enforcement proceedings have concluded.
FSA acting director of enforcement Tracey McDermott says: “Banks and other firms have to manage their business by ensuring that their systems and controls are appropriate for the risks that they are running.
“The conduct of the Bank of Scotland illustrates how a failure to meet regulatory requirements can end not just in massive costs to a firm, but losses to shareholders, taxpayers and the economy.”