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FSA censures BoS for high-risk strategy

The FSA has censured Bank of Scotland after finding it guilty of “very serious misconduct” which led to it being bailed out by the Government and taken over by Lloyds Banking Group.

The regulator says a fine in this case would be “both merited and substantial” but has decided against imposing a financial penalty as it says the taxpayer has already bailed out the bank once through the Lloyds takeover of Halifax Bank of Scotland in January 2009.

The FSA says a fine would just force the taxpayer to pay twice for the same misconduct.

The censure is against the conduct of Bank of Scotland’s corporate division between January 2006 and December 2008.

The FSA says the corporate division pursued an “aggressive growth strategy” that focused on high-risk, sub-investmentgrade lending.

Its portfolio was high-risk which posed significant risk to big borrowers. When market conditions started to deteriorate in 2007, the division pushed for a greater market share as other lenders started to pull out of the market.

At the start of 2006, 52 per cent, or £44.4bn, of the corporate division’s loanbook was exposed to the commercial property market. By the end of 2008, this had grown to 56 per cent or £68.1bn.

Over this period, Bank of Scotland made repeated statements in its internal business plans that the bank was adopting a “selective and cautious approach to lending”.

In February 2009, Lloyds announced that the level of impairments on Bank of Scotland’s lending portfolio had been increased from £3.3bn to about £7bn.

The FSA says there was a lack of focus on managing risk across the portfolio and serious weaknesses in identifying transactions which showed signs of stress. It says other enforcement proceedings against HBOS are ongoing. A public interest report into the causes of HBOS’s failure will be published once these proceedings have concluded.

Evolve Financial Planning director Jason Witcombe says: “It strikes me that this is too little too late.”

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