The inquiry was opened in 2016 to determine whether the bosses of the bank would be prohibited from performing certain roles in the financial services sector or issued with fines.
The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) gathered over two million documents as part of the investigation and spoke with the bosses of HBOS to assess their roles in the bank’s failure. The regulators said the investigation had now concluded with decision makers at each authority choosing to take “no further action” against the former senior managers.
Road to failure
HBOS was established in 2001 as part of a merger between Halifax and the Bank of Scotland. It was the largest mortgage lender in the UK at the time. It had a 22 per cent share of the mortgage market and 16 per cent of retail savings.
In 2004, Mike Ellis, group financial director at HBOS told the board that the group’s growth had outstripped its ability to control risks and said it was “an accident waiting to happen”.
In 2006, Peter Cummings, who was chief executive of the bank’s corporate division from 2005 to 2008, aimed to make HBOS the “best real estate bank in the UK”, and by the end of 2008 over a third of loans were represented by this segment of the market.
From 2001 to 2008, the bank focused on its property and construction lending and this part of the business expanded faster than its deposit growth.
The House of Lords and House of Commons’ 2013 report ‘An Accident Waiting to Happen’ suggested this increased the bank’s reliance on wholesale funding.
The report said the board knew its growth strategy would heighten its risks as well as expose it to the UK’s residential and commercial property markets.
HBOS also focused on lending to borrowers with a poor credit history, which FCA predecessor the Financial Services Authority (FSA) said resulted in it having a higher risk loan book than other major UK lenders.
Impairments threatened bank’s operating capacity
The bank ended 2008 with a funding gap of £213bn, with its retail division accounting for £111bn of this. The Lords and Commons report said this was a “principal immediate cause in the short term of the failure of the bank”, noting that the retail division incurred more losses than its competitors due to its high-risk mortgage lending.
However, its impairments were not confined to one single division as its corporate division had impairments of £25bn. The report said this would have threatened the bank’s ability to operate.
It also had impairments of £15bn in its international division and impairments of £7bn in the treasury division, and the report said that while these would not have affected the bank’s capacity to recapitalise, the combined impairments would have resulted in HBOS’ insolvency.
The report said the “growth of HBOS’s corporate division was not the result of superior performance but of its high-risk strategy”.
The group was also said to have ignored warnings about the market in 2007 and 2008, which further exposed it to any downturns.
HBOS was acquired by Lloyds Banking Group (LBG) in 2009 and at this time, reporting on the former divisions of the group stopped. However, it is estimated that between 2008 and 2011, loan impairments within the corporate division totalled £25bn or 20 per cent of the 2008 end loan book.
In the same year it was acquired, LBG reported a £4bn loss which it attributed to bad debts at HBOS.
In 2009, the FSA began enforcement investigations into the bank regarding its failure. In 2012, this led to the regulator imposing a £500,000 fine on Cummings and prohibiting him from taking any influential role in certain authorised firms including banks and building societies. Although it concluded that a financial penalty against the Bank of Scotland would be appropriate, the FSA decided not to impose one to prevent further expenses to the taxpayer.
New regulations
The PRA and FCA said since the failure of HBOS “fundamental changes have been made to the regulatory regime” such as the introduction of the Senior Managers and Certification Regime which puts greater accountability on individuals and allocates responsibilities.
