The “destruction” of Halifax-Bank of Scotland was the fault of up to 10 former executives who could now be banned from working in the City. At some time in the future. Maybe.
That was the conclusion of last week’s long-awaited report from the Financial Conduct Authority into the failure of what was the UK’s biggest mortgage lender during the 2008 financial crisis.
Weighing-in at over 600 pages – with testimony from more than 80 individuals and costing over £7m – this exhaustive investigation took three years to produce, not least due to the 1,425 separate representations submitted under “Maxwellization”, the cumbersome process allowing those criticized, and their lawyers, to respond prior to publication.
What we got, though, was a detailed account of the HBOS collapse – which sparked an emergency take-over by Lloyds and a £20bn state bailout. Delving into risk and governance transgressions by senior management and flaws in regulatory oversight from the now defunct Financial Services Authority, the report described how HBOS’s balance sheet ballooned from £477bn in 2004 to £690bn in 2008 – even after the collapse of Northern Rock raised huge doubts about the availability of wholesale funding.
During the seven years before HBOS imploded, the bank pursued “more risky propositions” to boost profits, with an excessive focus on market share. Former Chairman Lord Stevenson and two former Chief Executives, James Crosby and Andy Hornby, “failed to set an appropriate strategy” and “failed to challenge a flawed business model”, the report concluded.
Despite that, and after three years of investigation, the regulator is yet to decide if the most senior HBOS executives are to face any sanction – in the form of a ban from working in financial services. “FCA will conclude a review as to whether further enforcement action should be taken as early as possible next year,” the report concluded.
It’s too late to fine anyone deemed culpable for the HBOS collapse – because the period covered by a statute of limitations expired during all the pre-publication legal wrangling. No matter that an authoritative report published in 2013, produced by Parliament’s Banking Standards Commission, already pointed to a “a colossal failure of leadership” at HBOS, urging regulators to look at whether Stevenson, Crosby and Hornby “should be prohibited from holding a position at any regulated entity in the financial sector”.
The public remains extremely angry about the UK’s banking collapse and the scale of the resulting bailout. The government backed our out-of-control financial system to the tune of £1,100bn, according to the National Audit Office, as state funds were injected directly into a range of hopelessly over-exposed and, in some cases, grotesquely mismanaged banks. While some of that has been recouped, taxpayers remain tens of billions of pounds out of pocket.
Then there’s the cataclysmic impact on our economy – which endured a 7.2pc peak-to-trough drop after the banking collapse. This crisis significantly undermined the wealth and happiness of millions of British people. A sense of exasperation lingers, palpable across all layers of society that practically no one has been properly sanctioned or punished. I’m not sure that last week’s report, seven years after the event and still ultimately inconclusive, will do much to change that.
Several days before the FCA report, and generating far fewer headlines, was another UK regulatory development that deserves wider attention. When it comes to trying to “fix” our too-big-to-fail banks, Andrew Tyrie MP has been doing more than most. Not only as Chairman of the Banking Standards Commission but through his tireless leadership of the Commons Treasury Select Committee, Tyrie has been leading the charge.
Possessing deep technical knowledge, but also political savvy, Tyrie is the last person to engage in public over-statement. I was disturbed, then, when he gave a passionate speech last week warning UK regulators they “must not give in to special pleading [from the biggest banks] in implementing the reforms introduced as a result of the financial crisis”.
We’re often told that, behind the scenes, bank reform is happening, that momentum is being maintained. Bank of England governor Mark Carney recently gave a speech saying just that. It’s true that new rules do require banks to hold more capital, hopefully making them safer – and, to some extent, they are.
Tyrie, though, judges that “there is still a lot more work to do” to minimize that chances of the UK’s biggest banks requiring another taxpayer-funded rescue. He called for the roll-out of already agreed reforms to continue, suggesting he fears they might not.
Tyrie argued, in particular, that there must be no wavering on the commitment to complete the “ring-fence” enshrined in the 2012 Banking Act, requiring UK banks to keep high street operations separate from far riskier investment banking activities. That was at the heart of the Vickers reforms, our main regulatory response to the sub-prime disaster – designed not only to make banks safer but also, if necessary, easier to rescue.
If a big “universal” is able to use the taxpayer-guaranteed deposits of ordinary firms and households to conduct high-risk investment activities, it could well act recklessly, in the knowledge it will be bailed-out to protect the public. Keeping the two activities strictly apart means the racy investment strategies can be allowed to fail if they go wrong, without jeopardizing ordinary deposits or the very “utility” banking function that keeps our economy going. Tyrie clearly feels this vital separation, due to completed across the UK’s largest banks by 2019, may now not happen.
Why might he think that? Well, George Osborne recently removed Martin Wheatley, an ardent bank reformer, as FCA Chief Executive. The Treasury has also lately diluted regulatory efforts to ensure senior bank executives are held to account when things go wrong – which, as HBOS shows, has previously been very tough.
The Chancellor also brought in tax changes over the summer that penalize smaller “challenger” bank in favour of the big boys – whose lobbying have lately become more aggressive, with previously bailed-out institutions threatening to move overseas if the ring-fence goes ahead.
I want a complete separation of our banking sector, as regular readers know. The Vickers ring-fence amounts only to a Chinese wall within the same organisation – and Chinese walls spring holes. We did had a decisive split in both the US and UK – which was incrementally removed during the 1980s and 1990s, with America’s repeal of the depression-era “Glass-Steagall” safeguards in 1997, the result of countless assiduously-placed campaign donations from Wall Street, representing the final bursting of the dam. Since then, financial markets have lurched from crisis to crisis.
Splitting and ring-fencing are no panacea, just a necessary part of any solution. Less complex banks like HBOS can also go bust, as we’ve seen. But keeping ordinary deposits away from investment banking must be at the heart of any meaningful attempt at banking reform. That prevents bonus-fuelled traders gambling recklessly with household and company savings, at a stroke making our banking system much safer. If we can’t have a formal split, then a ring-fence within the same institution – with the prospect of a full separation if the system is abused – is better than nothing. Yet even that compromise solution now appears under threat.
Bank lobbyists are “misrepresenting” ring-fencing, says Tyrie, because the “awkward truth” is that preparation for such measures is forcing senior executives to “identify in more detail what is really going on” inside the institutions they’re supposed to be managing. That sounds right to me.
“The tax paying public’s tolerance of another bailout is low, to put it mildly” Tyrie continued. And, again, I wouldn’t argue with that.