One of the former executives who led HBOS to the brink of collapse in 2008 is to be hit with a massive fine and a lifetime ban from the industry, I can exclusively reveal.
Peter Cummings, the head of corporate lending at HBOS until its rescue by Lloyds TSB, is to be fined £500,000 by the Financial Services Authority (FSA) following a long-running investigation into his stewardship of the bank's vast balance sheet.
I am told that the City regulator plans to disclose the details of its probe tomorrow morning, although it is conceivable that a statement will be made this evening.
Mr Cummings was well-known in the City for leading the aggressive growth of HBOS' corporate lending activities, counting Sir Philip Green, the Top Shop billionaire, and Mike Ashley, the Sports Direct tycoon, among his most important clients.
He also presided over HBOS' acquisition of shareholdings in prominent businesses such as McCarthy & Stone, the retirement home-builder, and David Lloyd Leisure, the health and fitness club operator.
Since HBOS' rescue by Lloyds, the enlarged group's share price has tumbled, leaving taxpayers nursing a multi-billion pound paper loss.
In a statement in March, the FSA confirmed that it had been conducting an enforcement investigation into HBOS, saying that the bank "was guilty of very serious misconduct, which contributed to the circumstances that led to the UK government having to inject taxpayer funding into HBOS."
The lender, now part of Lloyds Banking Group, which is 41% owned by British taxpayers, escaped a fine from the regulator because (in the FSA’s words) "public funds have already been called on to address the consequences of Bank of Scotland’s misconduct, levying a penalty on the enlarged Group means the taxpayer would effectively pay twice for the same actions committed by the firm."
In the same statement, the FSA detailed a litany of failings at HBOS between 2006 and the early part of 2008.
"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."
Over the period, the division’s transactions increased in size, complexity and risk.
Its portfolio was high risk with highly concentrated exposures to property and to significant large borrowers.
This strategy was highly vulnerable to a downturn in the economic cycle, yet the Corporate Division continued with the strategy even as markets began to worsen in 2007.
Rather than re-evaluating its business as conditions worsened, the division set out to increase its market share as other lenders started to pull out of the market.
In addition, its internal culture was focused on revenue rather than assessing the level of risk in transactions.
Bank of Scotland did not have systems and controls that were appropriate to the high level of risks that its Corporate Division was taking on, and there were serious deficiencies in.
Bank of Scotland's control framework which provided insufficient challenge to the Corporate Division’s strategy; the framework for managing credit risk across the portfolio; the distribution framework which did not operate effectively in reducing the risks in the portfolio; and the process for identifying and managing transactions that showed signs of stress.
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.
In addition, while the firm’s auditors agreed that the overall level of the firm’s provisioning was acceptable, in relation to the Corporate Division provisions were consistently made at the optimistic rather than prudent end of the acceptable range, despite warnings from the divisional risk function and Bank of Scotland’s auditors."
The fine for Mr Cummings is the latest in a string of punishments meted out by the City regulator in recent times.
The FSA was itself criticised strongly, not only for its lax supervision of Britain’s biggest banks, but also for failing to anticipate the public and political appetite for a full report on the reasons for their collapse.
Last December, the FSA produced such a report on the failure of RBS, but said it would not begin a corresponding piece of work on HBOS’ collapse until enforcement proceedings had been completed.
Assuming no other former HBOS executives will be subject to such actions, the fine for Mr Cummings is likely to mean that that work will begin shortly.
The regulator is expected to face further questions about whether Mr Cummings has been made a scapegoat for HBOS’s failure at a time when the FSA chairman Lord Turner is mounting a vigorous public campaign to become the next Governor of the Bank of England.
Andy Hornby, the ex-HBOS chief executive, and Lord Stevenson, its former chairman, were at the helm at the time the bank had to be bailed out.
There is no suggestion that any of Mr Cummings’ actions or lending decision were unauthorised. The FSA supervised the rapid expansion of HBOS’ balance sheet during the economic boom years but, by its own admission, did nothing to curtail it.
There is also likely to be scepticism about the FSA’s decision to hand Mr Cummings a lifetime ban from the banking sector because he has already retired.
The regulator was similarly criticised at RBS for pronouncing no sanction against Fred Goodwin, the bank’s former chief executive, but instead pursuing Johnny Cameron, who ran its investment banking arm but was widely felt to have been unjustly singled-out.
The FSA declined to comment on Wednesday, while Mr Cummings could not be reached for comment.