Out-Law / Your Daily Need-To-Know

Taxpayer owned Bank of Scotland escapes fine over "serious misconduct" during financial crisis

Out-Law News | 12 Mar 2012 | 3:11 pm | 2 min. read

The corporate arm of the Bank of Scotland was guilty of "very serious misconduct" in the way it loaned money to businesses which contributed to its need to be bailed out by the Government, the financial services regulator has confirmed.

However the Financial Services Authority (FSA) said that the bank, which received £20 billion of public funding in 2008, would not be fined for its failings to prevent "the taxpayer effectively paying twice" for the same actions.

It has instead decided to "publicly censure" (37-page / 458KB PDF) the bank to "ensure details of the firm's misconduct can be viewed by all and act as a lesson in risk management failings". It will also publish a "full public interest report" into the failure of parent bank HBOS once other enforcement proceedings in connection to the case were complete.

HBOS was taken over by Lloyds TSB in 2009 to create the Lloyds Banking Group.

A spokesperson for Lloyds said that the conclusion of the enforcement action would "help to draw a line under the events in question and allow the Group to move forward".

The regulator said that the bank's Corporate Division had pursued an "aggressive growth strategy" that focused on high-risk lending between January 2006 and March 2008. Its lending centred on large, complex loans to property companies and "significantly large borrowers", even as the markets began to worse in 2007, it said - despite these companies being "highly vulnerable to a downturn in the economic cycle".

"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 focussed on revenue rather than assessing the level of risk in transactions," the regulator said.

It noted particular deficiencies in the bank's overall control framework which provided insufficient challenge to its corporate arm, as well as its specific framework for managing risk in its investment portfolio and the process for identifying and managing transactions that showed "signs of stress".

The FSA said that it had become apparent to the bank that its high value transactions were demonstrating signs of stress from April 2008, but said that the division had been too slow to move the transactions to its high risk area.

"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," it said.

It added that auditors had consistently reported "at the optimistic rather than prudent end of the acceptable range" despite warnings from the division's risk function.

"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," said Tracey McDermott, FSA acting director of enforcement.

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