Looking back you have to think what could or should have been done differently
THE party to celebrate another milestone was already getting into full swing when guests were treated to the evening's special entertainment, the winners of Popstars: The Rivals, Girls Aloud.
As the band belted out a medley of their early hits, the top floor of 30 St Mary Axe, better known as the Gherkin, swayed to the music and the whoops of delight from delirious salesmen at HBOS mortgage subsidiary BM Solutions, part of the former Birmingham Midshires building society. They had just completed 40bn worth of lending and wanted the rest of the City to know what a good job they had done.
It was 2005, the heady days when money was no object for a bank that was determined to hold on to its top spot as the UK's biggest mortgage lender. Nor was it the only party where champagne was flowing for banking executives, mortgage brokers and others who believed the music would never stop. Similar celebrations were being held across the country as banks celebrated their success on the back of the country's booming housing market.
Fast forward just four years to an ordinary-looking meeting room containing four long benches set out in a square. Along one bench sit four former bankers, their mournful faces bearing the hallmarks of condemned men.
They face their inquisitors, the 14 members of the House of Commons Treasury Select Committee chaired by the no-nonsense John McFall, while around the perimeter is a phalanx of financial journalists and angry members of the public, some of them shareholders who have lost their personal savings. The party is finally over and the mood has turned to retribution.
For Sir Fred Goodwin, the fall from grace had been particularly spectacular. While in London, the former chief executive of Royal Bank of Scotland was used to staying in a suite at the Savoy and having his clothes cared for by a personal valet. Such privileges had been snatched away, along with the private jet, the multi-million-pound pay deals and his reputation as one of the world's top achievers. Now he was having to endure public humiliation and vilification for racking up the biggest loss in British corporate history, and it has been taking its toll.
But while Goodwin waited for the executioner's axe and the headline writers to add to his personal pain, events were about to take another turn. Fingers were suddenly being pointed more firmly at the man seated alongside him: Andy Hornby.
The former chief executive of HBOS had looked particularly sheepish as he and his fellow witnesses were ushered through the pack of pressmen into the Thatcher Room in Portcullis House, the Treasury offices overlooking the Houses of Parliament. Hornby's normally perma-grinning boyish features had been replaced by an older, sullen demeanour that spoke of a man who was not taking the crisis at all well. While the two former chairmen, Lord Stevenson of HBOS and Sir Tom McKillop at RBS, retained a degree of stiff-lipped resilience, the two CEOs had clearly been suffering badly. The hearing was a date in the diary they had been dreading, but for Hornby matters were about to get worse.
With the apologies for their part in the banks' downfall out of the way, the business of explaining their ample rewards over recent years had them shuffling nervously in their seats. But the testimony of one whistleblower was about to prove particularly discomforting for Hornby and lead to a sequence of events that saw his predecessor fall on his sword and further questions asked about how much the bankers knew about the impending crisis and how much advice they ignored as their businesses headed to the edge of a cliff.
Paul Moore, former head of regulatory risk at HBOS, blew wide open the debate over the bankers' claims that they were victims of unforeseen circumstances by alleging that he had been sacked, threatened and gagged four years ago after raising concerns that HBOS was growing too fast. He claimed Sir James Crosby – Hornby's predecessor – had dismissed him and that it was "his decision and his alone". Moore sued HBOS for unfair dismissal under the whistleblowing legislation and the bank settled while subjecting him to a gagging order.
Crosby, by now deputy chairman of the Financial Services Authority, and a key adviser to Prime Minister Gordon Brown, said the claims had been investigated and there was "no substance" to them. Within 24 hours he'd resigned from the FSA amid suspicions Downing Street had leaned on him.
The FSA subsequently issued a rare statement detailing how it had identified a number of weaknesses after carrying out a full risk assessment of HBOS as far back as 2002. There had been further investigations by PricewaterhouseCoopers and again by the FSA. Questions were now being asked about why no action was taken, why HBOS was left to steam along like a runaway train, and why Crosby was allowed to take his seat on the FSA board. Was this not a case of the regulator regulating itself?
In the FSA's defence, its board is separate from its supervisory functions, though to the ordinary man in the street the two would seem to be umbilically linked. More pertinently, the degree of supervision and the recommendations made were said to be fairly normal practice. In other words, rather like a school report, they were saying there were aspects to HBOS's operations in which it could do better. Such concerns do not usually result in getting kicked out of school.
HBOS, in fact, was not viewed with any greater suspicion than any other bank. But that is not to say the FSA was acting with sufficient vigour in pursuing all the banks. Critics of the regulatory regime are using this latest series of revelations to point ever more accusingly at those who were supposed to be monitoring what is going on.
There is now a strong likelihood that the Treasury committee will want to hear further evidence from those named in Moore's submission. Topping that list will be Crosby, but it is also likely to include Mike Ellis, the former finance director at HBOS, and Charles Dunstone, the chief executive of Carphone Warehouse and a non-executive director who was appointed chairman of the retail risk control committee. According to Moore, Dunstone had "no technical competence in banking or credit risk management to oversee such a vital governance committee". Moore said Dunstone and Hornby "met quite often socially", though Dunstone "was supposed to be challenging Andy Hornby".
Banking sources say the inquiry could dig even deeper and one said there could be merit in calling former HBOS head of retail Benny Higgins to give evidence. He left after the bank's share of the mortgage market fell, but only after making known his concerns at chasing low-margin business. Why did the bank part company with Higgins, and is this another example of the board – Hornby in particular – ignoring warnings of imminent trouble?
Deep questions are now being asked about how executives, non-executives and external regulators interact with each other and about the quality of the advice they provide.
Lord Paul Myners, Treasury minister for the City and financial services, admitted at a Scottish Financial Enterprise seminar in Edinburgh on Friday that "existing regulation failed to adapt to the challenges of a highly globalised world". Pointing to the Chancellor's paper on financial regulation and Lord Turner's forthcoming report on the same issue he said there would have to be changes to current frameworks and a fresh look at the role of non-executive directors. This would tighten up relations between boards and investors and establish a more robust standard of corporate governance.
Afterwards, Myners elaborated, admitting that mistakes had been made. "With our old friend hindsight, things happened that should have been more vigorously challenged. Fund managers told the Treasury Select Committee they had lots of meetings with RBS but somehow they didn't get anywhere.
"Looking back, you have to think what could or should have been done differently. That's an aspect of governance. There are questions about the competency of directors, how you get an appropriate climate of challenge. It seemed to me the boards of our banks were light on people with banking knowledge and perhaps there wasn't enough challenge. Perhaps boards were a bit consensual and the person who asks the awkward questions can often begin to feel a bit lonely.
"One of the questions we have to ask ourselves is whether we are good enough at expressing warnings and taking them far enough."
On the specifics of the FSA report he said they "very rarely conclude that everything is absolutely perfect, that there are no areas where improvement cannot be achieved". But he said companies fail "because of their own shortcomings, because they had the wrong strategy, failed to appreciate risk, didn't have the right people".
"Regulation has a role in reducing the risk of failure and mitigating the consequences of failure and protecting those who suffer as a result of failure.
"But I don't think we should absolve the executives of firms from responsibility by saying if regulation had been good this wouldn't have happened. That's unrealistic. If we build that level of expectation on regulation we will significantly increase the cost of capital and stymie innovation. Striking the right balance is important."
A week on Wednesday the FSA will have another chance to put its case when its senior members take their turn in front of the Treasury Select Committee. Lord Turner, chairman, Hector Sants, chief executive, and Dr Thomas Huertas, director of wholesale firms division, will be joined in Portcullis House by Loretta Minghella, chief executive of the Financial Services Compensation Scheme.
One key question they'll have to answer is whether the FSA is fit for purpose or whether it has been stuffed with placemen who are protecting their own backs. As Vince Cable, the Liberal Democrats Treasury spokesman, said: "The FSA needs people with experience, but not the wrong experience."