Now FSA turns spotlight on reasons for collapse of HBOS

CITY regulators have announced a formal inquiry into the failure of HBOS, three years after it was forced into a merger with Lloyds TSB.

The bank is already subject to an "enforcement investigation" which gives the Financial Services Authority the power to compel former and current directors of the bank to give evidence which could lead to fines, bans, prohibitions and censures.

Now the FSA is to look into the reasons for the collapse of the Edinburgh-based bank which has led to thousands of job losses. FSA chairman Lord Adair Turner, in a letter to Andrew Tyrie, chairman of the Treasury select committee, said the failure of HBOS was a "key element" in the harm caused by the financial crisis.

He wrote: "HBOS's failure resulted in the need for significant public support, via emergency liquidity assistance, guarantees and equity injection.

"HBOS's role in the pre-crisis credit boom was a key element in the developments which led to the financial crisis and the macro economic harm which it has caused. There is therefore a public interest in knowing what happened at HBOS."

The FSA could not confirm if former chief executive Andy Hornby, or other members of the former HBOS board, have been compelled to give evidence to the FSA. But earlier this year Hornby gave up his role as chief executive of healthcare giant Boots because he was "stressed". However, he was this week revealed to have taken the top job at bookmaking group Coral.

The wider review that Turner has proposed will be conducted along the lines of that currently being undertaken on the Royal Bank of Scotland.

Last year, the former board of RBS, including chief executive Sir Fred Goodwin, was exonerated in the failure of the bank by the FSA following the conclusion of a 17 month enforcement investigation, a finding which was largely branded as a whitewash. As a result, the FSA pledged to publish a "comprehensive account of why RBS failed".

In the letter to the select committee, published on the FSA website, Turner also admitted the process governing the FSA's review into RBS "has been highly imperfect" but that the imminent publication of the report would highlight the issues that would need to be "addressed in the new legislative framework".

The FSA said the HBOS investigation is still ongoing, adding: "Whilst the enforcement process is ongoing, it would not be appropriate to launch a wider review."

However, Turner ruled out the release of additional reports into banks that failed in the crisis, meaning any study into the factors that led to the government's nationalisation of parts of Bradford & Bingley, Northern Rock or Dunfermline Building Society will not be made public.

Turner said: "We have considered whether similar public information reports should be published in relation to other firms that failed in the crisis. We believe not."

He argued that this is because a bank failure does not in itself constitute a regulatory failure, and none of the other institutions that failed in 2008 were "of the scale" of RBS and HBOS.

But Stewart Hosie, an MP and a member of the select committee, said there was "disappointment" among its members at the FSA's "cursory" dismissal of further investigations into other bank failures, "particularly given the level of direct support" received by Northern Rock and B&B.

A spokesman for Lloyds Banking Group, which took over HBOS following its collapse, said: "The group is co-operating fully" with the FSA investigation.