FSA’s £500,000 fine for Peter Cummings, only part of the story of a scandal

THE FSA’s £500,000 fine for former head of corporate banking at HBOS, Peter Cummings, is only part of the story of a scandal that has still not been properly investigated nor explained, writes Ray Perman

The number of people who either lost their jobs or are likely to do so as a result of the collapse of HBOS in 2008 totals 40,000. Perhaps as many as a hundred times that number lost all or part of their savings – many of them employees of the bank who ploughed their bonuses into the company’s share scheme or depositors who bought shares when Halifax Building Society demutualised.

Those people, along with the thousands of businesses that suffered and we taxpayers who had to stump up billions to avoid an economic disaster, are owed an adequate explanation of what went wrong.

We got a small part of the story last week when the Financial Services Authority (FSA) fined Peter Cummings, the man who ran HBOS’s corporate banking department, £500,000 and banned him from ever working again in financial services. But it was only part – and the judgment leaves as many questions as it gives answers.

My own interest in the story began in autumn 2008 when I attended a black-tie business dinner. I forget the occasion; after a while the memories of each merge into one. Next to me was a man with whom I had little in common. He managed a commercial real estate company and, though he was watching the free-fall of the property market, it did not directly affect him. His portfolio was mature with established tenants paying good rents. I only half listened to his conversation, nodding and smiling occasionally so as not to appear too rude.

Then he said something that seized my attention: “I withdrew £20 million from Bank of Scotland today to put it in a safe place.”

There had been rumours for days swirling around HBOS, the unlovely conglomerate that now owned Bank of Scotland. It was clearly in trouble, but the thought that it might go down, taking its depositors’ money with it, had never occurred to me and came as a real shock.

The bank had been part of the Scottish landscape for more than 300 years, as solid as Edinburgh Castle rock. My wife and I had entrusted our savings to it. My sons had been Bank of Scotland customers since we opened Super Squirrel saver accounts for them as toddlers. The bank had supported my own company – and countless other new-start businesses – through thick and thin and when I sold it, that’s where I deposited the proceeds.

What happened to HBOS in the weeks following that dinner is part of the story I have tried to tell in my book, HUBRIS: How HBOS Wrecked the Best Bank in Britain but only part. There was no public run on the bank, as had happened with Northern Rock, but a silent haemorrhaging of cash. We now know that £30 billion was withdrawn by individuals and companies within a few days and on the international money markets the group was being denied the funds it needed to survive from day to day.

The excesses of bankers during the first decade of the 21st century are lurid enough to grip the interest of readers, but to dwell too long on them would be to lose sight of what we have lost. The Bank of Scotland that disappeared with the collapse of HBOS in all but name had already ceased to be the bank I, and many of its customers, knew in the later decades of the last century.

That bank was one of the 100 biggest companies on the stock market, but it was a fraction of the size of banks today and operated on a human scale. Customers could telephone branches and speak to people whose names they knew and faces they recognised. If you called back, you could speak to the same person. The chief executive could – and did – review all large lending propositions and all customer complaints, replying to them personally if he felt they had not been adequately answered.

This was a bank that never called you at dinner time to try to sell you “products”. It seems incredible to me to write this now, but it was a bank trusted by its customers. When it adopted the advertising slogan “A Friend for Life” it was not greeted with cynicism. People believed it meant it, and more importantly, it did. Don’t get the impression that this was some hick bank. It was one of the most innovative in the world and it became the best-performing bank in Britain. Its share price quadrupled in ten years.

What went wrong? How could a bank that had survived more than three centuries go from being admired and respected to reviled and bankrupt in just seven years?

It is tempting to think that everything changed on 4 May 2001. That day Bank of Scotland, on the rebound from the failed and bruising battle to take over NatWest, signed the HBOS deal with Halifax, the former building society that had turned itself into an aggressive retail bank. But the roots of the disaster go back much further.

In 1986, Mrs Thatcher’s government ended restrictions on building societies, banks and the stockmarket, ushering in an era of greed and unbridled ambition that produced a 20-year boom and the biggest economic collapse for a century. Banks ceased to be regarded as boring but safe investments and became “growth stocks” expected to produce bigger profits and dividends every year. In the new world, a bank was either predator or prey; falter in your performance and you were gone.

At the same time banking was being deskilled. The Chartered Institute of Bankers in Scotland – the oldest and most respected banking professional organisation in the world, which had trained bankers from Hong Kong to California – was losing out to in-house HR departments which wanted their staff to have competitive advantage, not the same training given to every other banker.

So the simple basic banking rules, learned over centuries of booms and busts and dinned into every apprentice banker, began to be forgotten. In truth they amounted to little more than common sense – make sure you never run out of cash and lend only to people who can afford to pay you back – but ignoring them was what eventually led to the collapse of HBOS.

The creation of the group was portrayed as a merger, but from the day Sir Peter Burt, the able and experienced chief executive of Bank of Scotland, decided he was too exhausted to lead the new conglomerate, it was a takeover by the bigger and more confident Halifax. Within two years, Burt was out, and soon after him two of the three bank executives who had been on the top board.

Sales rather than prudence now became the dominant culture. Halifax, already the biggest mortgage lender in the country, astonished its Bank of Scotland colleagues by trying to grab even more of the market. Each time one of its upstart competitors, like the ultimately doomed Northern Rock, came out with a fancy new product, Halifax matched it: self-certified mortgages, buy-to-let and 125 per cent loans. Time-served traditional bankers could only gape in disbelief. Could the borrowers repay? That was a secondary consideration to getting the business.

When, in 2007, the overheated mortgage profit machine started to falter, the HBOS top management started to turn the screw on the corporate banking department to force more and more profit out of increasingly suspect loans. The market was wobbling, but standing still was not an option.

The crash, when it came in 2008, affected every family in Britain. HBOS shareholders lost most of their investment as the group was driven into the arms of Lloyds Bank, which itself was gravely weakened by the ill-advised takeover. To protect the savings and homes of 30 million customers, the Government had to pump billions of pounds into the group, a burden which we as taxpayers are still struggling to repay. Yet the group’s top management walked away with pay-offs and lavish pensions.

HBOS is a scandal which has still not been properly investigated or explained. The board, which bears ultimate responsibility, has not been held to account. No executive has been required to repay massive bonuses paid on profits that turned out to be illusory.

I hold no brief for Peter Cummings. He refused to speak to me when I was writing my book. By all accounts he is a quiet, unassuming man who lives modestly with his wife in Dumbarton, the town where he was born and brought up. The corporate banking department under his leadership brought the group billions in profits – and ultimately many more billions in losses. He undoubtedly should bear part of the blame.

But it is inconceivable that he caused the collapse of the bank on his own. The FSA’s own investigation showed that his own profit targets were constantly being pushed upwards by the bank’s top management in their quest for relentless growth. Yet none of his superiors is even named by the FSA, let alone criticised or fined. They have been allowed to go on to senior positions in public companies, including financial services firms.

It wasn’t only corporate loans that brought down HBOS. Billions were lost in mortgages which could not be repaid, in American securities which turned out to be worthless, in Irish property deals, and in compensation which had to be paid to people mis-sold Payment Protection Insurance. Cummings was not responsible for any of them, yet the people who were have not been held to account.

HBOS was investigated several times by the FSA, which failed to follow up on its own findings and missed the fact that the group’s elaborate corporate governance structure was a sham that was frequently bypassed and ignored. If it had not been for persistent goading by MPs, the regulator would have quietly buried the results of its own internal investigation. As it is, four years after one of the most disastrous financial collapses ever, we still do not have a full official explanation for what went wrong. That is an outrage and an affront to all those who have lost out and Scotland has lost one of its oldest and most successful institutions.

• Scotsman readers can purchase Hubris: How HBOS Wrecked the Best Bank in Britain by Ray Perman, published by Birlinn (RRP £20), at the special price of £15 (free P&P in the UK). Call Booksource on 0845 370 0067 (office hours) and quote reference SMHUB