Leaders: Finger of blame in HBOS fiasco points to very top

RARELY has the failure of management in a major business been exposed so harshly as in the report by the Financial Services Authority (FSA) on the collapse of Halifax/Bank of Scotland. If anyone wanted a guide on how not to run a bank, then this 37-page report is it.

Anger at, and the finger of blame for, the catastrophic failure has been directed at Peter Cummings, a man whose career was otherwise a rather admirable rise from the lowliest of jobs in a branch to head the corporate finance division. This was the big and glamorous end of the business – putting together loans worth hundreds of millions to industry – which, in normal times, provides the oil that keeps the economy’s wheels turning.

Mr Cummings, while culpable, should not, however, take all the blame. The FSA found that his division was not just the riskiest part of the bank, it also had a much higher risk profile than equivalent corporate divisions at other banks. More than half of the lending was to commercial property, a much higher proportion than at other banks, and, therefore, a much higher risk as commercial property is always vulnerable in a downturn.

Many of the loans were made to single name borrowers, particularly Sir Philip Green, whose many retail interests were also highly liable to lose value and earnings during a downturn. Concentrating lending to one particular sector, or to one individual, no matter how eminent, is a basic mistake.

Why was Mr Cummings allowed to do this? Among many failings, three major ones can be identified. There was no control framework which would have enabled group management to identify risk and manage it by either vetoing or selling risky loans or to reduce the risk by syndicating them across a number of banks. Even worse, the FSA says that risk management was regarded as a constraint on the business rather than an integral part of it.

Second, a fair interpretation of the findings is that group management encouraged excessive risk-taking by giving the corporate division ever more demanding targets. High targets for profits and earnings were set and then doubled. By 2007, the corporate division was expected to achieve pre-tax profit growth of 22 per cent, a target so demanding that it would have been focused on quantity not quality.

Third, the lack of insight that the group management and board had over the corporate division extended also to the external auditors, accountants KPMG. Although they had no clear view of risk in the corporate portfolio, they had an inkling because the FSA reports that they consistently suggested a much higher degree of provisioning for write-offs than the bank was willing to accept.

Though the FSA report does not say this, it is clear where blame should lie – with the executive management team chaired by chief executive Andy Hornby and with the board chaired by Lord Dennis Stevenson. They should be made to answer for their failings.

Stop arm-wrestling and get shovelling

Scotland’s economy, although it is gradually recovering, may stutter throughout 2012, zigzagging between upturn and downturn, the Scottish Government’s chief economic adviser warned this week. Given that prospect, there is sense in implementing the list of capital investment projects worth £300 million that infrastructure secretary Alex Neil has produced.

The suggestions apparently follow a request by Prime Minister David Cameron to First Minister Alex Salmond for “shovel-ready” projects that work could start on pretty much immediately, an indication that the UK government also thinks such a stimulus is needed.

The Scottish Government’s capital budget is under strain from the UK spending squeeze and the large slice now being taken by the replacement Forth crossing. The schemes listed by Mr Neil have the additional merit of being spread across the country and are of a small enough size to allow local firms to bid for them. But the SNP says, with some justice, that it cannot set people to work on these schemes unless the UK government allows it to bring forward more capital spending money from future years.

This, rather ominously, looks like the SNP preparing the ground for an all-too-familiar arm-wrestling match between Edinburgh and London. For the sake of the construction industry, which is under severe pressure, we hope it isn’t. The Scottish Government, if it is serious rather than merely political about its economic rhetoric, should be prepared to plough any end-of-year underspend in its budget into some of these projects.

A neglected institution that deserves a boost

The Post Office, Nicholas Ridley, one of Margaret Thatcher’s most free-market secretaries of state for industry, once remarked while queuing up to buy stamps for his postcards, is forever Poland. His exasperated comment on its nationalised inefficiency betrayed the gulf of comprehension between ministers and the public.

People grumble that they have to wait in a queue, but understand that it is so because of the many varied functions that the local office fulfils – from selling stamps to handling complicated government forms. And when the closure of a small outpost of this creaking state-owned business is threatened, the latent affection for an inherently British institution that serves a vital function emerges to confront politicians.

After years of such closures, the announcement of a £1.3 billion programme of investment in the network is good news. All branches are to benefit with more than half to be modernised to offer more services and with longer opening hours. Smaller ones, operating inside convenience stores, are also to receive some investment.

The investment has been condemned by a union representing many postal workers. But it has been welcomed by a union representing sub-postmasters, the people who have most contact with the public, which indicates that, just maybe, this is a programme that will reverse years of decline in post office usage.