Watchdog launches inquiry into bail-out of Scots banks

A FORMAL investigation is to be conducted into last year's government rescues of Scotland's top banks.

The Financial Standards Agency (FSA) has asked four major audit firms to make bids to help compile a report on bail-outs of the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS) last year.

The investigation, which will be led by FSA officials, is expected to examine risk management undertaken by banks, and whether shareholders and board members were given enough information.

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Whoever is selected from Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers would assist with the inquiry.

More than one could become involved as some have close links to the organisations they would be investigating.

Deloitte is auditor to RBS and PricewaterhouseCoopers acts in the same role for Lloyds.

Although there is no indication the City regulator wants to lay the blame for wrongdoing at the feet of directors, their competence leading up to the crises will be scrutinised.

It is understood the Treasury has been informed and the investigation could begin in a matter of weeks.

Rights issues undertaken by the two Scottish banks, as well as the building society Bradford & Bingley, are also likely to be closely scrutinised.

RBS was given an initial 20 billion bail-out from the taxpayer last year. In order to allow Lloyds TSB to take over struggling HBOS, the government had to exempt them from competition rules, and then invest billions of pounds of public cash in the new struggling banking group. Other issues, such as the pension awarded to Sir Fred Goodwin, the former chief executive of RBS, are not expected to be covered by the report.

Sir Fred has courted controversy by refusing to hand back any of his 16 million pension.

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His Edinburgh home was attacked by protesters angry at the former bank chief's payout, awarded despite him being at the helm when the bank ran into difficulties.

Lawyers have already been engaged by the new RBS chairman, Sir Philip Hampton, to try to claw back some of the retirement payout.

The FSA has no plans to announce the investigation formally and would not comment.

Meanwhile, pension deficits at RBS and Lloyds have soared to more than 18 billion.

A report by retirement consultants Hymans Robertson said RBS's deficit had risen from 8 billion to 12.3 billion in the past three months.

Lloyds has also registered a 6.2 billion shortfall in funding for its occupational final-salary scheme. Low interest rates and inflation are likely to exacerbate the problem still further.

Several large firms are looking to cut the cost of pension schemes or have asked staff to match contributions.

Aviva, owner of Norwich Union, and insurance broker Aon last week announced plans to ask staff to make larger contributions. The report said it will take far longer than previous estimates for finance companies to fill funding gaps as their deficits grow.