Hubris: How HBOS Wrecked the Best Bank in Britain (38 page)

‘I recall that when Sir Bruce was at the helm he made it clear that there should be no egos, as the Bank was what mattered and not the individual members of staff, and stewardship was a
critical requirement. I’m afraid that these core values readily got subsumed as the new culture emerged. More’s the pity.’

In HBOS the high-pressure sales culture led to anxiety and even fear among staff. One manager, who asked for anonymity since he still works at Lloyds, remembered: ‘Counter staff were
pushed at the beginning of the day and throughout the day to generate leads. Failure to sell could/would eventually lead to disciplinary action. Managers could record that failing staff had
received coaching or support and then the process of easing them out could continue.

‘Managers were no safer, they reported to an Area Sales Manager and each day they had to phone the ASM, give their results and explanations for any targets not hit. In an environment based
so completely on sales, quality of business and customer care would always be a long way behind hitting bonus figures, whether for the money or to protect your job.’

Staff learned to subvert the sales culture at HBOS. ‘When Andy Hornby came to the bank from Asda, branch staff were told that he had promised the City that he was going to grow current
accounts by
one million. Current accounts are one of those things that people don’t usually think about moving, so if you have the current account you have the salary,
probably the mortgage, and from there you can sell all of the add-ons. Current accounts became one of the key measures for branch staff bonuses, but without any regard or interest in quality.

‘A customer would come in and ask for their card cash account to be upgraded to a current account. Upgraded accounts didn’t count [towards sales targets], so they would be told that
a new application had to be done and they got a new account. I’ve seen cases where people went in for savings accounts and were told that they needed to have a current account to run
alongside it (they didn’t). I’ve seen cases where the partners of staff had three or four current accounts.

‘To get around it the company said that it only counted if it had a credit. Cashiers would have a pot with paper clips and pennies next to the till. At the end of the day interviewers
would hand over their current accounts that they had opened for them to be credited with 1p.

‘To get around that the company said that it only counted if it had a credit of at least £10. At the end of each month branch managers would use their suspense account to credit each
of the accounts with £10, leave it in overnight and then the next day take it back out. One manager I knew was eventually disciplined for this. So to get around that the company said it only
counted if it had a salary credited. That brought it to an end, but thousands of unwanted unused accounts had been opened. Accounts that made the bank look good to the City but were of absolutely
no value because in many cases people didn’t know they had them.’

Staff would connive with customers to meet the qualifications to get a home loan. ‘I talked to a mortgage adviser and asked how she was doing and she said: ‘‘I’ve had a
good week and I’ve only had to bump up the income on a couple of them.’’ ’

Another instance illustrates the triumph of sales over customer service. ‘I visited branches across the south-east and staff were usually happy to talk about how the branch bonus was
progressing and what they were having to do to keep earning it. I was in a banking hall when a customer came in and in very poor English asked for an envelope to be handed to an interviewer. I was
going into the staff room when the envelope was brought in to the staff member, who was
making a cup of tea. The envelope was opened and she said to her colleague
‘‘It’s a credit card app[lication] with CCRC’’ [credit card repayment cover]. She was asked: ‘‘This woman speaks hardly any English, I could hardly
understand her, how did you manage to sell the CCRC?’’ The answer was ‘‘Tough, if they don’t understand English they get the cover.’’ ’

Another example: ‘I was asked by a branch manager to speak to a customer who wanted a personal loan. The customer was known to the branch PFA [Personal Financial Adviser]. The customer did
not have the income from his job to justify the loan. I told the manager and the PFA that there was no point [in progressing the application] as it would fail. I was told that he had a rental
property and that the rent would cover the loan repayments and to include the rent as part of his income. I pointed out that if the tenant left he would be in trouble. I was told not to worry and
that it was needed for the branch’s targets. I spoke to the assistant manager who also had some responsibility for risk and compliance and was told by her to ‘‘Just do
it’’. The loan went through.’

And again: ‘We had a client who was in trouble, he was self employed, but business wasn’t great so he came in on a regular basis for larger and larger loans. Branch staff were warned
about ‘‘churning’’ [repaying one loan by taking out a bigger one]. I saw him one day in the banking hall and said to the manager and the assistant branch manager that it was
only five months since his last loan and we couldn’t give another loan to him. I was told that it was his decision and he always took PLRC [Personal Loan Repayment Cover], which was a key
bonus measure. I refused to see him, but somebody else did and he took £25k with another £7k for the insurance.’

While this was happening in retail lending, there was similarly extraordinary behaviour in corporate banking. A newspaper investigation in 2013 discovered that in early 2008 Bank of Scotland had
lent £12.2 million to the company which owned the Dunfermline Athletic Football Club ground.
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Two features of the transaction made it
controversial: the first was that the chairman of both the company which owned the ground and of the football club itself was Gavin Masterton, former Treasurer and Chief General Manager of Bank of
Scotland. The second aspect was the condition on which the loan was granted. Unless the ground was sold, no capital or interest was payable until the end of the term of 35 years. Some fans smelt a
rat and immediately alleged corruption, but the loan was entirely above board and subject to the Bank’s normal credit approval process.

The truth is far less colourful than some disgruntled fans would like to believe and illustrates the prevailing optimism of the Bank and the borrower at the time. Neither expected the loan to
run for anything like the full term. Dunfermline hoped to emulate its Scottish rival St Mirren, which had sold its old ground in the centre of Paisley to a supermarket and with the proceeds cleared
its debts and built a new stadium out of town. But Dunfermline’s timing was bad and the property crash ended any hope of selling the ground at anything like enough to repay the loan for the
foreseeable future, leaving the Bank with an embarrassing uncollectible debt.

Also in 2013 a serial fraudster named Achilleas Kallakis was jailed for seven years. This former estate agent and his counterfeiter accomplice pretended to be high-rolling developers backed by a
major Hong Kong property company. Their fraud was breathtakingly simple, yet it took in several banks. The crooks rented offices in Mayfair, produced reams of fake documents and hired an actor to
impersonate a Hong Kong executive.

They didn’t have to be terribly sophisticated. Like all good illusionists they could rely on their audience to be easily distracted and to believe what they wanted to believe. Bank of
Scotland lent Kallakis A26 million to convert a 100-metre long passenger ferry into a luxury yacht. The court was told that it disregarded warnings from their own legal advisers and relied on
letters of assurance from a Swiss lawyer, believed by the prosecution to be part of the conspiracy. The Bank wasn’t alone. Allied Irish lent the fraudsters £750 million, and other banks
duped included Bristol & West (now part of Bank of Ireland), Barclays and GE Capital, which financed a private helicopter and a corporate jet.

Why were all these bankers so easily fooled? It all becomes explicable when you remember the changes in management organisation in banks over the past 20 years. Under the old system managers
stayed in post for years at a time, so the originator of the loan remained responsible for it. When he (it was usually ‘he’) made the decision, he had to weigh the profit the bank would
make against the risk it was running. If the loan went bad it could blight his career. By the time of the credit boom the two functions had been
separated. The dealmakers
worked to sales targets – and their bonuses and their future prospects depended on reaching or exceeding them. Risk assessment was outsourced to risk departments and risk committees, who were
regarded within banks as a lesser form of life.

As the FSA report into Bank of Scotland Corporate found, the dealmakers had no problem in brow-beating the risk department, and a ‘culture of optimism’ reigned. But optimism proved
to be no substitute for hard-headed risk assessment.

It was against this background of emerging examples of lax standards and shirked responsibility that the Parliamentary Commission on Banking Standards announced that it would investigate the
collapse of HBOS and call former managers and directors of the Bank to give evidence. The commission had been set up in response to an entirely different scandal, the manipulation of the LIBOR
interest rate, which banks use to lend to each other. The comparison of the LIBOR scam to the collapse of HBOS could not be more marked: HBOS cost taxpayers £20 billion, yet the only fine
imposed had been the £500,000 paid by Peter Cummings. No public money was lost in the LIBOR fraud, yet three banks had been fined a total of £1.5 billion by US and UK regulators, the
chairman of Barclays resigned and the chief executive was forced out of his job.

HBOS really did appear to be the officially forgotten disaster, which only increased the smoldering anger of those who had suffered real loss and hardship. It was this sense of injustice –
that the top men had not been held to account – which explains the welcome to the commission’s decision from the victims of HBOS, and the close attention its subsequent findings
received.

Called to account – at last

There was a low-key start to the parliamentary commission hearings
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at the end of October 2012. One or two reporters
from the financial press attended the early sessions, but most of the media took time to wake up to the extraordinary human drama slowly unfolding in the airless committee rooms of the Houses of
Parliament. The scale of human suffering caused by the banking crisis had faded from the news schedules.

The HBOS panel was chaired by Lord Turnbull, accompanied by one or two other commission members. Witnesses, who appeared for an hour or more, were questioned patiently and courteously. Bankers,
including Lord Stevenson and Andy Hornby, had been hauled before parliament before, but then the questioning had been by MPs keen only to get their soundbite onto the television news, so there were
few follow-ups and little new information was elicited. This time the cross-examination was by a professional, David Quest, one of the two counsel engaged for the investigation. He had read the
background papers and meticulously took witnesses through their evidence, steadily adding incremental facts to the story.

Paul Moore, sacked as a risk officer by James Crosby, repeated the allegations he had made to the Treasury Select Committee. Jo Dawson, appointed Group Risk Director after Moore’s
departure, clearly could not have challenged the prevailing sales culture and characterised her role as having influence rather than authority. Colin Matthew, head of International from
2005–8, described the rapid growth and ambitious targets of the group in Australia and Ireland. It subsequently incurred heavy losses in both markets. Mike Ellis was finance director during
two crucial periods in the brief life of HBOS – in the first three years when its fast growth strategy was being set and again from the autumn of 2007 until the Bank’s end. He appeared
nervous. He told the hearing that he was not trying to be
evasive, but came across as just that, ducking many questions with phrases such as ‘I was no longer with HBOS
when those accounts were struck,’ and ‘I was not there, I could not possibly comment,’ and ‘I really can’t comment. I was not there.’

As the Autumn wore on a few moments of drama occurred. George Mitchell, who resigned as head of corporate banking in 2006, was incredulous that after slowing the growth in corporate lending in
2005–6 because he felt the market was peaking, it had again been ramped up after his departure. He came out with one of the most memorable quotes when he described the reason for the
liquidity crisis which hastened the Bank’s demise. ‘Once you have spooked the market and once confidence in your name has gone, it doesn’t matter if you are trying to raise
£50 billion or £150 billion, you are not going to get it because the markets close to you. They might be global, but they are a veritable village when it comes to gossip and rumour. If
they are spooked by, for example, the speed of growth in HBOS, confidence in your name gets eroded.’

The inquiry uncovered some new facts. Lindsay Mackay, head of treasury, had warned the HBOS executive committee in 2006 that the Bank had the highest wholesale funding requirement of any UK bank
and in fact was close to the Big Four banks combined. He had warned them that in the longer term the position was ‘untenable and unsustainable’. But the growth had continued.

The non-executive directors who gave evidence, Sir Charles Dunstone, chair of the retail risk committee; Anthony Hobson, the audit committee chair; Sir Ron Garrick, senior non-executive director
and chair of the corporate risk committee, cut pathetic figures, at pains to say that they had done their jobs conscientiously, followed the correct procedures, asked all the right questions, been
given all the information they needed – yet at a loss to explain how things had gone so disastrously and hideously wrong. In the end they all resorted to what Lord Turnbull described as the
‘innocent victim defence’, that everything would have been all right if the US sub-prime mortgage collapse had not led to the closure of wholesale markets.