Bloomberg News

Bank of Scotland Censured for Failings, Won’t Get FSA Fine

March 09, 2012

Bank of Scotland Plc was censured by the U.K.’s finance regulator for “very serious misconduct” at its corporate division that led to it getting a government bailout during the financial crisis.

The bank, which was part of HBOS Plc until the parent company was bought by Lloyds Banking Group Plc (LLOY) in 2009, won’t be fined by the U.K. Financial Services Authority because it received taxpayer money, the regulator said in an e-mailed statement today. Individuals may still face enforcement action, the agency said.

Bank of Scotland took on too much risk over a three-year period with “highly concentrated exposures to property and to significant large borrowers,” the FSA said. The bank’s strategy focused too highly on revenue and it didn’t have appropriate systems and controls for its level of risk, the regulator found.

Lloyds cooperated fully with the FSA’s investigation, the London-based bank said in a statement today.

“The conduct of the Bank of Scotland illustrates how a failure to meet regulatory requirements can end not just in massive costs to a firm, but losses to shareholders, taxpayers and the economy,” Tracey McDermott, the acting director of enforcement for the FSA, said in the statement.

‘Empire’ Unit

The former corporate banking unit provided loans and equity in management buyouts. It funded investments by entrepreneurs including retailer Philip Green and newspaper owners David and Frederick Barclay. The division helped rack up 7 billion pounds ($11 billion) of bad debts for the bank in 2008 and was described by lawmaker Michael Fallon in 2009 as “an empire within an empire.”

HBOS Plc’s assets more than doubled to 681 billion pounds from 2001 to 2008. About 40 percent of the bank’s 117 billion- pound corporate loan book was allocated to real estate and commercial property. Lloyds’s acquisition of HBOS, Britain’s biggest mortgage lender at the time, led to the bank needing a bailout valued at more than 20 billion pounds.

As a result the government acquired 43.4 percent of Lloyds shares after it acquired HBOS, the regulator said.

“As such public funds have already been expended in order to deal with the consequences of the very misconduct for which a financial penalty would be imposed and the taxpayer would again be impacted,” the regulator said. “In these exceptional circumstances, the most effective way in which to balance the need for deterrence and act in the wider public interest is to issue a public censure.”

Managers at Royal Bank of Scotland Group Plc were heavily criticized by the FSA in its December report into the bank’s near collapse in 2008 following its takeover of ABN Amro Holding NV.

To contact the reporters on this story: Lindsay Fortado in London at lfortado@bloomberg.net; Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Christopher Scinta at cscinta@bloomberg.net


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