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FSA Issues Record Fine On Senior Bank Executive For Management Failures
Tom Burroughes
13 September 2012
The UK’s
financial regulator added to its list of penalties on wrongdoers by fining ex-HBOS
banker Peter Cummings £500,000 and banning him from the industry for management
failings. HBOS is the lender that was taken over by Lloyds, the UK
bank, at the height of the credit crisis. The fine on Cummings, a former executive director at the bank, is the
highest penalty imposed by the Financial Services Authority on a senior
executive for management failings, the watchdog said in a statement yesterday. The FSA said it has not acted sooner to publish a report on
the failings of HBOS because it had not wanted to prejudice the outcome of
enforcement proceedings. The regulator has meted out a number of punishments to financial
services organisations in recent months, such as cracking down on wealth
managers for allegedly selling unsuitable products to consumers. The banking
industry has also been hit by the interbank interest rate rigging scandal,
which has seen the resignation of Barclays’ chief executive Bob Diamond, while
a number of banks have been investigated in the US
for allegedly breaching economic sanctions against Iran. To view an updated list of
financial miscreants, click here. Period of
mismanagement The FSA’s penalty relates to the period between January 2006
and December 2008, during which time Cummings was an executive director of HBOS - now part of UK-listed Lloyds Banking Group - and chief executive of its corporate
division. During that time, the FSA said Cummings “failed to exercise
due skill, care and diligence by pursuing an aggressive expansion strategy
within the corporate division, without suitable controls in place to manage the
associated risks”. Also, between April and December 2008, Cummings failed to
take reasonable care to ensure that the corporate division adequately and
prudently managed high-value transactions which showed signs of stress. “The FSA found that Cummings was aware that there were
significant issues with the corporate division’s controls, including:
weaknesses in management information; staff being incentivised to focus on
revenue rather than risk; and a culture which saw risk management as a
constraint on the business rather than an integral part of it,” the regulator
said. Aggressive In its explanation of Cummings’ actions, the FSA said his division
“pursued an aggressive growth strategy, despite these known weaknesses in the
control framework”. The FSA said a focus on growth peaked in 2007 and continued
into 2008, even though Cummings was aware of concerns within HBOS about some of
the markets in which the division operated and growing signs of problems in the
economy. “Rather than taking reasonable steps to mitigate potential
risks, he directed his division to increase its market share as other lenders
were pulling out of deals,” the FSA said. “Cummings led a culture of optimism which also affected the
division’s judgement about bad debts. The division did not adequately monitor
the deterioration of high-value transactions and was slow to pass them to the
dedicated ‘High Risk and Impaired Assets’ team for more detailed assessment of
the likelihood of default and the corresponding level of provision that should
be raised,” it said. The FSA said that it accepted that Cummings did not act
deliberately or recklessly in breaching FSA regulations and that the full
impact of the financial crisis was not “reasonably foreseeable” at the time of
the period that the regulator reviewed. “However, the FSA has judged Cummings to be personally
culpable in breaching Statement of Principle 6 of the FSA’s Code of Practice
for Approved Persons, by failing to exercise due skill, care and diligence in
managing HBOS’s Corporate Division during this critical period." The watchdog said it also judged Cummings to be knowingly
concerned in the misconduct which was the subject of the separate Final Notice
issued to Bank of Scotland on 9 March 2012.