HBOS took a £240m hit in 2007 after discovering a “serious control breakdown” in its Reading operation, according to information published by the City regulator for the first time.
The Financial Conduct Authority (FCA) on Tuesday published information that had been redacted by its predecessor body in a 2012 regulatory notice because of an investigation by Thames Valley police into the HBOS Reading branch.
That police investigation, which began in 2010, led to a trial in January after which six individuals were jailed, including former HBOS employee Lynden Scourfield, who was in charge of looking after troubled businesses and pleaded guilty.
Scourfield referred struggling companies to David Mills and his consultancy QCS. He and Mills were jailed along with four others for their activities between 2003 and 2008.
The redacted paragraphs shine a light on what the Financial Services Authority – the City regulator at the time – had concluded in 2012, while the police investigation was still going on. The passage said: “A serious control breakdown in corporate’s Reading office was discovered in March 2007.
“A senior member of staff had been sanctioning limits and additional facilities beyond the scope of his delegated lending authority undetected for at least three years.
“The additional facilities were provided to distressed companies, and involved the use of a workout firm that had a potentially inappropriate link with the member of staff. This unauthorised extension of credit may have exposed the firm and the firm’s customers to potential fraud.”
The regulator said HBOS took a £76m bad debt provision in the first half of 2007 and by the end of the year this had increased to £240m.
The information is contained in a 2012 decision notice by the FSA – now replaced by the FCA – which as previously reported found an arm of HBOS had committed “very serious misconduct” in the run-up to the crisis.
The so-called decision notice analyses the Reading operations in the context of the systems and controls in place at the time and does not conclude that fraud took place.
After the FCA published the unredacted report, Lloyds Bank, which took over HBOS during the 2008 financial crisis, said “once again we apologise and express our deep regret to customers”.
The bank was “determined to get to the bottom of what happened at HBOS Reading and to find out who knew what, when”.
The publication of the missing six paragraphs comes when the FCA is investigating when HBOS knew about the problems in Reading and while Lloyds is awaiting the outcome of an investigation it has commissioned into how it handled the situation when it took over HBOS.
