The Financial Services Authority yesterday hit the former number two at Northern Rock with a record £504,000 fine and a ban from the City, in what is expected to be the first of a rash of disciplinary actions against the people who ran banks in the lead-up to the credit crunch.
David Baker, who left the company in May 2008, was penalised for failing to alert shareholders and his boss when he discovered nearly 2,000 bad Northern Rock mortgages had gone unreported, as the bank lurched towards a crisis that led to customers queuing outside branches to withdraw savings.
While the actions of Mr Baker – and another executive Richard Barclay, who was fined £140,000 – were not related to the funding crisis that ultimately forced the bank's nationalisation, they do shine a light on a damaging culture at the bank that put pressure on staff at its Debt Management Unit (DMU) to keep figures for arrears at half the market average (compiled by the Council of Mortgage Lenders). To meet this target, DMU staff created a new category of loans that should have been recorded as in default but were not reported, the FSA found.
When Mr Baker became aware of problems within the unit – which meant that 1,917 loans that should have been reported as failing were not in the bank's figures – he sought to deal with the issue over a six-month time frame, for fear that "an employee" in the DMU could face disciplinary action.
He failed to inform Northern Rock's chief executive, Adam Applegarth, and even participated in a webcast to the market in which he claimed that Rock's arrears levels were far better than rivals because of improved collections and risk-underwriting processes.
In fact, he knew that the real reason was that the "missing loans" were not on the books. Had they been, the arrears levels would have been 50 per cent higher than what was reported.
Significantly, the FSA said Mr Baker's attempt to deal with the missing loans over time was approved by another "senior employee" – indicating that further fines could be on the way. Mr Baker stepped down with a £4.3m pension pot, and was paid £900,000 in his last full year at the bank. The penalty is believed to be the biggest imposed on a high street banker, and would have been £720,000 if Mr Baker had not agreed to plead guilty and waive his right to appeal.
Mr Barclay, the head of credit at the company's debt management unit, would have faced a £300,000 penalty but for his guilty plea and what the regulator described as personal hardship.
The fines are the first substantial penalties levied on executives who were in charge at retail banks in the run-up to the credit crunch. However, more could follow, with the FSA investigating the events leading up to the rescues of Royal Bank of Scotland, HBOS and Bradford & Bingley.
Simon Morris, a partner at law firm CMS Cameron McKenna, warned: "By banning two managers, the FSA has once again made it clear that it will review the actions of senior management whenever a firm fails and hold them to account."
Mr Baker, who worked for Northern Rock for 34 years, said he accepted the FSA's findings: "I decided to give the Debt Management Unit six months to rectify the misreporting. My decision, and its time frame, was made with the best of intentions.
"However I now recognise that this decision, taken to resolve and not hide the reporting error, did not make these loans immediately transparent. I made an error of judgement and I regret it."
In charge when the walls fell in: What the men at the top are doing now
Former Northern Rock chief executive Adam Applegarth knew nothing of the bank's "missing" 1,917 bad loans, according to the Financial Service Authority. However, he is widely blamed for the catastrophic funding crisis that forced Rock's nationalisation. He has since taken up a role as a senior adviser to "Apollo", an investment "vulture fund" which buys distressed debt from bad banks and seeks to profit from it.
While Mr Applegarth's behaviour as chief executive has been widely criticised, his sins pale when compared with those of Sir Fred Goodwin. The former chief executive of Royal Bank of Scotland might have agreed to forgo part of his six-figure pension, but after a brief exile in France now has a job as a consultant to the Scottish architectural consultancy RMJM. His chairman, Sir Tom McKillop, is back in the boardroom as a director of a Belgian pharmaceutical company.
However, all these roles pale into insignificance when compared to what Andy Hornby has achieved since presiding over the near collapse of HBOS. He is chief executive of Alliance Boots, and is on some bookies' lists as potentially the next chief executive of his alma mater, Asda. Lord Stevenson, former chairman of HBOS, has a diverse array of interests. Outside business, he is chairman of Aldeburgh Music, a director of Glyndebourne Productions and chancellor of the University of the Arts in London. However, he's still working in the boardroom as a non-executive director of the Western Union Company and The Economist.
The City, it seems, looks after its own.Reuse content