City watchdogs have issued their most excoriating attack yet on any of the British banks over their role in the financial crisis, accusing the giant HBOS of "very serious misconduct".
The public censure by the Financial Services Authority yesterday casts a critical light on the role of Peter Cummings, who ran the department in question at HBOS's Bank of Scotland subsidiary. Banker to many of the biggest names in British business, including Sir Philip Green's Topshop-to-BHS empire, he oversaw a culture of aggressive lending at the bank.
While the FSA does not name any individuals, Mr Cummings' management of his division is implicitly savaged.
HBOS is accused of a reckless culture of lending, continuing to make hugely risky loans even as rivals started pulling back when the meltdown loomed.
The bank eventually had to be rescued by a massive taxpayer bailout, followed by a takeover by Lloyds and further taxpayer guarantees. The FSA said that HBOS ignored warnings from its internal risk officials and external auditor KPMG. It breached rules requiring banks to put in place adequate risk management systems which could have prevented the disaster.
The FSA backed off fining the bank because it said that would have punished the taxpayer, which still owns 41 per cent of the bank, twice over.
Bank of Scotland's behaviour was one of the significant factors that led to the £65bn taxpayer bailout of UK banks in 2009, the regulator said.
The FSA said that the bank, which merged with Halifax to become HBOS in 2001, "pursued an aggressive growth strategy that focused on high-risk, sub-investment grade lending. Over the period, the division's transactions increased in size, complexity and risk. Its portfolio was high risk, with highly concentrated exposures to property and to significant large borrowers."
The FSA said that while the case against Bank of Scotland – which no longer exists as a legal entity – had been closed, "other enforcement proceedings in connection to the failure of HBOS are ongoing and remain subject to the legal processes".
It is understood that this means that cases against individuals have been prepared but are still being challenged by those individuals through the FSA's appeals process.
The regulator said that it is still committed to publishing an in-depth report on the near-collapse of HBOS and its takeover by Lloyds in 2009 which cost the taxpayer £20bn. But it claimed it cannot do so yet because that "would risk legally prejudicing the outcome of ongoing enforcement action. Therefore, it is our intention that the review and analysis work to produce such a report will commence at the conclusion of the enforcement proceedings connected to this matter."
Tracey McDermott, acting director of enforcement at the FSA, said: "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."
The report from the FSA did not directly blame any individuals.
Lloyds said: "This will help to draw a line under the events in question and allow the Group to move forward. We will continue to focus our efforts on rebuilding the Group for the benefit of our customers, employees and shareholders."
Lloyds has tried to distance Bank of Scotland from its mortgage and savings business Halifax since the disastrous takeover.