Paul Moore, the HBOS whistleblower, has presented new evidence to the Treasury Select Committee supporting his claims that the reckless sales-culture and product mis-selling ultimately led to the bank's collapse.
The "driven" sales culture at HBOS had a serious impact on the potential for mis-selling products, such as corporate bond funds and credit insurance, to customers who neither understood the risk involved nor, in many cases, needed the product, Mr Moore said yesterday.
His new evidence opens the door to legal action by former shareholders of HBOS – now part of Lloyds – against HBOS executives and directors for breach of fiduciary duty and "fit and proper" FSA regulations.
"In simple terms this crisis was caused, not because many bright people did not see it coming, but because there has been a completely inadequate balance of powers between the executive and all those accountable for overseeing their actions and reining it in," Mr Moore said.
In his 53-page testimony to the committee, he says: "The implication of the sales culture being out of balance with risk management and compliance is twofold: the risk to customers is that they are mis-sold and over-sold credit, while the risk to the bank is that more wholesale funds are required for the consequential increased credit and liquidity risks."
Ultimately, he said, it was the liquidity risk in the wholesale markets that crystallised, ultimately leading to the collapse of HBOS because it could not raise new funding.
The former head of risk at HBOS, sacked after his warnings, explained that as yields went down on standard deposit accounts, many customers were switched into corporate bond funds. "I was not confident that those who were switched out of deposit accounts into CBFs would really understand the additional capital risks they were taking on, and we wanted to ensure they did."
But, he added: "What was clear was that the advisers were strongly targeted to sell CBFs to deposit account customers whose deposits matured and the margins HBOS made on CBFs was very much higher than on deposit accounts. This obviously increased the incentive to sell them."
Mr Moore, who warned the HBOS board about these risks at the time, added that he also questioned the sale of creditor insurance sales, sold with personal loans and mortgages, also known as payment protection insurance (PPI), because of the big potential for mis-selling. Creditor insurance made up about 10 per cent of HBOS group profits.
But Mr Moore said HBOS staff were driven to encourage customers to take out larger loans than they needed, or wanted, because the creditor premium is larger as well. Many customers who bought PPI were never able to claim as they were in an excluded class.
Mr Moore's testimony to the Treasury Select Committee last month led to the resignation of Sir James Crosby, ex-HBOS chief executive, as deputy chairman of the Financial Services Authority. But Sir James, who dismissed Mr Moore in 2005, and the FSA have denied his claims, arguing that the KPMG audit showed there were no reasons for concern.
The committee has also received Mr Moore's rebuttal of the KPMG report, which he claims is "imbalanced" and failed to consider key facts. The select committee is now expected to hold a new session investigating Mr Moore's testimony.
But while Mr Moore welcomes the opportunity to put his case, he also wants an independent judicial inquiry.Reuse content