Regulator `failed to read damning report'

Senior executives at the Building Societies Commission, the societies' regulator, allegedly failed to read a damning report on the sale by one of its members of high-risk home income plans to elderly investors.

They told MPs at a Treasury Select Committee meeting last month that they had not seen a report by Fimbra, the financial advisers' former regulator, on the activities of West Bromwich Building Society.

MPs later discovered that a draft of the report, prepared by one of Fimbra's senior lawyers in February last year, had been sent to the BSC. The regulator has since admitted it had the document all along.

Mike O'Brien, Labour MP for North Warwickshire and a member of the Treasury Select Committee, said: "This apparent mistake by its senior officials raises a crucial question of whether the BSC is prepared to resolve a scandal that has been going on for years.

"If they say they do not have a report and then suddenly find it, you have to ask whether any of them ever read it in the first place."

The committee issued a report before Christmas in which it called for the Building Societies Commission to be abolished and and its regulatory functions to be taken over by the Bank of England. However, Anthony Nelson, the Treasury Minister, last week rejected the committee's proposals.

Fimbra's report covers a period between 1988 and 1990, when almost 1,000 elderly savers were encouraged to borrow up to £20m in mortgages from West Bromwich, at high interest rates.

They were told that if they invested the money it would be enough to pay off their mortgages and give them an income.

In fact, high interest rates and a sluggish stock market meant rolled- up interest rocketed upwards. Loans of £30,000 climbed to £40,000 within two years as interest became due on the amount outstanding after the first 12 months.

Fimbra was called in because the schemes were mainly sold by a financial adviser, Fisher Prew-Smith, which it regulated. The regulator found that, although Fisher Prew-Smith was principally responsible, West Bromwich should have been prepared to take much of the blame.

In fact, the building society, in common with many other lenders who made loans to elderly borrowers at the time, argues that it was not to blame.

Both West Bromwich and the Securities and Investments Board, the senior City regulator, are to appear before the Select Committee next month to discuss the home income plan scandal.

A BSC spokesman said: "We are working with the SIB to resolve the matter and under the circumstances it would not be right to comment further."