Hubris: How HBOS Wrecked the Best Bank in Britain

by Perman, Ray

  The Bank whose story I want to tell was quantitatively different to banks operating now. It was not insubstantial, it was after all a FTSE 100 company – one of the biggest companies on the stock market. But it was a fraction of the size of banks today and operated on a human scale. Customers could telephone branches and speak to people whose names they knew and faces they recognised. If you called back, you could speak to the same person. For Bank of Scotland managers ‘know your customer’ did not mean look at a computer screen, but recognise their names, remember their banking history, their businesses and perhaps their families too. A human scale meant that the chief executive could review all large lending propositions and all customer complaints, replying to them personally if he felt they had not been adequately answered.

  This was a bank which never called you at dinner time to try to sell you ‘products’. Thirty years ago when I began my relationship with it, the Bank took the view that if you needed its services you would ask. Later its managers were encouraged to try to sell to customers, but it was never pushy and sometimes they looked rather embarrassed in doing so. It seems incredible to me to write this now, but it was a bank which was trusted by its customers. When it adopted the advertising slogan ‘A Friend for Life’ it was not greeted with cynicism. People believed it meant it, and more importantly, it did.

  To say the Bank was rooted in the community is an understatement. It had been part of Scottish history since before the Act of Union and there was no major historical event since in which it had not played a part. It acted as banker to a large proportion of the country’s employers and their employees. It banked charities and community groups, golf clubs and trade unions. It looked after the millions of some of Scotland’s richest men and women, but was also one of the first banks in the UK to offer bank accounts for all in disadvantaged communities. When The Big Issue wanted to open accounts for its homeless magazine sellers to deposit the cash they collected, the Bank’s Treasurer defied the money-laundering regulation which said that a bank had to verify the home address of all its customers and opened them all with the address of one of the Bank’s branches.

  Don’t get the impression that this was some hick bank. It was one of the most innovative in the world, the first to bring electronic banking to Britain, a leader in leveraged finance back in the days when those were not dirty words, the first clearing bank to get its cost/income ratio below 50 per cent and a pioneer in getting others to sell its services so that it could extend its reach further than bricks and mortar would allow. It was at the same time a risk taker, known for backing entrepreneurs, and a prudent institution, maintaining high capital ratios. And it became the best-performing bank in Britain in terms of its return on equity. Its share price quadrupled in ten years.

  Bank of Scotland was not unique. Many of its characteristics were shared by the other Scottish banks, The Royal Bank of Scotland and Clydesdale Bank, and they had once been replicated across the UK. But with the exception of Yorkshire, which kept its bank longer than most, other regions lost their financial institutions to a relentless process of consolidation during the twentieth century, which shrank competition and extinguished local responsiveness.

  Bank managers used to be among the most respected in their communities – and they were in the community because managers managed branches and branches were part of the fabric of small towns or city neighbourhoods. With the local clergyman and the school teacher, the bank manager was trusted to sign the back of your passport photograph or give you a character reference when you went for your first job. A retired manager writing in the Bank of Scotland staff magazine noted how ‘Bank men’ usually ended up as the treasurer of the golf club, the church committee or the parent-teacher association. I suspect that was once true of all bank managers anywhere in the UK – people knew the cash was safe with them. Part of the branch manager’s standing came because he (almost invariably ‘he’) could make real decisions. He could agree a personal loan or business overdraft and he made his decision not only on the basis of working out the figures, but also on his assessment of character based on years of local knowledge. Only in the case of large amounts would he need to get sanction from Head Office, which took into account his recommendation and the fact that since he was likely to be in post for years at a time, he would have to live with the consequences if the decision turned out to be the wrong one.

  Now many thousands of branches across Britain have been closed and those that are left are manned by ‘relationship managers’, who probably do not live locally, do not have time after the stress of work to be treasurer of anything and will not be in post long enough to build a relationship with anyone or any business. Face-to-face meetings have given way to call centres, risk assessment to credit scoring. Personal recommendation has been replaced by ‘customer acquisition’, services replaced by ‘products’ sold to reach targets, rather than to answer the needs of customers. As recent fines imposed on the big banks by the regulator have shown, some products were ‘toxic’ – they did the customers who bought them more harm than good – and in some cases the banks knew this before they sold them. To meet constantly rising profit expectations, big banks have continually to drive down cost – mostly at the expense of customer service and satisfaction – and expand their sales, often by swallowing other companies to gain their customers. At each stage banks became more remote from their customers, geographically and by hiding behind automated telephone systems. What has been lost in this process is trust.

  This is the story of how one bank went from being one of the most trusted, to one from which customers could not wait to remove their money.

  I am grateful to all those current and past executives of Bank of Scotland and HBOS who have spoken to me. Many asked for anonimity, so I feel it invidious to name those who did not. Where I have attributed quotes to individuals, their words were already on the record, either in newspapers and magazines or company or Government reports. There were also many who would not speak to me. As I say later in this story, I do not criticise them for that; I have no right to demand their response, but it does mean that I have not been able to check facts with them. I am grateful to those who considered my request for an interview and then wrote to decline. Several did not give me the courtesy of a response.

  I have tried to report only actions and not to attribute motives without evidence. I have also tried not to apportion blame. Readers should make up their own minds.

  Preface to the Paperback Edition

  In the summer of 2012 a new scandal engulfed British banking. The collapses and rescues of 2008–9 had precipitated the deepest economic downturn for eighty years; banks were still having to pay billions of pounds in compensation for mis-selling Payment Protection Insurance; and there was public outrage over continuing high levels of salaries and bonuses. The revelation that LIBOR interest rates were being manipulated was the last straw. Regulators on both sides of the Atlantic imposed fines running into hundreds of millions of dollars and pounds on several banks and there was a clamour in the UK for a judge-led public inquiry into the whole industry.

  The Government’s response in establishing a Parliamentary Commission on Banking Standards was seen by some critics as a craven second-best. In the event the commission proved to be anything but a creature of either the still-powerful banking lobby or the Government. It was led by the Conservative MP Andrew Tyrie, chair of the Treasury Select Committee, and recruited its members from both houses of parliament. Drawn from all parties and none, they included political heavyweights like former Chancellor Lord Nigel Lawson and the former Treasury Committee chair Lord John McFall. There was also the former Cabinet Secretary Lord Andrew Turnbull and, to the surprise of many, Justin Welby, once an oil trader, then Bishop of Durham and soon to be announced as the next Archbishop of Canterbury.

  The commission had powers to summon witnesses, obtain from the banks and the Financial Services Authority (FSA) papers which otherwise would have remained secret. It broke new ground
in engaging counsel to question witnesses. It worked quickly and showed its independence with its first report, which went considerably further than Government policy in calling for the separation of domestic and investment banking. Significantly, it launched an inquiry into the collapse of HBOS, forcing directors and managers of the bank and the regulatory authority to give evidence in public.

  The purpose of the inquiry was officially to ‘learn lessons’ from the HBOS debacle, but it also tapped into a simmering public anger that there had been no proper explanation for a disaster which had cost taxpayers £20 billion, seen over 2 million small shareholders lose most of their investment and would deprive 40,000 employees of their jobs. Worse, the men at the top of the Bank had appeared to walk away without sanction. They had not been named and shamed, let alone prosecuted, no bonuses had been clawed back, and the principal players had gone on to other well-paid and prestigious jobs, some in financial services. The FSA, which was supposed to regulate the industry, had produced a report blaming one man, corporate banking director Peter Cummings. A promised more comprehensive report was so long delayed that the FSA was abolished before it was published.

  For those affected by the HBOS disaster, the commission’s public examinations became compulsive viewing on parliamentary television. They also received widespread attention from press and broadcasting. At last people were being held to account. I wrote in my preface to the first edition of this book that I had tried not to apportion blame. The parliamentary commission had no such inhibitions, and An Accident Waiting to Happen, its report on the collapse of HBOS, published in April 2013, provoked a storm of public indignation against the men who had led the Bank – the chairman Lord Stevenson and the two chief executives, Sir James Crosby and his successor Andy Hornby.

  The report itself was comprehensive, detailed and damning. But although the commission was able to cross-examine some witnesses who had refused to speak to me, and to obtain board minutes and other corporate documents which I was denied, its conclusions were no different from mine. I have therefore left the main narrative of the book, which covers a longer period than the parliamentary report, unchanged, and I detail and analyse its findings and their implications in new final chapters to this edition. Since this book first came out, many former HBOS employees have contacted me, and I include some of their stories in the new chapters.

  It is a sorry tale: how human weakness and pride destroyed two solid and once-respected institutions. We need to know the story, but is that enough to prevent it happening again?

  Edinburgh

  June 2013

  1

  Banker to the Stars

  The family of retail billionaire Philip Green knows how to throw a party. For his 50th birthday the tycoon’s wife Tina organised a three-day bash in Cyprus which reportedly cost £5 million. Rod Stewart and Tom Jones provided the music, the guests were expected to wear togas and the birthday boy himself dressed as the Emperor Nero. The tycoon’s 55th was even more exotic, with the Greens flying 100 guests 8,500 miles in two private jets to an eco-spa on a private island in the Maldives, where singers Ricky Martin and George Michael performed.

  There were no togas for son Brandon’s bar mitzvah in 2005, but no expense was spared nonetheless. The Greens took over all 44 rooms and nine suites of the Grand Hotel on Cap Ferrat, one of the most luxurious and expensive hotels in the South of France. Rooms can cost up to £1,000 a night, but The Sunday Telegraph speculated that the Greens would have paid much more to ensure exclusivity at a time when the hotel could expect to be busy with stars attending the Cannes film festival1. In addition to its Michelin-starred food and extensive cellar, including rare vintages of Château d’Yquem from 1854 and Château Lafite Rothschild from 1799, the hotel boasts an auditorium with outstanding acoustics designed by Gustave Eiffel, of tower fame. It was not big enough for the Greens’ party of 200 so they built their own. A synagogue is also an essential part of a Jewish boy’s coming of age and the hotel did not have one, so that was constructed too. These weren’t flimsy structures. So much wood and stone was used that guests marvelled that the buildings were only temporary.

  Some guests arrived in the charter flight from London laid on by the Greens, others came from nearby Monaco in a fleet of luxury cars and a few in their own speedboats. It was a private party and locals moaned that public footpaths around the hotel had been closed for the event, but paparazzi lurked under the Aleppo pines in the grounds, or behind rocks on the Mediterranean shore to snap celebrities such as television impresario Simon Cowell, pop star Beyoncé, who was providing part of the entertainment, racing driver Eddie Jordan and film director Michael Winner. From the world of business came Tom Hunter, the Scottish entrepreneur, Royal Mail chairman Allan Leighton and the property-developer brothers Robert and Vincent Tchenguiz. There were also the high-powered international investment bankers who had part-financed Philip Green’s string of acquisitions of high street fashion chains – Mike ‘Woody’ Sherwood, top banker in the UK for the mighty Goldman Sachs and worth a reputed $48 million2, and Bob Wigley, Chairman of Merrill Lynch in Europe.

  And there was Peter Cummings.

  Short, balding and smartly dressed in black tie, Cummings looked no different to many of the business people present, but he was not like them. He had been educated at St Patrick’s High School, Dumbarton, not expensive private schools like Sherwood and Wigley. He did not own his own yacht like Green and Hunter, although he counted scuba-diving as one of his hobbies. He did not have an apartment in Monaco – in fact he still lived in the modest semidetached home he had bought with his teacher wife Margaret in the town in which he was born and went to school. He had a reputation among those who knew him well for being quiet, thoughtful and meticulous. He gave to charities – the Maggie cancer support centres and a school in Malawi, which he was quietly co-funding with his wife – but not in the ostentatious way of some of the millionaire philanthropists at the Riviera party. He was a banker, but not for one of the glamorous Wall Street investment houses like Goldman or Merrill and his had not been a quick rise to the top.

  After school Cummings had taken the path many bright kids had chosen in an age when university entrance was only considered for the fortunate few. He had joined Bank of Scotland as a trainee and studied at night for his banking diploma. The Bank moved him around – unspectacular jobs, but he broadened his experience and steadily climbed the hierarchy: regional manager in Carlisle, manager of the Glasgow Chief Office, head of corporate recovery, director of corporate banking. His experience had also given him something many of his younger competitors lacked. He had worked through three recessions as well as the prolonged boom of the first decade of the twenty-first century.

  Among other bankers he was envied, despite his unglamorous early career. No one had a closer relationship or had been able to pull off such big deals with Philip Green. Bank of Scotland had backed Green through a succession of larger and larger buys, culminating in the purchase of the Arcadia group in 2002 which had brought him household names such as Burton, Dorothy Perkins, Evans, Wallis, Miss Selfridge and Top Shop. Green borrowed more than £800 million to secure the deal, but paid it all back in two years. The Bank earned handsome fees and huge kudos, but there was more. Green allowed Cummings to buy a small shareholding in the business for the Bank, a privilege given to no one else. When Green paid his wife the biggest personal dividend in UK corporate history a year later, the Bank made £100 million profit – one hundred times what its stake had cost.

  On the strength of his relationship with Green, Cummings had been able to meet and work with entrepreneurs like Tom Hunter, the Tchenguiz brothers, hotelier Rocco Forte and property magnate Nick Leslau. These were the high rollers, the guys who did the big deals and were fêted by the press. Newspapers began to call him ‘Banker to the Stars’ and within HBOS, the conglomerate which Bank of Scotland had joined in 2001, he was seen as a star in his own right, responsible for a growing proportion of the group profits. The Bank co
mmanded respect and admiration far beyond its size and modest roots and rivals wanted some of the action. Cummings had turned down several lucrative job offers from international investment banks, but when he ‘sold down’ his deals – reducing risk by offering part of the loan to other banks – there was no shortage of takers.

  The bank Peter Cummings joined had been very different to the one of which he became a director 35 years later. Then it had been an institution with modest ambitions with, some would have said, a lot to be modest about. It was not even the biggest bank in Scotland let alone being taken seriously as a challenger on a UK scale. It was conscious of the weight of history on its shoulders, conservative in its outlook and particular about the people with whom it did business. There was an instinctive distrust in the Bank for anyone regarded as ‘flashy’.

  The thought that one of its senior managers might be seen in the same company as men and women who appeared regularly in the gossip columns of the cheaper newspapers and magazines would have filled the directors of 30 years ago with horror. When he had been making the tea in the Dumbarton branch, Cummings cannot have dreamed that years later he would be sipping Louis Roederer Cristal Vintage Champagne in such exalted company on the Côte d’Azur. Nor that his bosses would have thanked him for it and assured him it was part of the job.