The investigation into the firm has now concluded and the FSA has published details of its findings into Bank of Scotland and its corporate division between January 2006 and December 2008.
The FSA judged that the firm was guilty of very serious misconduct, which contributed to the circumstances that led to the UK government having to inject taxpayer funding into HBOS.
The FSA considers that during this period, Bank of Scotland failed to comply with Principle 3 of the FSA’s Principles for Businesses, which state: “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.”
The regulator says the severity of Bank of Scotland’s failings during this time would, under normal circumstances, be likely to warrant a very substantial financial penalty.
However, because public funds have already been called on to address the consequences of Bank of Scotland’s misconduct, levying a penalty on the enlarged group means the taxpayer would effectively pay twice for the same actions committed by the firm.
Therefore, to reflect these exceptional circumstances, the FSA has not levied a fine against Bank of Scotland but has issued a public censure to ensure details of the firm’s misconduct can be viewed by all and act as a lesson in risk management failings.
The FSA has found that between January 2006 and March 2008, Bank of Scotland’s corporate division 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 says rather than re-evaluating its business as conditions worsened, the division set out to increase its market share as other lenders started to pull out of the market.
In addition, its internal culture was focused on revenue rather than assessing the level of risk in transactions.
Tracey McDermott, acting director of enforcement at the FSA, says: “Banks and other firms have to manage their business by ensuring that their systems and controls are appropriate for the risks that they are running.
“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.”
This announcement marks the conclusion of the enforcement action against the firm, but other enforcement proceedings in connection to the failure of HBOS are ongoing and remain subject to the legal processes prescribed by the Financial Services and Markets Act 2000.