The UK Financial Services Authority (“FSA”) has banned former HBOS plc executive Peter Cummings from holding any senior position in a UK financial institution and fined him £500,000 for “failing to exercise due skill, care and diligence.” It is the largest fine of this kind that the FSA has ever levied against a senior executive, and reflects a period of ill-judged acquisitions that ultimately saw HBOS taken over by Lloyds TSB to avoid collapse at the height of the credit crisis.
The decision reflects an “aggressive expansion strategy … without suitable controls in place to manage the associated risks….” as well as a poor staff incentive structure and problems in internal controls and management information. In its press release, the FSA states that it “accepts that some of the problems existed before Cummings was appointed, that he did make efforts to introduce some improvements and that critical business decisions were made collectively. It also accepts that Cummings did not act deliberately or recklessly in breaching FSA regulations, and that the full severity of the global financial crisis, and its effects, were not reasonably foreseeable…” Nonetheless, it judged Mr. Cummings to have breached the FSA Code of Practice for Approved Persons in his role as chief executive of HBOS’ corporate division.
Mr. Cummings responded in a statement, calling the FSA investigation an “extraordinary Orwellian process” and questioning why he is the only person from HBOS to be investigated. He noted that he had worked “with the full co-operation and knowledge of the FSA”, and called for an independent inquiry into HBOS’s failure.
The judgment caps a busy summer for the FSA, which recently fined BlackRock Investment Management (UK) Limited for client protection failures, questioned whether retail investors should participate in collective investment schemes, and launched an investigation into the incentive structure that led to the recent insurance mis-selling scandal. Moreover, it reflects a renewed emphasis on enforcement in the face of accusations that the UK’s traditional “light touch” regulatory regime had turned London into a financial wild west.
Mr. Cummings likely has some valid points regarding his treatment by the FSA; however given the difficulty in holding individuals responsible for corporate failures, the judgment should serve as a powerful deterrent.