The UK Financial Services Authority (FSA) said Wednesday it has levied its largest penalty against a financial industry executive for management deficiencies against a senior executive of HBOS plc, which failed during the financial crisis.
The FSA announced that it has fined Peter Cummings, former executive director of HBOS and chief executive of its corporate division, £500,000 ($786,000) and banned him from holding any senior position in a UK financial firm, for actions that the regulator found amounted to a breach of its principles.
It says he pursued an aggressive expansion strategy without proper controls between January 2006 and March 2008; and, failed to ensure that his division prudently managed high value transactions, which showed signs of stress, between April and December 2008.
The regulator said that it found that Cummings was aware that there were significant issues with its controls, including: weaknesses in management information; staff being incentivised to focus on revenue rather than risk; and a culture which saw risk management as a constraint on the business rather than an integral part of it. And, that rather than addressing those issues, it pursued an aggressive growth strategy under his leadership.
The FSA said that while it accepts certain mitigating factors — that some of the problems existed before Cummings was appointed, that he did make efforts to introduce some improvements, that critical business decisions were made collectively, that he did not deliberately breach the regulations, and that the full severity of the global financial crisis was not reasonably foreseeable — it did find him personally culpable in breaching regulatory principles “by failing to exercise due skill, care and diligence in managing HBOS’s corporate division during this critical period.”
“Despite being aware of the weaknesses in his division and growing problems in the economy, Cummings presided over a culture of aggressive growth without the controls in place to manage the risks associated with that strategy. Instead of reacting to the worsening environment, he raised his targets as other banks pulled out of the same markets,” said Tracey McDermott, director of enforcement and financial crime.
“It is essential that senior executives understand that incentivising revenue over risk is a dangerous folly. Growth is a sound ambition for any business but risk must be properly managed and robust controls are imperative to ensure growth is achieved in a way that is both stable and sustainable,” McDermott added.
With this case concluded, the FSA says that it now also plans to publish a report into the causes of the failure of HBOS in 2008. The FSA said that it couldn’t start the report until the enforcement proceedings were done, to avoid the risk of legally prejudicing the outcome. The purpose of the review will be to explain why HBOS failed, and to understand the causes of failure during the crisis.