Hubris: How HBOS Wrecked the Best Bank in Britain (37 page)

That was in a different age. Then the
Financial Times
could, with approval, call Bank of Scotland ‘the most boring bank in Britain’ for its failure
to do any of the spectacular things which regularly hobbled its larger, London-based competitors. When John Smith was elected leader of the Labour Party, newspapers were able to describe him as
being like a Scottish bank manager. It was a simile everyone recognised: a bank manager was sober-suited, calm, competent, reliable and possibly also a little boring – but who wanted to deal
with an exciting bank manager? Banks were trusted by their customers and regarded by investors as safe and consistent, not ‘growth stocks’ expected to double in size every few years. A
fund manager, who was also a director of Bank of Scotland, told me he put all his widow and orphan clients into the Bank’s shares. ‘Money in the bank’ was an everyday phrase which
meant ‘secure’.

The change did not come suddenly, but by the
fin de siècle
banks were regarded as either predator or prey: being efficient, dependable but unexciting was not an option. This
coincided with a progressive deskilling of banking, partly as a result of technology but also through the rise of the profession of ‘manager’ as a generic skill. The MBA replaced the
banking diploma as the passport to the top.
⁶

The professional manager did not need to know every aspect of the business because he could rely on other professionals – risk specialists, consultants, auditors, ratings agencies. Risk
was no longer a matter of experience and judgement and you did not have to be cautious because the market would prevent you from going too far. You could take any risk as long as you priced it
correctly. If the price went too high, no one would buy and you would not run the risk. The correct price could be determined by mathematics and calculated on a computer. Amazingly this belief
persisted after the collapse of Long Term Capital Management in the US in 1998, a company that had two Nobel Prize-winning mathematicians on its board. As we have seen, professional managers turned
out to be incompetent, mathematical models were inadequate and some risks were not worth taking no matter what the return.

Another ingredient in the sour mix was the change from regarding lending as a service to be provided to account holders, to being a product to be sold to customers. If a bank offered products,
then why
would it not employ the same techniques as a retailer? No one stopped to think of the difference. Years after selling a customer a tin of beans, a supermarket does
not ask for it back in perfect condition. But a bank does expect the money it lends to be returned. A better analogy would be with a car hire company, except that the car hire firm may own its
cars, a bank does not own the money it lends – that belongs to its depositors.

Losing sight of that fact was fundamental to the collapse of HBOS. Depositors’ money is finite, whereas the money borrowed from the wholesale market was infinite. Although the savings of
millions of ordinary people were nice to have, they were not essential because you could go on borrowing and lending eternally from the global market. There was no limit to the growth of the bank.
The Philosopher’s Stone had been discovered – except, of course, that the interbank market was not everlasting, at least not for banks like Northern Rock and HBOS. In 2008 it came to a
halt. Base metal could be converted, but only into fool’s gold.

The banking crisis destroyed public trust in banks and bank managers. They regularly now feature in lists of the top ten hates. Senior bank executives – like the other titans of the
corporate elite – are seen as greedy. It was not always like this. Thirty years ago Lord Kearton was a highly successful chief executive of the textile company Courtaulds, who went on to
chair the British National Oil Company for the Government of the day. When he retired it was revealed that he had never taken a salary from BNOC. I asked him why. ‘I had enough money
already,’ he replied. Now men and women who are already millionaires many times over, demand more millions for running banks – and we give it to them. I am not sure why. Does running a
bank take more skill than, say, being a brain surgeon? Do bank chief executives work longer hours than the Prime Minister? Are they more knowledgeable than the President of the Royal Society?
Banking is complicated because the men who run banks have made it so, yet the most successful banks are the simplest.

Even after the crash, banks have hardly changed their ways. Public trust no longer seems important to them. Go into a bank and attempt to deposit a reasonable sum of money and you will be urged
to speak to an ‘investment adviser’, who is, of course, nothing of the sort: his or her primary aim is not to give you dispassionate investment advice, it is to sell you a product which
will make money for the bank. It is so
transparent. No wonder people are cynical. Is it ever possible that we could get back to a situation where banks are trusted, where
banks realise that their success depends on the long-term well-being of their customers, not on selling them products which produce a profit for the bank, but may actually do the buyer financial
harm? Will we ever see again banks which know and care about the communities in which they operate, above a superficial level required to fill the pages of ‘corporate responsibility’
reports? The enforced sale of branches from Lloyds gives that possibility, but doesn’t guarantee it.

The character of Bank of Scotland took 300 years to evolve. It is tempting to think it changed overnight when the Bank merged with Halifax, but in truth it had been gradually shifting for years,
if not decades. The sales culture had been creeping in, dependence on wholesale funding had been increasing and most pernicious of all, the growth imperative had become ingrained. The Bank believed
that if it stopped growing it would lose its independence. So it made a Faustian bargain, it gave up its independence in order to keep growing.

It is fruitless to speculate on what might have been if the HBOS merger had not taken place. It did and Bank of Scotland was destroyed in seven years by men who were intelligent, hard-working
and meant well, but focused only on growth. Everything else was subordinated, with the result that they lost sight of the simple rules of banking, which had not changed since 1695.

Gone, but not forgotten

In 2012, the
Financial Times
called HBOS ‘the UK’s forgotten banking disaster’,
¹
and nearly
four years after the crash, officialdom – the Government, the Bank of England and the FSA – appeared to be doing its best to put one of the worst banking failures in history behind it.
In marked contrast to the Royal Bank where, responding to a media clamour for retribution, the Prime Minister personally encouraged the honours committee to strip Fred Goodwin of his knighthood,
the men at the very top of HBOS appeared to have got off Scot-free. Crosby was still ‘Sir James’ and chairing big companies, Lord Stevenson still held his place in the House of Lords
and at corporate top tables, and Andy Hornby had quickly found high-paying jobs, firstly as chief executive of the pharmacy chain Alliance Boots, then as head of the betting business Coral.
Astonishingly, with the apparent approval of the regulatory authorities, finance director Mike Ellis had become chairman of another mortgage lender, the Skipton Building Society. These men knew
they were now safe from any regulatory action. After fining and banning Peter Cummings, the FSA had drawn a line under its enforcement proceedings. Lloyds, whose shareholders were carrying the HBOS
burden alongside the taxpayers, preferred to get on in silence with the gory work of disposing of the vast mountain of bad and doubtful debts it had blindly acquired.

But the tens of thousands of people who had lost their jobs and the millions who had seen the value of their investment plunge by 95 per cent could not forget. By the Spring of 2013 the number
of people made redundant had reached 35,000 and the job cutting was still not over. Many had worked for HBOS, Bank of Scotland or Halifax for most of their adult lives and now found themselves in
middle age trying to find new careers in an economy flattened by the banking collapse. They faced a difficult employment market where banking
skills and experience were the
last things in demand. For most of those still lucky enough to be employed by Lloyds, life was hardly comfortable. HBOS directors may have walked away with pay-offs and annual pensions in the
hundreds of thousands of pounds, but after a series of pay-freezes or rises of less than inflation the average salary in Lloyds was just £17,000 a year – so low that many had to rely on
tax credits.

Aditya Chakrabortty, writing in the
Guardian
, highlighted ‘Karen’ (not her real name), a mother-of-two. She and her husband were struggling to pay the gas, electricity and
council tax bills. They had given up going out or taking holidays or buying treats for their children. ‘I’m going through my own financial crisis,’ she said. ‘Some of my
colleagues are on payday loans; it wouldn’t take much for me to join them.’
²

Yet she counted herself fortunate. Of workmates who joined HBOS around the same time as her, dozens had had to accept redundancies or move office, meaning in some cases a two-and-a-half-hour
commute to work. For those left, Karen added, the result had been ‘doing a lot, lot more work with a lot, lot less staff’. The stress had been so great that she had been ill. In a trade
union survey of nearly 11,000 Lloyds employees, 85 per cent said they felt stressed at work and nearly 20 per cent said they were suffering stress-related symptoms. Eight out of ten staff said they
had insufficient time to do their jobs in their contracted hours, were set unrealistic targets and were under unremitting pressure to perform well. Seven out of ten said they had too much work to
do and too many objectives. Three out of every five respondents stated that they believed Lloyds had an unfair pay system, which failed to recognise achievements. There was a lack of training and
they were uncertain about their future.
³

Having already left the bank before the crash was no guarantee of immunity. Gordon Dickson joined Bank of Scotland as a 16-year-old school leaver. In a career spanning more than 30 years he
built up shares and options worth over £1 million, a useful nest-egg to supplement his pension. The HBOS collapse wiped out nearly all of it. Now he earns his living as children’s
entertainer in one of two personae, Mr Giggles or Pirate Pete.

He described his career to the BBC: ‘You came in to the bank as a boy. You worked your way through the ranks. You learned the trade properly. You were a cautious person, because the people
before you
were cautious and you learned from them.’ He rose to become a senior risk and compliance officer: ‘My responsibilities were primarily to ensure that
the bank adhered to all the rules and regulations. We ran a very tight ship. We would jump on anything. If there was anything untoward, we wouldn’t touch it. But the whole mentality changed.
We were no longer a bank that was providing a service,’ he said. ‘We became a bank that wanted to sell to you – regardless of whether you wanted it. And the one thing it’s
very easy to sell is money.’
⁴

Following the publication of the first edition of this book, former HBOS or Bank of Scotland staff contacted me to tell me of their experiences. Some pointed out that the sales culture had been
coming in the old Bank long before the merger. One former HR manager told me that cultural change had started when Capital Bank, formerly Bank of Scotland’s Cheshire-based finance division,
North West Securities, began to attract the attention of some senior Bank executives because of its successful sales record.

‘There was some overlap especially in retention products and frequently Capital Bank performed better on these. So Bank of Scotland staff were ‘‘encouraged’’ to
adopt some of the Capital sales methods in the hope of similar success. However, Capital set themselves much more challenging targets, adopted much more aggressive sales methods, and were
apparently less concerned about longer-term customer satisfaction. Many Bank staff were very uncomfortable with this approach and saw their role to be just to get the numbers, with the threat of
failure to meet targets always present. However, management continually delivered the message that sales was what it was all about, and so the arrival of a similar culture from HBOS just speeded up
the pace of a change which was already well underway.

‘This drive to achieve profitable outcomes was also becoming something of a mantra in the business and the corporate banks, and was seen as the way to achieve further success. Its ability
to create unimagined revenue soon made corporate bank the new powerhouse. Many new staff, most of whom had accountancy backgrounds, were hired and quickly became imbued with the fast developing
culture which portrayed them as the ‘‘real guys’’.

‘The corporate senior management soon began to flex their muscles as key contributors to the bank’s bottom line and at times seemed to operate as if they were not part of the bank.
Corporate
operated increasingly independently from the bank, apparently seeing no need to conform to comparability in such [things] as pay levels and performance management,
and operating as if they were a devolved business unit with a separate, distinctive and results-driven culture. This caused much resentment especially among many of the branch managers, some of
whom expressed concern about the levels of risk being taken, but the bank executive’s response was to strongly endorse the activities of corporate.

‘As a senior HR manager, I expressed concern about the inconsistent approaches to people matters, especially pay and performance, adopted by corporate, but I’m afraid the response
usually was – ‘‘the business knows best’’. The traditional bank employment model of high security but limited remuneration was soon replaced, especially in corporate,
by one which provided high security and high – even very high – remuneration, encouraging risk-taking without real consequence. Bonuses started to rise well above the norm which in the
late ’90s in the Bank was around 20 per cent of salary, a far cry from the 100 per cent-plus I believe that followed soon afterwards.