Lloyds Banking Group has revealed an independent investigation into a colossal bank loan scam at its HBOS subsidiary that bankrupted many viable companies in the run-up to the 2008 financial crisis.
Earlier this month six individuals were jailed for a combined total of almost 50 years for their part in the fraud worth £245m, which destroyed up to 200 of the bank’s small business clients and is thought to have caused losses of £1bn at HBOS’s new parent, Lloyds Banking Group.
In a statement released yesterday, Lloyds said: “Customer cases will be considered afresh in light of all relevant evidence, including new evidence that emerged during the trial... The group deeply regrets that the criminal actions have caused such distress for a number of HBOS business customers.”
The announcement comes a day after a group of MPs urged Lloyds to compensate victims of the fraud, and blamed both Lloyds and HBOS for failing to adequately investigate allegations of criminal activity going back to 2007.
This article originally appeared in BusinessZone's sister site AccountingWeb.
The fraud was perpetrated from HBOS’s Reading division, which dealt with businesses clients suffering financial difficulties between 2003 and 2007.
Companies would find their bank accounts transferred without warning to a ‘high-risk’ team at HBOS run by Lynden Scourfield.
Scourfield, in turn, referred the companies to a ‘turnaround’ consultancy run by his business associate David Mills called Quayside Corporate Services (QCS). The trial heard that to secure these referrals Mills bribed Scourfield with thousands of pounds in cash, luxury holidays and sex parties.
QCS then saddled the businesses with extortionate adviser fees, huge additional loans, or forced them to hand over assets such as shares to the consultancy before they received crucial loan payments.
In some cases Mills and his associates also took control of companies, running them for their own benefit, before asset-stripping some of those that became insolvent.
Failure to investigate
The fraud took place before Lloyds acquired ownership of HBOS in 2009, which collapsed in the midst of the financial crisis. Lloyds has always maintained that it was a victim of the scam, which was perpetrated by a small number of individuals more than a decade ago.
However, MPs on the all-party parliamentary group on fair business banking this week found that both banks had failed to investigate detailed, highly evidenced complaints raised by affected business clients as early as 2007, both with the HBOS board and to Lloyds after it took over the bank in 2009.
“In both instances, there was an internal failure to adequately investigate the complaints,” chair of the group MP George Kerevan commented. “Further, police investigations were delayed because both HBOS and subsequently Lloyds informed the authorities that it was the bank that was the wronged party — rather than small-business customers — but that the bank had no wish to pursue a prosecution”.
Lloyds has now said that it is consulting with City watchdog the Financial Conduct Authority (FCA) about hiring a third-party to review business customers caught up in the fraud and “provide redress if appropriate”.
What has changed, and can this happen again?
Graham Down, director of corporate recovery firm Burton Sweet, told AccountingWEB that he believes despite the existence of bodies such as the FCA, who create and enforce banking regulations, the opportunity for rogue individuals such as Scourfield to exploit the system remains.
“There’s been no real change”, said Down, “the ability for someone to commit fraud – certainly in terms of legislation – remains today.
“In the early 90s banks created internal high-risk units doing a lot of the work themselves rather than farming it off to accounting firms or insolvency practitioners (IPs). The problem is, that created the environment in which the likes of Scourfield could abuse their position – no outside, independent checking.”
Lawrence Tomlinson, entrepreneur, businessman and author of an excoriating report into banks’ treatment of businesses in distress in 2013, spoke to AccountingWEB about the announcement. He said that although little had changed materially since his report was published, the exposure of customer mistreatment has at least given more credence to claims made by SMEs, which are therefore treated with more open-mindedness and credulity.
What can businesses do?
In terms of how businesses can react to such situations in the future, Graham Down believes that businesses should always seek their own independent advice, rather than simply rely on what the bank tells them. “They all have their own accountants, and if their accountant doesn’t have the skills necessary they should know an insolvency practitioner who would be prepared to have a quick look and say ‘yes, the bank are right’, or ‘no, that’s ridiculous’.
What can the government do?
According to Lawrence Tomlinson, the reality is that big banks like RBS and Lloyds remain too big and their market share is uncompetitive, leading to this type of behaviour.
“They are still too big to fail, too big to manage and, by extension, they are too big to regulate”, said Tomlinson.
“The answer is, and has always been, more competition in the banking market place”, he continued. “RBS and Lloyds need to be split into smaller banks so they not only have to value their customer, creating a natural deterrent to abusing their relationship, but also makes them capable of management and regulation (where appropriate).
“At the size they are at, no one person can possibly know how what is happening across the business, making monitoring of compliance and performance near impossible.
Writing in The Independent, Thames Valley's police and crime commissioner Anthony Stansfeld called for greater resources to be dedicated to tackling fraud. “The entire annual budget for the Serious Fraud Office is just £44m”, said Stansfeld, “yet the overall cost of losses from fraud and cyber crime is put at a staggering £200bn”.
The role of auditors
For Prem Sikka, professor of accountancy at the University of Essex, there are big questions to answer around the roles of KPMG, that audited HBOS, the auditors of the individual companies, and the various IPs involved.
“The audit of banks has never been seriously examined”, said Sikka. “There needs to be a thorough investigation into what exactly auditors do, conflicts of interest, and why auditors’ working papers are kept secret. There should be nothing confidential. Behind this wall of secrecy all kinds of corrupt practices flourish.”