Bank of Scotland fined £45m over failure to report fraud suspicions

Lloyds Banking Group's Bank of Scotland subsidiary has been fined £45.5 million (€51 million) by the UK financial watchdog over its failure to report suspicions of fraud at its Reading branch that forced dozens of small companies out of business.

Halifax Bank of Scotland did not fully disclose its suspicions about misconduct in the 2003-07 fraud until July, 2009, after it had been rescued by Lloyds. But the Financial Conduct Authority said on Friday that HBOS staff had become suspicious as early as May 2007, and had repeatedly "failed properly to understand and appreciate the significance of the information", despite "clear warning signs".

“BoS’s failures caused delays to the investigations by both the FCA and Thames Valley Police,” said Mark Steward, FCA executive director of enforcement and market oversight. He added that this had led to delays for victims of the scam in receiving compensation.

The fraud centred on HBOS’s Reading-based Impaired Assets team, which dealt with small companies in financial distress.

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Lynden Scourfield, its director, referred clients to restructuring consultancy Quayside Corporate Services as a condition of further credit, receiving in exchange expensive gifts, cash, luxury holidays and sex with prostitutes. QCS then extracted huge fees from the businesses and in some cases took them over for its own benefit.

Six people including Mr Scourfield and Mark Dobson, another former HBOS employee, were jailed for their roles in the fraud in 2017. The FCA on Friday banned both men from working in financial services, alongside two others involved in the fraud.

The regulator said there had been “insufficient challenge, scrutiny or inquiry across the organisation and from top to bottom” at Bank of Scotland.

António Horta-Osório, Lloyds chief executive, said on Friday that the scandal amounted to “a dark period in HBOS’s history”, and that Lloyds had “committed to putting things right”.

Lloyds set up a scheme in 2017, managed by professor Russel Griggs, to compensate victims, although it agreed last month to review the scheme after criticism from the FCA and campaigners.

Friday’s fine was reduced from £65 million because Bank of Scotland co-operated with the FCA. However, Nikki Turner, director of the SME Alliance, a campaign group set up to represent victims of HBOS Reading and other banking frauds, said it was “insulting that Lloyds receives a discount for being a ‘good boy’,” and called for a further investigation of senior executives.

Lloyds has been accused of covering up a critical 2013 internal report about the fraud and last year paid compensation to the whistleblower who produced it. An independent review led by retired High Court judge Linda Dobbs is investigating Lloyds’ handling of the fraud after the acquisition, and is expected to report her findings next year. – Copyright The Financial Times Limited 2019