Paul Moore: James Crosby sacrificed risk management on the altar of growth

HBOS under Crosby — a bank out of control?

Another former senior executive at HBOS has come forward to admit that the bank threw caution and prudence to the wind in its pursuit of sales and market share under its former chief executive Sir James Crosby.

Paul Moore, the Edinburgh headquartered bank’s head of group regulatory risk between 2002 and 2004, told BBC2’s the Money Programme that: “I think a concern everybody had [was] whether or not the business was under control.”

He suggests the bank became so obsessed with growth under Crosby that risk management was sidelined.

Crosby’s dash for growth, which was dependent on wholesale funding, and which was a strategy that his successor, Andy Hornby, continued to pursue after Crosby quit in July 2006, left HBOS with a fatal funding gap when the wholesale funding markets froze in the wake of the collapse of Lehman Brothers in September.

Bizarrely, given his culpability for HBOS’s collapse, Crosby is now leading a government review of the UK’s now sclerotic mortgage market. He is also leading the Government’s public private forum on identity management and is deputy chairman of City regulator, the Financial Services Authority.

In the five years between 2002 and 2007, HBOS almost doubled its asset base from £355bn to £666bn, with much of this growth funded not by deposits but by the wholesale market.

In an interview on the Money Programme, Paul Moore said that the pace of growth reflected a new “premier sales and marketing culture” on the Mound. Asked what the consequences were, Moore said: “Well, you can be forcing colleagues to sell things to customers that they don’t need or are not suitable for their needs as required – overselling loans, etc.

“I think it was a major change – to change a bank from a fuddy-duddy, musty old place to a shopping centre, to a supermarket-type culture. The retail bank was going at breakneck speed and the internal risk and compliance function [felt] like a man in a rowing boat trying to slow down an oil tanker. I’m not saying that there were any bad intentions in that but it was difficult to slow things down.”

On the same programme (Credit Crash Britain, Episode One), mortgage expert Ray Boulger of John Charcol said: “[HBOS] ales staff were bonused on the basis of how many mortgages they sold, and one criticism one could make of that bonus structure is it didn’t reflect the arrears record or the quality of those mortgages it was solely about the number of mortgages sold.”

HBOS’s retail arm was, at that time, led by Hornby, who formerly ran the George clothing range at Asda. Last month he resigned as HBOS’s chief executive after it emerged the taxpayer would have to make an £11.5bn capital injection to prevent the bank’s collapse, as a result of his recklessness.

Moore, whose role was to ensure that the sales culture was kept in check by internal risk management (including the old-fashioned notion that a bank should only lend to people it knew and who it deemed capable of repaying their loans) claims that, when he was made redundant in November 2004, there was “a long way to go” to ensure that risk was properly managed.

“You have risks to customers. You also have risks to colleagues. And you have risk to the whole financial system because you’re obviously going to need more liquidity to cover the volume of business that you’re actually doing.”

He believes that a “broad-ranging inquiry” is now required “to investigate in some detail all of the things that happened … because out of that will come lessons”.

The BBC also obtained a copy of an internal HBOS report revealing that the FSA was concerned about the impact of the bank’s ‘spivvish’ culture. In 2003, the FSA wrote to the bank to express concern that its risk-management and control mechanisms had failed to keep pace with the “increasingly sales-driven operation.”

An HBOS spokesman claimed: “We have always managed our business in a measured and responsible way. We continually challenge our working practices and Mr Moore would have been part of that. We’re more than surprised by his comments.”

• Credit Crash Britain: HBOS, Breaking The Bank, will be broadcast on BBC Two on Thursday 30th October 2008. It is part of a special five-part series examining the credit crunch.
• To read an opinion piece on HBOS’s suicidal approach to banking, click on The tragic endgame of a once proud bank, written by Alf Young of The Herald

This blog post was published on 29 October 2008