HBOS dangerously ‘out of control’ under James Crosby

THE impression that Halifax Bank of Scotland (HBOS) was dangerously out of control under former chief executive Sir James Crosby has been reinforced by claims from a former insider.

Tim Hicks, who worked as an accountant in the bank’s insurance arm, Clerical Medical Europe, alleges that there was “a catastrophic failure of controls” within that business.

Hicks said he alerted his bosses to serious anomalies — including employees buying cigarettes on expenses and the sales director giving passwords to the accounting and audit system to a temporary secretary.

However Hicks said no one in HBOS’s ‘control community’ — who included senior people in compliance, risk management, human resources and audit accountants — saw anything wrong with such behaviour, even though it contravened the bank’s codes of conduct and constituted a material controls failure that opened the bank up to the risk of fraud.

“There was a catastrophic failure in the entire control community within HBOS,” said Hicks. “It was made up of professionally incompetent yes men, who would not stand up against failures in control for fear of being seen to ‘rock the boat’. Meanwhile, the sales people were treated like kings.”

Hicks, a qualified chartered accountant since 1986, made the claims in a submission to the Treasury Select Committee’s inquiry into the causes of the banking crisis. He has worked in financial services for most of his career but said the controls situation at HBOS under James Crosby “was certainly the worst I have come across.“ He said even basic control concepts, such as that no-one should approve their own expenses, were ignored.

Hicks said: “An awful lot of people were paid an awful lot of money to control HBOS but they just took the money and didn’t bother.”

He blames the sales-driven culture at the bank, which came close to bankruptcy last September and has since succumbed to a rescue takeover by Lloyds TSB. Anything that got in the way of shifting products was perceived as a nuisance by the bank’s senior management under James Crosby, said Hicks.

Hicks believes that recent media coverage has given the impression that the governance failures at HBOS, led by James Crosby from September 2001 to June 2006, occurred solely at board level. However, in evidence submitted to the Treasury Select Committee, he revealed the problem was endemic.

Hicks’s specific allegation — which ultimately caused him to be fired by the Edinburgh-headquartered bank — was that the sales director of Clerical Medical Europe (CME) gave away all the passwords to finance systems to a temporary secretary in September 2004.

This made it possible for the temp to authorise hundreds of thousands of euros of expenditure and make entries in the accounting records, opening up the bank to the possibility of material fraud.

He added that one CME director approved expense claims unsupported by receipts and without bothering to check them — including claims for cigarettes.

Hicks warned his bosses of the irregularities, adding that the risk of fraud and abuse was compounded by the absence of any formal expenses policy at CME. However they ignored the red flags and ultimately dismissed him for his pains.

This mirrors the bank’s treatment of former head of group regulatory risk, Paul Moore, who was personally fired by James Crosby on 23 November 2004 after he alerted the board that they had embarked on a self-destructive course. “I was forced out because I had opposed failures in financial control,” said Hicks.

Hicks also said that he was surprised when CME — which has operations in Austria, Germany, Italy, Luxembourg and the Netherlands —hired a hotel for a corporate briefing which he believes could just as readily have been held on corporate premises. In the evening the insurer’s board directors appeared on stage dressed in women’s underwear and singing from the Rocky Horror Picture Show and Abba, led by chief executive Mike Robinson.

“That is not the sort of behaviour that directors in a bank should indulge in,” said Hicks.

Hicks was surprised when senior executives in HBOS — including its highest-ranking staff in compliance, risk, internal audit, human resources, group audit committee, data protection and information technology — supported the findings of an internal investigation that ruled that allowing a temp to approve invoices and expenditure did not represent a controls failure.

He added: “The conduct of the HBOS directors fell far below the level of skill and propriety one would expect in a regulated industry.” James Crosby retired as HBOS chief executive in July 2006 at the age of 50, handing over the reins to so-called “wunderkind” Andy Hornby, who was 39.

Hicks subsequently took CME to a Luxembourg industrial court and won a case for unfair dismissal. Solicitors Linklaters provided erroneous sales information to the court. He has also written to the former head of HBOS’s audit commit Anthony Hobson, alleging that the bank has sought to cover-up material failures of financial controls and that he was forced out because of the legitimate concerns that he raised.

HBOS, now part of Lloyds Banking Group, declined to comment.

This is the unedited version of the business splash published in The Sunday Times on 26 April 2009