The HBOS fraud scandal back in 2007 is challenging the FCA. Is it doing its job properly or should the FCA be shut down? Quick Loans Express find out…

Story Highlights:

  • The Reading HBOS fraud scandal
  • The role of the FCA in overseeing regulated activities
  • How far the FCA mishandled allegations of misconduct at HBOS – regulation of commercial lending in the UK; a comparison of the FCA and its predecessor; the delay in starting an investigation
  • Conclusion – should the FCA be shut down

Should the FCA be Shut Down?

At the beginning of May 2018, the Treasury Committee continued its investigation into the way banks mistreated small business owners, and how the Treasury can protect small businesses in the future.

Nikki Turner, one of the owners directly affected by the fraud scandal at the Reading branch of HBOS (Halifax Bank of Scotland), was highly critical of the FCA. She said that it was incapable of handling complaints about the financial institutions it regulates. Quick Loans Express, a direct loans lender, investigate the truth of her remarks.

In this article, we briefly explain the fraud at HBOS which affected Mrs Turner, and which resulted in the 6 bankers being given a total of 47 years and 6 months in prison. We then look at the role of the FCA – not only towards consumers but also in their regulation of the financial sector. How fair were Mrs Turner’s criticisms? Should the FCA be shut down and replaced with something else?

The Reading HBOS Fraud Scandal

Mr and Mrs Turner’s story is typical of what happened to the other 66 small- and medium-sized business owners who applied for commercial loans from the Reading branch of the HBOS. Once HBOS approved their £160,000 loan, HBOS bankers encouraged them to use the consultancy firm QCS (Quayside Corporate Services) for their music publishing business. They didn’t know that bribes is how this consultansy firm and the bankers had this relationship.

When Mrs Turner and her husband realised how ineffective the consultants were (especially considering their extortionate fees), they ended their business relationship in 2007. As a result, the bank called in their loan, the couple lost their business and spent the next decade dealing with court enforcement actions such as visits from bailiffs, having lost an estimated £11 million.

During the period 2007-17 Mrs Turner felt that neither she nor the other owners (firms whom the corrupt HBOS bankers deliberately pushed under) received the necessary aid from the FCA. She set up the lobbying group ‘SME Alliance‘ as part of her fight against banks’ misconduct towards small businesses.

When asked about the regulatory body’s investigation of the bank, Mrs Turner said the answer was to “sack the FCA and start again.”

Before considering how fair her condemnation of the FCA is, let’s explain what their role is.

What is the Role of the FCA in Overseeing Regulated Activities?

The FCA has two main roles. The first is to protect market integrity. This means they oversee the conduct or business ethos of companies offering financial products. They ensure that they operate in a way that is fair and aboveboard. This role is closely linked to their second reason for being, which is to protect consumers. They make sure that consumers are able to make well-informed decisions about the financial products they buy and banks compensate when they are misled or things go wrong.

Mrs Turner believes that she, and other business owners, were let down badly by the FCA. Is she right?

How Far Did the FCA Mishandle Allegations of Misconduct at HBOS?

There are a number of issues to explain why the FCA didn’t do anything sooner even after Mrs Turner had brought her allegations to their attention.

Who Regulates Commercial Lending in the UK?

According to the Financial Services & Markets Act of 2000, small – or medium-sized business loans don’t come under the remit of the FCA. This is because the FCA classifies them as commercial lending. The loans of many SME owners (like Mrs Turner’s loan of £160,000) might have been smaller than many mortgages. However, they aren’t consumer credit.

Despite this, in 2013 the FSA (the FCA’s predecessor) took the unprecedented step of issuing a warning to Lloyds Banking Group (who took over HBOS after the financial crisis). They warned about the possibility of fraud at HBOS, and added,

“such allegations may also indicate wider concerns in relation to governance and culture within (the bank)”

In other words, they were implying that a financial institution had to act with complete integrity across all of its activities whether they the FSA regulated or not. Another point to emphasise is that Mrs Turner’s complaints are really directed at the FSA since they occurred in 2003-7. Have things changed since the FCA took over?

Is the FCA any Better than its Predecessor?

The FCA isn’t the FSA or the OFT under a different name. Let’s take the example of the HCSTC market. From instant payday loans from direct lenders to rent-to-buy, the FCA play a dynamic and active role in improving outcomes for consumers.

It is doubtful if these victims of fraud would receive the same treatment nowadays. Since 2016, the FCA changed the way that they investigate claims of misconduct. Under the FSA, the burden of proof was on the accuser. The FCA takes a different view. Since 2016, they consider senior managers as responsible as their employees lower down the hierarchy. This is because the FCA believes that the attitudes in a financial institution filter down from those higher up.

Why the Delay in Starting an Investigation?

The FCA has said that the reason that it didn’t act sooner was that the £7 million police investigation into HBOS took over 6 years. During this period, the Thames Valley police asked the regulatory body to halt their own investigation.

Since the bankers’ convictions in February 2018, the police reopened the case to see how much senior management at HBOS knew, and whether there was an attempted cover-up.

Conclusion – Should the FCA be Shut Down?

Mrs Turner is right to be furious about how HBOS treated her. However, her anger towards the FCA is perhaps misplaced. Changes in the regulatory body and the way it handles complaints suggest that what happened to her and other SME owners in 2007 wouldn’t happen nowadays. Therefore, should the FCA be shut down? We see no reason for it.

When the FCA officially publish the report report the matter, there will also be recommendations for future action. This more than anything will ensure that future victims of misconduct by banks will be better protected.

Taylor Rose
Taylor has been an avid writer since her early school days. At 5, she was creating candy floss planets where heroic candy canes stood up to the evil Russel Sprout. Later, she was documenting historic events, and her writing was always appreciated by all who read it. After working as a program developer for many years, she traded her successful career to make a living out of her writing skills. Nowadays, Taylor helps the Quick Loans Express blog bring current and useful information to people looking for helpful financial advice online – hopefully with a fun twist!

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