The Financial Conduct Authority (FCA) has today

1. fined Bank of Scotland (BOS) £45,500,000 for failures to disclose information about its suspicions that fraud may have occurred at the Reading-based Impaired Assets (IAR) team of Halifax Bank of Scotland.

The FCA found that

1. BOS failed to be open and cooperative and failed to disclose information appropriately to the then regulator, the Financial Services Authority (FSA).

The FCA has also

1. banned four individuals from working in financial services due to their role in the fraud at HBOS Reading. They are Lynden Scourfield, Mark Dobson, Alison Mills and David Mills.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:

‘Bank of Scotland failed to alert the regulator and the police about suspicions of fraud at its Reading branch when those suspicions first became apparent.​​​​​ BOS’s failures caused delays to the investigations by both the FCA and Thames Valley Police.

There is no evidence anyone properly addressed their mind to this matter or its consequences.

The result risked substantial prejudice to the interests of justice, delaying scrutiny of the fraud by regulators, the start of criminal proceedings as well as the payment of compensation to customers.’

Key aspects of the case:

1. BOS identified suspicious conduct in the IAR team in early 2007. The Director of the Impaired Asset Team at the Reading branch, Lynden Scourfield, had been sanctioning limits and additional lending facilities beyond the scope of his authority undetected for at least three years.
2. BOS knew by 3 May 2007 that the impact of these breaches would result in substantial losses to BOS.
3. Over the next two years, on numerous occasions, Bank of Scotland failed properly to understand and appreciate the significance of the information that it had identified despite clear warning signs that fraud might have occurred.
4. There was insufficient challenge, scrutiny or inquiry across the organisation and from top to bottom. At no stage was all the information that had been identified properly considered.
5. There is also no evidence anyone realised, or even thought about, the consequences of not informing the authorities, including how that might delay proper scrutiny of the misconduct and prejudice the interests of justice.
6. It was not until July 2009 that BOS provided the FSA with full disclosure in relation to its suspicions, including the report of the investigation it had conducted in 2007.
7. BOS also did not report its suspicions to any other law enforcement agency. The FSA reported the matter to the National Crime Agency (then the Serious Organised Crime Agency) on 26 June 2009.
8. In 2017, following an investigation by Thames Valley Police, six individuals including Lynden Scourfield and another BOS employee, Mark Dobson, were sentenced for their part in the fraud committed through the IAR.

FCA VIEW

1. If BOS had communicated its suspicions to the FSA in May 2007, as it should have done, the criminal misconduct could have been identified much earlier.
2. The delay also risked prejudice to the criminal investigation conducted by Thames Valley Police.
3. Full disclosure would also have allowed the FSA, at an earlier opportunity, to assess BOS’s response to the issue and its approach to customers and complaints.
4. Commercial lending was and still is largely unregulated in the UK which meant that the activities of IAR were not subject to specific rules imposed by the FSA. For example, conduct of business rules and complaints handling rules did not apply. However, BOS was required to be open and cooperative with the FSA, and the FSA would reasonably have expected to have been notified of BOS’s suspicions that a fraud may have been committed in May 2007.

AGREED

1. BOS agreed to resolve the matter and qualified for a 30% (stage 1) discount. Were it not for this discount the FCA would have imposed a financial penalty of £65,000,000 on BOS.

Notes to editors

The final notice for Bank of Scotland.

The final notices for Lynden Scourfield, Mark Dobson, Alison Mills and David Mills.

On 4 June 2010, the FSA appointed investigators to start looking at BOS’s misconduct but, at the request of Thames Valley Police, the investigation was placed on hold on 21 August 2013 until after the criminal prosecution of relevant individuals had been completed. The FCA restarted the investigation in February 2017.

BOS has been authorised by the FSA/FCA since 1 December 2001, initially as part of the HBOS Group. Following the failure of the HBOS Group in October 2008 it was formally acquired by Lloyds TSB on 16 January 2009 and BOS became part of the merged Lloyds Banking Group (LBG). The FCA’s investigation has focused on BOS’s conduct before it became part of LBG.

In 2012 FSA imposed a public censure on Bank of Scotland for failures related to its Corporate Banking Division.

LBG implemented a review of the cases of customers who may have been affected by the fraud. The review was conducted voluntarily by LBG, and is outside the Authority’s remit as the corporate lending involved was unregulated. LBG appointed an independent reviewer, Professor Russel Griggs, to review the information provided and determine the appropriate amount of redress for customers. LBG has estimated that the total compensation amount to all customers (including those outside the review) could be up to £115 million. LBG has commissioned an independent review to provide assurance that the Griggs Review methodology is delivering fair and reasonable outcomes for customers. The Assurance Review will be led by Sir Ross Cranston and LBG has committed to publish in full the findings of that review once it is completed.

https://www.fca.org.uk/news/press-releases/fca-fines-bank-scotland-failing-report-suspicions-fraud