HBOS

In 2006, HBOS secured the passing of the HBOS Group Reorganisation Act 2006, a private Act of Parliament that rationalised the bank's corporate structure.[6] The act allowed HBOS to make the Governor and Company of the Bank of Scotland a public limited company, Bank of Scotland plc, which became the principal banking subsidiary of HBOS. Halifax plc transferred its undertakings to Bank of Scotland plc, and although the brand name was retained, Halifax then began to operate under the latter's UK banking licence.

The provisions in the Act were implemented on 17 September 2007.

The share price peaked at over 1150p in February 2007.[7]

In 2004, Paul Moore, HBOS head of Group Regulatory Risk, warned senior directors at HBOS about excessive risk-taking. He was dismissed, and his concerns not acted on.

In March 2008, HBOS shares fell 17 percent amid false rumours that it had asked the Bank of England for emergency funding.[8] The Financial Services Authority conducted an investigation as to whether short selling had any links with the rumours. It concluded that there was no deliberate attempt to drive the share price down.[9]

On 17 September 2008, very shortly after the demise of Lehman Brothers, HBOS's share price suffered wild fluctuations between 88p and 220p per share, despite the FSA's assurances as to its liquidity and exposure to the wider credit crunch.[10]

However, later that day, the BBC reported that HBOS was in advanced takeover talks with Lloyds TSB to create a "superbank" with 38 million customers. That was later confirmed by HBOS. The BBC suggested that shareholders would be offered up to £3.00 per share, causing the share price to rise, but later retracted that comment.[11][12] Later that day, the price was set at 0.83 Lloyds shares for each HBOS share, equivalent to 232p per share,[13] which was less than the 275p price at which HBOS had raised funds earlier in 2008.[14] The price was later altered to 0.605 Lloyds shares per HBOS share.[15]

To avoid another Northern Rock-style collapse, the UK government announced that should the takeover go ahead, it would be allowed to bypass competition law.

Alex Salmond, Scotland's First Minister, previously an economist, said of the takeover:

"I am very angry that we can have a situation where a bank can be forced into a merger by basically a bunch of short-selling spivs and speculators in the financial markets."[16]

On 18 September 2008, the terms of the recommended offer for HBOS by Lloyds TSB were announced. The deal was concluded on 19 January 2009.[17] The three main conditions for the acquisition were:

• Three quarters of HBOS shareholders voted in favour of the board's actions;[5]
• Half of Lloyds TSB shareholder voted to approve the takeover;[18]
• UK government dispensation with respect to competition law.

A group of Scottish businessmen challenged the right of the UK government to approve the deal by over-ruling UK competition law, but this was rejected. The takeover was approved by HBOS shareholders on 12 December.

Prime Minister Gordon Brown personally brokered the deal with Lloyds TSB. An official said: "It is not the role of a Prime Minister to tell a City institution what to do".[19] The Lloyds TSB board stated that merchant banks Merrill Lynch and Morgan Stanley were among the advisers recommending the takeover.[5]

Lloyds Banking Group said Edinburgh-based HBOS, which it had absorbed in January, made a pre-tax loss of £10.8bn in 2008. Andy Hornby, the former chief executive of HBOS, and Lord Stevenson of Coddenham, its former chairman, appeared before the Commons Treasury Committee to answer questions about the near-collapse of the bank. Hornby said: "I'm very sorry what happened at HBOS. It has affected shareholders, many of whom are colleagues, it's affected the communities in which we live and serve, it's clearly affected taxpayers, and we are extremely sorry for the turn of events that has brought it about."

On 13 October 2008, Gordon Brown's announcement that government must be a "rock of stability" resulted to an "unprecedented but essential" government action: the Treasury would infuse £37 billion ($64 billion, €47 billion) of new capital into Royal Bank of Scotland Group Plc, Lloyds TSB and HBOS Plc, to avert financial sector collapse or UK "banking meltdown". He stressed that it was not "standard public ownership", as the banks would return to private investors "at the right time".[20][21] The Chancellor of the Exchequer, Alistair Darling, claimed that the British public would benefit from the rescue plan, because the government would have some control over RBS in exchange for about £20 billion of funding. Total State ownership in RBS would be 60%, and 40% for HBOS.[22] Royal Bank of Scotland said it intended to raise £20 billion ($34 billion) capital with the government's aid; its chief executive Fred Goodwin resigned. The government acquired $8.6 billion of preference shares and underwrote $25.7 billion of ordinary shares. Thus, it intended to raise £15 billion (€18.9 billion, $25.8 billion) from investors, to be underwritten by the government. The State would pay £5 billion for RBS, while Barclays Bank raised £6.5 billion from private sector investors, with no government help.[23] Reuters reported that Britain could inject £40 billion ($69 billion) into the three banks including Barclays.[24]

In 2015, an investigation by the Prudential Regulation Authority and Financial Conduct Authority blamed the failure requiring the bailout on the bank's executives, as well as being critical of the Financial Services Authority (FSA), the then-regulator. A parallel investigation into the FSA's enforcement process concluded it was too late to fine responsible executives, but up to 10 former HBOS executives could be banned from the financial services industry.[25]

Causes of failure were identified as follows:

• The board failed to instil a culture within the firm that balanced risk and return appropriately, and it lacked sufficient experience and knowledge of banking.[25]
• There was a flawed and unbalanced strategy and a business model with inherent vulnerabilities arising from an excessive focus on market share, asset growth and short-term profitability.[25]
• The firm's executive management pursued rapid and uncontrolled growth of the Group's balance sheet. That led to an over-exposure to highly cyclical commercial real estate (CRE) at the peak of the economic cycle.[25]
• The board and control functions failed to challenge effectively the pursuit of that course by the executive management, or to ensure adequate mitigating actions.[25]
• The underlying weaknesses of HBOS's balance sheet made the Group extremely vulnerable to market shocks and eventual failure as the crisis in the financial system intensified.[25]

After putting the investigation on hold in 2013, in April 2017, the Financial Conduct Authority resumed its probe of "the way HBOS handled fraud allegations at its Reading branch".[26]

On 21 June 2019, the Financial Conduct Authority fined the Bank of Scotland £45.5 million over its failure to report suspicions of fraud at its Reading branch which led to the jailing of six people. The authority said that the bank "risked substantial prejudice to the interests of justice" by withholding information. The fine was reduced by almost £20m because the bank agreed to settle.[27]

In December 2008, the British anti-poverty charity, War on Want, released a report documenting the extent to which HBOS and other UK commercial banks invested in, provided banking services for, and made loans to arms companies. The charity wrote that HBOS held shares in the UK arms sector totalling £483.4 million, and served as principal banker for Babcock International and Chemring.[28]

Neighbouring Halifax and Lloyds TSB branches outside Crossgates Shopping Centre, Cross Gates, Leeds.

During 2003, The Money Programme uncovered systemic mortgage fraud throughout HBOS. The Money Programme found that during the investigation, brokers advised the undercover researchers to lie on applications for self-certified mortgages from, among others, the Bank of Scotland, the Mortgage Business and Birmingham Midshires.[29] All three were part of the Halifax Bank of Scotland Group, Britain's biggest mortgage lender. James Crosby, head of HBOS at the time, refused to be interviewed in relation to the exposed mortgage fraud. Further examples of mortgage fraud have come to light, which has seen mortgage brokers take advantage of fast track processing systems, as seen at HBOS, by entering false details, often without the applicant's knowledge.

In 2002, HBOS dropped the Bank of Wales brand and absorbed the operations into Bank of Scotland Business Banking.

On 13 February 2009, Lloyds Banking Group revealed losses of £10bn at HBOS, £1.6bn higher than Lloyds had anticipated in November because of deterioration in the housing market and weakening company profits.[30] The share price of Lloyds Banking Group plunged 32% on the London Stock Exchange, carrying other bank shares with it.[30]

In September 2012, Peter Cummings, the head of HBOS corporate banking from 2006 to 2008, was fined £500,000 by the UK financial regulator over his role in the bank's collapse. The Financial Services Authority (FSA) also banned Cummings from working in the banking industry. The losses in his division exceeded the initial taxpayer bailout for the bank in October 2008.[31][32]

On 3 October 2010, Lynden Scourfield, former director of mid-market high-risk at Bank of Scotland Corporate, his wife Jacquie Scourfield, ex-director of Remnant Media Tony Cartwright, and ex-NatWest banker David Mills, were arrested on suspicion of fraud by the Serious Organised Crime Agency.[33][34] The scandal centred around Scourfield's use of his position to refer companies to Quayside Corporate Services, owned and operated by David Mills, for "turnaround" services which Quayside was unqualified to provide. Several members of Quayside's staff had criminal records for embezzlement. Customers were allegedly inappropriately pressured to take on excessive debt burdens and to make acquisitions benefiting Quayside.[35]

On 30 January 2017, following a four-month trial, former HBOS employees Scourfield and Mark Dobson were convicted of corruption and fraud involving a scheme that cost the bank £245m;[36] Scourfield pleaded guilty to six counts including corruption, and Dobson was found guilty of counts including bribery, fraud and money laundering.[37] The court also convicted David Mills, Michael Bancroft, Alison Mills, and John Cartwright for their parts in the conspiracy.[37] On 2 February 2017, David Mills was jailed for 15 years, Scourfield for 11 years and three months, and Bancroft for 10 years. Dobson was sentenced to four and a half years, and Alison Mills and Cartwright were given three-and-a-half-year sentences for money laundering.[38] Following the convictions, the BBC reported:

"Businessmen Bancroft and Mills arranged sex parties, exotic foreign holidays, cash in brown envelopes and other favours for Scourfield between 2003 and 2007. In exchange for the bribes, Scourfield would require the bank's small business customers to use Quayside Corporate Services, the firm of consultants run by Mills and his wife Alison. Quayside purported to be turnaround consultants, offering business experience and expertise to help small business customers improve their fortunes, but far from helping turn businesses around, Mills and his associates were milking them for huge fees and using their relationship with the bank to bully business owners and strip them of their assets. In cash fees alone, according to prosecutors in the trial, £28m went through the accounts of Mills, his wife and their associated companies. […] Mills and his associates used the bank's customers and the bank's money dishonestly to enrich themselves." [37]

The BBC added: "A decade on, HBOS's owner Lloyds Banking Group still has not acknowledged the full scale of the fraud - or offered to compensate its victims"; the broadcaster noted that the fraud was first discovered in 2007 by the bank's customers Nikki and Paul Turner, who used publicly available records to uncover it, but that after the Turners submitted their evidence to the bank it dismissed their claims and tried to repossess their home.[37] Following the convictions, the background to the case was reported on BBC Radio Four's File on Four programme on 31 January 2017.[39] Lloyds is taking a £100m hit paying compensation to the victims.[40]

Noel Edmonds, a celebrity victim of the scam, reached a settlement with the bank in July 2019.[41] Dame Linda Dobbs is chairing an independent inquiry into the investigation and reporting of the fraud.[41]

Bank of Scotland plc was the banking division of the HBOS group, and operated the following brands:

• Bank of Scotland
• Bank of Scotland Private Banking
• Bank of Scotland Treasury Services
• Birmingham Midshires
• Halifax
• AA Savings (the same brand also used Bank of Ireland for some accounts)
• Halifax Financial Services (Holdings) Ltd
• Halifax Investment Fund Managers Ltd
• Halifax Share Dealing Limited
• Halifax Unit Trust Management Ltd
• Intelligent Finance
• Sainsbury's Bank (50%) – holding sold to J Sainsbury plc on 31 January 2014.
• The Mortgage Business (TMB)
• Blair, Oliver & Scott (Debt recovery)
• St James's Place Bank

• Banco Halifax Hispania – rebranded as Lloyds Bank International in 2010 and sold to Banco Sabadell in 2013.
• Bank of Scotland Corporate
• Bank of Scotland International – transferred to Lloyds TSB Offshore in 2012, which became Lloyds Bank International in 2013.
• Bank of Scotland Investment Services
• Bank of Scotland (Ireland), trading as Halifax since 2006 and closed down on 31 December 2010.
• Bank of Scotland, Amsterdam branch - trading as Lloyds Bank since 2013 (savings) and 2014 (mortgages).
• Bank of Scotland, Berlin branch

HBOS Australia was formed in 2004 to consolidate the group's holdings in Australia. It consisted of the following subsidiaries:

• Capital Finance Australia Limited
• BOS International Australia Ltd

On 8 October 2008, HBOS Australia sold its Bank of Western Australia and St Andrew's Australia Pty Ltd subsidiaries for approximately A$2bn to Commonwealth Bank of Australia.[42]

The group's businesses in Australia were sold to Westpac in October 2013.[43][44]

HBOS Insurance & Investment Group Limited manages the group's insurance and investment brands in the UK and Europe. It consisted of the following:

• St James's Place Capital (60%)
• Halifax General Insurance Services Ltd
• St Andrew's Group
• Clerical Medical

It also used to own UK investment manager Insight Investment Management Limited.[45] The Bank of New York Mellon acquired Insight in 2009.[46][47][48]

• Alan Cameron, Bank of Scotland, 1695–1995: A Very Singular Institution, Mainstream Publishing (20 April 1995), ISBN 1-85158-691-1
• Peter Pugh, The Strength to Change: Transforming a Business for the 21st Century, Sponsored Publishing (29 October 1998), ISBN 0-670-88049-3