The following is a guest post by Professor Atul K. Shah reflects on the implications of the ‘Turnbull Report' on HBOS, recently leaked:
A Bank is a very special institution at the heart of economic life. That is why its licencing is restricted and supervision is very close and tight. One of the largest British Banks, HBOS rose and collapsed spectacularly in a period of seven years — and the detailed reasons behind this scandal have only come as a drip feed, and often after lots of public anger and pressure. Alongside regulators, auditors have a significant role in independent monitoring and reporting, but no warnings were raised by them prior to the collapse of HBOS. The eventual cost of the failure may never be known, but the latest estimate suggests it as £52billion, making it the highest corporate failure in British history. In my extensive academic analysis over this scandal, now published as a Routledge book, there was a forensic study of this failure, demonstrating that politics was at the heart of the mis-management and audit and regulatory failures.
It is now known that there was a specific tumour in the history of HBOS. This was fraud at its Reading branch, which was known and covered up, not only by the original HBOS management, but also by the new Lloyds bosses who took over the collapsed Bank. This was known about since 2004, but was covered up in the final year of the Bank, even when it was known to be material and should have been reported to shareholders. Purely through the diligence of customers who had been defrauded, and some excellent police leadership, criminal charges against the fraudsters were successful, and the main criminals finally put behind bars in 2017.
Whistle-blowers like Paul Moore and Sally Masterston, who had warned of the excessive risks and fraudulent behaviour, were fired for their courage in speaking truth to power. Even the police commissioner, raised serious concerns about the regulatory and audit cover-ups over this scandal, aghast at the lack of public scrutiny and accountability of the over-seers. Regulators, with highly skilled staff and public resources, rather than tackling the fraud at its root, colluded to hide it and cover it up.
In 2013, an inside report was commissioned by Lloyds. This is now known as the Turnbull Report. It was written by an experienced accountant, risk manager and auditor named Sally Masterston. It suggested very serious mis-conduct over the Reading scandal, from auditors, consultants, regulators, and management. She alleged criminal behaviour of key professional supervisors and consultants, who, she said, knowingly looked away from the fraud or profited from it. This report, because it was explosive in its potential impact to senior Directors and influential accountants, was covered-up until leaked last week to the public, five years after its original writing. It makes for very embarrassing reading about the scale of the collusion, and the series of lies and cover-ups perpetrated by senior management.
The Turnbull evidence further highlights the fundamental problems we have within our financial regulatory system, which is flawed, ineffective, and captured by powerful interests. The result was a huge and continuing loss to the public purse. Regulators rely on the management to control and monitor. They in turn rely on professionals to ‘independently' endorse risky culture or accounting, but no-one gets punished or imprisoned when things go pear-shaped.
Academics, whose public duty it is to speak truth to power, often look away at such major crises, in the narrow-minded pursuit of their careers and research publications, looking for high theory and ivory tower breakthroughs.
In the meantime, the public gets duped and paralysed by a lack of power and technical know-how to challenge the fundamentals.
What Turnbull shows is how far professionals lost any sense of culture and conscience, and how greedy they became in the pursuit of private profit at any cost. And it also shows how regulators have lost the might to challenge. I n the process they have become highly politicised and captured by powerful interests. This has to stop.
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The responses of the Bank’s executives, which go far further than mere ‘cover up’, leave them with no credible defence against suspicions that they don’t really mind a fraud that’s profitable to their bank, no matter how damaging to their customers; and, further, that they are determined to entrain a culture in which bringing such a fraud to light will be severely punished.
Their bailout should have progressed to a full nationalisation, and a programme of reform and change of culture, controlled by state-appointed managers within the bank.
This may yet happen: and I see no sign that their boardroom peers in other banks, investment funds, and FTSE-100 companies are taking action – no more sinecure directorships! – against such dangerous fools, who might bring down such measures on us all.
Is there room for a class action by people who were badly effected by this against the people identified in the Turnbull report? I’m sure significant money could be raised for such legal action by crowdfunding.
I think this is underway
Noel Edmonds is leading the way
When you think of the pain and suffering caused by austerity and then you read something like this above……………I think I will leave it to my favourite libertarian economist to sum this up.
“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”
― Frédéric Bastiat
“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”
Frédéric Bastiat
To which the only social response resides in the message of the following paper:-
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3471369/
Thanks for that
The figures linked to below are not up to date but are worth keeping an eye on to see if this issue affects customers joining Lloyds Banking Group.
https://www.google.co.uk/amp/s/www.lovemoney.com/news/amp/43887/the-banks-and-building-societies-were-all-switching-to
Also worth keeping an eye on TSB after their recent problems.
My point here is how big a “Ratners” moment (remember that) do businesses need to have before customers vote with their feet.
Talking of TSB, it was not so long ago that banking systems weren’t so far off Windows 3.1.
Talking to people in the banking industry, these problems are the tip of the iceberg, that’s before PPI is touched upon.
Some databases used would pre-date the Windows 3.1 era
Multiply patched old mainframe porgrams still exist
I choose not to comment on that.
Mostly, because all the really cynical and can’t-possibly-be-true comments are in The Register, on any one of several news stories about recent retail banking ‘outages’.
I would suggest that there are a number of bank systems which pre-date Microsoft (let alone Windows)
My understanding is that the large banks are (still) a large part of IBM’s mainframe client base.
I heard – long after D (for decimalisation) day – that the core account system(s) of one the main clearing banks still (internally, at base) worked in £sd, with all transactions going through conversion routines to change them from or to £p, and I wouldn’t be surprised if – somewhere – there is still a system working that way.
Jeremy – I absolutely cannot comment on that, other than to say that I no longer put COBOL anywhere on my CV.
In any case, the really interesting stuff that we remediated in the runup to Y2k was in assembly code, which I have only ever done for hobby projects: doing it commercially on the unforgiving metal of a mainframe is beyond me.
Nevertheless, that code is solid, dependable, and lightning-fast, even under the eye-watering I/O rates achievable on a mainframe – and by very few other computers, even today – while the cooling systems thunder in the Datacenter and the stokers shovel in the coal.
All the recent IT failures – the ones that aren’t security negligence – are in systems integration: bodges in the pipework between layer upon layer of accretions or mergers between utterly incompatible companies’ systems, and ‘upgrades’ that are nothing but a newer layer over older software, hardware, networks and undocumented processes…
…And whoever knew how to restart those pricesses has been long ago declared ‘redundant’ and outsourced to well-meaning but clueless ‘service providers’ who do not even know how much they do not know.
This is, of course, purely a personal opinion, and in no way reflects the state of the systems in the market-facing banks who pay me.
Do your own research and draw your own conclusions about retail banks.
I was so surprised to see that KPMG get a mention. in the ‘Turnbull’ Report. (Not)
Who would have thought…..?
Heavens above and Deloitte aswell.
Would you Adam and Eve it ?
Wouldn’t have done for PwC to miss out on the action…… and here they are.
Can we get a full house of all the Big Four I wonder. (?)
Thank you for bringing this to my attention. A link to the report would have been helpful. I think the exemplary service that Sally Masterton has done for all those who believe UK bankers and UK big 4 accountants need bringing under control could at least be acknowledged by spelling her surname correctly. Her’s is a masterful report and I hope she appropriately screwed LLoyds for mega bucks when she had to leave for assisting the police with their enquiries.
The internet seems to be totally dark about her current position but for me Sally should be director of the FCA, or chair of HMRC if anyone in government felt seriously about these organisations doing their jobs properly.
I agree only the battle hardened who did not succumb under pressures are worthy. When their moral integrity outshone the selfish or greed parts of humans.
I once did a course where the open public exposure of an embaressing incident was made light as so many others had the same opinion and incident.
I think the savings and loans solution of prosecuting a few and telling all the other guilty ones never to do that again was wise. Alternatively use the WW2 solution of sending them to serve in the front line in the army.
What is very noticeable in the UK (as the USA) is the reluctance of politicians in the two main parties to withdraw the licences of the crooked banks and accountancy companies. Of course, their main argument is this would undermine the economy but neither are they willing to prosecute individuals in these companies for malfeasance. Party funding has some influence in this matter in the UK and dominants in the USA. Voters are generally too ignorant to understand the need to clean house with these politicians and their parties. This is now a massive problem undermining human societies.
I remember was it KPMG, Arthur Anderson? that did a massive £1.5mil of research in how to extra a windfall tax on listed companies for labour before the 1997 election and then once they were in power wrote it off after being allowed back in to do some audits.
Certainly an exclusion of one from being able to do some large section of audits might act as a bloody enough nose to change some attitudes and behaviours. Better if the company had a Shareholder Committee however UKGI voted against that apparently at the latest RBS AGM. I say apparently as the AGM was a farce with shareholders being asked to vote on resolutions that noone knew which one, the chairman was asked to be removed from chairing the meeting and the chairman ignored that and closed the meeting just before 430pm which I think was not a conincidence. The FCA are weak and supine saying its not a matter of market integrity but company law! What hogwash values , ethics and justice are not laws.
I agree. The ‘ too big to fail, too big to jail ‘ rationale has undermined trust and that’s a very big deal in the following ways :
1. It says that government will do what’s expedient not what’s right in terms of restoring trust.
2. It says trust is not what binds us together as a society which is a denial of everything it means to be a society and which all laws from the beginning of time are based on .
In the contemporary world the result of these failings is to potentially render us subject only to what is agreed by some sort of data construct by which I mean ‘ the computer says yes or no ‘ to coin a phrase. In the everyday world of monetary transactions beyond the most basic retail purchases we are ,I would suggest almost there, if not actually there. This is something way beyond simplistic notions of good and evil so much so that is very difficult to observe without taking a big step away from it intellectually, and even worse, how on earth are we going to rectify this loss of our humanity.