Governance Watch - Issue 18

by Dina Medland in London


'Trust' is a word we have heard a lot of in Britain since the 2008 financial crisis. It has been commonly uttered and muttered by senior names in business, analysed and spun by corporate governance experts, corporate communications, consultancies, think-tanks and politicians. It is well-established as a subject that commands attention, inspires conferences and events, and is an essential component of the relationship between business and society.

But listening to the UK’s corporate governance watchdogs and regulators speak for years about the need to re-establish ‘trust’, it has come at times to seem like the legendary search for the Holy Grail, in that its very quest elevates those who pursue it. 

A story in the Financial Times by City editor Jonathan Ford yesterday headlined Lloyds and the HBOS time bomb: how not to deal with fraud uses two words that you would never expect to be seen together where the pursuit of corporate governance is held high: 'trust' and 'Omerta.' Looking at the details of how Lloyds Bank handled the legacy of the massive fraud it inherited when it acquired HBOS, it asks questions that should make uncomfortable reading for many in banking and in regulation.

Using original sources including the letter that was first written by businessman Andrew Reade to Lloyds chairman Sir Victor Blank in October 2008 outlining wrongdoing at HBOS – a letter that was dismissed – as well as the human stories of those whose lives were ruined, the FT brings a near-decade old story to life again. 

It was only in February this year, after a six-year police investigation, that two men were convicted of a massive fraud perpetrated out of the HBOS Reading branch between 2003 and 2007. According to an internal document seen by the FT, the total cost of the scam is estimated to be "up to a staggering £1bn."

Laying out the background against which Lloyds Bank continued to claim it knew nothing about criminality at Reading, the story brings us to the reason it is still making the news: Anthony Stansfeld, police commissioner for Thames Valley. "He maintains that Lloyds and HBOS were engaged in a cover-up for more than a decade" says the FT.

Mr Ford writes: "Lloyds inexplicably persists with its mantra of innocence. When a senior official met with two victims in March this year, he stated: "It is true the bank did not have evidence of criminality before the trial" — a comment that is clearly false. Why is Lloyds getting away with this? There are two possible explanations. Either officialdom doesn’t care or, worse, it wants the story to go away."

'Officialdom' is a useful word that conjures up a bureaucracy without a beating heart. Yet every single day, our corporate governance watchdogs and regulators are using increasingly emotive language to depict the ideals of accountability and a corporate governance regime that makes Britain stand out.

The piece mentions – and Governance Watch did as well – that a fortnight ago the Financial Reporting Council (FRC) dropped its inquiry into KPMG’s handling of the audit of HBOS results in 2007. 

"For all the pious words about reforming cultures and rebuilding trust, there is little sense when it comes to specific cases that the City's top brass want to look closely at what happened during the crisis and its aftermath. But without a proper review, the risk is that accountability cannot be apportioned, nor lessons learnt" says the FT.

I encourage you to read the entire piece. But as I mentioned 'Omerta' at the outset, here’s the quote from the piece, from a former regulator: "Plenty of people feel that trust in finance remains pretty minimal. So, there is this big sense of omerta among regulators, bankers, politicians. Everyone failed in the crisis, busting rules that were there to protect the public out of an interest to prop up the failing system. So, no one has any incentive to point out publicly where others went wrong."

Anyone genuinely passionate about corporate governance should be appalled. There is, of course, no concept of 'fairness' in the quote above. The saving grace is that the media (and the police) are keeping this story in the headlines. 

We have a great way in Britain – surprisingly at very senior levels – of thinking it is ok to refer to things without spelling them out – see an older Governance Watch on proposed changes to the listing regime and Saudi Aramco. That just has to change, or if you want 'trust' you might have to do as a certain politician suggested and 'go whistle.'

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