HBOS investigation should have included CEO Hornby, lawyer says

(Recasts with parliamentary hearing, adds KPMG reaction)

By Huw Jones and Steve Slater

LONDON, Dec 14 (Reuters) - An investigation into the former bosses of collapsed British bank HBOS was "materially flawed" and should have also scrutinised ex-chief executive Andy Hornby, a lawyer who wrote a report on the failure said on Monday.

HBOS, which traded under the brands Halifax and Bank of Scotland, had to be rescued in a government-engineered takeover by Lloyds, which subsequently needed a 20 billion pound($30.26 billion) taxpayer bailout of its own.

Andrew Green, the lawyer who wrote the report on how regulators handled HBOS that was released last month, said the scope of an investigation by the now defunct Financial Services Authority (FSA) had been too narrow from the start.

He told parliament's Treasury Select Committee that Hornby (Berlin: 1878572.BE - news) should have come under more scrutiny, piling pressure on the Bank of England and other regulators to take action.

The BoE said last month it would consider barring up to 10 executives, including Hornby (LSE: HRN.L - news) , linked to the 2008 collapse of HBOS, after regulators published their own, separate main report on the lender's failure.

"In the circumstances where you have the CEO of a systemically important bank that fails - and is failing across multiple areas ... it seems it's pretty obvious and in the public interest that he should have been investigated in early 2009," Green told lawmakers.

Hornby was HBOS chief executive at the time of the collapse and has since become chief operating officer of gambling company Gala Coral.

Hornby could not immediately be reached for comment. He had declined to comment last month via Gala Coral.

To date, only the head of HBOS's corporate lending division, Peter Cummings, has faced any formal sanction as a result of the bank's collapse.

"From the moment this (HBOS) went wrong, and the moment when enforcement action was being considered, because of the richness of information on Peter Cummings he was the only person who was really considered," Green said.

He said the introduction of Britain's Senior Managers' Regime, which will hold executives more accountable from next March, should make it easier for regulators to allocate potential blame when things go wrong.

"It (Other OTC: ITGL - news) will still be necessary to establish personal culpability. I think establishing personal culpability will always be a very big ask when you are dealing with senior bankers," Green said.

He also criticised the regulator for refusing to allow the names of four FSA officials, who took part in a 2009 meeting that decided only to pursue Cummings, to be published.

Andrew Tyrie, who chairs the parliamentary committee, said the lawmakers would consider whether to use its authority to obtain the names, though this would not be a "witch hunt".

"SERIOUS MISTAKE"

Tyrie said Britain's accounting standards watchdog had also made a "serious mistake" in refusing to open a formal investigation into accountancy firm KPMG over the way it checked the books of HBOS.

Tyrie said he had asked the Financial Reporting Council (FRC), which polices accounting firms, to reconsider the need for an investigation into the auditing by KPMG of HBOS.

The FRC said it had received Tyrie's letter and noted its contents but had nothing further to add.

The accounting watchdog said last month it found no reasonable grounds to suspect misconduct in its own review of HBOS audits in the run up to the collapse. It also said it would review the regulators' final report published last month to see if there was any new information.

KPMG has said that an FCA document in 2012 noted that the accounting firm had suggested to HBOS management it should take a more conservative approach to provisioning. KPMG had no further comment on Monday.

On Tuesday Tyrie and the Treasury Committee is due to question Andrew Bailey, deputy governor of the Bank of England, and Brian Pomeroy, a non-executive board member of the Financial Conduct Authority. ($1 = 0.6610 pounds) (Editing by Greg Mahlich and Jane Merriman)