Legal Threat To City Regulators' HBOS Battle

A string of ex-HBOS managers are considering a legal challenge against City regulators if they mount a formal bid to ban them from Britain's financial services industry.

Sky News has learnt that several former executives at the bank have taken legal advice that they have little prospect of securing a fair hearing during enforcement proceedings because the official inquiry into HBOS's collapse has already been published.

The news threatens to throw a further obstacle in the way of regulators' attempts to take action against former HBOS chiefs more than seven years after the bank failed, triggering a £20.5bn taxpayer bailout.

On Thursday, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) issued a joint statement in which they said they had "decided to start investigations into certain former HBOS senior managers".

"These investigations will determine whether or not any prohibition proceedings should be commenced against them.

"The FCA and PRA continue to review materials with a view to making further decisions regarding other former HBOS senior managers."

The statement followed the publication of the official report on HBOS's failure in November, prompting regulators to say at the time that they would consider whether further action was justified.

Last year's report pinned the blame on former bank executives for decision-making which triggered the bank's "destruction" during the 2008 financial crisis.

It (Other OTC: ITGL - news) painted a vivid picture of HBOS's uncontrolled expansion as the bank's balance sheet grew from £477bn in 2004 to £690bn in 2008.

To date, only Peter Cummings, HBOS's former head of corporate banking, has been fined and banned for his role in the bank's downfall.

The watchdogs have since been under intense political pressure to pursue action that would ban the likes of former HBOS chief executive Andy Hornby from the City.

However, legal sources highlighted a statement issued in September 2012 by the then Financial Services Authority (FSA) which said that "work on such [an official] report could not commence until the conclusion of enforcement proceedings to avoid the risk of legally prejudicing the outcome of those enforcement actions".

One insider said that statement would be used by any former HBOS manager who becomes the subject of formal prohibition proceedings.

Managers may have given evidence to the official inquiry on the basis that there was no prospect of future enforcement action because they had faith in the accuracy of the FSA's 2012 statement, they added.

Lawyers said that both the FCA and PRA had taken external legal advice about whether the publication of November's report would prejudice any subsequent enforcement proceedings.

The regulators declined to name which former HBOS managers had been informed that they were now the subject of investigation, although an independent report by Andrew Green QC in November named several employees, including Mr Hornby and Colin Matthew, the former boss of HBOS's international division.

Since its merger with Lloyds TSB created Lloyds Banking Group (Other OTC: LLOBF - news) - just under 10% of which remains owned by taxpayers - tens of thousands of jobs have been axed and former HBOS shareholders have been hit by the absence of dividend payouts until Lloyds restored them last year.

On Thursday, George Osborne, the Chancellor, blamed market turbulence for delaying the sale of the remaining stake beyond a planned spring disposal to ordinary retail investors.

The ongoing regulatory actions are likely to take several more months, with the threat of a legal challenge potentially extending any outcome beyond that.

Regulators have already said that they are powerless to fine anyone deemed culpable for the HBOS crisis because the period covered by a statute of limitations has expired.

Eight former HBOS non-executive directors including Lord Stevenson and Charles Dunstone, the Carphone Warehouse co-founder, issued a statement in November saying they disagreed with some of the report and "particularly the way in which it downplays the unforeseen and unforeseeable effect of the financial crisis on HBOS".

Nobody connected with HBOS would comment on Thursday on the prospect of a legal challenge to regulators (Other OTC: UBGXF - news) .