This is the highest fine imposed by the FSA on a senior executive for management failings.
The FSA’s action relates to the period between January 2006 and December 2008, during which time Cummings was an executive director of HBOS plc and chief executive of its Corporate Division.
The FSA judged that:
 between January 2006 and March 2008, Cummings failed to exercise due skill, care and diligence by pursuing an aggressive expansion strategy within the Corporate Division, without suitable controls in place to manage the associated risks; and
 between April and December 2008, Cummings failed to take reasonable care to ensure that the Corporate Division adequately and prudently managed high value transactions which showed signs of stress.
The FSA found that Cummings was aware that there were significant issues with the Corporate Division’s controls, including: weaknesses in management information; staff being incentivised to focus on revenue rather than risk; and a culture which saw risk management as a constraint on the business rather than an integral part of it.
Under Cummings’ direction, the division pursued an aggressive growth strategy, despite these known weaknesses in the control framework. This focus on growth peaked in 2007 and continued into 2008, despite Cummings being aware of concerns within HBOS about some of the markets in which the division operated and growing signs of problems in the economy. Rather than taking reasonable steps to mitigate potential risks, he directed his division to increase its market share as other lenders were pulling out of deals.
Cummings led a culture of optimism which also affected the division’s judgement about bad debts. The division did not adequately monitor the deterioration of high value transactions and was slow to pass them to the dedicated ‘High Risk and Impaired Assets’ team for more detailed assessment of the likelihood of default and the corresponding level of provision that should be raised.
The assessment of individual provisions was consistently optimistic rather than prudent and Cummings chose not follow the approach to levels of provisioning which had been suggested by HBOS’s auditors and the division’s own Risk function.
In reaching its decision, the FSA accepts that some of the problems existed before Cummings was appointed, that he did make efforts to introduce some improvements and that critical business decisions were made collectively. It also accepts that Cummings did not act deliberately or recklessly in breaching FSA regulations, and that the full severity of the global financial crisis, and its effects, were not reasonably foreseeable during the early part of the time period reviewed.
However, the FSA has judged Cummings to be personally culpable in breaching Statement of Principle 6 of the FSA’s Code of Practice for Approved Persons, by failing to exercise due skill, care and diligence in managing HBOS’s Corporate Division during this critical period.
The FSA also judged Cummings to be knowingly concerned in the misconduct which was the subject of the separate Final Notice issued to Bank of Scotland plc on 9 March 2012.
Tracey McDermott, director of enforcement and financial crime, said:“Despite being aware of the weaknesses in his division and growing problems in the economy, Cummings presided over a culture of aggressive growth without the controls in place to manage the risks associated with that strategy. Instead of reacting to the worsening environment, he raised his targets as other banks pulled out of the same markets.
“It is essential that senior executives understand that incentivising revenue over risk is a dangerous folly. Growth is a sound ambition for any business but risk must be properly managed and robust controls are imperative to ensure growth is achieved in a way that is both stable and sustainable.”
