CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 705-vii

HOUSE OF commons

House of LORDS

oral EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKING STANDARDS

sub committee b

panel on hbos

TUesday 27 November 2012

mr peter cummings

Evidence heard in Public Questions 1152-1373

USE OF THE TRANSCRIPT

1.    

This is a corrected transcript of evidence taken in private and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

on Tuesday 28 November 2012

Members present:

Lord Turnbull (Chair)

Counsel: Rory Phillips QC

________________

Examination of Witness

Witness: Mr Peter Cummings, Former Chief Executive, Corporate Division, HBOS, gave evidence.

Q1152Chair: A bit of background about the Parliamentary Commission. It is looking for general lessons from the financial crisis: what went wrong, and why it went wrong, looking particularly at lessons on conduct and standards. The Independent Commission, the Vickers Commission, is looking at the structural changes. We have decided to do a case study on HBOS. The reason for that is that it is an important event. It has not been looked at in the same degree of detail. There is a 500-page FSA report on RBS. There is nothing equivalent. They will be doing something, I gather, over the next few months, and I would think there could well be some important lessons from the HBOS story.

I make it absolutely clear that we are not wishing to re-run the enforcement hearing. That would be double jeopardy. If at the end you want to offer us your reflections on that process, that is fine. Principally, we want to look at the events of the company as a whole. I notice that at some point in the speaking notes you prepared for yourself for the hearing, you asked the question, "Did we all get it wrong?" so that is more our focus than particularly your role.

I should also point out that I am accompanied by Rory Phillips QC. We are not in a sense bringing out the big guns to talk to you. In effect, we have three hearings of the whole Commission-not just the panel that I lead-next week, and we will be taking evidence from the two chief executives and from the chair; those are probably the most important hearings in the process, and Rory is, in a sense, preparing himself for those meetings.

We are also interested in the part played by the FSA in the regulatory process. There is a sense of blowing hot, cooling and then coming back really strong in the enforcement hearing. Did the FSA take a consistent line throughout? Was it emphasising the right things? I notice that at the end of the decision notice in your case there is this notorious paragraph 5.50 that says, "It’s nothing to do with us, Guv." I find that an amazing statement. You pointed out that you were not getting the warnings from the FSA, and then it comes back and says, "It’s not our job to give you warnings." At some point we need to get to the bottom of whether the FSA’s conduct of this case was consistent throughout, and we have detected a number of inconsistencies.

I would like to start by asking Rory to ask a number of questions, in particular to establish the narrative of what actually happened, and then I will take the questioning on about what the implications of that were. If at some point you want to stop for a break, simply give us a signal and we will stop for a break. I hope that is satisfactory. Is that clear?

Mr Cummings: Thank you very much, and thank you for coming here. You will appreciate that I have been ill, and I will let you know if I feel I need to take a break. The expectation, I understand, is that this could be about two hours or so. Perhaps after an hour or so we can take half an hour.

Chair: Yes, that is fine. If you are happy with the rules of the game, so to speak, let us proceed.

Q1153Rory Phillips: Can I just start, so that we have it on the record for our purposes, with some very simple biography, so that we can get your career straight? You joined the Bank of Scotland in, I think, 1973. Is that right?

Mr Cummings: Yes.

Q1154Rory Phillips: You worked your way up and became, I think, PA to the Chief Manager in Glasgow, is that right?

Mr Cummings: Yes.

Q1155Rory Phillips: From 1985 to 1990 you were an advances manager in the Corporate Division?

Mr Cummings: It was not called the Corporate Division then. It was advances manager in the Controlling Office.

Q1156Rory Phillips: Thank you. Then I think you proceeded to Head of Corporate Recovery?

Mr Cummings: Yes.

Q1157Rory Phillips: You then went down to, I think it was, the north of England for a short while, coming back as Director of Corporate Banking in 1995. Is that right?

Mr Cummings: Yes.

Q1158Rory Phillips: It looks as though you widened your remit in the same position up to the moment of the merger with Halifax. Is that right?

Mr Cummings: It is not quite the case. Broadly, I moved from the west of Scotland to Edinburgh and became Managing Director of Structured Banking, which was effectively a private equity environment. That then merged with the then Corporate Division. The Corporate Division existed prior to the merger for a very short period, and then, following the merger, it became a division in its own right.

Rory Phillips: The Corporate Division?

Mr Cummings: Yes.

Q1159Rory Phillips: I think you were Managing Director in that division until July 2005 and Deputy Chief Executive in that division until the beginning of 2006, when you took over as Chief Executive from George Mitchell.

Mr Cummings: Yes. The Deputy Chief Executive’s position was not the position. It was just a statement that I would be the successor to him, so it was not a defined role as such. It was merely an acknowledgement that I would become the Divisional Chief Executive when he left.

Q1160Rory Phillips: Yes. So far as that is concerned, could I focus on this question of your experience with the Bank of Scotland? You are clearly career-long with the Bank of Scotland. You spent your entire working life-as we have just gone through-with them. Would it be fair to assume that you worked closely with George Mitchell in the years after the merger when he was Chief Executive of that division?

Mr Cummings: I was part of the corporate banking board. As a managing director I would be one of many managing directors, maybe eight. I headed the transactional work, so I did not have a direct line responsibility for assets, except the equity assets.

Q1161Rory Phillips: I see, yes. During that period, i.e. after the merger, while Mitchell was the Chief Executive, did you have a role in formulating corporate strategy?

Mr Cummings: Yes.

Q1162Rory Phillips: As you have said, you became his number two and his acknowledged successor in that period when you were the-

Mr Cummings: Can I just add, I was slightly surprised at that?

Rory Phillips: Really?

Mr Cummings: Yes.

Rory Phillips: To be-

Mr Cummings: To be his successor.

Q1163Rory Phillips: You were recommended for that by him, presumably?

Mr Cummings: It may well have been that. There were perceptions, from me, of more senior people in the division.

Rory Phillips: But you were chosen?

Mr Cummings: Obviously.

Q1164Rory Phillips: I just want to look, please-

Mr Cummings: That was not my ambition, by the way.

Rory Phillips: It was not your ambition to become Chief Executive?

Mr Cummings: No.

Q1165Rory Phillips: Where did your ambitions lie?

Mr Cummings: I did not think he would retire. He was 55. I expected him to remain in force until at least 60. By that time I would have been 55. I did not have that expectation, if you like.

Q1166Rory Phillips: Can I just ask you to look at a document? This is the final notice about the bank, not about you. It is in the file we have prepared, at G1. If you look at page 8-you will know these paragraphs, I am afraid-this is 4.10 and 4.11. The only reason I want you to look at these now is because at 4.11 they describe what they call "The risk profile of the Corporate book". They set out there four characteristics of the book. Is it fair to say that in the period when you were in corporate, after the merger with Halifax but before you assumed command, those were indeed characteristics of the corporate book; in other words, a high degree of exposure to property and large single-name borrowers, the risk capital point, and then 3 and 4? Is that a fair summary?

Mr Cummings: I think to use the word "fair" is a bit strong, but these types of assets were a feature of the work at Bank of Scotland historically and indeed subsequently.

Q1167Rory Phillips: In other words, again, this was not something new at the time of the merger. This was historically the sort of business they became involved in, and that, as I understand it, continued throughout the post-merger Mitchell period and-would you agree-continued during the time when you were in charge?

Mr Cummings: Yes.

Q1168Rory Phillips: So there is a consistency of books there?

Mr Cummings: Yes. I think it is important to point out two perspectives here: one is history and the other is geography. If you are a regional bank, as the Bank of Scotland was, without a network of branches in England, you had to target growth in England where we saw a bigger market. That approach had to be consistent with how you can deliver from a Scottish-headquartered environment, so leveraged funding and real estate and that type of thing. We did not have the infrastructure to target major corporates. By "major corporates" I mean PLCs.

Rory Phillips: Yes.

Mr Cummings: Our approach to the SME environment in England-we had 3% of the UK market in the United Kingdom of SMEs, and something like 40% in Scotland, but that 40% in Scotland is equivalent to 3%, so post the merger there was a definite strategy to grow the franchise in SME, a strategy that failed.

Q1169Rory Phillips: Yes. We will come to that in a moment. Because of the impact of the merger-and what you were doing is obviously a key element of the story, as you just said-can I just ask you about what the FSA is saying here? I want to know whether you agree with it. It says that this type of profile was high-risk and, as a result, required particular skills and experience to deal with it. Is that a fair comment?

Mr Cummings: I think to label something as high-risk is very dangerous. It is an environment where there is a dedicated necessity for a skill set to deliver and execute. Therefore it is high-risk, particularly if you are looking to drive a higher return. So the adage of "high-risk, high-return" has to be applied to that.

Q1170Rory Phillips: But presumably you would say-certainly at this point, so 2001 to 2005, say, in the Mitchell era, if I can put it in that way-that the bank had a track record in this scheme and had the experience and expertise to manage that sort of book?

Mr Cummings: Yes. The two main focuses, I suppose, are private equity and real estate. The Bank of Scotland were a buyout bank, and had been a buyout bank since the 1980s when management buyouts started to be developed as a discipline, and we were always a real estate bank.

Q1171Rory Phillips: Just pushing it on a little bit. The next paragraph is 4.12-I am not going to go through them all, you will be relieved to hear-in relation to concentration, which is something we will come back to. The statement there of the nature of the book-and that is a little more detailed, it is drilling down a bit from 4.11-again, is that a fair description? It looks, for example, at commercial property, which you have just been talking about, real estate, and then secondly, significant exposure to large single-name borrowers. Certainly, on the material I have seen, that seems to be a consistent feature, Bank of Scotland and then post-merger. Is that fair?

Mr Cummings: Yes.

Q1172Rory Phillips: Coming back to the merger-which you mentioned and I put to one side-presumably the point about this was not that you were changing the nature of this business, but then you had more clout and that that would enable you to undertake the sort of expansion that you have just mentioned. Is that fair?

Mr Cummings: Yes-you keep using the word "fair".

Rory Phillips: Sorry.

Mr Cummings: Yes, that is the notion, that the scale of the organisation on a merged basis means that you can go up the ladder of value, up the quantum element, so you can underwrite larger transactions as opposed to smaller transactions.

Q1173Rory Phillips: Presumably you can do things that you were simply not able to do before. You can actually enter the underwriting market, rather than be a participant, which you did.

Mr Cummings: Yes. I think there was possibly a-I do not want to use the word "disagreement", as that is unfair-but there was certainly a debate, as far as I was concerned, about how you went about that and how you delivered and executed it. For me it was not a question of, "We are a big bank now so we can hold more." It was, "We are a big bank now; we have to behave like a big bank," which is quite different from the notion of holding more.

Q1174Rory Phillips: Yes, but just going back to my theme, in terms of the overall business that you were in, as I understand it anyway, it was the same type of lending, the same business that you had been experienced in at the Bank of Scotland, that you had taken in after the merger, and that continued until the end of 2008-the end, if I can put it that way.

Mr Cummings: Yes.

Q1175Rory Phillips: Culture: the Bank of Scotland and culture. There is a lot of talk about this in the FSA material and in other documents. Can I just ask you a few questions about that? There was an expression that I picked up in the papers, which is, "Never a fair-weather friend", which I rather like as an expression. I think what it is intended to convey is that, particularly in the 1990s, the bank made a virtue of standing by its customers, i.e. of supporting them through difficult times. Is that how you remember it?

Mr Cummings: Yes.

Q1176Rory Phillips: That was seen, wasn’t it, by the Bank of Scotland as a very positive feature for you in the market?

Mr Cummings: Yes.

Q1177Rory Phillips: Loyalty brings loyalty.

Mr Cummings: Yes.

Q1178Rory Phillips: Isn’t it as simple as that?

Mr Cummings: I would not say it is as simple as that. To be fair to us, my former colleagues and I, it was a very different type of downturn than this one. It was a very client-centred organisation. We did believe in engaging with clients anyway, and loyalty would be driven by behaviour. One of my former superiors said to an insolvency practitioner once, "Losing capital is a mortal sin in this organisation, so you have to engage the client so that we do not lose capital," and we genuinely believed that was the correct approach.

Q1179Chair: You say it was different from the 1990s downturn.

Mr Cummings: Yes.

Q1180Chair: Briefly, what were the differences?

Mr Cummings: It was not a financial recession. The 1990s was actually structural economic issues. This was driven by a financial recession and very much a global impact. The connectivity of what happens in America was much more accelerated here than would have happened in the 1990s; an "If America gets a cold, we get pneumonia" sort of thing. That was a fact. How do you make the connection between the housing issues in America to a global banking crisis, for example? That was a very different thing.

Q1181Rory Phillips: Perhaps you would agree that there may be a connection, in terms of the Bank of Scotland, because wasn’t there a feeling in the bank that the policy you pursued in the 1990s recession had worked. Did that not create some sort of complacency when things started to soften up and go wrong later?

Mr Cummings: No.

Q1182Rory Phillips: No? Are you saying then that you understood the difference between the 1990s problem and the problem we are now talking about, which we are now dealing with, from the start?

Mr Cummings: No, not from the start. The problem from the start was a liquidity issue. In the banking crisis, the man in the street did not know there was a banking crisis going on until later on. If you look at the assets that we had, if you take real estate, for example-I am not going to teach you to suck eggs on real estate, Lord Turnbull, as I know your background-there is often a lag in real estate value as a consequence of economic downturn. That lag did not happen here, and you had a real estate downturn immediately because of the banking liquidity. Did that catch me? Yes, it did. Sheltering assets was problematic for the institution. Sheltering assets in the 1990s was less problematic for the institution.

Q1183Rory Phillips: You said you did not see the difference straight away. It is very hard now to think about the chronology, but can you help us with when? Let’s say nasty warning signs from 2007; to where after that?

Mr Cummings: The nasty warning signs in 2007 were driven by liquidity. By the end of 2007 it became apparent that things were going to be difficult. The panacea, if you like, was the raising of capital. I did not view that as the panacea, but the decision was taken for us to do a rights issue.

Q1184Rory Phillips: That was when?

Mr Cummings: It was actually decided in February 2008.

Q1185Rory Phillips: It rolled through to the middle of the year, did it not?

Mr Cummings: To June. It was by then that we saw features of real decline, if you like, but that was driven by the banking crisis rather than economic issues.

Q1186Chair: You said you had a preferred remedy to the one that in the end the company followed. What would you have done at that stage?

Mr Cummings: It is very difficult to say what was the correct thing at that time. The perceived wisdom was to go first, or quickly, because there would be a limited pot of equity available to the banking sector. What then happened was the perception that, "They are going for equity, you’re in trouble." I then watched the share price being shorted. I then watched the rumour market driven by bizarre things, such as, "You are even shorted by your own investment bank." The rules kind of changed and the game was changing, without your having any line of sight to how the game was actually being played.

Q1187Rory Phillips: This was in 2008?

Mr Cummings: Yes.

Q1188Rory Phillips: Can I just pick up on something you have said there about the short sellers, and so on? Can you remember-I appreciate it is difficult-when you became concerned that you were the object of their interest, i.e. that the bank might be singled out as a target for their activities?

Mr Cummings: We had a board meeting on a Sunday evening. I can remember it being February.

Rory Phillips: 2008?

Mr Cummings: Yes. When the share price was announced or the rights strike price was announced. At that point I think the price-and I am doing this from memory-was £2.40-the strike price for the rights issue. That was a 40% discount on the current share price, and it was at that point that in my own head I thought, "By the time the rights issue is delivered the share price will be the strike price."

Q1189Rory Phillips: That picks up on a comment that another witness has made-I think it may have been George Mitchell-who described the danger of being perceived as an outlier. It is a bit like a wounded animal that is separated from the pack-the pack of banks in this case. You said, in relation to the rights issue, that you were concerned that it was giving the wrong message. Was that concern, "We must not do anything to give the wrong message," influencing your approach during 2008 up until the end of that year?

Mr Cummings: Are we getting to the notion of this culture of optimism? Is that where you are coming from?

Q1190Rory Phillips: It is really the comments that you were making in 2008.

Mr Cummings: Can I just be clear about this strapline or soundbite of "the culture of optimism"?

Rory Phillips: Yes, please.

Mr Cummings: Banking is about confidence. That is a fact. So my optimism was driven out the window when I saw people queuing up round the corner at Northern Rock.

Rory Phillips: End of 2007.

Mr Cummings: My optimism was out the window when I believed Andy Hornby was going to go for a rights issue. My optimism was out the window when I watched good businesses struggling with their liquidity because of our liquidity, and my optimism went out the window at the abyss that we were confronting, between September and December 2008. This strapline may be convenient for the FSA and may well be convenient for members of the Commission, but it certainly was not in my mindset to be optimistic at that time.

Q1191Rory Phillips: There is a comment, I think, of yours in February 2008, a couple of months after Northern Rock, "Some people look as if they are losing their nerve, beginning to panic even in today’s testing property environment; not us." To what extent were you then, very deliberately, presenting a confident front to the-

Mr Cummings: That comment was made in October 2007-

Rory Phillips: Before Northern Rock.

Mr Cummings: -but published in 2008. The interview was in 2007.

Q1192Rory Phillips: Would you have said the same thing in February 2008?

Mr Cummings: Absolutely not, but, having said that, I would have tried to be supportive of our client base.

Q1193Rory Phillips: I am not being critical about this. It is obviously vital that the head of an important division like this-where, as you say, you have all these customers with whom you are in very important relationships-should keep confidence. We have a quotation from The Observer in June 2008-it is not your words-"Cummings keeps his nerve in the face of property downturn". Were you consciously presenting a confident front to the market with all these concerns in mind?

Mr Cummings: No. I am sorry, I don’t recognise that1 and I did not speak to the press. Very little of what has been said about me has come from me, but I did have an interview in October 2007, which was then published in February 2008.

Rory Phillips: Yes; after the very important Northern Rock events.

Mr Cummings: Yes.

Q1194Rory Phillips: Just to summarise this part, and on the famous optimism, you do not accept that the success of the bank in dealing with the 1990s recession made you a bit complacent about what was happening in 2007-08?

Mr Cummings: I certainly wasn’t complacent. We were in very different territory.

Q1195Rory Phillips: Yes. Again, just to complete this, as far as you can recall-and of course it won’t be precise-you were aware that you were in different territory roughly when?

Mr Cummings: Probably at the time of the events of February 2008.

Q1196Rory Phillips: So far as February 2008 is concerned, am I right in thinking that you were recorded as making reasonably optimistic comments on the state of the bank’s-the division’s-impairments at the 2007 results meeting that month? Is that fair?

Mr Cummings: I cannot recall.

Rory Phillips: You cannot?

Mr Cummings: The impairment levels-there was no sign of distress at that point.

Q1197Rory Phillips: Can we just look together at the way the business developed after the merger, and taking it as quickly as we can. If you look at E3, the 2002 to 2006 business plan. That is-as I understand it anyway-the first plan after the Halifax merger took place, and you were certainly a much bigger player. So far as your bit of the bank is concerned-it is 8.2 on page 39, I think, under the heading "Corporate Banking". This is the point I think you were making, isn’t it? "Notwithstanding the current uncertain economic outlook, the successful establishment of HBOS Plc gives Corporate the balance sheet firepower to fully exploit such opportunities:-", and then there are various advantages and challenges listed.

Mr Cummings: Sorry, which-?

Rory Phillips: Bottom of 39, 8.2, under the heading "Corporate Banking".

Mr Cummings: Oh, yes.

Rory Phillips: I just read out the second sentence.

Mr Cummings: Okay.

Q1198Rory Phillips: That is what I think you have just been saying. If you look at "Key Priorities", 8.2.1, "We will aggressively grow the business without compromising on asset quality. This will mean taking business off our competitors." Do you see?

Mr Cummings: Yes.

Q1199Rory Phillips: So the plan then was to muscle into the market and really take on the existing Big Four banks. Is that fair?

Mr Cummings: Yes.

Q1200Rory Phillips: We can see how this would work out in terms of numbers, on page 65 of the same document, because of course the plan was made in 2001 for 2002 to 2006. The forecast profit is projected to go up from about £2.6 billion to nearly £6.3 billion, and in the second half your loan projection, how your loan book was going to work in corporate, is projected to go from £35 billion to £96 billion. Those are very substantial projections. Your Corporate Division’s part in all of that-those numbers-was merely part of a group plan to expand with the benefit of the great addition of Halifax. Is it right to say-and this is something, Mr Cummings, that comes out of your FSA material very strongly-that, as far as you are concerned, at all times what you were doing in corporate, your strategy, your plans, was part of and subject to group planning and group direction?

Mr Cummings: Completely.

Q1201Rory Phillips: That, as you will appreciate, is a very key issue for us, and I am going to be asking you some questions about your relationship with the group, the group management and the senior directors. That is very important indeed.

Mr Cummings: Excuse me, could I have a break?

Rory Phillips: Yes, please do.

A short break.

Q1202Rory Phillips: We were talking about the position of corporate within the group as a whole and, as I said, I do want to return to that topic. But before we get there, can I ask you a few more questions about corporate and about the difference, if any, between the position when you took over from George Mitchell and the position before that? In other words, whether there is a distinction that you would like to draw to our attention between what you were doing in that role and what he had been doing. Can I explain why? When we look at the material and, indeed, when George Mitchell came to speak to us, the impression I think was that, if anything, in the period just before he retired, growth in corporate was slowing down after a pretty dramatic start post merger, and that he expected that growth after he had left to reduce still further. Does that fit with your recollection?

Mr Cummings: No.

Q1203Rory Phillips: What would you say about what was going on, let us say, in 2005, in terms of corporate growth?

Mr Cummings: I think what you have to look at is the make-up of profitability. A lot of profitability in 2006 was manifesting itself in our growth numbers and comes from realisations of equity and, indeed, in 2007 itself. So you have to look at the way those profits are constructed. The realisations in 2006 were as a consequence of work done in 2003 and 2004, and there are some pretty chunky equity realisations in 2006 and 2007.

Q1204Rory Phillips: In other words, you are saying that one has to bear it in mind that the numbers are reflecting commercial features that have been in the pipeline and established for a number of years. In other words, whatever was set up, as you have just said, in 2003 and 2004, came home, as it were, a few years later. You are saying, are you, that we have to bear that in mind when looking at what appear to be-and I think you would accept that they do appear to be-further big increases through 2006 and even 2007?

Mr Cummings: Yes.

Q1205Rory Phillips: That is the way you would explain it? Does that account for the whole of the-

Mr Cummings: Substantially; a lot of it, yes.

Q1206Chair: Another way of putting it, you can look at what one might call "gross lending". That is, the number of new clients you identified and the extension in the facilities that you give to them, but lending as recorded in the book, which is net lending after you have sold down. So you could have a situation where you are not aggressively looking for new clients, but your lending could accelerate for two reasons: one is realisations slowdown, and the other is people whom you have offered facilities taking them up more rapidly?

Mr Cummings: Yes. I think it is important if you look at the timeframe in 2006 to 2008, there is a dysfunctional aspect to the asset position from August 2007 to December 2008. That dysfunctionality is that there is no liquidity and there are no syndication markets. We cannot shift anything and there is no churn, so, on the face of it, it looks as if the assets have grown-we must accept that, but that is as a consequence of carrying on while nothing is getting sold.

Q1207Rory Phillips: So you are stuck with it?

Mr Cummings: Yes.

Q1208Chair: So there is a difference. There is the lending that you are planning and the lending that is happening-

Mr Cummings: Yes, as a consequence of market conditions.

Q1209Chair: And the decision ledger does not distinguish between those two?

Mr Cummings: No. Despite my representations to the contrary.

Q1210Rory Phillips: Will you accept that, within that, there is a suggestion that, in a sense, the thing has got out of control because, as you say, whether you like it or not, the figures are getting bigger and bigger and you are not able to do anything about it, precisely because, as you say, things were shut down on you so you can’t shift it?

Mr Cummings: Correct.

Q1211Rory Phillips: So you are not any longer in control of your own book?

Mr Cummings: Correct. But we are no different from many other banks. The other thing we do not have is a capital market solution, and the instruction not to sell at a discount.

Q1212Rory Phillips: We are jumping ahead a bit. The obvious question that arises is, well, if you are not different from any other banks, why is it that things went so badly wrong for HBOS? What were the points of difference? Now you are sitting back, you have a bit of distance from the thing, what was it about HBOS that made its problems so bad?

Mr Cummings: If you have a real-estate book that is not churning because the assets have not been sold, then all that is happening is your book is growing as a consequence of utilisation of facilities.

Q1213Rory Phillips: But look at the numbers. As I understand it, the impairments level recorded after the demise, when Lloyds had come in, for the period of 2008 to 2011 are gigantic. They are between £40 billion and £50 billion, I think. As far as we can see, about £26 billion of that was attributable to corporate. I may be wrong about the precise number-that huge scale-but if that is right, does that level of impairment not say something at least about the quality of the corporate book?

Mr Cummings: The level of impairment is horrendous, and indeed I accept that. I have no notion of how they impaired or the formula they applied to impairment, but I do know that they were taking pain; indeed, the market says there was a 60 to 70% discount of value on real estate.

Q1214Rory Phillips: As I say, that is a way of illustrating how bad things were. What I would like to come back to, if I may, is your take now on what the differences were between HBOS and other banks that led to this particular problem, because other banks were in the same sort of market.

Mr Cummings: I do not know, really, is the answer to that. I wasn’t there at the time it was decided to impair, so I cannot really comment on that.

Q1215Rory Phillips: But can’t you help us, at least, with why you think the problems as they turned out for HBOS were so much worse?

Mr Cummings: We did have a high concentration of real estate.

Q1216Rory Phillips: You think that is it, the beginning and end?

Mr Cummings: We did have a private equity group as well.

Q1217Rory Phillips: So, in terms of what went wrong-as Lord Turnbull said, we are looking of course not just at getting your view of this, but we will be, in due course, asking the same questions of the people who were senior to you in the organisation-you don’t think that it is appropriate to point the finger at anyone in a position of authority, in terms of competence. Is that what you are saying? You had a real estate book, and this terrible tsunami of banking finance crisis happened, and you were overwhelmed?

Mr Cummings: I have been through three and a half years of things. I have not rubbished, bad-mouthed, or anything like that, my colleagues to the FSA, and I am certainly not going to do it to a parliamentary commission. I say to you, these were people who turned up every day, worked hard, genuinely believed that they were doing the right thing, working for an institution that we believed in. It is not down to me to point fingers at anyone. I am absolutely heartbroken about what happened, and I live with it every day, but it would be inappropriate of me to point the finger at any colleague. I have not done it to the FSA, and I am certainly not going to do it to a parliamentary commission.

Q1218Rory Phillips: No, but can I turn-

Mr Cummings: I think it is an unfair question to ask me-do I think the competence of people was inappropriate?

Rory Phillips: Can I turn it round the other way? I assumed that you would take the view that the way in which you have been singled out-this is what you say in your submissions-by the FSA, as the only banking director or official to be proceeded against in this way, was unfair.

Mr Cummings: Yes, I do think it is unfair. It is unfair, and it is also seems a bit sinister. We are not the only failed bank. There are at least four or five of them, and I find it curious that I was singled out. So someone, somewhere decided that that was the appropriate action to be taken, and it is the best part of four years later, and this is the first time that I have been asked that question. I think it is sinister and curious.

Q1219Rory Phillips: I accept entirely your wish not to point the finger at other people, but it seems, frankly, impossible, doesn’t it, that the entire banking crisis could be attributed-as the FSA’s enforcement actions suggest-to the activities of one director in one bank?

Mr Cummings: You will have to ask them that question. They certainly have not answered it to me.

Rory Phillips: No.

Mr Cummings: I am bewildered-that is how it feels.

Q1220Rory Phillips: Can we just, after that, come back to the question we were discussing about growth? You had an explanation for why the numbers continued to go up after George Mitchell’s departure. Can I put one further thing to you from his evidence? As I say, he thought that growth would continue to decline in the Corporate Division, and said that that was appropriate in his judgment for that particular stage or phase of the cycle, and that when he discovered that growth had in fact increased he thought, as you, that that was inappropriate. Is this question, of what is appropriate to a particular phase of the cycle a concept, first of all, that you recognise?

Mr Cummings: There is always and should always be worry about the cycle. He is talking about the economic cycles and the performance indicators within the economic sector-I assume he is talking about that. He is not talking about a financial crisis.

Rory Phillips: Yes.

Mr Cummings: That economic cycle was governed in the way I looked at it by a number of things: employment, affordability, the price of oil and what was going on in China, for example. That is where my questioning of the economists was around, and there is evidence of that in the board minutes and so on.

Rory Phillips: Yes, I saw that.

Mr Cummings: I did not question the economists, or indeed internally, what the liquidity of the organisation impact would be if we ran out of money. In terms of those four dynamics at that time, there was no pressure on any of them, and in fact there was a skills shortage; affordability was fine for my retail colleagues; employment was good in that there was a skills shortage; China was still motoring; and the price of oil I worried about constantly, because we had oil and gas business.

Q1221Rory Phillips: Just coming back to your explanation for the increase in the numbers, because undoubtedly there was an increase in the numbers in terms of growth, the suggestion in the FSA material-again it is the firm’s final notice-is that the firm, by which I think it means the sector, directed corporate-you-to increase your targets. This is a consistent theme in this period. The first reference is in relation to the 2006 to 2010 plan. Was that what happened? Were you directed to increase your targets?

Mr Cummings: That is their words, not mine.

Q1222Rory Phillips: Is it correct?

Mr Cummings: It is part of the functionality and discussion process, and the budgetary aspects, so how they concluded that I am not really quite sure, given that they did not speak with the finance directors2.

Q1223Rory Phillips: This is the FSA?

Mr Cummings: Yes. But, yes, the budgetary process was directed by the centre.

Q1224Rory Phillips: Yes, and that would be specifically the CEO and the Finance Director-Hodkinson at the time, wasn’t it?

Mr Cummings: Yes. We would be given guidance from the centre around construct of the budget. We would be given guidance on a consensus economic scenario. So they would take a number of economic commentators and then get a consensus, so the guidance would be driven by, for example, "We think the profits are going to grow by X%; we think house market inflation will be X%; we think employment is going to remain at whatever level." So it was the economic guidance and our expectations of where the numbers were going.

Q1225Rory Phillips: Yes. Now, were you, during this period conscious of pressure-not guidance, but pressure-from the centre, from the top, of the organisation to increase your targets year on year?

Mr Cummings: Yes.

Q1226Rory Phillips: Can I ask you, please, where was the pressure coming from, and I mean the individuals; which individuals? The two we just talked about?

Mr Cummings: Yes.

Q1227Rory Phillips: Were there any others?

Mr Cummings: The process was budgetary debate, and then during the year there was expectation. So, what is a quarter one forecast-and it is a rolling quarter outlook-what is our expectation for the quarter two, quarter three and quarter four? During these quarters, there was a discussion with the finance director and the chief executive about where the numbers will land, in the context of the individual division and in the context of the group as a whole.

Q1228Chair: You could be put under pressure or asked to try harder or do more. That could be an entirely legitimate process. You start bottom-up. You get some guidance on the background. You put forward your plans and retail and so on do the same. There is a challenge from the centre, as a result of which you come to an agreement on a figure higher than you originally put in for. Now you could describe that as pressure, or you could say that that is how budgetary processes work in companies up and down the land. So you are saying that this pressure, you would say, was exceptional. Were you in a sense being pushed to do things you really did not think were safe, sound or achievable, or was it part of the normal process of budgeting that companies go through?

Mr Cummings: I think, to be fair, it is a bit of both. There was a point where the retail bank was not performing and not delivering on the expectation, and I was asked to step in.

Q1229Chair: Can you remember where in the timeline we are?

Mr Cummings: I think that is probably the beginning of 2007.

Q1230Chair: Right. So you had some misgivings about that?

Mr Cummings: Certainly.

Q1231Chair: Were they misgivings about whether this was achievable or whether it was desirable?

Mr Cummings: It was certainly desirable from the centre’s perspective. It meant harvesting early some of our assets. We were six months pregnant on this action, so you can-

Q1232Chair: It was putting the profit figures up rather than the asset growth up, and realising more profit from the stock?

Mr Cummings: Yes.

Q1233Chair: Yes. I think their final notice goes through: the original plan was X, as a result it was then raised to Y, and then you achieved Z-or Z happened.

Mr Cummings: Yes. If you have lumpy realisations, my push-back was always, "You cannot have a lumpy realisation quarter one and then expect the same realisation in quarter two."

Q1234Chair: Yes. Your doubts were about whether the realisations were realistic, rather than about whether you were being pushed to lend more aggressively or more riskily?

Mr Cummings: They are inextricably linked, though. You have to do one to get the other, if you see what I mean. You cannot realise something if you do not have something. You actually have to have it first.

Q1235Chair: Yes. But in the end you went away from those meetings thinking, "Well, that is what I have agreed to. It was not what I originally proposed, but it is the one I agreed to", rather than, "This was imposed on me over my dead body"?

Mr Cummings: I think it is stretching it a bit to say it was imposed. I certainly made it clear to my superiors at that point that I was not all that happy about it. But if you believe in an organisation, you are part of a collegiate, and you actually believe that you are part of an executive team, and if you believe that your role is there, my statement to them was, "That’s fine, gentlemen, as long as we don’t have selective memory loss in the next budget round."

Q1236Chair: Yes. But it does not sound to me terribly different from what I have experienced.

Mr Cummings: No. I was not banging the table or running up and down the room saying, "This is outrageous." I was there in a spirit of co-operation, as I thought I should be.

Chair: All right. I get it. Yes. Okay.

Q1237Rory Phillips: On the timing, let us look at the firm’s final notice, at G1, page 19, paragraph 4.65. Do you have the page? Bottom of 19: "Corporate had originally proposed targets for 2007 of 10% to 12% UPBT growth. During the Group challenge process"-which I think is the process you have just been describing-"the firm directed Corporate to increase this target substantially." Then the growth target becomes 22, and lending growth 9. "The targets were increased again during quarterly reforecasts in H1 2007, as Group increasingly looked to the Corporate Division to make up for the underperformance of the Retail Division. In April 2007 the UPBT target was increased to 30%." In June it became 35%, which is a pretty huge number. Is that a fair summary, from what you can remember, of what was going on; that the targets were increasing through to the middle of 2007?

Mr Cummings: Yes.

Q1238Rory Phillips: Was it, as you recall, to compensate for the underperformance of retail?

Mr Cummings: Yes.

Q1239Rory Phillips: Who was in charge of retail at that point?

Mr Cummings: Benny Higgins.

Q1240Rory Phillips: Were you happy about that, being given higher and higher targets to make up for the underperformance of another division? No? Sorry, we won’t record a shake of the head.

Mr Cummings: No.

Q1241Rory Phillips: Did you make that view known to the centre?

Mr Cummings: Yes. But again, it was in the spirit of co-operation.

Q1242Rory Phillips: It is a huge target, is it not, 35%?

Mr Cummings: But you have to take cognisance of the fact that I may be well aware of certain events that are going to happen if I know there is a large realisation coming along, which is more spike-if you have a private equity book, the pattern of profitability is not as predictable.

The other thing I would say to you, gentlemen, is that profitability from writing assets does not flow the year you write them, so it is not a question of going out and lending more money to people and I will get profit in the next week. The way accounting works is that you amortise the fees over the life of the loan. You get the physical cash, but the profitability booked is not in that year. It is spread.

Rory Phillips: Understood.

Mr Cummings: The rise in this profitability again is a convenient notion for the FSA, but the reality of the analysis-they did not undertake the analysis, despite our pointing it out to them-is that some of the profitability is as a direct consequence of realisations as a single one-off case.

Q1243Rory Phillips: So you are speeding up the realisation of loans made some years ago.

Mr Cummings: You may approach a company and say, "Will you buy our stake in you back?" I would prefer not to do that necessarily, but you then realise something from that.

Q1244Rory Phillips: Although you were not delighted to have this increasing target, presumably what you are saying is that, because you were aware that there may be these spikes, or however you want to put it, coming up, this was not a completely unrealistic target for you because you knew what was coming up.

Mr Cummings: Yes.

Q1245Rory Phillips: And it is not a steady pattern, as you have described. What about all of this though when seen-and I am moving through the chronology, you can see-against what is going on in the wider world, the wider market? We are now in the middle of 2007; the impression I received from what you were saying earlier is that even though your antennae were up, as it were, this was before you had appreciated quite how bad things were going to be. Is that right?

Mr Cummings: Yes.

Q1246Rory Phillips: Just remembering Mitchell’s idea of adapting your growth according to what appears to be the right moment in the cycle, can I take it that you did not see this as the right moment to try to rein back, because you did not see it as a particular moment in the cycle?

Mr Cummings: I think that is slightly unfair. I think that the reining back was forced on us because we did not have the liquidity. If the FSA said, "Why did you not rein back in August?", I would say, "I did, but what do you want me to do?" I made this point to them, saying, "Do you want me to stand up and say publicly I think the world is going to fall off a cliff this time next year?" What do you think they would have said to me had I said that? I do not have a crystal ball; I speak to the treasury people, and in fact the head of treasury sat on the corporate board. "What is the issue around liquidity?" "It is two weeks, the market will readjust, people will come back from holiday in August and it will be fine." Other commentators are saying, "Don’t worry, it is October,", or "Don’t worry, it is Christmas"; then it will be after the bank results period. So what is it that is going on?

Then you start to see Treasury assets taking quite serious impairments around the securitisation environment; Merrill Lynch has taken a hammering, Goldman Sachs and so on. Indeed our own treasury function began to impair mark to market. There is no market at this point because, and despite what is coming up on the screen, there is no trading in any volume. There is no syndication market, so syndication throughputs are getting stuck because of a disconnect in what is perceived to be the pricing of those and what the market will accept. In fact the market is not accepting anything at this point. The prices on the screen are broker-led prices, but no trading.

Q1247Rory Phillips: That is very interesting and helpful, thank you. But just continuing with the chronology and moving to late 2007 and into 2008, there is a sense certainly in the papers that comes out of the FSA material that you and your colleagues at corporate regarded the beginnings of the problem, the beginnings of nervousness, not so much as a problem but as an opportunity: an opportunity to further grow the business and to exploit-not run away from, but to exploit-market conditions. Is that a fair assessment of what was going on?

Mr Cummings: No. Be careful what you say; it comes back to haunt you. If this liquidity issue is a short-term thing, there may well be opportunity. What we never exploited was opportunities. We did not go into the market and buy debt from Barclays or Royal Bank at a discount. We certainly looked at it, but decided not to do it, because we were seeing that we would just be buying assets and growing our book and that was not where our treasury people were saying we needed to be.

So saying things and doing things are quite different. Remember, banking is about confidence, and we have just seen a horse and cart being driven through confidence by all the people queueing up outside Northern Rock.

Q1248Rory Phillips: So you had to maintain that first side of things, the essential confidence in the business?

Mr Cummings: Yes.

Q1249Rory Phillips: But that does not mean-and I think you are saying we would be wrong to infer that that meant-that in terms of the doing rather than saying you were doing.

Mr Cummings: And a lot of phone calls from new best friends, put it that way, which were polite, rather than actually doing things.

Q1250Rory Phillips: That is one suggestion. The other suggestion that comes out, which is a rather different suggestion-but I am going to seek your comment on it, please-is that the bank at this point, and particularly corporate, was guilty if anything of head in the sand. In other words, "Don’t worry, it is all going to blow over; we survived the quite nasty recession of the 1990s, and it will all be fine. No need to change direction; no need to change strategy." What about that as a characterisation of what was going on?

Mr Cummings: I am sorry, I cannot comment on that, because I did not see it that way.

Q1251Rory Phillips: You were not guilty, as it were, of hoping that something would turn up as the thing got worse and worse and worse?

Mr Cummings: I watched a train crash for nine months and could not do anything about it, so to say I put my head in the sand-I was a spectator of world events that I could not control.

Q1252Rory Phillips: That must have been particularly galling because it came not long after the moment where you had, I think, become the number two corporate lender-this is the bank-in the UK, taken over from Barclays, and in which your division had overtaken retail, had it not, within the group?

Mr Cummings: In profitability terms.

Rory Phillips: Yes. You had emerged as the most profitable organisation.

Mr Cummings: I do not view the first point you made there as something that registered. But in terms of profitability the 2007 profits were forced.

Q1253Chair: Sorry, can you just explain that?

Mr Cummings: We pushed the profitability in 2007 by realisations, so I would not say it was a one-off, but there were certainly one-offs in there.

Q1254Chair: Can I ask a question about the board? You go through this process of challenge in the ExCo, or whatever you call it; did the board know how far you had been pushed, or were they simply presented with, "This is the agreed plan that we have come up with"? Did they know of your misgivings about this?

Mr Cummings: I did not go and bleat to them, if that is what you mean. I think there was appropriate governance of submissions of business plans and various challenges around that.

Q1255Chair: Once the ExCo has agreed something there is a collective responsibility, and that is what is presented to the board?

Mr Cummings: Yes.

Q1256Chair: One characteristic of the board is that there are various people on it, and I am not talking about their competence but about the collective coverage of the skills that they have. Is it true to say that you and Colin Matthew were the only people on the board who were steeped in corporate/property lending?

Mr Cummings: We were the only bankers, if you like.

Chair: Yes, that is what I mean.

Mr Cummings: I think that is a different thing than someone understanding the dynamics around corporate-

Q1257Chair: Was there anyone there on the board who might have said, "I have been through something like this, and in my experience we are pushing this too far, too fast," other than your colleague who is doing the same kind of thing but in a different vehicle?

Mr Cummings: I think that the directors had an edge.

Q1258Chair: What do you mean by "an edge"?

Mr Cummings: It was not chummy-chummy, if you see what I mean. They had a definite edge to them, which I think is right, correct and proper. This was not a glee club by any stretch of the imagination, and I felt-not intimidated, that is the wrong word-I was in a place where I had to be clear and I had to be appropriate, and I knew at the end of a board meeting that it was a board meeting, if you see what I mean.

Q1259Chair: Can you just clarify the difference; in corporate there is one risk forum, which you chaired, and then there is another risk forum that Sir Ron Garrick chaired-can you distinguish for me the role of those two?

Mr Cummings: There was a regulatory risk committee that Ron Garrick chaired and that had non-executives on it. It was a bit more detailed than the higher level stuff of the board and he would, from time to time, ask for people to come to that board, which were not necessarily regulatory risk-led. He would want a paper on real estate or he would want a paper on oil and gas or on-

Q1260Chair: These are kind of sectoral discussions. He was not going through your loan book and saying, "Why on earth are you lending £2 billion here?"

Mr Cummings: But that board also saw the list of advances. The main board saw the list of the advances and the regulatory risk committee saw that as well.

Q1261Rory Phillips: Just picking up on that, did the members of the board, for example, ever question you about the sort of issues that the FSA brought up; in other words, the asset quality issues, high concentration and all of those points that we discussed earlier that made up the book or were features of the book?

Mr Cummings: I think it would be more of an informal discussion rather than specifically. From time to time, they would ask about a particular client on the list.

Q1262Rory Phillips: An individual?

Mr Cummings: Yes, and I would explain that to them. I would also be asked about who is behaving themselves and who is not behaving themselves. They would bring intelligence, telling me things from time to time. They had an open invitation to come to the corporate board at any time.

Q1263Rory Phillips: Do you think they were provided, as part of the process, with sufficient information to understand the nature of your book?

Mr Cummings: Yes, I believe they got whatever information we had. There was no question of our hiding anything. That just did not occur to me.

Q1264Rory Phillips: Again, you may not be able to help on this, but based on your exchanges with them, do you think they understood some of the sorts of business you were getting into, particularly the transactions in which there was an issue of debt and equity?

Mr Cummings: Yes.

Q1265Rory Phillips: That is based on the questions they asked?

Mr Cummings: Yes, and the presentations we made.

Q1266Rory Phillips: Can I ask you, with this in mind, about some of your internal processes and, in particular, what we have been told is called level 8 sign-off? I think that was a type of approval for larger transactions. Can I just ask this question first: was there a level 9, or was level 8 the top?

Mr Cummings: I think it was level 8. I cannot remember the facts. There is a board manual that is directly related to that.

Q1267Rory Phillips: Sadly, I have not seen that, so can I just ask you, if you can remember, what size of transaction or loan did it have to be to get up to level 8? Can you remember?

Mr Cummings: I think it was over £75 million.

Q1268Rory Phillips: That fits with some of the schedules we have seen. Who had the authority, presumably at group level, to give level 8 approval?

Mr Cummings: Any executive did.

Q1269Rory Phillips: In practice, looking at the time period 2003 to 2004, who gave the authority; would it have been Colin Matthew?

Mr Cummings: Yes.

Q1270Rory Phillips: Now you were, as Lord Turnbull said, writing an international book, and that book has also given rise to various substantial losses, as a percentage of the number of approvals, would he be approving 75% or more at level 8?

Mr Cummings: I would be guessing, sorry.

Q1271Rory Phillips: But a high percentage?

Mr Cummings: Yes.

Q1272 Rory Phillips: Who else would get involved from time to time?

Mr Cummings: Whoever was available.

Q1273Rory Phillips: Mr Hornby?

Mr Cummings: Yes, occasionally.

Rory Phillips: Mr Hodkinson?

Mr Cummings: I cannot remember him doing any of that.

Rory Phillips: Did you at any point-

Mr Cummings: I was not particularly paying attention to that.

Rory Phillips: Understood.

Mr Cummings: They have to make their own call on that. It is not a question of me thinking, "I will take that to so and so". There was never any of that. If they made their own call on things, that was their call.

Q1274Rory Phillips: Were you in a position-I think you were-to give level 8 approval to Mr Matthew’s loans?

Mr Cummings: Occasionally, yes.

Q1275Rory Phillips: That was occasional?

Mr Cummings: I don’t remember signing a lot.

Q1276 Rory Phillips: Are you aware of who else was involved in that system of approval?

Mr Cummings: No.

Q1277Rory Phillips: Did it occur to you at any point that that system of Matthew doing, let us say, the majority of your level 8 approvals, was perhaps not sufficiently rigorous or independent in terms of an approval process at that very high level?

Mr Cummings: I think it was certainly independent. I never influenced him in any way, shape or form, and he never influenced me.

Q1278Rory Phillips: Does it not create a difficulty when, as you have said, he and you were in fact the only bankers on the entire board, and you were approving each other’s business?

Mr Cummings: Again, I think that is a wee bit unfair in terms of the way it is being portrayed here. It certainly wasn’t a cosy club, and there were various tiers before it came to level 8; there was rigour and independence I believe around that whole process. So it is not a question of my being the first to read it by the time it gets to me.

Q1279Rory Phillips: Just drawing in the focus a bit, but on the same point about understanding information and looking at corporate itself, and, bearing in mind the extent to which obviously there were, by the end, these very substantial impairments, do you think with hindsight that there were classes of transactions about which you did not have enough information? In other words, did you go into business that turned out to have characteristics that you had not understood?

Mr Cummings: I think if a loan goes bad, then obviously that could be a characteristic. In terms of sensitivity of risk analysis on credit, there was never any feed-through of testing to destruction, because we didn’t anticipate asset values falling to the extent that they did. You have to sensitise certain things based on factors that arise or on information you have. I cannot say that we sensitised any credit in that way that had value written down to zero or by 60% or 70%.

We had a bizarre situation where values changed in the dynamic of a loan, i.e. it was meeting its interest and its rent was being paid on time but its value collapsed; so, how do you compare that? Do you compare it based on value or do you compare it based on viability because it is certainly viable, but value, in terms of realisation, is non-existent. I am curious-and I don’t know the answer to this-about how other banks impaired with that type of loan.

Q1280Rory Phillips: I think it would follow from what you are saying, that the problem here was not your system or the rigour with which you assessed propositions, but rather that you were hit by events that no systems and no testing mechanism could have disclosed.

Mr Cummings: If you lend to a house builder who is building 1,000 houses and he is only selling 100 houses-did we put that into any analysis? No, we did not. Did we put an analysis of his land bank collapsing by 60% or 70%? No, we did not. There is nothing in the dynamic of the economy at this point, or at any point, that points to that being a factor, or points to that being an outcome.

Q1281Rory Phillips: The ultimate way of looking at this is to stand back and say, "Okay, that is understood," but does it follow from that that if you had your time again you would have run the book in exactly the same way?

Mr Cummings: I have the benefit of hindsight, haven’t I? If I lived my life again, I would never take the chief executive’s job.

Q1282Rory Phillips: But do you see what I mean? If you are right about your systems and the robustness of the assessment and testing, then you would have done the same thing anyway.

Mr Cummings: To be honest with you, the only answer to that question is that it is completely hypothetical.

Rory Phillips: Yes, it is.

Mr Cummings: Would I like to be born again and live a life different to the one I’ve got? The short answer is yes.

Chair: Just having a look at the time.

Rory Phillips: Shall we have a break?

Q1283Chair: We will have a break, but there is a question I have on the technology. Do you want a break, Peter?

Mr Cummings: There are some sandwiches there, if you want, gentlemen.

Q1284Chair: I want to come back to the FSA. You have a phase in 2002 and 2003 where they start expressing concerns on two things, one of which is in your comments, which is the risk management in your corporate and the heavy dependence on wholesale funding. There is then quite a robust exchange around Christmas 2003-04, and in 2004 they do two things. They maintain their criticisms, they add about half a billion to the capital ratio now, a percentage point, and require a section 166 inspection. At that stage they are running the thesis that, firstly, the growth of this business is exceeding the ability to risk-manage it; secondly, that something is very obviously-

Mr Cummings: Just so we are clear, they are talking about group here?

Q1285Chair: No, that bit is about corporate. They use the word "atypical"-something about the risk management in corporate. This is a time when of course you are growing very fast, and the group plans are highlighting the fact that you have this wholesale funding deficit, a kind of strategic weakness of the company. But just following the FSA bit of it, they then in January write a quite critical letter, despite the fact that you have pushed back quite hard to the initial letter. By July they seem to be reaching an accommodation-

Mr Cummings: This is July what year?

Chair: 2004. By December, they are sufficiently satisfied that they reverse the surcharge on the capital ratio. Of course, December is 12 months away from the start of the relevant period in these decision notices. When you get through to 2006 there is a dialogue with you, and it is critical to some degree, but it does not look like you are in special measures, sort of thing, but by then almost all the dialogue is about Basel II and whether you are ready enough for it, and are getting the waiver that you need. You get words like "good progress" or "no further action needed", except for this Basel II discussion. Basel II we now know is on the scrapheap of history, and no one has much time for it. Do you think the diversion of the risk management discussion into a discussion about your model, and how ready it was, took the eye off the ball of looking at quite practical things like how fast is the lending growing, what proportion is in corporate, the concentration on single risks and so on?

Mr Cummings: The short answer is that I don’t know. I don’t know if they took their eye off the ball on that particular aspect. But your point about Basel II is well made. When I was appointed Deputy CEO, the Basel problem, if you like, was exercising the minds of the whole group. The perceived wisdom was that accreditation as an advanced bank would mean less capital, and given the dominance of our mortgage book in the overall asset base-the allocation of capital to a mortgage was weighted at 50%, and you could not get a division to be accredited; you had to get the bank to be accredited-there was no doubt that corporate was having difficulty progressing the Basel issue.

I know that Basel II has been put on the scrapheap, but there was a lot in Basel II in terms of risk management behaviour that I did like, in terms of its theory. The practice was something quite different, but the notion of it was appropriate, and in terms of how I saw our risk profile, I believed that it was appropriate to look at the best practice. So one of the first things I did in January 2006 was to call PWC to help me to look at the risk area, and that was also aligned to the notion of the redefining what our business was, because I had lived with the concept of relationship banking since I started, and the older, the more experienced and the more senior I got, that was a notion that I had a lot of issues with. Not because I did not believe in relationships, but my brain works in a certain way; I like to define things in a certain way, and for many years, particularly since I became a managing director, I tried to define our business, asking, "Are we a relationship bank?" Every bank says we are a relationship bank. Are we a relationship bank that does transaction work, or are we a transaction bank that has relationships? So I wrestled with those two things for a long, long time. I tried to pin my colleagues down in 2001 to 2005 on what they thought relationship banking was about. They all thought they could be it, but the best I could get out of them was that it was about client engagement, which is fine, but that is not necessarily a foundation that you can write a strategy on.

Chair: But during this period-

Mr Cummings: So you have to then think about what you define your business as, and I saw it as being a people business, with relationships, that is in the risk business and with a high level of IT. Those three things need addressing, particularly the bit in the middle; that is the risk bit. The name "risk" is a relatively new concept in banking, believe it or not. It is only 15 years ago that we began to have risk departments. Before that they were called other things like controlling office, branch administration, or whatever. The word "risk" was now defined. The problem with that was that it became departmentalised.

Q1286Chair: I want to come back to that bit about risk, but in the decision notices, company and personal, there are some very broad statements about how the risk management system is not good enough; we have an A, B and C, and they are relating this to a period that starts at the beginning of 2006. As you went through 2006 and 2007 would you have ever expected them to write that about that period, given what you were actually talking to them about? It was not necessarily agreed, but it did not have the kind of aggressive tone that turned up in 2003 and 2004. It looked like the normal business of a regulator. I cannot quite understand; I don’t know if you have any insight, as to why they turn around and then say, "Your risk system was deficient over the relevant period."

Mr Cummings: It is bewildering to me as well, sir. The issue for me is that Basel was not a panacea. It is a platform that guides your risk management behaviour.

Q1287Chair: You thought that developing Basel II, and then adopting it, was the way you could demonstrate to them that you had a proper risk management system?

Mr Cummings: Yes. And to be fair, I was getting quite serious pressure from the group about getting-

Q1288Chair: Is Jo Dawson the first who is called a group risk director?

Mr Cummings: Someone before that, and another guy, Andrew Smith.

Q1289Chair: Am I right in saying that their standing and authority in the organisation was relatively weak? She describes herself as having "influence but no authority". You have been in the bank, by this stage, 25 years, run a successful division, so for someone in her first year as group risk director, it is quite difficult to say, "You really should not be doing this." In the absence of a group risk committee with a non-executive director as chair, is it quite difficult for that role to have a big influence in the company.

Mr Cummings: I never had a problem with group risk. I saw the role of group risk as extremely important. Was there tension between corporate division’s risk department and the then chief executive of the division and group risk? Yes, there was.

Chair: Yes, she refers to it in her submission.

Mr Cummings: If we have a problem like Basel, what is the problem? I saw that part of the problem was, "I am telling them to do something, and he has not done it," so everyone throws their toys out of the pram, but actually nothing is getting done. This is the beginning of 2006. My job, as I saw it, was to establish a programme and a relationship with group risk that says, "What is the issue we are actually trying to solve?"

Q1290Chair: So this was a company that managed its risk still on quite a federal basis.

Mr Cummings: Yes.

Q1291Chair: Whereas since David Walker’s report, we now have group risk committees, and we have CROs, who sometimes even are executive directors. The bank was still at this stage of its development doing most of the work on risk at business unit level?

Mr Cummings: Not all of it, but yes, I would say it is dominant. A federal structure is a dominant feature of HBOS and that was done initially after the merger to drive, "We will establish the correct culture of each division to do it."

Q1292Chair: You can see the upside of it is a way of developing the business, but the downside of it is it is relatively-

Mr Cummings: If you have read my transcripts, you will see that I disagreed with the federal structure. Ultimately, at the time when Andy Hornby took over, I said it had run its course: we have to define what HBOS is, and it is not a group of federal structures.

Chair: Right, no, I had not read that.

Q1293Rory Phillips: Why was that? Why did you disagree with the federal structure at that point?

Mr Cummings: Because I believed it had run its course. I believed we had to start to think like a big bank and not a siloed group of divisions.

Q1294Chair: Even though you were the head of one of them?

Mr Cummings: That does not matter. It is no secret that I had was very vocal about the international division. I thought it was the wrong decision, completely wrong decision, and if I had my life all over again I would have said, "I am not taking the chief executive’s job if you are going to have an international division".

Q1295Rory Phillips: So you wished to keep the international book within-

Mr Cummings: No, what I wished for was a collective look at what HBOS was like. The federal structure had run its course. It was fit for purpose to get over the merger. You have a new group chief executive who really should make his mark and say, "This is what HBOS is going to look like going forward." Instead, he said-and I am not being disrespectful to him, because it is his call-"It is more of the same."

Q1296Rory Phillips: This is Mr Hornby?

Mr Cummings: Yes. My view on international division was that the City would like to see international earnings. I don’t have a problem with that in terms of diversification of earnings, being international. I do not think you have to establish an international division, which mirrors an existing federal structure. So the international division has in it an insurance company, it has a retail bank in Ireland and Australia, and a corporate group in America, Europe, Australia and Ireland-sorry, and in there are certain asset classes that are mirrored in the UK.

Q1297Chair: This is one of the unfairnesses of-personally I do not think it is just you-the person who lost nearly as much money as you did-

Mr Cummings: I am not criticising Colin Matthew in any way shape or form; please do not take this as a criticism. I think it was a valid debate, suggesting that we should look very closely at the federal structure as having satisfied its purpose, but now defining what HBOS is.

Q1298Rory Phillips: But it follows from that, does it not, that you thought that there was a better structure for the bank, which it should move to? I think also that you must have perceived weaknesses in the federal structure, as otherwise you would not want to improve it.

Mr Cummings: Yes.

Q1299Rory Phillips: Can you just briefly-it is a big topic-tell us what they were, in your view, at that point.

Mr Cummings: I get the point where you say we are having a federal structure. If you have an insurance company like Clerical Medical, it is a very different culture from what the people at corporate division look like. It is very difficult for me as a divisional chief executive to look over the fence as an executive director and say, "Am I comfortable with what is going on in Clerical Medical?" for example. "Am I consistently au fait with the accounting treatment of insurance companies?" I have to go up a learning curve, as I should in my role as executive director, and I don’t have any problem with that. Debates on how Clerical Medical are doing are one thing. The debate on how Clerical Medical fit within a financial conglomerate is quite something different. I see that as strategic. Is it the right thing for HBOS to have, as a strategic direction? Is it the right thing for HBOS to have an international earnings stream? I don’t have a problem with that, but you can report international earnings without having an international division.

Q1300Rory Phillips: What was the better structure?

Mr Cummings: I think a more centralised structure with a more centralised executive management, where you have cross-discipline. I genuinely believe that risk would be the centre of that. We did not have a risk director on the main board. I found that very disturbing and if you want to speak to Jo Dawson, less so Jo Dawson more like Dan Watkins, maybe he will tell you that I said to him, "You should be on the main board."

Q1301Rory Phillips: Is that something you said to your colleagues?

Mr Cummings: Yes. "I don’t understand why we do not have a risk director on our main board, and I don’t understand why we do not have an HR Director on our main board."

Q1302Rory Phillips: I know this is slightly unfair, but can you roughly remember when you were making those points to your colleagues, in particular about the risk director?

Mr Cummings: Yes, during my time as the CEO.

Q1303Rory Phillips: So, from 2006?

Mr Cummings: Yes. It is about strategy, structure and people. I sometimes felt it was people, strategy, then structure. There would be seven executive directors and there would be seven jobs. Sorry, that is not right in my opinion, and that was the point I was making. The federal structure had run its course, you have a new group chief executive, and more of the same was not, I think, the right approach, particularly against the backdrop of Basel II, as now you’re in the game of capital allocation-

Q1304Chair: When you get to David Walker’s report, basically he has vindicated your point of view. He has said all banks should have a much more tentative risk, have a risk committee alongside and separate from audit, and an identifiable CRO possibly as a director.

Mr Cummings: That is right, but the other point I would make to you is that you have the outputs from Basel II. Who will run it? Because a lot of the output is financial management-led and a lot of the output is risk management-led, so who owns that information is the real question. Basel II is not a risk issue; it is actually a business issue, and I believed that it had to be taken out of risk and put in the business, and that was my approach to-

Q1305Chair: That is, a centralised risk function?

Mr Cummings: Yes, a centralised risk function for the overall governance of it, but the fact of the matter is the front line has to think Basel. Does that make sense?

Chair: Yes.

Mr Cummings: It is a business issue. I set out to build what I called a bridge between business and risk. That is what I needed to do. I even did drawings on the wall about building a bridge. The ownership of Basel is not the risk directors. It is yours; you in the front line. That will guide the thought process around capital, the thought processes around capital allocation, and it will drive risk management in terms of best practice and operational risk in best practice. I was an advocate of Basel; I bought into it. The problem you had was, "Oh, that’s a risk problem. Let me know what you want me to do, and I will do it. I am not in the risk department." That was the ethos. I think to be fair that was the ethos of all banks-that it is a risk problem. Actually it is not; it is business issue. I was quite passionate about that and very vocal internally about it.

Q1306Rory Phillips: This may be a final thing before we break; just to bring these two themes of the session so far together and just to confirm something, you are not saying, are you, that if, for example, Andy Hornby had made a different decision and the structure of the bank had changed, it would have protected you from what was to come during 2008?

Mr Cummings: I don’t think so.

Q1307Rory Phillips: You think it is a possibility?

Mr Cummings: I think that is an unfair assumption. You cannot change reality.

Rory Phillips: But are there points as to which you could-

Mr Cummings: The asset growth would not have been necessarily on the same scale as an international division and a corporate division. If you have one oil and gas business, for example, we ended up with three oil and gas businesses: one in America, one in Australia and one in the United Kingdom. The fact of the matter is that oil and gas is a globalised business. Private equity is a global business, but focused in London-sorry, it is certainly pan-European, focused in London. There is an argument about real estate as well. You have a European real estate business. The reality is that it was Brits moving abroad. Is the decision around that about asset allocation, and it is a risk issue? Yes, we will do property in France, but we’re going to need a French property company, not a guy in London thinking he can buy a retail park in Paris. That might be okay, but if you have a centralised environment, those are the types of debates. Instead, you have a federal international division writing assets.

Q1308Rory Phillips: Again, this is all hypothetical, but you think that there are those ways in which a different structure might have made it easier to ride out the storm?

Mr Cummings: I don’t need to tell you guys that organisations go through devolution and centralisation, and there is nothing wrong with that from time to time. Government even do it. There is nothing wrong-I am not saying the devolved structure was wrong and the centralised structure was right. It has to be appropriate for the type and the time, and I thought the time was then in 2005, and probably even earlier. But 2005-ish was the right time to make the call to say the federal structure had run its course; we are now looking to create a structure that fits with our strategy. If that strategy is international earnings-there is nothing wrong with that-you define what that means and where we are going to be in terms of geography and the type of business around it.

Q1309Rory Phillips: But is the flipside of that that the federal structure, which in fact was the structure, made it more difficult for the bank to ride out the storm?

Mr Cummings: Yes, I would have said so. Just one point on that, we have a decentralised disconnected high value book with our treasury function. We do not have a capital market solution.

Q1310Chair: Just looking at the programme now, we have been going not quite two hours but nearly. It has gone very fast, because we are interested in your evidence. Do you want a break now?

Mr Cummings: Would that be all right?

Chair: When shall we resume? Partly for your benefit and partly for ours, we need to set a deadline.

Mr Cummings: First of all, I am okay. I am all right. You need to leave at what time?

Rory Phillips: I think we probably need another half an hour, 45 minutes, maybe less.

Mr Cummings: So we start again about-

Chair: As well as your questions, I want to come right back to two things at the end. You have given us some lessons but maybe while we have a sandwich you could think of any other lessons and say, "For you guys working in this Commission, I hope you will take notice of X." Also, of course, we would welcome any reflections on the RDC system because, just to make you even more angry, there is a clause going through in the Financial Services Bill, where the FCA says, "We need to be able to disclose, even before the RDC process is concluded, that we should have warning notice". I think that is outrageous. In other words, "I don’t care about blackening someone’s reputation before they have fully studied it." That is my the mindset we are dealing with. Let us break.

A short break.

Q1311Rory Phillips: Can I just come back on two or three things you were saying this morning, Mr Cummings? We were looking at the numbers and the question of growth during your time, from 2006 to 2008. You explained that a lot of the projected profit was because of realisations-bringing things forward. Wasn’t there also asset growth over that period? It was not just the profit numbers going up, was it?

Mr Cummings: Yes, there was asset growth. Having said that, the asset growth from August 2007 onwards is simply a market function.

Q1312Rory Phillips: This is back to the point we discussed before; the thing had its own momentum by this stage, and you were not able to control it.

Chair: Undershooting of realisations.

Mr Cummings: Yes, and nothing is being sold or bought. It is utilisation of existing funding lines and delivery of most of it; a lot of contractual issues that we had to deliver.

Q1313Rory Phillips: You were stuck with it, as it were?

Mr Cummings: Yes.

Q1314Rory Phillips: What about new business? Were you not writing new business in the period 2007 to 2008?

Mr Cummings: Not very much.

Rory Phillips: Can you put a figure on it?

Mr Cummings: I can’t say.

Q1315Rory Phillips: But you were not entirely-in insurance terms, which I am a bit more familiar with-running off; you were writing some new stuff as well?

Mr Cummings: Yes, but only for existing customers.

Q1316Rory Phillips: Okay. But is that part of your standing by people when things are getting tough?

Mr Cummings: Yes.

Q1317Rory Phillips: That was a consistent approach and it was one you followed in 2007 and 2008. Was that the right market, were those the right conditions to follow your old regime?

Mr Cummings: I think it is easy in retrospect to say no, but how do you change a leopard’s spots? If you are a client-centred and client-focused organisation, to get up one Monday morning and say, "I am not doing anything anymore," raises another issue. By making statements like that to the market-I am sorry, we are in the middle of a rights issue; I have to be consistent.

Q1318Rory Phillips: So it is back to confidence again?

Mr Cummings: Yes.

Q1319Rory Phillips: But what about the realisation, that was the other question I wanted to ask you? What were you doing with what you were getting? In other words, were you reinvesting, were you going back into equity? How was it working?

Mr Cummings: We were not aggressively doing transactional work, simply because we could not deliver on transactions. That is just a fact. We couldn’t sell down, so our underwriting became less important.

Q1320Rory Phillips: I think at its peak you had an equitable fund of about £5 billion. Was none of that required during the period we are talking about-2007-08?

Mr Cummings: Very little.

Q1321Rory Phillips: Can I just look with you in a little more detail at what was in the book in terms of the large exposures, the large transactions? We have some schedules in here at F1, F2 and F3. We will go through them quickly, because I think it is pretty obvious what is going on. Perhaps I can introduce it so it is on the transcript. This is the corporate banking advances over £20 million for the information of the group board; it is one month of approvals, September 2002, do you see that?

Mr Cummings: Yes.

Q1322Rory Phillips: This is a George Mitchell document-he was the CEO at that point-dated 29 October 2002. You can see that there are four transactions listed under the new facilities column in excess of £500 million; do you see that?

Mr Cummings: Yes.

Q1323Rory Phillips: If you just go to F2, this is three years later, same time of the year, October 2005. This is corporate facilities over £75 million now; again, it is just a month of business, September 2005, and if you look down the new facilities column, you can see that there are now, I think, 12 over £500 million and the biggest ones are very much bigger. In other words, the facilities are extending up to just under £2.2 billion. Can you see that at the top of the page?

Mr Cummings: Yes.

Q1324Rory Phillips: Would these be facilities extended to individuals?

Mr Cummings: I don’t think so. Do you mean "individual" as a single person?

Rory Phillips: Yes.

Mr Cummings: No. There may be a single person controlling a number of companies.

Rory Phillips: It might be one of those?

Mr Cummings: Yes.

Q1325Rory Phillips: That is 12 over £500 million at October 2005. Then if you go to F3 that is your document, it appears: "Author: Peter Cummings". We do not have a date for the document, but we do have a date for the transaction period, and again it is three years later, September 2008. If you look at the page you have in front of you, the entire column under "New Facilities" consists of transactions over £500 million; that is right, is it not?

Mr Cummings: Yes.

Q1326Rory Phillips: I think it is 17 in all, and the largest is now far larger, even than the previous schedule at £2.8 billion. This is very late on in our period, as I say, September 2008. So the question I have for you, obviously, is what does this show about what corporate were actually writing or doing late in the cycle?

Mr Cummings: Can I just say that these facilities-if you look at the increase and decrease column, I cannot categorically say this to you, but I suspect, these are existing clients and these increases are about the treasury function? This is not new business, if you see what I mean. If there was a fixed rate attached to any facility, our treasury people would allocate a limit to that fixed rate. As LIBOR became very disconnected from the world, treasury people re-evaluated the fixed-rate issue, and we had to go for approval on the higher price rate. A lot of these increases would be a technical increase.

Q1327Rory Phillips: They are technical increases in existing transactions?

Mr Cummings: Yes.

Q1328Rory Phillips: So the heading "New Facilities" is slightly misleading?

Mr Cummings: Yes. Because if you look at the column there "Existing Facilities"-

Chair: It is the new limits that have been set.

Rory Phillips: Yes.

Mr Cummings: Yes.

Chair: Yes.

Q1329Rory Phillips: Okay; well, then, keep your eye on the numbers at the top of the third schedule-the one we are looking at-and flick back, please, to the second one, the one we have just looked at, 2005; is it not true that the size of these large exposures has gone up? Wherever it occurred, however it came about as a matter of contract, they are just a load bigger, are they not, at the end of September 2008 than they were three years before?

Mr Cummings: Yes, on that analysis, yes, they are.

Q1330Rory Phillips: How do you explain that?

Mr Cummings: I have just explained to you that these are artificial numbers. This is not new business that they are raising in September 2008.

Q1331Rory Phillips: What you have explained is the increase that, to take the top one of 2008, is a modest increase from an existing facility at 2.868 to 2.880, yes?

Mr Cummings: Yes.

Q1332Rory Phillips: But what I am asking you is to look, please, at the existing facilities number, which is 2.8 in the left-hand column, and then flick back to the previous highest existing facility; that is 2.1.

Mr Cummings: Yes.

Q1333Rory Phillips: There are, are there not, far greater numbers of, for example, facilities over £1 billion in 2008. They cannot all be explained by treasury-

Mr Cummings: Yes, I think that is probably right.

Q1334Rory Phillips: Does it not suggest that between 2005 and 2008 you are extending your loan book in terms of these large transactions? It is not just a contractual mechanism.

Mr Cummings: Yes; I would say to you yes, there would be higher underwriting capability within corporate, yes.

Q1335Rory Phillips: Yes. Doesn’t it also suggest that the growth we are talking about between 2005-just before you took over-and the time just before the demise, or when things went very badly wrong for HBOS, was very much asset growth-driven as well as profit-driven, which is the point you have made? You were doing more, and at a higher level?

Mr Cummings: Yes.

Q1336Rory Phillips: Yes; thank you. The question that then arises-and we cannot tell obviously where the original agreements were made and how the transactions were structured so that further increases came through as late as September 2008-is, in the market conditions that we have been discussing, was that prudent, or is this going out, getting new business when the market was pointing against that being the right thing to do?

Mr Cummings: Sorry, I think I have not made myself clear; there was no drive for new business in 2008, or very limited.

Q1337Rory Phillips: There was some new business, but no drive for it.

Mr Cummings: Yes, very limited. We did not have the liquidity to do it.

Q1338Rory Phillips: Yes. When do you think these large exposures were originally incurred?

Mr Cummings: If you look for virtually all of them in September 2008, I have existing now-

Q1339Rory Phillips: Yes, I understand that. The question is, when do you think you wrote those loans?

Mr Cummings: I don’t know. Someone having a £2 billion facility-it would not have been written as a single credit. I suspect to get this property investment it would have been a long-term plan.

Rory Phillips: All right.

Mr Cummings: To go out and get £2 billion of new property lending to a single person or a single company would be quite remarkable.

Rory Phillips: Yes.

Mr Cummings: This would have been an evolutionary process to get to that level.

Q1340Chair: We need to find the 2006 and 2007 tables, because it makes a difference as to whether these facilities are being pushed up in 2006 when things were okay or 2007 when it was only just beginning to turn up, or was it 2008 when things were definitely looking poor?

Mr Cummings: You have to differentiate between what is a technical increase and what is an actual increase.

Rory Phillips: That I understand, yes.

Q1341Chair: Yes. Rory, do you know where these things come from? These have come from lawyers, haven’t they?

Rory Phillips: Yes, I think it was. HBOS lawyers.

Chair: Yes, yes; okay.

Q1342Rory Phillips: Can I ask you something, again, picking up on one further point? We had exchanges about what board involvement, challenge, and so on-the question of growth, profit, asset. You had that discussion, but was there ever any challenge coming back to you from the board to do something about asset growth?

Mr Cummings: Yes, the asset growth targets were part and parcel of the-

Rory Phillips: Profit.

Mr Cummings: No, it was part and parcel of the budgeting, and that was driven very much from the centre around where the expectation of capital ratios would be. So high asset growth utilises more than capital, and the periods 2004 to 2006, I think, saw some capital buy-backs or some share buy-backs and so on. Therefore a lot of the asset growth was governed by capital behaviour.

Q1343Rory Phillips: In terms of the board input, you have described the meetings or the process in which you ended up setting higher targets, and you have explained what you had in your mind about that. But did the process ever come the other way? Was there ever a moment, even in 2008, when the board was saying to you, "Actually, you have to rein things back. You have to try to reduce"?

Mr Cummings: Yes, it was during 2008, at the beginning of 2008, that we could not grow our asset base, whether we wanted to or not. It was not a question of us saying, "We want to do this." The actual fact of the matter is we can’t do it.

Q1344Rory Phillips: By then it was too late?

Mr Cummings: Yes.

Rory Phillips: Yes?

Mr Cummings: Yes, I cannot sell anything in the market, and I cannot write stuff. I am supporting existing clients as best I can if they want to do something.

Q1345Rory Phillips: Okay, so at that point it is too late. Was there any point before that when the board said to you, "No, hang on a minute"?

Mr Cummings: No.

Q1346Rory Phillips: As far as you are concerned-again, I am using crude language-from the board you were being pushed in that direction and then you pushed back in the other direction?

Mr Cummings: The asset growth targets was set at budgeting times.

Rory Phillips: Yes.

Q1347Chair: Then approved by the board?

Mr Cummings: Approved by the board, and I had to comply with the asset growth targets, because they were driving overall an underlying profitability, which is about the allocation of capital, which is about tier 1 ratios and so on.

Q1348Rory Phillips: Thank you. Can I just ask you a few questions about the FSA process; not the enforcement process, but the supervision history that Lord Turnbull outlined earlier? I would like to move us on a little bit in the chronology, because earlier we were starting really with 2003-04 and we went through a little later, but in your submissions to the RDC you place particular reliance on what was being said by the FSA, or perhaps not said by the FSA, in 2007.

So far as today and the transcript are concerned, I want to pick up a few references. You know, as you already made the points, but they are not yet, as it were, on the Commission’s record. Before I do that, a general question, if I may: in your submissions you make the point that as far as you were concerned these points-there were varied points that were made in the final notice against the firm and against you-were not the focus of FSA attention during this later period-is that correct?

Mr Cummings: Yes.

Q1349Rory Phillips: Indeed, you were being given a message that HBOS had tightened up its procedures and had improved its senior management engagement, for example, and, in other words, had got to grips with concerns that they had ventilated earlier. Again, is that fair?

Mr Cummings: The concerns that were ventilated earlier I cannot comment about, but they certainly made statements around senior management engagement.

Q1350Rory Phillips: Yes. For example-I am going to read this out-in June 2007 the supervisor’s report said, "HBOS has a robust governance structure and programme management framework in place. HBOS has a robust framework for setting risk appetite". That was the message that was coming back to you in June 2007-is that correct?

Mr Cummings: Yes.

Q1351Rory Phillips: Again, if I may-the same report-"There has been a noticeable improvement in the level of senior management engagement and commitment within the division following the appointment of the new CEO, Peter Cummings. Peter, with support from the HBOS Board, has been actively involved in the Basel implementation and has strongly advocated the use of advanced modelling techniques for risk management within the business. There has been a big step up in the involvement of the business." Do you remember being given that impression by the FSA?

Mr Cummings: Yes.

Q1352Rory Phillips: Thank you. Moving forward to the end of that year, certainly on the material we have seen, it looks as though the message you were being given in corporate on the following topics and, again, I am just going to read them out: "Stress-testing, credit-decisioning process, risk-grading system and management information and provisioning." The message on each of those was, to use their expression, "Issue closed." Again, is that consistent with what you remember? I think that was the end of October 2007.

Mr Cummings: Yes.

Q1353Rory Phillips: Thank you. Was there any focus-we are talking now about 2007-on any of the issues that, for example, we looked at earlier: asset quality, concentration of risk, risk capital, and all of those matters that are set out in the two final notices sent to you in 2012?

Mr Cummings: No.

Rory Phillips: Thank you.

Mr Cummings: I think I have to be balanced about this. I was clear when I took over that the operating model within corporate was not the way I wanted it to be. You have heard my comments about relationship banking and-you don’t know me, obviously, but I was not a control freak; I am a wee bit of an information freak, and I saw Basel as a real opportunity to drive information forward, and the intellectual debate about who owned the information was quite important to me.

My desire was to have one version of the truth. What we have to have is inputs that are accurate, and outputs that are capable of analysis. I drove a number of initiatives as a direct consequence of my takeover. I suggested to my successor that I did not think this relationship-banking model was the correct model, so I changed it to an asset-class model. I tried to drive specialisms into a disciplined division.

If we have a real estate book, I want people to be real estate specialists. If we have an oil and gas book, I wanted people to have oil and gas experience, so that you get closer to the market and closer to the client. If you put the assets into silos, divided into asset classes, I then try to identify from the Basel perspective where our concentrations are, where our growth should be, what is the right time in the cycle-because a lot of these assets have their own cycle; it is not a general cycle. Each of the asset classes from an evolutionary perspective would have their own risk management appetites stated and then, at divisional level, a gross risk appetite, and then at central level a steer from HBOS management. I am making progress to that effect, but although I say I want to change an asset class model, it takes 12 months to move assets around and get the right people in the right place to manage these assets. So all of 2006 was about trying to implement Basel and move the assets around to an asset class.

Simultaneously, we took a number of initiatives on how we behaved on the liquidity issue. A kick-off of a programme or a project says, what is the correct risk management structure? What is the correct way to evaluate portfolio management, in terms of advanced portfolio management techniques? In the first one I get PWC to help me and in the second one I get McKinsey to help me, and the third aspect was the operational risk environments around the control environment.

These things were done by me because I had defined the business around the Basel issue as people, risk and IT. The IT would have evolved from a people business, and the risk business has a high dependency on IT. The evolution would be people, risk and knowledge, so the IT drives knowledge. I used two words. The second one was technology, but the first one was more important; it was information. So we created a chief information officer, because I was not going to have a debate as to who owns this information. It is business ownership rather than some sort of risk notion.

These things were being demonstrated to the FSA and we started off a high-value committee, not a sanctioning committee. Each area would have to report twice a year on the highest five connections, so there was an independent view on the sanctioning, as it were. That was another initiative. Yes, I am conscious of the concentration risk. Yes, I am conscious of where the growth should be coming from, and yes, I am conscious that I have to build a platform of portfolio management techniques. I would add that very few banks have that in real terms, because most banks have a single credit function. The development of that, as a discipline, is relatively new.

Aligned to that was an attempt by me in 2007 to engage with my colleagues in the treasury division, because this is a different division, to get a joined-up capital market solution that assists the risk-adjusted return on equity through mechanisms such as securitisation and bonds-a mechanism with some sort of capital solution. These are the things that I am doing, many of them engaged in the Basel process. So the Basel process drives a lot of that. It is inextricably linked to Basel. And it is the pushing of that into the business as opposed to the risk department existing only as a risk department.

The other thing that is important from an FSA perspective is the key risk mitigation programme. The bizarre thing is that I tell them what I am doing, and it gets fed back to me as, "This is what we want you to do." I am not being pedantic about it; that is what this is about here. These are the things you think we have done, and I am sorry but that is how it works. I am clear about how I think the business should be run in terms of risk management so we can run the business from an information and a risk perspective, because that is the business I believe we were in.

I say that to the FSA and they feed it back to me, "These are the things we want you to do." I am sorry, but that is how it worked. To be fair to them, they had a number of personnel changes during the process, and recruitment by other banks of their supervisors, which irritated me no end, because you start on the learning curve again, but I assured them, virtually, of everything I did, and my instructions to the division was that you had to be as open and honest with the FSA as possible.

The feedback on that is-let me be honest about it-when we recruit from other banks, they tell me we are far too open with the FSA, and I did not believe that. If we had a problem, I told the FSA. If I thought we had an issue, I told the FSA, because I genuinely believe that regulatory input is essential to all aspects. The culture was that you have access to anyone you like, you can have access to any document you like and you can have access to any person you like, and I believe that that was the right thing to do.

Q1354Rory Phillips: Just summarising-you have explained your approach in that interaction with the FSA, and how you think they pushed it back to you.

Mr Cummings: To be fair to them-and I am being fair to them-it has to be balanced here; if they see me doing something about advanced portfolio management, that is a tick in the box. If they see me doing something about a programme or a project about operational risk, and I set up a project management team to manage the operational risk project and so on, that is a tick in the box for them. They are not acting in isolation thinking everything is okay; they are getting feedback from us as to what we are doing. But their input to what we were doing was very limited; it was a turnaround of what we told them. Does that make sense?

Q1355Rory Phillips: Yes, and what they were certainly not doing was to say, "Well, there are all of these problems"-precisely the problems that are now listed in the final notice.

Mr Cummings: I am sorry, the final notice is not me. What is it? It is not me and this looks like someone who doesn’t go to his work. I am sorry, that is not how I thought. I was as well staying home as going to work, if that is what I was doing. And anything I explained to them or said to them, or any representations I made to them, frankly they were not interested.

Rory Phillips: That is all I wanted to ask.

Q1356Chair: Okay, can I come to one other issue? In the final notice, the one that relates to you, in paragraph 4.114 and 4.115, this is about provisioning where basically the accusation is that you were getting advice that you should provision at a higher level and you disregarded that advice and provisioned at a lower level, and I just want confirmation of what you thought of those two paragraphs.

Mr Cummings: Provisioning is not an exact science; it is at a point in time. Again, if I had an issue about provisioning, I would not have gone about the construct of provisioning in the way I did. If I was wanting to mislead anyone-it would have been me who made the decisions about provisioning, I certainly had an input. I would not have let my risk people near it, and I would have had a very small group of people beside me.

Q1357Chair: When it says-

Mr Cummings: The bottom-up provisioning approach is that the input from the risk people, the high risk people, the chief risk officer, and so on-and, yes, we ran various scenarios about high, medium or low. If KPMG, our auditors, say it is within acceptable levels and the board decide that that is the levels we should go to, I cannot functionally say-

Q1358Chair: First of all, it does say, "Mr Cummings and other members of the HBOS senior management". First of all, there was no division between you. It was not that you entered these lower provisions; it was a collective decision. Secondly, you believe that these were within the ranges that KPMG were advising as acceptable.

Mr Cummings: Yes.

Chair: It is interesting because that is what every other witness has told us as well.

Mr Cummings: There are documents that actually say that.

Chair: Yes, anyway-

Mr Cummings: A KPMG partner and his assistant came to the board and were asked specifically by the board, "What is the position on the provisions, are they within the acceptable range?"

Q1359Chair: Presumably you made that point and they just ignored it.

Mr Cummings: Exactly. You know, if you want to talk about that I am happy to do so but the fact of the matter is, what is a fiduciary duty of a board if the auditor says, "I am happy to do this"?

Q1360Chair: Okay. It is difficult for you to be an impartial observer, but looking back, is the view that HBOS was an unlucky victim of the financial tsunami correct, or did it contribute in some ways to its own downfall?

Mr Cummings: Every day I look in the mirror and ask that: what did I do wrong?

Q1361Chair: I don’t mean you in particular, but the whole company.

Mr Cummings: No; what did we do wrong? I think there was no intention by anyone other than to see the welfare of HBOS be a good thing. I honestly believed that, in a downturn in real estate, I did not factor into anything a liquidity issue for us, and if there was no liquidity issue we work through with some of these assets and it would be much, much-

Q1362Chair: By liquidity you mean not just the liquidity of Lindsay Mackay-

Mr Cummings: I am not talking just about the liquidity of HBOS; I am talking about market liquidity-

Q1363Chair: Which therefore included its impact on your ability to syndicate and sell down?

Mr Cummings: Yes, and also people to buy and sell your assets to. So if you have a building that was once worth £100 million and it is now worth £70 million, you can make the call to either sell it or hold it. But the fact is you cannot sell it for £70 million, because no one is funding to buy it at £70 million, so the value falls to £50 million. Yet the viability of the earnings stream from the building has not changed.

Q1364Chair: Second question: was there a point at which you thought the die was cast? You talked about the nine-month train crash; this rather implies that from around February and the rights issue, you began to think, "Are we ever going to get out of this?"

Mr Cummings: The abyss, to be fair, became very profound overnight almost; I mean, we were on a downward-it fell off a cliff. As your funding starts to mature, you get some very heavy numbers every morning for your treasury people to get-panicked.

Q1365Chair: Yes and those difficulties started in the spring of 2008.

Mr Cummings: To be fair, they started in August 2007.

Chair: Right, right.

Mr Cummings: That is when the funding crisis start. So the liquidity crisis becomes a credit crisis.

Q1366Chair: I am not asking you-because you declined to do so-to bad-mouth your colleagues, but was there any comment on the fact that the three senior positions in the company-Chair, Chief Executive, CFO-all came out of the Halifax side? Did anyone say you might have talented people in all those roles, but you have not got the right balance between them?

Mr Cummings: You have to remember that HBOS is a merger. It was always portrayed as how many Bank of Scotland directors we have and how many Halifax directors.

Q1367Chair: But you were, in some areas, in corporate and international, quite well represented.

Mr Cummings: Frankly, I did not care. My view was that HBOS had moved on and you do not talk about the merger any more. The merger was in 2001. 2004 to 2005 is what we are talking about. It is nothing to do with anything. I think that the structure of your executive team should be driven by the Chairman and the Chief Executive. That is my opinion. If I am not the right person for the job, then tell me, and if-

Q1368Chair: Yes. No, my question is more about whether having those three jobs, the kind of HQ jobs all Halifax rather than HBOS and none of them were long-time career bankers.

Mr Cummings: It is very easy for me to see that now, but I did not think it at the time.

Q1369Chair: But these were guys who have a first in maths and all these terrific reputations around the internet. Okay; finally, just-

Mr Cummings: Let me put it this way; did they have a feel for banking the way I have and did I believe they had it? No, but I did not have a feel for retail in the way Andy Hornby had, if you see what I mean.

Chair: But then he is the CEO and not the head of-

Mr Cummings: It has to be multi-disciplined, and strange and different are just strange and different, they are not wrong.

Q1370Chair: Yes, okay. We have talked a certain amount about the FSA approach. I have seen the press statements and things. There is this extraordinary thing that you uniquely in this whole universe have been penalised, but what are your thoughts on how that process works? Is the RDC as the CPS is to the police; that is, the police will suggest something and the CPS will often say, "Come off it, mate, you cannot make that charge stick and you either have to drop it, reduce the charge or get some more evidence"? Does the RDC remotely have that kind of role?

Mr Cummings: By that point it was nearly three years, so I have had three years of stuff. I get two hours at the RDC in total, albeit the morning is ours and the afternoon is the FSA’s. I find them, if I am being honest, distant. What they said in the RDC is not what the issue is. They suggested certain things to the FSA, but their engagement with me was very limited. I am not sure that they were anything other than a committee, that-

Q1371Chair: That is what the C stands for, doesn’t it?

Mr Cummings: Yes, I understand that, but a committee that were there to not rock the boat. They certainly did not challenge anything the FSA said in terms of analysis.

Chair: Yes, okay.

Mr Cummings: I found it, if I am being blunt, quite inept and very disappointing. In terms of the way the process was explained to me, that I would have the ability to put my side, and I believe that I did in the various representations, but very little was referred to therein. They issued what my one legal team concluded was an unlawful notice, reducing the original fine from £1 million to £800,000, and we issued them with a notice to say that it was unlawful because they had not explained how the fine was constructed. Within 24 hours3 the investigative team got back involved, and then a phone call to my solicitors and one meeting and approximately two phone calls later the fine was reduced from £800,000 to £500,000 if I do not take the matter to the judicial-

Chair: The tribunal, yes.

Mr Cummings: The judicial tribunal. What they did not know is I was unwell and I could not do that anyway. My wife and I decided that I am not fit enough to do that, and I am not waiting another two years for that judicial review, apart from the fact I don’t have enough money-I don’t have any money to pay my legal expenses. But I do think it bewildering and bizarre that in the space of a meeting and two phone calls-because they did not want me to take it to judicial review-they reduced the fine to £500,000. Frankly, it was like living in an American soap opera. I find it bewildering, bizarre and downright impossible to believe this country has an organisation that is out of control to the extent that it is. I think it is unacceptable behaviour.

Q1372Chair: All right; okay. Judging by some of the transcripts, a lot of people would agree with you. Are they introducing the perp walk in a different form, which are basically big heavy accusations to browbeat people into-

Mr Cummings: It is certainly that, it was certainly at that time. You would think they knew that this was an individual and not in an institution, so I had no institutional framework to fall back on. I had no ability to call witnesses. I had no ability to analyse documents, and I think from an individual’s perspective it is quite oppressive. I look at a corporate’s behaviour-I mean as a corporate entity-and I look at the sign-up by Lloyds on signing up to the notice, and the incidents that happened before that. In their notice against the bank there are certain things that Lloyds do not want in it, whereby Lloyds may well find themselves in litigation, if this notice remained the same, which would mean that they would have to litigate against KPMG. It was put to me that I should sign up to the notice against me, which would be softened, and that part of the litigation or the part that could be litigated against would be removed. When I talk about brow-beating, that is the sort of scenario that I faced.

Chair: Yes, okay. I think I have probably covered the ground I wanted to cover. Rory, do you have any other questions? Broader questions?

There are lessons about federalism, attention to risk, and I personally think that the Basel II took things into a more theoretical area, and there was a loss of sight of the day-to-day looking at the book. There is an inconsistency of tone in the FSA; sometimes they are blowing hot and sometimes they are blowing cold. But is there anything else you wanted to say about the general application to banking going forwards?

Mr Cummings: If you are looking at culture going forward-it is a very difficult environment to describe-you certainly shouldn’t describe it in straplines or soundbites. These are complex organisations with large numbers of people in them, and it is people who do things, not organisations. I feel if you are going to look at the culture of banking you have to look at the culture of the regulator because that is an intrinsic part of banking. The fear of the regulator should have been a respect issue, rather than actually a fear. As far as I can see, the banks will pay whatever it is to get the regulators off their back, and there is no debate about the issue other than a massive fine or a-

Q1373Chair: Hector Sants at one stage said, "You should fear me."

Mr Cummings: I think that is pretty appalling. I know he said that; I found that quite offensive and quite appalling. Margaret Cole also said, "We should hang people." What is that about? Who wants to be an executive of a bank now? That is just uncalled for.

Chair: Okay. We are very grateful to you. It has been very helpful filling in components of this and also helpful for Rory and myself as we move to the end of the sessions next week. I am not quite sure how I will write it up, but it will be a kind of appendix, I suppose, to the main report. It may not appear until after Christmas, but anyway you have been very helpful in filling parts of that in for us. Thank you very much.

Mr Cummings: Thank you.


[1] Note by Witness: I am still unable to recall this quotation in these terms in The Observer in June 2008.

[2] Note by witness: I would like to clarify that the FSA’s characterisation of the term “directed” is odd given that none of the relevant directors involved in this process were interviewed.

[3] Note by Witness: I now recall that that this was more than 24 hours, although the investigation team responded very quickly.

Prepared 21st December 2012