It was late September 2008 and Britons were numbed and... [Derived headline] [Sunday Herald (Scotland)]

(Sunday Herald (Scotland) Via Acquire Media NewsEdge) It was late September 2008 and Britons were numbed and angry to discover that banking's emperors had been prancing about naked for years. Around the world, banks were toppling like dominoes. Lehman Brothers had just gone belly up and governments were scrambling to salvage a financial system laid low by its own folly.

One of the few ways for the public to vent their anger was through writing comments on online newspaper articles about the credit crisis. Beneath an article of mine - "Call to sack HBOS directors", published in the Sunday Herald on September 28, 2008 - one of the 400 comments stood out.

It was from Nikki Turner, a music publisher from Cambridgeshire, one of the small business operators whose allegations resulted in eight people being charged last week. The charges deal with a range of offences - including fraudulent trading, conspiracy to corrupt and money laundering - connected to business loans made through HBOS's Reading branch.

Intrigued by Turner's comments, I tracked her down to the Cambridgeshire home she shares with her husband and business partner Paul Turner, a former lighting and stage-production guru to rock stars including Bob Marley and Fleetwood Mac. Her research was enough to convince me that there was something to investigate.

As industry watchdog the Financial Services Authority (FSA) later described it, the Reading scandal centred on unauthorised commercial lending by an HBOS manager to high-risk small companies on condition that the companies appointed an HBOS-preferred corporate turnaround specialist to their boards. Many of the companies which complied later went into receivership, with many of their assets then allocated to those specialists.

I have been writing about this case off and on since then, largely for the Sunday Herald. For my pains, I have faced a libel writ from one of the bankers charged and legal sabre-rattling from others.

Reporting restrictions prevent further detailing of the alleged fraud itself. But what has astonished me more than anything else is how HBOS and its parent company, Lloyds Banking Group, treated their bank's alleged victims and the media throughout. Their approach has been deny, delay, dilute, divide - perhaps driven by the hope that the case would disappear.

It hasn't. Sue Patten, head of fraud at the Crown Prosecution Service, said last Tuesday: "We have determined that there is a realistic prospect of conviction and a prosecution is in the public interest. All eight defendants will appear before Reading Magistrates' Court on January 18, 2013, with a trial expected later this year or early in 2014." HBOS directors were alerted to the alleged fraud on September 3, 2007. Lord Stevenson, then the bank's chairman, Andy Hornby, its chief executive, and its head of corporate banking, Peter Cummings, along with all the other then HBOS directors, received letters from Turner detailing the behaviour of a Bank of Scotland Corporate senior executive.

In her letter to Hornby, Turner wrote: "We are surprised that, in the previous five months, you have not provided an apology, explanation, comment or even excuse for [alleged misconduct] which we now find out the bank has been aware of for some considerable time." None of the board of directors at HBOS - where executive directors earned between pound(s)1.2 million and pound(s)2.6m in 2007 - paid her the courtesy of a reply, or had her allegations investigated. Instead, the Turners received a menacing letter from the bank's lawyers, Denton Wilde Sapte.

BoS Corporate's initial response to the crisis was directed by the bank's head of impaired assets, Tom Angus. He now runs Edinburgh- based Taga Advisory, which has advised Lloyds Banking Group on the value of toxic loans on BoS Corporate's book.

Angus decided the best approach to the Reading situation was to "hive down" (ie, reduce) the loan book of a manager fired for "over- generous lending". He delegated executives Andrew Scott and Fraser Kelly to do this. Kelly would later be described by a judge as revelling in his "hardball" approach to recovering HBOS cash from defunct Christmas hamper firm, Farepak.

Many companies affected by activities at the Reading branch were forced into administration between April 2007 and June 2008, and the role of KPMG and now-bust accountancy firm Vantis in organising "pre- pack administrations" has come under scrutiny.

Denial by the bank continued in November 2008, when then corporate affairs director Shane O'Riordain told the Sunday Herald: "We do everything in our power to reassure customers while, at the same time, helping them to turn around their business ... We strongly believe that we have acted throughout in a fair and responsible way." An HBOS spokesman had earlier claimed the bank had "robust procedures in place around the appointment and continued engagement of consultants by our clients".

After HBOS was rescued by Lloyds in a deal concluded on January 19, 2009, some of the alleged victims imagined the new bank might take a different attitude towards the Reading case. They were wrong.

On January 27, 2009, a group of MPs representing businesses claiming that they had been driven out of business by alleged wrongdoing at the Reading branch, had a meeting with bank executives. They had demanded to see Lord Stevenson, but he excused himself, and they met instead with three ex-HBOS middle managers - Philip Grant, Andrew Scott and Liza Vizard - accompanied by the bank's solicitor, Rory McAlpine of Denton Wilde Sapte.

Grant - chief operating officer for corporate banking and formerly of Bank of Scotland Corporate - said the bank had carried out "an extensive internal review" but found no evidence of wrongdoing.

Following the meeting, in a letter to South East Cambridgeshire MP James Paice and others dated February 18, 2009, Grant said that the bank had "concluded that there was a lack of evidence of direct personal benefit on the part of [name removed] from his relationship with [consultancy, name removed for legal reasons]". Grant was, however, prepared to concede that the bank "had been more supportive than it should have been" of certain clients, adding: "Following communication between the bank and the FSA, improved procedures were implemented to ensure that there was no recurrence of ['over- generous lending'] ." Enter the FSA, which after sitting on the sidelines for more than two years, was finally persuaded to launch a formal investigation into the matter following a debate in Parliament in June 2009.

In a memo to the House of Commons Treasury Select Committee dated March 2010, the FSA reported: "In early 2007 HBOS reported a control issue to the FSA. This related to unauthorised/unapproved commercial lending by an HBOS manager in their Reading office to high-risk small companies on condition that the companies appointed an HBOS- preferred corporate recovery specialist to their boards. Many of the companies later went into receivership leaving HBOS with losses of around pound(s)250m in the branch." But the regulator emphatically washed its hands of responsibility, adding: "Our practice at that time was to rely substantially on [the banks'] senior management to ensure that the appropriate systems and controls were in place." In other words, the regulator left it to the banks themselves to behave responsibly and ethically. It was taking a passive attitude to the Reading scandal.

Whistleblower Paul Moore, former group head of regulatory risk at HBOS, insists that directors including Stevenson, Hornby and Cummings ought to have been investigated in the Thames Valley Police and Serious Organised Crime Agency investigation into Reading, not just a couple of middle-ranking bank executives.

THE FSA has since acknowledged that Bank of Scotland was pretty much out of control in the period the alleged fraud occurred. In a "final notice" enforcement notice on BoS, published on March 9 last year, the FSA said the bank was "guilty of very serious misconduct", and outlined some hair-raising failures in its corporate bank, including in risk management and corporate governance. The report added that the bank's management information systems were so flawed they impeded its ability to "assess, manage and mitigate credit risk".

The bank's attitude to the case of HBOS Reading appears to epitomise much of what has gone wrong with UK banking. Like the pound(s)20 billion personal payment insurance rip-off and interest- rate swap mis-selling, the banks' response when clients complain of mistreatment and possible fraud is not to seek to treat customers fairly, but to play hardball, and insist they have done nothing wrong.

In Iceland, politicians and regulators have made sure that those responsible for the credit crisis - including the most senior bankers and auditors - are fired, prosecuted or sued. This approach seems to have helped Iceland's financial system get on the road to recovery.

The approach favoured in the UK has been for politicians and regulators to allow banks to? deny and delay, and, if pressed, throw a few low-level bankers under the bus. Five years after the crash, with the UK economy still languishing in the doldrums, maybe it is time for a rethink.

Nikki Turner said: "Since September 2007, we have written on many occasions to senior executives of both HBOS and Lloyds, providing them with detailed information about this scandal ... Faced with incontrovertible evidence, they have remained steadfastly in denial and have knowingly compounded the losses and distress for the victims." An HBOS spokesman said: "The group has assisted Thames Valley Police fully in their investigation and it will continue to do so. Neither Bank of Scotland nor Lloyds Banking Group is the subject of the investigation." (c) 2013 ProQuest Information and Learning Company; All Rights Reserved.

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