Lloyds Bank has barely been out of the headlines in recent weeks, with a missed deadline on compensation for HBOS Reading Fraud Victims, harsh and public criticism from TV star Noel Edmonds and revelations that the bank was warned five years ago about fraud. Here our expert banking team take an in depth look at the story so far…
Lloyds Banking Group (“Lloyds”) has set aside £100m in compensation for victims in the HBOS Reading fraud, however this figure has been criticised as falling far short of fairly and adequately compensating all victims with the compensation review condemned as a slow moving, refined scheme that is lacking transparency, fairness and independence.
What was the HBOS Reading Fraud?
A six year investigation concluded with a finding of guilt of six individuals of conspiracy to defraud, bribery and money laundering in February of this year. The six individuals involved, including two HBOS bankers, were jailed earlier this year for a total of 47 years.
The lengthy investigation, costing approximately £245m discovered that during the period 2003 – 2007, a senior HBOS employee in Reading, Lynden Scourfield, coerced numerous struggling businesses into taking out unnecessary loans they could not afford. When the businesses inevitably defaulted on their repayments, Mr Scourfield instructed them to use a turnaround consultancy firm, Quayside Corporate Services (“Quayside”), run by David Mills. Quayside used its relationship with HBOS and Mr Scourfield to force the struggling businesses to hand over large fees for the consultancy services. As a result of this abuse, many businesses went bankrupt and owners lost substantial amounts of their assets which even included their family homes.
Lloyds took over HBOS after the fraud was committed in 2008, before the judgement Lloyds refused to accept evidence of criminality and ignored the numerous customer complaints they had received from victims of this unethical behaviour. Lloyds went so far as to claim they were a victim of the crime and has since failed to address why the fraud went undiscovered for such a vast period of time.
The 2008 review has estimated that £375m of debt was owed by the business, all managed by Mr Scourfield, as a result of this mismanagement of their accounts.
As a result of the findings of guilt, Lloyds has written off £245m from its impaired assets division and has commenced an independent review linked to a compensation scheme for the victims.
The FCA are due to resume the investigation into the fraud after it was placed on hold in 2013 at the request of the Thames Valley police, the resumed investigation will focus on the extent and the nature of the knowledge of these matters within HBOS and its communication (or lack of) with the FSA after the initial discovery of the misconduct.
Independent Review and Compensation Scheme
Lloyds have appointed Professor Russel Griggs to independently review the issues on a case to case basis with agreed outcomes ensuring fair results.
Six or seven customers are believed to have been consulted on the review and Professor Griggs has encouraged others to participate further, stating that reviewers will be paid necessary costs for participating.
In addition to the review Lloyds has set aside £100m to compensate the 64 victims it has identified and has stated that offers will be put in front of them by June 2017 at the latest. Lloyds has been criticised saying that a further 250 businesses have been affected by the fraud that have not been included within the 64 and that the sums closer to £1bn are adequate to compensate the victims.
How much will individuals be compensated and how will this be paid?
Of the £100m set aside, it has yet to be determined how this will be split between the 64 victims and whether this amount will be increased if this cannot adequately cover everyone. So far only one victim has been compensated but the figure remains unknown, it is also worth noting that the claim of TV star Noel Edmonds stands at £73m alone which would support claims from victims that £100m is not nearly enough.
Lloyds have stated that payments will be assessed on a case to case basis and could be interim or in full. Individuals have started to receive and accept offers of compensation but Lloyds will not comment on the amount or size of offers made.
What will the compensation cover?
Lloyds will pay compensation for economic losses, distress and inconvenience as part of a package of measures to assist victims.
Lloyds has also stated that this could also cover ‘reasonable fees’ for professional advice and amounts in writing off remaining business personal debts that are still owed.
How do I know if I am eligible for compensation and when will I be paid?
Lloyds has stated that they have already contacted the 64 customers affected to inform them that they are eligible for compensation. For those who have provided information to Lloyds, had stated that they were prepared to make compensation offers by the end of June, however the bank admitted at the end of June that it would miss the self imposed deadline. To date victims have been paid living expenses of up to £35,000 but a date for full compensation remains unknown.
For those who have not yet received correspondence from Lloyds surrounding the compensation scheme but think they have been affected, it has not been determined whether the bank will be considering these customers as part of the review.
Criticisms of the compensation scheme
Noel Edmonds has publically criticised the scheme stating that the review procedure is “fatally flawed” with no means of proper independent assessment on the outcome and a lack of transparency and he has called for the appointment of an independent forensic accountant.
Mr Edmonds, a victim of the fraud, has stated that his losses on his Unique business total £73m and as part of the stress suffered from the mistreatment he has set up a website campaigning against Lloyds.
This scheme is similar to the compensation schemes concerning the mis-sold interest rate hedging product in 2012 which were criticised for their lack of transparency, speed and low payouts. With Professor Griggs as the driving force behind the fairness and transparency to the scheme, it is arguably lacking independence when the reviewer has been appointed by the bank who is the subject of the review.
Further links to fraud
Since the finding out guilt, Lloyds have been criticised of assisting directors of a company linked to the HBOS Reading Fraud in buying a private jet chartering company at a substantial discount.
Once Lloyds rescued HBOS in 2008, it became the main creditor of Corporate Jet Services (“CJS”) which collapsed in 2007 owing £113m to HBOS. Lloyds accept the sale of Corporate Jet Services’ prime asset, 328 Support Services (“328”), for £5m in July 2011; this was a substantial discount to the £27m previously agreed and the £23m valued in the company’s accounts. The buyer was Quest Aviation Services (“Quest”), a quarter owned by David Mills who was jailed for his central role in the HBOS fraud. In funding this acquisition Quest borrowed the entire £5m against 328’s own assets and for the transaction to proceed Lloyds had to write off €12.5m of claims.
David Mills and the other owners were likely to have made millions when Quest sold 328 for an undisclosed sum to a private US aerospace company in 2015. The police are investigating the circumstances surrounding CJS’s insolvency and are likely to be focusing heavily on the decision of Lloyds to sell 328 for such a reduced sum.
Next steps for those affected
For individuals and businesses who have been victim to the fraud, it is vital that they gain proper guidance and assessment of the merits of their claim. Anyone who thinks they may be involved should look into instructing a solicitor with knowledge of financial compensation schemes and an accountant to identify clear losses.
The most important consideration is whether or not the claim is still within date to be brought; regard must be had to the limitation period and whether a protective claim form should be issued to avoid the period elapsing.
It is important to maintain all evidence and act quickly in instructing specialist legal advice.
To find out more about the issues raised in this post, or to discuss any queries regarding HBOS Reading Fraud or other banking misconduct issues call +44 (0) 161 829 2599.
The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by berg or any of its partners or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.