The FCA has accused the Bank of Scotland of failing to be open and co-operative with it and failing to disclose information appropriately (in breach of Principle 11) in relation to the bank’s suspicions that fraud may have taken place at its office in Reading. It has imposed a fine.

Principle for Business 11 (a rule to do with relations between firms and regulators) states that a firm must deal with its regulators in an open and co-operative way and "must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice." This is the first time that the FCA or its predecessor has punished the firm for breaking this rule.

BOS identified suspicious conduct in its impaired assets team in early 2007. This was a part of the bank's commercial lending arm, the operations of which are not relevant to our readers. Suffice to say that because commercial lending is largely unregulated, the FCA has restricted itself to invoking a very vague principle. The bank's efforts to keep the fraud away from the regulators' eyes, however, are of concern to all regulated financial firms as the reach of Principle 11 is universal.

The director of the team at its Reading branch, Lynden Scourfield, had been sanctioning limits and additional lending facilities beyond the scope of his authority and this had remained undetected for at least three years. BOS knew by 3 May 2007 that this misconduct had cost it dear financially. The FCA has also today banned Scourfield and three others from working in financial services because, it says, they took part in a fraud. The others are Mark Dobson, Alison Mills and David Mills.

The bank uncovered the "control breakdown," as the FCA calls it, in early 2007. By 3 May it had spotted suspicious conduct and some of its people suspected that fraud had been taking place. It was not, however, until July 2009 (five months after BOS had become part of the merged Lloyds Banking Group) that BOS provided the regulator with a full disclosure in relation to its suspicions and the report of the investigation that it had conducted. The Thames Valley Police later established that a fraud had indeed occurred.

BOS agreed to resolve the matter as soon as the FCA told it that a fine was in the offing. It has therefore obtained a 30% (stage 1) discount from the figure that the regulator would otherwise have imposed (£65 million).

Examples of evasion

On 12 May 2007, after problems relating to the impaired assets team came to the attention of the press, BOS emailed the now-defunct Financial Services Authority to describe the matter as a failure in controls. It later gave an FCA regulator a briefing by telephone. On 14 May, the FSA specifically told the bank to keep it updated and the bank promised to do so.

On three occasions in 2007 BOS informed the FSA that it had found no evidence of fraud. In fact, BOS had identified suspicious conduct that suggested an inappropriate and potentially corrupt relationship. It asked for some more details about BOS’s reasons for its belief that that Scourfield was not acting fraudulently or corruptly and the steps it had taken to investigate. By way of response, on 24 October it sent off a brief summary of its investigation. It said that it had spotted suspicious emails and an exit fee which appeared to be owed to the bank being re-directed to an account controlled by a director of Quayside Corporate Services or QCS, a 'turnaround consultancy' which acted on behalf of businesses in financial distress and which Scourfield and his people were compelling customers to use. However, the bank failed to provide all relevant details and did not send the FCA the report of its investigation. It was not until July 2009, after another nudge from the FSA, that it sent off full details. Even then, both the FSA and the bank eventually agreed that the report was "woefully inadequate" and left "many unanswered questions" about Scourfield's conduct. The FSA then sent in a "skilled person" to investigate in accordance with s166 Financial Services and Markets Act 2000. It also conducted a few "close and continuous" meetings with bank staff. The decision notice does not mention the skilled person's name.

In August 2007, BOS closed its internal investigation of Scourfield, with no evidence found, over the protests of one senior manager. This was despite some customers writing to the bank to complain about the QCS's high charges and the prioritisation of the payment of QCS fees at the exense of other creditors of the businesses and payments being made from their business accounts to QCS without their consent. Some also complained that the funds supplied by lending from BOS, and by the fees that customers paid to QCS, had been used to fund the lifestyles of Scourfield and individuals connected to QCS, including holidays abroad and prostitutes. One complaint said that Scourfield and other bank advisors had used £25,000 of a business customer’s funds for entertainment purposes, adding that a certain lawyer had the evidence if the bank wanted to see it.

In 2017 six people, including Scourfield and Mark Dobson, were convicted for the fraud involving QCS.