The world’s toughest regulator just got even tougher.
On Tuesday, the FSA announced it had banned the former deputy chief executive and the credit director of Northern Rock for misreporting nothing less than ‘mortgage arrears’.
As the regulator’s website noted:
1. The Final Notices for David Baker and Richard Barclay can be found on the FSA website.
2. Impaired loan figures are loans reported as being either ‘3 months plus’ in arrears or in possession. These figures formed part of the management information and subsequent communications made to the market.
3. Both individuals no longer work at the firm: Baker left Northern Rock in May 2008 and Barclay left in March.
4. The period in question for these events is January 2004 to March 2008 prior to Temporary Public Ownership.
The final notices meanwhile offer the following extra details (our emphasis):
(1)despite becoming aware in December 2006 that there were 1,917 loans omitted from the impaired loan figures (loans reported as being either “3 months plus” in arrears or in possession), which formed part of the management information and subsequent communications made to the market, Mr Baker did not escalate this information satisfactorily nor make any formal record that this issue had arisen;
(2) he agreed on a course of action to deal with the position which was not transparent and did not have immediate effect; and (3) he made misleading statements regarding the impaired loans to external 2 stakeholders, including market analysts, quoting figures which he knew were not a true representation of NR’s impaired loans.
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Mr Baker’s failures in this regard are serious because:
(1) he was Deputy Chief Executive of a large retail bank with responsibility for accurate internal and external reporting;
(2) during the Relevant Period he had controlled function responsibility for the DMU;
(3) had the 1,917 loans remained in the Firm’s reported arrears, the figure reported in the 2006 annual accounts would have been 0.68% of the loan book instead of 0.42% (at a time when the reported Council of Mortgage Lenders (CML) average was 0.89%). If the 1,917 loans had been included in the reported possessions, the stated possessions figures would have increased from 662 cases to 2579 cases;
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4.11. On 24 January 2007, Mr Baker participated in a webcast to the market discussing the Firm’s 2006 accounts. He stated that NR’s arrears levels were less than half the CML average, attributing this to improved collections and improved front end risk underwriting processes. He also stated that possession figures were exceptionally low at only 600 given the size of the Firm’s loan book. Mr Baker in fact knew that the reported data in respect of impaired loans stated in the Operating and Business Review for the 2006 annual accounts was low because 1,917 pending possession cases had not been reported.
And in the case of Richard Barclay:
2.6. The consequence of Mr Barclay’s conduct was that senior management was provided with management information concerning loan arrears and property possessions that was inaccurate in certain material respects. The provision of accurate data concerning loans in arrears and/or possession was of significance because it enabled recipients of that data (including analysts or other NR stakeholders) to form a view of NR’s asset quality.
4.6. The deviation from the secured lending policy and the mis-use of Trove, was a result of perceived pressure on the staff in the DMU to retain NR’s arrears position at half the Council of Mortgage Lenders (CML)/industry average. The performance of the Firm’s loan book relative to the CML average was referred to in various documents issued by the Firm, and in briefings to market analysts, as an indicator of the quality of NR’s loan book.
Which begs the question – what constitutes a non-performing loan anyway?
The answer, by the way, is that there isn’t really a clear and unified definition in Europe. Although obviously institutions should in most cases at least abide by their own national definitions.
Related links:
FSA probes dealings of former Flowers investor – FT Alphaville
FSA probe targets trades in S&N deal – FT Alphaville