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Northern Rock former directors fined and banned by FSA

Northern Rock former directors fined and banned by FSA

Two former Northern Rock directors have been fined by the Financial Services Authority (FSA) and banned from working for a regulated financial firm again.

The City regulator fined former deputy chief executive David Baker £504,000 for misreporting mortgage arrears data.

Former credit director Richard Barclay was fined £140,000 for also failing to ensure accurate financial information.

The FSA said the two had admitted their misconduct and received reduced fines as a result of their co-operation.

In a statement, David Baker said he accepted the FSA's findings "with great sadness".

Market perception

Mr Baker was Northern Rock's deputy chief executive between 2004 and 2008, and was responsible for the bank's reporting of financial information.

The FSA said he became aware in 2007 that there were 1,917 loans left out of the mortgage arrears or repossession figures.

But he failed to make sure the figures were corrected, or to refer the matter up to the chief executive, and he subsequently made misleading statements to market analysts.

If these omitted loans had been included, the number of borrowers in arrears would have increased by 50%.

Mr Baker said he decided in January 2007 to give the unit involved six months to rectify the mis-reporting, to "resolve, not hide the reporting error".

"I made an error of judgement and I regret it," he said.

He argued that his actions did not affect customers or have anything to do with Northern Rock's collapse later that year, when it had to be rescued by the government.

Market perception

The FSA stressed that these figures were important to analysts and outside investors when judging the health of the company.

This was particularly the case for Northern Rock as it relied on a positive market perception of its performance in order to fund its rapid expansion during a time in which it became the UK's fifth largest lender.

"Important to the firm's rapid growth was the maintenance of its asset quality," said the FSA.

"The value of Northern Rock's securities [shares and bonds] was in part derived from a market perception of how its loan book was performing."


The FSA said staff in the debt management unit, where Richard Barclay was a director, felt under pressure to maintain a lower-than-average level of mortgages in arrears and properties they had lent money against that had been repossessed.

This resulted in actions that "improperly reduced" the reported numbers of what are known as impaired loans.

However, the FSA stressed there was no evidence that Mr Baker, who ran the unit, was involved in these actions.

'Clear message'

According to the regulator Richard Barclay failed to prevent a number of "improper practices" and his failings were abused by some members of staff, leading to an under-reporting of arrears figures.

As the detailed report on his actions said: "Mr Barclay's conduct demonstrated a lack of skill, care and diligence in establishing and overseeing effective systems and controls."

The FSA said Mr Barclay was aware that Northern Rock's (NR's) arrears position was being misrepresented.

"[He] took no steps however to ascertain the extent to which the arrears figures were being adjusted. Mr Barclay was also aware that the firm's arrears position enabled people within NR, analysts, NR stakeholders and the FSA to form a view of NR's asset quality.

However, the FSA said it was not possible to calculate the exact extent of the mis-reporting.

"The fines we have imposed on them leave no doubt that we will take action against individuals who either fail to act with integrity or who fail to perform their roles to a high standard," said Margaret Cole, FSA director of enforcement and financial crime.

"This is a loud and clear message that we are serious about taking action against senior directors where they step over the line."

Simon Morris, of City law firm CMC Cameron McKenna, said: "Every senior manager would do well to read these cases carefully.

"[The] FSA is in effect providing two case studies... explaining the standard to which it requires all individually approved managers to operate."

Posted on Tuesday 13th April 2010

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