Ex-Northern Rock directors fined and banned

Ex-Northern Rock directors fined and banned by City watchdog

Two of Northern Rock’s top former directors have been fined by the City watchdog and banned from working at any bank for concealing the scale of bad debts at the mortage lender in the years before its nationalisation.

By Philip Aldrick, Banking Editor
Telegraph, 13 Apr 2010

Northern Rock branch - Ex-Northern Rock directors fined and banned by City watchdog Photo: Rii Schroer

David Baker, the deputy chief executive from 2004 to 2008, made “misleading statements” about loans that were three months or more in arrears, according to the Financial Services Authority, and Richard Barclay, Northern Rock’s managing credit director, “failed to ensure that the information reported was accurate despite warning signs at an early stage”.

Revelations that the bank knowingly mis-stated its bad debts in the months and years before it was nationalised will come as an embarassment to the Government, which repeatedly stressed Northern Rock’s strong asset quality and solvent position to the markets before and after the run on the bank that ultimately led to its demise.

Although the mis-statements themselves were not the cause of the bank’s collapse, the poor lending standards help explain why the Government has had to put £3bn of taxpayers’ money at risk with the bank and lend it another £23bn that is now expected to take up to 20 years to recover.

Mr Baker, 57, has been fined £504,000 and “prohibited from performing any function in relation to any regulated activity”. Mr Barclay had his fine reduced from £300,000 partly “on the grounds of hardship” to £140,000. It is possible they may now face civil action from the thousands of Northern Rock shareholders who lost everything when the bank was nationalised.

Mr Baker, 57, who answered only to chief executive Adam Applegarth, was on a £530,000 salary when he left in March 2008 and had built a £4.3m pension pot over 34 years at the bank that paid him £300,880 a year from the age of 60.

The FSA fined Mr Baker for failing to disclose that 1,917 loans had been omitted from the arrears figures after becoming aware of them in January 2007. He subsequently made “misleading statements regarding these impaired loans to external stakeholders, including market analysts, quoting inaccurate figures”.

Had he reported the correct numbers, Northern Rock’s arrears rates would have been roughly in line with the industry average, not half the rate. The numbers were absolutely vital to Northern Rock’s success, as it prided itself on having the best arrears rates of the banks despite pioneering the 125pc mortgage.

Mr Barclay “knew that the firm’s arrears position enabled senior management, analysts and the FSA to form a view of NR’s asset quality, but failed to ensure that the management information reported was accurate despite warning signs at an early stage”, the FSA said.

Margaret Cole, FSA director of enforcement, said: “Baker and Barclay both held senior positions of trust within the firm but they provided inaccurate information to the Northern Rock board and to the market. 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.”

Mr Baker said: “I accept the FSA’s findings ... I accept full responsibility for my own actions. Where the FSA has decided my conduct fell below the expected standard, it is only right that I accept the personal and financial consequences imposed.”

He explained that, on discovering the misreporting, he decided to give the unit responsible “six months to rectify the misreporting”. “My decision, and its timeframe, was made with the best of intentions,” he said. “However I now recognise that this decision, taken to resolve and not hide, the reporting error, did not make these loans immediately transparent. I made an error of judgment and I regret it.

“The decision I took also had no adverse impact on Northern Rock’s customers. It did not cause, or precipitate, the bank’s later liquidity difficulties.”