10 December 2019 the CRANSTON review TABLE OF CONTENTS EXECUTIVE SUMMARY 3 PART A INTRODUCTION CHAPTER 1: THE ASSURANCE (“CRANSTON”) REVIEW 6 PART B THE BANK’S CUSTOMER REVIEW CHAPTER 2: BACKGROUND TO BANK’S CUSTOMER REVIEW 13 CHAPTER 3 THE CUSTOMER REVIEW: FIRST STAGES 19 CHAPTER 4: COMPENSATION: THE BANK’S METHODOLOGY 29 CHAPTER 5: INDEPENDENT REVIEWER: PROFESSOR GRIGGS 35 CHAPTER 6: CUSTOMER OUTCOMES 41 PART C STAKEHOLDER AND CUSTOMER VIEWS CHAPTER 7: STAKEHOLDER SUBMISSIONS TO CRANSTON REVIEW 48 CHAPTER 8: CUSTOMER INPUT TO CRANSTON REVIEW 55 PART D ASSESSMENT OF BANK’S CUSTOMER REVIEW CHAPTER 9: PRINCIPLES OF ASSESSMENT OF CRANSTON REVIEW 61 CHAPTER 10: BANK’S PROCEDURES AFFECTING CUSTOMERS 69 CHAPTER 11: BANK’S PROCEDURES: SCOPE OF CUSTOMER REVIEW AND ASSESSMENT OF CASES 80 CHAPTER 12: ASSESSMENT OF DIRECT AND CONSEQUENTIAL LOSS 89 CHAPTER 13: DISTRESS AND INCONVENIENCE PAYMENTS 112 CHAPTER 14: SETTLEMENT AGREEMENTS 125 PART E RECOMMENDATIONS CHAPTER 15: CONCLUSIONS AND RECOMMENDATIONS 136 APPENDICES I TERMS OF REFERENCE FOR CRANSTON REVIEW 146 II MODEL ASSESSMENT PANEL 148 GLOSSARY 151 The CRANSTON Review 2 The Bank established the Customer Review in February EXECUTIVE 2017 to compensate the victims of the fraud committed at the HBOS Impaired Assets unit based at Reading and SUMMARY Bishopsgate. Together with my team, I have spent seven months assessing whether the Customer Review achieved the purpose of delivering fair and reasonable offers of compensation. In the first part of the Report, I explain how the Bank went about the task, before turning to customer and stakeholder views of the Customer Review. The next section of the Report contains the core of my assessment of the structure of the Customer Review and its implementation. My conclusions, at a high level, may be summarised as follows. There was much about the Customer Review for which the Bank is to be commended. The Bank set out to provide swift and fair compensation to customers impacted by the fraud. It sought to cast the net wide in defining the cohorts in the Customer Review population methodology, and it provided generous payments for legal assistance, interim payments and, to compensate for delay, a payment of £35,000 to everyone in the Customer Review. It also wrote off significant amounts of outstanding customer debt. The Bank took the innovative step of appointing Professor Griggs as an independent reviewer. Professor Griggs played an important role in the process. He acted independently from the Bank, and, as a result of the steps he took, some customers received increases, sometimes substantial increases, over what the Bank offered. In a number of cases he overruled the Bank. Perhaps most importantly, the awards paid by the Bank under the heading of ‘distress and inconvenience’ (what in this report are called D&I payments) were generous, and beyond what a customer could hope to have been awarded under that head of loss by a court. Redress under this heading was, moreover, extended to those customers who had not necessarily been victims of the fraud, but only of what I have called bad or aggressive banking practices. Although I have concluded that there were some flaws with the Bank’s methodology as regards D&I payments, my overall assessment was that the Bank’s D&I redress was generous. Despite the many merits of the Customer Review, I have concluded that it had serious shortcomings. For example, Professor Griggs was placed in an impossible position and his appearance of independence was undermined by the way the process was structured. The most serious shortcoming, however, concerned the Bank’s approach when it came to the assessment of direct and consequential loss caused by the fraud (referred to in this report as D&C loss). Having taken a lenient approach to the assessment of D&I redress, the Bank then took an overly adversarial approach in its assessment of claims for D&C loss, which was inappropriate to the Customer Review. The CRANSTON Review 3 I have concluded that this part of the Customer Review, Accordingly, for the detailed reasons set out in the body both in structure and in implementation, was neither fair of this report, and adopting the language of my Terms nor reasonable. of Reference, I have reached the conclusion that the methodology and process of the Customer Review did not This unfairness and unreasonableness manifested in a achieve the purpose of delivering fair and reasonable offers number of different ways. The Bank refused to disclose of compensation. documentation to customers, and, in the main, to fund financial advice, whilst placing undue emphasis on My recommendations are set out in Chapter 15. The the contemporaneous documents, at the expense of central recommendation is that the customers’ claims the customer submissions. This was not sufficiently to D&C loss must be reassessed. One way of doing this communicated to customers. On the contrary, the Bank is by means of an independent panel, along the lines I set publicly emphasised the non-legal, customer-focused out in an appendix to this report. Before proceeding along nature of the Review. those lines, however, the Bank must conduct a proper consultation with stakeholders and customers. The consequence was that, from the outset, customers’ D&C loss claims were unlikely to ever be able to meet My conclusions and this recommendation come with an the standards being set by the Bank. This seriously important note of caution. My review has not been an disadvantaged customers. Nor did the Bank adequately appeals process. I am therefore unable to comment on the undertake its own assessment to enable it to reasonably scale and breadth of D&C loss that may in fact have been and fairly identify where D&C loss may have been suffered. suffered by customers as a result of the fraud, whether The outcome was that the Bank did not make a single in respect of individual cases or generally. Particularly award acknowledging that any D&C loss had been caused in view of the generosity of the D&I payments, it may to customers by the fraud. As a matter of analysis, be that for many customers, they have already been therefore, on the Bank’s approach, the Bank appears to adequately compensated. Accordingly, it may be that have been the only victim of the fraud to have been caused the reassessment process does not result in a materially financial loss. different outcome for many customers. The key difference, however, will be that their claims will have been properly Other inconsistencies also resulted in unfairness. The Bank addressed, in an open and transparent manner. wrote off debts of those customers who were still with the Bank, but not those customers who had repaid their debts or refinanced them elsewhere, sometimes at considerable personal expense, in the period between the fraud and the date of the Customer Review. The Bank’s population methodology (as regards individuals to be included in the review) was overly strict. It was limited to directors and so excluded a number of impacted customers. The general failure to communicate in a sufficiently clear and transparent way caused confusion, in particular as to what D&I payments were for or represented. Finally, the effect of the terms of the various forms of settlement agreement used by the Bank unfairly stifled some potential claims. The CRANSTON Review 4 PART A INTRODUCTION 1.1 In replying to a debate initiated by Kevin Hollinrake CHAPTER 1: MP in the House of Commons on 18 December 2018, the Economic Secretary to the THE ASSURANCE Treasury, John Glen MP, announced that the Bank had agreed with the Financial Conduct Authority (“CRANSTON”) REVIEW (“FCA”) that it would commission “a post-completion review to quality-assure the methodology and process” of the Customer Review. 1.2 The Customer Review was the compensation scheme the Bank had set up for businesses affected by what in this report I call the IAR fraud.1 It was sometimes called the Griggs Review, but it was a Bank review with Professor Russel Griggs as the independent reviewer. 1.3 The Minister acknowledged the concerns that MPs had raised about the Customer Review. He added: “I am pleased that Lloyds has committed to publishing the review once it has concluded, and I welcome Lloyds’ commitment to implementing any recommendations it produces.”2 1.4 On 7 May 2019 the Bank announced that I had been appointed to conduct the review which the Economic Secretary to the Treasury had foreshadowed. It was to be an “Assurance Review led by a high profile independent party to go above and beyond a customary lessons learned exercise undertaken following the completion of a customer rectification process.” 1.5 The aim of the Assurance Review, the announcement added, was to provide assurance “that the Customer Review, overseen by Professor Griggs, has delivered fair and reasonable outcomes for customers.” It also stated that the Bank “will act upon any recommendations made by Sir Ross Cranston and will provide his final report to the Financial Conduct Authority and ensure its findings be made publicly available.” 1.6 In this chapter I give a short account of my appointment to conduct the Assurance Review (which I will call “the Cranston Review”) and a brief overview of how I went about the task. The details of the assessment I undertook is contained in the following chapters. 1 IAR refers to the Impaired Assets unit based in Reading, which I explain further in Chapter 2. 2 House of Commons, Debates, Westminster Hall, Hansard v.651, 18 December 2018, c.285WH. The CRANSTON Review 6 I APPOINTMENT OF 1.12 Principle 2 was that stakeholders would be provided the opportunity to provide input into the scope of CRANSTON REVIEW the Cranston Review.