Dame Linda Dobbs is expected to finish her HBOS inquiry by the middle of next year © FT Montage
Victims of the HBOS Reading fraud have questioned the independence of an inquiry commissioned by Lloyds Banking Group into its actions in relation to the scandal.
The review, chaired by Dame Linda Dobbs, a retired judge, was set up by Lloyds in April to examine whether the bank — which acquired HBOS in 2009 — properly investigated the affair.
The fraud was masterminded out of HBOS’s Reading branch and crippled small business customers between 2002 and 2007.
Lloyds has consistently maintained that it probed allegations of wrongdoing at HBOS Reading after it completed its acquisition of the bank in January 2009, but found no evidence to support them.
As a result, Lloyds refused to compensate victims for a decade after the fraud. Lloyds only changed its mind in February when six individuals — including the ringleader Lynden Scourfield, a former HBOS banker — were convicted of the scam.
From left to right Michael Bancroft, David Mills and Lynden Scourfield in Barbados
Dame Linda’s review covers the period from the acquisition of HBOS to the end of the trial this year, and involves a trawl of reams of documents produced over eight years by Lloyds, its advisers and third parties, including the police and regulators.
She began her review with legal adviser Peter Carter QC in April, and of particular concern to victims is the involvement of Herbert Smith Freehills, the City of London law firm that has been hired to assist Dame Linda with her work.
Herbert Smith acted as legal advisers to Lloyds during the period after the HBOS acquisition. It advised the bank on an investigation by the Financial Services Authority into HBOS’s Reading branch and also a subsequent police investigation into the fraud that led to the convictions in February.
It has emerged that Herbert Smith was appointed by Lloyds and not Dame Linda, who had no say in the matter, raising further questions about the review’s independence.
“It seems very strange that the law firm that’s supposed to help Dame Linda to get at the truth was also intimately involved in the events she is investigating and could therefore be criticised in her report,” said Paul Turner, one of the victims of the fraud. “It feels like Herbert Smith could get to mark its own homework.”
Anthony Stansfeld, the police commissioner for the Thames Valley force that investigated the fraud, also expressed misgivings about the use of Herbert Smith by Dame Linda, saying he found it “difficult to understand” why the firm was involved.
“The lawyers advising the review are from the same solicitors who were advising Lloyds when they were denying for 10 years that a fraud had taken place,” said Mr Stansfeld.
HBOS victims Paul and Nikki Turner. Mr Turner says it feels like law firm Herbert Smith ‘could get to mark its own homework’ © Charlie Bibby/FT
Dame Linda has not set a date for the completion of her inquiry, although it is expected to be finished by the middle of next year.
The review is due to examine material provided by victims of the fraud to senior Lloyds managers, including António Horta-Osório, chief executive, which contains evidence of wrongdoing, such as the falsification of business plans that were raised in the trial and are likely to have helped in securing convictions.
But a large number of the documents submitted to the inquiry enjoy legal privilege because they contain advice given to Lloyds by its lawyers, including Herbert Smith, and cannot be seen by Dame Linda unless the bank gives permission.
Lloyds has undertaken to consider on a case-by-case basis requests by Dame Linda’s team for privilege to be waived on relevant documents.
Lloyds said the bank was confident there was no conflict in appointing its lawyers. “Herbert Smith Freehills’ role for Dame Linda Dobbs and her review is purely the provision of administrative support, ensuring Dame Linda has access to documents and materials,” it said.
“It is Dame Linda Dobbs’ role, as the independent legal expert, to determine the facts from her review and whether [Lloyds] could and should have done more after the acquisition of HBOS to investigate issues relating to HBOS Reading or to report matters to the appropriate authorities.”
Herbert Smith and Dame Linda both declined to comment.