UK's FSA finds "very serious misconduct" at HBOS

LONDON, March 9 Fri Mar 9, 2012 9:07am EST

LONDON, March 9 (Reuters) - HBOS, the troubled British lender taken over by Lloyds Banking Group during the 2008 financial crisis, was guilty of "very serious misconduct" in failing to control risky lending, the financial watchdog said on Friday.

HBOS, at the time Britain's biggest mortgage lender, breached rules requiring banks put in place adequate risk management systems, the Financial Services Authority said after completing an investigation into the failed lender.

HBOS ignored warnings from its internal risk officials and external auditor KPMG, the FSA said. The bank failed to rein in risky lending as its peers pulled out of the market amid deteriorating financial conditions from April 2008, it added.

However, the FSA said it did not plan to fine HBOS as any penalty would ultimately be borne by the taxpayer, which has already had to fund the government's bailout of HBOS' parent, Lloyds.

The FSA's investigation centred on the corporate lending division of HBOS' Bank of Scotland unit.

Lloyds said it welcomed the FSA's findings.

"This will help to draw a line under the events in question and allow the group to move forward," the bank said in a statement.

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