Sally Masterton is the winner of the 2020 Blueprint UK Whistleblowing Prize. Her whistleblowing played a key role in bringing to light one of the largest banking frauds in UK history.  The full amount of the money involved is still not known by the public, but is estimated to be in the order of £1 billion.

Sally’s careful research and disclosures also revealed the bank’s efforts to sweep knowledge of the wrongdoing under the carpet. 

She is a central character in the search for accountability from those responsible. It is a story which is still ongoing. 

The story begins with the 2007-08 banking crisis, the consequences of which are still being felt today.

At the height of the financial crisis in 2008, Lloyds Banking Group became the UK’s largest retail bank when it acquired Scottish banking and insurance company HBOS, which was itself formed from a merger of Halifax plc and Bank of Scotland in 2001. The UK government had encouraged the deal to shore up HBOS, which had been left close to collapse when money stopped flowing through commercial lending markets after the 2007 credit crunch.

In reality HBOS’ problems were greater than anyone knew. Prior to the acquisition by Lloyds, a corrupt HBOS employee in the business’ Reading office had been busy colluding with external partners to rip off the bank’s own corporate customers, driving many viable businesses to the wall. Many of those affected were small, local enterprises feeling the impact of the financial crash brought about by others higher up the chain– the start-ups developed at someone’s kitchen table, the couple who had poured their lifesavings into building the music business they had always talked about. 

Business customers from across south-east England who needed additional funding were directed to HBOS’ Reading branch, which would oblige the company to buy corporate services from a specific external consultancy, Quayside Corporate Services, as a precondition for obtaining a loan. Evidence presented at the trial of Quayside and former HBOS Reading staff in September 2016 described inappropriately large loans being made to businesses on Quayside’s recommendation, funds from which were then siphoned off with large consultancy fees. In some cases, Quayside had taken over control of people’s businesses entirely.

The fraudulent scheme had begun before the Lloyds takeover and continued after it. As a result of the fraud, businesses collapsed and many individuals suffered financial distress. Some were left entirely destitute. In one case, Lloyds tried to repossess a couple’s home 11 times between January 2009 to August 2010. A judge finally suspended those proceedings pending the conclusion of the fraud prosecution. Six people connected with the HBOS Reading fraud were eventually convicted in January 2017.

The HBOS story is important not only for the enormous amounts of money involved – police estimate the total cost amounting to up to a billion pounds – but for the way Lloyds responded to the wrongdoing and subsequent cover-ups that had come from within its own ranks. 

Sally Masterton was a forensic accountant and insolvency practitioner, who had worked for HBOS since 1998 and then, after the takeover, for Lloyds. She worked in the ‘high risk’ unit of the bank which managed the bank’s small business customers, who were seen as more likely to default and who became the main victims of the Reading fraud.

By 2010, the ringleader of the Reading fraud had been arrested and there was an active police investigation underway (“Operation Hornet”). Masterton’s own investigations inside the bank, which had the advantage of unrestricted access to internal records, had revealed evidence of possible money laundering and theft, as well as unauthorised lending that the police should have been aware of. The more Masterton dug, the more she hit internal walls. Bank staff told her to stop digging. A senior colleague had previously suggested that she destroy internal documents. She refused. 

Instead, Masterton helped Thames Valley Police to piece together what had happened. The bank allowed her to meet with the police, albeit in a highly controlled manner. After her first meeting with detectives in 2013, Masterton was shocked at how little they knew, according to The Financial Times. 

Even as the bank’s legal department told her that an internal investigation team had given everything to the police investigation, she had found that police investigators had been “severely disadvantaged” and “were lacking even basic information from the bank”.

So vital was Masterton’s forensic work, the police tried to have her co-opted onto the investigation. In a letter to Lloyds, one of the officers wrote that her evidence had “provided in an understandable format that in a way explains in essence what is banking industry (LBG) banking practices”, adding that “the usefulness of such explanation is vital to the ongoing investigation.”

In 2013, Masterton was given permission to document the disclosure failings and the criminality she had uncovered. The paper she produced has become known as the Project Lord Turnbull report. It alleges not only that HBOS deliberately concealed criminal activity at their Reading branch prior to the Lloyds takeover, but that Lloyds executives failed to act appropriately once the issue was brought to their attention.  

The report was put into the public domain by parliamentarians from the All-Party Parliamentary Group (APPG) on Fair Business Banking in June 2018. 

In their statement accompanying the release of the report, the APPG said it “makes serious allegations of fraud, malpractice and a subsequent cover up at Lloyds and HBOS… The contents and allegations contained within this report must be available to rigorous public scrutiny and full, forensic and expeditious investigations by regulators, fraud and crime agencies. Important though the report is, it should be considered in the context of other contemporaneous evidence.”

By this point, Masterton had had to leave Lloyds. In mid-2013, Masterton had made a formal complaint to the bank about its lack of cooperation with the police investigation and the harassment she had experienced for doing so. The bank appointed a City law firm to investigate Masterton’s allegations, which decided to focus on Masterton’s complaints about harassment before it would consider anything to do with the police investigation or allegations of a cover-up.

Splitting up a complaint in this way is a known tactic for dealing with difficult reports bringing unwelcome news: by dismissing an individual’s complaints about their treatment, the credibility of their other allegations can be diminished and difficult issues swept under the carpet. This is exactly what happened in Sally Masterton’s case: once the harassment case was dismissed, Lloyds placed her on leave and prevented her having anything more to do with the police investigation. The bank told the regulator, the Financial Conduct Authority, that it questioned the credibility of Masterton’s other allegations and did not see fit to investigate them. 

Masterton left Lloyds and raised a constructive dismissal case against her former employers, who have since made two separate settlement agreements with her. As part of their second settlement in November 2018, Lloyds admitted that they had commissioned the Project Lord Turnbull report and apologised to Sally Masterton, who they said had “acted always with the best of intentions.”  

Like many whistleblowers, Masterton faces legal restrictions on her ability to speak publicly.

The six individuals convicted for their part in the HBOS Reading Fraud in 2017 included two former Lloyds employees. The six were sentenced to a combined total of 47 years’ imprisonment, after a jury at Southwark Crown Court heard how money siphoned from HBOS customers had paid for kickbacks, prostitutes and holidays in Barbados.  

In the wake of increasing public pressure, Lloyds appointed former High Court judge Dame Linda Dobbs DBE to undertake an independent investigation into the bank’s knowledge of, and actions in regard to, the HBOS Reading fraud.

More than 50 barristers have worked on the Dobbs Inquiry in the three years since it was set up in 2017. The Inquiry is due to deliver its report in the first half of 2021.

In 2019, the FCA fined Bank of Scotland £45.5 million amount for its failures to disclose information related to suspected fraud at its Reading branch. The investigation had been placed on hold in 2013 in order to let the criminal case conclude first. 

In June 2020, the FCA fined Lloyds again, this time for £64 million for mistreating hundreds of thousands of mortgage customers in financial difficulties.

It was the largest fine ever imposed by the financial regulator for mortgage-related failures. Lloyds agreed to accept the watchdog's findings.

On top of this, Lloyds and its subsidiary units, Bank of Scotland and The Mortgage Business, estimate they have had to pay approximately £300 million in redress to more than half a million customers. 

The regulator made a special warning, in assigning the second fine, that the COVID-19 pandemic “only heightens the importance of firms treating customers in financial difficulty fairly and appropriately".

Whistleblowing is an essential part of this story.  Sally Masterton’s courage and determination in bringing to light serious financial crimes is to be commended.  

The largest bank in the UK wields enormous power. By comparison, a local shopkeeper or someone trying to set up their first small business has little power when going up against such a monolith in an effort to get justice. The overwhelming imbalance in the power relationship is one reason we must have corrective mechanisms, like protections for whistleblowers, in society.

Sally’s efforts contributed to justice for hundreds of thousands of people who suffered because of this power imbalance and could not get redress.

The full impact of those disclosures is still on the horizon, and may yet be revealed in the Dobbs Inquiry report when it is published.

Congratulations Sally Masterton, winner of the 2020 Blueprint UK Whistleblowing Prize.