The Financial Services Authority, the UK regulator, has imposed a fine of £504,000 ($777,000) for misreporting mortgage arrears figures on David Baker, the former deputy chief executive of Northern Rock, the collapse of which was among the first signs of the UK financial crisis. Baker was also banned from performing any function in relation to any regulated activity.

Additionally, Richard Barclay, Northern Rock’s former managing credit director, was fined £140,000 and prohibited from performing any significant influence function at an FSA-regulated firm. 

Baker was deputy chief executive between January 2004 and March 2008 and for much of this time had overall responsibility for Northern Rock’s debt management unit, which managed its secured loan book.

The FSA said in a statement that Baker became aware in January 2007 that some 1,917 loans had been omitted from the firm’s mortgage arrears figures, but failed to escalate the information internally and agreed a course of action which resulted in the loans not being reported.

Baker also made misleading statements about these impaired loans to external stakeholders, including market analysts, quoting inaccurate figures, the FSA said. If the 1,917 loans had been reported as being in arrears, the figures would have increased by approximately 50 per cent. Alternatively if the loans had been reported as in possession, the number would have increased from 662 to 2,579 cases. 

During his tenure, Barclay was directly responsible for the provision of accurate management information concerning loan arrears and property possessions as managing credit director of Northern Rock’s debt management unit. He knew that the firm’s arrears position enabled senior management within Northern Rock, analysts and the FSA to form a view of the firm’s asset quality, but failed to ensure that the management information reported by the debt management unit was accurate despite warning signs at an early stage, the regulator said.

The FSA said that while it is not possible to calculate the exact extent of this mis-reporting, if the correct figure had been reported, the arrears figures would have been significantly worse and closer to the Council of Mortgage Lenders average over an extended period of time.

“Baker and Barclay both failed to meet the standards we require of senior individuals within FSA-regulated firms. They both held senior positions of trust within the firm but they provided inaccurate information to the Northern Rock board and to the market,” said Margaret Cole, FSA director of enforcement and financial crime.

“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 – this is a loud and clear message that we are serious about taking action against senior directors where they step over the line.”

Baker and Barclay received a 30 per cent reduction in their fines for early settlement, having admitted their misconduct at an early stage and co-operated fully with the FSA’s investigations. Baker was originally to be fined £720,000. Barclays original fine was additionally reduced on the grounds of hardship and if it were not for these considerations would have been fined £300,000.