In the dock

Last week, public opinion accepted a plea bargain of sorts. Sir James Crosby, former chief executive of HBOS and the architect of the strategy that "set the course for disaster", volunteered to surrender his knighthood, and to hand back 30% of his £580,000 annual pension.

Apparently anxious to avoid the fate of Fred Goodwin, the ex-Royal Bank of Scotland chief executive now serving a life sentence of public opprobrium, Crosby's guilty plea piled pressure on fellow defendants Andy Hornby and Lord Stevenson to make similar gestures, along with Peter Cummings and Colin Matthew, HBOS's head of strategy and international operations.

In the wake of Matthew's many namechecks in the Parliamentary Commission on Banking Standards (PCBS) report, relating to losses in Australia, Ireland and subprime lending, he is under pressure to surrender at least some of his £416,000-a-year pension.

Crosby threw himself on the mercy of the notional court – just as new details emerged about extra pension payments to him, and massive "bonuses for going bust" to seven other executives, including Cummings and Matthew. Long-standing hopes by HBOS executives that their cases will lapse as public opinion moves on seem doomed.

Why the sudden change? After all, anger and bitterness at the rewards for failure enjoyed by the banking elite have been constant since the crisis broke. The oddest aspect of the burgeoning HBOS scandal is that a moral meltdown revealed in 2008 should only begin to be properly addressed in 2013.

Future observers will point to the publication of the PCBS report as the turning point. Unlike the previous post-mortems by the great and the good, it sought to channel public anger rather than attempt to dampen it down, dilute, or divert it.

After cataloguing "catastrophic failures of management, governance and regulatory oversight", the extent to which the report blamed HBOS's top trio suggests that justice for the manslaughter of a proud 300-year-old Scottish financial institution is at last at hand.

How different from the 300-word Financial Services Authority report into RBS of December 2010, which essentially suggested that there was nothing to investigate. Or the same body's September 2012 "final notice" on HBOS, which heaped blame on director Peter Cummings while leaving his superiors – the "HBOS Three" – unscathed.

This month's report was critical of Cummings, but it was even more so of the FSA for making a scapegoat of the banker, with a lifetime ban and £500,000 fine.

Now that the court of public opinion has heavyweight support from parliamentarians, is the end of the rewards-for-failure era nigh?

Not necessarily, argues Richard Murphy of Tax Research UK, an independent consultant who has advised the UK Government and trades unions on tax avoidance,

Murphy maintains that Crosby's pension gesture is "absurd" given how much he retains – rubbing along on £406,0000 a year rather than £580,000 – and he discounts the "emotional and psychological cost" of surrendering his knighthood.

These "penalties", Murphy says, are negligible in the context of the "ruined lives" implied by the destruction of £70 billion of shareholder value that constitutes the HBOS collapse.

For Murphy, the place for the HBOS Three is a court of law.

He said: "Crosby may have set the course for HBOS to follow, but Hornby and Stevenson should have considered whether they were effectively trading while insolvent. Any bank that needs a £20bn subvention from the taxpayer is nothing if not insolvent."

Murphy is perplexed that there should be any doubt as to whether the HBOS board breached its fiduciary duties, or as to whether failed directors should not suffer the personal bankruptcy their actions and greed inflicted on their victims. To him, only the spectacle of Hornby and Stevenson "spending time at Her Majesty's pleasure" would sufficiently focus the minds of the financial and corporate elite, and draw a line under the age of excess.

This view is endorsed by Stewart Hamilton, the Scots professor emeritus of banking and finance at the International Institute for Management Development in Lausanne, Switzerland.

He said: "In any other commercial business apart from banking, where a company fails or requires a government bailout there would be an automatic referral of the directors to the relevant government department.

"You would expect that if the performance is sufficiently horrendous that there would be automatic recommendations for barring directors of taking directorships of companies, not just other banks.

"In the case of HBOS, we should be looking at a criminal inquiry. In April 2008, HBOS launched a rights issue that, it has been claimed, misrepresented what their financial position was at the time. If it is about issuing a fraudulent prospectus, then that is a criminal offence rather than a civil one.

"I think it would be a good thing for Hornby and Stevenson to spend some time in prison 'pour encourager les autres'."

More draconian measures are hinted at in the PCBS report's conclusion, which calls it "a matter for profound regret that the regulatory structures - have shown themselves incapable of producing fitting sanctions - which might serve as a suitable deterrent for the next crisis".

But there is one important reason to doubt that justice will be done: Britain has a well-greased revolving door between the financial and accounting world and the government and regulatory sectors, a phenomenon that was entrenched by Tony Blair and Gordon Brown because it delivered them a phony boom. This grotesquely conflicted oligopoly has become "the system".

But even here, there are signs of spring. The clerks of the court of public opinion (journalists included) are calling on the regulators themselves to answer for their role in the crisis in British banking.

Last week, it was the head of the new Financial Conduct Authority (FCA), John Griffith-Jones, who was being pushed towards the dock.

The old Etonian is a 37-year veteran of KPMG, the "Big Four" accountant whose auditing of HBOS between 2001-08 earned it at least £70 million in fees – while HBOS's reckless lending behaviour was "an accident waiting to happen", to borrow the title of the PCBS report.

A spokesman for the FCA insists, however, that despite rising to the chairmanship of KPMG, Griffith-Jones was latterly not involved in the firm's auditing practice, concentrating instead on corporate finance. Chairmen of accountancy firms are not responsible for audit failures in their organisation, the FCA's spokesman explains, due to their partnership model.

Having left KPMG with a £3m pay and pension packet, our new regulatory boss has been paid £300,000 a year for a three-day week.

When headed by Griffith-Jones (salary: £2m a year), KPMG produced a report that exonerated the bank for its effective sacking in 2004 of whistleblower Paul Moore – the man who, as HBOS's head of financial risk, dared to challenge the bank's strategy, and who has since been vindicated by the parliamentary report. For this, HBOS paid KPMG £1.5m.

Griffith-Jones was also revealed last week to have been present – albeit declaring an interest – at a meeting last September when it was decided that an FCA inquiry into HBOS "would not cover KPMG's auditing of HBOS". The FCA said the Treasury Select Committee had discussed this apparent conflict, and was satisfied that there would be a Chinese wall between Griffith-Jones and the FCA's HBOS inquiry.

It all still stinks to Moore, who last week called for Griffith-Jones to be sacked. Moore said: "It is impossible for [him] to stay in place, he must consider his position and resign. It is simply no good for him to say, 'I am not going to be involved in scrutiny of HBOS'."

For Stewart Hamilton – who also believes that Griffith-Jones should stand down to bolster the credibility of the FCA – the real question is why Chancellor George Osborne, who presumably wishes to restore the credibility of the UK financial system, would sanction the appointment of a seemingly compromised player.

Hamilton said: "I doubt Osborne himself has the experience and understanding to reach good decisions on regulatory matters. I don't see it as anything more sinister than that.

"It's typical of a government that tends not to think through the consequences of their actions."

Hamilton believes that the UK financial sector will not be able to shake off its sickness – directors out of their depth, short-term sales-oriented cultures, greed – until cosiness between the regulators and regulated is ended.

Drawing a contrast to the UK, where the most talented potential financial gamekeepers tend to be poached by the industry, Hamilton cites the example of the US, where the Senate has just confirmed a tough ex-public prosecutor, Mary Jo White, to head watchdog the Securities & Exchange Commission.

He also likes the example of Singapore, whose regulator pays top dollar for accounting talent having been burned by the Barings debacle and other reputational disasters.

The HBOS mess and its farcically protracted aftermath show the extent and durability of regulatory capture by the big-bucks banking and accountancy professions.

Were this apparent conspiracy against shareholders and the public to be decisively cleansed, the unreliable judgments of the court of public opinion would count for less. The rule of law could resume its place in our financial system.

Until then, we must live with the fact that Bank of Scotland, shamed by its own collapse, has been shamed again by the bankers', auditors' and regulators' lack of enthusiasm for uncovering the truth, however embarrassing.