‘Genghis Khan,’ Barings CEO Seek New Start in Finance (Update1)

Feb. 9 (Bloomberg) -- Peter Norris and Vernon Hill, forced out of the banks they once ran amid scandals, are taking on the U.K.’s biggest lenders to rebuild their reputations in Britain’s new banking gold rush.

Norris was banned from being a U.K. director for four years and called a liar by politicians after his 233-year-old bank, Barings Plc, collapsed in a rogue-trading scandal. Hill, who described himself as the “Genghis Khan of banking,” resigned from the New Jersey bank he built from scratch when regulators challenged contracts awarded to his family.

Entrepreneurs and companies such as Norris’s Virgin Group Ltd. and Hill’s Metro Bank see an opportunity to create new lenders in the record losses of Britain’s banks. Cracking the U.K. market, dominated by four lenders that control two-thirds of consumer accounts, won’t be easy even as banks are being vilified for their bonuses and bailouts.

“It was the career equivalent of a nuclear bomb going off,” said Norris, 54, who was chief executive officer when Barings collapsed in 1995. “Frankly, it all ended in a day. When things like that happen, it is pretty bleak. It has been a long, hard slog to come back.”

Chancellor of the Exchequer Alistair Darling says he wants three new entrants into the U.K banking market in the next four years to boost credit for businesses and consumers. Sandy Chen, the Panmure Gordon & Co. analyst who predicted the collapse of bank stocks in 2007, and Tesco Plc, Britain’s biggest retailer, are among those raising funds and locating branches.

‘Negative Stigma’

Norris, chairman of Virgin Group, and Hill, who is planning a bank modeled on his former New Jersey company, may find it hard to shrug off their past as they compete for market share.

“History is not on these people’s side,” said Ralph Silva, an analyst at London-based Silva Research Network, which specializes in financial-services firms. “The negative stigma attached to people’s names means they may struggle to improve their reputations even when they try something new.”

There is appetite among consumers for new banking services: more than 21 percent of customers surveyed said they changed banks in the last two years because they were dissatisfied, according to a report published in November by YouGov Plc and Deloitte LLP.

The biggest problem for new entrants will be raising capital, according to Silva. New banks may struggle to attract sufficient deposits to fund mortgages and other lending, which would force them to turn to the wholesale funding market -- a business model that can be risky, he said.

Four Big Banks

The new lenders will challenge Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc and the Royal Bank of Scotland Group Plc, which together control 66 percent of the 923 billion pounds ($1.4 trillion) of U.K. retail deposits, according to figures compiled by London-based research group Datamonitor Plc and the Bank of England. RBS is reducing its market share to comply with state aid laws after recording the biggest corporate loss in U.K. history under former CEO Fred Goodwin.

“Darling’s plan probably won’t work because there are so many significant barriers to entry,” said Chris Roebuck, a visiting professor at Cass Business School in London, who worked at UBS AG and HSBC. “The start-up costs are very expensive, and people’s reluctance to leave their bank will make it difficult. I am not expecting a revolution on the high street.”

Norris Role

Norris was appointed chairman of Richard Branson’s Virgin Group in October, the same month Virgin Money, the consumer- finance unit of Branson’s group, applied for a banking license. In his role at the holding company that controls Virgin Atlantic Ltd. and Virgin Rail, Norris will monitor Virgin Money as it seeks to expand from an Internet lender offering credit-card, savings and insurance products into a full-fledged bank with branches.

Virgin Money has hired former Lloyds TSB Chief Executive Officer Brian Pitman as chairman, who will work alongside CEO Jayne-Anne Gadhia in devising strategy.

“The opportunities are straightforward in the sense that there is a marketplace that suffered enormous shock,” Norris said in an interview. “Shock to the institutions, shock to the consumers that used them, and that has presented a clear opportunity for new entrants to do things in a different way.”

The U.K.’s Department for Trade and Industry banned Norris as a director for four years for failing to prevent Singapore- based trader Nick Leeson from losing more than 860 million pounds in unauthorized wrong-way bets. Leeson spent 3½ years in a Singapore jail for the crime.

Barings’s Long History

Barings, whose clients included Queen Elizabeth II, financed Britain’s campaign against Napoleon Bonaparte from 1804 to 1815 and helped fund U.S. President Thomas Jefferson’s Louisiana Purchase of 1803. The bank’s assets were eventually sold to ING Groep NV of the Netherlands for 1 pound.

A report by Singapore’s Finance Ministry into the fraud accused Norris of lying to investigators and covering up irregularities in Leeson’s accounts that, if discovered, might have saved what was then Britain’s oldest investment bank. His explanation “totally lacks credibility” and was “implausible,” the report said.

At the parliamentary hearing into Barings collapse, U.K. lawmaker Quentin Davies asked Norris if in the history of investment banking there had ever been “such a severe indictment of anybody and such a large number of witnesses called to demonstrate that you were untruthful?”

Norris’s View

Norris at the time denied the allegations made in the report, saying the conclusions were “completely untrue.”

At the parliamentary hearing at the time, Norris did say Barings was run like a “Mad Hatters’ Tea Party” because management was so unaware of Leeson’s trading. Norris, in his interview with Bloomberg, declined to comment on the past investigations.

In the years since, Norris built a corporate finance firm, New Boathouse Capital Ltd., and worked as a consultant for London-based John Brown Publishing, which owns the satirical adult comic magazine Viz, whose characters include the “Fat Slags” and “Sid the Sexist.”

Norris sold New Boathouse for 7.4 million pounds in 2007. The same year, Norris advised Branson on a bid for lender Northern Rock Plc months before it was nationalized. Their friendship dates to 1996, a year after the collapse of Barings, when Branson invited Norris to his home in London’s Holland Park district to discuss opportunities to work together.

“He is both a highly skilled banker and an experienced entrepreneur, and that is a rare mix,” Branson said in an e- mailed statement.

‘Love Your Bank’

Virgin’s attempts to enter Britain’s banking market faces competition from Hill’s Metro Bank, which plans to open two branches in London this year and as many as 220 around the capital within a decade, a person with knowledge of the matter said. Signs in the windows in the two designated offices in the center of London urge customers to “Love your bank.”

Hill, 64, a former real estate developer and owner of Burger King restaurants, founded Commerce Bancorp Inc. in 1973 and built it into the largest bank in New Jersey, with more than 400 branches. His expansion was built on a customer-friendly approach, including longer opening and marketing innovations such as providing dog biscuits for pets at branches.

“We are a retailing company that happens to sell bank products,” Hill said in 2002.

Contracts With Wife

After regulators ordered the bank to stop doing business with companies controlled by Hill’s family, he was forced to resign. The bank paid a firm owned by Hill’s wife, Shirley, $50 million over 10 years to design and furnish branches.

Hill said at the time that he gave family-run companies contracts because they did the best job. He sued the bank for $57 million in 2008, according to a complaint filed in federal court. The lawsuit is still pending.

He and Metro Bank declined to comment for this story.

In 2008, Hill became chairman of the board at Philadelphia- based Petplan USA, which sells insurance for dogs and cats. Hill has also set up a private investment group and joined the executive committee of the Saladworks Inc. restaurant chain, based in Conshohocken, Pennsylvania. He also writes an online banking column that is critical of regulators and other banks.

“The banking industry has followed fad after fad for the last 15 years with disastrous results,” Hill wrote in June 2008 on the Bankstocks.com Web site. “The next fad is clearly risk management, the catch phrase for regulators.”

Banking License

Hill’s Metro Bank has applied for a banking license and has raised about 75 million pounds of funding from institutional and private investors, according to the person with knowledge of the matter. The bank will need an additional 200 million pounds in its third year as part of its business plan, the person said.

Both Virgin and Metro Bank will find it difficult to draw deposits away from the existing U.K. banks, a task made even harder by other firms trying to establish themselves as lenders in Britain, according to John Hitchins, head of retail banking at accounting firm PricewaterhouseCoopers.

“There are big start-up costs, and I am sure that some will look at it and decide not to do it,” London-based Hitchins said of the new entrants. “You could even see some start and go away again. They will take market share, but I don’t see another big bank emerging.”

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.netJon Menon in London at jmenon1@bloomberg.net