Failings of RBS small-business unit laid bare

February 13, 2018

The full detail of how Royal Bank of Scotland systematically mistreated thousands of small business clients and caused financial distress to many of them after the 2008 banking crisis will soon be laid bare for everyone to see.

The litany of failings at RBS’s Global Restructuring Group — which was meant to help small businesses recover but in fact treated many as cash cows — are chronicled in a 361-page report by Promontory, a financial consultancy commissioned by a UK regulator four years ago.

With growing sections of the report being leaked by British politicians and aggrieved former business customers of RBS, the Commons Treasury committee on Tuesday said it planned to use parliamentary privilege to overcome the legal hurdles to publishing it.

The saga, which risks besmirching the reputation of Britain’s biggest lender to small businesses, has also prompted questions about the independence of the Financial Conduct Authority because of its reluctance to publish the full report. The Financial Times has seen a copy of the report and selected five of its main findings:

1. Endemic, systemic mistreatment of small clients

The mistreatment of small business customers by GRG was systemic. This was not a problem of a few bad apples — it was endemic, encouraged by the unit’s managers while the board of the bank either endorsed the behaviour or turned a blind eye.

In a foreword written by Sir Callum McCarthy, the former head of the UK financial watchdog who now works for Promontory, the report identifies failings in governance and oversight at GRG and points the finger at the board of RBS as having primary responsibility.

The report also criticises the way GRG prioritised its commercial objective of generating profit at the expense of its twin aim of supporting the turnround of vulnerable small-business clients. The mistreatment ranged from charging overly complex and excessive fees to failing to take complaints seriously. Small companies with little financial experience were offered high-cost sophisticated products, such as property participation fee agreements.

The bank’s chief executive at the time in question was Stephen Hester, who now runs RSA Insurance, while its chairman was Sir Philip Hampton, who is now chairman of drugmaker GSK. Nathan Bostock, the current CEO of Santander UK, was the senior executive at RBS who at the time had direct oversight of GRG as its head of risk and restructuring.

2. Inappropriate treatment was widespread

The report found that a significant proportion of the 5,900 small businesses that were handled by GRG from 2008 to 2013 were caused material financial distress and many more had valid grounds for considering themselves badly treated by the unit.

Promontory examined in detail 207 cases of small businesses handled by GRG. It identified instances of inappropriate treatment in 86 per cent of cases. It found that a third were not viable companies when they entered GRG. Of the remainder it said one in six suffered material financial distress.

RBS insiders said that as of last year, 20 per cent of the 5,900 companies that entered GRG in the period had returned to the main bank, 30 per cent had repaid or refinanced their loans, 41 per cent entered insolvency, and 9 per cent remained unresolved.

3. Extra fees and charges encouraged

The 250-plus staff at GRG were coached on the best way to extract extra fees and interest income from small-business clients, almost all of which had defaulted on a loan before being moved to the unit.

In one case, a company with £100,000 of debt to RBS was charged an extra £1,600 in interest, £3,000 of additional management fees, a £4,500 exit fee and pushed to sign a property participation fee agreement that would result in a future payment of £5,000.

In another case, an overdraft facility was pulled at very short notice to encourage a client to agree an equity-participation agreement. Promontory found 83 cases where pricing changes were not properly explained to clients.

Last month, the Treasury select committee published a memo entitled “Just Hit Budget!” written by a GRG manager, which included points such as “Rope: sometimes you just have to let customers hang themselves” and “Avoid round number fees — £5,300 sounds as if you have thought about it, £5k sounds like you haven’t.”

4. Emphasis on profit generation

GRG was a profit centre. Clients were seen as sources of incremental income. The quarterly information packs the unit produced for its board focused heavily on its financial performance rather than on customer outcomes. Where the packs mentioned companies returning to stability, it was in a context of how this cut the bank’s exposure. The same was true in managers’ appraisals. “Missed opportunities mean missed bonuses,” is how a GRG manager summed up the approach.

In a management presentation, GRG boasted to the board of its 2011 achievements, including making total income of £1.32bn that far outstripped its expenses of £132.5m for that year. The unit was boosted by extra fees and costlier loans charged to clients, while losses on loans were absorbed by the originating department of the bank. But RBS insiders pointed out that 90 per cent of GRG’s income came from large corporate clients.

5. Perception of RBS a bit unfair

RBS’s behaviour was not as bad as some people have claimed. Promontory found no evidence that the bank engineered debt defaults by companies simply to transfer them to GRG and generate more revenue through fees. It also found no evidence that West Register, the property arm of GRG, had acquired assets from business customers at prices that were below market levels at the time.

Promontory also makes the point that most of GRG’s client-facing activities are not regulated — like almost all small-business lending — and the behaviour of the unit was judged against the bank’s own standards as well as fair and reasonable practice.

RBS last year set aside £400m to compensate small businesses and has already repaid £115m of complex fees that GRG levied on small-business clients. The bank said the report “makes for very difficult reading” as its culture and structure have “changed fundamentally” since then, adding: “We are deeply sorry that customers did not receive the experience they should have done while in GRG.”

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