LIMITATION WARNING: Businesses that were or are affected by the restructuring or turnaround divisions of the major banks must urgently take legal advice on their specific cases. If you fail to do so your legal rights will become time-barred by virtue of the Limitation Act 1980, resulting in the complete loss of your right to compensation. Legal rights can be reserved by instructing solicitors to agree a carefully negotiated standstill agreement or by issuing protective legal proceedings.
We are the leading law firm with the skill and experience to act for businesses seeking to resolve wrongdoing by bank recovery departments often titled ‘business support’, ‘restructuring’ or ‘turnaround’ departments. We are aware that some major banks have regularly engineered defaults and created and profited from distress, often caused by other departments of the bank including via wrongdoing such as LIBOR manipulation, deliberate concealment of credit utilisation and mis-sold derivatives.
In recent years, we have litigated and settled more banking disputes for UK SMEs in the High Court in England & Wales than all other law firms in the UK combined. We provide strong legal representation and use our banking and financial services litigation expertise to ensure we obtain the best possible results which means optimal compensation for our clients.
Our lawyers are regularly interviewed by journalists and broadcasters and featured in international and UK print and television media commenting on bank litigation and insolvency (see our Media Appearances section).
“The profit-making nature of GRG significantly undermines its position as a turnaround division, in which good businesses should be restructured and returned to normal banking. The temptation to get hold of assets and take additional profit from these businesses to boost GRG’s balance sheet is clear.”
Dr. Lawrence Tomlinson
Author of the Tomlinson Report on Bank Lending Practices
Entrepreneur in Residence at the Department for BIS
Bank Recovery Teams: Natwest / RBS GRG, Lloyds BSU, Barclays BBS, NAB Clydesdale / Yorkshire SBS, HSBC CRU, & Santander CRT
These teams were tasked to recover debt owed to the bank but were purposefully mis-described as providing ‘business support’. In fact these departments managed that bank’s distressed and impaired customers that had lending secured by property based assets. The members of these teams prepared and submitted exit strategies and liaised with LPA Receivers and Administrators and the bank’s solicitors to recover debt owed to the bank.
Some of these recovery teams, for example, at RBS GRG, Barclays BSR and Lloyds BSU, behaved in an aggressive and arguably dishonest and unfair way designed to maximise profit for the bank. This included for example moving lending rates to rigged rates (LIBOR); setting up pre-pack administration deals without the customer’s knowledge; and pressurising customers into Profit or Property Participation Fee Agreements (PPFA) whereby associated parts of the bank (West Register or would take up free shares in a business or gain say 10% percent of sale proceeds.
We represent property investors and developers and other business clients in litigation claims against financial services institutions over bank-engineered loan defaults during the credit crunch which caused massive financial loss to the businesses including triggering events of insolvency. We have been consulted and are instructed on claims against:
- RBS’ Global Restructuring Group division (GRG);
- Lloyds’ dedicated Business Support Unit (BSU);
- Barclays’ Business Support & Recoveries (BBS or BSR);
- HSBC’s Commercial Recovery Unit (CRU);
- NAB Clydesdale & Yorkshire Banks’ Strategic Business Services (SBS); and
- Santander’s Corporate Restructuring Team (CRT).
What is GRG?
GRG is shorthand for Global Restructuring Group, which was NatWest/RBS’s turnaround or business support unit (BSU) for troubled businesses. GRG was set up in the early nineties by Derek Sach and was formerly known as Specialised Lending Services. Following the credit crunch, GRG took control of 16,000 SME customers with assets of £65 billion. Following allegations of misfeasance and wrongful profiting, GRG was reportedly disbanded in August 2014 however, GRG was in fact re-branded as RBS’s Restructuring Group.
Examples of RBS GRG, Lloyds BSU misconduct
Bank recovery departments were often highly incentivised to overstate the bank’s write-down provisions in order to obtain bonuses for ‘recovering’ more than the bank ‘expected’ to recover.
The misconduct of these divisions ranges from the regrettably routine manipulated property valuations triggering Loan To Value (LTV) breaches involving bank-friendly chartered surveyors and valuers as well as bank-friendly investigating accountants and other supposedly independent professionals employed to ‘advise’ customers. More complex examples we have seen include:
- valid loan drawdown refusal triggering loan defaults; and/or
- unauthorised or engineered upward changes in loan lending margin; and/or
- change in reference interest rate from Bank of England Base Rate often changing to a higher fraudulently bank-manipulated reference rate such as LIBOR; and/or
- mis-sale of a complex financial derivative which was sold as interest rate hedging (IRHP) but amounted to speculative hedging that increased not minimised risk; and/or
- mis-sale of a derivative which used the customer’s credit limit without customer knowledge or approval (amounting to deliberate concealment of such utilisation).
Capital adequacy: Bank Recovery teams under pressure
The major banks’ recovery teams are: RBS’ Global Restructuring Group division (GRG); Lloyds’ dedicated Business Support Unit (BSU); Barclays’ Business Support & Recoveries (BSU) teams; HSBC’s Commercial Recovery Unit (CRU); NAB Clydesdale & Yorkshire Banks’ Strategic Business Services (SBS) and Santander’s Corporate Restructuring Team (CRT).
Following the financial crisis in 2008-2009, the UK Government announced a bank rescue package which would restore market confidence and help stabilise the British banking system. The plan provided for a range of short-term loans and guarantees of interbank lending, as well as up to £50 billion of state investment in the banks themselves.
Out of the banks bailed out by the Treasury, RBS and Lloyds received majority of funds and were approximately 80 percent and 40 percent government owned (respectively). Other banks obtained multi-billion pound bailouts by other means, such as Barclays who raised £7.1bn from Qatar, Abu Dhabi and its own shareholders in November 2008, and the £4.5bn from investors including Qatar and Sumitomo Mitsui Banking Corporation in June 2008.
The Global Restructuring Group was set up in the early 1990s to take troubled businesses and help turn them around. After the financial crisis, GRG was seen as part of the solution to the bank’s problems. The fees the bank collected helped offset its bad debts and improve the bank’s capital strength. At its peak in 2010, GRG handled tens of thousands of British businesses with a combined value of around 90 billion pounds.
Other bank recovery teams were similarly under pressure during the credit crunch to improve their bank’s Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio (CRAR). This is the ratio of a bank’s capital to its risk which is tracked by regulatory authorities to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements.
The Tomlinson Report into Bank Lending Practices
On 25 November 2013, entrepreneur Dr Lawrence Tomlinson published his independent report into banks’ lending practices: treatment of businesses in distress (“Tomlinson Report”). The Tomlinson Report, which was commissioned by the then Business Secretary Vince Cable, accused Royal Bank of Scotland (which also owns NatWest and Ulster Bank) of destroying viable businesses in order to seize their assets.
After reviewing cases and experiences of businesses, Dr Lawrence Tomlinson found evidence to suggest that there were occasions in which RBS engineered a business into default in order to move the business out of local management and into their turnaround division, Global Restructuring Group (“GRG”). This then generated revenue for the bank through fees, increased margins and the purchase of devalued assets by their property division, West Register (now known as Sig 1 Holdings Ltd). Once in GRG, the business was trapped with no ability to move or opportunity to trade out of the position.
In early January 2014, the Financial Conduct Authority appointed Promontory Financial Group & Mazars to carry out an independent review of RBS’s treatment of businesses in financial difficulty and consider allegations of poor practice set out in the Tomlinson Report. The results of the investigation were due to be published in the third quarter of 2014 but in December 2015, the FCA announced that it would be pushing back its report and will be making an announcement “as soon as possible in 2016.”
No such report has yet been made public and it is clear that the FCA, RBS GRG, Mazars and Promontory have been allowed to engage in dilatory conduct. It is speculated that this indulgence is because of support of RBS GRG by HM Treasury to avoid further bailout and compensation costs for the largely state-owned bank.
As of 14 October 2016, the FCA has provided an update on it’s claimed ‘independent’ review of Royal Bank of Scotland’s treatment of business customers in financial difficulty and states that it has now received the final report from the skilled person:
The FCA has now received the final report from the skilled person. There are a number of steps for the FCA to complete before we are in a position to share our final findings, which will include an assessment of all relevant material, of which the skilled person’s report is one. This has been a complex and lengthy review – it is therefore important that we do not rush the final stages of this process.
Summary of Tomlinson’s Findings on RBS’s GRG
After considering a number of cases and experiences of businesses, Dr Lawrence Tomlinson summarised RBS’s overall process as being as follows:
- The bank artificially distresses an otherwise viable business and through their actions puts them on a journey towards administration, receivership and liquidation.
- Once transferred into the business support division of the bank the business is not supported in a manner consistent with good turnaround practice and this has a catalytic effect on the business’ journey to insolvency.
- The insolvency process lacks fairness and accountability leading to financial implications and biased outcomes to the detriment of the business owner.
Lawrence Tomlinson considered the process to be “systematic and institutional” and found from conversations with whistle-blowers, experts and lawyers that more often than not, viable businesses were entering such a path as there was more to be gained by the bank from this than a less asset risk business.
Engineering a Default – Identifying Business as “Distressed”
There are numerous mechanisms by which a business may be put into default and transferred to business support by the bank. This often takes the form of one of the following:
- Reassessment of loan to value – revaluation which significantly undervalues the business’ assets and puts them in to breach of their covenants;
- Technical breach of covenants – such as a temporary dip in EBITDA or a late submission of information. These are often breaches that have no bearing on the performance or viability of the business; and
- Removal of or change to loan facilities – the move to a rigged and more costly LIBOR rate or more expensive asset based finance.
The purpose of the above is to enable the bank to identify the business as being “distressed” so it can be moved out of local management. Once moved into GRG, they are considered risky and with the increased margins and fees, their cash flow will also be impaired.
Treatment of Businesses in RBS’s Global Restructuring Group
Once a business has been sent to GRG, it is exceedingly difficult for it to find an alternative source of finance as it is considered as being distressed. The business will find that it is no longer able to liaise with its local relationship team. In his report, Dr Tomlinson stated:
“Businesses across the country have a real fear of entering these divisions of the bank given the experience of others in their network. There are very few examples received as part this evidence gathering process where the business has gone into GRG, in particular, and gone back into local management.”
The following are some of the consequences/difficulties faced by businesses in GRG:
- Increase in margins and excessive fees: the business was usually fined on entry into GRG for breaching its own covenants and more often than not, interest on their loans increased. This made it harder for businesses to trade out of their difficult situation.
- Requests for information: Businesses received numerous requests for information from the bank which distracted them from the day to day running of their business.
- Shadow directors: Businesses were required to delay or stop paying their suppliers which in turn had a detrimental impact on their business credit rating.
Purchase of Assets by West Register
Dr Tomlinson found that once a business collapsed, there was a potential for conflict of interests in the sale of assets out of the ‘insolvency pot.’ The report found that a large number of businesses were approached by West Register (a division of GRG that is owned by RBS) and which was interested in purchasing their property.
There was a large number of Property Participation Fee Agreements (“PPFAs”) targeting customers assets and where the bank secured a large participation in the value of customers’ real estate assets for little or no real investment.
This was an obvious conflict of interests and many customers felt that their property was purposefully undervalued in order for the business to be stressed, enabling West Register to buy assets at a discount price. West Register made hundreds of acquisitions which included purchases directly from the customer (labelled as consensual sales) and from bank-friendly and bank-appointed insolvency practitioners. The bank thereby acquired a diverse portfolio, from high value properties (such as hotels) to residential properties.
GRG also engaged in equity participation agreements with customers, obtaining a significant shareholding (for little to no investment) in a business that the bank itself may have partially or wholly wrecked by mis-selling IRHPs or EFG loans.
Financial Conduct Authority investigates: An FCA GRG Review?
Following the publication of the Tomlinson Report, the FCA announced on 17 January 2014 that they had appointed Promontory and Mazars to carry out a Review under section 166 of the Financial Services and Markets Act 2000.
The Review will examine Royal Bank of Scotland’s treatment of small business customers in financial difficulty and consider allegations of poor practice set out in the report by Dr Tomlinson.
If RBS customers / other contacts wish to draw attention to points they believe are relevant to the FCA’s Review, they should contact [email protected]
The FCA GRG Review was announced swiftly, in response to the Tomlinson report. However the FCA GRG s.166 report is now two years overdue yet the regulator continues to refuse to provide a timetable as to when the public will be able to learn of the findings. It is widely speculated that the report will be a whitewash as to the activities of GRG which is a division of the largely state-owned RBS which will excuse the bank from organising a compensation scheme for victims.
Victims of GRG must take legal advice to avoid their legal rights becoming time-barred.
RBS’ Clifford Chance GRG Review (April 2014)
RBS has always publicly denied wrongdoing (although this may change in early 2016) and in 2014, it hired Clifford Chance LLP to investigate the allegations made by Dr Tomlinson.
On 17 April 2014, RBS published their report titled:
“INDEPENDENT REVIEW OF THE CENTRAL ALLEGATION MADE BY DR LAWRENCE TOMLINSON IN BANKS’ LENDING PRACTICES: TREATMENT OF BUSINESSES IN DISTRESS”
This report into RBS GRG, paid for by RBS and conducted by RBS’ own lawyers, predictably cleared the bank of systematic wrongdoing. However the report corroborated a number of questionable practices carried out by RBS and GRG (listed below) which RBS promised it would eliminate:
► RBS didn’t obey RICS valuation rules ◄
RBS’ internal valuations of businesses were not carried out in accordance with best practice per the Royal Institute of Chartered Surveyors:
“Internal valuations were not carried out to the standard of the Red Book, but they were undertaken according to set assumptions by qualified surveyors employed by the bank.”
► GRG exploited customer debt levels ◄
Clifford Chance exposed a GRG training manual which instructed threatening to remove a distressed business’ overdraft as a way to gain “leverage” in negotiations over equity.
“using the on-demand nature of the overdraft as a point of leverage in negotiations of equity upsides when the customer is not in breach of its facilities but the business may be experiencing underperformance against expectations/forecasts.”
► Inadequate explanation of RBS’ & GRG fees ◄
“We found it difficult to understand how the bank calculated the fees which it proposed to customers in any particular case and therefore found it difficult to assess allegations of unfairness,”
► Profitable businesses were put into GRG ◄
Clifford Chance reported that they had seen examples of firms that were not struggling with their loans, but were still deemed to require restructuring ‘support’.
“a number of other cases where a customer had been transferred to BRG [Business Restructuring Group] without an event of default having occurred.”
► RBS GRG manipulated customers conduct ◄
“RBS sought to encourage or incentivise a specific course of action by the customer through its pricing such as an exit or sale of assets to reduce the customer’s debt.”
► RBS bank managers were incentivised ◄
“The relationship managers’ financial contribution was clearly an important part of the performance assessment process and, within the relevant sections of the appraisal, the focus is almost entirely on BRG’s revenue generation/loss avoidance objective. In free text blocks on the form, the appraiser estimated the relationship managers’ individual revenue generation and highlighted cases where they had generated strong revenues. Relationship managers were encouraged to seek upsides (equity participations and PPFAs)”
► RBS’ West Register Conflict of Interest ◄
RBS admitted that the fact that a “damaging perception” of a conflict of interest arose due to fact that the bank was effectively able to buy a business’ property through its West Register vehicle. And so the bank has decided to sell all assets on its books and wind it down. As the report noted:
“In December 2012, West Register’s UK property portfolio was valued at £929m. Property acquired from the bank’s UK SME customers totalled approximately £400m, less than half the overall portfolio. Between 2008 and 2013, West Register made acquisitions from 166 SME customers at an average of approximately 50% of the original loan value at the date of the transfer to GRG.”
GRG Recovery division disbanded by RBS
After suffering a maelstrom of controversy following the publication of the Tomlinson Report and former Bank of England deputy Sir Andrew Large’s report, RBS announced in August 2014 that it would be shutting down its controversial GRG team.
Whilst RBS have shut down this division of the bank, the bank clearly have employed recovery techniques that have not been as honest or responsible as one would expect of a bank that ought to be dealing fairly with customers. It remains to be seen whether the new recovery team at RBS will behave honestly or not.
FCA-agreed GRG Review Compensation Scheme?
We understand that RBS are preparing for the possibility of being forced to enter into an FCA-agreed Review scheme to compensate victims, although there is no guarantee such a scheme will transpire (it has been speculated about since May 2015 and no doubt resisted by RBS). We are aware that a Project team has been set up at RBS’ disaster recovery offices in Angel, London to deal with the banks responses to customers complaints to Mazars and Promontory acting for the regulator. If a review is announced, there can be no doubt, that just as with the IRHP review, RBS will take every possible step to minimise payments to customers.
It is important that victims of RBS GRG or any other bank’s misconduct do not wait to take legal advice as their legal rights are in the process of expiring (or may have already expired in many cases). Expiry of legal rights by the passage of time may result in a good claim being worth nothing. All victims of any bank recovery teams misconduct must therefore take legal advice from a specialist solicitor as soon as they possibly can.
For the avoidance of doubt, the Limitation Act does not allow extensions simply because of delays by the regulator or the wrongdoing bank which cannot amount to a valid excuse for inaction.
The FCA, having promised an announcement by the end of 2015, then announced in December 2015, that it would be making an announcement in early 2016. This promised publication date was also delayed and as of 14 October 2016, the FCA now reports that publication is still not imminent but will occur in late 2016.
Customers must also realise that their right to take legal action cannot be compromised by a possible GRG Review scheme and that litigation will give customers far greater prospects of a successful outcome in the FCA-agreed GRG review including legal costs recovery from the bank, which is unlikely to be available in any FCA GRG Review compensation scheme.
The FCA’s update page is here: Update on independent review of Royal Bank of Scotland’s treatment of business customers in financial difficulty