A Royal Bad Bank: RBS Capital Resolution (RCR)

RBS’ bad bank (Royal Bank of Scotland Capital Resolution – RCR) has been set up to take over RBS’ bad loans (those with significant non-performing assets).  When transferring the bad assets of RBS to the bad bank, RBS will clear its balance sheet of toxic assets. RBS will therefore take write downs in which RBS shareholders and bondholders may lose money from this solution (but not depositors).  The bad bank strategy is designed to allow RBS (sans bad loans) to start to trade profitably and then move into a taxpayer exit.  

Those RBS customers affected (many of whom are in this vulnerable position due to interest rate swaps mis-selling by the bank itself) are being told their loans are now ‘bad RCR loans’ and will be dealt with in accordance with RCR objectives as enunciated below:

Background to creation of RBS Capital Resolution (RCR) and its objectives

In June 2013 the Chancellor announced a review into the case for The Royal Bank of Scotland Group (RBS) creating a bad bank. In response to the review, RBS announced on 1 November 2013 the creation of RBS Capital Resolution (RCR). RCR is a separate business within RBS whose objective is to manage and wind down RBS’ higher risk and capital intensive assets by the end of 2016.

Working in consultation with the Prudential Regulatory Authority (PRA), HM Treasury (HMT) and their advisers, RBS established RCR with effect from 1 January 2014 with a portfolio of assets totalling £29 billion. The RCR portfolio includes, but is not limited to, certain lending products and other financial instruments originated by subsidiaries of The Royal Bank of Scotland Group, including RBS PLC and Ulster Bank.

RCR was established with the following principles:

  • removing risk from the RBS balance sheet in an efficient, expedient and economic manner;
  • reducing balance sheet volatility; and
  • accelerating the release of capital through the management and exit of the RCR portfolio.

It is our intention to manage the RCR portfolio in accordance with these principles in order to strengthen RBS’ balance sheet whilst preserving value for the Bank’s shareholders. RCR has committed to reduce its portfolio of assets by 55-70% by the end of 2015 and 85% by the end of 2016.

What this means for RBS customers

We are writing to inform you that the financing arrangement listed in the Appendix to this letter (the RCR facilities) has been included in the RCR portfolio and are now being managed in line with the principles and objectives outlined above.

This means that the Bank’s strategy and the options we may be able to offer in restructuring the RCR facilities are subject to the overriding commitments given to the PRA and HMT as outlined above. In particular, we will be unable to extend the term of any RCR facilities beyond 2016. We may be unable to agree additional forbearance or temporary extensions of RCR facilities in the period up to December 2016.

Our objective will be to work with you to seek a consensual repayment or refinancing of your facilities prior to December 2016, irrespective of the final maturity date and whether the facilities are currently compliant with their contractual terms. If we unable to agree a consensual exit, we will be obliged to consider alternative means of removing risk from the RBS balance sheet, which may include a sale of the loans to a third party or, in extremis, enforcement against our collateral in the case of facilities that are in default against their contractual terms and where no reasonable repayment or exit strategy can be agreed.

Within these constraints we will continue to deliver excellent customer service. We will work with you to try to agree a consensual solution that meets the bank’s obligations and your business objectives.

Impact on IRHP Review

As you may be aware the Bank has agreed with the Financial Conduct Authority (FCA) to conduct a review of the sale of interest rate hedging products. We have agreed with the FCA that for the period of the review, we will not foreclose on or adversely vary existing lending facilities without giving prior notice to the customer and obtaining their prior consent unless exceptional circumstances arise. The arrangements referred to in this letter do not in any way affect the review or our undertaking to the FCA.

Appointment of new (RCR specialised) Relationship Manager

In view of this development, [a new bank employee specialised in RCR relationships] has been appointed as your new Relationship Manager to actively work with you to explore your options and to develop appropriate courses of action to enable RCR to achieve its objectives.

Dealing with RBS / RCR – Borrower Protection Lawyers

Every bank-customer relationship and lending situation is unique.  For many RCR customers (that are able to) exiting from RBS/RCR may prove to be the best strategy.  However, where customers cannot move to other lenders the lending bank knows that the borrower is under pressure to go along with whatever they dictate.  Customers are often unable to move due to the impact of, for example, (i) a shift in property prices leading to a loan to value (LTV) covenant breach, or (ii) due to the bank citing a ‘market disruption clause’, or (iii) changing the interest rate in some other way, or (iv) due to previous pressure to sell assets or shares (eg via RBS Global Restructuring Group – GRG) to a bank subsidiary such as RBS West Register or (v) the huge break costs of an interest rate swap or other derivative product (that may have been mis-sold in the first place).

Many NatWest and RBS customers were mis-sold interest rate hedging products (IRHPs such as swaps, collars, cancellable swaps, structured collars) which cause significant credit limit utilisation (CLU).  When selling an IRHP derivative contract to a customer, the use of the customers credit limit (over charged assets) was regularly done without the (otherwise usual) customer knowledge of credit limit applications and utilisation.  We believe this practice of non-notification of CLU was designed to avoid the customer appreciating the real contingent liability risk that these complex financial instruments posed (this could be tens or hundreds of thousands or millions of pounds depending on product sold and size of notional amount and term).

The Borrower Protection team at LEXLAW has a wealth of experience and success in negotiating with banks and building societies and challenging unfair lender practices and mis-selling.  As the leading UK lawyers dealing with these disputes for borrowers, members of the team regularly appear in print, TV and radio broadcast media discussing misconduct by the major banks and building societies.