Entrepreneur in residence at the BIS, Dr Lawrence Tomlinson, has today published an explosive report which accuses many of Britain’s banks of ‘heavy handed profiteering and abhorrent behaviour.’
The report which was commissioned by Business Secretary Vince Cable, compiled case studies and examples relating to the treatment of borrowers by the Royal Bank of Scotland’s turnaround division Global Restructuring Group (“GRG”) and found that RBS forced viable businesses into financial trouble so it could profit from their distress by squeezing them for exorbitant fees and charges. Often, RBS’s property division, West Register purchased the devalued assets.
Tomlinson Report: RBS’s Global Structuring Group (GRG) another ‘Terrible Scandal’?
Global Restructuring Group (“GRG”) was set up in the 1990’s to help ailing businesses turnaround; following the financial crisis, it was seen as a solution to the bank’s problems. Businesses who found themselves in financial distress were identified by their lender as needing assistance. They were then put in Business Support Units (BSU) such as GRG which were divisions which would work with the business to help them overcome their difficulties.
However, in a report compiled by the government’s key advisor, it was revealed that RBS had forced businesses into the GRG division and withdrawn lines of credit by charging unreasonably high fees and charges so when it became insolvent, it could seize its assets at knockdown prices.
In his press release, Dr Lawrence Tomlinson commented:
“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.
From the cases I have heard, it is clear that a perception has arisen that the intention is to purposefully distress businesses to put them in GRG and subsequently take their assets for the West Register at a discounted price.”
Tomlinson Report: RBS’s GRG Process
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.
Lawrence Tomlinson: Solutions & Recommendations
Dr Lawrence Tomlinson was contacted by 200 companies of which he included 23 companies in his report to illustrate bad bank behaviour. Ironically, 20 of the companies were RBS customers. Tomlinson concluded his report by highlighting three key areas where he thinks Government reform could help prevent bank behaviour. These included:
- Business Protection: It is important to protecting businesses, especially SMEs, when issues and disputes with the banks arise so proper redress is given.
- Removing conflicts of interest: Conflict of interests between the banks, IBRs, valuers, administrators, insolvency practitioners and receivers should be given careful consideration because when these conflicts occur, they do so at the expense of the business.
- Competition: RBS and Lloyds should be made significantly smaller, removing conflicts of interest within the bank, and creating a number of smaller, purely retail/commercial banks. They will then have to compete for businesses’ custom in the same way as other banks and the incentive to maintain relationships with businesses and encourage them to growth will be reinstated.
Following the publication of report, it remains to be seen how RBS and other banks respond to Tomlinson’s critical analysis into Business Support Groups and also how the government now respond to claims that banks have profited from distressing businesses and forcing them into insolvency.
Lawrence Tomlinson’s report can be read here: Tomlinson Report (PDF) & Tomlinson Report (Text)