On 18 January 2018, a Parliamentary backbench motion on RBS’s Global Restructuring Group’s (GRG) systemic failure to protect SMEs has received unanimous Ministerial support in condemning the bank’s parasitic relationship and systematic asset stripping of the British business sector. The debate provided further evidence of widespread endemic malpractice leading to accusations that Lloyds and RBS’s turnaround divisions committed the “largest theft anywhere, ever.”
RBS was criticised for its “extraordinarily aggressive” approach to litigation and bullying SMEs into submission. LEXLAW was the only law firm referenced by Parliament for our work in highlighting the inherent legal inequality of power between lenders and businesses. Concerns were raised about RBS’s “entirely unsatisfactory” ad hoc compensatory redress scheme akin to a “burglar… [picking] the jury for his trial.” GRG’s “horrifying” “Just Hit Budget” memo- bleakly stating “let customers hang themselves”– acted as damning evidence of the “profoundly sick culture” within that bank. The FCA’s Kafkaesque cloaking of Promontory’s skilled persons report into deliberate mistreatment by the rogue unit was unanimously criticised; especially after the bombshell revelation that RBS “knew or shown of known… [about GRG’s] intended and co-ordinated strategy” to artificially distress and raid SMEs to re-build their own profits after the financial crash.
The House assented to the essential need to reform the banking system with the following suggestions: an independent inquiry to provide transparent accountability; a Treasury-backed FCA proposal to widen access to the Financial Ombudsman Service (FOS); the APPG on Fair Business Banking-backed establishment of an impartial Financial Services Tribunal to resolve customer disputes (LEXLAW led calls for a Tribunal in 2016); a proposal to introduce an Office of the Whistleblower to protect the rights of those exposing endemic bank wrongdoing and finally LEXLAW’s call on the FCA to release the independent report into GRG misconduct to bring justice to their victims. The evidence against RBS has mounted, so too does the responsibility to act. The overriding message coming from Parliament is: “enough is enough”.
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 financial crash in 2008, GRG took control of 16,000 SME customers with assets of £65 billion. 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 after allegations of misfeasance and wrongful profiting were brought to light.
The bank recovery team were tasked to recover debt owed to the bank but were purposefully mis-described as providing “business support”. In fact these departments managed RBS’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. 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. 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) would take up free shares in a business or gain a percentage of sale proceeds. Instead of SMEs getting the help they needed in a weak economy, GRG targeted the unregulated SME sector and became a profit churning processing unit to exacerbate the demise of SMEs and squeeze capital to improve RBS’s own post- credit crunch balance sheet.
In November 2016, RBS admitted it had failed SME customers and established a so-called independent (but heavily criticised by LEXLAW) FCA-backed complaints process fund of £400million to refund complex fees paid by SME customers between 2008 and 2013. In November 2017, the FCA published a heavily redacted Promontory summary report into GRG mistreatment of customers. LEXLAW (through a campaign of DPA Subject Access Requests), SME victims and Parliament are still awaiting the publication of the full report.
Parliamentary Charge Sheet against GRG
(i) GRG was an “abattoir” unit at the centre of “the largest theft” in British Banking History
During the debate, every MP gave a damning indictment of GRG’s bad practices as a whole and most Ministerial remarks were informed by vivid personal testimonies from SME owners who all suffered huge financial losses as well as personal hardship. Jim Shannon MP referred to the HBOS scandal as the second worst failure in “British banking history”. The worst is RBS’s GRG unit. Clive Lewis MP accused RBS of the “largest theft anywhere, ever” and said businesses under the supposed care of GRG were instead “carved up like a Sunday roast” with many perfectly healthy SMEs moved to GRG simply because they wanted to move banks or had complained. MPs also heard that GRG was less an intensive care unit for struggling businesses but “an abattoir”, “slaughterhouse” or “mortuary” of organised fraudulent asset stripping on a huge scale. GRG held assets of more than £90 billion but 90% of their administered businesses never made it back to mainstream banking whilst GRG became RBS’s most profitable sector.
Reports from SME constituents all shared the common feature that whilst under the administration of GRG, advisers to the bank (now part of a “conspiracy of denial”) consistently undervalued company assets whilst simultaneously overvaluing its liabilities to falsely perpetrate a conclusion that the business was unviable and ultimately forcing companies into receivership. GRG’s aggressive tactics in manipulating property values which resulted in alleged covenant breaches; the unlawful possession of property; the manipulation of overdraft facilities and unfair inflated bank charges has been described as an “extortion racket”. These personal accounts and the strategic focus prioritising the realisation of assets for the bank has been confirmed in the summary of the independent Promontory report with “inadequate” and “inappropriate” tactics employed leading to “systemic failure”. In addition, GRG was also heavily criticised in the Tomlinson Report:
“GRG artificially distresses otherwise viable businesses. Through such actions, GRG placed businesses on a journey towards administration, receivership and liquidation.”
Although GRG was the primary focus for the debate, malpractice is not simply contained to one rogue unit. Bill Esterson MP found similarities between RBS and Carillion: in both cases small businesses have been “imperilled” by the actions of huge institutions and as Ian Fraser notes both should not have been “wholly trusted” by government as they were both “built on sand.” Widespread banking malpractice exacerbated by an opaque regulatory system plagues the sector which has scavenged off small businesses and broken the backbone of our economy. 60% of lending to SMEs was conducted by two “shameful” conglomerates: RBS and Lloyds. Both these institutions have defined the banking culture towards SMEs and both were accused of “systematically destroying” confidence in the British banking system. Instead of supporting small businesses, RBS and Lloyds were parasitically thriving off of the lifeblood of the economy.
(ii) RBS’s “extraordinarily aggressive” approach in Litigation: LEXLAW’s research referenced by Parliament
The House highlighted the “inherent inequality of power” between lenders and businesses starting with a one-sided contract laden with “onerous and ambiguous” terms. The lack of accountability is a result of an expensive court process exploited by banks to bully claimants into submission meaning none but the richest litigants have their day in court. Banks use their army of lawyers and financial firepower to obfuscate and delay forcing claimants to capitulate and in some cases, statutory limitation periods are run down through deliberate delays by banks.
Kate Green MP highlighted the “extraordinarily aggressive approach” that RBS takes to litigation. In particular, she criticised the bank for its endemic failure to provide full and frank disclosure when defending its claims of wrongdoing. Disclosure is a fundamental litigation process (CPR Part 31) whereby each party are required to produce all documents they hold which are relevant to litigation regardless of whether they assist or harm their case. RBS and its law firm Dentons have consistently declined to provide all relevant documents. Kate Green MP praised LEXLAW’s work in highlighting cases of RBS’s non-disclosure. In Mehnaaz Chaudhry & Another v. The Royal Bank of Scotland PLC (High Court of Justice, Chancery Division, Claim No: HC-2013-000489), Dentons advanced the meritless argument that documents generated by the IRHP review scheme were non-disclosable. RBS were forced to redo their standard disclosure exercise and hand over the documents. Moreover, in The Royal Bank of Scotland Plc v. Highland Financial Partners LP  EWCA Civ 328, the Court of Appeal found a deliberate and dishonest failure by RBS to disclose relevant documents and misled their client, their own lawyers and the court. In addition, the Court of Session in Royal Bank of Scotland Plc v Carlyle  ScotCS CSOH 3 found the bank lacked “candour” in its deliberate failure to admit evidence. Finally, in Property Alliance Group Ltd v The Royal Bank of Scotland Plc  EWHC 322, the High Court criticised the bank’s “cavalier” attitude to disclosure in hiding 25 million documents relating to allegations of LIBOR manipulation.
Christine Jardine MP correctly stated that victims of RBS misconduct are “caught in a trap without fair protection of law.” There is no incentive for banks to avoid malpractice if they can bully claimants with unnecessary delays and extend the costly litigation process. Moreover, their continual tactics of unfairly (and in breach of CPR 31) failing to disclose essential documents, represents yet another hurdle for swindled customers and their legal representation.
(iii) RBS’s Inadequate Compensation Scheme treats Customers with “Disdain”
The House found that RBS are not only at fault for their past actions but their present behaviour as the bank “continues to do all it can to avoid its responsibilities” by treating its customers with “disdain” with the unfair operation of their supposed “independent” compensation scheme. The bank has set aside a £400 million fund for victims of GRG. However, research by the Property Alliance Group suggests the real size of the compensation scheme should be ten times that amount at £4 billion. Having examined the balance sheets of RBS’s subsidiary, SIG Holdings, the bank profited £400 million from just one area of its misconduct: giving away equity stakes. It is clear that the £400million fund only addresses this limited range of GRG misconduct. Furthermore, this fund has not even come close to being paid out by RBS. The FCA’s chief executive, Andrew Bailey, told the Treasury Select Committee in October 2017, that only £115million had been paid out. This is clearly an inadequate situation for RBS’s customers who deserve compensation.
The compensation scheme is essentially a self-regulatory review scheme run by the wrongdoers themselves under the cloak of purported FCA regulation. Clearly, RBS has not created a redress scheme for altruistic public service reasons but because their scheme will save them significant redress and no doubt be delayed to allow legal rights to become time-barred. Clive Lewis MP criticised the “discredited” ad hoc redress scheme as “wholly unsatisfactory” and a “cynical exercise in limiting… (the banks’) liability rather than a genuine attempt at restitution” akin to a “burglar being allowed to pick… the jury for his trial.” In addition, LEXLAW has brought the failings in and abuses of the IRHP review to the attention of the FCA. We have found inherent flaws in that particular scheme and the continued abuse of the review. The GRG compensation scheme appears to have been approved by the FCA even though it is clearly inequitable as:
(a) it does not deal with the victims of GRG and West Register misconduct who no longer have control of their businesses (who are often former shareholder and director stakeholders in the business ousted by the actions of RBS);
(b) while it is advertised as a “New Complaints Process”, RBS will refuse to deal with any customers who have already made ‘old’ complaints via the Financial Ombudsman Service or the courts or who have threatened litigation (there is no regulatory precedent for such exclusions);
(c) RBS does not accept a number of Promontory’s findings (which are effectively the FCA’s findings) however will self-assess the customer’s complaint and make the decision and neither the independent third party nor the FCA nor Promontory nor any skilled person will play any role or have any impact whatsoever on the banks decision on its own wrongdoing save that appeals, over direct losses only, may be made to the independent third party; and
(d) the scheme is purposefully designed to evade any independent third party or FCA review that might ensure proper consequential loss is paid to affected businesses, which will no doubt save the bank billions of pounds of redress truly owed to GRG and West Register victims (as well as millions of pounds arguing over inequitable redress proposals with skilled persons).
(iv) GRG’s “Gloating and Cruel” “Just Hit Budget” Memo Confirms a “Profoundly Sick Culture”
A damning 2009 internal memo entitled “Just Hit Budget!” was published on 17 January 2018 by the Treasury Select Committee. The leaked tipsheet, which according to a secret report being withheld from publication by the FCA, was not an isolated example of the misconduct of RBS. The memo highlights the underhand pressure tactics deployed by GRG to close deals and represents a step-by-step guide on how to swindle their customers. MPs labelled the memo disgraceful and were scathing in their criticism of RBS staff, especially for the callous sentiments referring to struggling business owners as “basket cases” and to “let customers hang themselves.” The latter remark is particularly concerning because it has been reported that at least one customer did take their life after their business was stripped by RBS. The memo adds to the evidence that GRG were intentionally squeezing owners of struggling businesses for profit with Nicky Morgan MP noting “there is clearly something very wrong occurring.” Neil O’Brien MP summarised the opinions of SME owners and the public alike by saying:
“[Every MP is] horrified and sickened by the contents of the RBS memo…Gloating and cruel, it is a symbol of the profoundly sick culture within that bank.”
The chief executive of RBS, Ross McEwan, attempted to downplay the significance of the memo in a letter to the Treasury Committee on 9 January 2018, by saying the document should be viewed “in context”, because it was written by a “junior manager.” Frankly, this excuse is unconvincing. Stephen Kerr MP- a former RBS employee himself- agrees that this justification “does not wash” as a junior bank manager certainly would not have written the memo “without understanding that it conformed to the culture of the business that they were operating in.”
(v) Serious Allegations of Enterprise Finance Guarantee Scheme (EFG) Manipulation
The debate also brought to light the fact that the Department of Business, Energy and Industrial Strategy (BEIS) are in the early stages of investigating whether RBS improperly manipulated and profited from the Enterprise Finance Guarantee Scheme (EFG). The EFG Scheme was established during the financial crisis and was designed to help small businesses requiring credit that could not secure lending. The government backed 75% of the lender’s liability if the customer went into default. However, customers were improperly pushed into taking up an EFG loan and RBS even admitted that a number of SME borrowers were incorrectly led to believe they would be backed by the government in the event of default, when in fact it was the bank. LEXLAW has represented many clients whose banks misrepresented the mechanics and requirements of the EFG scheme in litigation and in front of the FOS. RBS publicly admitted to this mis-selling scandal in 2013 and have paid out only £3.5million in 2016 to defaulting customers who were misled to believe they would benefit from the scheme.
It is understood that the FCA’s investigation into GRG is not focusing on EFG manipulation. However, the BEIS have the power to refer its findings to the FCA. RBS’s use of the EFG scheme was criticised by Sir Vince Cable in 2015, however, it has taken campaigning from a victim of a mis-sold EFG (Clive May) for the BEIS to re-open its file. As David Hanson MP noted, it is imperative RBS are fully held to account for EFG loan mis-selling to “secure justice” for all SME owners that have suffered loss.
(vi) Skilled Persons Review: Extraordinary Revelation that RBS knew about GRG’s Strategy to Fleece Customers
The FCA have refused to publish their full Promontory review- due to Maxwellisation of s.166 reports – despite mounting public and Parliamentary pressure. A leaked minute from an FCA board meeting suggests the FCA will not release the full report for fear of being sued by RBS. Lord Cromwell criticised the FCA’s decision as not regulating but “supplicating” and Kevin Hollinrake MP raised the question of “whom is regulating whom in this relationship?” The FCA’s final summary on RBS’s treatment of SME customers referred to GRG was published on 28 November 2017. Although just a redacted summary, it does expose a “litany of poor conduct” including:
(a) “insensitive, dismissive… and aggressive” treatment of customers;
(b) an “inadequate and inappropriate” complaints handling process;
(c) a failure to “handle inherent conflicts of interest”; and
(d) a rampant “culture of deal making…that set little store by the interests of customers.”
Given the nature of the bad banking practices exposes, it is particularly disappointing that the FCA and RBS jointly stated that “the most serious allegations made against the bank have not been upheld.” However, Sir Vince Cable’s bombshell revelation certainly dismisses this protestation of innocence. A full report has been leaked to the BBC, and although the public have been denied access to the document, Sir Vince Cable used parliamentary privilege to reveal an incriminating phrase which was omitted from the detailed summary:
“Management knew or should have known that this was an intended and co-ordinated strategy and that the mistreatment of business customers was a result of that”.
He also named Santander UK’s chief executive, Nathan Bostock– the former head of GRG in charge of restructuring and risk at RBS- as “responsible” for that strategy. Prior to this revelation, there was limited evidence publicly available to judge whether RBS were ignorant or complicit in the actions of GRG. This leak proves the latter: RBS’s management were complicit in the systematic defrauding of SMEs. Moreover, Norman Lamb MP expressed concern that this damning conclusion was omitted from the FCA’s summary and suggests the omission potentially makes the FCA complicit in the cover-up, which is “incredibly serious and needs to be considered.”
Next Steps: Holding the Major Banks to Account
(i) Independent Inquiry and/or Release the Full GRG Review
Clive Lewis MP led calls for an independent inquiry into the treatment of businesses by all banks. It is essential to secure “proper transparent accountability” to start rebuilding the social contract of trust between borrowers and lenders. MPs were critical of the Financial Ombudsman’s ability to effectively provide accountability and the FCA’s abdication of its full regulatory powers. As such, Jeff Smith MP called for a “proper” Select Committee inquiry to bring justice to the victims of mis-selling and unjustified asset stripping.
A supposed independent inquiry has taken place by Promontory, however, the FCA have refused publication. LEXLAW, on behalf of our clients affected by GRG, have submitted a data subject access request under the Data Protection Act 1998 to view extracts from the report which may help the cases of GRG’s victims. Its publication is “long overdue” and the public are tired of the “foot-dragging that has gone on far too long” (Clive Lewis MP). Moreover, this was only part one of Promontory’s review; the FCA has complied with RBS’s demand to not carry out part two. Its publication and a second investigation would be the first step in ending the inherent inequality of power between banks and their customers.
RBS has long breached its disclosure obligations whilst at the same time extracting information from its victims using its army of lawyers to ask leading questions in the hope of finding incriminating evidence. The report would aid claimants in their litigation process by showing there was an intention to deliberately mis-sell and to purposefully set SMEs on a path to liquidation. The full independent report would act as a deterrent to other banks as they would be put on notice that bad banking practices cannot be hidden and justice will be served. Furthermore, its release would end accusations that the FCA are abdicating their regulatory responsibilities and that the watchdog has no teeth. Perhaps the Maxwellisation procedural principle would have to be re-litigated, but in the midst of the largest crisis in British banking history, public interest and necessity should trump the wrongdoer’s ability to object to critical findings in a report before a final version is published.
(ii) FCA Proposal to Widen Ambit of Financial Ombudsman Service (FOS)
Following the debate, the FCA released proposals to widen the ambit of FOS to permit more smaller SMEs access to the free independent dispute resolution service. Currently, only SMEs with fewer than 10 staff can use the service. The FCA’s proposals (if adopted) will come into effect on 1 December 2018 and would result in a further 160,000 small businesses having the right to take their complaints to the ombudsman. To be eligible an SME must have:
(a) fewer than 50 employees;
(b) an annual turnover below £6.5million; and
(c) an annual balance sheet of less than £5million.
Although both the Treasury and the Federation of Small Businesses (FSB) have favoured this extension; many MPs and the APPG on Fair Business Banking expressed doubts over the FCA’s solution and effectiveness of the FOS procedure as “merely a sticking plaster” in dealing with complaints from SMEs. The FOS has been criticised as only being suitable for low-level disputes; lacking powers of disclosure; unable to enforce decisions; lacking “teeth”; no ability to adjudicate and it “cannot deal with complex cases.” Instead, a more effective solution would be for the government to establish a more effective dispute resolution system in the form of a specialist Financial Services Tribunal.
(iii) Establish a Financial Services Tribunal to Resolve Customer Disputes
It is time for Parliament, the executive and the financial watchdog to ensure SMEs get access to fair and affordable justice. Major banks are all legally and financially sophisticated and are far too often locked in complex financial disputes with customers. Such disputes are often difficult for the FCA and FOS to resolve and beyond their capability and remit. The FCA is a regulator and was never mandated to be an arbiter of disputes and is therefore completely unequipped to resolve disputes in spite of its mandate to protect consumers. The financial ombudsman scheme is inadequate because it is designed to be simple and to deal with simple disputes with a low financial value of less than £150,000 (this will increase to £600,000 under the new FCA proposals). The failed FSA-backed IRHP scheme in which banks are allowed to determine compensation for their own wrongdoing and the flawed RBS GRG scheme, which adopts the same self-determined compensation flaw, each highlight the justice gap that UK SMEs currently face. Only a tiny fraction of financial services disputes are ever litigated and the vast majority of good litigation cases settle, which means there is a lack of meaningful court precedents to force financial services institutions to deal with customer disputes fairly, particularly where those disputes have multimillion financial values. This leaves a vacuum for a Financial Services Tribunal which could offer not only judicial scrutiny over the financial services industry but also provide a sense of justice for customers who might finally get their day in court.
LEXLAW led calls for a Financial Services Tribunal in 2016 by submitting a petition at the UK Government site. The APPG on Fair Business Banking has formed a working group to look at proposals for a tribunal. The Banking Futures Project has also brought together stakeholders and formulated an ambitious plan to rebuild trust in the banking system including: “the introduction of a new Financial Arbitration Service that is fast, affordable and available to all SMEs”. It seems since our petition in 2016, the political will has become much more receptive to the proposal of a permanent commercial financial dispute resolution platform. It is hoped that Ministerial support during the debate will be more than mere talk but lead to the rapid establishment of an independent external service to give justice to the victims of banking misconduct. If justice is to be delivered and standards of conduct to be corrected then maintained at fair levels in future, then there is only one choice: a Financial Services Tribunal.
(iv) Expose Endemic Bank Wrongdoing by Protecting Whistleblower Rights
A novel and interesting proposal was advanced during the debate by Norman Lamb MP on behalf of Bank Confidential. RBS whistleblowers have been offered scant legal and regulatory protection for exposing wrongdoing and risking their own careers in the process. In particular, the FCA revealed the name of one whistleblower to RBS; a move described by Norman Lamb MP as a “cavalier disregard of a whistleblowers’ rights”. In contrast, the USA have an Office of the Whistleblower, protecting the legal rights of those who speak out. In fact, whistleblowing is actively encouraged as whistleblowers are rewarded financially for doing so (between 10% to 30% of the sanction collected against the firm: a sum that could run into the millions).
In light of the damaging evidence, especially the “Just Hit Budget!” memo of 2009, whistleblowing must be actively encouraged and anonymity protected in the UK to prevent continuing institutional malpractice behind closed doors.
(v) Criminal Charges
Many MPs called for a criminal investigation into the senior management at RBS GRG. Chris Matheson MP made an interesting point that this is “in a league way beyond” the PPI scandal. Skimming from extra money in a customer’s payment protection insurance is one thing but “deliberately driving down, crashing and destroying someone’s business… is a league beyond anything we can comprehend.” Clearly this is criminality, and it should be dealt with as such. Thames Valley police successfully investigated HBOS Reading and finally secured the convictions of six “utterly corrupt” bankers for fraud in February 2017. Tonia Antoniazzi MP is right: the HBOS case must be the norm and not a one-off. Underhand tactics destroying small businesses must not be allowed to continue. Criminal prosecutions will act as a deterrent to any errant bank employee in the future. The HBOS Reading case cost Thames Valley police £7million to investigate and similar financial resources must be provided to the Serious Fraud Office.
It is surely time for a criminal investigation into the substantial number of claims and evidence that RBS engineered businesses into default whilst profiting from their struggles. The relevant authorities could quite easily commence their investigations by obtaining and reading through the report and evidence gathered by the FCA’s skilled person.
LEXLAW Banking Litigation & Dispute Resolution
It is an absolute must that victims of RBS GRG or other bank BSUs protect their legal rights. This is the only sensible course of action when a business is facing a high value dispute with a major bank, such as the Royal Bank of Scotland or National Westminster Bank. Otherwise, if there is no redress scheme, or if the bank refuses to offer reasonable redress, customers may well find they are time-barred from commencing legal action and their high value claim is now worthless. Legal rights can be protected by taking urgent legal advice and by instructing specialist GRG solicitors to issue a protective claim form or by instructing GRG litigation solicitors to prepare and agree a carefully written standstill agreement.
Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in banking litigation and specialise in representing SMEs in banking disputes. Our high profile and high value cases regularly appear in the national and international media. Our banking litigators advise on the protection of borrower legal rights in the face of predatory bank practices. We have successfully managed and settled court litigation against all major UK banks. Call us on ☎ 02071830529 or complete our online contact form.
Financial Services Litigation Team, LEXLAW