Bloomberg News

RBS Drove Companies Into Trouble to Lift Profit, Study Says

November 25, 2013

Royal Bank of Scotland

A pedestrian carries a Royal Bank of Scotland Group Plc (RBS) branded umbrella in London. Photographer: Chris Ratcliffe/Bloomberg

Royal Bank of Scotland Group Plc appointed Clifford Chance LLP to investigate whether it pushed companies that owed it money into difficulties to boost profit.

RBS said in an e-mailed statement today it appointed the law firm after a report by Lawrence Tomlinson, chairman and founder of LNT Group Ltd., said that once companies were in default, the bank could charge them advisory fees and buy their assets at reduced prices. Business Secretary Vince Cable has referred RBS to the Financial Conduct Authority.

U.K. banks, including 81 percent taxpayer-owned RBS, have been criticized by the government for holding back lending to businesses since the 2008 financial crisis as they boost capital reserves and clean up their balance sheets. The Bank of England earlier this year extended its plan to provide cheap loans to companies and consumers and make credit available for small firms to help support the economy.

“There are many devastating stories of how RBS has wrecked good businesses and the ruinous impact this has on the lives of the business owners,” Tomlinson said in an e-mailed statement.

RBS shares rose 0.4 percent to 331.50 pence in London. They have gained 2.2 percent this year, making them the second-worst performer among Britain’s five largest banks.

‘Serious Problems’

Chris Hamilton, a spokesman for the FCA in London, declined to comment on the report, as did a spokesman for the U.K.’s Prudential Regulation Authority. RBS said that Clifford Chance is scheduled to report its findings in 2014.

Cable has previously signaled concerns about small and medium-sized companies’ access to finance and in 2010 called bankers “spivs and gamblers.” Tomlinson, entrepreneur in residence at Cable’s department, compiled allegations about companies’ difficulties with their banks during the recession and turned them into a report for Cable. Chancellor of the Exchequer George Osborne today called the results “shocking.”

Andrew Tyrie, chairman of the Treasury Committee, said in an e-mailed statement today that RBS’s lending to small and medium-sized companies “has serious problems.”

“The actions and reputation of RBS have discouraged would-be customers and reduced SME activity,” Tyrie said. “We have all lost out as a result.”

Large Report

If the report leads to compensation claims, it may further delay Osborne’s efforts to recoup some of the cost of RBS’s 45.5 billion pound ($74 billion) bailout. RBS and Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, “in particular,” were found “harming their customers through their decisions and causing their financial downfall,” according to the report.

RBS needs to overhaul its lending practices, and instigate an inquiry into how it has treated customers in financial difficulty, former Bank of England Deputy Governor Andrew Large said today in a separate report conducted with consultant Oliver Wyman, which was commissioned by the Edinburgh-based bank.

The lender should establish a set of lending objectives, with clear lines of responsibility for delivering them, the Large report said, echoing parts of a statement published on Nov. 1. The bank also needs to improve staff training, counter risk aversion and improve customer communication, it said.

“It’s clear from your report that we have over corrected for the reckless lending practices that broke the bank five years ago,” RBS Chief Executive Officer Ross McEwan, who took over from Stephen Hester last month, said in an e-mailed response following Large’s report. “In many cases, the pendulum of risk aversion has swung too hard to one side.”

‘Horror Stories’

Tomlinson’s criticisms focused on RBS’s Global Restructuring Group, at the bank’s “turnaround” division. His report said profits from business lending were “extremely low comparative to the revenue targets bankers are incentivized to meet.” Struggling firms were pushed toward the unit, which could charge increased fees or strip assets.

RBS said in an e-mailed statement that GRG “successfully turns around most of the businesses it works with, but in all cases is working with customers at a time of significant stress in their lives.” Not all businesses “that encounter serious financial trouble can be saved.”

“How Tomlinson came to his conclusions is not made completely clear,” said Andre Spicer, a professor at Cass Business School in London. “It appears he mainly focused on informants who would give him horror stories. This means the sample is probably biased toward less than positive findings.”

Tomlinson told the BBC that even if his report “was completely wrong, aren’t RBS getting this completely wrong, that that’s the way people feel about them.” Cable said that he’s “all too aware of the claims” of how small businesses have been treated by banks, and RBS “in particular.”

“This has had a negative impact on the British economy, from which we are still trying to recover,” he said. “I am, however, confident that the new management of RBS is aware of this history and is determined to turn RBS into a bank that will support the growth of small and medium-sized businesses.”

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Edward Evans at eevans3@bloomberg.net


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