This statement provides an update on the Financial Conduct Authority’s (FCA) review of Royal Bank of Scotland’s (RBS) treatment of small and medium enterprise (SME) customers in financial difficulty.
The statement addresses the announcement made by RBS today regarding customers transferred to its Global Restructuring Group (GRG), gives a summary of the findings of the report by Promontory Financial Group (Promontory) and sets out the next steps which the FCA will take.
RBS has today announced how it will address poor outcomes faced by certain SME customers who were referred to GRG between 2008 and 2013. The key elements of RBS’s announcement are:
- a new complaints review process; and
- an automatic refund for complex fees charged to SME customers in GRG.
RBS’s proposals were developed with our involvement. We agree these are appropriate steps for RBS to take.
While the FCA still needs to see further detail about how the scheme will operate, we believe that it is an important step for RBS to put in place an appropriate complaints review process which should provide certain SME customers with a route to make a formal complaint, should they wish to do so. Additionally, RBS has agreed to provide automatic refunds for complex fees to some SME customers. In particular, the FCA notes and welcomes the involvement of an independent third party to provide oversight of the complaints review process. The independent third party will provide reports to the FCA on a regular basis.
FCA’s summary of the findings of the Report
In January 2014, the FCA appointed Promontory as a skilled person under section 166 of the Financial Services and Markets Act 2000 to review RBS’s treatment of SME customers transferred to GRG between 2008 and 2013. Promontory, with the assistance of its sub-contractor Mazars, provided its final report to the FCA in September 2016 (the Report).
This was a complex and lengthy review. As part of their work, Promontory examined 207 cases and covered a six-year period. RBS provided Promontory during the course of the review with 323 gigabytes of data (approximately 1.5 million physical pages and 270,000 emails).
The Report is a very comprehensive document and provides a detailed description of the work undertaken and contextual background of the market and the way that GRG operated at the time.
We set out below the FCA’s high level summary of the main findings and some key conclusions in the Report.
Whilst some isolated examples of poor practice were identified, the Report concluded that:
- RBS did not set out to artificially engineer a position to cause or facilitate the transfer of a customer to GRG;
- SME customers transferred to GRG were exhibiting clear signs of financial difficulty;
- there was not a widespread practice of identifying customers for transfer for inappropriate reasons, such as their potential value to GRG, rather than their level of distress;
- there was not a widespread practice of requesting personal guarantees and/or cash injections when GRG had already determined that it had no intention of supporting such businesses;
- there was not a widespread practice of RBS making requests for information from customers that were unnecessarily burdensome;
- there was not a widespread practice of RBS acting as a ‘Shadow Director’;
- there was no evidence that an intention for West Register to purchase assets had been formed prior to the transfer of the customer to GRG; and
- there were no cases identified where the purchase of a property by West Register (as opposed to by another person) alone gave rise to a financial loss to the customer.
However, there were other areas in which the inappropriate treatment of SME customers by RBS was identified in the Report as being widespread. These arose from:
- the failure to comply with RBS’s own policy in respect of communicating with customers around transfer. The Report found that the standard of much communication was poor and in some cases misleading;
- the failure to support SME businesses in a manner consistent with good turnaround practice;
- placing an undue focus on pricing increases and debt reduction without due consideration to the longer term viability of customers;
- the failure to document or explain the rationale behind decisions relating to pricing following transfer to GRG;
- the failure to ensure that appropriate and robust valuations were made by staff, and carrying out internal valuations based upon insufficient or inadequate work – especially where significant decisions were based on such valuations;
- the failure of GRG to adopt adequate procedures concerning the relationship with customers and to ensure fair treatment of customers;
- the failure to identify customer complaints and handle those complaints fairly;
- the failure to handle the conflicts of interest inherent in the West Register model and operation; and
- the failure to exercise adequate safeguards to ensure that the terms of certain upside instruments, in particular Equity Participation Agreements, were appropriate.
The Report found that some elements of this inappropriate treatment of customers should also be considered systematic as it resulted from a failure on the part of RBS to fully recognise and manage the conflicts of interest inherent in GRG’s twin commercial and turnaround objectives and to put in place the appropriate governance and oversight procedures to ensure that a reasonable balance was struck between the interests of RBS and SME customers.
The Report estimates in total over a third of the customers transferred to GRG during the relevant period could be expected to face insolvency or administration regardless of RBS’s actions, i.e. over a third were potentially not viable.
Of the potentially viable SME customers transferred to GRG, the Report concluded that most of them experienced some form of inappropriate action by RBS. However, the Report also concluded that, in a significant majority of cases, it was likely that inappropriate actions did not result in material financial distress to these customers.
The FCA is carefully considering the Report and other additional material. The activities carried out by GRG and addressed by RBS’s proposals are largely unregulated; therefore, the FCA’s powers are limited in this area.
The FCA is currently assessing what further work may be needed given the findings in the Report. The FCA will provide a further update on this matter when it is in a position to do so.
The FCA recognises the considerable interest in these issues and will publish a full account of its findings when practicable once our work is concluded.
Notes to Editors
‘Complex fees’ includes management / monitoring fees, ratcheted fees, late management information fees, mezzanine fees, risk fees, exit fees and asset sales fees.
The independent third party appointed by RBS to oversee the new review complaints process is Sir William Blackburne, a retired High Court Judge.
West Register was the property arm of RBS.
The Report described that GRG consistently adopted throughout 2008 and 2013, twin objectives. These objectives were:
- to be at the leading edge of a wider rescue culture – focused on turnaround, rehabilitating customers in distress and working with the aim of returning customers to mainstream banking wherever possible (the ‘turnaround objective’); and
- to be a major contributor to RBS’s financial objectives, which initially focused on revenue generation with GRG as a profit centre within RBS but later evolved to focus on other metrics relating to the protection of capital (the ‘commercial objective’).