Royal Bank of Scotland (RBS) and its senior managers have escaped any chance of a penalty after the Financial Conduct Authority admitted it has “very limited” powers to take any action against the bank following allegations that its specialist turnaround unit asset-stripped struggling businesses.

Last year, the Financial Conduct Authority (FCA) launched an investigation into RBS’s Global Restructuring Group (GRG) following accusations that the unit pushed its small-business customers into bankruptcy to boost its own profits rather than help them like it was supposed to.

In a statement Andrew Bailey, FCA chief executive said: “It is important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.”

He added: “We have concluded that our powers to discipline for misconduct do not apply and that an action in relation to senior management for lack of fitness and propriety would not have reasonable prospects of success.”

“The fact that we can’t take action in no way condones the behaviour of RBS,” said Bailey.

Commercial lending is not regulated by the FCA. There are no enforceable regulatory rules, such as “conduct of business” rules, against which to assess GRG’s treatment of SME customers.

The FCA says that “the lack of regulation around commercial lending means there is no clear objective yardstick, in place at the time, by which standards of conduct within GRG could be measured, for example, around the fees and charges that GRG could impose.”

“It is important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.”
Andrew Bailey, Chief Executive, FCA

Under the Senior Managers Regime introduced in 2016, however, the regulator is able to hold key individuals to account for their actions. If the FCA considers that managers are not fit and proper, it can prohibit them from working in the financial services industry—even where their conduct took place in an unregulated area of the business.

The saga around RBS and GRG has highlighted shortcomings not only at the bank, but also with the regulator. On 20 February, Parliament’s Treasury Select Committee published a report that slammed RBS over GRG’s “widespread inappropriate treatment” of customers. The report, compiled by consultancy firm Promontory, was only made public after months of wrangling with the FCA, which received the document in 2016 but refused to publish it.

The document revealed that 92 percent of “viable” small- and medium-sized enterprises (SMEs) seen by GRG experienced “inappropriate action.”

The FCA, however, found “no evidence of dishonesty or lack of integrity, specifically, that senior management sought to treat customers unfairly.”

According to the FCA, the Promontory review found no evidence that RBS artificially distressed and transferred otherwise viable SME businesses to GRG to profit from their restructuring or insolvency. It did, however, identify that many aspects of GRG’s culture, governance, and practices were deficient and that in some areas the inappropriate treatment of customers was widespread and systematic.

Highlights from the FCA statement

In its review of GRG’s activities, the FCA found:
No evidence that any member of senior management was dishonest or lacking in integrity;
The unit often gave customers an unrealistic expectation of turnaround that could not be achieved;
Additional controls for GRG relationship managers, which included policies, guidance notes and training modules covering handover procedures, assessing turnaround, valuations and pricing, were not always followed in practice, sometimes lacked detail and did not have a particular focus on the fair treatment of customers;
Throughout the relevant period GRG did not have a dedicated “second line of defence” in relation to SME customers;
GRG's record keeping was poor, particularly in relation to recording the rationale for valuations, its communications with customers during the referral stage and the reasons for pricing decisions. This also impacted GRG’s ability to conduct checks on customer files;
The significant tension between the turnaround and commercial objectives created challenges. There was no legal or regulatory requirement for GRG to prioritise the interests of a customer over what were, in effect, RBS shareholders’ interests, where the referred customer was already in default of a commercial lending agreement and in financial difficulties.
Source: FCA

According to the Promontory report, “there was a failure on the part of GRG and RBS to fully recognise and manage the conflicts of interest inherent in GRG’s twin commercial and turnaround objectives. There was also a failure to put in place appropriate governance, policies, procedures, and processes ... to ensure that a reasonable balance was struck between the interests of the Bank and those of its SME customers.”

The FCA will publish a full account of its decision later in the year.

In a statement Howard Davies, RBS chairman and a former chairman of the Financial Services Authority, the precursor to the FCA, said: “The board welcomes the FCA’s confirmation that it has concluded its investigation into the bank and that no further action will be taken. We await the publication of the FCA’s full account and will reflect carefully on its findings to learn any further lessons from what was a hugely challenging time for the bank, its customers, and the wider economy.”

He added that “the way the bank deals with business customers in financial difficulty is fundamentally different now.”

Nicky Morgan MP, chair of Parliament’s Treasury select committee, is less enthusiastic about the FCA’s climbdown.

She said in a statement: “It will be disappointing and bewildering for those who got caught up in GRG’s actions that the FCA is not able to act. This demonstrates the need for a change in how lending for SMEs is regulated. The government should stand ready to introduce any legislation required when it sees the outcome of current reports on redress and should also urgently consider what additional powers the FCA requires to act in cases such as GRG.”