Last week, U.K. bank Royal Bank of Scotland revealed that it had made a profit for the first time in 10 years since its £45 billion (U.S.$63bn) government bailout at the height of the financial crisis. However, the £752 million (U.S.$1bn) profit it made for the past financial year is in stark contrast to the £58 billion (U.S.$80bn) it has lost in the past nine years as part of its restructure and is of little comfort to the thousands of distressed small-business owners that the bank—which is still 71-percent owned by the taxpayer—deliberately targeted by charging excessive fees to claw back cash. 

The United Kingdom’s banking regulator, the Financial Conduct Authority (FCA), first commissioned a report back in 2014 into RBS’ Global Restructuring Group (GRG), a specialist unit run within the bank to turnaround struggling small- and medium-sized enterprises (SMEs), following allegations made by former clients from 2009 to 2010 that the bank was more intent on saving itself than the businesses it was ostensibly meant to turn around.

The impetus to publish the report, however—or for the regulator to take action against the bank—has been slow, despite its contents being leaked by the BBC last August. And as far back as November 2016, RBS knew that its past conduct was likely to come back and haunt it when the bank made a provision of £400 million (U.S.$557M) to compensate customers over complex fees.

Even up until mid-February this year, the regulator had still refused to publish the report in full, citing “legal reasons.” The FCA had published most of the report, but had cut out passages relating to the bank’s management team.

Correspondence between the head of the FCA, Andrew Bailey, and Parliament’s Treasury Select Committee into making the report public has been ongoing since last October, and at times it makes for painful reading, given the regulator’s reticence to hand over documents.

Eventually, under the threat of contempt of Parliament, Members of Parliament (MPs) gave the FCA an ultimatum to either publish the report by 16 February or hand it to the Treasury Select Committee to take action. The FCA opted for the latter. Under U.K. law, documents published by Parliament and Crown bodies have absolute privilege and so are protected from defamation claims. The group of MPs duly published the final, unredacted report in full on 20 February—three days before RBS released its financial results.

“There is overwhelming public interest in bringing transparency to what happened at GRG, given the earlier leak of the report, and in ensuring that everyone can see, and know that they are seeing, an authentic and verified copy of [the] original report.”
Nicky Morgan, Chair, Treasury Committee

The Treasury Committee “had not taken the decision to publish lightly,” said its chair, Nicky Morgan. Normally, reports prepared under section 166 of the Financial Services and Markets Act (2000) are confidential, but Morgan said that “there is overwhelming public interest in bringing transparency to what happened at GRG, given the earlier leak of the report, and in ensuring that everyone can see, and know that they are seeing, an authentic and verified copy of [the] original report.”

Written by compliance and risk management group Promontory and accountancy firm Mazars, the report covers six years in which 5,900 struggling businesses were referred to GRG. The authors sifted through 323 gigabytes of data, including 1.5 million pages of documents and 270,000 e-mails. It is an astonishing read. The 362-page document details “widespread inappropriate treatment” of small businesses by GRG, resulting in “material financial distress” for thousands of customers. It found that the focus on “upsides” and “opportunities” were explored to benefit the bank—not its customers. And too often the emphasis on closing deals was for the bank to regain its money rather than turnaround the business’ fortunes.

Morgan called the report’s findings “disgraceful,” adding that “the overarching priority at all levels of GRG was not the health and strength of customers, but the generation of income for RBS, through made-up fees, high interest rates, and the acquisition of equity and property.”

The Committee says that it will “examine what must change to prevent what occurred at GRG from ever happening again, and how to restore confidence among SMEs in banks as a source of finance.” As well as continuing to monitor the FCA’s further investigation into GRG, the Committee has warned that it will “keep a close eye” on RBS’ complaints process to “determine whether it is providing the fair and reasonable compensation that has been promised to mistreated customers.” Morgan added that “any person referred to in the report is invited to make any observations to the committee."

The report found widespread, even systemic, inappropriate treatment of SME customers. In fact, one in six customers examined in the report sample suffered “material financial distress” thanks to RBS’ treatment, though 92 percent of potentially viable customers “experienced some form of inappropriate action by RBS.”

Furthermore, RBS’s approach—and the failure of management to make any significant changes to customers’ treatment—amounted to “an intentional and co-ordinated strategy to focus on GRG’s commercial objective and to place inadequate weight on the interests of its SME customers,” says the report. It also found that there was inadequate oversight from the bank’s second and third lines of defence—namely its risk management, compliance, and internal audit functions.

Statements from RBS and the FCA

Both RBS and the FCA have emailed statements (rather than publish them on their websites) in response to the publication of the Promontory report.
An RBS spokesperson said:
“We are deeply sorry that customers did not receive the experience they should have done while in GRG. The report makes for very difficult reading and some of the language used by our staff in the past was clearly unacceptable.”
“The culture, structure and way RBS operates today have all changed fundamentally since the period under review and we have made significant changes to deal with the issues of the past, including how we treat customers in financial distress. We have accepted all the relevant recommendations from the report and our focus is now on rebuilding trust and supporting our customers.”
An FCA spokesperson said: “The FCA fully supports the Treasury Committee and BEIS Committee inquiries into the issues facing SMEs. The FCA feels that it is important for everyone, including financial services firms, that there is an effective dispute resolution mechanism for businesses.”
—Neil Hodge

According to Promontory, the standard of communication was “poor,” and even “misleading,” and the bank failed to explain the rationale behind decisions it advised on customers’ behalf, particularly around transfer to GRG. Valuations of companies that needed turnaround services were also often based on “insufficient” or “inadequate” work, while conflicts of interest inherent in GRG’s commercial and turnaround services were allowed to occur due to the bank’s failure to put in place appropriate oversight and safeguards to protect customers.

The report authors also criticised RBS for its approach in helping with enquiries, which, they say, could “on occasion, be characterised as narrow compliance.”

One of the most controversial parts of the report relates to a memo entitled “Just Hit Budget.” This was circulated among GRG staff as a training aide in 2009 to 2010 and contains “16 ways to generate income” to help bank staff get SME customers to agree to hefty fees. The memo advised staff to use strong-arm tactics to get customers to sign facility letters, whereby the bank’s terms and conditions could be changed without notice, as opposed to allowing them to rely on standard terms requiring 30-day notice periods. “If they sign, they can’t complain” the memo says.

The same part of the memo also refers to “basket cases” as “time-consuming, but remunerative” and adds that “missed opportunities will mean missed bonuses.” In a section headed “Rope,” the memo says that “sometimes you need to let customers hang themselves. You have then gained their trust, and they know what’s coming when they fail to deliver.” The document also advises staff to “be specific” about the fees they are going to (over) charge: “Avoid round number fees—£5,300 sounds as if you have thought about it. £5K sounds like you haven’t.”

Small-business owners also complained of intimidation. One said: “At one point (the GRG manager was) banging on the table with his hand really loudly, shouting at the top of his voice, issuing threats of receivership.” Another customer complained of “cynical and bullying tactics … which are quite frankly way out of order.” They were also threatened with being put into bankruptcy. A December 2010 e-mail included “mimicry” of a customer’s foreign accent that the FCA deemed “disrespectful of the customers’ nationality.”

GRG staff were also alleged to have applied pressure on a client to increase the price he needed to pay to regain control of his company from £400,000 (U.S.$557,304) to £2m (U.S.$3M), by using the “Kissinger school of negotiation”—a reference to the hardball tactics deployed by former U.S. Secretary of State Henry Kissinger.

Customer suggestions were also ignored. The owner of a hotel business that had ran into trouble put forward a number of restructuring proposals to help turn his business around, as all valuations had shown that the value of the hotels was higher if they were operating rather than closed. His relationship manager at the bank dismissed them out of hand the night before the meeting—without even analysing them. He wrote in an e-mail to a colleague who was due to lead the meeting: “I’ll save you some time … the answer is ‘no’ on all points—quite entertaining if you have the time.”

Like vultures, staff also picked over the bones of failed businesses they were meant to support. When a shop went under, GRG staff were invited to cherry-pick items for themselves. They were told: “Can you go in and add your name and what you want ... It’s looking tight [...] to get any special treatment here, so keep things to staff only.”

As damning as the report is, the most serious allegations made against the bank in a 2013 report by Dr. Lawrence Tomlinson, entrepreneur in residence at the U.K. Government’s Department for Business Innovation and Skills (since renamed the Department for Business, Energy and Industrial Strategy, or BEIS), were not upheld. Promontory stated that “they did not find that defaults were engineered to transfer business simply to generate revenue” for the bank.

The FCA is conducting a second stage of its review into RBS and GRG, which includes looking at what management knew, or should have known.

RBS has responded to the report by announcing that a new complaints process will be put in place, led by Sir William Blackburne, a retired High Court judge, and that there will be an automatic refund for “some”—not all—of the complex fees charged to customers who were in GRG between 2008 to 2013.

In its latest set of accounts, RBS says: “While we have acknowledged we did not treat all these troubled business customers as well as we should have done, we do not accept that the bank artificially distressed otherwise viable SME businesses or deliberately caused them to fail. The FCA’s skilled person and our independent investigators have also found no evidence that the bank either inappropriately targeted businesses to transfer them into GRG or drove them to insolvency.”

RBS is not the only bank to have badly mistreated small-business customers. In February 2017, six people—including two managers at HBOS bank—were jailed for a total of 47 years and nine months, following a six-year investigation by Thames Valley Police into a decade-long, multimillion pound corruption and fraud case that saw dozens of small-business owners get ripped off through a scam involving high consultancy fees.