[Originally published in the March 2014 issue of the Australian Insolvency Journal, and reproduced here with permission]
In November 2013 a UK government adviser issued what is now referred to as The Tomlinson report. It was highly critical of the workout function of the Royal Bank of Scotland (RBS) and the insolvency professionals who advise it.
The report was the subject of a great deal of media attention in the UK, and has been reported, albeit less intensively, in the US, Asia, and Australia. In the UK, the Financial Conduct Authority has initiated its own review, and in Australia the report has been linked with the upcoming Murray inquiry.
Later media reporting raises questions about whether Lawrence Tomlinson himself has a conflict of interest in criticising RBS, and arguably the report itself is an aggregation of complaints rather than an objective review. In one sense however, such complaints are irrelevant – the response to the report highlights the very challenging reputational issues faced by banks and the insolvency profession, whether in the UK or Australia.
Background to Tomlinson
An engineer by training, Tomlinson is the owner and chairman of the LNT Group, which employs over 2,000 people in five separate businesses, with significant reported net wealth.[i] Tomlinson was appointed as an Entrepreneur in Residence for the Department for Business, Innovation and Skills (BIS) in April 2013. With hindsight it is notable that on appointment he identified his key focus as addressing ‘some of the key concerns around access to finance and improving bank lending to business’, and advised his intention to ‘share the views and experiences of my peers with Ministers and officials’[ii].
Looking back it is clear that by issuing his report, Tomlinson has done exactly what he said he would do. But in another sense his report appears to have been a surprise to the Government, RBS and the insolvency profession, none of whom were consulted or invited to provide input or comment.
Independent Lending Review and Large Report
In July 2013 RBS appointed former Deputy Governor of the Bank of England Sir Andrew Large and the management consultancy Oliver Wyman to undertake an independent review of lending standards and practices for small business lending.[iii]
The objective of the Independent Lending Review (ILR ) was to: ‘identify steps that RBS/ NatWest can take to enhance its support to SMEs and the economic recovery whilst maintaining safe and sound lending practices’, and ‘promote a common understanding of the way in which the bank makes its judgements and decisions on SME lending’.
The ILR was a wide-ranging review of all aspects of SM e business lending, drawing on a very wide range of internal data, customer surveys and comprehensive stakeholder consultation.
Relatively late in the ILR process BIS made a submission prepared by Lawrence Tomlinson that raised concerns about the work undertaken by the Global Restructuring Group (GRG), the RBS workout function.
On 25 November 2013 the ILR issued its report (the Large report). While the majority of the 95-page report deals with origination and ‘front-end’ issues, there is some discussion of the GRG function.
The report observed that: ‘GRG has been successful in executing its mandate’, noting that ‘over half of all customers under the relationship management of GRG are returned to normal relationship management … around a third refinance with another bank or repay through asset disposals and only a minority (~10 percent) enter insolvency proceedings.’
The Large report referenced ‘more extreme accusations’ made by ‘a small minority of RBS customers’ primarily based on the Tomlinson material, which it summarised as a perceived conflict of interest such that RBS ‘may even be profiting by working against the best interests of financially distressed customers’.
The report also referred to the role of West Register, an RBS subsidiary that acquired properties from RBS customers for later sale, with the end result that any uplift in value would accrue to RBS rather than the former owners.
The report explained that an inquiry into individual cases was outside its scope and recommended that RBS ‘address the concerns that have been raised by some customers and external stakeholders about its treatment of SMEs in financial distress and minimise the perceived conflict of interest within GRG’ through a formal forensic inquiry.
The Tomlinson Report
Presumably it was no coincidence that Tomlinson issued a 21-page redacted version of the material that he had provided to the ILR (now widely referred to as the Tomlinson report) on the same day that the ILR released the Large report.[iv]
The Tomlinson report sets out conclusions drawn by Tomlinson following his own investigations into complaints he had received, apparently without input from RBS. The absence of RBS input does not of itself render his conclusions invalid. But critics of Tomlinson would point out that the assessment was conducted based on ‘one side of the story’ and risks a lack of context.
The redacted report provides a small number of examples, but there is no reference to data or data analysis. Again though, we should note that of itself this omission does not automatically render the conclusions invalid. Tomlinson later clarified that the full report provided 23 examples drawn from around 200 complaints. [v]
The report does include a number of very quotable observations and it is no surprise that media attention focused very heavily on the Tomlinson report in preference to the Large report:
The trigger point [for transfer to GRG] … is sometimes so insignificant, given the otherwise positive performance of the business, that the reaction by the bank can only be considered as utterly disproportionate at best and manipulative and conspiring at worst.
The bank artificially distresses an otherwise viable business and through their actions puts them on a journey towards administration, receivership and liquidation … it became very clear, very quickly that this process is systematic and institutional.
It is undeniable that some of the banks, RBS in particular, are harming their customers through their decisions and causing their financial downfall.
Tomlinson also raises criticisms about the scope and role of the Investigative Accountant (IA):
The potential for conflicts of interest in insolvency is also rife … there are many occasions in which the IBR who works with the business whilst in business support is also the business administrator.
There is also often a requirement for an Independent Business Review (IBR) … at great cost to the business, who often do not even get to see the report.
At best, there is little accountability for the IBR and resulting actions, denying the business of the ability to respond to parts of the report or challenge it (sic) accuracy.
Tomlinson concludes by calling for bank break-ups: ‘The ideal scenario would be the creation of six banks out of RBS and Lloyds … to create fully functioning challenger retail and commercial banks.’
One of the first reports was an article in The Independent on 25 November 2013. It focused on the high-profile head of GRG, Derek Sach, known for ‘treading on toes and slaying sacred cows’ by calling for tenders for receiverships and blocking IAs from taking a later role as administrator or receiver of the same company. This second point is noteworthy because it contradicts Tomlinson’s first complaint about IAs.
On the same day, the BBC summarised the two reports and reported that RBS had instructed the law firm Clifford Chance to investigate the allegations. The Daily Mail provided a spectacular headline ‘A State-owned Bank that kills small firms to feed off their corpses. and still not a hint of shame!’ above an article that referred to ‘new-wave grave robbery’.
The Independent returned to the story the following day with two articles. The first called for a break up of RBS, describing it as ‘a vertically integrated, systematically organised asset stripping machine’. The second focused on the information in RBS’s 2012 Annual report which showed that only six percent of GRG customers were returned to normal management.[vi]
The following day, The Guardian published a case study of an aged care home business which had reportedly ‘never missed a mortgage payment’ and was in credit across all bank accounts when it made a request to change one loan to an interest-only basis. According to the story, this led to a transfer to GRG, a visit from a pink-Porsche driving RBS staffer who ‘said she knew nothing about care homes’ so would have to engage an IA.
The Tomlinson report also attracted international interest, and was reported in the New York Times, The Irish Times and The Australian. The Australian reported that ‘similar allegations have been aired in Australia by customers of the major banks’, and quoted Senator John Williams as saying that he had ‘no doubt’ that issues similar to those in the Tomlinson report would be brought before the Murray inquiry.[vii]
The British weekly The Spectator covered the issue with a case study, ‘How our company was nearly bullied to death by a desperate RBS’, describing how RBS had threatened to call a default because a borrower had commenced ‘negotiating with a creditor with a view to rescheduling indebtedness.’
In fact those negotiations were with RBS itself; the borrower had asked RBS to consider changing a repayment schedule. Notably, the article described the GRG bankers as ‘the warrior trolls of Orwellian “corporate recovery”’ and the ‘sharp-suited’ IA team as charging ‘£600 per valueless hour as they tap us for the knowledge that will reappear, beautifully presented, in a report to RBS that we will never be allowed to see in full’.
Tomlinson’s Conflict of Interest?
On 3 December 2013, The Financial Times raised concerns about selective editing in the Tomlinson report, explaining that similar criticism of Lloyds appeared in an early draft, but had been removed in the final version[viii]. The paper said that Tomlinson’s ‘willingness to make such a fundamental change to his report at a late stage, and to direct his criticisms at a single named bank, has caused some to question his methods and motivation.’
The Financial Times also referred to an unnamed government minister that Tomlinson was ‘gunning for RBS from the start’, and reported that he had made a formal complaint about the behaviour of two executives at the bank and expressed ‘frustration’ at the lender’s approach to a refinancing a four-bank £100m facility to his ln T Group which cost £1.4 million in fees to arrange.
Tomlinson did not deny the reports of his personal dissatisfaction with RBS but pointed out, rightly, that any dissatisfaction with RBS did not mean that the complaints were unfounded.
Uncertainty over the RBS Repatriation Rate
The repatriation rate (the percentage of workout customers that return to normal management) is a key performance indicator for a turnaround function. By contrast, a recovery team is more likely to focus on a loss rate.
The Tomlinson report referred to an ex- RBS whistleblower unable to recall any examples of repatriation. The Large report referred to repatriation of ‘over half’, but unhelpfully provided no more data than Tomlinson. RBS’ own 2012 annual report, scrutinised by auditors, refers to a six percent repatriation rate.
The numbers are different, but they will not necessarily reconcile. Firstly, the annual report speaks to repatriations achieved in a 12 month period, the whistleblower is presumably intending to describe a broader period, and we simply don’t know which time period the Large report describes. Secondly, the annual report appears (and it’s not as clear as it could be) to measure repatriation of incorporated borrowers, whereas Large may be referring to both incorporated and unincorporated borrowers.
However, with all the uncertainty about the data noted, an outsider can reasonably conclude that:
- The discrepancy between six percent (annual report) and ‘over half’ (Large report) is so great that it is difficult to believe that both are correct.
- A repatriation rate of six percent must be regarded as disappointing for a team working towards a turnaround objective.
RBS provided an initial response on 25 November 2013 via an open letter from the CEO[ix]. It was careful to show that it accepted the Large report, describing it as ‘a thorough and balanced analysis of the business’ which at the same time provided ‘a tough read for the bank’.
However, they also used their response to provide some context for their actions, explaining the impact of regulatory pressure via regulators who ‘want the bank to remove problem loans more quickly’.
Finally, RBS announced it would engage a newly – appointed panel law firm Clifford Chance to undertake an independent inquiry, and undertook to address any shortcomings identified and share all findings with the Financial Conduct Authority (FCA ).
A statement on 27 November explained that Clifford Chance would focus on ‘the most serious allegation’ that ‘RBS conducted a “systematic” effort to profit’ from customers in financial distress[x]. This second announcement appears to quite significantly narrow the focus of the review: Clifford Chance might find widespread poor treatment of customers yet reasonably conclude that it had not been systematic.
The Tomlinson report generated immediate political interest. The BBC analysis quoted Chancellor George Osborne describing the reports as ‘shocking,’ Andrew Tyrie, chairman of the Treasury Committee, as saying ‘The reports … make clear that there is a fundamental cultural problem with RBS’s lending to and treatment of SMEs’, and Business Secretary Vince Cable as saying ‘we are pretty confident that the evidence is solid’.
A Treasury Select Committee questioned the Bank of England governor Mark Carney, who told them he thought the allegations were ‘both deeply troubling and extremely serious’.
Both Sir Andrew Large and Lawrence Tomlinson were invited to appear before the Treasury Select Committee in January 2014. Introductory remarks by the chairman that ‘We have all had huge problems with RBS in our constituencies one way or another’ were typical of the members’ views, and there was very little challenge to Tomlinson’s evidence or independence.[xi]
Responses discussed by the Committee included an expansion of the role of the Financial Ombudsman Service (FOS). FOS is an independent statutory body available to private individuals and micro-enterprises (businesses with an annual turnover of less than two million Euros and fewer than 10 employees) with complaints against financial businesses. FOS can order compensation of up to £150,000.
The FCA is an independent government authority with a strategic objective ‘to ensure that the relevant markets function well’. Its operational objectives are ‘to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system [and] to promote effective competition in the interests of consumers.’
On 29 November 2013 the FCA issued a statement in response to the Tomlinson and Large reports.[xii] The FCA explained that while commercial lending was not directly within its purview, the nature of the allegations in the reports gave rise to concerns about governance and culture, which are. Thus they announced the statutory appointment of ‘an independent skilled person’ to review the allegations and report to the FCA.
The FCA would also write to other banks seeking confirmation that they ‘do not engage in any of the poor practices alleged in the reports’.
On 17 January 2014 the FCA announced that consulting firm Promontory Financial Group and accountants Mazars had been engaged to review a sample of GRG customers including some of the Tomlinson complainants. The review would specifically assess whether any poor practices identified were widespread and systematic, and if so make recommendations to address any shortcomings. The FCA advised that it expected to publish the outcomes of the review in the third quarter of 2014.
The nature of the allegations and their headline-friendly wording has attracted the attention of a public that was clearly prepared to believe the worst of bankers and insolvency practitioners, highlighting the reputational issues that both face.
Critics have raised questions over Tomlinson’s independence as well as the strength of the evidence and analysis to support his allegations. In a sense these criticisms are almost irrelevant, because they emerged only after the FCA had already initiated a review. It is also noteworthy that the original allegations received heavy media coverage, whereas the questions over Tomlinson’s independence have been mostly confined to the specialist finance media.
Once the crisis broke RBS handled it in text-book fashion. If we ask ‘what could they have done differently?’ the challenge is clear because RBS appear to have been excluded from Tomlinson’s process altogether. Two points stand out:
- If RBS had engaged with Tomlinson immediately after his on-appointment comments they may have had the chance to inform and influence him.
- RBS has not been able to present a clear and understandable picture of the success of their turnaround function i.e. their repatriation rate.
RBS will incur costs in running the Clifford Chance investigation and responding to the FCA inquiry. However, those costs will not be material. In my view, the more significant impact will be on senior management in dealing with the inquiries and their consequences.
To this observer at least it seems unlikely that the review will result in the bank break-up that Tomlinson calls for. But an expansion of the role of the Financial Ombudsman might be proposed even in the absence of any evidence of systemic wrongdoing.
Update: For more recent developments please see The beginning of the end? The RBS – GRG saga
[iii] The background to and the report itself is available at http://www.independentlendingreview.co.uk/index.htm
[v] Tomlinson’s evidence to the Select committee on 29 January 2014 is available as a transcript http://data.parliament.uk/writtenevidence/Writtenevidence.svc/evidence html/5629 , or via Parliament TV: http://www.parliamentlive.tv/Main/Player.aspx?meetingid=14764 ; evidence from Sir Andrew Large on 22 January 2014 is available at http://data.parliament.uk/writtenevidence/Writtenevidence.svc/evidence html/5605
[vi] RBS Annual report 2012, page 174
[vii] More correctly this is the Financial System Inquiry, headed by David Murray AO, the former CEO of the Commonwealth Bank, announced by the Government on 20 November 2013, http://www.pm.gov.au/media/2013-11-20/financial-system-inquiry.
[viii] ‘Criticism of Lloyds removed from Tomlinson report’ by George Parker and Andrew Bounds http://www.ft.com/intl/cms/s/0/550c5360-5c31-11e3-931e-00144feabdc0.html#axzz2oxojGGic
[xi] See footnote 5