Bad Reputation? …Reputational issues for lenders and their advisers

[First published on Linkedin.com on January 23, 2017]

Brand and reputation may be intangibles in an accounting sense, but the latest development in the long-running investigation into the Royal Bank of Scotland’s Global Restructuring Group shows that there can be real and significant costs arising from their loss.

In November 2016 RBS announced a complaints process for GRG SME customers, as well as the automatic refund of so-called ‘complex fees.’ RBS estimated that the total cost of the scheme administration and likely refunds would be as high as £400m.

Closer to home, claims about ‘artificial’ loan defaults have been raised in Australia via the Parliamentary Joint Inquiry into Impaired Loans, and so the issues and outcomes are important for Australian lenders and their advisers.

The Large Report

In 2013 RBS commissioned an Independent review of lending standards and lending practices.  The 95 page report  (‘the Large Report,’ named for the main author) released in November 2013 mostly dealt with origination issues, but there was some discussion about GRG – RBS’ workout function – which had been raised by a submission from the Department for Business, Innovation and Skills (‘BIS’) written by Lawrence Tomlinson, and others. The report referred to allegations that RBS was working against the best interests of customers, but explained that an inquiry into individual cases was outside its scope, and recommended that RBS conduct a formal forensic inquiry.

Tomlinson, and his report

Lawrence Tomlinson is the owner of the LNT Group, which employs over 2,000 people.  In April 2013 he was appointed as an ‘Entrepreneur in Residence’ for BIS – an honorary position intended to assist BIS in policy formulation.

On the day that the Large Report was released, Tomlinson distributed a paper (available here). Effectively a modified version of the BIS submission, the Tomlinson report was highly critical of GRG, and the insolvency professionals who advised it. The key claim in the report was that RBS was using so-called ‘technical defaults’ to move customers into GRG, so that it could charge much higher fees. If it could not find an existing default, then apparently RBS might ‘engineer’ one, with the assistance of complicit valuers.

Even though secured creditors in the UK can no longer appoint receivers (as explained here) they may still call in loans if there is a default. Tomlinson claimed that defaults were called without consideration of the impact on the customer, and in fact if the customer’s business failed then it might even create an opportunity for a bank subsidiary (West Register) to buy the assets at undervalue.

The Tomlinson report is concise – only 21 pages long – and provides a number of starkly-phrased conclusions, for example describing some bank action as ‘utterly disproportionate at best and manipulative and conspiring at worst,’ and the media certainly responded.

Media and Political response

It seems that it was easy for journalists to find case studies supporting the report’s conclusions, and there was widespread media coverage. A Daily Mail headline ‘A State-owned Bank that kills small firms to feed off their corpses. And still not a hint of shame!,’ was perhaps the most striking example, but it seemed to capture the general mood, and the BBC current affairs show Panorama also ran the story (available here).

There was also an immediate political response leading to an appearance by Tomlinson before a Treasury Select Committee in January 2014. It is clear from that hearing (shown live and still available here) that his report resonated with the members of the committee, with several referring to complaints received from their own constituents.

Queries over Tomlinson’s motivation and method….didn’t seem to matter

It was soon clear that Tomlinson was not asked to conduct a review. Neither the government nor RBS was aware it was being undertaken, as neither had the opportunity to provide any input into his report.

There was some criticism of Tomlinson’s method, and suggestions that he himself was a disgruntled RBS customer, unhappy about fees levied against his business.  Tomlinson admitted that he was an unhappy RBS customer, but said that that the criticisms were valid regardless, and maintained that the focus on RBS was appropriate because it was the subject of the greatest number of complaints.

By and large, the claims about bias and the queries about his methodology were lost in the media and political storm. RBS was left to deal with the issue – whether that was fair, or not.

RBS commissions Clifford Chance

RBS responded within two days, announcing it would instruct panel law firm Clifford Chance to investigate ‘the most serious allegation’ that ‘RBS conducted a “systematic” effort to profit from customers in financial distress.’

The April 2014 Clifford Chance Report available here concluded that there was no evidence of a systematic program to take advantage of RBS customers. Some parts of the report were less helpful however: Clifford Chance said that they were unable to assess whether fees were fair or not because it was ‘difficult to understand’ how fees were calculated ‘in any particular case.’

The Clifford Chance report did not seem to help to close the issue. Some challenged the firm’s independence (for example The Huffington Post: 7 Things RBS Hoped You Would Not Notice In Its Clifford Chance Report), and it gave Tomlinson the opportunity to point out that the focus on the most extreme allegation left the others unaddressed.

Regulatory Response

The FCA is an independent government authority responsible for protecting and enhancing the integrity of the UK financial system. The FCA issued a statement explaining that the allegations gave rise to concerns about governance and culture, and announced an independent ‘Skilled Person’ review of the allegations by consulting firm Promontory Financial Group and accountants Mazars.

Project ‘Dash for Cash’

The controversy didn’t go away, but it seemed to quieten – until a joint investigation by BBC NewsNight and Buzzfeed in October 2016 which released RBS documents alleged to show that ‘under pressure from the government’ (an interesting sidebar for those who argue that Australia should have a government owned bank: the Tomlinson complaints relate to conduct after the government took a 63% stake in the bank), RBS had:

• Provided staff with financial incentives (called ‘Project Dash for Cash’!) to force customers into GRG, so that it could extract higher fees.
• Transferred businesses into GRG for reasons that had nothing to do with financial distress.
• Not maintained proper Chinese walls between GRG and West Register, and instructed staff to conceal conflicts of interest from customers.
• ‘Generated a profit’ of more than a billion pounds in a single year through GRG fees and rate increases.

RBS denied the allegations in a statement, and an in-depth interview with the NewsNight reporter the next day. Regardless of RBS denials, the Chairman of the Treasury Select Committee soon released a letter calling for the full release of the Skilled Person Report, which had been delivered In September 2016 – almost two years later than planned.

Two years on…the Skilled Person report is delivered

On 8 November 2016 the FCA released a statement setting out a high level summary of the main findings and key conclusions.

The reviewers concluded that RBS did not set out to artificially engineer the transfer of customers to GRG, and in fact reported that customers transferred to GRG were exhibiting clear signs of financial difficulty. They found no evidence of West Register targeting customer assets for purchase, and could not find any examples of property purchase by West Register that increased financial loss to the customer.

Less happily for RBS however, the FCA said that the inappropriate treatment of SME customers appeared ‘widespread’ and that ‘much communication was poor and in some cases misleading.’ It also identified a failure to support businesses ‘consistent with good turnaround practice,’ and an ‘undue focus’ on pricing increases and debt reduction rather than longer term viability of customers.

RBS response

On the same day that the FCA released the summary of the Skilled Person report, RBS released an LSX announcement outlining a response to the report, described as having been ‘developed with the involvement of the FCA.’

RBS announced a new complaints process to be overseen by a retired High Court Judge, and the automatic refund of ‘complex’ fees paid by SME GRG customers between 2008 and 2013. RBS said that the estimated £400m total cost of the program was approximately 20% of the amount it lost from lending to SME customers in that period.

An analysis by UK solicitor Cat MacLean identifies the fees which are said to attract an automatic refund, a long list including Management fees, Asset Sales fees, Exit fees, Mezzanine fees, Ratchet fees, Risk fees, Late Information fees, Property Participation fees and Equity Participation Agreement fees.

Is this the end?

RBS must hope that their response to the Skilled Person report will close the issue, but that seems unlikely:

• There are still calls and campaigns for the release of the full report.
• The £400m refund and compensation scheme will not resolve all claims (borrowers with debt facilities or turnover higher than £20m are excluded).
• The outcomes do not appear to be binding on borrowers, so borrowers unhappy with the decisions may still pursue the normal avenues.

The total cost is already higher than £400m – UK-based claim adviser Seneca Banking Consultants claims to have recovered £100m just for its own clients – and there are other claims in the wings, most notably the RBS-GRG Action Group claims to be organising ‘group litigation’ involving more than 400 borrowers with claims reported as totalling more than £1b.

So, we should give a damn….

Three years after complaints were raised in the Tomlinson report, the worst of the allegations appear to have been discredited. But that conclusion has only been reached after considerable damage to the RBS brand and reputation, and now, very real and significant financial cost.

‘Do our loan documents allow this?’ is still a very important question for workout bankers, but it is not the only question to be asked. The RBS experience shows very clearly that lenders and their advisers are wise to address other questions around transparency and fairness before determining a final course of action – even more so given that there is no lessening in calls for the independent review of lender conduct.

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Update: For more recent developments please see The beginning of the end? The RBS – GRG saga