Will the Banking* Royal Commission impact restructuring and turnaround professionals?

The Senate Select Committee on Lending to Primary Production Customers was the sixth inquiry in the last seven years to examine the conduct of Restructuring and Turnaround practitioners – will the recently announced Royal Commission be the seventh?

Unlike both the Senate Select Committee Inquiry, and the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans before it, the terms of reference released on 15 December 2017 (available here) do not directly refer to ‘insolvency practitioners’ or ‘insolvency’ at all.

However, the first term of reference directs inquiry into ‘the nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf).’  Whilst there may be technical legal discussion about the extent to which a receiver is acting on behalf of a lender, at a practical level it seems likely that the work of receivers may well be under review.

The definition of ‘financial services entity has been extended to cover ‘a person or entity that acts or holds itself out as acting as an intermediary between borrowers and lenders.’  This has been described as extending the Royal Commission to include the work of finance brokers – but in fact the broadened scope would appear to potentially also include the work of the “Non-mainstream advisers” who concerned the Senate Inquiry.

The terms of reference specifically allow the Commission to choose to not investigate matters where to do so would duplicate the existing work of another inquiry or civil proceeding.

That power to avoid duplication may assist the commission to meet its tight deadline, but it has the potential to frustrate those who see their previous failure in Court as defining a ‘broken’ legal system, and who use each fresh inquiry as an opportunity to re-litigate those failures.

The Commission may submit to the Government an interim report no later than September 2018, and must submit a final report by 1 February 2019.

*Although headlines have referred to a ‘Banking Royal Commission’ in fact the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry specifically extends to non-bank lenders, as well as insurance companies, and Superannuation Funds.


Posts about the Senate Select Committee Inquiry into Lending to Primary Production Customers:

“Non-mainstream advisers”

The Senate Select Committee Inquiry into Lending to Primary Production Customers began with an obvious focus on lenders.

However, as the hearings proceeded, that focus seemed to shift.  One member’s view was that ‘when you look at what’s come before this committee, the big banks have come out pretty well.’  By contrast, as the chair noted, ‘the number one area…standing out for complaints is the receivers’ (more background here).

To those following the hearings it was therefore no surprise that the 20 October hearing was dedicated to evidence from restructuring and turnaround professionals and their professional association, ARITA.

Those giving evidence (listed below) did a tremendous job in explaining the extensive regulation to which they are subject, the duties and reporting obligations imposed by the Corporations Act, and the challenges of dealing with farmers and small business operators in moments of greatest stress and difficulty.

Through the course of evidence on 20 October, the beginnings of a new line of inquiry appeared: those described by one witness as ‘non-mainstream advisers,’ often without appropriate qualifications, whose involvement was a ‘consistent element of matters which become protracted and difficult to resolve.’

The witness referred to the use of ‘arguments, which have no legal substance,’ as well a routine by which a ‘promissory note’ is tendered purportedly in satisfaction of the debt. Other devices (albeit not the subject of evidence) include the promise of offshore refinance or funding, and of evidence purporting to show that a loan has been ‘securitised’ (which is somehow said to invalidate the loan), both of which seem to require a significant and non-refundable up-front fee.

As another witness explained, those purported ‘strategies’ provide borrowers with false hope, when more realistic advice would lead them to negotiate with creditors.

One of the committee members noted his personal experience with non-mainstream advisers, one ‘pretty good’ – but others ‘not so good,’ and raised the question of whether they should be regulated.  The committee chair also raised concerns: ‘we can see the damage of non main-stream advisers.’

Another hearing has been scheduled for 17 November.  It will be interesting to see whether there is further exploration of the problems caused by non-mainstream advisers, and what can be done to mitigate the damage caused by the worst of them.

Update: Some of the relevant footage of the committee proceedings have been made available via youtube.


Witnesses who represented the turnaround and restructuring profession, in my view with great distinction, at the 20 October 2016 hearing:

  • Justin Walsh of Ernst & Young
  • Stephen Longley and David Leigh of PPB Advisory
  • Ross McClymont, Narelle Ferrier, and John Winter of ARITA
  • Jamie Harris, Rob Kirman, Matthew Caddy, and Anthony Connelly of McGrathNicol
  • Will Colwell, Stewart McCallum, Tim Michael and Mark Perkins of Ferrier Hodgson

For comment on some other problematic advisers: Wanted: Regulation of pre-insolvency advisers

Consultation on the Industry wide EDR for Business Credit disputes: AFCA

Yesterday the government opened a 17 day consultation window for input into the design of the Australian Financial Complaints Authority, and its operations.

As the consultation papers explain, AFCA is the single external dispute resolution scheme that will replace three existing schemes: the Financial Ombudsman Service, the Credit & Investments Ombudsman, and the Superannuation Complaints Tribunal.

For lenders, the most significant change is the increase in jurisdiction.  Currently, there is a cap of $309,000 on the compensation that FOS can award.  It is proposed that AFCA will have jurisdiction over small business credit facilities up to $5 million, with a compensation cap of $1 million.  Notably, there is no limit on disputes about the validity of guarantees supported by security over a guarantor’s primary place of residence.

The dual reference – facility limit amount as well as compensation cap – highlights that outcomes will not necessarily be limited solely to compensation.  In 2016/17 FOS received 2,772 complaints about lender responses to claims of financial difficulty, and many of those complainants would have been seeking slower or different recovery processes rather than compensation.

There will be some non-bank lenders (those who aim above the micro-business market with say a minimum loan of $500,000) who currently operate mostly outside the current FOS jurisdiction, who will find that AFCA has significant coverage in the future.

The consultation paper notes that AFCA has a specific objective to deploy ‘a consistent approach’ to determinations.  Elsewhere the paper references that FOS currently has regard to ‘applicable industry codes’ and ‘good industry practice.’  Taking those together, might AFCA have scope to decide that the Code of Banking Practice should apply to Bank and non-Bank lenders alike?

Responses are sought by 20 November 2017.

The beginning of the end? The RBS/GRG saga

Last week’s release of an interim summary of an independent review into Royal Bank of Scotland’s (RBS) treatment of distressed small business customers may signal the end – or perhaps the beginning of the end – of an extremely challenging period for RBS.

As discussed here, public concern about the treatment of customers transferred to the RBS workout area – the Global Restructuring Group (GRG) – followed the issue of the so-called ‘Tomlinson Report’, in 2013.

The report – highly critical of GRG, and those who advised it – generated an immediate media and political response, and led to the UK Financial Conduct Authority (FCA) seeking an independent ‘Skilled Person’ review of the allegations by consulting firm Promontory Financial Group and accountants Mazars.

Only later did it emerge that Lawrence Tomlinson, who held an honorary role as an ‘Entrepreneur in Residence,’ was not commissioned to undertake a review, and that he himself was an unhappy RBS customer.

To some extent the controversy cooled, but public interest re-kindled following a joint report by BBC NewsNight and Buzzfeed in October 2016 which seemed to anticipate the delivery of the report to the FCA.

The High Level summary

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

  • Notwithstanding the Tomlinson allegations to the contrary, RBS did not set out to artificially engineer the transfer of customers to GRG
  • The customers transferred to GRG were exhibiting clear signs of financial difficulty.
  • There was no evidence that property purchase by RBS entity West Register had increased financial loss to the customer.
  • Inappropriate treatment of SME customers appeared ‘widespread’ and that ‘much communication was poor and in some cases misleading.’
  • There was a failure to support businesses ‘consistent with good turnaround practice,’ and an ‘undue focus’ on pricing increases.

It was surely no coincidence that on the day that the summary was released, RBS announced a response to the report which included a complaints process to be overseen by a retired High Court Judge, and the automatic refund of some types of fees paid by SME customers.

However, the RBS response did not close out the controversy, and calls for release of the full report continued.

More detail: a sixty-nine page summary

Almost 12 months later the FCA has released – not the full report – but rather a sixty-nine page ‘interim summary.’  What does it tell us?

Firstly, it highlights the large scale of the review: 207 cases, including 60 in which West Register had some involvement.  The reviewers had access to 1.48 million pages of data and more than 270,000 emails, supplemented with interviews of RBS staff and customers.

Critically, the most serious of the Tomlinson allegations were not upheld by the independent review.  However, the reviewers found that inappropriate treatment of customers was widespread and systemic – evident in 86% of all cases reviewed, and 92% of the cases involving viable businesses.

The report clearly identified that GRG’s twin objectives – turnaround of businesses in distress and financial contribution to RBS – resulted in inherent conflicts of interest, and that RBS did not have appropriate governance and oversight procedures to balance the interests of RBS and its SME customers.

The specific findings included:

  • In practice RBS had failed to place appropriate weight on turnaround options, failed to manage the conflicts of interest inherent in the role of West Register, failed to handle complaints fairly, and was unduly focused on pricing increases.
  • RBS’s policies and procedures for problem loans were appropriate, and broadly reflective of normal turnaround practice – but in many aspects the policies were not actually followed.
  • GRG notionally used a ‘balanced scorecard’ approach, but in practice the generation of additional income from customers took precedence over any other aspect.
  • GRG often sought a reduction in facility levels ‘with insufficient regard’ for the impact on customers.  Extensions were typically short-term, and accompanied by fees or higher interest rates.
  • Interactions with customers ‘were often insensitive, dismissive and sometimes unduly aggressive.’
  • A target of “zero justifiable complaints” actually incentivised a lack of recording and reporting of complaints.
  • There had been previous misreporting of the turnaround success rate, in fact only around one in ten cases was returned to mainstream banking.

Where next?

The summary included a careful explanation of FCA policy around the release of skilled person reports, noting that full disclosure was ‘subject to a wide prohibition in the legislation.’  The summary further explained that an attempt to publish the full report in this case would require ‘heavy redaction’ – a ‘complex and lengthy’ process.

It appears clear that the FCA will not publish the full report unless compelled, and so it seems – no doubt to RBS’ relief – that the issue might finally be heading towards closure.

Regardless of whether the full report is ever published, the message for banks is clear: the public and political expectation is that ‘is it fair?’ is a more important question than ‘is it legal?’


Other posts about the RBS/GRG saga:

‘Inhuman,’ ‘Crooks’ – Receivers’ right of reply?

Receivers: are “crooks”?  commented on some of the most strikingly-phrased evidence given at hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers, and Receivers: are “inhuman”?  discussed the responses of the committee members to the testimony (available here) that they had heard.

Some turnaround and restructuring professionals have expressed concern about the risk that the Inquiry might conclude without the benefit of an explanation of the duties and obligations of the registered liquidators who undertake such receivership roles, or information about the level of scrutiny and regulation imposed by the Corporations Act and applied by ASIC.

Those concerned will be pleased that ARITA has been invited to give evidence to a hearing in Canberra on 20 October, which should be broadcast live via the browser-based ParlView service, available here.

ARITA President Ross McClymont, CEO John Winter, and Technical & Standards Director Narelle Ferrier will give evidence at 12 noon.


Update: You can watch ‘replays’ of Part 1 (ARITA appears at 12.25) and Part 2 of the hearing online.

Receivers: are “inhuman”?

In Receivers: are “crooks”? I commented on some of the most quotable evidence given to the first two hearings of the Senate Select Committee Inquiry into Lending to Primary Production Customers.

The transcripts from hearings three and four are also now available here.

Notably, in the fourth hearing one senator asked whether “receivers have professional standards bodies?”  Neither the bank to whom the question was directed, nor the other members of the committee, were able to identify ARITA’s role or the fact that ARITA had already lodged a submission to the inquiry.

Towards the end of the hearing the Chair referred to having seen conduct by receivers that ranged from “fraudulent—through to things that we could possibly describe as inhuman.”

If the committee does continue to pursue its present line of investigation it would not be a surprise to see a further Senate Inquiry into the conduct and regulation of receivers.

ASBFEO at the ARITA National Conference

The Inquiry into Small Business Loans report issued by the Australian Small Business & Family Enterprise Ombudsman in December 2016 included specific recommendations concerning restructuring & turnaround professionals:

Recommendation 9 – Every borrower must receive an identical copy of the instructions given to the investigating accountant by the bank and the final report provided by the investigative accountant to the bank.

Recommendation 10 – Banks must implement procedures to reduce the perceived conflict of interest of investigating accountants subsequently appointed as receivers. This can be achieved through a competitive process to source potential receivers and by instigating a policy of not appointing a receiver who has been the investigating accountant to the business.

Those recommendations led to an invitation to speak at the ARITA National Conference in Melbourne this week, followed by a media release – set out in full below.

The media release included a call for receivers to avoid giving the appearance that they ‘work for the biggest creditor, which is usually a bank.’  Of course, most of those reading this post will know that in fact receivers usually are working specifically for the secured lender.

The comment highlights for me just how difficult it can be for outsiders to understand the technically complex world in which the restructuring and turnaround profession operates, and the need for the profession to engage and educate.

For that reason ARITA should be commended for inviting an apparent critic to speak, and Ms Carnell should be commended too, for her willingness to participate and be involved.

Postscript: Some interesting commentary on the ASBFEO position on EDR, by Michael Murray.


ASBFEO media release 9 August 2017

Insolvency sector urged to embrace accountability

The Australian Small Business and Family Enterprise Ombudsman has called on the insolvency sector to improve its accountability and transparency or face louder calls for increased regulation.

Speaking at the Australian Restructuring Insolvency and Turnaround Association (ARITA) conference in Melbourne, Ombudsman Kate Carnell said there should be an external dispute resolution process or tribunal to hear complaints.

“Small business operators are often confused about the role of receivers, how they charge and what their timeframes are,” she said.

“There needs to be greater accountability and a simple way to resolve disputes.”

Ms Carnell said insolvency practitioners were required under legislation to work in the best interests of the business.

“We hear from small business people and farmers the reality is somewhat different; it often appears that the receivers work for the biggest creditor, which is usually a bank,” she said.

“There is sometimes a potential conflict between the interests of a creditor and those of a distressed business.”

Ms Carnell said submissions to the Select Committee on Lending to Primary Production Customers echoed some of those heard by her inquiry.

The business of Queensland prawn farmer Sam Sciacca suffered after Cyclone Larry. Mr Sciacca told the select committee that receivers lacked expertise to manage his aquaculture operation and he was left with substantial debt as a result.

Property and livestock agent Andrew Jensen claimed that receivers often lacked farm management skills and didn’t always achieve the highest possible price.

“What’s disturbing about these accounts and others is the lack of accountability,” Ms Carnell said.

“There’s nowhere for farmers or small business people to go if they’re unhappy with the actions of a receiver.

“In my view there needs to be an external dispute resolution process.”

Ms Carnell said insolvency fees should be clearly stated and explained.

“Going into receivership is a stressful event for any business operator,” she said.

“A good insolvency practitioner can help a struggling business achieve a good outcome.

“The problem is that a bad insolvency practitioner can’t be held to account.”

 

Receivers: are “crooks”?

The registered liquidators I speak to have a real sense of being under close and careful scrutiny.  ASIC is an increasingly active regulator – as evidenced in the most recent enforcement report (available here).  The roughly 85% of registered liquidators who are ARITA members must also comply with its comprehensive Code of Professional Practice (available here), or risk facing its Professional Conduct Committee.  And many would say that FEG – an active and well-resourced priority creditor – provides additional scrutiny to receiverships where employee priorities are involved.

It is clear from the evidence provided to the Senate Select Committee on Lending to Primary Production Customers (available here) however, that some of the borrowers subject to receivership do not see – or do not appreciate – the level of scrutiny and supervision.

One borrower claimed that asset sale proceeds “finish up in the receiver-manager’s accounts” and do not reduce the farmer’s debt – a “systemic misappropriation of those funds” by the “most corrupt, the most unscrupulous, the most unethical industry in Australia.”

Another debtor said that receivers “are crooks down and out,” and a former rural agent described the insolvency profession as “the greatest bunch of virtually bloody criminals and they get away with it.”

Insolvency practitioners may argue that those giving evidence are the most vocal of an unrepresentative minority, but it seems that their evidence may be having an impact.  The committee chair closed the Perth hearing with a reminder that the inquiry was “not only into lending practices, including default, but also into other service providers associated with this sector, including receivers, brokers and agents.”

The reputation of the insolvency profession remains an ongoing issue, and we should not take outsiders’ understanding – of a technically complex function – for granted.


Postscript: Some comment on the later deliberations of the Inquiry is here: Receivers are ‘inhuman’?

Loan workouts: insights from the UK

Introduction

In the UK, the handling of financially stressed business customers by RBS’ Global Restructuring Group (the loan workout unit) has been highly controversial, and attracted a great deal of media attention.

However, very few disputes between borrower and lender have actually progressed through to final judgement, until the December 2016 decision in Property Alliance Group Ltd (PAG) v The Royal Bank of Scotland plc.

In that case the borrower claimed (amongst other things) that RBS had breached a duty of ‘good faith’ in its conduct of the loan workout.

In the judgement the Court held that there was no such common law duty in the UK, and so there could be no breach – but is there such a duty in Australia?  That’s a difficult question: one academic said the answer was “incoherent”!   Perhaps the answer does not matter, however, because the Australian Code of Banking Practice includes a requirement to “act fairly and reasonably.” *

The decision will be of interest to Australian lenders and their advisers, even more so because the conduct at issue goes to the heart of allegations about ‘constructive default’ that have been raised in the PJC Inquiry into the Impairment of Customer Loans and the forthcoming Senate Select Committee on Lending to Primary Production Customers.

Background

PAG is a property investment and development business – still trading today – that operates primarily in the North West of England.  It borrowed money from RBS, and entered into a series of interest rate derivative products (‘swaps’) prior to 2009.

In the aftermath of the GFC LIBOR fell significantly and by December 2009 sat at 0.60%, and consequently the swaps were ‘out of the money’ by more than GBP9m.  A fall in the value of PAG’s real estate portfolio, on top of the liability for the break cost, resulted in a loan to valuation ratio of more than 90% – and led to a transfer to GRG.  After extensive negotiations in June 2011 the swaps were closed out a cost of GBP8.2m.  Part of that cost was absorbed by RBS, but most of it was funded by an additional loan.

PAG remained under the control of GRG until July 2014 when it refinanced to another lender, shortly after initiating the legal proceedings against RBS.

Three elements to the claims

PAG claimed that the swaps were mis-sold.  Instead of providing a hedge as represented, PAG argued, in fact they left PAG in a worse financial position than otherwise.

PAG’s claim also involved the widely reported allegations that LIBOR had been manipulated by RBS and other LIBOR participants.  PAG said that it was unfair that RBS knew of the manipulation, but PAG did not.

The last claim, and the part most relevant to this discussion, was that by transferring management of PAG into GRG – and by what occurred after that transfer – RBS had breached an implied duty to act in good faith.

What did the RBS workout team actually do?

Arguably, GRG (referred to by some critics as the Grim Reaper Group!) did not quite live up to its apparently fearsome reputation (discussed in more detail here).

GRG did not appoint an Investigative Accountant, or appoint receivers.  It did obtain updated valuations and seek a one-off debt reduction to improve the LVR, but even the  deputy Chairman of the borrower, who lead the negotiations for re-financing, described RBS’s role amongst other things as ‘reasonable’, ‘friendly’, ‘helpful’ and ‘constructive.’

Alleged breach of good faith #1 – the transfer to GRG

PAG claimed that the stated reason for its transfer to GRG control was a pretext: it said that it had little need to restructure because there was ‘no risk of default.’  PAG said that the real reasons for transfer were to stifle anticipated litigation over the swaps mis-selling, and to extract as much revenue from PAG as possible.

The Court held that there was no contractual right to be managed by a particular team, and so it was open to RBS to transfer management control to GRG, and there was ‘substantial documentation’ which showed the transfer clearly as being within RBS policy.  Secondly, the Court found that at the time of the transfer RBS was not really aware of PAG’s mis-selling complaints, and so could not have made a decision to attempt to stifle them.

Finally the Court said that there was simply no evidence that there was an intention to extract as much as possible from PAG.

Alleged breach of good faith #2 – retention in GRG

PAG claimed that it was ‘wrongfully retained’ in GRG, to impose a 100% ‘cash sweep’ in order to maximise value for RBS and (continue to) deprive PAG of funds for litigation.

The Court held that there was simply ‘no evidence’ to support those contentions.  The Court accepted that RBS policy required an updated valuation before the customer could be returned to the frontline team, and information about an associated entity.  RBS’ failure to address these reflected a far more mundane reason: overwork.

Alleged breach of good faith #3 – Demanding an unnecessary and onerous ‘Security Review’ at PAG expense

The Court said that the requirement for a security review was not capricious, it was a condition of the very significant new lending that RBS provided to fund the close out the swaps.

Alleged breach of good faith #4 – Calling for updated valuations of PAG’s portfolio in both 2010 and 2013.

There was a clause in the loan documents that allowed RBS to call for an update of valuations at borrower expense, but it had opted not to exercise this right until 2010, and then again in 2013.  The Court held that the decision to seek valuations was not ‘capricious’ – the bank needed valuations to make an informed assessment as to whether PAG met the criteria for transfer back to the front line, or refinance by another bank.

Alleged breach of good faith #5 – applying improper pressure on the valuers to manipulated the result of the 2013 Valuation

It was true that RBS had raised queries about a draft valuation, which had led to a 1.5% reduction in the valuation, and thereby increased the amount of the payment that PAG had to make to improve the LVR.  However, the valuer had not challenged the legitimacy of the questions, and there was nothing in the valuer’s evidence to suggest that he had been placed under improper pressure.

Alleged breach of good faith #6 – a threat to appoint receivers

It was clear that there had been discussion about the possible appointment of receivers – although it was less clear what the context was.   The Court accepted that an RBS staff member did threaten to appoint receivers, and that ‘the incident amounted to an improper threat,’ but found that single incident by itself did not justify a conclusion ‘that the alleged implied duties were breached.’

Bank wins 3 – nil

PAG was unsuccessful on all counts.  The Court held that RBS had a ‘non-advisory’ role, and that the terms of the contract between PAG and RBS prevented PAG from claiming otherwise, and so the misspelling claim was doomed.

The rejection of the LIBOR claim was comprehensive.  The Court said that linking a transaction to the LIBOR rate did not automatically give rise to any implied representation, but in any event there was no evidence that PAG had relied upon such representations.

Finally, even though there is no general duty of good faith under English law, the behaviour complained of would not have breached any hypothetical breach.

What should Australian Lenders and their advisers take from the decision?

The judgement is unusual in revealing some of the inner workings of a loan workout team – but what it does reveal is fairly mundane.  It highlights that banks are best prepared for challenges to conduct by having policies that set out what is expected, and ensuring that where discretion is exercised there is contemporaneous documentation to explain how it was exercised.

 

*My thanks to Michael Murray of Murrays Legal for guiding a non-lawyer through the complex issues of good faith!


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

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 Post7 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.


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