New allegations are emerging that the Royal Bank of Scotland, already under investigation by the Serious Fraud Office, forced small businesses to default on their loans in an effort to reduce its exposure and lessen the regulatory burden placed on the bank to hold capital against SME loans. Small business loans require greater capital placed against them because they are considered high-risk.
In publishing the results of its investigation into the matter last Tuesday (May 5), U.K. newspaper The Times found that RBS’s Global Restructuring Group “piles on fees, revalues property that loans are secured against, triggers defaults and takes over assets,” forcing business loaners to fail.
According to reporters, RBS – which is partially state-owned – implemented a strategy to dispose of these risk-weighted asset to improve its standing in federal stress performance tests. The Times also found that this plan was agreed upon with the Treasury to improve the bank’s balance sheet.
RBS’s GRG was established with the purpose of aiding SMEs struggling to repay debts.
SMEs referred to the GRG told reporters that they faced unfair, excessive fees and forced to face reevaluations about their assets. These matters caused businesses to default on their loans, reports said, and led to a loss of these assets or entirely going out of business. Reports said tens of thousands of SMEs have taken part in the GRG division in recent years.
Unnamed sources told The Times that RBS has placed pressure on businesses even if they were profitable, and that reducing exposure to SME borrowers’ risk would improve RBS’s federal banking.
In other words, The Times claimed, stress tests implemented on banks to promote financial stability has inadvertently caused SMEs to be pushed out of accessing financial help from these lenders.
“Squeezing thousands of business customers who might have thrived had they been given the support they were promised appears to be an unintended consequence of the desire to make banks safer,” the report said.
One U.K. small business owner, Surinder Hullait, told The Times in a subsequent interview that “GRG ruined my business” despite never missing a loan payment.
Following the publishing of the report last week, Parliament’s Treasury Select Committee chairman Andrew Tyrie expressed “extreme concern” about the findings, and said RBS should face Parliament during its next hearing to explain whether it misled lawmakers about the goings on of GRG.
The Serious Fraud Office is “monitoring developments” surrounding the matter, it said, while Serious Banking Complaints Bureau director Andy Keats described these findings as “deeply disturbing” and expressed concern that similar practices have been implemented in other banks.
In a statement, RBS said, "following the reckless lending leading up to the financial crisis many of our customers and their businesses ended up in serious financial difficulty. GRG helped minimize losses where it could and successfully restructured a significant number of businesses it worked with, advancing over 100 million pounds of new lending and safeguarding hundreds of thousands of jobs."
Not The First Time
This is the second time that RBS has come under fire for allegedly mistreating its SME borrowers. Lawrence Tomlinson, an advisor to British Business Secretary Vince Cable, released a report last year that found RBS “forced vibrant businesses into financial trouble” in an effort to charge them higher fees and seize their assets. The claims similarly focused on GRG.
Specifically, Tomlinson claimed that RBS passed its business borrowers through to the GRG, forced them into default, then capitalized on seizing their assets that were acquired at a cheaper cost to the bank. Tomlinson argued that GRG essentially turned into a “debt collection agency.”
Since his report was filed, the expert said that more than 1,000 companies have approached him with claims of mistreatment by RBS. Tomlinson called for an overhaul of the banking sector throughout the U.K., and the claims were passed on by the Department for Business, Innovation and Skills to the Financial Conduct Authority for investigation. GRG remains under FCA watch, and about 270 small businesses have filed a lawsuit against RBS related to the claims.
RBS has also begun to wind down the GRG restructuring unit.
Last July, RBS apologized to the Treasury Select Committee for providing misleading evidence with regards to the allegations. At the time, Tyrie accused RBS officials of being “willfully obtuse” and “materially incorrect on a crucial point and unacceptable.” The FCA’s investigation of this matter, however, has focused on how RBS may have “profited” from failing SME borrowers, and not how its balance sheets may have improved from such behavior.
Tomlinson responded to the most recent allegations against RBS, calling them “in line with the information received in the compilation of the Tomlinson Report which remonstrated that the RBS non-core strategy included perfectly operable SME businesses. It looks as if many businesses have been unwitting victims of RBS’s desire to strengthen its balance sheet.”
The Political Climate
The new allegations could bring renewed pressure on politicians to take greater action and support SMEs’ access to working capital. Officials have already implemented a referral scheme which requires mainstream banks to refer SMEs rejected for a loan to an alternative lender.
But with last week’s victory of Prime Minister David Cameron to secure a Conservative Parliament for the next five years, officials may be called on to improve the treatment of SMEs who have been approved for a loan from a traditional lender. PM Cameron has supported banking reform, though shied away from a breakup of the major lenders across the U.K., which include RBS.
The Times’ allegations come as reports emerged Monday (May 11) that the U.K. government may begin selling its share of RBS at a loss, according to unnamed sources. The government acquired part of RBS at a cost of more than $102 billion for taxpayers following the 2007 financial crisis. Reports said that the U.K. could face a loss of more than $21 billion through the sale.
RBS rival HSBC, the U.K.’s largest bank, announced plans over the weekend to increase small business lending and cut several fees that burden SME borrowers. The lender is looking to increase its small business lending by 25 percent this year, amounting to more than $12 billion in funding.