Royal Bank of Scotland (RBS) became the new face of scandal on Monday (Oct. 10) when leaked documents surfaced that seem to show new evidence the bank profited from the demise of small and medium-sized businesses.
It’s a riveting saga involving allegations of an internal project codenamed “Dash For Cash,” emerging from internal documents obtained and outlined by BuzzFeed News and BBC “Newsnight.”
But the story of claims that RBS gained from SME failures dates back three years when a U.K. government inquiry called into question RBS’ tactics in dealing with its SME clients. The story is undoubtedly complex; PYMNTS breaks down what you need to know.
The RBS Files
In what BuzzFeed and BBC are calling the “RBS Files,” internal documents from RBS have been obtained by the outlets that reportedly outline how 16,000 small businesses were coerced into joining RBS’ Global Restructuring Group (GRG). The files are comprised of emails, internal memos, meeting minutes and other records provided by a whistleblower from within RBS, BuzzFeed reported.
According to reports, the files show how small businesses were forced to join the Global Restructuring unit, a part of the bank intended to help ailing businesses, even if those SMEs had never missed a loan payment. Rather, BuzzFeed said, the files show that RBS forced businesses to join GRG for questionable reasons, like small business customers showing consideration for leaving RBS or threatening to sue the bank for mistreatment.
GRG reportedly forced fees and spiked interest rates on its SME members “that could run into seven figures,” the BuzzFeed report said, leading GRG to nab more than £1 billion of profit in a single year as part of this so-called Dash for Cash initiative within the bank.
In the wake of BuzzFeed’s report, U.K. lawmakers have urged the Financial Conduct Authority (FCA) to release its findings of its years-long investigation into the bank.
“If laws have been broken, individuals must be held responsible,” said the Labour Party’s shadow City minister, Jonathan Reynolds, in a statement to Bloomberg. “These shocking revelations are a damning indictment of RBS’ behavior during the financial crisis.”
U.K. Treasury Committee Chairman Andrew Tyrie is urging the FCA to “get on with publication as soon as possible” and is calling on the government regulator to commit to a publication date.
Prime Minister Theresa May had a spokesperson release a statement, which called the allegations within the BuzzFeed report “very serious,” though supported the FCA’s decision to conduct a thorough investigation before releasing its findings and conclusions.
RBS has denied claims that the bank systematically forced SMEs into ruin via its GRG. But after BuzzFeed confronted the bank with the leaked documents, the institution issued an on-the-record comment, part of which read:
“In the aftermath of the financial crisis, we did not always meet our own high standards, and we let of our SME customers down. We have already acknowledged that, in some areas, we could, and should, have done better for SME customers.”
“Specifically, we could have managed the transition to GRG better, and we could have better explained to customers any changes to the prices or fees we were charging. We also did not always handle customer complaints well. As a result, a number of our customers did not receive the level of service they should have done or, importantly, that they would receive now.”
The bank added that the revelations should be placed in “the context of the time and the impact of the financial crisis.”
“In 2008, there was an unprecedented increase in SMEs falling into financial distress, and the numbers moving into GRG increased by over 400 percent,” it stated.
The bank also told reporters that the leaked documents came from someone outside of its GRG.
Reporters spoke with some small business owners affected by RBS’ Global Restructuring Group.
One of them, Andrew Gibbs, a Norwich-based architect, reportedly lost his business — as well as all of his assets and his home — after taking out a £1.3 million ($1.6 million) business loan from RBS in 2008. As part of the loan agreement, RBS reportedly forced Gibbs to purchase an interest rate hedging product, the rates of which spiked after the financial crisis.
Gibbs said his businesses was placed into GRG after only a year, being told by RBS that his business was in loan-to-value breach. Nine days later, GRG reportedly took total control of Gibbs’ business accounts and began to cancel direct debit deposits, including cancelled payments for professional indemnity insurance, a legal requirement for a practicing architect.
He told BuzzFeed that RBS told Norwich council that Gibbs had died and cancelled his business tax payments.
“They threatened my professional life,” he said. RBS said it has no record of cancelling his professional indemnity or tax payments. “When I fell, the fall was really big. They almost strip away your clothes and put you into the corner. Mentally, they are just hitting you all the time.”
According to BuzzFeed, about a year after he had initially taken out the loan, RBS demanded sudden, full repayment, though the same day offered to re-lend him the loan, plus more, if he would hand RBS a 15 percent stake in his company. He refused, and within months, Gibbs was evicted from his business property. The company was eventually sold to repay RBS.
Another small business owner, Kenny Riddoch, told BuzzFeed News he and his family were forced into homelessness after his farming business’ experience with RBS.
RBS pulled him into GRG in 2008 after he requested another bank loan to complete a property development, reports said. That additional financing was provided, but RBS reportedly spiked his interest rates and Riddoch was forced to pay monthly fees of £10,000 ($12,360). In 2013, RBS reportedly sent administrators to seize his land and assets. He was evicted three years later. Just last week, he said, RBS froze all of his bank accounts.
“GRG’s involvement in my business and my family has had a huge impact,” he told BuzzFeed News. “It’s taken everything away, and there’s nothing left.”
The FCA commenced a probe into RBS over these allegations three years ago but has yet to release its findings.
Reporters have taken an investigation into their own hands while the market waits for the FCA’s conclusions.
In May 2015, U.K. publication The Times concluded that GRG “piles on fees, revalues property that loans are secured against, triggers defaults and takes over assets” of SMEs. Unnamed sources told the publication last year that RBS’ practices were imposed even on profitable small business borrowers.
“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 Times‘ report concluded.
One year ago, Reuters conducted its own report into the matter and concluded that the bank may be forced to repay some of the SMEs forced into ruin after joining GRG. RBS Chief Executive Ross McEwan had denied the allegations of unfair practices and fees within GRG, but after meeting with the FCA, reports said unnamed sources said McEwan was considering financial compensation to small businesses.
If that were to happen, Reuters said it could cost RBS billions of dollars. It’s unclear whether financial compensation is in the works.
But BuzzFeed’s report highlighted the government’s own possible role in the issue, with the leaked documents suggesting RBS was straining to meet rigorous government requirements after it got bailed out by taxpayers after the financial crisis. That bailout was worth $56 billion, according to reports.
BuzzFeed said government and regulatory bodies squeezed RBS to reduce its property loan exposure, increase capital reserves and increase overall profits to aid economic recovery.
To meet these demands, RBS reportedly launched its effort to offload business loans — a strategy grasped by many major financial institutions in the wake of the financial crisis, with SME loans deemed high-risk and not profitable enough to justify the exposure.
In the wake of the BuzzFeed News and BBC report, reports said on Monday that MPs are considering reopening a case initiated by the Treasury in 2014.
“What was uncovered in these documents does not match what they said to us,” said Conservative MP Steve Baker in an interview with The Telegraph, reflecting on what RBS told MPs during Treasury Select Committee hearings. At the time, the bank told lawmakers that GRG was not a profit center, reports said.
“The impression I get is that we were badly misled,” Baker continued, “and we cannot have government being misled on an issue which is of utmost importance to the economy and people’s trust in banking.”