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RBS, GRG, What’s it all about?

fear-bank-managerTaxpayer-owned Royal Bank of Scotland has sought to put an end to the storm that has surrounded its now-defunct Global Restructuring Group (GRG) by outlining a compensation scheme for the 12,000 small businesses that were customers of the division between 2008 and 2013.

Press coverage of the ‘RBS GRG’ (and ‘Lloyds BSU’) situation is confusing on the issue of conspiracies to bring businesses down, leaks about what actually happened and what the FCA are proposing in terms of compensation for SME’s affected.

So perhaps it’s time to step back and remind ourselves what this is all about:

Our high street banks have always had a kind of ‘intensive care’ approach to business accounts which are showing signs of stress/distress. Once identified as such, they were separated out into specific portfolios and often with new managers dealing with them – with the intention to ‘contain the banks’ exposure’ but genuinely nurse them through.

Fast forward to when ‘Humpty fell off the wall’ in 2008 and things became more complicated. The banks had the same approach, but with other factors, including:

  • They were genuinely short on capital. One way of replenishing capital was to have loans repaid – if you have to do that, then which customers do you choose to ‘encourage to go elsewhere’ – certainly not your best long term borrowers.
  • Their ‘cost of funds’ changed (this is how much it costs them to borrow money in the markets so that they can lend it on, with a margin, to make a profit). Traditionally this had been Base Rate or LIBOR, but almost overnight, banks funding costs became higher than they were earning from some loans (especially those that had been taken on at low margins to grow the book in the ‘good times’). Suddenly many committed term loans were losing them money on a daily basis.
  • Regulatory changes led to the banks having to identify loans that were at risk and vulnerable to future interest rate changes (whilst the banks were being ‘stress-tested’ by the authorities they were also ‘stress-testing’ their customers). Through a process which became known as ‘slotting’ they were having to report on the quality of the loan book and put even more capital aside to cover potential losses for ‘vulnerable’ loans.

The reality is that decisions had to be made at the top about surviving this and how to respond urgently to situations where:

  • Loans had been granted in the past at fine rates which were losing the bank money (when they could least afford it)
  • They could see that a business was struggling – and how they ensured that the extra work entailed in ‘hand-holding’ those businesses at least generated some income to cover the additional costs.

As always it is in the implementation that things go wrong, with poor communication, incentives generating the wrong behaviour, pressure on staff to deliver objectives etc. Exactly the same factors which create all the miss-selling scandals in financial services.

The results have been that:

  • Many businesses with loans at low margins were subject to scrutiny and stress-testing, in an endeavour to prove that they were no longer eligible for that pricing (particularly where it could be shown that loan covenants had been broken).
  • Some genuinely sound businesses were ‘encouraged’ to move their banking elsewhere – because whilst they were surviving they were not deemed to be amongst the best to retain (which became a problem because other banks going through the same exercise didn’t want them either!)
  • ‘Intensive care activity’ was combined with additional fees to cover closer monitoring; counter- productive of course.

It is the extremes of this that have made the headlines, because inevitably:

  • Some businesses failed that would not have otherwise.
  • SME owners, already under stress to survive during those times, were subject to additional work, creating negative activity and pressures.
  • Some less capable bankers behaved badly or incompetently.

On top of this, RBS seemed to think it was a good idea to have a business within the bank (‘West Register’) which would buy the assets of these companies when they failed and then look to dispose of them at a profit.  A Conflict of Interests and a ‘School-Boy Error’ if ever there was one.

Needless to say the combination of businesses believing that they had been forced out of business and then seeing their assets bought at a discounted price by the bank and sold on later at a return to the bank, has led to court cases and ultimately the FCA enquiry.

The FCA proposals for recompense have hardly been published and already there is an outcry about the level of compensation being budgeted for (£400m). The reason is that it is apparent that all they are planning to do is refund fees – not ‘compensate’ for losses, actual or consequential. It seems inevitable that they will have to bow to pressure to do more.

So what are those affected to do now? Well the ‘ambulance chasers’ will be circling (especially as the work they had on the SWAP reviews has dried up) and will be encouraging businesses to complain and present compensation claims.

It is premature to do that however until it is known how the banks will deal with this. There are however three things that a business can do:

  1. If they have a serious claim they need to protect their position legally, because many of these claims will become ineligible through the Statute of Limitations time bars. In those situations legal opinion should be sought about how to preserve the right to claim later.
  1. Retrieve all records relating to this period and write down as much as you can remember about discussions and action taken by the bank. As with all bank ‘disputes’ the party that has the best collection of evidence will be in a stronger position – and it is often surprising how poor the banks record-keeping and retention can be. All emails and letters could be valuable – find them now whilst you are not subject to time pressures (remembering that the SWAP review gave many businesses only 28 days to make a claim).
  1. Decide on whether you are going to need professional support in presenting your case and find someone reputable and with the technical knowledge and negotiating skills necessary.

 

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