3 RBS Global Restructuring Group (GRG)
Treatment of customers in GRG
53. A number of serious allegations have been made
about RBS's treatment of financially distressed customers. These
allegations have centred on RBS's internal division—Global
Restructuring Group (GRG). GRG is comprised of several parts,
but this Report focuses in particular on Business Restructuring
Group (BRG) and West Register. BRG is the part of GRG that managed
the most financially distressed SMEs in RBS. West Register was
an entity within GRG that purchased properties.[84]
ALLEGATIONS AGAINST GRG
54. In November 2013, Lawrence Tomlinson, then Entrepreneur
in Residence at the Department for Business, Innovation and Skills,
made a number of allegations against RBS in his report entitled
Banks' Lending Practices: Treatment of Businesses in Distress.
Principally, he alleged that RBS was "unnecessarily engineering"
businesses into default in order to move the business from local
relationship management to turnaround divisions—such as
GRG. He alleged that the purpose of doing so was to generate revenue
through "fees, increased margins and devalued assets".[85]
55. Supporting the principal allegation contained
within Dr Tomlinson's report were a number of further allegations
about RBS's treatment of businesses in financial distress. These
allegations included:
· Inaccuracy and manipulation of property
asset valuations. Specifically, Dr Tomlinson alleged that businesses'
assets had been undervalued for the purpose of determining adherence
to loan-to-value covenants;[86]
· Technical or "insignificant"
breaches of covenants being used to bring businesses into default
and transfer them out of local management;[87]
· Transparency of decision making about
the transfer of a business into GRG. The report alleged that "there
is much confusion on the part of businesses" and that "the
rationale and reason for their treatment is not clear to the business
at the time it happens";[88]
· "Excessive" fees and increased
interest payments charged to businesses upon entering GRG; and[89]
· Allegations of conflicts of interest arising
from the sale of assets. Specifically, the report alleged that
conflicts of interest existed between West Register, a property
management subsidiary of RBS which frequently bought distressed
assets, and BRG, which sold distressed assets.[90]
RESPONSES TO ALLEGATIONS AGAINST
GRG
56. In response to Dr Tomlinson's report, RBS asked
law firm Clifford Chance to review and report on the "principal
allegation" of Dr Tomlinson's report. Clifford Chance was
asked by RBS to investigate the allegation that RBS was "guilty
of 'systematic and institutional' behaviour in artificially distressing
otherwise viable businesses, putting its customers 'on a journey
towards administration, receivership and liquidation'".[91]
The Clifford Chance report focused on a sample of customer files
that was intentionally compiled in a way that was, according to
Clifford Chance, "more likely to identify facts adverse to
the bank", interviewing 138 customers and reviewing 130 files.[92]
57. The review itself was "conducted solely
by Clifford Chance". However, the role of Jon Pain, Group
Head of Conduct and Regulatory Affairs at RBS, was to "oversee"
the review. Clifford Chance reported its findings to Mr Pain.
Mr Pain subsequently presented the results to RBS's board and
senior management.[93]
58. The Clifford Chance report was published in April
2014. It found no evidence to support the principal allegation
against RBS, stating that it did not identify "any files
which fitted the description of the bank 'engineering' a default
or 'artificially distressing' a customer".[94]
RBS welcomed the review has having found "no evidence of
systematic defrauding of business customers".[95]
59. At the time that Dr Tomlinson was conducting
his investigation, Sir Andrew Large was in the process of conducting
an RBS-commissioned report into its own lending performance—the
RBS Independent Lending Review.[96]
Sir Andrew's report did not look at the validity of the principal
allegation made against RBS by Mr Tomlinson. He said:
The validity of the accusations made in these
sources has not been investigated, as a forensic inquiry into
individual cases was not in the scope of the Independent Lending
Review.[97]
60. Some of the other allegations made by Dr Tomlinson
were directly addressed in the Clifford Chance report. For example,
Clifford Chance "did not observe examples within our sample
of purchases of properties from SMEs which resulted in subsequent
sales at a substantial profit to West Register (comparing the
purchase price and sale price only)".[98]
However, in response to Clifford Chance, RBS acknowledged that
there was a "damaging perception that the bank had a conflict
of interest" regarding West Register, and decided to wind
down the division.[99]
61. Some allegations against RBS by Dr Tomlinson
were only partially addressed by the Clifford Chance report. On
the inaccuracy of asset valuations, Clifford Chance concluded
that there was "no evidence that the bank deliberately manipulated
valuations to procure a customer's transfer to [Business Restructuring
Group]." Clifford Chance also said that it did not see "any
instances of an LTV breach being the event that precipitated transfer
to BRG." However, whilst Clifford Chance had access to copies
of property valuations for each of the cases it examined, it "did
not test the accuracy of the bank's valuation methodology"
when coming to its conclusion.[100]
62. On the topic of fees charged to customers, Clifford
Chance found problems with the transparency of pricing in GRG.
Their report noted that GRG had been aware of complaints regarding
pricing transparency from polls conducted at least as early as
2008.[101] In investigating
the pricing of GRG products, Clifford Chance had found it "difficult
to assess allegations of unfairness" owing to the limited
transparency of RBS's fee structure.[102]
The report said:
A number of complainants commented that they
felt pricing of restructured facilities lacked transparency. […]
In reviewing the files, we found it difficult to understand how
the bank calculated the fees which it proposed to customers in
any particular case and therefore found it difficult to assess
allegations of unfairness.[103]
63. When questioned by the Committee on the transparency
of GRG's fees, Derek Sach, Head of Global Restructuring Group,
described it as a "reasonable criticism" and said that
"something that we have been working on since 2012 [is] to
try to improve people's understanding of the fees we charge and
to make the fees less onerous for them".[104]
However, Mr Sach disagreed with the assertion that there was no
accountability or structure to the fees, and that GRG charged
whatever it liked.[105]
Chris Sullivan, Deputy CEO of RBS, added:
There is absolutely justification. […] every
single case is different. There are different levels of risk,
different levels of stress within the organisation, different
facilities for each customer. On the basis of the mix of all of
those things the relationship manager will take a decision that
would relate to the amount of risk the bank was were taking and
an appropriate reward for that risk. The appropriate reward element
comes from market practice and internal checks that are made both
by the managers of the bank and then the internal audit department
above them.[106]
64. Mr Sach said that RBS had been slow to improve
pricing transparency because GRG was under strain from its increased
case load:
In the early days of 2008, 2009 you were looking
at an organisation in terms of GRG that multiplied 10-fold over
nine months as the bank was obviously in a very difficult circumstance
[…]. Any business that multiplies 10-fold in nine months
is going to have stresses and strains.[107]
65. When challenged by the Committee on whether fees
that could not be explained were fair fees, Derek Sach responded
that fees are not transparent if they are "not well explained
to the customer",[108]
and that "generally banks need to be much more transparent".[109]
FCA REVIEW INTO GRG
66. Allegations against RBS have also drawn attention
from the Financial Conduct Authority (FCA). The FCA announced
on 17 January 2014 that it was conducting a separate, independent
review of RBS's treatment of business customers in financial difficulty.
In an update on the progress of the review, the FCA said:
The report will examine Royal Bank of Scotland's
(RBS) treatment of business customers in financial difficulty
and consider allegations of poor practice set out in the report
by Dr Lawrence Tomlinson and referenced in Sir Andrew Large's
report.
The first stage of the review will consider RBS'
treatment of a sample of customers referred to its Global Restructuring
Group. This will include some cases where customers have already
raised concerns with Dr Tomlinson, the Department of Business,
Innovation and Skills or the FCA.
The review will also consider whether any poor
practices identified are widespread and systematic. If this is
the case, the second stage of the review will identify the root
cause of these issues and make recommendations to address any
shortcomings identified.[110]
67. The FCA's review is being conducted by an independent
skilled person under section 166 of the Financial Services and
Markets Act (FSMA) 2000. The FCA has stated that "due to
the complex nature of the review and the seriousness of the allegations,"
it is expected that the review will report in early 2015. The
FCA appointed Promontory Financial Group and Mazars to conduct
the review.[111]
68. The Clifford Chance review of RBS's treatment
of distressed customers, principally by the Global Restructuring
Group, was welcomed by RBS as finding "no evidence of systematic
defrauding of business customers". However, the review—overseen
by a bank executive rather than an non-executive director—was
not independent, was based on narrow terms of reference, and left
a number of questions unanswered, such as why GRG could not explain
the size of fees it had charged, and the accuracy of its asset
valuations.
69. The FCA is conducting its own review into
GRG. It is important that this review comprehensively address
the allegations against GRG, so that the public can be confident
that any wrongdoing is identified and resolved.
Conflicts of interest, customer
perceptions and governance
70. Sir Andrew Large, in his independent review of
RBS's lending practices, did not investigate individual allegations
of wrongdoing. He did, however, criticise GRG's governance and
its communications procedures, and concluded that these could
lead to negative perceptions amongst customers. Sir Andrew said
that "the decisions and actions taken by the bank can be
highly unsettling and emotional for the customer" and that
"they will likely impact the livelihoods of the individuals
and families who own and run the SMEs in question". He also
found that the individual SME "may be unaware or unprepared
for the consequences of the change", and highlighted the
lack of recourse available to customers in such situations, stating
that "SMEs typically lack the funds or expertise required
to challenge the banks in protecting their interest".[112]
71. During the potentially stressful process of transferring
an SME to GRG, Sir Andrew found that internal structures within
RBS were "not well suited to mitigating the risk of poor
perceptions […]".[113]
In particular, Sir Andrew identified as a problem the combination
of GRG both being run as an "internal profit centre"
and having ultimate responsibility over which customers are transferred
to it. Sir Andrew told the Committee:
It comes to a significant extent to questions
of organisation and governance. When a bank lends to an SME, the
two parties have a common interest in the SME being successful
in servicing the debt, paying it down and the relationship continuing.
That situation is the case right up to the point where the decision
has been made that this organisation is irretrievable and therefore
the interests have to diverge as between the bank and the customer
in that resolution has to take place in the interests of the shareholder,
recovering what can be recovered.
The situation that I commented on in the review
[…] is that the ultimate decision as to which SMEs will be
handled by the Global Restructuring Group is made by the Global
Restructuring Group. They have the say. Equally, the decision
that might be made at a later stage that the organisation is beyond
retrieval and has to be resolved is made within the Global Restructuring
Group, which is an internal profit centre within the bank. Perceptionally,
and I would also argue in other ways as well, I think that is
flawed.[114]
Sir Andrew said that "particular care"
was needed at the point where "interests of the customer
and the bank are likely to diverge"—for example, the
point of insolvency. However, he found that the governance process
for transfer into GRG from normal relationship management was
"opaque" to both the SME itself and also to its normal
relationship manager. He concluded that these "governance
structure issues exacerbate the risk of a perceived conflict of
interest."[115]
72. Transparency of decision making was also a problem
identified by Clifford Chance. In its report, Clifford Chance
described RBS's handover procedure from normal relationship management
into GRG. This included a handover meeting and "a pro-forma
letter to be sent to the customer setting out the reasons for
the transfer to BRG".[116]
Nevertheless, Clifford Chance found similar complaints from its
sample of customers about the opactity of the decision-making
process. Clifford Chance said:
In our interviews with customers, some complained
about aspects of the handover process. Their complaints included
the fact that they had not understood prior to the handover meeting
that they were being transferred to BRG, that they did not understand
why they were being transferred, that they had no choice in the
matter and that the transfer from [RBS's normal relationship management]
to BRG […] was disruptive.[117]
GRG AS A PROFIT CENTRE
73. In both oral evidence and written evidence to
the Committee, RBS contested the basis of Sir Andrew's arguments.
On GRG's status as a profit centre, Mr Sullivan told the Committee
that GRG was "absolutely not" a profit centre and that
describing it as such was "totally inappropriate".[118]
Mr Sullivan explained to the Committee that, instead of a profit
centre, GRG was "absolutely, unequivocally […] a cost
centre".[119]
Mr Sach too said he believed that Sir Andrew had been wrong in
his assertion about GRG being a profit centre.[120]
He argued that "it cannot be a profit centre because we are
making a loss on this particular segment".[121]
A letter from RBS Communications to the Clerk of the Treasury
Committee on 21 February 2014 also stated that "GRG does
not act as a 'profit centre'".[122]
74. At the time that Mr Sullivan and Mr Sach gave
evidence, the Chairman of the Committee provided both Mr Sullivan
and Mr Sach with an opportunity immediately to correct their oral
evidence. This was after the Chairman had reminded them that Sir
Andrew had referred to GRG as an "internal profit centre"
and read out the definition used in his report. Mr Sach responded,
and maintained that GRG was not a profit centre.[123]
Mr Sullivan did not respond. Mr Sach also stated that "drafts
were certainly fact checked" by RBS.[124]
75. Sir Andrew defended the findings of his report.
He emphasised that his report had identified GRG as a profit centre
on an internal and management basis, not a statutory or legal
one:
Perhaps as important as the terminology employed
is the substance of what it means. The Glossary of Terms [from
the document "RBS Independent Lending Review"] describes
'profit centre' as used in the Report as 'internal organizational
boundaries defined to measure the financial contribution of a
particular area of a larger organization'. The particular area
in question in this instance is, of course, GRG.
The use of the word 'internal' was important.
The Report makes it clear that for both GRG and the bank this
was an 'internal' matter since the actual assets and income/losses
accrue to the donor department. There was no suggestion that there
was a formal basis in which GRG acted as a profit centre, or for
the purposes of statutory financial reporting.
Internal profit centres of this sort—which
can of course be loss making—are a perfectly normal mechanism
used to assist in determining the performance of units within
banks and other forms of enterprise when those units perform some
service on behalf of either other departments or the enterprise
as a whole. They are usually constructed using 'management information'
(rather than the 'financial information' used for statutory reporting).[125]
76. In his letter, Sir Andrew also referred to information
sent to him by GRG during the course of the RBS Independent Lending
Review. This stated that "GRG has a 'shadow' P&L which
tracks contribution based on incremental income generated […]
and the costs of providing support—predominantly staff costs".
Sir Andrew described such a 'shadow' profit and loss account as
"consistent" with his use of the term "internal
profit centre".[126]
77. Following the response from Sir Andrew, the Committee
contacted RBS seeking further comment on the matter. Mr Sullivan
responded, stating that he and Mr Sach did not disagree with Sir
Andrew's description of GRG as a profit centre:
[…] with regard to the term of 'profit centre'
we wish to make clear we do not disagree with the way that that
accounting term was used by Sir Andrew Large in his report. Sir
Andrew clearly set out his definition for that accounting term
in his glossary and it is indeed the case that the financial performance
of GRG was monitored to enable us to understand GRG's financial
performance. This is a standard accounting practice across all
sectors of our business (for example our Property Service division,
which exists to support amongst other things our branch network,
can also be classified as a profit centre by virtue of its recordings
of assets, as well as costs and income). However, what Mr Sach
and I were taking issue with is the way others have used Sir Andrew's
report to suggest that GRG had a profit motive with a prejudice
against our customers, rather than a turnaround motive.[127]
78. Following the letter from Mr Sullivan, the Committee
wrote to Sir Philip Hampton, Chairman of RBS, seeking further
comment.[128] Regarding
the question of whether GRG was a profit centre, Sir Phillip wrote:
The answer to whether Sir Andrew was right is
"yes"; his definition was reasonable and correct as
it applies to GRG. Having read his 8th July letter
it is plain that that is the answer the Committee should have
received and I am sorry that they did not.
In his 8th July letter Sir Andrew
notes that "the possibility remains that the bank feels that
the term "profit centre" in some way adds to any public
perception that the presence of such a mechanism leads of a systematic
abuse of the banks position…" Mr Sach and Mr Sullivan
have confirmed that when providing evidence to the Committee that
their responses were informed by their reaction to this adverse
characterisation of "profit centre".
This was a mistake. Your questions and those
of your colleagues were clear. Based on the review we have undertaken
my colleagues on the Board and I believe it was an honest mistake
and that neither of the bank's representatives intended to mislead
the Committee. When the clear definition of "profit centre",
used by Sir Andrew, was subsequently brought to their attention,
both Mr Sullivan and Mr Sach agreed with it and agreed that the
Committee deserved a clearer answer and that is why Mr Sullivan
wrote to you.[129]
FUTURE OF GRG
79. Following the Committee's evidence from Mr Sullivan
and Mr Sach, it has been reported that RBS has decided to close
down GRG as a stand-alone unit, with Mr Sach leaving RBS in March
2015. Furthermore, it has also been reported that Mr Sullivan
has left RBS earlier than expected.[130]
80. In his report on RBS, Sir Andrew Large said
that GRG was run as an "internal profit centre". However,
in written and oral evidence to the Committee, RBS disputed that
description—even though it had had the opportunity to contest
that point when it saw Sir Andrew's report in draft. Mr Sullivan
and Mr Sach told the Committee, on behalf of RBS, that GRG was
not a profit centre. The Committee, having received further written
evidence from Sir Andrew Large, the Chairman of RBS, Mr Sach and
Mr Sullivan, has concluded that Mr Sullivan and Mr Sach's original
statements to the Committee on this point were wrong. It is now
agreed by all that Sir Andrew was correct in his description of
GRG as an internal profit centre.
81. The evidence that Mr Sach and Mr Sullivan
gave was incorrect and therefore misleading, whether intentionally
or not. RBS has apologised to the Committee and corrected its
evidence. However, given the seniority of the original RBS witnesses,
it should not have required intervention by this Committee with
the Chairman of RBS to obtain that apology and a full statement
of RBS's position.
82. This misunderstanding
of the bank's position by two senior executives is indicative
of a systemic weakness of standards and culture. It is understandable,
indeed right, that banks should seek to support businesses in
difficulty with special measures but how that is done and whether
the institution or the customer is the main beneficiary needs
much greater clarity.
84 Clifford Chance LLP, Independent review of the central
allegation made by Dr Lawrence Tomlinson in 'Bank's lending practices:
treatment of businesses in distress', 11 April 2014, p 4 Back
85
Lawrence Tomlinson, Banks' Lending Practices: Treatment of Businesses
in distress, 25 November 2013, p 2 Back
86
Lawrence Tomlinson, Banks' Lending Practices: Treatment of Businesses
in distress, 25 November 2013, p 6-7 Back
87
Lawrence Tomlinson, Banks' Lending Practices: Treatment of Businesses
in distress, 25 November 2013, p 8 Back
88
Lawrence Tomlinson, Banks' Lending Practices: Treatment of Businesses
in distress, 25 November 2013, p 9-10 Back
89
Lawrence Tomlinson, "Banks' Lending Practices: Treatment
of Businesses in distress," 25 November 2013, p 11 Back
90
Lawrence Tomlinson, "Banks' Lending Practices: Treatment
of Businesses in distress," 25 November 2013, p 14 Back
91
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress.' 11 April 2014, p 3 Back
92
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress.' 11 April 2014, p 4 Back
93
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress.' 11 April 2014, p 51-52 Back
94
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress.' 11 April 2014, p 6 Back
95
"RBS responds to Clifford Chance report into allegation of
systematic fraud,' RBS news release, 17 April 2014 Back
96
RBS independent Lending Review, Sir Andrew large, 25 November
2013 Back
97
RBS independent Lending Review, Sir Andrew large, 25 November
2013, p 52 Back
98
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress." 11 April 2014, p 8 Back
99
RBS responds to Clifford Chance report into allegation of systematic
fraud, RBS news release, 17 April 2014 Back
100
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress." 11 April 2014, p 6, 22 Back
101
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress." 11 April 2014, p 36 Back
102
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress." 11 April 2014, p 35 Back
103
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress." 11 April 2014, p 7 Back
104
Q 540 Back
105
Qq 612-613 Back
106
Q 614 Back
107
Q 617, 619 Back
108
Q 620 Back
109
Q 622 Back
110
Financial Conduct Authority, "Update on independent review
of Royal Bank of Scotland's treatment of business customers in
financial difficulty," 24 February 2015 Back
111
Financial Conduct Authority, "Update on independent review
of Royal Bank of Scotland's treatment of business customers in
financial difficulty," 24 February 2015 Back
112
Sir Andrew large, RBS independent Lending Review, 25 November
2013, p 52-53 Back
113
Sir Andrew large, RBS independent Lending Review, 25 November
2013, p 52 Back
114
Oral evidence by Sir Andrew Large to the Treasury Committee, 22
January 2014, q 34 Back
115
Sir Andrew large, RBS independent Lending Review, 25 November
2013, p 52 Back
116
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress." 11 April 2014, p 25 Back
117
Clifford Chance LLP, "Independent review of the central allegation
made by Dr Lawrence Tomlinson in 'Bank's lending practices: treatment
of businesses in distress." 11 April 2014, p 25 Back
118
Qq 563-564 Back
119
Q 566 Back
120
Qq 578-9 Back
121
Q 596 Back
122
SME0144 Back
123
Q 578 Back
124
Q 531 Back
125
Letter from Sir Andrew Large to Andrew Tyrie MP, 8 July 2014 Back
126
Letter from Sir Andrew Large to Andrew Tyrie MP, 8 July 2014 Back
127
Letter from Chris Sullivan to Andrew Tyrie MP, 15 July 2014 Back
128
Letter from Andrew Tyrie MP to Sir Phillip Hampton, 23 July 2014 Back
129
Letter from Sir Phillip Hampton to Andrew Tyrie MP, 22 August
2014 Back
130
Deputy CEO Sullivan to leave bank early, Martin Arnold, Financial
Times, 5 January 2015; RBS begins to dismantle controversial restructuring
division, Julia Kollewe, The Guardian, 8 August 2014 Back
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