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RBS will pay back £400m to small businesses

Royal Bank of Scotland has promised to pay hundreds of millions of pounds in compensation after it was found to have “systematically” mistreated thousands of small and medium-sized businesses.

The Financial Conduct Authority published the preliminary findings of an investigation into the conduct of the bank’s Global Restructuring Group, which revealed “widespread inappropriate treatment” of businesses.

This included charging excessive and opaque fees, conflicts of interest at the heart of the group’s business model, misleading customers and wrongfully taking equity stakes in companies.

Ross McEwan, the bank’s chief executive, said yesterday: “I am very sorry that we did not provide the level of service and understanding we should have done.”

He admitted that “serious failings” had been identified and that the findings made for “very uncomfortable reading” for the bank.

RBS has set aside £400 million to set up a new complaints scheme and to return complex fees that were wrongfully charged to companies.

The restructuring business was set up as a turnaround unit that was supposed to return struggling companies to financial health. However, the bank’s customers were not told that in fact its primary goal was to repair the bank’s capital position.

Promontory Financial Group, which led the investigation on behalf of the FCA, identified nine areas in which the bank had failed its customers. These included placing an “undue focus on pricing increases and debt reduction without due consideration to the longer-term viability of customers”.

RBS plans to return money to about 4,000 businesses out of about 12,000 small and medium-sized companies that went through the group between 2008 and 2013.

However, for several of the most serious allegations, Promontory did not find widespread evidence of misconduct, although it noted some isolated examples of poor practice.

Promontory found that there was not a widespread practice of identifying customers for transfer for inappropriate reasons, such as their value to GRG rather than their need for help, for example. Almost two thirds of customers were found to be potentially viable. The FCA said that most of these had experienced some form of inappropriate action by RBS. However, the regulator added that in a significant majority of cases, it was likely that inappropriate actions and fees “did not result in material financial distress to these customers”.

Lawrence Tomlinson, who owns the Ginetta motorsport company, accused the bank of putting profitability before the viability of small businesses

Lawrence Tomlinson, an entrepreneur, accused the group in 2013 of “artificially distressing” businesses. “It has taken the bank three years to admit that the core elements of my findings were correct,” he said yesterday. “The bank put profit ahead of the viability of businesses.” Mr Tomlinson, who runs Ginetta, a motor sport business, said that the compensation scheme was an “important first step” but added that more detail was needed before the bank could be considered cleared of the scandal.

He said it seemed inconceivable that Promontory could conclude that charging inappropriate fees to small companies during an economic crisis did not lead to their financial distress.

West Register, the bank’s property division, was accused of using its position inside the bank to strip GRG companies of their assets. Promontory said that RBS had failed to handle “conflicts of interest inherent in the West Register model” and identified problems with how the bank had valued the assets that customers’ loans were secured against. However, it found that “there were no cases identified where the purchase of a property by West Register alone gave rise to a financial loss to the customer”.

Chris Richardson, who lost a hotel that he had been developing in Kent after it was purchased by West Register from GRG in 2010, said: “This is the most positive news I’ve had in six years, although I still have my reservations. Not all of [Promontory’s] conclusions are correct, so I shall be writing to the FCA.”

Notes of an RBS conference call seen by The Times show that valuers appointed by the bank openly discussing the valuation of Mr Richardson’s hotel, the Coniston, with West Register before the company was in administration.

The FCA said that it was still considering Promontory’s findings. Enforcement action against RBS has not been ruled out, although it said that its options were limited as commercial lending is unregulated.

Bully Banks, set up to represent victims of interest rate swap mis-selling, questioned why RBS was establishing a compensation scheme before the FCA’s full findings had been announced, saying that it feared a “whitewash”.

Behind the story
Those overseeing compensation for small businesses treated badly by Royal Bank of Scotland’s restructuring unit would learn from mistakes made during the scandal surrounding mis-sold interest rate swaps, MPs were told yesterday (Katherine Griffiths writes). The Financial Conduct Authority’s scheme to compensate the victims of swap mis-selling has been widely criticised for being opaque and too favourable to banks.

Sir William Blackburne, a retired judge, will set up the new scheme, oversee it and decide on appeals. Having a third party in charge was a key improvement on the swaps arrangement, which lacked “transparency”, Andrew Bailey, chief executive of the FCA, said.

RBS said that affected companies “automatically” would be repaid complex fees charged by GRG and would be given access to a dedicated complaints scheme.

However, if a business went bust while in GRG, the money will go to the administrators or liquidators. Directors of insolvent companies will be unable to access the complaints scheme without the permission of their administrator or liquidator. The scheme will cover small and medium-sized companies with debt facilities of up to £20 million between 2008 and 2013.

Speaking to the Treasury select committee, Mr Bailey said that a tribunal system could be set up, similar to the Financial Ombudsman Service but for more complex corporate complaints. He said that “ad hoc redress schemes” were often problematic, as “people feel they haven’t had their day in court. If there were to be a process that could substitute for this, it would be a big step forward.”

Promontory’s full report may never be published because it was an official section 166 inquiry. These are normally confidential, as publication could deter others from co-operating, he said.