Following the publication of an independent review, it’s been revealed that serious abuse of small and medium sized businesses has taken place by the Royal Bank of Scotland’s Global Restructuring Group (GRG).
The Financial Conduct Authority (FCA) carried out an investigation into claims that GRG mistreated thousands of SMEs transferred into their control following the financial crisis of 2008.
The scandal has shaken the already rocky foundations of public trust in the Royal Bank of Scotland, which remains 75% taxpayer owned. So what exactly happened to the businesses transferred into the hands of GRG between 2008 and 2013?
The FCA’s report reveals GRG manufactured financial distress situations for SMEs through astronomical fees, fines, and demands, causing liquidation and closure for many, all to boost the bank’s balance sheet and bolster their own financial standing.
The report describes widespread inappropriate treatment of customers by GRG, stating that one in six cases they believed to be potentially viable are likely to have suffered material financial distress due to that treatment.
A catalogue of plans and projects were created to drain cash from SMEs, and acquire assets and equity for the benefit of GRG, and in some cases their members of staff, whilst boosting bonuses in the process.
So what did GRG do to cause such devastation to the small and medium sized businesses transferred to them?
The aptly named ‘Project Dash for Cash’ involved forcing businesses to restructure loans simply so GRG could apply extortionate fees and charges, and inflict huge increases in interest rates.
A team leader at one GRG regional office sent a motivational document to staff entitled “Just Hit Budget.” It listed “16 Ways to generate income” with tips including avoiding round number fees - “£5,300 sounds as if you have thought about it, £5K sounds like you haven’t,” and the use of facility letters – “If they sign they can’t complain.”
Once a loan was called in by the bank, GRG managers were able to suffocate the business by cancelling overdraft facilities and claiming any cash available in RBS accounts.
This essentially forced companies into insolvency and the subsequent liquidation of their assets. In some cases property assets were purchased by a group of companies operating alongside GRG, and within RBS, called West Register.
This had a two-fold benefit for GRG and the bank – it recouped their money, but also reduced the value of the bank’s loan book. New regulatory requirements meant that banks had to hold more capital reserves to mitigate potentially risky loans.
Complaints were made by RBS customers that GRG staff had used bullying and intimidatory tactics following the transfer of their businesses to the restructuring unit.
Conflicts of interest were flagged by the bank’s auditors in relation to a group of companies called West Register. This was essentially another division of RBS, with executives from GRG also sitting on West Register committees - notably the property acquisition committee that sanctioned the bank’s bids to buy assets of the distressed businesses.
Thousands of company directors and business owners affected by GRG are taking group action against the bank to claim an estimated £7 billion or more in total. It’s thought that over 1,000 company directors could receive compensation as a result.
The GRG scandal caused considerable distress, both financially and psychologically, to business owners around the UK, resulting not only in the loss of their businesses, but also homes, and in some cases their marriages.
RBS have reportedly set aside £4 million to compensate the customers who suffered mistreatment whilst under the control of GRG. An estimated £1 million of this may be needed to run the compensation scheme, leaving only £3 million in the compensation ‘pot.’
This is clearly an insufficient sum to properly compensate former GRG clients for their loss, so it remains to be seen whether any further official action will be taken to address the shortfall and ensure company directors and SME owners receive the amounts they deserve.
The FCA published only a redacted version of their report, but the Treasury Committee used parliamentary privilege to publish the review in its entirety, citing public interest as the reason. The full report suggests RBS bosses knew what was happening at GRG, and allowed the wilful destruction of UK small and medium sized businesses to continue.
Real Business Rescue is a major part of Begbies Traynor Group, the UK’s largest professional services consultancy. We are restructuring specialists and provide the reliable guidance you need when your business is experiencing financial distress. Call to speak to one of our licensed insolvency practitioners. We offer same-day consultations and work with 78 UK offices.