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 "I think they've found something," he said, according to three
sources with direct knowledge of the meeting.
McEwan was referring to the regulator's investigation into claims by
customers that RBS, once a colossus with a balance sheet nearly
twice the size of the British economy, had deliberately pushed small
businesses to bankruptcy so it could pick up their assets cheaply.
For three years, the bank has vigorously denied the allegations
about its Global Restructuring Group (GRG).
But the meeting at the Financial Conduct Authority (FCA) convinced
McEwan outright denial was no longer an option, according to
insiders. Now, they say, the 300-year-old lender is considering a
compensation scheme for small firms – from tyre makers to nursing
home operators – which say GRG abused them or forced them out of
business.
The cost to the bank, rescued during the financial crisis by British
taxpayers, could run to billions of pounds. But bank executives hope
the step might help draw a line under the mounting tally of blunders
and alleged wrongdoing which has dogged RBS since 2007, crippling
its reputation, impeding its recovery and delaying government plans
to re-privatize it.
Of the many scandals that have entangled RBS in recent years,
executives say McEwan feels the GRG allegations have been most
damaging. McEwan, who became chief executive at RBS in 2013, is
trying to refocus the bank. He has closed or sold its investment
banking operations and wants to place small-business customers at
its heart, recasting it as a predominantly domestic lender that
supports Britain's economy.
Asked to comment on the bank's plans, Jon Pain, RBS's Chief Conduct
and Regulatory Affairs Officer, said the bank is cooperating with
the regulatory investigation. "We have no plans for any redress
scheme in relation to this matter," he added.
The sources within RBS agreed there are no specific plans for a
redress scheme yet. But they said there has been a change of
thinking in recent months. The bank's board will make a decision on
possible compensation after the regulator's report is published,
they say, and it has hired external advisers to make sure it is
fully prepared.
The FCA declined to comment on the scope of its investigation, but
reiterated an earlier statement that it expected to complete its
review of RBS by the end of the year.
RBS could offer compensation without admitting liability, lawyers
said. Even this would be "a real seismic change," according to Dean
Nicholls, a partner at law firm Gordon Dadds. He has acted for
several clients in cases against GRG and says he learned of the
bank's thinking through legal circles.
"They seem to be taking a completely different approach, perhaps
driven by a combination of what's been happening at a political
level and the FCA's position," he said.
SHARE SALE
Paying customers off could avoid costly litigation, which includes a
possible class action from hundreds of businesses.
Dean D'Eye, a bankrupt property developer, is one potential
claimant. He says he wants to pursue a claim against RBS for
"millions of pounds." He alleges the bank's NatWest division pushed
his business into GRG without his knowledge and unfairly called in
all his debts at no notice.
"It's not just the money," he said. "For what they put me and my
family through I want an apology and an annulment to my bankruptcy.
I would rather expose them for the diabolical liberty they have
taken."
RBS declined to comment on his case.
A compensation scheme would make the bank's risks clear, which could
also help Britain's Finance Minister George Osborne sell more of the
state's shares in RBS. The bailout in 2008 and 2009 cost a total 46
billion pounds ($70 billion). The ministry sold off a first batch of
stock in August, taking a loss of more than 1 billion pounds as it
cut its holding to 73 percent.
The shares are now trading at 313 pence, leaving taxpayers with a
current loss of around 16 billion pounds on their remaining stake.
The finance ministry declined to comment.
FROM SOLUTION TO PROBLEM
The RBS division that became GRG was set up in the early 1990s to
take troubled businesses and help turn them around.
After the financial crisis – which Britain's government blamed in
part on the failings of RBS's past management – GRG was seen as part
of the solution to the bank's problems.
The fees it collected helped offset RBS's bad debts and improve the
bank's capital strength. At its peak in 2010, GRG handled tens of
thousands of British businesses with a combined value of around 90
billion pounds. That's twice as much as the state spent to bail out
the bank.
Starting in 2008, complaints trickled out from small businesses
which said RBS had forced them into dealing with GRG. They claimed
that GRG had undervalued their assets and imposed punitive fees.
The complaints were often posted on social media and at first made
no impact. They were eclipsed by other allegations and accidents,
including RBS's part in attempts to rig foreign exchange and
interest rate markets, and a U.S. investigation into its sales of
bonds backed by home loans. The bank also drew flak over its
reluctance to cut executive pay and a software glitch which
disrupted customer payments.
By 2013, Osborne was pressuring the bank to clean up the messes and
focus on domestic lending. McEwan, a New Zealander with a decade's
experience in retail banking, was seen as best-placed to do the job.
Though softly spoken, McEwan, a 6-foot-2 supporter of New Zealand's
All Blacks rugby team, has brought a new down-to-earth dynamic to
the bank, insiders say. On his appointment he told one newspaper his
goal was to make RBS number one for customer service by 2020.
He was barely a month into the job when a report surfaced which made
that goal look tough. Compiled by Lawrence Tomlinson, a businessman
from the north of England employed by the government as an
"entrepreneur-in-residence," it zeroed in on the complaints about
GRG and alleged that RBS had systematically set out to break its
small business customers to generate profits for the bank.
Tomlinson said RBS "artificially" distressed otherwise viable
businesses and put them on a journey toward administration,
receivership and liquidation. Once in GRG, they were tipped toward
insolvency and the bank bought up their assets "at cut prices." He
later told members of parliament that more than 1,000 companies had
come forward alleging "morally wrong" treatment by GRG.
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The report "came as a major shock” to the RBS board, said a senior
RBS source. The bank denies the allegation that it systematically
abused small businesses.
"DEEPLY TROUBLING"
RBS asked law firm Clifford Chance to undertake a "thorough and
independent review." After five months, Clifford Chance found no
evidence for the allegations. RBS welcomed the report, for which it
had paid 1.5 million pounds.
Britain's regulators also acted. Bank of England Governor Mark
Carney told parliament the FCA should conduct an investigation into
what he called the "deeply troubling" claims. The FCA said it would
publish its investigation in late 2014. Britain's Serious Fraud
Office said it may launch its own investigation after the FCA.
Pressure was mounting. Scottish businessman Neil Mitchell brought
together more than 370 firms which believe they have a claim against
GRG. The group is planning an "unlawful means conspiracy action"
case against the bank and four individuals, alleging they conspired
to perform illegal acts.
"There's a growing groundswell of potential claimants. More and more
people are coming forward," Mitchell said.
RBS executives were called to appear at a parliamentary inquiry into
Tomlinson's allegations in June 2014. They said GRG had not become a
"profit centre" for RBS. But five months later, RBS chairman Philip
Hampton wrote to the committee to retract that statement and
apologize for what he called "misleading" evidence. He said GRG was
a profit centre; the RBS executives had made "an honest mistake."
In August 2014, RBS said it was closing GRG. Hampton and two
executives who appeared before the committee have left RBS.
More than a year later, the FCA's review has yet to be published.
"SPOOKED"
On the morning of May 8, McEwan ordered a driver to take him from
RBS's office at Bishopsgate in the City of London to the FCA's
concrete and glass headquarters in Canary Wharf.
Britain was waking up to a surprise election outcome. The
Conservative Party had increased its majority and could govern the
country on its own. For McEwan, that meant Chancellor Osborne, the
man who had backed him to reinvent RBS as a trusted stalwart of the
entrepreneurial economy, would remain in office and keep pushing to
sell RBS.
As well, The Times of London had just published a report which
appeared to back Tomlinson's claims and went even further,
suggesting RBS had forced companies into default to help it keep its
own capital ratios healthy. The bank had denied the allegation, but
McEwan urgently needed clarity from the regulator about when it was
going to publish its report.
At the meeting, McEwan pushed the FCA officials to publish their
review as soon as possible, three sources with direct knowledge of
the meeting said.
What he heard in reply left him "spooked" and convinced that the
regulator would take punitive action against the bank, one of them
told Reuters.
The FCA, which had already reviewed evidence submitted by Tomlinson,
had asked to see thousands more documents, one of the sources said.
Its investigation had been extended and would be "broader and
deeper" than the bank had expected.
The review would not be published until the end of 2015 at the
earliest, meaning speculation about its findings would persist.
That, the sources said, would make it harder for the government to
sell RBS stock, because a sale prospectus would have to detail all
of the bank's outstanding risk relating to past misconduct and
litigation.
"In any sale, if something bad happens after, you risk criticism,"
said a source directly involved in the sale of the government's
stake. "If you wanted to wait (until) there were no grey clouds on
the horizon, I think you'd be holding this stake for much, much
longer than you would want to," the person added.
It was at a board meeting at the end of May that RBS directors
decided to change strategy, insiders said. The directors agreed to
hire external advisers, officially to assist with the bank's
response to the FCA's investigation, but also to prepare a scheme to
compensate GRG customers.
The advisers - accountancy firm PwC and legal firms Denton Wilde
Sapte and CMS Cameron McKenna – declined to comment on their remit.
The inside sources said the bank is preparing for a multi-billion
pound bill at most. Some lawyers doubt it will ever cost that much.
Many of the firms GRG dealt with no longer exist, so their former
owners won't be able to claim compensation.
And firms that have survived would have to claim what are known as
consequential losses. These take into account missed opportunities,
to try to take businesses back to where they were before an alleged
wrongdoing.
Claimants have to demonstrate missed opportunities, slower growth,
soured business relationships or even ill health brought on by
financial difficulties. None of these are easy to prove.
And even if RBS goes ahead with a compensation scheme, not all its
former customers would sign up. D'Eye said he, for one, would not:
"I will never trust a bank again in my life."
(Edited by Sara Ledwith and Simon Robinson)
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