The Financial Conduct Authority’s review of Royal Bank of Scotland’s treatment of small and medium-sized business customers has delivered a scathing verdict on the governance of its distressed division, the Global Restructuring Group, during the financial crisis.
However, the report found little to suggest that the bank and its internal property and asset management company West Register had deliberately pushed customers into insolvency or profited from doing so, as had been alleged in a 2013 report by businessman Lawrence Tomlinson. FCA chief executive Andrew Bailey also acknowledged that “the most serious allegations had not been upheld”.
Prior to its practical winding down in 2014, West Register was a buyer of last resort and asset manager of properties being sold by RBS following insolvencies. In practice, this created a reserve price and allowed the bank to seek to enhance the value of the assets internally rather than selling them off cheaply.
The 67-page interim summary concluded that GRG was considering West Register’s view on at what level it would hypothetically bid for assets if they were subject to insolvency prior to any process being implemented.
It said: “Information had been inappropriately shared by GRG with West Register. The nature of the information shared was extensive and/or the sharing of it took place at a time when West Register was able to and in some cases did influence GRG’s strategy toward the customer.”
Various roles were “double hatting” across departments, which “added to the risks of inappropriate information sharing or influence over strategy” it was concluded.
In relation to GRG customers generally, the FCA report, undertaken by consultancy Promontory Financial Group, found that the bank had “used its pricing discretion” on punitive payments as a result of defaults or covenant breaches “as leverage to achieve its objectives” in relation to the future of businesses or assets. Also “in a number of cases it was evident that, while exposure was being reduced (either debt was being paid down and/or security cover was increased), pricing was still increased”.
Despite these indictments, in all of the cases examined where West Register had bought assets “there was no evidence that the intent to purchase those assets had been formed prior to the transfer of the customer to GRG”.
Furthermore, it was found that West Register had not bought assets at bargain prices in order to book a profit for the bank and that assets had only been bought at values below the level of outstanding debt owed by the customer, essentially proving their fundamental insolvency.
In only one of the 382 properties that were bought from 166 SME customers had West Register realised proceeds in excess of the underlying customer’s liabilities to the bank. This can be perceived as a reflection of the extent of the distressed nature of the assets that it took on and a justification for taking those assets in.
The interim summary included a number of recommendations for both RBS and the banking sector to better deal with distressed customers, which are particularly pertinent in the context of current market uncertainty.
For RBS specifically they include:
- Fundamentally reviewing its approach to the purchase of distressed assets
- Reviewing its use of third-party firms and secondees to prevent conflicts of interest
- Improving the arrangements around transfer in and out of the turnaround unit
- Providing a greater focus on turnaround options
- Rethinking its approach to pricing of penalties for distressed customers
- Ensuring internal valuations are handled more carefully.
For the wider market the report recommends:
- All banks review their turnaround units in the context of the concerns highlighted in relation to RBS
- A review by banks of how they interact with third-party providers and secondees
- Industry and customer groups develop a code on how banks can best support customers in need of business support
- The FCA works with the government to extend protections available to SME customers.
The summary of the report was released as a result of political pressure, with both RBS and the FCA reluctant for it to be disclosed, the latter having argued that it would not be in the public interest.
Nicky Morgan, chair of the Treasury select committee, has pushed for greater transparency and holds the right to force the publication of the full report. She is due to take advice from the committee’s independent adviser and consider whether the disclosures made in the summary are sufficient before doing so.
GRG/West Register’s major sales
2011 Sells £1.4bn Project Isobel loan portfolio to Blackstone but complex nature means £550m of stapled debt required
2011 Grosvenor House hotel, W1, sold to Sahara Group for £470m following administration of Le Méridien
2012 Two German office towers, Kurfürstendamm Boulevard in Berlin and Die Welle in Frankfurt, sold to AXA IM – Real Assets and Norges for €784m
2014 Maison Portfolio, comprising 139 UK residential assets, sold to Apollo for £210m
2014 Project Swallowtail sees £735m raised from sale of eight retail assets, including £350m sale of Fosse Park in Leicestershire to the Crown Estate and Gingko Tree.
2014 Silverbird Portfolio, made up of 26 regional UK assets, sold to Colony Capital for £97m
2014 Spinningfields campus, home to RBS’s own Manchester office, sold to M&G for £320m
GRG/West Register top dogs – where are they now?
Derek Sach
Then: Head of GRG
Now: Industrial adviser, CVC Credit Partners
Aubrey Adams
Then: Head of property, GRG
Now: Chairman, L&Q; non-executive director, Tritax Big Box and British Land
Helen Gordon
Then: Head of RBS Real Estate Asset Management/global head of West Register
Now: Chief executive, Grainger
James Rowney
Then: Head of West Register, UK
Now: Head of solutions, restructuring at RBS
Andy Thomson
Then: Senior director, real estate restructuring
Now: Head of debt advisory, GVA
Joss Brushfield
Then: Director, RBS Real Estate Asset Management
Now: Partner, Adynaton
EG comment: Complexity and confusion
Taking a view on the rights and wrongs of RBS’s Global Restructuring Group, West Register and the people who worked within them is hideously complex.
Perhaps it is because the FCA’s disclosure is only a summary, or that it has failed (or chosen not) to interview extensively all of GRG’s senior staff, but there are no findings that highlight wrongdoing by particular individuals. Neither are there suggestions of malicious or spiteful behaviour towards customers.
The report’s conclusion is more focused on the inherent flaws in the way in which the divisions and functions were set up and operated, finding that “the overall relationship between GRG and West Register was inappropriate”. A separation between GRG and West Register appeared entirely absent, which is perhaps unsurprising as the latter was a functionary of the former.
Getting to the root cause of the failure was always going to be challenging – especially as there appears to be no internal consensus on what went wrong.
Conflicting views
One insider told me they had highlighted to management a concern that the same people making decisions over insolvencies at the front end were involved with buying in assets at the back end.
In contrast, another claimed that governance and Chinese walls were so strict that information simply wasn’t shared – to the point where it damaged the bank’s core business.
With people’s livelihoods at stake – and one of the world’s biggest banks brought to its knees – passions have understandably run high throughout this saga. But one observation I can make with absolute certainty is that when West Register and GRG were at the height of their activities, the structure and processes of the divisions left many borrowers in a state of utter confusion.
The most common, and most serious, accusation levelled at GRG/West Register is that they were forcing borrowers to default, buying the properties back in at a discounted price and then making a profit that could otherwise have been made by or alongside the original customer. This destroyed what could have been sustainable projects, runs the accusation.
Sympathy for staff
But is that really the case? When claims such as these are bandied about I find it difficult not to feel sympathy for those who worked there. No one – including the authors of this report – has been able to demonstrate that staff acted – or were incentivised to act – maliciously. In fact, the report highlights that in only one instance did West Register ultimately sell an asset at a level above that of the outstanding debt of the previous owner.
So does that imply “good” or “bad” behaviour?
On the one hand it sounds bad. Should West Register not have been creating more money for its majority owner – the taxpayer – in all the other instances before selling on an asset?
On the other, it is kind of “good”. It suggests that the position of the borrower was so bad that the bank was justified in buying-in the property. If it had been left with the customer, the bank might never have recovered the debt.
Of course, the behaviour of RBS cannot be viewed in isolation: compare and contrast its philosophy with that of Lloyds.
After its somewhat botched Project Isobel non-performing loan sale in 2011, RBS took the view that it would keep assets in-house for as long as possible to maximise values and provide the best returns for its shareholders and the public.
In contrast, Lloyds chose to sell off large loan portfolios much more swiftly. Its strategy was to cut losses and try to get back to normal as quickly as it could.
At the time RBS was widely criticised for delaying providing a return and taking control of assets. Yet if it had taken the Lloyds approach, no doubt it would have faced criticism for selling assets too quickly and too cheaply, and passing customers on to aggressive private equity buyers. That was the stick used to beat Lloyds.
Where this mess began
In both cases, the real origin of this whole mess goes back to the point at which the loans were agreed. Whether the hideous overleveraging was the fault of the lender or borrower is another debate. But one thing is clear: it was not caused by those operating within GRG.
No doubt in some instances customers could have been dealt with better. The report’s highlighting of ambiguity and an aggressive approach taken over penalty payments does not scream of an organisation trying to help borrowers out of trouble. However, few who have made mistakes and seen ventures fail, be it through pride or ego, take pleasure in admitting their own failings – blaming someone else is much easier.
When jobs at GRG came up as the crash unravelled they were perceived by many as offering a desirable, unique and almost academic opportunity to be part of a process that was market-formative and unlikely to be seen again for decades. In reality, those working there were on a hiding to nothing.
To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette
