Overview

An announcement from the FCA of 8 November 2016 heralds the creation of a compensation scheme that the FCA has agreed with RBS. This follows an FCA investigation which found systemic inappropriate treatment of customers in its Global Restructuring Group unit (‘GRG’) in a variety of ways. The compensation scheme is intended to refund certain fees to some GRG customers and also RBS will have an independent assessor (a former judge) to review its handling of complaints from the same group of customers.

This is good news for many business banking customers of RBS who have been complaining for many years that their treatment at the hands of GRG during and after the 2008 financial crisis was unfair and not consistent with GRG’s purported role in assisting them to “turnaround” their business.

The FCA’s investigation concluded that “RBS did not set out to artificially engineer a position to cause or facilitate the transfer of a customer to GRG.” It did find that RBS did not take appropriate steps to safeguard customers from the conflicts of interest inherent in its “twin objectives” for GRG. One of these was to promote RBS’s financial interests by focusing on revenue generation as a profit centre and latterly also by focusing on the protection of capital. Yet, the other one was to simultaneously focus on turnaround and rehabilitating customers in financial distress to return to mainstream banking. This confirms the suspicions of customers that RBS was acting to an agenda unrelated to the financial position of their business and the FCA specifically concludes that RBS had placed undue focus on pricing increases and debt reduction without due consideration to the long term viability of businesses.

It is clear from the FCA and RBS’s statements that this is far from the end of the process, however. The scope and operating details of the compensation scheme are yet to be finalised (although it is clear that it will be limited to smaller businesses with an example given of a limit of £20m on turnover or total debt). The FCA has also not ruled out further action being required and intends to publish more details of its findings when it completes its work. There are indications that many of the same flaws inherent in the Interest Rate Hedging Products Review will also apply to this scheme (lack of transparency, arbitrary financial eligibility criteria).

Time Limitation Issues

A particular concern for customers is limitation periods for court proceedings arising out of the issues identified by the FCA. Where customers are not eligible for the review, they may wish to bring court proceedings in respect of any inappropriate treatment that gives rise to a cause of action. However, in many cases actions could already be time barred and if not may soon become time barred because the events concerned took place 6 or more years ago. This can only be extended for some complaints and in some circumstances such that it is important that customers urgently take legal advice about time limitation.

RBS’s published material discourages customers from using lawyers to deal with any complaints eligible for the review, saying that it is not necessary given the independent assessors involvement. However, whilst the criteria for the scheme remain unconfirmed, customers may rely on being included and then find that they are not, and that court proceedings are out of time. This was a particular problem with the Interest Rate Hedging products review. Also, customers unhappy with the compensation scheme result may find that it is too late to take court action about some or all of their complaints by the time they have received the result.

The FCA findings in more detail

1. The FCA found systemic failures in RBS’s treatment of GRG customers. The FCA has concluded that RBS failed to fully recognise and manage the conflicts of interest inherent in the GRG’s twin commercial and turnaround objectives. Most of the potentially viable customers transferred to GRG were subjected to some form of inappropriate action.

2. The FCA’s statement confirms that the FCA did not find evidence that RBS set out to artificially engineer a position to cause or facilitate the transfer of a customer to GRG. However, there are other failings listed where the FCA says only that such failures were not “widespread” alongside a finding that there were isolated examples of poor practices

3. Therefore this appears to confirm that the FCA found “isolated” examples of;

a) Transferring customers for inappropriate reasons
b) Requesting personal guarantees/cash injections where GRG had already determined RBS would not support the business
c) Unnecessarily burdensome requests for information
d) RBS acting as a shadow director

4. What the FCA did find was widespread was inappropriate treatment of SME’s as follows:

a) Failure to comply with RBS’s policies regarding communicating transfer to GRG
b) Failure to support SME’s in line with good turnaround practice
c) Placing an undue focus on pricing increases and debt reduction without due consideration to the longer term viability of customers
d) Failure to document or explain pricing rationale
e) Failure to ensure appropriate and robust valuations
f) Failure to ensure fair treatment of customers
g) Failure to identify and deal with complaints fairly
h) Failure to handle conflicts inherent in the West Register Model and operation, arising from West Register being an associated company of RBS.
i) Failure to exercise adequate safeguards to ensure the terms of certain upside instruments by which RBS were to benefit, in particular that Equity Participation Agreements (‘EPA’s’) were appropriate