RBS announced last month that SME customers will automatically be entitled to a refund of the fees that they were charged whilst being managed by the Bank’s Global Restructuring Group (GRG) between 2008 and 2013 following a review by the FCA.
This offer follows on from the payments RBS has made in recent years for the mis-selling of PPI and interest rate swap products which has resulted in £1.8 billion of redress costs.
This article examines possible consequences for SMEs that were in GRG during the relevant period which now are, or have been, in an insolvency procedure.
Between 2008 and 2013, many SMEs in financial difficulties were placed in the Bank’s specialist turnaround unit GRG. Whilst a customer was in GRG, RBS levied a number of complex fees on the customer but often failed explain the reasoning for charging them.
In January 2014, the FCA commissioned a review into RBS’s treatment of its customers. In September 2016, the FCA concluded that RBS:
- Failed to comply with its own policy in respect of communicating with customers, with the standard the communication being poor and in some cases, misleading;
- Failed to support SME businesses in a manner consistent with good turnaround practice;
- Placed an undue focus on pricing increases and debt reduction without due consideration to the longer-term viability of customers;
- Failed to document or explain the rationale behind decisions relating to pricing following transfer to GRG;
- Failed to ensure that appropriate and robust valuations were made by staff, especially where significant decisions were made by RBS based on those valuations;
- Failed to adopt adequate procedures within GRG concerning the relationship with customers and to ensure fair treatment of customers;
- Failed to identify customer complaints and handle those complaints fairly;
- Failed to handle the inherent conflicts of interest; and
- Failed to exercise adequate safeguards to ensure that the terms of certain upside instruments, in particular Equity Participation Agreements, were appropriate.
Despite their adverse findings, the FCA estimated that over one third of the customers transferred to GRG would have faced insolvency regardless of RBS’s actions. Of the potentially viable SME customers transferred to GRG, the FCA concluded that most of them experienced some form of inappropriate action by RBS. However, the FCA also concluded that, in a significant majority of cases, it was likely that inappropriate actions did not result in material financial distress to these customers.
2) RBS’ RESPONSE
On 8 November 2016, RBS announced that:
- A new complaints procedure will be set up and overseen by former High Court Judge Sir William Blackburne should SME customers wish to complain about their previous treatment by RBS in GRG; and
- SME customers who were in GRG at the relevant time will be entitled to an automatic refund of the following charges:
- Management / Monitoring Fees: charged to cover the increased costs incurred in relation to managing customers in restructuring situations.
- Asset Sales Fee: charged on the sale of an asset to reflect the Bank’s increased risk profile, such as in circumstances where the customer’s cash flow could not meet the increased margin required by the Bank on an ongoing basis.
- Exit Fee: charged at the point of repayment to reflect the Bank’s increased risk profile, such as in circumstances where the customer’s cash flow could not meet the increased margin required by the Bank on an ongoing basis.
- Mezzanine Fee: charged to reflect mezzanine risk (i.e. the debt level above the Bank’s standard senior debt appetite), usually expressed as a percentage of the mezzanine debt level.
- Ratchet Fee: charged by the Bank in relation to a repayment milestone.
- Risk Fee: charged to reflect an increased risk profile in continuing to support a customer for a period of time following an event of default or failure to agree a formal renewal of expired contractual facilities.
- Late Management Information (MI) Fee: charged for the late submission of management / financial information by the customer.
- Accrued interest will also be repaid in respect of the fees refunded to SMEs.
RBS will review all customers individually to determine if a refund is due. Once that review is completed, RBS will write to SMEs to advise what refunds might be payable in order to arrange payment, together with any accrued interest.
Although the Bank will automatically refund the fees paid, RBS will apply either legal or contractual set off where it believes it is appropriate to do so.
If the SME customer is in an insolvency process, the refund (subject to any set-off) will be payable to the appointed insolvency officeholder and not the former directors / individual trader as the refund will constitute an asset of that company / the trader’s bankruptcy estate. This will apply even if the SME has been dissolved or the individual partners have since been discharged from bankruptcy.
4) WHAT HAPPENS IF THE SME HAS BEEN DISSOLVED
Some corporate SMEs owed refunds will no longer exist, having been dissolved at Companies House. Therefore for the company to receive the refunded fees, a court application to restore the company to the register will need to be made. Once restored, the company will be returned to the position it had previously been in when it was struck off. However if the company had been in Administration prior to the strike off, it will not mean that the company will return in Administration. This is because the Administrator may have resigned prior to dissolution or alternatively, their appointment may have ceased to have effect if more than a year has passed since their appointment. In those circumstances, directions from the court will need to be sought to clarify how the company, once restored, will be controlled.
In a similar vein, if the company had been in liquidation, the court may not have the power to appoint the former liquidator, particular if the liquidator had vacated office prior to dissolution. On restoration, the court could make a winding up order on “just and equitable” grounds, leading initially to the appointment of the Official Receiver as Liquidator, although the court sometimes overlooks this and appoints a named insolvency practitioner.
Once restored, the insolvency officeholder will be able to reclaim any refunded fees from RBS and distribute them to creditors in the normal way.
5) CONSEQUENTIAL LOSS CLAIMS
Despite the FCA’s conclusions, some SMEs may have suffered other losses as a result of cash-flow restrictions caused by RBS’s charges which, taken together, had a negative impact on the SME’s business.
RBS will not be making automatic payments for consequential losses. Therefore any SME wishing to seek compensation for consequential losses from RBS should first submit a complaint under the procedure being overseen by Sir William Blackburn and may need to resort to court proceedings if no satisfactory redress is achieved.
Once again, RBS’s actions during the financial crisis of the last decade are coming under scrutiny as a result of the way they treated their customers. Although this issue only affects RBS, it may well be that in time other banks find themselves having to make similar redress for the fees they charged their customers.
Further information can be found at: