Ian Fraser: The “Financial Terrorism” of Royal Bank of Scotland

Yves here. This story of institutionalized pilferage of customer accounts hasn’t gotten the attention it warrants in the US. Even if you are pretty jaded about bank chicanery, I suspect you’ll find this account falls in the category of “no matter how bad you think it is, it’s worse.” And in this case, the victims aren’t the usual hapless retail customers, but businesses.

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser. Originally published at his website

Another of the banking scandals I’ve been covering for more than three years is gaining a wider audience, following the publication of the Tomlinson Report on Monday and this morning’s confirmation from the Financial Times that the Serious Fraud Office is “considering” an investigation into the bank’s alleged theft of customers’ assets.

>Listen to Radio 5 Live’s Stephen Nolan interview me about this topic [the interview starts at one hour 7 minutes]

I first looked into the activities of RBS’s “recovery and restructuring” arm – global restructuring group and West Register – three years ago, publishing a blog that examined RBS’s despicable treatment of Scotland-based businessman Derek Carlyle in December 2010. I first looked at the allegations of “systemic institutionalised fraud” and systemic abuse inside GRG in June 2012. And in October 2012, I provided further details of alleged widespread wrongdoing inside RBS’s global restructuring group and West Register.

This included details of “manufactured defaults” which are when a bank trips a business borrower into breach of covenant through mechanisms including:-

(a) selling interest rate hedging products under false pretenses, and often under duress as a condition of continued funding support

(b) the removal of overdraft facilities at 48 hours notice

(c) arbitrary changes to the terms and conditions of loan agreements, including raising interest rates, adding charges and dramatically shortening loan maturities

(d) “losing” and then “recreating” lending agreements

(e) the placing of false valuations on the customers’ commercial property assets using ”tame” firms of chartered surveyors, which are alleged to include Graham & Sibbald in Edinburgh

Through such mechanisms banks, including RBS, are able to make out that business customers are “in breach” of loan-to-value agreements and/or covenants. In the case of RBS the evidence from several hundred case studies assembled by Tomlinson suggests a pattern of abuse, which while perhaps not systematic, is systemic. Legally or otherwise, the alleged pattern of abuse permits the bank to transfer targeted business customers’ accounts to its “recovery and restructuring” unit GRG. While it is sometimes dressed up as a “hospital” or “intensive care unit” intended to help distressed corporate borrowers back onto their feet, it is actually nothing of the sort. Once a business is in GRG, it is saddled with additional fees and charges, often for wholly spurious reasons, and with often amateurish and unqualified “consultants” posing as advisers and charging £1000 a day plus for what is often wholly inadequate advice.

Once a client firm has been “zombified” and milked for fees, and its carcass is of no further used to the bank, it generally goes into an administration process. There is not enough space to go into the iniquities that can arise from the collusion between RBS and large accountancy firms including PWC, Ernst & Young and KPMG during administrations and receiverships, but suffice to say these parties have been known not to act in the interests of all the affected companies’ creditors. Sometimes, they have been known to favour the sale of commercial property assets to RBS’s shady West Register property arm at prices well below those offered by rival bidders, including what might be considered to be the properties’ legitimate owners. Only about six per cent of corporate and commercial borrowers who enter GRG return to RBS’s performing portfolios (source: RBS annual report 2012)

Both GRG and West Register are profit centres for the bank, and are a bit like private equity funds albeit ones that obtain their assets at knockdown prices. It is at or after this stage in the process that RBS’s West Register arm seizes (or buys at crazily low valuations) the “distressed” customers’ commercial property assets. Like GRG, West Register was established by RBS’s former chief executive George Mathewson in 1992 to try and profit from “distressed” situations in the wake of the 1990-1 recession.

Since I first spoke about RBS’s alleged maltreatment of business borrowers on BBC News (towards the end of the clip) and the Keiser Report in July 2012 I have been deluged with emails, phone calls, voice messages, and texts from SME directors and shareholders who complain that, for no legitimate business reason, RBS snuffed out their life’s work and seized their business assets using the methods described above. I have had people literally crying down the phone about the despicable way in which the bank has treated them, with some in a suicidal state. And, as far as I am aware, most were running profitable, stable, creditworthy businesses, before the bank set out to destroy them — not so called “zombies”.

Victims of the abuse only really have three avenues to go down – sue RBS, complain to their MP or go to the media. However in all three of these routes the odds are stacked against them. Unless they have an MP like Jim Hood or Guto Bebb, complaining to their MP tends to get them nowhere. Speaking on Channel 4 News on Monday, Jesse Norman, MP for Hereford and Herefordshire South, admitted that all 650 of the country’s MPs share a dirty little secret – that their inboxes have for the past four years, been stuffed full with emails from constituents complaining that RBS has snuffed out their livelihoods and destroyed their businesses.

Complaining to the bank, Financial Ombudsman Service or the regulators is a complete waste of time, and will achieve absolutely nothing. It’s also worth noting that Business Secretary Vince Cable has been fully briefed on this scandal since May 2010 but has chosen to do little or nothing about it. He only appears to have taken any real action once the Tomlinson Report was published on Monday.

The putative SFO inquiry, mentioned on the front page of the FT today, (but which I also mentioned in the Sunday Herald on 3 November), which has only arisen thanks to the persistent efforts of businessman Neil Mitchell, former chief executive of Torex Retail, clearly offers a glimmer of hope to the tens of thousands of businesses effected by this scandal, and the majority of the UK population who believe that, if there are criminals inside RBS, they should be prosecuted and convicted for their crimes.

RBS’s decision to refer the matter to the ‘magic circle’ law firm Clifford Chance – which is already said to be acting for the bank in defending itself from claims that it stole customers’ commercial property assets and joined the bank’s panel of law firms alongside Freshfields, Linklaters, Simmons & Simmons, White & Case, Allen & Overy and Eversheds in July 2013 – is a risibly pathetic response to these very serious allegations. I am currently unable to think of an organisation more inclined to produce a whitewash than Clifford Chance.

I will be revealing more about this scandal, including further detail of the methods by which RBS has been plundering SMEs up and down the UK since May 2009 in my book Shredded: The Rise and Fall of the Royal Bank of Scotland, which is published by Birlinn in spring 2014. Not only is this sort of behaviour by RBS holding back the UK’s economic recovery, causing unemployment and reducing tax revenues, it is also creating much unwarranted misery including family breakdowns and even suicide among targeted firms. It is obviously also completely destroying any trust which UK citizens may at one time have had in the banking sector.

For the record, the top people at GRG include Derek Sach, Richard Dorman, James Cresswell, Joss Brushfield, John Baini, David Whatham, Andy Thomson, Neil Graham and Laura Barlow, while the top people at West Register include Aubrey Adams, James Rowney, and the somewhat naive ex LGIM property expert Helen Gordon.

These case studies come from the Sunday Times 24 November 2013

Our livelihood, our home, our marriage — all gone
WHEN Eddie Warren and his wife Cheryl took over the prestigious Bold hotel in Southport, their RBS manager was keen to boast to the local press how the bank’s loan had made the £3.7m purchase possible. But four years later the bank forced the Warrens’ business into administration by withdrawing the lending it had been so keen to provide. In the subsequent fire sale, the new owner became none other than the bank itself, when its property company West Register bought the hotel.

The bank snapped it up for the knockdown price of £1.4m, a year after independent valuers said the hotel was worth no less than £3.1m. Since the proceeds of the sale were insufficient to cover the Warrens’ £2.5m debt to the bank, they have lost everything. Last week Warren said he was bewildered as to how his hotel business, which had a healthy turnover, could have dropped by almost two-thirds in value when West Register took it into its extensive property empire.

“They stole it. Even if the property market was depressed it would be worth £3m,” he said.

The Warrens bought the hotel in 2007 using £1.2m of their money from the sale of their nursing home business. A condition of the loan was that they had to take out an interest rate swap because the bank said this would protect them when base rates rose. This was poor advice. They ended up paying a high fixed interest on their loans as base rates tumbled. Even worse, a peculiarity of some swaps is that the borrower pays penalties when interest rates fall. This added an extra £120,000 a year to their bill. Since it would have cost the Warrens £575,000 to buy out of the swap, the bank added this figure to the loan.

Its internal calculations now suggested the Warrens owed more than £3m at a time when property prices were falling. The Warrens never missed a loan payment, but the new calculations meant the bank could say they were in breach of their covenant because the value of the business was close to the amount borrowed. The business was put into the bank’s Global Restructuring Group, where it was hit with higher charges. In July 2011, the bank valued the hotel and slashed its worth to £1.8m even though an independent report had valued the business at £3.1m the previous year. The new lower valuation meant the business was worth far less than the loan. The business went into administration in autumn 2011 and was bought by West Register for £1.4m a couple of months later.

The hotel is still owned by West Register and the bank says it will at best break even when it is sold. Warren believes the hotel will soon be worth £4m again in a rising market — a substantial profit for the bank. He and his wife have lost £1.2m, their livelihood, their home and are now divorcing.
We have no duty to be fair, ruined businessman told
RBS forced an Edinburgh businessman to sell his home to his company before pushing it into administration and buying its assets in bulk at a fraction of their original value. Leonard Wilcox, 69, is fighting RBS in the courts over the loss of a prime residential site which was first valued at £5.35m but was later snapped up by the bank’s property division, West Register, for £1.1m.

He claims the bank misled him into taking a loan to buy four houses before pulling the plug on the deal and using the threat of bankruptcy to force him to sell his home. RBS is pursuing him for personal guarantees worth £467,000, arguing that it had no duty to “act fairly and in good faith” towards him because the relationship was “purely contractual”. Wilcox believes the bank deliberately “cherry-picked” his site for West Register. “I believe a decision was taken by the bank to take the site, and everything thereafter led up to that happening,” he said.

Wilcox’s firm, Bayfields Ltd, became embroiled with RBS in 2007 when he bought a bungalow in the exclusive Barnton Park Wood area and spotted a development opportunity. He planned to buy the four neighbouring houses and sell the whole site to a developer with plans to add 12 villas. RBS offered to lend Wilcox £2.5m to buy the houses after a valuation showed the complete site would be worth £5.35m with planning permission. He took the loan and signed personal guarantees in May 2008 after his bank manager emailed to say all the security requirements had been “covered off”.

Wilcox set about buying the properties but within months, the manager wrote a panicked email to say she had made a “grievous error” and the bank did not have enough security. The funds were withdrawn and Bayfields was moved into the feared Global Restructuring Group (GRG). A valuation in May 2009 after the property crash said the site would now be worth £3.5m with planning permission — less than its original value, but still more than the £2.5m loan. But GRG brought in a new surveyor who slashed the value to £1.2m.

The bank then demanded that Wilcox sell his bungalow to Bayfields so GRG had the entire site within its control. Wilcox tried to resist but was told he would face bankruptcy if he refused. The sale went through in 2010. The firm went into administration in August 2011. All five houses went into receivership and were sold to West Register. Wilcox and his wife were forced to leave their home.