How a bank brought SMEs to the edge

However, it has become clear that certain bankers did not merely panic when loans started to go bad, they actually sought to profit from the situation and in some cases, may have actively sought to engineer financial collapses in the hope of extracting valuable booty from the ensuing wreckages.

The Treasury Committee of the British parliament recently published a long-awaited report into the Royal Bank of Scotland’s (RBS) treatment of a large chunk of its SME customer base.

The report was prepared for the UK Financial Conduct Authority by the Promontory Financial Group and accountants Mazars.

The report examined the activities of the bank’s Global Restructuring Group (GRG), an offshoot set up by RBS in 2009 to deal with struggling client firms.

Over the years, the activities of GRG have come in for mounting criticism and most of the accusations have been upheld.

The FCA, displaying a timidity one associates with financial regulators, sought to have chunks of the report redacted or blacked out. The Treasury Committee rejected this request, invoking parliamentary privilege to secure full publication in the public interest.

The report concludes that the failures identified at GRG up to 2013 were not “the one-off errors of staff at an institution under significant pressure” but “stemmed from a more fundamental failure to ensure effective oversight and governance and to manage critical conflicts of interest inherent in its activities”.

“Our central conclusion was that there was widespread inappropriate treatment of customers not confined to failures of process. In one in six cases the treatment appears to have caused material financial distress,” according to the report.

And it added: “One reason inappropriate actions were allowed to flourish was that SME customers were often left with no choice but to deal with RBS.”

The review examined almost 6,000 cases handled by GRG during the period. It showed the mistreatment was ‘in certain respects.. systematic”. A large majority of the businesses put into GRG went under eventually.

The report identified a lack of communication, including failure to document and explain the rationale behind decisions.

The group failed to ensure that robust valuations were carried out. Customer complaints were not identified and handled carefully.

Significantly, it noted that “inadequate safeguards were put in place to prevent inappropriate equity participation agreements”.

A key charge levelled at the GRG is that its managers in many cases bullied customers into surrendering control of their businesses in return for continued support. It has been alleged that unscrupulous bank staff engaged in profiteering, including asset stripping.

The 350-page report contains details of a memo circulated among GRG staff called Just Hit Budget. There is advice on “how to get a customer to agree chunky fees and upsides and thank you for it”.

“Avoid round numbers — £5,300 sounds like you have thought about it. £5,000 sounds like you haven’t.”

Other gems included the following: “Sometimes you need to let customers hang themselves.”

And “basket cases: Time-consuming but remunerative.”

Managers were advised to resort to hardball negotiation tactics following the template established by former US secretary of state Henry Kissinger.

The report cites complaints about bullying and intimidation, of a GRG manager “banging on the table” and shouting at the top of his voice, issuing threats of receivership.

A Tory MP on the Treasury Committee, Alister Jack, spoke of his personal experience as a business owner at the hands of the GRG, recalling the “thuggishness” of one GRG manager he dealt with.

The authors criticised the bank for dragging its feet in response to its queries. RBS was certainly slow to admit guilt despite a growing torrent of criticism from customers, many contemplating the wreckage of their lives.

The bank commissioned a leading law firm, Clifford Chance, to produce a report which largely gave them a clean bill of health.

This review was commissioned in response to a highly critical report published in late 2013 by Lawrence Tomlinson of the UK Department of Business.

Mr Tomlinson concluded that RBS was guilty of “systematic institutional behaviour in artificially distressing otherwise viable businesses and putting them on a journey towards administration, receivership and liquidation”. Mr Tomlinson was hard-hitting.

RBS chief executive Ross McEwan delivered apologies and the bank’s chairman, since late 2015, Howard Davies, a leading establishment figure, spoke of his acute embarrassment at the situation.

RBS is the parent of Ulster Bank which set up its own restructuring unit on this island. By the end of 2013, the unit had 250 people employed managing 2,140 cases with a portfolio value of €14bn.

A review has concluded that of 2,140 clients transferred to the unit, just six were turned around, according to Leman Solicitors which represents a group of Irish clients.

A business action group has been established to represent around 60 client firms.

Businessman Bill Cullen filed a challenge in the High Court a fortnight ago against Ulster Bank and the receivers, Kavanagh Fennell arising from the shutdown of his motor dealership.

He is claiming €120m in damages. His partner Jackie Lavin made allegations regarding the treatment of Mr Cullen to an Oireachtas committee.

Ulster Bank chief financial officer Paul Stanley said in response that the sort of behaviour highlighted in the UK report did not involve his bank.

Last year, the High Court in Belfast dismissed proceedings brought by the leading developer Michael Taggart.

Ulster Bank has established a new complaints review process.

The Government has updated its code of conduct for lending to SMEs and it imposes a duty on banks to act

honestly, fairly, and professionally with due skill and diligence, avoiding conflicts of interest and not exerting undue pressure.

There is much scope for ‘slip between cup and lip’ when it comes to the implementation of such a code.

SMEs need to be treated with the same respect as ordinary retail customers.

The lawmakers must be aware that SMEs are the backbone of local economies and that the destruction of businesses by financiers who first over lend and then act either in panic or calculation only serves to sweep the ground from under everyone’s feet.

Perhaps the only real panacea is the re-emergence of full-blooded competition, on a properly regulated basis, in the SME sector.