By 2012, when the then Financial Services Authority (“FSA”) announced the review into banks’ behaviour in the sale of Interest Rate Hedging Products (“IRHPs”) it was very apparent to those of us that specialised in this that something was dangerously wrong at the Royal Bank of Scotland.
Clients who had been sold IRHPs by RBS were also telling us of the restructuring group that was trying to put all of them into administration. They almost always had the same tale to tell, but some variations.
Between 2008 and the present RBS would approach the client for a review. They would demand a revaluation of assets and a business review to be undertaken by an accountant. Predictably the accountant’s report would say that the business was perilously close to having no, or substantially negative, cash flows. The valuations would come back and say that the Loan To Value (“LTV”) on the property assets were below the rate agreed in the lending arrangements.
The Bank was thus allowed to default the lending. Huge fees would be incurred by the business. New loans were agreed that substantially increased the margins and moved the lending to LIBOR rather than base rate. More fees would be added. The clients would be told to sell off assets to pay down the loans to get the LTV rate below the new rate, which varied between 50% and 65%.
Cases worked their ways through the system and eventually RBS would say they will move the customer back to main-stream banking, but only if they agreed to an arrangement with an RBS subsidiary (usually referred to as West Register). The arrangement would require the customer to either agree a Property Participation Fee Agreement and/or would require new shares to be created and sold to West Register for a pittance.
Property Participation Fee Agreements (“PPFAs”) had a double benefit for RBS. They were an equitable instrument, and RBS was allowed to use PPFAs as equitable holdings. This helped shore up RBS’s rather below par holdings for the purposes of regulatory requirements. It was the same as holding stocks and shares in a company – it has a monetary value. RBS was simply bleeding customers dry in order to make money and to create equities that it could hold as capital, fixing two birds with one shot. The shares in the companies were the same. The bank could hold them and report them as regulatory capital. That way, RBS did not have to hold its own capital, which it could then use to help grow the business.
Lloyds did a similar thing, but their intention was to simply sell off as many loans as they could to a group known as Promentoria, which is owned by Cerberus Capital Management. Their aim was not to create equities that could be held, they just wanted to remove all former HBOS/Bank of Scotland lending, which created such a toxic problem for HBOS/Bank of Scotland Lloyds in 2008/9 when HBSO collapsed and was rescued.
To put this into perspective, in 2004 the main West Register company (now known as SIG 1 Holdings Ltd) had a turnover of £10,301,772 in 2004, assets of £24,057,408, equities of £2,018,042 and cash of £8,022,751. Forward 10 years to 2014 and they had a turnover of £95,056,493, assets of £184,041,445, equities of £173,574,557 and cash of £57,222,292. Its PPFA income started in 2008 at £1,702,128, rose to a height of £4,802,413 in 2013 and dropped to £2,928,765 in 2014. Between RBS first reporting PPFA income in 2008 up to its last accounting in 2014, Sig 1 Holdings Ltd had a total income of £18,768,688 just from PPFAs. Every last penny of that was a business customer that had been “persuaded” to agree to a PPFA.
Sig 1 Holdings between 2004 and 2014 had an expected tax bill of £102,833,171 and actual tax of £59,833,171, paying RBS a dividend of £97,000,000 in 2014. The many little subsidiaries of RBS simply use cross group losses (quite often losses that are just on paper) allowing them to reduce their tax bills to extra-ordinary levels. The total turnover between 2004 and 2014 was £416,917,199 and paid just £59,833,171 in tax – which no doubt was then reduced further through the cross group accounts.
A good example of how this works is looking at RBS’s Care Home companies. Between it being set up in 2006, this small group of companies had a combined income of £339,686,138 and an expected tax bill of £4,093,398 but only paid £0.00 in tax.
So, between 2008 and the FSA’s announcement in 2012 about the IRHP reviews saw many practitioners pressing for an investigation into RBS and its now infamous Global Restructuring Group (“GRG”). This was largely ignored, despite that it was in the media, a lot.
Unexpectedly, Lawrence Tomlinson issued a report into RBS’s use of GRG in November 2013. It made sensational headlines. The Financial Conduct Authority had no option but to undertake a review. This is done by way of s. 166 Financial Services & Markets Act 2000. Two accounting/auditing firms were instructed in January 2014 to undertake the review. Most practitioners expected it to take about six months. It took until April 2016. That is an extraordinary amount of time.
What is upsetting and unfair is that it appears that the FCA will not release the report in full – it may not even release the report at all in any form. Many, many GRG victims will need the evidence from this report to help them sue RBS. RBS is very clever – it has a lawyer at every meeting so that nothing sensitive can ever be disclosed in litigation. In England & Wales it is for the claimant, in the most part, to evidence their case. With GRG this can be quite difficult, because almost all of the evidence is held by RBS, who will not release anything unless absolutely forced to or unless it damages the client’s case, in which case RBS gleefully releases it.
Most practitioners saw the s. 166 report as being a unique way in which a case may start to be evidenced. But we have been waiting since April 2016 for the FCA to tell us something, anything. The last public update from the FCA was in April 2016:
So, what do you need to do?
Many people wanted to wait until the FCA’s s. 166 report is released before pursuing a claim. RBS wanted customers to do that, as it would mean that the cases would become time barred under the usual six year rule. I personally have had to break the distressing news to a client that his very good case could not proceed because he had waited too long. We had the same conversations with IRHP clients – they waited for the review before deciding what to do. When RBS rejected their cases they demanded to sue, and could not understand why litigation was no longer an option.
It appears to us, the practitioners who deal with this, that the whole review by the FCA has been one giant red herring. Practitioners welcomed the review. To now find that the FCA is effectively burying the bad news on behalf of RBS has meant that people, genuine hard working entrepreneurs, have lost the ability to sue, because for a second time they had hoped that the Government in the form of the FSA and FCA, were actually on their side. It appears not. The review has been kicked off into the long grass.
Businesses still are becoming crippled through having to find extra money to pay for the PPFAs and to buy back their shares from the RBS subsidiaries like West register (now Sign 1 Holdings Ltd). It is a real shame, because between the banks and the regulator, this country has probably lost quite a number of intrepid entrepreneurs who will no longer risk it all because over the last 10 years they have been kicked in the teeth time and time again, with no apparent respite in sight. The country as a whole has suffered because of this lost generation of entrepreneurs have been lost to UK business. Many have retired with a fraction of their pre 2007 assets and money in tact – mostly the Banks have leached away the last of their assets, income and retirement pensions. Neither the Government nor the FCA seem to care about this.
You should therefore contact a law firm like Muldoon Britton, that specialises in litigation claims against banks, to consider what your case is, if you are time barred and how you can take things forward. Do not delay, because five months after the s. 166 report was given to the FCA and it looks increasingly like it will never be released thus protecting the Government’s shareholding in RBS.
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