[1].  Gutto Bebb, the Welsh MP that has really been a a heroic champion of British SMEs impacted by the banks’ misbehaviours, put forward the following motion: 

“That this House believes that the Financial Conduct Authority in its current form is not fit for purpose; and has no confidence in its existing structure and procedures.”

The statements by many of the MPs was an absolutely condemnation of the FCA and its apparent failures to help SME businesses in the UK affected by the bad behaviour of banks.  GRG was central within this debate (as were Interest Rate Hedging Products).  The Government confirmed that the GRG report would be with them by the end of March 2016.

Since then the FCA has lost its CEO, Tracey McDermott, who used to be the FCA’s enforcement officer[2].  Her former department has now faced calls to be hived off as an independent and stand-alone/alongside the FCA because of the apparent failures to take action against transgressing regulated firms[3].  Indeed, the recent fines in the US and a failure to fine the same people in the UK shows that the FCA is failing to tackle banks and bankers whilst the US carries on imposing fines[4].

So what is it that we know about the GRG report, what is it that we think we know about the GRG report and what is it that we know we do not know?

We know that the report is, in simple terms, investigating whether RBS used its turnaround division to artificially default business customers so that new loans could be agreed with higher interest rates (pegged to LIBOR), higher fees and lower Loan To Value ratios.  They did this for a number of reasons.

Pre 2008 business loans under £5 million tended to be on bank base rate.  Banks borrow money on the wholesale markets using LIBOR.  When LIBOR went up to nearly 7% and base rate went down to 5% in 2008 all banks scrambled to move loans.  Then base rate went to 0.50% (and is now 0.25%) so banks, including RBS, moved customers to LIBOR.  Most customers did not want this, as LIBOR tends to track a little above base rate.  Banks needed the move because that difference was costing them too much money – so if there is an impasse, the only way of doing it is defaulting the loans and imposing new loans.

The Bank needed more fees.  2008 was a bad year for RBS.  It needed money.  If it could only just find a way of changing all of the loans to impose new charges, then RBS could bring in the money.  Between 2008 and 2014 RBS managed to do this by defaulting a very large number of loans.

RBS also needed to change the loans because pre 2008 LTV rates tended to be 70%, some as high as 90%.  Under new rules that were brought in in 2010/11 (and were anticipated as early as 2008) the highest ratio that the banks should have is 65% but 50% to 60% was favoured.  The higher the LTV rate the more capital the bank had to hold – the lower the rate, the more capital the bank could use to make money.  Property prices also plummeted in 2008.  So, the previously 70% rate was in some occasions getting on for 90 to 120% if taking account of lower property prices.  Many people were still comfortably within the 70% range.  But the bank wanted 60%, possible as high as 65% but preferably as low as 50%.  So many people who were not in breach suddenly found their assets re-valued at ridiculously low figures.  That, plus the ones in genuine LTV breaches, allowed the bank to default the loans of thousands of customers, impose new lower LTV rates.  This also allowed the bank to force customers to sell assets to pay down loans – thus bringing in money.

Finally, as part of this atrocious massacre of British businesses, the bank also wanted to impose Property Participation Fee Agreements (“PPFAs”) on businesses and force businesses to give RBS’s subsidiary (West Register now known as Sig 1 Holdings and Sig Number 2) preferential shares in their businesses.  Essentially this did two things.  It gave RBS equities that it could hold as capital, which was a new requirement on the banks and thus stopped the bank holdings equities that it needed for its daily business, but it also created a future cash flow when it “cashed in” its PPFAs and forced the business to buy back the preferential shares.  RBS was simply imposing yet another fee on the businesses for the pleasure of being dealt with by GRG.

The FCA’s s. 166 report was investigating this.

What we do not know is whether the s. 166 report into GRG found evidence of fraudulent activities by bank employees, nor whether there was evidence that RBS purposefully defaulted businesses when the business was not in default.  Many practitioners and many, many customers believe that this is what happened.  However, if a business brings a claim in Court it is the business that must evidence the alleged fraud.  No solicitor or barrister may advance a claim of fraud in Court unless there is clear and compelling evidence of fraud.  Businesses therefore cannot argue it unless there is good evidence.  The s. 166 report might provide that evidence.

What we think we know is that the first draft of the s. 166 report appears to have surfaced in August or September 2015.  RBS hired quite a number of professionals to help it, including a firm intended to help RBS improve its reputation.  Then things became quiet until the FCA confirmed that it had received the report in April 2016.  It appears that RBS may have hired these professionals because it knows that the s. 166 report will be a disaster.  It may not be – but having worked with GRG victims for many years, Muldoon Britton’s solicitors will be very surprised if there are no findings in this report that are not highly damaging to RBS, its reputation and its ability to defend cases in Court.

Unfortunately, businesses up and down the country have elected to wait for the report.  Most of the really significant bad activities at RBS took place in 2008 to 2010.  Limitation is six years (except where something was not known due to fraud) and so many businesses have already lost the ability to sue, regardless of what is in the report.  Many are about to lose the right to sue if they wait any longer.  RBS is happy for cases to go past the six-year limitation period because it means the customer cannot sue.

We will produce an article this week about the six year rule and about whether the FCA can impose of “review” similar to the IRHP review.  In short, we do not expect that a review can be imposed because West Register and commercial loans are not regulated.  Customers may therefore have been waiting for a review that simply cannot happen.

We wait.  But we urge SME businesses that were negatively and unfairly treated by GRG to contact us.  It is essential that you attempt to seek a standstill agreement with RBS or you issue protective proceedings.  Waiting could mean you have no case.

 

Resources:

[1] Hansard, Commons, Column 710 1st February 2016 at 7:39pm. 

http://www.publications.parliament.uk/pa/cm201516/cmhansrd/cm160201/debtext/160201- 0003.htm#1602023000001

 

[2] City Wire, 13 April 2016 “Tracey McDermott to leave the FCA” 

http://citywire.co.uk/new-model-adviser/news/tracey-mcdermott-to-leave-the-fca/a898017

 

[3] Muldoon Britton 15 August 2016 “FCA: Enforcement And The Future”