By Kalvin P. Chapman 22/09/2016
As outlined by Muldoon Britton previously, the Department for Innovation & Skills issued a report by its entrepreneur in residence, Lawrence Tomlinon in November 2013. That report identified some of the horrific things alleged to have taken place in RBS’s infamous GRG division.
In January 2014 the FCA instructed an independent skilled person review into GRG pursuant to s. 166 Financial Services & markets Act 2000. It is usually referred to as a s. 166 report.
During a tumultuous debate in the House of Commons on the 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 Rt Hon Harriet Baldwin, who was the Economic Secretary to the Treasury, told the House:
“Let me reassure the House that I expect to see the conclusions of the FCA’s investigation into [GRG] in the first quarter of the year.”
The FCA updated its website on 13 April 2016 to say:
“The FCA received the draft final report from the skilled person. There are a number of important steps to be taken before the report is finalised. The FCA is carefully considering the contents of the report, will review underlying evidence, where appropriate, and will discuss the findings with the skilled person. RBS will be given the opportunity to review the report. The timing of any substantive announcement by the FCA will therefore depend on how quickly these steps can be completed. The FCA remains committed to completing this complex review as soon as possible.”
When the then acting CEO of the FCA was questioned by the Treasury Select Committee on the topic the following exchange took place at question 253:
“Q253 George Kerevan: My final question is on something you have not published. We had been expecting some time this year to have the report on what you were doing on RBS, on the global restructuring, which you had originally initiated and said would come out this year. Again in the welter of announcements that were made around Christmas-time, you have announced that it has been put off a year. Am I right?
Tracey McDermott: Originally we said that we hoped to have it before that. We had said that we hoped to have it published by the end of 2015. We wrote to the Minister and possibly also to the Committee to say that, actually, it was not going to be possible to publish it. We are expecting it to be published in the early part of this year. We are endeavouring to get that finalised and ready to be published as soon as possible.
Chair: We are likely to come back to this subject in a few weeks.”
Note the very specific wording: “We had said that we hoped to have it published by the end of 2015. … We are expecting it to be published in the early part of this year.”
I have been following GRG since before it became a wide-spread and well known issue. I do not recall them ever saying they hoped to publish by the close of 2015, nor that they expected to publish it in the early part of 2016.
There was a comment by the author Ian Fraser that the FCA may have asked for the report to be re-visited by the authors. Rumours unfortunately are just that. The FCA has not said a word.
Why is this important?
As indicated previously, many businesses suffered at the hands of the people in GRG. According to the evidence made public in the Property Alliance Group v RBS case, GRG was an exceptionally unpleasant place to be. The RBS line taken was that RBS was protecting itself where customers were facing hardship and RBS only used GRG to turn those businesses around, at which point they would go back to normal banking. But that is not really the true picture. Indeed, when giving evidence to the Treasury Select Committee Derek Sach gave evidence that that businesses were often grateful to GRG. He gave the example of Independent Slitters limited. That company wrote to the Committee to say that not only did they not offer gratitude, they had in fact complained that GRG had ruined them. Mr Sach (and Mr Sullivan on another reissue) had to apologise.
Between 2008 (when it first started reporting this) and 2014, the RBS subsidiaries known as West Register had cash flows just for Property Participation Fee Agreements (“PPFAs”) (one of the worst excesses of GRG) of £18,768,688 + £23,753,235 being a total of £42,521,923. Every penny of that was from an SME business’ cash flows. All GRG businesses are classified by RBS as being in financial trouble. It is difficult to understand how a business can become more stable by having its casflows demolished by RBS’s fee hunger.
For those that do not know what PPFAs were, after GRG had defaulted a business’s lending, imposed huge fees, increased the lending margin (and moving the loans to Libor), reduced overdrafts and stripped out cash flow by refusing new money loans, a business would then be told that as part of the refinance the Bank required more. In many cases (but not all) a PPFA would be demanded, in many cases (again, not all) the bank would also require preferential shares in the business. Businesses signed them because the alternative was insolvency.
PPFAs turned out to be charge on the equity of the businesses property assets. The Bank would, allegedly, value the assets at the lowest end of the market (and some allege even lower). The PPFA would require a percentage of the increase in property value to be paid at a specified date. Just before that date a new valuation would value the property at the top end of the market (and some allege even higher). As such, the percentage charged is usually the percentage of increase in equity. This was not necessarily always the case.
So, for example, if a property was valued in GRG at £100,000 the PPFA would require 15% of any increase in equity above £100,000. Five years later, the property is re-valued at £250,000. The fee payable to RBS would be 15% of £150,000, being £22,500. PPFAs can be very, very substantial figures.
Sometimes the PPFA would just be a percentage of the buildings’ total value on a specified date, rather than just an increase in equity. This was often done in areas where business property tends not to increase in value.
Such fees were in addition to the huge fees already charged. Often, businesses were hit with this PPFA fee as well as a fee to buy back the preferential shares. Often, because the bank refused loans for new money, this would leave businesses back at the doors of insolvency. Also quite often, at this stage GRG would also be telling the business that their loans were not being renewed and they were required to bank elsewhere otherwise they would be put into administration when the loans were due for repayment.
As noted, just these two West Register companies brought ££42.5 million to RBS. It was, as the saying goes, money for old rope. RBS did not need to do anything. The West Register companies do not employ anyone. It was pure profit.
So, when you see businesses battling RBS through the Courts, you have to remember that many businesses never made it. RBS had to remove “toxic” lending from its books. The bank therefore had to force all of these fee demands on businesses. They would then need to move the businesses away to another bank. The only way of doing this was to reduce their LTV rates to below 60% and to ensure that the loans were below £5 million. A million miles away from the golden era of 2004 to 2007 when RBS was throwing loans at customers.
The failure of the FCA to release their GRG report is also likely to have damaged businesses. Many have let their claims become stale because they were waiting for the report before they saw a solicitor. Many have no money, so have waited in the hopes that the FCA announces a review similar to the IRHP Review. That is highly unlikely because commercial loans are not regulated by the FCA (only retail loans are). One of the biggest losses a business would have was the PPFA (and sometimes the preferential shares). They were contracts between the businesses and the West Register companies. As the West Register companies are not regulated by the FCA, the FCA cannot order RBS or West Register to do anything in regards to matters pertaining to West Register – the FCA has no powers at all. There may be a technical argument that RBS must undertake its complaints’ process properly – which is regulated. Or, the FCA could potentially say that RBS, when directing West Register (PAG v RBS tells us that most decisions were taken at the RBS Group level by RBS Group and RBS Bank directors) they were required to act with integrity and in the customers’ best interests, again, both of which are regulated. So one cannot ever say “never” it all depends on whether the FCA has the gumption to do so.
The report was handed to the Government and the FCA five months ago. The FCA has not done anything publicly since then. As a result, many businesses are likely to once again be given the bad news that their case is time barred because they waited too long. The FCA should have made announcements that limitation dates apply and that the businesses should not place all of their hopes on a happy ever after ending with the s. 166 report providing the comfort they need.
Information has been key. The FCA has let these customers down by not being as clear as they could have been. People still think the s. 166 report will provide an answer that we suspect may not be coming.
Keep reading Muldoon Britton’s website. We will update this as often as we can. If you have a limitation question, please contact us. It may be possible to invite RBS to enter into a standstill agreement. If not, you should be pursuing your case, because no one knows when the s. 166 report will be released.
Resources Hansard, House of Commons 1 February 2016: Column 710 Financial Conduct Authority
http://www.publications.parliament.uk/pa/cm201516/cmhansrd/cm160201/debtext/160201-0003.htm Hansard, House of Commons 1 February 2016 at column 748
http://www.publications.parliament.uk/pa/cm201516/cmhansrd/cm160201/debtext/160201-0004.htm Financial Conduct Authority, updated 13 April 2016
https://www.fca.org.uk/news/statements/update-independent-review-royal-bank-scotland%E2%80%99s-treatment-business-customers Treasury Select Committee 26 April 2016 Evidence, FCA Business
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/financial-conduct-authority/oral/32542.pdf Treasury Select Committee investigation into SME Lending. Evidence by Derek Sach and Chris Sullivan on 17 June 2014
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/sme-lending/oral/10753.pdf There are now numerous businesses that can be classed as West Register. However, the two main businesses used to be West Register (Investments) Limited (Company Number SC143950) and West Register Number 2 Limited (Company Number SC383516) which are now known as Sig 1 Holdings limited and Sig Number 2 Limited respectively