By Kalvin P Chapman
In November 2013 there was a report published by the entrepreneur in residence at the department for Business Innovation & Skills. The entrepreneur was Lawrence Tomlinson, who owned numerous businesses, including a care home business. The report stated that RBS was unfairly treating its customers. It was a ground breaking report, which outlined what many people in the legal and financial industries had been saying for some years: RBS was stabilising its reserves by unfairly taking money from its customers.
The bank immediately instructed its solicitors to undertake a report into the allegations. Three months later the report cleared RBS of all wrong-doing, only finding a problem with how fees had been communicated (or not communicated as the case may be).
The FCA announced in January 2014 that it was undertaking its own investigation. It used two companies as experts. This kind of report is known as a section 166 report. The report was handed to the FCA at the end of March 2016. Since that time there was a lot of rumour, but very little action.
The FCA announced some preliminary results of the report – but most assuredly not the whole results and certainly not the report itself – on Tuesday 8 November 2016.
The FCA’s announcement can be downloaded HERE. We expect what is on the FCA’s page to change, so it is important to keep a note of each new release.
The most important sentence in the report is this one:
“The activities carried out by GRG and addressed by RBS’s proposals are largely unregulated; therefore, the FCA’s powers are limited in this area.”
This is important for two reasons. In the first instance, it confirms that only RBS (and as such NatWest also) is subject to the report and redress scheme. It also says that no redress will be given in respect of West Register, such as the West register preferential shares. RBS will not offer any redress in regards to commercial loans or hedging or fees applied to them save for the named “complex” fees.
Why does it say this? The sentence confirms that the FCA has limited powers in respect of the commercial loans and other contracts issued by NatWest & RBS and West Register companies (as they are known) because they are not regulated by the FCA. Few commercial agreements issued by RBS and few contracts issued by the West Register companies can be subject to the FCA’s enforcement team.
If a product (loans) is not regulated, the FCA has no powers to force any regulated business to do anything in regards to them. If a business (West Register companies) is not regulated, then the FCA cannot order them to do anything.
However, the RBS page on this issue confirms that the bank is refunding PPFAs. This is a surprise given that they are not a regulated product.
So, what has the FCA agreed?
The FCA has powers to force a bank (or regulated firm) to undertake complaints properly. This is done under the terms of the DISP regulations. The FCA and RBS have agreed that RBS will take complaints about complex fees imposed by NatWest and RBS. But it cannot cover fees imposed by or in respect of commercial loans or West Register.
The fees that RBS has agreed to consider refunds of are:
“‘Complex fees’ includes management / monitoring fees, ratcheted fees, late management information fees, mezzanine fees, risk fees, exit fees and asset sales fees.”
Muldoon Britton has dealt with a number of GRG complaints. The losses that are most substantial are almost always losses in regards to the imposition of a new loan or loans (increased margins and fees), a new overdraft (or the removal of one) and West Register fees, such as property participation fee agreements (known as PPFAs) and preferential shares made in favour of the West Register companies. The fees noted above imposed by RBS and NatWest are usually significant but minimal in comparison with the losses in regards to PPFAs and preferential shares. PPFAs are being refunded.
The decision is therefore one that will disappoint many businesses. Indeed, many businesses may not survive now that the ability to sue has been removed. 12,000 businesses are expected to receive some form of redress, which will be automatically calculated by the Bank.
Businesses that are still in business and can take legal action may need to consider very carefully the findings, as they have been released. Obviously, further analysis will be needed based upon the yet-to-come announcements by the FCA. The FCA found that “RBS did not set out to artificially engineer” a business being moved to GRG. The wording is curious: “Did not set out”. That sounds almost as though the FCA admits this is what ultimately did happen – though of course they have not said that and the curious wording may just be an unfortunate use of wording.
The following are the failings that the FCA is currently admitting to:
- the failure to comply with RBS’s own policy in respect of communicating with customers around transfer. The Report found that the standard of much communication was poor and in some cases misleading;
- the failure to support SME businesses in a manner consistent with good turnaround practice;
- placing an undue focus on pricing increases and debt reduction without due consideration to the longer term viability of customers;
- the failure to document or explain the rationale behind decisions relating to pricing following transfer to GRG;
- the failure to ensure that appropriate and robust valuations were made by staff, and carrying out internal valuations based upon insufficient or inadequate work – especially where significant decisions were based on such valuations;
- the failure of GRG to adopt adequate procedures concerning the relationship with customers and to ensure fair treatment of customers;
- the failure to identify customer complaints and handle those complaints fairly;
- the failure to handle the conflicts of interest inherent in the West Register model and operation; and
- the failure to exercise adequate safeguards to ensure that the terms of certain upside instruments, in particular Equity Participation Agreements, were appropriate.
These are substantial findings. RBS has agreed to set aside £400 million to cover redress. This includes, it appears, legal/administrative costs together with interest. However, the failings by the Bank as currently worded in the FCA announcement would make a case for a business wishing to sue RBS difficult. In particular, there is a distinct failure to find any wrong doing that would assist a claim that RBS colluded unlawfully in a conspiracy to distress businesses and charge them fees the bank was not entitled to. There is a large group of businesses that are looking to issue proceedings in regards to a Group Litigation Order claim (ie a large group where all claimants allege substantially the same thing). This report does not currently appear to assist them. But, the next set of releases from the FCA may have further findings that assist.
What Is a GRG Claim
There is no set heading(s) that GRG customers can bring a claim in regards to. It was expected that most would argue that RBS/NatWest artificially distressed them and/or moved them to GRG when there was no clear need for it. The losses then flow from what GRG did to a customer once in GRG.
To argue that the business was classed as suffering a cash flow or liquidity problem when in fact it was not would require a very well evidenced expert report from a forensic accountant. This will need to take into account the position of the company at the time of moving to GRG and after it was moved to GRG. In many cases there will be an independent audit undertaken at the request of RBS, and so any expert evidence would need to address what was in the audit report. Consideration must be given to the fact that advocating against RBS’s audit report by an independent accountant/audit company must be undertaken with expert guidance from a lawyer. Issues of libel may arise, and issues may arise if the expert is alleging duplicity, fraud or collusion. Such claims should never be made unless there is clear evidence to support such an allegation. Making unfounded remarks of collusion or duplicity will harm your case.
As such, the FCA’s findings have made cases much harder, but not impossible. The FCA alleges that RBS/NatWest acted appropriately and that in the majority of cases the business was in some sort of financial distress. If a business was in genuine distress, then the bank was under a duty to its shareholders and the Government to put the business in its turn-around division and try and fix any problems the business had. This is where the evidence you collect will be most important. If you cannot evidence that you were financially sound, then your case becomes much harder.
The Bank will undertake a process under which it will refund some of the fees it imposed. The bank’s website states that the fees have been identified, and customers will receive a letter to confirm that their case will be reviewed. The repayment will be automatic; the customers do not have to do anything. PPFAs that are still extant will be reviewed with a view to terminating them with no payments made (or a refund if the PPFA previously matured).
If a refund is made, then a business should be entitled to consider whether those fees/charges caused the business any additional losses – known as consequential losses. RBS is known for refusing even the most blatant consequential loss claims, so the failure of the FCA to address this in their announcement is not a shock or a surprise. RBS will be seeking at every juncture to minimise its losses. However, if the fees that are refunded are substantial and did genuinely cause losses, it is likely you will need a solicitor and expert forensic accountant to prove those other losses. The FCA has been silent on this issue.
For those seeking to argue an unlawful means conspiracy, they will need to start collecting the evidence of this conspiracy. Who did RBS conspire with? How can that conspiracy be evidenced? How much evidence is lost due to the Bank having its solicitors at most meetings? How did that conspiracy cause you a loss? There will be substantial hurdles to address in regards to causation, not least because of the finding that the businesses were, overall, suffering from genuine financial issues. This report – which was expected by most commentators and solicitors to find unlawful activities – really does make a claim against RBS difficult. Businesses wishing to proceed with a claim must appreciate and understand how this report – as yet unseen – can damage a previously viewed credible argument.
What Are The Next Steps
There is a six year limitation on bringing a claim against RBS. Many businesses did nothing and waited for the s. 166 report. Many of those people have now largely lost any claim they had, except as far as the RBS fee refund applies. The six years will generally run from the date of moving into GRG. The three year “negligence” exemption will almost certainly run from November 2013 when the Tomlinson Report was issued and as such that exemption will not be available having run out this month. As there are no findings of deceit or fraud then the fraud/deceit exemption also will not apply. The six year rule will be the principal starting point for the majority of cases. No doubts there are businesses that will try and argue the negligence/deceit exemptions, but largely those challenges will likely be rejected by a court at an early stage.
The redress scheme announced by the FCA appears to be a largely administrative process in which the FCA has produced a list of fees that must be refunded and the bank will simply do that with no input required from the customer.
It will assist you greatly if you can go through your accounts and identify every fee charged by RBS and West Register, but specifically look for fees that are within the list issued by the FCA as noted earlier in this article (including equity share and property participation fee agreements).
It is essential that if you wish to instruct a solicitor to consider litigation that you get your documents in order. You will be expected to prove your financial position prior to entry into GRG and then what the position was in GRG and when you left GRG. It is likely that if this cannot be proven by a back of the packet calculation you will likely need an expert forensic accountant to prove your case, which will necessarily involve fees. Getting your accounts, cash flows, cash flow forecasts, loan agreements, hedging agreements, FX agreements and related documents in order will be needed to consider whether you were in a financially difficult position or not.
Many businesses can then consider whether the West Register charges were unfair. Did the Bank essentially put you under duress to agree to these fees or face administration/ bankruptcy? Again, it is for you to evidence this. A “he said – she said” would not survive a court claim, it would need contemporaneous evidence.
Additionally, do not forget that the PAG v RBS case has judgment handed down in December 2016 and the Hockin v RBS case is, we understand, still starting in January 2017. Both have substantial GRG claims. It will be interesting to see if RBS offers to settle either. The judgments in those cases could open up new claims against RBS. But it must be remembered that it is for you to evidence your case, and the decision of the High Court in another case may assist, it will not remove your need to evidence your specific and individual case.
So, if you wish to consider your options, please do call Muldoon Britton solicitors. We would be happy to discuss your case and your options. We urge people to be cautious when approaching firms that will make it sound as though the lid has been blown off the GRG pot. It has not. Muldoon Britton will be realistic with you about what your options are and how you can proceed with a case if that is suitable. In many cases either the six year rule or a liquidity/financial issue at the start of GRG may make your case too difficult. It is better for you to be realistic at this stage than to spend a large sum of money on experts and finding that your case could not proceed.