The issue as to whether Royal Bank of Scotland (RBS) forced small companies into insolvency as a way of boosting its profits has been in the news again today. Global Restructuring Group (GRG) was the division of the bank which was responsible for trying to help struggling companies repay loans but at the same time price in the risk that they might fail. The Tomlinson Report looked at these allegations. Read our recent blog post on this.
Basically, if a company was referred to GRG then they immediately saw an increase in their borrowing costs which, in many cases (allegedly) was the reason, they went on to fail. So, a self fulfilling prophecy!
The question that has been bothering the banks business customers, and the politicians, is whether GRG were actually incentivised to close businesses down and extract large fees to boost profits. Obviously, it is in the bank's interest to try and keep the businesses running paying larger fees but at some point many will fail. Another alleged tactic was where businesses had valuable property, such as in the case of hotels, GRG would force the business to close and then be able to take the property, on which it had security, and sell it at a profit. During the credit crunch many properties were taken back and then subsequently sold by RBS.
At a Parliamentary Committee hearing the bosses of GRG were quizzed on whether the division was a "profit centre" for the bank. The term is important because if it is then it raises the prospect of a conflict of interest in the bank as GRG was set up to help struggling businesses and not make a profit out of them. In a statement to the Committee, Chris Sullivan, the Deputy Chief Executive, said that he had not seen a Clifford Chance report into internal procedures relating to GRG commissioned by the bank. He has now admitted that he did see the report and even made comments of a typographical nature... So he must of read it quite thoroughly. He also agreed that GRG was indeed "monitored for financial performance"
This U-Turn for the Deputy Chief Executive is damaging for RBS and everyone in the business will be interested to see what the next Select Committee report says in the Autumn.
It is KSA’s view that turning around viable but distressed companies should be the focus of these bank departments, by giving financial support and to help these businesses stay alive, wherever possible. But if they cannot be kept afloat as is often the case, then any sale of assets forced by administration should not be to the bank’s own companies.