By Ian Fraser
Published: Sunday Herald
Date: December 1st, 2013
In a recent Business Focus, the Sunday Herald presented a rough guide to the £1 trillion of time bombs metaphorically ticking beneath the plush carpets of the Royal Bank of Scotland’s headquarters. What we didn’t predict was that two of these would explode in the faces of the bank’s chief executive Ross McEwan and chairman Sir Philip Hampton, within a month of that piece.
The first explosion came on 7 November when the Gogarburn-based bank reached a $154m (£93m) settlement with the Securities & Exchange Commission after misleading investors in $2.2bn worth of residential mortgage-backed securities (RMBS) assembled by its US arm RBS Greenwich Capital in April 2007. The SEC said 30% of the underlying loans failed to meet underwriting criteria and that RBS duped investors.
Then came a bigger blast. Last Monday a report produced by Lawrence Tomlinson, “entrepreneur in residence” for Vince Cable’s Department of Business Innovation and Skills, accused the bank of systematically killing off good firms in order to profit from their carcasses.
The pressure on RBS intensified on Wednesday morning, when the Financial Times revealed that, further to representations from Glasgow businessman Neil Mitchell, the Serious Fraud Office is considering investigating RBS’s alleged wrongdoing. On Friday, the Financial Conduct Authority announced it was launching a section 166 “skilled person’s report” into the alleged malpractice.
There are parallels with the HBOS Reading scandal, first revealed by the Sunday Herald in November 2008, which saw at least 50 companies needlessly destroyed after Bank of Scotland imposed a turnaround consultancy, Quayside Corporate Services, three of whose consultants had a history of embezzlement, on them. That scandal, which took place in 2002-08, led to a police inquiry, Operation Hornet, which culminated in two former HBOS executives and eight associates including Quayside personnel, lawyers and accountants being charged with fraud, fraudulent trading, blackmail and related offenses. The trial is due to be heard at Southwark Crown Court by April 2015.
Clearly, in a major economic downturn such as the UK experienced in 2009-12, businesses do struggle – especially if they are poorly managed, heavily indebted and took speculative bets that turned sour. In such instances banks need to deleverage and are within their rights to seek to retrieve funds.
However the Tomlinson report suggests something much more sinister: that RBS is routinely tipping stable, profitable and creditworthy businesses into GRG for profiteering purposes. Some have compared GRG to a butchery that is masquerading as an intensive care unit, and businesses referred there struggle to understand how a supposedly reputable bank can behave in such a manner.
In his report, Tomlinson, chairman of Leeds-based conglomerate LNT Group, cited some 400 case studies and interviews with ex RBS insiders, professional advisers and victimised companies. The report accused RBS of deliberately engineering, or “manufacturing”, defaults among SME and corporate borrowers, for example by encouraging phoney valuations on commercial property assets and suddenly calling in overdrafts, and illicitly triggering the transfer of their business accounts to the bank’s Global Restructuring Group, which has also been described as a “hit squad”. Since his report was published on Monday, Tomlinson has received a further 250 complaints from SME and corporate customers of RBS about GRG.
In his report Tomlinson said “it became very clear, very quickly that this process is systematic and institutional.” City of London Police has reportedly been passed a dossier of information by one alleged victim, and is investigating another. Other police probes are underway in other parts of the UK. Sir Andrew Large, the former Bank of England official, last week published his own final report on RBS’s lending to smaller businesses, which recommended the bank looked into the accusations about its GRG arm.
And in a further development, a significant number of affected businesses, thought to include music retailer HMV, are poised to launch group actions against the bank, one under the banner RBS GRG Business Action Group.
Tomlinson told the Sunday Herald: “This is a huge scandal. It’s about stealing people’s businesses, people’s livelihoods, it’s about people with cancer being chased for debts the bank has created, sometimes without the customer’s knowledge; it’s about the bank creating situations that put people into a corner where they can hit them with outrageous fees and transform them into zombie companies, companies that would in many case never have become zombie companies if the bank hadn’t increased its margins and fees. As far as RBS is concerned, zombie businesses are the perfect result: it’s an excellent fee opportunity. Once the owners have been milked for all that can be had, the business can be put into administration.”
The scandal owes its origins to an over-riding strategy signed off by prime minister Gordon Brown and chancellor Alistair Darling in February 2009. It was also approved by UK Financial Investments, a vehicle for holding the taxpayer’s stakes in RBS and Lloyds. The aim was to bring about a turnaround of RBS as quickly as possible in order to “flip” the bank back into the private sector at a profit within three to five years of the bailouts (so by 2011-13).
To achieve this, the government and UKFI ordered the bank to focus on short-term maximisation of profit and shareholder value via a rebuilding of its capital base. And Darling is familiar with GRG. He spent two hours being briefed on GRG’s activities by Derek Sach, who has run GRG since 1992, in January 2010, but is thought to have failed to ask the right questions about its modus operandi. Tomlinson said that weak competition in the banking market was also driving bad bank behaviour. “There is no real accountability for their actions and the incentives within the banks are completely misaligned with long term growth.” Tim Bush head of governance at PIRC, said “UKFI’s ownership of utterly dysfunctional RBS has been as blind as Violet Kray over her twins.”
One of RBS’s responses to the strategy laid down by Brown’s government was to seek to maximise returns from the property and other assets of distressed borrowers in the UK – including those stressed as a result of the bank’s own actions. In leaked internal strategy papers dated May 2009, the bank said it would “strengthen the level of resourcing available to support the buy-in activity” and that its opportunistic West Register property division would be the vehicle to Hoover up properties.
An email leaked to the Sunday Times suggests West Register developed an “appetite” for certain types of developments, while the May 2009 document revealed it was targeting offices, retail and industrial premises, pubs, hotels, nursing homes, car dealerships and hospitals. Tomlinson said there is perception the bank set out to “purposefully distress” business borrowers to put them in GRG and “subsequently take their assets for West Register at a discounted price.”
His report revealed that the triggers for a transfer to GRG could be as minor as a 10% fall in sales, or being a day late in filing accounts, and that “asset rich” companies were favoured for referral. In some instances, Tomlinson said, chartered surveyor firms aligned to RBS would low-ball valuations of property assets to engineer a breach of loan-to-value thresholds. Tomlinson said in one instance a “desktop” valuation reduced the value of the customer’s prime asset from £5m to £1.6m in two years.
Businesses which that have had their accounts transferred to GRG, of which the Sunday Herald has spoken to 60, compare the experience to being mugged by a “hit squad”. Once there, they are hit with extortionate extra fees, charges and higher interest rates on loans, none of which are conducive to recovery. The report said: “One business who submitted evidence demonstrated that in fees alone, their time in GRG had cost them £256,000.” Tomlinson said that RBS’s reaction once a business customer is in distress is “utterly disproportionate at best and manipulative and conspiring at worst.”
Tomlinson also highlighted the conflicted nature of some of RBS’s advisers. In his report he wrote: “There is also a clear potential conflict of interest, especially when you consider the number of cases reported in which the same company which acts as an IBR [‘Independent Business Review’] also later becomes the business’ administrator.” Tomlinson cited evidence that RBS has instructed clients in GRG to withhold taxes owed to HMRC when in GRG, and forced them to take other actions detrimental to their viability.
Tomlinson said the insolvency process faced by many victimised firms was “unfair and opaque” and the insolvency practitioners are often conflicted as their firms do other work for the bank. Companies found that, once administrators are called, in they have little means of redress and “feel betrayed by the financial organisation they have been customers of for many years … There is nowhere for businesses to turn and many wish only to have a fair hearing.”
He said one of the most shocking aspects of the scandal was the “culture of fear” that RBS bankers instil in the directors of effected businesses. This fear factor meant that Tomlinson was obliged to hide the identities of the 400 case studies which underpin his report. He said ex-bankers who came forward to provide evidence were also frightened of speaking out, fearing they might be stripped of their pensions.
There have also been allegations of conflicts of interest at the top of West Register. Its boss, the ex-Savills chief executive, Aubrey Adams, is a non-executive director of British Land and chairman of the Jersey-incorporated Max Property, a property investment fund founded by entrepreneur Nick Leslau. Property experts believe that there is scope for conflicts of interest, not just between West Register and Max Property, but also between West Register and other property firms that borrowed from RBS.
“What is immoral, unethical and usurious is that, when a bank lends money, it prices in the risk of default into the interest rate at the beginning,” said James Nicholls of Nicholls & Co, a Birmingham based lawyer who specialises insolvency and was seconded to West Register during 1999. “They also charge ‘facility fees’ which is another way of extracting more money. They’ve already taken their margin and risk at the outset, so hiking interest rates on default and charging default fees is really taking money twice for the same risk. The termination fees are even more outrageous but brilliant for the managers involved.”
Rowan Bosworth-Davies a former senior regulator at FIMBRA, which is now part of the Financial Conduct Authority, said the word “appetite” would be pivotal to any future criminal trials. He said: “the GRG cases demonstrate that the bank has deliberately engaged in unfair conduct which must now be examined carefully to establish whether any criminal laws have been broken.”
RBS announced that it has referred the matter to Clifford Chance to investigate, but there have been complaints that the “magic circle” law form is conflicted, as it is already defending the bank from allegations it stole customers’ property assets and joined RBS’s panel of law firms in July.
And RBS chairman Sir Philip Hampton told BBC News last week: “At the moment all we have is some unsubstantiated, anecdotal allegations… that’s what it amounts to at the moment. We need to get to the bottom of this, we need to get to the facts and if there are facts that show that we have behaved in the wrong way, we will take appropriate action.”
Clayton Perks: ‘It’s like a game in which the bank continuously changes the rules’
Glasgow Chiropractic (in administration)
Newcastle Chiropractic (in administration)
Australian-born Clayton Perks (pictured left), founder of Glasgow Chiropractic, alleges that GRG and West Register conspired to sabotage his business by engineering breaches of lending agreements, misselling an interest rate swap, pulling lending and seizing the company’s assets. Glasgow Chiropractic, founded in 1997, was a successful business for 15 years, employing 70 people with 17 branches across Glasgow when RBS forced it to restructure.
It was put into GRG in 2009 and for four years Perks alleges he was held as “a virtual prisoner of war” by the bank after it missold him two interest-rate swaps which drained £661,000 from the business, with a further £300,000 due against his properties which are under separate ownership.
Perks believes that the “independent adviser” who GRG imposed on his business four years ago acted as a “shadow director” and seriously destabilised the business. Even though she had contractual ties to the bank, the bank claimed she was not acting on its behalf, and absolved Perks from paying her fees. Perks was concerned that he was sharing confidential financial data with a third party whose relationship to RBS was unclear.
In the early stages of being within GRG, Perks says the bank allowed his businesses to keep their heads above water by selling individual clinics at roughly £100,000 each, and permitting him to use some of the proceeds for operational purposes. However he says GRG effectively killed it following its insistence after December 2012 that the proceeds of future sales should go entirely towards debt reduction. The bank further destabilised the business by refusing to extend its overdraft.
Perks said: “The bank said my business, independently valued at £4m in 2007, was worth zero in 2010. As we were in GRG and West Register, there would be fees of 12.5%, the bank would buy a 12.5% stake in the business at one pence per share, and the bank would have to break our swap agreements in order to restructure my borrowings. I would argue that this was extortion on the part of GRG”.
After Perks complained to former RBS boss Stephen Hester, managers dismissed his complaints and RBS told the Herald: “We are committed to the fair and timely treatment of our customers.”
In March 2013, the business went into administration with Begbies Traynor as administrators. Perks said: “It’s like a game in which the bank continuously changes the rules, trying to get money out of surviving businesses to bolster their own balance sheet.” Vedanta Hedging, which is advising Perks, said he has a strong case for redress. “In the end, the bank got nothing out of companies. What they’ve done defies logic”
Jim O’Donnell and Ian McDonald
Whinhill Developments (in administration)
The yo-yo style valuations that RBS’s advisers placed on a 10.83 acre development site in Greenock during and after the crash of 2008 suggest the bank sometimes skews land valuations to suit its own needs.
Following a case won by Ian McDonald against the bank in the court of session, Lord Malcolm said in June: “It would appear vastly differing valuations of the site were obtainable depending upon whatever assumptions the valuer was asked to, or chose to, adopt.”
Whinhill Developments, owned by Jim O’Donnell and Ian McDonald, bought the Inverclyde site for £1.55m in 2007, with a view to selling it on to a housebuilder for the construction of some 120 homes. At RBS’s request the site was revalued at £2m by Edinburgh-based chartered surveyors Ryden in December 2008. This enabled RBS to insist O’Donnell and McDonald provide personal guarantees against their loans.
In his opinion, Malcolm said the revaluation was “designed to ensure the end result met the figure previously promised”. The developers were not informed that the £2m valuation was an “indicative”, “desktop” one rather than a formal revaluation, or that it was unsuitable for lending purpose. This, arguably, invalidated their personal guarantees.
Malcolm said: “Neither Mr McDonald nor Mr O’Donnell would have signed the guarantee if they had known the Ryden revaluation could not be relied upon as a professional opinion.” In December 2009, another firm of surveyors, Graham & Sibbald placed a £156,000 valuation on the site – just 7.8% of Ryden’s estimate made 12 months previously. In an email to GRG’s John Robertson, Graham & Sibbald’s Les McAndrew admitted that the downwards valuation was “fairly brutal (even for us)”.
Whinhill was transferred to RBS’s “recovery” unit GRG and placed in administration in February 2011. The plot ended up being bought O’Donnell’s wife Elizabeth for £65,000. The Royal Bank of Scotland is appealing Lord Malcolm’s opinion, as it continues to hound O’Donnell and McDonald for £300,000 in personal guarantees, with an appeal hearing due on 5-6 February. McDonald says he cannot understand why the bank is persecuting him and O’Donnell when it seems to have a greater claim against Ryden.
This is the unedited version of an article that was published as the Business Focus on page 52-53 and 55 of the Sunday Herald on 1 December 2013. The article was only published in the hard copy of the newspaper. It was not published on the Herald Scotland website (minor edits to this online version on December 7th, 2013 and December 14th 2013).