June 17th, 2012 (updated November 10th 2012)
Have NatWest and RBS gone rogue?
Has the Royal Bank of Scotland, which has owned NatWest for the past 12 years, become a ‘rogue’ institution? And more specifically has its global restructuring group, formerly known as specialised lending services, become a quasi-criminal or mafia-like enterprise, whose focus is on the wholesale expropriation of customers’ assets?
These might seem odd questions to ask but, with every passing day, and in the light of the powerful claims made at the bank’s May 30th AGM by the former Torex Retail chief executive Neil Mitchell (he claimed he has overwhelming evidence that the division is engaged in “systemic institutionalised fraud” — you can also read a report of Mitchell’s intervention on my Huffington Post blog of June 8th), I believe they at least merit investigation.
It seems the trouble started in the wake of the crash that followed the Nigel Lawson boom in 1989-90. At that time RBS had massive exposure to troubled UK commercial property and corporate borrowers. Under former chief executive Sir George Mathewson, it decided the best way to handle its bad debt crisis was to learn from the private equity and venture capital industry turn its restructuring division into a profit centre.
The bank recruited 3i executive Derek Sach (pictured right) to establish what was initially called Specialised Lending Services in 1992. His brief was to reduce the £400m in bad debt provisions incurred by RBS in 1992 but the longer term goal was to turn SLS into a profit centre in its own right. Some of Sach’s early initiatives were admirable but there was clear moral hazard attached to the strategy.
This was highlighted in an article in Private Equity News published in September 2010. Gary Wilson, managing partner at Endless LLP, wrote (emphasis mine):-
So what has happened? I blame 1991 when workout bankers were scarred for life by a wave of uncontrolled insolvencies and losses which were quickly followed by the further pain of watching the buyers of the bust businesses selling them on at super profits.
A turning point was RBS’ recruitment of Derek Sach, a former 3i executive, intent on challenging the cosy relationship between bankers and insolvency practitioners. Insolvency statistics at RBS plummeted and Specialised Lending Services, now Global Restructuring Group, quickly became a division intent on creating value from troubled situations.
Other banks followed, some of them such as Barclays Business Support further refining the model and made ‘customers returned to good book’ a key performance indicator. The top brass in the bank workout teams now consist of seasoned restructuring bankers and former private equity professionals who have overseen more turnarounds and value creation plans than the whole of the private equity industry put together.
They are accused of creating zombies but in fact are carrying out “Brombis” (bank rollover MBIs) from the wreck of the “Colombos” (colossally overpriced MBOs) and doing very well out of some of them.
With RBS/NatWest one of the largest lenders to British corporates, leveraged buyouts and property speculators in the credit bubble, and with the bailed-out bank still desperate to prove it can survive as a standalone business in the private sector, the scope for moral hazard has intensified.
I accept there are some recent examples where GRG has taken positive steps to rescue ailing businesses that might otherwise have gone to the wall. Some, including German-owned tour operator Thomas Cook, have been highlighted by Anthony Hilton in the Evening Standard (in some such cases, the bank only let troubled commercial borrowers off the hook as a result of intense political pressure).
However, there is strong evidence to suggest that GRG’s underlying agenda is rather different. I would highlight the treatment meted out to entrepreneurs whose businesses were transferred to SLS/GRG, including the likes of Neil Mitchell (ex CEO if Aim-listed software firm Torex Retail), Nigel Henderson (Park Hotel/Portree Hotel), Nigel Matheson (the Conservatory Seafood Restaurant), and Derek Carlyle (Carlyco).
The alleged epidemic of wrongdoing is has been partly facilitated by a clause in RBS’s standard loan agreements that permits the bank to rip up previous agreements and impose more onerous terms without notice.
Clause 13.2 in the standard RBS contract states: “the agreement replaces all previous agreements in relation to the loan“.
That may sound innocuous enough, but the clause allows RBS to impose revised terms and conditions on corporate borrowers, sometimes with the express intention of steering them into bankruptcy. The bank is then able to transfer the borrower into its global restructuring group, where they can be stripped of their assets at will, with any commercial property assets finding their way into the bank’s £20 billion to £40 billion West Register repository.
For the situation to change, all that needs to happen is for one single corporate or commercial property customer to sue the bank, and a judge to rule that clause 13.2 is in breach of the Unfair Contract Terms Act 1977, the Unfair Terms in Consumer Contract Regulations 1999, Sale of Goods Act 1979 or other national or international statutes. A landmark legal victory along these lines could mean the game would be up for RBS and global restructuring group, opening the floodgates to litigation from tens of thousands of SMEs who believe they have been maltreated, abused, cheated or tricked by the bank.
“I am the owner of a small independent children’s day nursery. I borrowed money from NatWest to buy out my partner in 2008 and was forced to take one of these sinister products [interest rate swap agreements] as a condition of the loan.
“When I inevitably started to struggle I was handed over to RBS’s equally sinister Global Restructuring Group. I asked what this was and was told they were here to help. This idea evaporated with the first letter from GRG head office outlining four different ways they were going to take more money out of my business!
“Global Restructuring take businesses having difficulty and if there is a future in them they will milk it and if there is not they will shut them down. So it appears all of the major British banks have departments like this screwing British businesses to clamber out of they’re own self-inflicted mess?
“The massive irony is that they are only still in existence to do this thanks to the self same businesses and their employees tax money bailing them out! The comments above pretty much tell the blow by blow story of my last four years of hell. I had thought that my situation was probably unique but it appears it’s systematic.”
If nothing is done to rein in RBS’s in this area, I fear the scope for further unwarranted carnage across corporate Britain is going to become unsustainable.
Note: further evidence of rogue-like behaviour from RBS emerged on June 13, when Bloomberg reported a lawsuit against RBS’s NatWest unit. Ex-hedge fund manager Jeremy Stone alleges the bank ignored evidence its accounts were being used as a conduit for one of the UK’s largest Ponzi schemes. Stone and his firm Jeremy D. Stone Consultants are suing NatWest and one of its managers for negligence, dishonest assistance, deceit and conspiracy, seeking £24m. NatWest received internal reports of suspicious activity in the accounts in 2006-10 but failed to act on them, according Stone’s solicitors. In 2009-10, “the bank was actively assisting the architects of the Ponzi scheme [allegedly Jolan Saunders, 36, and Michael Strubel, 50] to hide the fraud,” said the lawyer.