26 April 2016
By Ian Fraser
A High Court ruling over evidence relating to its rigging of Libor and the destruction of businesses via its global restructuring group, looks like a turning point for RBS
The Royal Bank of Scotland has failed in its attempt to strike out key elements of a major claim against its activities, concerning both its infamous Global Restructuring Group, and the rigging of Libor.
High Court judge the Hon. Mrs Justice Asplin ruled against RBS’s attempts to strike out key evidence in the Hockin vs. RBS case, which is due to be heard in January 2017.
Finding against the bank’s application and submissions, Asplin held that Michael and Diane Hockin, represented by David Reade QC and Farhaz Khan, could proceed with their claim regarding both GRG and Libor.
RBS’s leading counsel, Mark Hapgood QC, instructed by Dentons, told the court that the Hockins were sold a “vanilla” swap, yet it was demonstrated that it was in fact a more complex “Bermudan” product.
Hapgood also argued that the bank only ever wanted to keep Libor rates lower not higher. Yet regulatory information shows that the bank manipulated Libor rates both up and down to suit its derivatives’ position on any given day, as Hapgood subsequently accepted.
The Hockins’ business, Plymouth-based London & Westcountry Estates owned and managed 27 business parks in south-west England and had about 300 tenants. However in 2008, RBS sold it a complex interest-rate hedging product with a ten-year term, even though the underlying loan had only a three-year term. This resulted in London & Westcountry Estates having to pay an extra £600,000 per year in repayments, and the swap came with an £11 million exit fee. The Hockins were unaware of this when the bank pressurised them into signing the arrangement.
The increased payments put financial pressure on the Hockins’s business, and like many victims of the mis-selling of swaps by RBS, the Hockins found their account was transferred to Global Restructuring Group, a division of RBS which has earned the sobriquet “vampire unit”. Originally called Specialised Lending Services, GRG’s activities were ramped up as the bank battled to rebuild its capital position in the wake of its £45.5 billion bailout and launch of Alistair Darling’s £282 billion Asset Protection Scheme.
As I have explained and as government adviser Lawrence Tomlinson revealed in his November 2013 report, many UK firms that saw their accounts transferred to the “vampire unit” ended up there after being deliberately tripped up by the bank, via for example “manufactured defaults” and perhaps also through the missale of interest rate swaps. The bank is understood to have wanted them in GRG, as risk-weightings under Basel II meant the bank would be deemed by regulators to be in a stronger financial state if “riskier” borrowers, irrespective of their actual viability or the consequences for their owners and the wider economy, could be milked for fees within GRG for a period before being snuffed out and asset-stripped via administrations.
Businesses unfortunate enough to bank with RBS Group’s retail banking brands, which in the UK include NatWest, RBS and Ulster Bank, were equally at risk, as their “relationship managers” were incentivised to transfer viable businesses into GRG, and the wider bank was incentivised to do so under the terms of the Asset Protection Scheme.
London & Westcountry Estates’ loan was subsequently sold on to Isobel Asset Co Limited, an entity created by RBS to enable it to sell off large tranches of its loan book in order to bolster its capital position. Isobel is 25 per cent owned by Blackstone, the New York-based private equity house, and 75 per cent by RBS. The bank also provided the majority of the funding to enable Blackstone to proceed with the deal.
Isobel then demanded the full repayment of the loans and the Hockins’ business was forced into administration in March 2012. Two years later, in a landmark High Court victory against the administrators Ernst & Young, who had been refusing to grant the Hockins a deed of assignment, the Hockins secured the right to sue RBS for its alleged mis-sale of the commercially disastrous swap. The High Court also awarded them costs.
Alison Loveday, chief executive of Manchester based lawyers Berg, which has represented the Hockins throughout, says the ruling has wider connotations for other claims against RBS. “RBS proudly announced last week it had appointed a firm to improve its image to become ‘the most trusted bank by 2020’. One has to question how spending taxpayers’ money on attempting to limit the flow of information with regard to GRG and Libor, helps those aims.
“I believe the reason the bank went to such measures is that it knows the true size of the iceberg underneath this case. As many businesses are finding it hard to counteract the might and cost of the taxpayer-funded RBS legal machine, the Hockin case takes on greater significance than ever.”
Ian Fraser is the author of Shredded: Inside RBS, The Bank That Broke Britain, which has been named as a ‘book of the decade’ by the Financial Times. A fully revised and updated edition was published in both paperback and ebook/Kindle in October 2015.