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Net closes on Royal Bank of Scotland’s property shenanigans

October 1st, 2012 (updated from July 6th, 2012) (revised October 8th, 2012)

Today, Royal Bank of Scotland chief executive Stephen Hester used a speech at the London School of Economics to call for a new “compact” between banks and society. With his industry engulfed in scandal and widely despised by customers and the general public, Hester said “the current level of negative feeling is, in my view, particularly unhealthy. We need to reach a new compact with society where banks are better at balancing the interests of everyone who depends upon them.”

We certainly do. But if this is Hester’s goal, he has a decidedly odd way of going about it. Under his leadership RBS has been shifting billions of pounds of commercial property assets from its banking book into its commercial property division, West Register. In the process, the bank has been destroying the livelihoods of many of its borrowers.

The juggling act suits the bank, which also owns NatWest, as it enables it to avoid crystallising losses on loans that can be decreed to have gone bad* and to transform liabilities into assets. This commercial real-estate hustle is central to Hester’s recovery program, enabling him to massage the RBS balance sheet and ultimately to flog off customer assets for much-needed cash.

The practicalities of the strategy are distasteful, though. They include reneging on lending agreements, arbitrarily changing the maturity and the interest rate on lending agreements, ‘losing’ and then ‘recreating’ loan agreements, lying about lending agreements, persuading friendly chartered surveyors (and in-house surveyors) to concoct fantasy valuations designed to help the bank, for example by putting customers in breach of loan-to-value agreements, bully-boy tactics, and other nefariousness and skulduggery.

One goal is to manufacture defaults*, to make it look as if a corporate or SME borrower is ‘in default’ or ‘breach of covenant’, so that the customer’s assets can be transferred into the bank’s vast repository for “distressed assets”, variously known as Specialised Lending Services, Global Restructuring Group (GRG) and West Register. Once they are there, the assets are seen as fair game by the Edinburgh-based bank. Both personal and business assets can be asset-stripped with impunity (see also my earlier blog: A short history of RBS’s Global Restructuring Group).

And, yes, some of the activity borders on the criminal. As one abused customer, Brechin-based hotelier Nigel Henderson, told RBS chairman Sir Philip Hampton at the bank’s 2011 annual general meeting:-

“the conduct of a significant number of employees in your bank would make even the most crooked, unscrupulous and despicable back street loan shark appear as a paragon of virtue. Yes, the jackboot culture is alive and kicking – literally as well as metaphorically within [Royal Bank of Scotland], despite your pious statements”

It seems that the UK authorities are – finally – waking up to the bank’s behaviour. The Times today reports that City of London Police have launched an investigation into RBS’s alleged ‘theft’ of a multimillion-pound hotel from its own borrowers. Investigations editor Dominic Kennedy reports:-

Detectives have requested interviews with bank executives in a case that shines a light on how RBS moved a fortune in clients’ assets into its own property division … RBS has bought £1 billion worth of its former borrowers’ property, but City of London Police is trying to establish whether a crime was committed when the Coniston, a four-star conference hotel in Sittingbourne, Kent, came into its ownership.

The previous owners, Chris Richardson and Innes “Ernie” Berntsen, were longstanding customers of NatWest, which is owned by RBS. The bank used them on a brochure boasting how it had provided a multimillion-pound package to redevelop an old hotel, but the pair now claim to have lost savings of £4 million.

In February 2010, four months before it was due to open, the property agent Savills valued the Coniston at £7.7 million on completion. Internal RBS documents suggest the bank estimated its value on opening would be even higher, exceeding £9 million. But nine days before the scheduled opening, the bank said that the business had run out of funds.

The hotel’s owners, described on internal bank papers as “excellent customers”, were perplexed. They understood that all lending had been agreed. The RBS Global Restructuring Group, which handles “problem lending situations”, wanted a further valuation. RBS-appointed valuers then put the hotel at “less than £2.5 million to £3 million”. Among those in a conference call where the valuation was given was a representative of West Register, the RBS property wing. The owners were not party to the call.

With no more cash available from RBS against an asset now so poorly valued, the hotel went into administration with a guide price of only £3.95 million. A member of staff at RBS Global Restructuring Group e-mailed the administrators: “Please keep me advised on the second highest bidder’s position.”

The bank is entitled, as a creditor, to be informed about offers for customers’ assets, although RBS insists that it erects “Chinese walls” to stop its property staff getting this sensitive information. The bank, which wins a third of its bids, won the Coniston by offering £4.24 million cash, beating the next best offer by just over £300,000.

The hoteliers complained to police under the Fraud Act because newly disclosed internal bank documents suggest that they still had funds available when RBS claimed that they had run out of cash. The bank says the documentation is a mistake.

RBS said the customers had “already articulated these allegations in High Court proceedings. NatWest and West Register are happy to co-operate with police inquiries.”

The Times published a separate analysis piece by Kennedy (Cashing in on property crash), which says that, in response to the property crash of 2007-09, the Royal Bank of Scotland set a strategy of seeking to acquire customer assets, presumably at knockdown prices. According to the newspaper, leaked papers confirm that in 2009 — after ex-British Land boss Hester had replaced Goodwin as chief executive — the bank developed a strategy involving taking possession of customer assets, especially their property assets, and secreting them into its West Register portmanteau. It probably made sense given Hester’s background in running one of the UK’s largest listed real-estate groups, but it is may also be state-subsidized kleptomania. The Times analysis piece states:-

 The internal papers, dated May 2009, showed that the bank decided that it would need to “strengthen the level of resourcing available to support the buy-in activity”. West Register was to be used as the vehicle to buy the properties. Offices, retail and industrial premises, pubs, hotels, nursing homes, car dealerships and hospitals were to be considered.

I understand that Tayside Police and the Crown Office (Scotland’s equivalent to the Crown Prosecution Service) are looking into the bank’s alleged misappropriation of two hotels from former customer Nigel Henderson as part of the ongoing probe into RBS malpractice North of the border.

Cat McLean, a solicitor advocate from Edinburgh-based law firm MBM Commercial, has detailed how the bank used Machiavellian tactics to allegedly misappropriate the ownership of Charters in Sunningdale, Berkshire — which was used by the Duke and Duchess of Windsor (pictured right) — from the property’s owner, developer John Morris. Charters has been converted into several blocks of luxury flats, where the singer Sir Cliff Richard has an apartment.

However, RBS allegedly reneged on a pre-agreed facility to finance final construction works, which caused the contractors to go unpaid and to walk off site leading to £4m of fully deposited sales failing to complete. In February 2009 the bank placed the business in administration. Administrators PWC and the bank then turned down a £32m offer from Morris, backed by South African bank Investec, claiming it did not want to sell at a discount. However they later sold Charters to West Register for £16.2m. Morris claims this was one-third of its market value, adding this has been confirmed and supported via independent valuation.

Here is a piece I found on July 6th 2012 on the UK Business Property website…

Today West Register is selling, among other assets, 15 residences on Grosvenor Crescent, three years after seizing the properties from an insolvent developer and taking on the unfinished project. Having appointed the Duke of Westminster’s Grosvenor Estates to complete the pert finished project, RBS expects to get its money back finally, as it offers one of the 15 properties for £45 million, while the rest range down to £9 million.

“We are certainly looking to get all our money back,” said Aubrey Adams, head of property in the bank’s Global Restructuring Group (GRG) of which West Register is a subsidiary.

Adams is better known as the former boss of Savills, but is also on the boards of British Land and Max Property.

The West Register portfolio is a small part of RBS’s exposure to real estate and operates on a global basis. While the majority of the assets are UK-based, the West Register contains properties across Europe as well as in the US and Asia.

West Register was set up in 1991 to deal with that property downturn. Due to the length of time it takes to sell some of it’s more challenging properties it was still around when the next cycle hit.

RBS aims to eliminate its £83 billion non-core loan book by the end of 2013, Adams said some of the debt is so underwater the deadline may be missed.

There is no shortage of private equity funds for this distressed real estate, but the prices on offer would force further writedowns on RBS, which it is seeking to avoid by expert management from Adams and his staff.

“As we get further and further into the portfolio there will be a rump that’s harder and harder to sell and that’s an issue,” he said.

Fri, 6th Jul 2012

Bloomberg also wrote about the Grosvenor Crescent houses that West Register is flogging off through Savills (“RBS markets mansions to salvage $47bn in loans). The report states: ”less than a mile from Buckingham Palace in London, among a row of 19th century luxury homes, RBS is seeking to recover some of the £30bn ($47 billion) of commercial property loans it got stuck with when borrowers defaulted.”

Adams, 62, who was chief executive of estate agents Savills from 1991 to 2008 and curiously shares his name with an American female porn star, joined RBS as head of property within Global Restructuring Group last November to oversee the defaulted commercial loans.

I could go on, for example by referring to the alleged conflicts of interest between Aubrey Adams’s role as head of property at  GRG / West Register and his continuing roles as a non-executive director of British Land and as chairman of Nick Leslau’s Max Property group. But since this is likely to be the subject of a forthcoming TV documentary, I’d better hold my fire for now.

* In numerous cases property-rich borrowers claim RBS / NatWest tipped their companies into Global Restructuring Group and West Register unfairly, for example by arbitrarily changing the terms and conditions on loans and/or undervaluing their properties to make it look like the loans had become “unservicable” and/or covenants had been “breached”.

 

For more on the RBS’s commercial property shenanigans, please read:-

 

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7 Comments for “Net closes on Royal Bank of Scotland’s property shenanigans”

  1. [...] redevelopment. Exactly the same sting as that applied to this latest case. Just two months ago, financial blogger Ian Fraser reported that Royal Bank of Scotland had shifted billions of pounds of commercial property debt from its [...]

  2. Johnthedeveloper

    Hi. Does anyone know who you can report this to? I am a developer and was served with a letter last week. Basically I have offered more than my asset is worth, but the RBS manager wants WEST REGISTER PROPERTY INVESTMENTS to review the value of the asset to see whether WRPI might be interested in making an offer for it…. He has insisted that WRPI would not have privileged access, but the same information as other third parties…. I doubt this to be true. How can the bank behave like this? Can you honestly see the bank being impartial? Does anyone else have experience of this matter? Can anyone else shed light on it?……
    We need to expose what RBS are up to. It is immoral and commercially wrong. I understand they are already being investigated for this type of thing by the FSA. Is there anything I can do? It is my livelihood that is at stake.

  3. [...] The goal is to manufacture defaults in order that customer assets can be transferred into the bank’s repository for “distressed assets”, variously known as Specialised Lending Services, Global Restructuring Group (GRG) and West Register. Once they are there, they are seen as fair game by the Edinburgh-based bank. Both personal and business assets can be asset-stripped with impunity (see also my earlier blog: A short history of RBS’s Global Restructuring Group).  read more [...]

  4. [...] Net closes on Royal Bank of Scotland’s property shenanigans | Ian Fraser [...]

  5. Just found this story by The Herald’s Simon Bain – published 1 July 2012

    My bank forced me to buy an interest-rate product that lost me £500,000 … and then treated me like a prisoner of war’

    One victim’s story

    by Simon Bain

    Published: Sunday Herald

    Date: 1 July 2012

    A Glasgow businessman has revealed how the mis-selling by Royal Bank of Scotland of an interest-rate-hedging product five years ago has cost him £500,000.

    Clayton Perks also said he was treated like a “prisoner of war” under the control of an RBS-appointed external adviser who it later emerged had no contract with the bank.

    On Friday, the Financial Services Authority said the four big banks had agreed to review all sales of interest-rate-swap agreements (IRSAs) and compensate victims of mis-selling, just 48 hours after Barclays was hit by a seismic £290 million fine for manipulating inter-bank lending rates. State-owned RBS has admitted it is “cooperating with the investigations” into the latest scandal.

    Now Perks, an Australian who founded Glasgow Chiropractic at St Vincent Place 15 years ago and has 17 clinics across the city, has become the first Scottish IRSA mis-selling victim to protest publicly about the bank he depended on for support.

    He this week formally complained to RBS chief executive Stephen Hester about a catalogue of alleged misconduct by the bank, including a serious breach of data protection in installing an “independent adviser” to run his business for two years – then denying any connection with the adviser.

    That followed a similar washing of hands for selling Perks the IRSA, despite the bank having proposed the agreement and then made it a condition of his continued financing in 2007. The case is typical of up to 28,000 small businesses that were approached by their banks between 2001 and 2008 and persuaded to sign up to what appeared to be a simple fixed-rate loan, to protect against rising interest rates. It was often a “swap” derivative, promoted by a salesman from the bank’s financial-markets division who had a target to sell what were highly profitable products for the bank.

    “We had said we didn’t want to take the product, but the bank said ‘your funding is dependent on you hedging the interest rate’,” Perks told the Sunday Herald. “The message over and over at the time was ‘you need to fix because rates are going up’.”

    But there was no discussion of the risk of rates falling. When they crashed to 0.5% three years ago, businesses were stuck on rates of about 6% instead of 3%, and those who were sold the most complex “structured collars” – which the FSA has said should never have been sold to small businesses – had to pay even higher rates. Everyone with a “swap” was saddled with a huge extra “exit fee” liability on the business, never disclosed and typically now up to 30% of the original loan.

    When RBS crashed and was bailed out by the taxpayer in late 2008, Perks, like business borrowers everywhere, found himself summoned to a meeting. “The tone of the meeting was really hostile,” he says. “The relationship manager didn’t come – they were off with stress – and then we had six relationship managers in 18 months.

    “I was told my business, which the bank had valued at £4m, was now worth zero, the bank was taking a 12.5% stake in it, and it would have to break the swap agreement in order to restructure my borrowings.”

    A second swap agreement was enforced, which was also later broken by the bank. The effect was to pile a total extra liability of £500,000 onto a business powerless to object.

    RBS put the business into the bank’s Global Restructuring Group (GRG) and later appointed an “independent adviser” to take control in St Vincent Place. “Once you are in GRG, you have to do it their way,” Perks says. “He was overbearing at all times, but we did what we were told for two years. When I queried the hedging agreement, he told me, ‘if you think you can do anything about it you are naive and delusional’.”

    After requesting on two occasions to see the adviser’s professional rates and his letter of engagement from the bank, he was sent a non-itemised one-year bill for £10,000. “His lawyers told me he was not paid by the bank and had not been engaged by them. So for two-and-a-half years RBS was openly sharing all my information with an agent who had no contractual arrangement, and is now said to be nothing to do with them.”

    Perks has complained formally to chief executive Hester about the breach of data protection, while his mis-selling complaint will at last now be reviewed by the bank.

    Senior managers have continued to be “aggressive”, Perks says. “We are being bullied and harassed. At the last meeting I was told I was like a carnival performer doing the three-cup trick. All I am asking for is fairness.”

    Glasgow Chiropractic, which supports 70 jobs, covers all of its interest payments and has plenty of cash in the bank, but Perks is nevertheless concerned the bank plans to turn the screw again. It has accused him of being “in breach” of his lending agreements, triggering the bank’s right to renegotiate or withdraw its support in three months’ time.

    “It is a fabricated breach,” he says. “They have deliberately created a false situation. It is like a game where they continually change the rules, trying to get money out of surviving businesses to bolster their own balance sheet.”

    He concludes: “We have been trading here very successfully for 15 years, we are strong and profitable and we want to be here for the next 20 years. Without the hedges we would now be paying 3% and would have avoided the £500,000 bill.

    “The problem is the [banking] culture doesn’t seem to have changed. Banks are supposed to be helping small businesses, but I don’t consider their actions helpful. Even though we have done all the right things, it feels like being a prisoner of war.”

    It was only when he read an investigation last month in The Herald that Perks complained to the bank about the mis-selling. “I thought I was the only one,” he says. “Until now I have just been rolling with the punches, but when you find out there are thousands of cases you get to the stage where enough is enough, and you have to make a bit of noise.”

    A spokesman for RBS said: “We are committed to the fair and timely treatment of our customers and will work closely with the FSA to achieve that end.”

    He said the bank had rejected Perks’s complaints and invited him to go to the Ombudsman.

  6. […] incentivised staff to mis-sell to its retail customers even since the financial crisis, or RBS has abused its business loan book. Lloyds Chief Executive took his bonus despite these abuses, which had happened since he became […]

  7. […] Today, Royal Bank of Scotland chief executive Stephen Hester used a speech at the London School of Economics to call for a new “compact” between banks and society. With his industry engulfed in scandal and widely despised by customers and the general public, Hester said “the current level of negative feeling is, in my view, particularly unhealthy. We need to reach a new compact with society where banks are better at balancing the interests of everyone who depends upon them.”  Read more […]

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