The ‘dash for cash’ scandal that continues to plague RBS entered the realms of the absurd last month, when the ‘Deal or No Deal’ presenter Noel Edmonds declared he had obtained a leaked copy of the Financial Conduct Authority’s still unpublished report into the debacle. Edmonds – who is in a separate dispute with Lloyds bank – later said he was unable to publish the document, as the regulator’s chief executive Andrew Bailey had warned him this could lead to criminal prosecution.
Global restructuring group was the name RBS gave to its restructuring division between 2008 and 2014. After the bank received a £45.5 billion bailout in October 2008, it was coming under pressure from the UK government, through the government’s UK Financial Investments (UKFI) arm’s length organisation, to protect and rebuild its balance sheet and liquidity, and to return to profitability as quickly as possible. Under chief executive Stephen Hester, the bank saw a rapid reduction in its exposure to SME lending as means of achieving this.
So, in a below-the-radar sort of way, RBS ratcheted up GRG’s activities from 2009, with tens of thousands of customer firms going through the division. Their numbers peaked at 16,000 in 2011, when GRG controlled commercial property assets worth some £34 billion.
Publicly, GRG was meant to support business customers of NatWest, Royal Bank of Scotland and Ulster Bank that were in distress and nurture them back to health. However, most of the business customers who experienced it claim GRG was more of an abattoir than an intensive care ward.
This was because, once in the unit, businesses were hit with additional fees and charges, and the interest rates on their loans were jacked up. They also had to pay accountancy firms chosen by the bank to conduct independent business reviews, chartered surveyors chosen by the bank to revalue their assets and also had to jump through all sorts of other hoops to the bank’s tune.
The bank often seized equity stakes in many of their businesses, sometimes without their full knowledge or consent. Ultimately, a great many firms wound up being put into administration, a process which sometimes culminated in their assets being acquired by RBS’s property arm, West Register or private equity arm, Strategic Investment Group.
Many clients subjected to such treatment are furious. They complain of an un-level playing field, being emotionally drained and losing their livelihoods. In some instances it led to family break-ups, mental breakdowns and even suicides. Many complained to RBS’s majority-owner H.M. Treasury, UK Financial Investments, MPs, the FSA/FCA and the bank’s board – but their complaints mostly fell on deaf ears.
The ‘dash for cash’ affair first erupted into the public consciousness in November 2013, when the entrepreneur-in-residence in the business department, LNT Group chairman Lawrence Tomlinson, produced a report exposing GRG’s treatment of small firms. This prompted the FCA to launch a Section 166 probe, with US-based Promontory Financial Group and accountants Mazars appointed to carry it out.
Then, thanks to a massive haul of leaked policy documents, a joint Buzzfeed News UK and BBC Newsnight investigation in October 2016 revealed that the Royal Bank of Scotland, together with its subsidiary or sister brands NatWest and Ulster Bank, had a deliberate premeditated strategy of wrecking businesses for profit. One of the secret documents urged RBS corporate bankers to embark on a “dash for cash”, and one of the many user manuals urged staff to RBS, NatWest and Ulster Bank send “victory emails” whenever they manged to strip of business customer of an asset.
In his infamous “Project Dash for Cash” memo of 9 November 2008, Rhydian Davies, head of property and construction for RBS / NatWest’s southern region, urged staff to search for companies that could be restructured, or have their interest rates bumped up. The documents also showed that where business customers had not defaulted on their loans, bank staff could find a way to “provoke a default”.
In exuberant prose, Davies gave an insight into the banks thinking and, specifically, how it could profit from snuffing out its own business customers. He confirmed that the bank would be able to benefit financially from (1) restructuring / exit fees after business borrowers breached covenants, (2) breaches of covenants by business borrowers whose assets were revalued downwards, (3) business borrowers with “excess positions”, (4) cases where borrowers required “extra support”, (5) cases where the bank may have an exit fee which it would be able to “buy out”.
In November 2016, the FCA and RBS issued a surprise joint announcement. RBS sought to take the heat out of the matter by voluntarily setting aside £400m to compensate business customers for the complex fees they had been forced to pay while in GRG. The FCA, for its part, claimed the S166 reviewers, whose report it said it had received the previous month, had found only “isolated examples of poor practice”.
This echoed a report the bank commissioned from law firm Clifford Chance which concluded there was “no evidence” RBS had set out to systematically defraud small firms (although the Clifford Chance report did corroborate some of Tomlinson’s findings, including that GRG’s fees were opaque, that it wasn’t sticking to the rules where valuations were concerned and that its culture needed improvement).
But in the abbreviated findings published last September, some of the FCA’s conclusions were damning. They included that the majority of viable firms in GRG “experienced some form of inappropriate action by RBS”; and that the bank had “failed to handle the conflicts of interest inherent in the West Register model”.
After obtaining a leaked copy of the FCA’s 361-page report in August, the BBC reported that its conclusions included that fewer than one-in-ten companies put into GRG ever returned to the main bank, and that 92 per cent of viable firms placed in GRG were subjected to “inappropriate actions”. This prompted Treasury Select Committee chair Nicky Morgan MP to demand that the FCA publish its report in full. However FCA chief executive Andrew Bailey claimed the public interest would not be “best served by us publishing the full report”.
Even though GRG generated profits of £1.88bn for RBS in 2011, two of RBS’s most senior executives including GRG head Derek Sach later claimed to MPs that it was not a profit centre. The bank was later forced to apologise for their error. Professor Ruth Bender of Cranfield School of Management believes successive generations of RBS management ought to have been more alert to where profits were coming from.
“If you’re in charge of a bank, and your recovery unit has become a major profit centre, that’s a red flag – a warning that something could be wrong,” said Bender. “But RBS management seems to have ignored it. They ignored it because it was profitable, and they ignored it because it was going to be really, really difficult if it became public.” She added: “They should have acted as soon as they found out what was going on in that unit.”
Lawrence Tomlinson believes the regulator should have sought to bring the individuals responsible for the ‘dash for cash’ debacle to account at an earlier stage. “The only way the FCA can prevent this sort of thing from happening in the future is to identify the individuals responsible, ensure they’re fully investigated and, at the very least, stop them from working in the sector again.”
Tim Parkman, a former Standard Chartered banker who is now managing director of specialist consultancy Lessons Learned, believes that businesses probably have more to learn from the debacle than the bank.
“For SMEs, the lesson is that the debt recovery and workout division of a bank is its Terminator, and must be avoided at all costs because, like its Hollywood namesake, it can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, remorse, or fear. And it absolutely will not stop, ever, until the risk you represent is dead.”
RBS, which is still faces a lawsuit from some of the businesses affected, has said the FCA made it clear the small companies transferred to GRG were “exhibiting clear signs of financial difficulty” and that in a “significant majority of cases, it was likely RBS’s actions did not result in material financial distress”.
Timeline of destruction
1992 – RBS forms Specialised Lending Services, the first time a UK bank has run its restructuring arm as a profit centre
August 2008 – RBS CEO Fred Goodwin informs analysts the bank is transferring growing numbers of business customer into SLS, which is renamed GRG later that year
October 2008 – RBS is rescued with £45.5bn bailout
November 2008 – infamous “Dash for Cash” memo from RBS executive Rhydian Davies
2011 – GRG activity peaks, with 16,000 firms and £34.3bn of commercial property assets managed by the unit.
November 2013 – Lawrence Tomlinson publishes the Tomlinson Report with the blessing of Vince Cable’s business department
January 2014 – the FCA appoints Promontory Financial Group and Mazars to conduct a S166 probe into GRG
April 2014 – Clifford Chance’s report is published
October 2016 – Buzzfeed and BBC Newsnight publish incriminating “Dash for Cash” emails
November 2016 – RBS voluntarily launches a £400m compensation scheme for GRG victims
August 2017 – excerpts of the S166 report are leaked to BBC News and broadcast
This article was commissioned for ICAEW’s FS Focus in October 2017 but never run.