Banking practices of the Royal Bank of Scotland referred to City regulators…

DAMNING REPORTS

The latest accusations being levelled at the Royal Bank of Scotland are as incriminating as any in its recent chequered history.

Small and Medium Sized Enterprises (SMEs) have long complained that they cannot get the loans they need, despite protestations by the banks to the contrary. A newly released report from Sir Andrew Large, a former deputy governor of the Bank of England, on the bank’s small-business-lending, confirms that much of the criticism levied at the bank in recent times is justified and the taxpayer-rescued institution must explain why it has not been doing all it could to assist Britain’s economic recovery. In normal circumstances, such practices would be worrying enough for the newly installed chief executive of the bank, Ross McEwan.

But these are not normal circumstances; Mr McEwan is also faced with a more troubling contention. According to another published document from Lawrence Tomlinson – deemed a successful businessman and ‘entrepreneur in residence’ at the Department of Business – RBS may have sunk to even greater depths in its condescending and haughty treatment of Britain’s SMEs. Contemptuous, because not only has the bank been transferring perfectly legitimate and profitable companies into its high-risk Global Restructuring Group (GRG), but the West Register (the bank’s property division), has reportedly been acquiring their assets on the cheap after imposing deliberate and exorbitantly high fees on them. Many companies in this high-risk category, deemed perfectly viable, have been unable to pay these fees imposed and as such have found themselves having their assets taken over by the bank at heavily discounted prices.

Both these reports must be put into context. Prior to 2008, RBS had been reckless over a number of years in its dealings, over-extending loans to many small firms that did not justify such levels of confidence. As the bank now struggles to repair its balance sheet, bad debts are continually being written off and lending practices have been tightened.

The findings contained within these reports have left many feeling aghast, not least Mr Tomlinson himself. His inquiries and formal deliberations suggest something altogether more serious. Vince Cable, the Business Secretary, has acted quickly and sent the evidence to City regulators. For his part, Mr McEwan has called in the law firm Clifford Chance to conduct an internal review of the bank’s practices. Such deviant and acute methods would be inexcusable from any bank, but from one that is largely owned and controlled by the state makes matters even worse.

COMMENT & ANALYSIS

The claims made in Lawrence Tomlinson’s report into the way the Global Restructuring Group at the Royal Bank of Scotland has dealt with struggling enterprises are truly dire.

It rightly is a matter that needs to be examined by the regulators the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Forcing struggling firms into insolvency when there may have been a chance of survival is bad enough. Ruthlessly seizing property and assets for its own gain is immoral and much worse.

Yet, should we be surprised? RBS had a hand in almost all the post-crisis scandals, including Libor fixing, interest rate swaps and the sale of payment protection insurance. The bank is also being sued by investors for failing fully to disclose the parlous state of its finances ahead of the £12bn rights issue to shareholders in 2008.

Tomlinson and the Department of Business also have some questions to answer. The in-situ ‘entrepreneur in residence’, for example, is a little mysterious. How was he chosen for this appointment, what is the scope of his role and how much did he tell civil servants and the Secretary of State, Vince Cable, about his own business affairs before he took on this rather curious role?

What also of the poor judgement by Tomlinson not to disclose that NatWest, RBS’s main operating offshoot, had granted him an overdraft and that in the last couple of years he was engaged in a major refinancing operation? Financial analysts will find it extraordinary that this was not considered a relevant factor either by Tomlinson or the Department for Business, and that it was not disclosed in the report. Making a strong case against the predatory behaviour of RBS is one thing, the dealings and judgments of Mr Tomlinson are clearly and significantly related.

The published accounts of Tomlinson’s business LNT Group are, even by the standards of many private empires, on the opaque side. They show a group that is indebted and making losses, with a host of intercompany relationships that are difficult to untangle.

The main product of Tomlinson’s dealings looks to be the design and building of new care homes, something the UK badly needs. But this is a notoriously difficult sector in which to operate – as was seen from the fate of Southern Cross – and management often has to choose between keeping costs under control and maintaining high standards of care.

Before giving Mr Tomlinson a government imprimatur one should trust that Vince Cable and his Department looked carefully at all his dealings before approving the appointment.

Statements by RBS are clear on two points…

ROYAL BANK OF SCOTLAND

A series of rash statements issued yesterday by the Royal Bank of Scotland is clear on two points. Firstly, the decision taken to create an internal ‘bad bank’ with toxic loans amounting to £38 billion will hardly provide an instant cure. It will take a further three years of write-downs and bank disposals before the institution will even be considered to have recovered from its 2008 financial collapse and taxpayer funded rescue.

The second relates to serious deficiencies in the day-to-day management of RBS – from its chronic failure to meet targets on lending to small and medium sized firms, through shortcomings in service to personal customers, and to the provision of £250 million made by the bank for mis-selling payment protection insurance.

It is extremely unlikely there will be any start to the sale of the bank back to the private sector until well after the General Election.

RBS has announced a bottom-line loss of £634m for the three months to September. Far from the internal ‘bad bank’ resolution being hailed as a panacea, it is little wonder that shares in RBS have slumped. Even in its darkest hour of 2008, few would have believed that the recovery of what was then the UK’s largest bank would have taken eight years and a massive restructuring and shrinkage of its business. RBS has suffered a major curtailment in much of its global business and activities, not just the unwinding of the vainglorious acquisitions of the Fred Goodwin era but is also shorn of the overseas expansion delivered by his predecessor, Sir George Mathewson.

The protracted period of indecision on whether the bank’s bad loans – much of them incurred in Ireland by Ulster Bank – should have been left with the government or treated as a separate entity, is a nettle that should have been grasped in 2009 rather than allowed to have festered for the length of time it has. Chancellor George Osborne had had to recognise that RBS’ problems – structural and cultural – will take far longer to resolve than the government first anticipated before a share sale can be undertaken.

The traumatic legacy of its near-collapse remains problematic today. This induced a deep reluctance within the bank to lend, in particular to small and medium-sized businesses. A highly critical report by Sir Andrew Large found RBS was performing so erroneously it was not even in a position to meet its own targets. In the meantime, a review by RBS into how it serves its personal customers is scheduled to report next year.

The bank still has a mountainous task ahead under its new chief executive, Ross McEwan. There is much to do to overhaul the bank’s lending practices; by moving away, for instance, from the sales target-driven excesses of the previous era and by making major improvements to its overall service to customers.

RBS will eventually revert to being a domestically focused retail bank, stripped down to those core banking competencies it should never have deserted in the first place. The biggest challenge ahead will be to rebuild customer and investor trust. The bank’s widespread loss of confidence makes that a daunting and difficult task.

What the banking crash five years ago has taught us…

BANKING FIVE YEARS ON

THE last five years have been the most nerve jangling and traumatic in the modern history of the British economy and for the City of London.

It is only now, on the 5th anniversary of the collapse of the 158-year-old investment firm Lehman Brothers – and after intensive ministrations from the Bank of England – that the UK economy has started to splutter back to life.

However, the banking sector, which should be a bedrock of the economy, remains vulnerable and susceptible to external shocks, and to scandals of its own making.

The Central Bank administered strong economic measures, namely in the form of a staggering £375 billion of extra cash into the UK financial system.

It has held the official bank rate at a historic low level of 0.5 per cent for more than four years and it is currently heavily subsidising the cost of buying homes as well as supporting smaller enterprises through its Funding for Lending scheme.

Finally, it appears to be working, and forecasters are quickly revising their predictions upwards as every part of the economy – from the dominant services sector, to manufacturing and construction – has begun to take off.

In the Chancellor’s March Budget, the independent Office for Budget Responsibility (OBR) predicted that gross domestic product would expand by a miserly 0.6 per cent this year.

The Paris-based OECD has doubled its forecast to 1.8 per cent and some City forecasters say the economy is expanding by as much as 3 per cent.

House prices are moving up firmly in many areas and not just in overcrowded and overcooked London and the South-East.

The jobless rate is currently 7.7 per cent and falling more rapidly than many critics could have imagined.

But it would be wrong to get carried away. UK output is still 2.8 per cent below where it was before calamity struck in 2008. In contrast, the German economy has expanded by 2 per cent and the United States by 5 per cent.

Despite the new born optimism of many British forecasters, it is safe to say that the whole edifice of the UK upturn is built on worryingly fragile foundations.

No doubt, the most important lesson of the terrifying events five years ago is how important a functioning banking system is to the creation of wealth.

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ACCORDING to the former Chancellor, Alistair Darling, Britain was ‘on the brink of what could have been a complete and utter calamity’.

Cash machines at the Royal Bank of Scotland and Lloyds Banking Group came within two hours of running dry. The economy’s restoration to full health cannot possibly happen until these two banking High Street giants have been restored to the private sector.

Yet, half-a-decade on from the near collapse of these two banks, the struggle over how to re-privatise them is nowhere near being resolved.

Consider RBS. Stephen Hester, the man brought in on a salary of £1.2 million by Gordon Brown to turn the bank around, resigned after a fractious relationship with Chancellor George Osborne. At the behest of the Parliamentary Commission on Banking, merchant bankers NM Rothschild is investigating how to split off RBS’s flawed investment-banking arm from the retail operation that serves the public and small firms.

Until it reports, the important job of extending credit to new and growing businesses has been put on hold and the process of returning the Government’s 80 per cent in the bank to the public has been suspended.

Lloyds, though, does look in far better shape. Under an EU ruling, it has separated out 632 High Street branches and relaunched them under the revised TSB banner.

But its return has been less than smooth.

In the aftermath of the financial crash, the bank emerged as one of the biggest providers of Payment Protection Insurance (PPI) policies in which customers were mis-sold expensive insurance schemes to cover debt repayments. It was required to spend £4.3 billion in compensation, part of an industry wide bill of some £14 billion.

PPI is just one of the egregious scandals to emerge since the financial crisis. In June of 2012 Barclays Bank agreed to pay a fine of £290 million for rigging the LIBOR interest rate that helps to set the cost of corporate loans, mortgages and other commercial transactions.

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BRITAIN’S highest paid banker, Bob Diamond – who earned more than £100 million in his years at Barclays – was forced to resign.

Even the most respected and safest names in British banking have found themselves in the dock.

The mighty HSBC admitted it had been involved in money laundering activities for Mexican drug cartels and Middle East terror groups.

London-based Standard Chartered was forced to own up to billions of pounds of sanctions-busting transactions with Iran.

And to top it all, the world’s largest and most blue-blooded bank of all, JP Morgan lost $6 billion in 2012 at its London branch after engaging in high risk trading in credit default swaps.

There are now signs, at least, that regulators in the U.S. and Britain have forced a clean-up of our banking system by imposing heavy fines and penalties and by forcing the errant institutions to accumulate fresh capital.

But looming over the City is the spectre of the eurozone, which is caught in a ‘doom loop’ – a self-perpetuating cycle that relentlessly racks up both national debts and those of banks.

The recovery, then, at best is being built on the most fragile of foundations.

Even if our banks manage to overcome the already formidable problems, the medicine itself already used poses its own future dangers in the shape of surging inflation and higher interest rates that could eventually be as frightening as the events of five years ago.