RBS' Global Restructuring Group: An update

Published 1 September 2014

In April 2014, an investigation by Clifford Chance cleared RBS' Global Restructuring Group ("GRG") of the allegations made in the Tomlinson Report that it unnecessarily put small businesses into financial distress in order to generate profits for the bank.

Notwithstanding the outcome of the Clifford Chance investigation, RBS is facing a group action in the High Court led by the RBS GRG Business Action Group (the "Action Group"). According to the Action Group, over 800 companies have come forward for consideration and 200 cases are being reviewed "in detail".

The Tomlinson Report

In November 2013, Lawrence Tomlinson, a former adviser to the Department for Business, Innovation and Skills, published his report into the alleged wrongdoings committed by the GRG.

The Tomlinson Report suggested that RBS operated a process by which the potential value of business customers was assessed in order to select viable small to medium enterprise ("SME") customers as targets for the GRG. Tomlinson claimed that, once identified, RBS used a number of mechanisms to engineer the targets into financial difficulty. These mechanisms included undervaluing property assets, withdrawing or failing to renew existing credit facilities such as loans and overdrafts, replacing existing overdrafts with loan agreements and putting customers into breach of its covenants.

Tomlinson reported that, once in default, the SME would be transferred out of local management and into the GRG. According to the Tomlinson Report, this allowed RBS to take control of, and use the customer's assets to generate revenue for the bank. Specifically, it was claimed that revenue was generated through the imposition of additional fees, the re-negotiation of existing finance facilities and by requiring additional equity injections and personal guarantees. Furthermore, Tomlinson reported that the devalued assets would be purchased by RBS' property division, West Register, at a price below their true market value.

According to Tomlinson, as a result of these measures, viable businesses were put on a "journey towards administration, receivership and liquidation".

The Clifford Chance Report

In response to the Tomlinson Report, RBS instructed Clifford Chance to review the practices of the GRG. Clifford Chance concluded there was no evidence of RBS operating a process by which businesses were assessed for their potential value in order to select viable SME customers as targets. Furthermore, Clifford Chance did not find any evidence of files which suggested RBS had engineered a default or artificially caused financial distress to a customer. In relation to the allegation that RBS had undervalued assets, Clifford Chance reported that RBS obtained external valuations to assess LTV covenant breaches and there was no evidence of influence being exerted on the external valuers in order to trigger a covenant breach.

With regards to claims that RBS had unreasonably withdrawn credit facilities, Clifford Chance concluded that RBS had always acted on an honestly held belief that the customer was failing to deal with the signs of distress. As to whether RBS had put customers on a "journey towards administration, receivership and liquidation", Clifford Chance concluded that RBS had made genuine efforts to restructure customers' businesses and return them to good health.

Future Action and Potential implications

Notwithstanding the Clifford Chance report, it is apparent that RBS could feel the effects of the Tomlinson Report far into the future. The findings of Clifford Chance have been subject to criticism from both Mr Tomlinson and the Serious Fraud Office, particularly over its limited remit.

The GRG, which was dissolved in August 2014, remains the subject of an investigation by the Financial Conduct Authority ("FCA"). The FCA is expected to publish the outcome of its investigation in late 2014 or early 2015 and we anticipate that their report will be scrutinised in detail by potential litigants. Moreover, according to the Times Newspaper, RBS could face a formal investigation from the Serious Fraud Office.

In the meantime, it appears that the Action Group is considering all possible avenues including group litigation in the High Court.