RBS TO RE-VISIT TOMLINSON’S ALLEGATIONS

Recent reports suggest that Royal Bank of Scotland (“RBS”) has hired PwC and two law firms as external advisers to conduct a new investigation into its controversial restructuring division, the Global Restructuring Group “GRG”. RBS is the parent company of Ulster Bank in Ireland.

RBS has previously denied allegations that GRG systematically “engineered defaults” of otherwise viable businesses. This move is seen by some as a significant concession by RBS which could trigger a potential multi-billion-pound compensation liability.

Where it all Began – Lawrence Tomlinson’s Report

This story began when Lawrence Tomlinson, Entrepreneur in Residence in the Department for Business, Innovation and Skills in the UK identified issues in banking practice and policy that deliberately or otherwise damaged good and viable UK businesses. Tomlinson identified numerous mechanisms by which businesses were put into default and transferred to one of RBS’s ‘Business Support Units’. According to Tomlinson, RBS manipulated this process by means of:

• Reassessment of loan to value which significantly undervalued the business’ assets and put it in breach of its covenants;
• Technical breach of covenants such as a temporary dip in EBITDA or a late submission of information. These are often breaches that have no bearing on the performance or viability of the business; and
• Removal of or change to facilities and the move to asset based finance.

Each of these enabled RBS to categorise the business as distressed and allow RBS to move it out of local management and into the GRG.

Tomlinson said that:

“– it is undeniable that some of the banks, RBS in particular, are harming their customers   through their decisions and causing their financial downfall….

The cases and experiences businesses have shared follow such a consistent pattern, with detrimental consequences for otherwise good and viable businesses, that it should no longer be ignored.”

http://www.tomlinsonreport.com/docs/tomlinsonReport.pdf

So what did RBS do in response?

1. Disbanded the GRG;
2. Commissioned Clifford Chance to prepare a Report which is widely regarded as a whitewash exonerating it of any wrongdoing; and
3. Demand that Tomlinson take his business with RBS elsewhere.

GRG – disbanded due to “improvement” in the economy

It is alleged that the GRG was disbanded with immediate effect shortly after the Tomlinson Report was published. RBS denied that it disbanded GRG due to the adverse publicity following the Report’s publication. Instead it claimed that there was no longer a need for a large unit to deal with troubled businesses “because of an improvement in the economy.”

RBS Fight Back – Clifford Chance Report

RBS appointed Clifford Chance to undertake an independent review of the central allegation made by Tomlinson in his report namely that:

“GRG was guilty of ‘systematic and institutional’ behaviour in artificially distressing otherwise viable businesses, putting its customers ‘on a journey towards administration, receivership and liquidation’. “

On 11 April 2014, Clifford Chance published its report. It concluded that there was no evidence to support this allegation.

http://www.rbs.com/content/dam/rbs/Documents/News/2014/04/Clifford-Chance-Independent-Review.pdf

While RBS was quick to welcome Clifford Chances’ verdict- others deemed it a whitewash. Even Clifford Chance had doubts which RBS glossed over in its commentary on the Report.

• RBS didn’t play by the book in its valuations (valuations were not carried out in accordance with industry best practices);

• RBS may have exploited small firms’ debt levels (a GRG training manual suggested threatening to remove a distressed business’ overdraft as a way to gain “leverage” in    negotiations over equity);

• Some perfectly profitable businesses got RBS ‘support’ (some firms who were not in default found their way over to the Business Support Units);

• RBS used fees to ‘encourage’ firms to do things;

• RBS staff were meant to have an eye on money (those relationship managers who took in extraordinary amounts were highlighted at appraisal);

• And what about West Register? (RBS was able to purchase some of the “distressed” assets from GRG through its West Register vehicle); and

• Even Clifford Chance couldn’t understand RBS’ fees and therefore found it difficult to assess the allegations of unfairness.

The “independence” of Clifford Chance’s Report has also been called into question. The Report was proof read and approved by RBS prior to publication. The Clifford Chance Partner who conducted the Report was an ex-employee of RBS.

“Trust” broken down between Tomlinson and RBS

After the publication of the Clifford Chance Report RBS requested that Mr Tomlinson move his mortgage and all his bank accounts which had been with RBS to another bank. RBS claimed that

“the required trust between you and the bank has irretrievably broken down”.

In light of his longstanding dissatisfaction with RBS’s conduct it concluded that it could not continue to deal with him in a personal or in a corporate capacity. Tomlinson’s corporate dealings were moved to another bank, but he was eventually allowed to leave his personal mortgage with RBS.

A Fresh Investigation into GRG

The Financial Conduct Authority (FCA) in the UK launched an investigation last year into allegations set out in the Tomlinson Report. It is alleged that RBS wants to ensure that its responses to the FCA were not influenced by concerns about the Bank’s reputation. The newly commissioned external investigation by RBS also hopes to identify any inconsistencies with the FCA’s findings.

Ogier Leman is helping businesses who have been wrongly placed in Business Support Units such as GRG. Speak to our specialist commercial litigation team to find out if we can help you.

Contact Laura Daly or Ronan McGoldrick for further information.

Disclaimer

This publication is for guidance purposes only. It does not constitute legal or professional advice. No liability is accepted by Ogier Leman for any action taken or not taken in reliance on the information set out in this publication. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. Any and all information is subject to change.