Tuesday, 29 August 2017

RBS – The Latest Demonstration of a Poisonous Bank

On many occasions here in Financial Regulation Matters we have looked at two seemingly separate issues. We have covered, extensively, the developing story of the fraud at HBOS from the initial trial and conviction of a number of fraudsters, to the continued and difficult fight against Lloyds for compensation. At the same time, there have been a number of posts concerning RBS and their abysmal performance, ranging from their continued failings since being nationalised to their settlements with wronged investors and shareholders. However, there are now reports suggesting that these two streams can be neatly brought together, which unfortunate for the inevitable victims of such an amalgamation. This author has written extensively on the concept of oligopolistic dynamics within the credit rating industry and, regrettably, the same dynamics can be seen in the banking industry. The performance of the Reading Unit of HBOS in defrauding vulnerable SMEs was simply just the tip of the iceberg.

We will not cover the HBOS scandal here because it has been covered extensively throughout the posts of Financial Regulation Matters – for our purposes here, it is enough to say that the fraud can be defined as one in which vulnerable small and medium-sized companies where highlighted by the specific division of the bank and then exploited, with the result being the firm was wither stripped or destroyed at which point the fraudsters would pick up the pieces. The size of that scandal has, arguably, not been digested by the public – probably owing to the fact that the story has remained in the business pages of the mainstream media when it should be on every front page. However, if it was hoped that the banking sector would brush this scandal under the carpet then those hopes diminished greatly last week with the news that RBS, the incredibly troubled bank, has its own scandal ready to envelop its proposed recovery. Reports last Friday emerged that detailed that the ‘Global Restructuring Group’ (GRG) contained within RBS has been systematically ‘mistreating’ its clients, which included increasing interest rates and imposing unnecessary fees for those SMEs in trouble, rather than meeting their stated purposes. Incredibly, it is being reported that 92% of companies the group dealt with has been treated in such a way, although the FCA were at pains to declare that the group did not try to ‘profit from their distress’. Whilst the accusation of fraud has not been levelled at the group, the suggestion that no profit was sought is a difficult one to swallow, with the statistics showing that only one in ten firms survived the process intact, with almost seven out of ten companies remaining tied to ‘complex loans organised by the GRG which were often too expensive to leave’ – to suggest profit was not sought is to ignore the purpose of the bank entirely, particularly one is such difficulty.

Another issue that stems from this leaked report by the FCA is the supposed impotency of the regulatory framework. It has been reported that the Bank provided only ‘narrow compliance’ with the investigation which, although refuted by the Bank, details at least a major conflict between regulators and the regulated. In response, the Bank has stated that it has launched a new complaints procedure overseen by an independent third-party and an automatic refund process for GRG customers, although the experience of Lloyds customers should tell us that it is very easy to ‘talk the talk’. Yet, the complains of the regulator hint at an issue that is still to be resolved since the crisis, and that is the effect of unregulated finance, with a spokesperson for the FCA stating that ‘many of the activities carried out by GRG were largely unregulated and its powers were therefore limited’. This type of narrative should instantly remind of us of the regulatory surrender to the might of the unregulated ‘shadow banking’ sector, which was consistently paraded as an example of the consequences of an underfunded regulatory framework – the need to properly fund regulators is obvious, but the careering away from the Financial Crisis and the incessant need to show a booming economy makes that requirement wishful thinking at this stage.

Returning to RBS more generally, this latest instance marks the latest in a long line of negative press. The old adage that any publicity is good publicity is simply not true, and it is likely that RBS will learn that fairly soon – the question posed on a number of occasions here in Financial Regulation Matters is how much more can RBS get away with? There is seemingly an accepted understanding that RBS is too big to fail, which is supported by the crisis-era bailout, but is that truly the case? Lehman Brothers was a massive institution and it was allowed to fail, which means that, perhaps, there needs to be a recalibration in our societal perception of what is truly too big to fail. However, that last sentence is wrong, because in reality there needs to be a political recalibration, and on that front we may be waiting a while. A recent book by Ian Fraser titled Shredded: Inside RBS The Bank That Broke Britain, published in 2015, brilliantly describes the incredible problem faced by the United Kingdom, in that it plays host to a bank that is intertwined within its political and financial fibres, so much so that its removal would be catastrophic; however, what is required is that we keep addressing and analysing this relationship as much as possible because accepting it will normalise the actions of this incredibly poisonous bank. Recent news discussed how the Bank has been actively preventing rivals from reopening branches that it has closed as an attempt to stop the haemorrhaging of money, which has led to a number of small towns and villages without proper access to banking services, further compounding the problems highlighted in previous posts concerning financial literacy and financial exclusion. Ultimately, RBS is a problem that is growing by the day, and refusing to acknowledge that or downplaying the significance of this incredible problem only heightens the severity of the damage its implosion will cause – perhaps the next scandal will see RBS on the front pages, but one should not hold their breath.

Keywords – RBS, Fraud, SMEs, Finance, Politics, @finregmatters

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