Tuesday, 29 January 2019

The Conflation of Business and Politics: An Update on the RBS Global Restructuring Group

Unsurprisingly, RBS and its now-infamous ‘Global Restructuring Group’ (GRG) have been covered a number of times here in Financial Regulation Matters (most notably here, here, and here). We have also analysed the relationship between the regulators, namely the FCA, and the bank itself on account of the massive bail-out the bank received from British taxpayers at the height of the financial crisis. We have called into question the ability, or capacity of regulators to efficiently regulate and punish the bank owing to this ‘special relationship’ and, in today’s post, we will look at the latest twist in the tale that ‘MPs have referred to as the worst scandal since the financial crash’.

In the previous posts linked above we discussed and analysed how RBS, via its GRG group, failed thousands and thousands of SMEs (the BBC cite 16,000) with a large number of those companies ending up ruined by decisions taken by the GRG unit – the business media state today that ‘many of them were ruined and others lost not only their livelihoods but their marriages and their physical and mental health’. The scale of the issue is massive and discussed in the links above, but today there was a development that is ever-so-slowly being advanced by the business media. Oliver Morley Estates, a warehousing company, is currently engaged in a legal battle with RBS as the founder, Oliver Morley, claims that the bank owes him £100 million for the damage caused to his business whilst under the auspices of the GRG. The case, which is ongoing, is based upon claims that the GRG placed Morley’s business under ‘economic duress’, after which the bank’s property arm – West Register – acquired his assets. As part of Morley’s case, the BBC and The Times have been the first to pick up on the developments that have been advanced by the claimant party. It is being suggested by these media outlets that evidence has been put forward which suggests, rather directly, that it was in fact the Asset Protection Agency (APA), a government agency who we will cover shortly, that was essentially hamstringing the GRG for a number of reasons. The BBC suggest that official APA documents suggest that RBS ‘was prohibited from releasing GRG customers from secured loans without its approval, giving the Treasury an effective veto on any re-financing by business customers wanting to exit GRG’. Clearly, this is quite some claim. It is therefore unsurprising that The Times suggest that Morley will be bringing a case against the Treasury in due course on that very basis, but the issues continue to mount when we analyse the processes involved. It was suggested in documents advanced, namely specific emails detailing the information chain, that RBS wanted to support a re-financing deal that would see Morley’s company exit the GRG and obtain financing from another bank, believing that course of action to be ‘the best option for the bank’ – after all, the £70 million worth of loans that Morley held was substantial, and could be removed from the books of the troubled bank. However, the emails describe how the APA blocked this suggestion and instead wanted the assets of Morley’s business to be transferred to the bank’s property arm. The RBS managers, in the same email trail are clear in their understanding, calling the decision the APA’s ‘craziest decision yet’ but that ‘the APA’s views are clear and unlikely to change’.

It is important to note here two things: this post is reacting to breaking media articles, and the case is still ongoing. However, this is a massive twist in the tale that puts the government, via the Treasury department, right at the heart of what is being referred to as the biggest scandal in the UK since the Financial Crisis. This development, based upon a systemic decision in the late 2000s to use taxpayer money to prop up a failing and negligent and/or criminal banking sector, is a telling one in that there are still conscious decisions being made in the banking institutions’ favour, over SMEs in this case. Governments are theoretically developed to act for citizens, and governments within capitalist societies are, for some, theoretically designed to foster business development and protect those that engage in business – neither of those viewpoints are on display here.

If we take a moment to look at the APA and its role, a number of things come together in this story. The APA has now ceased operations as of October 2012, but when it was in operation it existed from January 2009 to ‘protect banks against further exceptional losses on their assets’. According to the Parliamentary report discussing the Agency, the Treasury made changes to the scheme ‘to better protect the taxpayer’ and that RBS and Lloyds had agreed to meet published targets for ‘lending to households and businesses’. However, the report fails to mention that the relationship between the Treasury and the target banks would be particularly close and, if today’s reports are to be believed, the relationship was one where the Treasury exerted direct control over the business of the target banks. In 2010 it was being reported that the APA were forcing RBS to take on advisors of the Agency’s choosing with regards to the handling of toxic assets, but this current suggestion takes our knowledge of the relationship to a new level. The BBC suggests that the stated goal of the APA was to ‘maximise the value of the assets ion the scheme and reduce the probability of payouts’ – this makes perfect sense for an Agency designated the task of monitoring the massive bailout given to RBS. However, the influence of the APA is now being brought to light. In the BBC’s article, they discuss how the FCA’s lack of investigation into the GRG unit, which eventually saw the Treasury Select Committee release the scathing report itself was based upon the suggested fact that RBS ‘would have been able to point at government involvement’ for many of the issues brought to light via that supposed investigation. This, if proven to be the case, fundamentally changes this story.

RBS, and the GRG unit, committed acts that are appalling when we consider the purpose of the unit and those who it affected. Although not exactly the same as the infamous unit with HBoS, driving businesses into the wall and scavenging on the remains is detestable. However, these allegations against the government’s own Agency mean that the decisions taken by the GRG unit were part of a systemic approach to favour banks rather than citizens and SMEs. There is an argument to be advanced that all of this was done in the name of maximising on the injection into RBS and that, eventually, the taxpayer will not be negatively affected by the whole sorry tale. But, that does not stand up under scrutiny. With such a massive bailout, at a time when social spending was slashed massively (and which continues to this day) and the British society continues to suffer from the savage effects of austerity, the reality is that the British society, taxpayers included, have been negatively affected by this situation, and massively so. Whether the government sees a full return on its initial injection is, at this point, bordering upon irrelevant. Perhaps the reality is that the government has showed its hand and, now, that approach is being brought to the public’s attention. Favouring banking elites that brought the world to its knees in the name of short-termism and profiteering is something that cannot go unnoticed nor unchecked. It is said that the FCA will be conducting further investigations into the GRG unit but, if today’s reports and the allegations are true, the conduct of the APA must also be investigated. It is not an acceptable truth that the government can and will intervene in private business for the benefit of private business. If RBS had to fail for that to be the standard, then what would have been the impact? Potentially contagion would have been witnessed at a much larger scale, but arguments that society would be negatively affected by allowing such an institution to fail are hard to hear when we know now, with the benefit of hindsight admittedly, that society has been negatively affected by allowing them to survive despite the actions they wilfully took in the pre-Crisis era. It is important that the government’s role in this debacle is brought to light, analysed thoroughly, and people are held to account. But, the sad truth is that as the country deals with one of the major results of the Crisis – political instability as demonstrated by the Brexit catastrophe – the results will overshadow the cause. The country is primed to focus on the result of the infection and not the origin of the disease itself. The conflation between government and private business is almost tangible and it is likely that this current court case will reveal a number of aspects to that established and thriving relationship.

Keywords – RBS, GRG, Banking, Politics, Regulation, UK, Business, @finregmatters

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