Small and Medium-sized Enterprises: Mistreatment

Baroness Bowles of Berkhamsted Excerpts

Thursday 27th June 2019 Lords Chamber

Asked by

[Baroness Bowles of Berkhamsted]

To ask Her Majesty’s Government what assessment they have made of the Report on the Financial Conduct Authority’s further investigative steps in relation to RBS GRG, published on 13 June; and what plans they have to mitigate any future mistreatment of small and medium-sized enterprises.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, global restructuring group was a unit within RBS into which struggling companies were pushed, with little option, when instant repayment demands were threatened. Newspapers have been filled over the last few years with findings about its unfair treatment of SMEs—92% unfairly treated and material damage to 25% are among the many baleful conclusions of an independent Section 166 report by Promontory, eventually commissioned by the FCA and published by the Treasury Select Committee when the FCA refused to do so. It revealed that the infamous “Just Hit Budget!” memo urging staff to “let customers hang themselves” was circulated widely, its content and tone never challenged at senior level, and that it was,

“indicative of an unprofessional culture that set little store by the interests of its customers”.

Neither was it the worst email it found. GRG unfairly destroyed lives, repossessed homes and acted aggressively, without transparency or proper control. The Treasury Select Committee chair summed it up:

“The overarching priority at all levels of GRG was not the health and strength of customers, but the generation of income for RBS, through made-up fees, high interest rates, and the acquisition of equity and property”.


And now the FCA report, although faint-hearted, is nevertheless damning, because it corroborates the Promontory findings: lack of management; failure to manage conflicts of interest; lack of appropriate governance, policies, procedures or processes. However, it stops short and is feeble on enforcement, presenting a catalogue of excuses in chapter 2, and in chapter 8 implying mitigating circumstances for RBS because the bank is systemic and was bailed out—which I do not recall coming about because of good behaviour. It says it cannot take action because commercial lending is not regulated. This is another GRG: the great regulatory gap. I agree with the Treasury Select Committee that commercial lending for SMEs should be regulated. Perhaps the Minister will explain the logic of why charges on homes differs from home lending, which is regulated.

Page 16 lists the Principles for Business that apply to every authorised firm, then says they do not apply because the business was not a regulated activity—except that principle 3, “Management and control”, can sometimes apply and has been used in the context of pursuing banks on the unregulated activity of foreign exchange. The RBS failings clearly fall under the “Management and control” definition:

“A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”.


I give your Lordships 360 pages of the Promontory report as evidence. The FCA then says that,

“Principle 3 only applies to the prudential context of unregulated activities”,


which means having,

“a negative effect on the confidence in the financial system … or a negative effect on the ability to meet … the ‘fit and proper’ test in the ‘suitability’ threshold; or the applicable requirements and standards under the regulatory system relating to the firm’s … resources”.

Grudgingly, the FCA concedes that the market for commercial lending is part of the financial system. Then in a box on page 18, it explains why the FX scandal was considered to undermine confidence, but it does not explain why it thinks GRG does not. Is it implying that commercial lending to SMEs is not sufficiently important? With 5.6 million SMEs employing more than 16.2 million people, 60% of UK employees and 52% of corporate turnover, of course SME lending is systemically important, to the economy and to the financial system. And RBS, the largest SME lender, is systemically important to that market.

On a different count, RBS gave evidence that GRG managed 25% to 30% of the group’s capital, and at one point in the relevant period had almost half of the group’s capital tied up. This is on page 70, in chapter 8, which is all about the systemic importance of RBS and how difficult it was after bailout in the asset protection scheme. However, chapter 8 is itself evidence of the systemic relevance of GRG to RBS and hence to the financial system. A unit tying up half of a systemic bank’s capital, operating without proper governance or management controls, without a second line of defence and with systematic flaws, is a significant threat to RBS and therefore to the entire UK financial system. That is what being a systemically important bank means. The reputational and financial risk to RBS from GRG was known internally, as is explained on page 42.

These control concerns are not limited by the 8% value of the SME lending in GRG; it is about all of GRG and the proper capital control systems in a systemic bank. For the current CEO to say, as he did to the TSC, that it is only a matter for GRG, not the group, is plainly wrong: a group must have controls over where 50% of its capital is at risk. Not to do so is hardly “fit and proper” for any senior banking activity and is wildly deficient under,

“requirements and standards under the regulatory system relating to the firm’s resources”.

Will the Minister explain whether all the systemically important and capital control counts I have elaborated were explored in detail with regard to principle 3? Can arrangements be made for me to see the analysis? It will be impossible to legislate properly in future if that all remains in the dark. Will the Minister say whether the FCA consulted the asset protection scheme and whether there was improper pressure from it or the Treasury? Is that playing a part in suppressing action? If not, why is so much made of it by the FCA?

The FCA poses the question whether it would it be right to bar people now. The answer has to be yes. Should big miscreants be saved because it would mean public disclosure? If we take that line, only the small will be brought to justice: that is what many think always happens in spades in financial services. The FCA also says that, because the activities are unregulated, no standards have been set by it, so there is nothing to measure “fit and proper” against. Well, shame! I have looked at the rulebook, and it is appalling how a general safeguarding provision has been sabotaged to be nothing of the sort.

I commend again the Australian offence of unconscionable conduct in commerce, which is defined simply with regard to the norms of the day, is not rule-bound, and the courts can interpret it. Courts, like the person on the Clapham omnibus, know a scoundrel when they see one.