Small and Medium-sized Enterprises: Mistreatment

Viscount Hanworth Excerpts

Thursday 27th June 2019 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords I shall reiterate some things that have already been said in the excellent preceding speeches. In November 2013, Lawrence Tomlinson delivered his report on the practices of the global restructuring group at the Royal Bank of Scotland. The bank had been rescued from insolvency by the Government and was effectively in public ownership. Lawrence Tomlinson was the special adviser to Vince Cable, who commissioned the report. Mr Cable was the Secretary of State for Business, Innovation and Skills from 2010 to 2015.

The aspersion against the Royal Bank of Scotland was that its global restructuring group, which was tasked with assisting small and medium-sized enterprises in financial difficulty, had driven many of those clients into bankruptcy by increasing the charges it imposed on them, denying them further credit and recalling existing loans. The bankers in GRG were under an injunction to improve the liquidity of the ailing megabank, which led to a so-called dash for cash.

A further charge was that the bank had sequestered the assets of the distressed enterprises by acquiring them at knockdown prices determined by the bank’s internal valuers, or valuers whom it had commissioned. The sequestered assets had fallen into the hands of an organisation called West Register, which was the property division of RBS. Having acquired the assets at fire sale values, the organisation was able to hold on to them until they could be sold at a profit. There was a clear conflict of interest between the bank’s obligation to care for its customers and its pursuit of profits.

The complaints against the Royal Bank of Scotland were numerous and bitter. In consequence of the testimonies gathered by Tomlinson, they merited further investigation. The Financial Conduct Authority was therefore called on to conduct a thorough and independent inquiry. Its recourse was to commission a report from Promontory Financial Group, a global consulting firm that advises clients on a variety of financial matters, including regulatory issues, compliance, due diligence and the like. Since 2016, the group has been wholly owned by IBM. The Promontory report largely substantiated the claims of the Tomlinson report. In the process, it discovered some appallingly callous and unpleasant attitudes on the part of the GRG staff towards their customers, which were revealed by some internal emails, the contents of which were widely publicised.

The FCA proved unwilling to release the Promontory report. Perhaps it did not wish to have its hand forced. Instead, it chose to summarise the report in a brief internal summary and in the final summary published on 13 June. However, meanwhile, the Promontory report has been published at the insistence of the Treasury Select Committee of the House of Commons, which gave the FCA a deadline of 16 February 2018.

An immediate reaction on reading the Tomlinson report might be to declare that bankers had been behaving like crooks and spivs. A response to that could be to declare that, unfortunately, such dealings are in the nature of banking and that, anyway, the bankers were doing nothing illegal. Thus, it could be argued that the bank was merely exercising its legal rights as a lender. By and large, the Promontory report adopted the first of those attitudes. Its central conclusion was that there had been widespread inappropriate treatment of the clients of the Royal Bank and that this treatment had caused material financial distress.

Nevertheless, the FCA’s final report declared that no evidence has been found of criminal intent of the sort that would convince a court of law. As we have heard, it has also insisted that commercial lending does not fall under its regulatory purview. In the main, the FCA’s report evinces the second of the two attitudes that I outlined—albeit that, for the sake of appearances, it acknowledges some faults of the Royal Bank. The report is at pains to avoid attributing blame to individuals within the bank, suggesting that to do so might expose them to personal danger. This seems far-fetched, unless one regards as personal dangers the loss of reputation or the revocation of an honour, as befell the chief executive of the bank.

MPs on the Commons Treasury Committee and the All-Party Parliamentary Group on Fair Business Banking, some of whom have banking experience, described the FCA’s report as a complete whitewash. In partial recognition of its malfeasance, the bank set aside £400 million for the compensation of its victims, to be administered by a High Court judge. In July 2018 it was announced that the scheme would close for customers with fresh complaints. At the time only 803 of 1,230 complaints received had been resolved, with only 370 of these upheld. The payout amounted to only £10 million. This sum can be put in perspective by reference to a statement in the Promontory report to the effect that in 2011, GRG contributed £1.2 billion to RBS’s bottom line.

Where does this leave us? The answer is that there is a deficit in the financial regulation of banks, for which the present Government are wholly responsible. They have failed to act on the recommendations of the Vickers report, which argued that casino banking, with its dangerous speculation, should be separated rigorously from commercial and personal banking. The Government have paid no attention to this. More recently, they have resisted a call for the financial regulation of the FCA to be extended to cover commercial lending. Indeed, the Promontory report warned that not doing this risks a repetition of the sort of events that occurred in RBS.

Under different political circumstances, I would be calling for the Government to act decisively now. However, I do not imagine that we can expect anything of the sort from the new management that will shortly be taking over the Government. There will be very different circumstances when our party takes over the shop.