Royal Bank of Scotland’s West Register unit is facing investigation into conflicts of interest and how the bank treated customers in its restructuring division.
The Financial Conduct Authority yesterday published the interim findings of an independent review commissioned by regulators into whether Royal Bank of Scotland’s Global Restructuring Group had deliberately acted against the interests of the bank’s small and midsize borrowers to maximise its profit, and pushed them into insolvency to take control of their assets.
The review found that RBS had not deliberately pushed clients toward insolvency, but that it had not properly managed the inherent conflict between the needs of its borrowers and its own need to maximise the amount it recovered from distressed loans.
This analysis applied also to West Register; the review found it had not deliberately sought to take over borrowers’ properties, but that there were huge conflicts of interest in the way it was run.
RBS set up the Global Restructuring Group following the financial crisis to work through distressed loans in a methodical manner rather than simply selling them to private equity firms at a steep discount. At its peak it managed more than £38B of loans, around half of which were to property companies.
West Register was a division of the bank set up in the 1990s. Its purpose was to buy property assets if the companies RBS lent to went into insolvency, and a sale on the open market would crystallise a big loss for the bank. It would manage the assets to improve the value then sell them at a later date.
At its height it managed more than £3.7B of assets. It was shut down in 2014.
The accusation that was levelled at West Register, both in the run-up to this report and consistently throughout its existence, was that RBS deliberately put property owners into insolvency so it could buy their assets through the division and then sell them later at a profit.
The FCA report said that during the period it examined, 2008-2013, West Register bought 382 properties from 166 clients for £219M.
It reviewed 60 cases where West Register was involved in some way, and in 15 of these cases West Register ended up buying the property.
It found no evidence GRG and West Register had deliberately set out to put a company into administration to take over its assets or that West Register had bought assets at below market value. Indeed, it pointed out that the purchase always crystallised a loss for RBS on the level of its loan.
But “the independent review concluded that the overall relationship between GRG and West Register was inappropriate,” the report said.
It said the staff of West Register was advising the GRG restructuring staff on the strategy for assets before it had bought them, creating a big conflict of interest.
“In 30 of the cases in the review sample, the independent review found that information had been inappropriately shared by GRG with West Register,” the report said. “The nature of the information shared was extensive and/or the sharing of it took place at a time when West Register was able to and in some cases did influence GRG’s strategy toward the customer.”
“In common with the twin goals of GRG itself, the tension between two competing objectives in the West Register model — maximising immediate recoveries and future profit to the bank — was never identified and therefore never managed.”
The FCA said the review had given an opinion as to what extent the senior management of RBS and GRG knew about the failings it identified, but since they had not been given the chance to give their version of events, this part of the report has not been published.
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