Clifford Chance has found no evidence that the Royal Bank of Scotland (RBS) set out to defraud small business customers in order to turn a profit, following allegations contained in a report by Lawrence Tomlinson last year.
Partners Carlos Conceicao and Kelwin Nicholls were drafted in by the bank to lead the investigation at the end of last year, after the bank was accused of “systemic and institutional” behaviour to put small businesses at risk through its Global Restructuring Group (GRG) (26 November 2013).
The firm found no evidence that the bank was guilty of systematically running small businesses into the ground in order to profit from their demise.
The Tomlinson Report had accused the bank of targeting small businesses and then artificially driving them to default in order to enable the bank to take control of its assets.
It claimed the bank deployed a range of methods in order to undervalue business assets and put them in breach of covenants. It stood accused of deploying a range of tactics to put customers “on a journey towards administration, receivership and liquidation” including its overdraft and loan facilities.
But the report said: “We did not identify any files which fitted the description of the bank ‘engineering’ a default or ‘artificially distressing’ a customer.”
It added: “We saw no evidence on the files that we reviewed that the bank exerted undue influence on external valuers in order to procure a covenant breach” and also found “no evidence that the bank deliberately manipulated valuations to procure a customer’s default or transfer to BRG”.
However the report did raise some areas of concern for RBS. Those included suggesting that the bank look again at a section of the GRG training manual which allegedly suggested threatening to remove a distressed business’ overdraft as a way to gain “leverage” in negotiations.
Clifford Chance said: “There is a line between seeking to manage the use of an overdraft by a customers showing signs of financial distress, which is standard credit stewardship practice and using the on-demand nature of an overdraft as a point of leverage.”
However it concluded: “The circumstances in which is it appropriate for a bank to remove or to warn a customer that it will remove an overdraft are beyond the scope of this report.”
The report also called into question the bank’s fees, which the lawyers confessed to being at a loss to understand. Customers had alleged that there was a lack of transparency in how the bank charged them and Clifford Chance concluded: “We found it difficult to understand how the bank calculated the fees which it proposed to customers in any particular case and therefore found it difficult to assess allegations.”
RBS has responded by delaying abandoning its practice of charging customers an immediate interest payment upon defaulting, putting in place a 90-day delay in demanding the payment. It has also pledged to give customers a 30-day notice for a any change in fees.
The bank has also acknowledged that its practice of effectively buying up a distressed business’ property through its West Register vehicle could be perceived as a “conflict of interest”.
The bank has committed to wind down and sell off all assets in West Register.