Commercial awareness: think like a professional about... RBS

Our banker, lawyer, consultant and accountant consider the most recent scandal to hit the troubled bank

RBS has had a hard time over the past few years. During the second half of the twentieth century and the early years of this century, international expansion across Europe, Asia and America led to the Edinburgh-headquartered financial conglomerate briefly becoming the largest bank in the world and the world's biggest company by assets.

But then came the financial crisis. Thanks in large part to its involvement in trading sub-prime securities and its costly acquisition of Dutch bank ABN AMRO, RBS was bailed out to the tune of £76 billion by the British government, which now owns 82 per cent of the bank. The bank hasn't reported an overall profit any year since the financial crisis, and is expected to report a loss of £8 billion for 2013.

Along the way, the bank has also faced a interest rate swap misselling scandal, been fined for involvement in the Libor-fixing cartel, and seen its one-time chief executive officer Fred "the Shred" Goodwin have his knighthood "cancelled and annulled" by her Majesty.

And RBS's woes aren't over yet. In early January the bank found itself the subject of a parliamentary debate as David Cameron refused to confirm that he would not give shareholder approval to the bank's request to be allowed to pay certain staff 200 per cent of salary bonuses, a condition imposed on European banks by EU lawmakers, though he did pledge to limit overall pay at the bank.

Even more recently, the bank has had to face yet another controversy. On 21 January, BBC Radio 4's File On Four consumer programme aired a critical report on another aspect of the bank's activities. Entitled Default by Design?, the programme assessed the way in which the bank has worked with the small to medium UK businesses it lends to.

A 2013 report by government advisor Lawrence Tomlinson claimed that RBS's Global Restructuring Group (GRG) had forced some viable businesses into insolvency. This report and File On Four suggested that not only had RBS not assisted businesses guilty of minor breaches of their loan agreements that still had a chance of financial recovery, but had actually welcomed these failures as they allowed the bank to take control of the assets of these businesses under the terms of the security agreements between them.

RBS, however, denied these accusations and has commissioned an independent report of its own to assess the affair, due out soon, which may tell a different story - a Bank of England report on the same subject found no evidence to back up the allegations.

And despite the troubles it's endured over the past few years, the bank can take heart from a return to profit for some periods of last year, which prompted speculation that the bank may even be stable enough for the government to start shedding the RBS shares it holds into the market later this year.

Thinking like a...


State of affairs

There have been calls, especially in the left-wing press, for largely taxpayer-owned RBS to become a "people's bank", run along "ethical" principles and eschewing the big bonus culture found across the rest of the banking industry. But it's important to remember that RBS is a (largely) government-owned bank not a state-run bank, and that means that to all intents and purposes it's still operating as a private sector enterprise different to, for example, UK Export Finance, the UK's export credit agency.


Letter of the law

I was interested to hear that the enquiry RBS has commissioned into the GRG scandal will be conducted by magic circle law firm Clifford Chance - given their strong reputation in finance and disputes work I'm sure they'll do an excellent job. But it seems to me that, however unjust it might appear, banks' legal rights under security agreements triggered by breaches of loan documents must be upheld - banks support the economy by lending out vast sums of money, and the legal protections that allow them to do so must be respected.


Turning points

The work undertaken by GRG is something that accountants often get involved in. Sorting through the financial affairs of a business in difficulty and either guiding them onto the path back to health, or making sure that the company's creditors receive their fair share of the dying businesses' assets is something that our accounting qualifications make us ideally suited to doing. These accountants who specialise in insolvency have specific ethical duties and are heavily regulated, which in theory should prevent them from getting involved in any irregular practices.


Strategic thinking

One of the criticisms levelled at RBS in relation to the GRG affair relates to the way in which this part of the bank is structured. A report by Sir Andrew Large, a former deputy governor of the Bank of England, and strategy consultants Oliver Wyman concluded RBS left itself open to criticism by allowing those at the bank who made decisions in relation to struggling borrowers to be aligned with profit-generating teams who had an interest in the bank seizing borrower assets. It also recommended that internal complexity at RBS should be reduced, clear lines of responsibility established, and safeguards for customers in financial difficulty put in place.