Royal Bank of Scotland announced last month that it will invest over one billion pounds in the improvement of services for its commercial and corporate customers. The bank – which is 80% taxpayer-owned – is hoping to improve its reputation among customers
after a string of scandals involving the mis-selling of mortgages, payment protection insurance (PPI) and interest rate hedging products.
As part of its billion-pound-plus investment, RBS plans to establish eight new regional business hubs to support local entrepreneurs. In addition, the bank will step up training for its staff, giving relationship managers more decision-making powers for local
customers. The money will be spent over the next four years to improve services such as account opening and lending. Most lending decisions should be made within five days as a result of the changes, according to RBS.
‘Swap Rates’ Complaints
The bank’s turnaround division has faced widespread criticism after allegations that it had mis-sold ‘swap rates’ – interest rate hedging products – to thousands of UK small and medium-sized business customers. According to a study by the Financial Services
Authority (FSA), interest rate hedges were sold to at least 40,000 UK SMEs from 2001 onwards, with RBS the single largest seller.
The complex financial instruments were designed to product business customers from rising interest rates. However, many customers complain that they were never warned of the extra costs they could face if interest rates fell. For some small businesses, the
swaps sold by RBS and other banks have cost them thousands of pounds in extra monthly fees, with ‘break costs’ to get out of the contract running into hundreds of thousands of pounds.
After an FSA pilot study revealed more than 90% of these ‘swap rate’ products had been mis-sold, RBS has increased its provision for compensation from an initial £50 million to £1.3 billion. UK government adviser Lawrence Tomlinson accused the bank’s turnaround
division of forcing small businesses into bankruptcy and profiting from their collapse. RBS was cleared of attempting to defraud its customers in an independent report commissioned by the bank. However, in addition to the £1.3 billion fund for ‘rate swap’
compensation claims, the bank has also been forced to put aside £3.25 billion to cover claims over the mis-selling of payment protection insurance (PPI).
In a further set-back to the bank’s corporate image, RBS was recently fined £14.5 million by the Financial Conduct Authority (FCA) for serious failings in its sale of mortgages. According to the regulator, “highly inappropriate” personal comments by salespeople
may have resulted in the mis-selling of mortgages. Customer advice on the most suitable mortgage terms and budgets, as well as on debt consolidation, was also deemed to be below FCA standards. Over 30,000 potentially affected customers are to be contacted
by the bank to deem whether they are due compensation for mis-selling.
In addition to being fined by the FCA for mis-selling mortgages to UK customers, RBS was last year penalised by American regulators for mis-selling bundled ‘mortgage backed securities’ to investors in 2007. A £128 million fine was levied by the US Securities
and Exchange Commission after the bank was charged with misleading investors.
According to the SEC, 30% of the loans in the bundled tranche offered to investors were so risky that they should not have been included. George Canellos of the SEC’s enforcement division said that RBS had “cut corners and failed to complete adequate due diligence”.
The string of mis-selling scandals has been a major embarrassment to RBS – the biggest lender to small firms in the UK – and its new chief executive Ross McEwan. In an article for The Guardian newspaper in February this year, McEwan wrote:
“In the last five years, much has been done to defuse the bank’s legacy of excess, to clean up the culture and build a strong, stable platform for the bank. But I am acutely aware that there is still much more to do.”
RBS’ customers and shareholders – as well as British taxpayers – will be hoping that the chief executive, appointed in October 2013, can improve trust levels as well as profit levels. The billion pound investment in improving services for corporate clients
will be a welcome step in the right direction.
For more information about any of the above or for practical advice on this or any other aspect of banking and financial disputes, please contact
Kalvin Chapman of the Berg Banking Litigation Team on 0161 829 2599 or email him at
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(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.)