By Barry Edwards

The Royal Bank of Scotland (RBS) Admonishment


The Royal Bank of Scotland (RBS) has not had a good week. Two reports have been issued, one accusing it of cheating customers who were in difficulty and the other, the second report by Sir Andrew Large continuing on from the first critical analysis issued on the 1st of November. It would be fair to say that RBS has been singled out but is certainly not the only bank that practised the activities that have been denigrated.

The links below will take you to the full reports which are 20 and 90 pages in length respectively.



The most serious is the Lawrence Tomlinson report which accuses RBS of obtaining assets by deception from customers who were put into their turnaround division, Global Restructuring Group. The author is an advisor to the department of Business Innovation and Skills (BIS) which heightens the attention it has been given and, indeed, the Serious fraud Office have taken it up to consider whether they will take action against the individuals involved. Vince Cable, the Secretary of State for the BIS, has also asked the Financial Conduct Authority and the Prudential Regulation Authority to investigate as well. RBS itself has commissioned a report into the allegations from the big City law firm Clifford Chance.

Matters do not get more serious than that with those organisations examining everything, so this is going to be around in the news for some time. Unfortunately, these activities were practised by most banks in the 1982/3 and 1992/3 recessions without any reproach from government; so better late than never! This is just the tip of the iceberg when the behaviour of banks is analysed and it is not surprising that the long suffering SME’s have much to complain about.

The second report is a follow on from the original criticism by Sir Andrew Large, the ex Deputy Bank of England governor, which was published on the 1st of November which was discussed in this weekly comment at that time. Both reports were commissioned by RBS. This is a comprehensive manual for RBS to improve the way they manage their SME lending which is a very explicit guide and particularly relevant for all banks. If you would like to learn how it should be done this is a recommended read.

RBS is coming under fire because it is 81% controlled by the government and it is the largest casualty of the financial crisis. The evidence that is being revealed is confirming the disinterest in finance for SME’s and how low down the list of priorities this sector features. The reality is that bankers consider the SME market a disadvantage for employment enhancement and do their best to play it very safe if they find themselves involved in this part of the bank. You do not find many senior bankers who have spent time in the world of SME finance.

It is time that the whole sector was put into the hands of experienced people who deal with SME’s all the time and the banks are only used as the funding providers with much reduced risk. Most small companies are lifestyle businesses that do not require a lot of working capital since they usually sell their products and stock before they have to pay for it. Out of the 4.9 million companies in this country, the ones that make a real difference to growth and employment number around 100,000 companies. It is amongst this group that most of the trouble has occurred for RBS.

The banks can adequately manage the much smaller businesses which do not cause anything like the problems they encounter with the larger growing companies. This is where the staff in the banks has difficulties because funding growth requires a lot of experience which is a rare commodity among the staff in the banks. Outsourcing the lending decisions for the growing companies and indemnifying the banks against losses is the way forward. This is especially relevant these days since many newer methods of funding are evolving and the big institutions could be persuaded to participate since the yield on the securitised loans that could be packaged together would be attractive with low risk.

The expertise is available from the wide range of consultants that deal with SME’s all the time and organisations would soon evolve if the government encouraged their creation (see Economic Growth Plan in the right hand column of this page). The success rate of these businesses would improve substantially and employment would increase achieving one of the government‘s main objectives. The funding would include the full range including much more equity since the perceived risk would be reduced because of the professional monitoring and advice continuously provided.

The whole approach to this market would change for the better in a few years really making a big difference to the attitudes that currently pervade the SME market. The most attractive part of this approach is that there would be no extra cost to government and it would allow them to encourage specific industries through these new organisations that are created utilising the funding that is already provided by government departments much more effectively.

It would allow these new organisations to provide the long-term funding to match capital investment expenditure for SME’s that has never been available which is provided in other developed countries. A truly professional market for the SME sector similar to the facilities provided for larger and quoted companies would establish itself benefitting investors and companies alike correcting the serious disadvantages this market has suffered for many years.

The banks would still be involved in the financing of SME’s without all the problems that regularly seem to arise according to these reports, allowing them to concentrate on the financing activities that they are most suited to providing. All in all, it is a win-win situation for the government, the banks, the new alternative finance organisations and the institutions without incurring any funding commitment from the long-suffering tax payer. It ought to be a promising electioneering policy for any party that wishes to appeal to the entrepreneurial voters.

Let’s hope that when all the investigations are completed the reports encourage something along these lines.

That’s all for this week, more observations next week.