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RBS abuses raise calls for insolvency regulation

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25th Nov 2013
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Insolvency practitioners and accountancy firms working in tandem with business banks are struggling with more negative publicity and calls for a regulatory crackdown on conflicts of interest following publication of a report on abuses at RBS’s Global Restructuring Group.

The potential for conflicts of interest in insolvency is “rife”, concluded Lawrence Tomlinson in his report on banks’ treatment of businesses in distress. As the “entrepreneur in residence” at the Department for Business, Innovation and Skills, Tomlinson produced the report after collecting evidence from a number of businesses that had suffered at the hands of RBS.

How it works

The Tomlinson’s report found a common pattern in which the bank artificially distressed otherwise viable businesses and put them on a journey towards administration, receivership and liquidation. The process can be triggered:

• Reassessment of loan to value ratios, often based on revaluations that depress the businesses’ assets and puts them in to breach of their covenants

• Technical covenant breaches due to things that have not bearing on the firm’s viability, including temporary dips in EBITDA or a late submission of  information.

• Changes to banking facilities or enforced moves to asset-based finance.

These situations let the bank class a business as distressed and move it into the turnaround division. When this happens, the unit does not support the business “in a manner consistent with good turnaround practice”.

RBS’s West Register division then bought properties post-insolvency at cut prices, creating the perception that the bank’s distressed businesses to put them into administration and take their assets.

To complete the process, the insolvency process lacks fairness and accountability leading to “biased outcomes to the detriment of the business owner”.

Source:Lawrence Tomlinson, Banks’ lending practices report (PDF)

The report documented multiple instances where RBS steered businesses into the hands of its turnaround division and engineered their default (see box right).

“This then generates revenue for the bank through fees, increased margins and the purchase of devalued assets by their property division, West Register,” he reported.

“The amount of profit business lending generates for the bank is extremely low compared to the revenue targets bankers are incentivised to meet ,” Tomlinson explained. “Rather than supporting a business, there are times when it is more profitable for a bank to stress the business. As one banker put it, to ‘put in a little cash and take all the value’.”

Tomlinson called for an immediate end to unscrupulous treatment of businesses and further investigation into this behaviour. Already business secretary Vince Cable has referred the Tomlinson report to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The Daily Record reported that HMRC set up a special investigation unit in Glasgow to investigate RBS.

But as with the Premier Motor Auctions case highlighted by Austin Mitchell in Parliament earlier this month, banks are not the only organisations coming under scrutiny as a result of the revelations. Turning his attention to conflicts of interest, Tomlinson noted: “Not only did some of the businesses we heard from not deserve to be pushed into administration, but once in the insolvency process, the behaviour of the administrators, receivers and/or insolvency practitioners (IPs) was unfair and opaque.”

There were many occasions where businesses found themselves subjected to an independent business review by an external accountancy firm, which was subsequently appointed as the firm’s administrator. Since the bank recommends or instructs the IP directly, Tomlison voiced concern about the potential for preferential treatment and lack of independence.

Further evidence supporting these findings emerged from AccountingWEB and our sister site UK Business Forums, where one member posted about their experiences of the circumstances described in Tomlinson’s report.

AccountingWEB member Richard Terhorst commented on the Premier Motor Auctions item that he had advised a client to put themselves in administration, only to discover that the bank appointed had a big accountancy firm to compile a separate report for a £24,000 fee. “No choice to the company, no choice as to the fee and that they had to pay for it. Anyway after a 26 page report that same accountant was now transposed into an IP who promptly put the company into administration under instruction of the bank.” The administration added another £15,000 in fees.

“No doubt it was all legal… but that does not mean ethical,” said Terhorst.

In these situations the directors lose their right to legal redress. Tomlinson noted however that it’s up to the administrator to take action if any party acts in an unjust manner, but they were unlikely to do so if they have a continuing relationship with another party when they are likely to have future dealings with them.

“Despite reassurances from the party involved that there are Chinese walls to prevent conflicts from occurring, this does not appear to necessarily be true,” Tomlinson concluded. “The relationship between the bank, IPs, valuers and receivers should undergo careful analysis.”

When AccountingWEB asked Austin Mitchell about the Tomlinson report, he endorsed the findings and repeated his call for tougher regulation.

“As I said in the banking debate, we had evidence that this was a practice going on elsewhere. The problem with Premier Motor Auctions and RBS is collusion between banks and insolvency practitioners.”

The insolvency profession desperately needs independent regulation, the MP argued, because the current regulator - the ICAEW - is effectively a “front operation” for the large accountancy firms.

“But we are dealing with a very conservative profession and a department that is reluctant to admit any faults. The government hasn’t interfered with banks in the way it needed to.

“Unless we have an enquiry we won’t know the full extent of what’s going on. Regulation is so lax and the rules are so obscure that if you have an individual insolvency practitioner or [bank] manager who wants to get into this murky business, there’s very little to stop them. The lack of effective regulation is the problem and people will seize the opportunity for wrong-doing.”

Replies (15)

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By jefflcbba
25th Nov 2013 20:34

How many "Groundhog Days"

How many companies needlessly closed?

https://www.accountingweb.co.uk/blogs/mrbradrmeyer/something-about-me/ru...

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By Alonicus
26th Nov 2013 12:10

Fraud or worse ?

Surely this is conspiracy to commit fraud at best. 

I would hope that the further investigation Tomlinson has asked for will look closely at the impact on the business owners and their families.  When a business is forced into liquidation (particularly a healthy business - these poor people must have wondered what on earth they'd done wrong !), the impact can be devastating in terms of both earnings and self esteem. 

If information comes to light that there were any suicides because of this appalling behaviour by RBS and their appointed co-conspirators, I feel it would be justified to seek charges of corporate manslaughter.  But I'm not betting on it happening, there are too many politicians with non-exec directorships at stake.....

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By ipaythebills
26th Nov 2013 12:13

Astonishing

The politicians, particularly Vince Cable, haven't got a clue. The banks get into trouble through imprudent lending. Having been bailed out, they are then criticised for not lending more to SMEs who, by definition, given the depth and duration of the recession, are likely to be more risky than when the banks got into trouble in the first place.Then, to cap it all, when banks attempt to recover assets from failing/insolvent companies, they are criticised again.I know it's not PC to defend banks but they are being attacked whatever they do. What would be the reaction if they continued to finance failing/insolvent companies and then were forced to write off even more debt (which would be described as being at the taxpayers' expense) once they had missed the opportunity to get out relatively unscathed.

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By ipaythebills
26th Nov 2013 12:15

Capitalism

I have just read some of the other comments. Oh deary me, the poor people who have lost their businesses!! These are exactly the sort of people who should't be in business in the first place. Remember Thatcher and the survival of the fittest. It's called Capitalism.

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By Alonicus
26th Nov 2013 12:56

This isn't capitalism. 

This isn't capitalism. 

I agree that some businesses aren't viable and should be allowed to go under; that is a natural evolution and is how capitalism should work.

But RBS were destroying perfectly viable businesses by a variety of thoroughly dishonest methods.  These methods may have been (borderline) legal, but the intent was short-termist and intended to cause deliberate harm.

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By ipaythebills
26th Nov 2013 13:22

Covenants

If the companies have breached their covenants they must bear the consequences. That's how capitalism works. Maybe we should replace the system with one where the borrowers can go crying to people like Alonicus to prop up their failing businesses.

The moral is surely that businesses should be more careful in what they sign up to.

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By robertgarrod
26th Nov 2013 13:38

Who regulates ICAEW. I wrote to the Privy Council and got a reply which said that they did not get involved with disciplinary matters.

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By mydoghasfleas
26th Nov 2013 14:28

The banks have learnt from us

Back in the days when the Big 4 was more numerous (OK the late 80s) there was a lot of press about the insolvency departments - reference to the insolvency departments as being large was a reference to waist size because the IP seemed to do most of their deals over lunches.  The story was the bank would appoint the firm to review its security.  The report would be negative, the bank would appoint a receiver, who would put in a negative report resulting in an administrator, repeat performance by the administrator resulting in a liquidator and the company would be sold at a song to a favoured client. 

The banks cottoned on, advising the initial advisor that any progress along the chain would involve a different firm each step of the way.  Suddenly the companies were no longer iffy.

Roll on 20 years and the banks have cut out the middleman and taking the profit themselves.  You cannot say we did not teach them well.

 

 

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By Ken Howard
26th Nov 2013 15:53

Not always zombie businesses

It's easy to assume that the businesses are hopeless cases, but in my experience, that's been far from reality.  Time and time again, I've seen business owners in despair because their loans/overdraft havn't been renewed - these are cases where there's been no breaches and the renewals have always been no problem in the past.  These are cases where the business hasn't shown any great difference as to profit/turnover levels compared with previous years.  It's just that the bank have decided not to renew, often without notice, leaving the business owner high and dry.  Suddenly finding all monies paid in "appropriated" by the bank to reduce the overdraft facility or pay off loans, and finding their cheques and standing orders bounced will usually cause the downward spiral, especially when the bank charges the "unauthorised overdraft fees" and "bounced payment fees" arising from their own last minute decision to cancel facilities.  

I fully agree that hopeless cases and zombie businesses can't expect guaranteed bank support for ever, but I know that isn't always the case.

I've also seen where the bank lies and tells the business owner that some funds paid in, maybe from the sale of assets or part of the business, will be shared between paying down the borrowings and leaving some in the bank to pay off creditors and staff, only to take the whole lot when the money arrives!

Thank goodness that their underhand (if not criminal) tactics are getting publicity which hopefully will lead to them being forced to stop these damaging practices.

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By The Black Knight
26th Nov 2013 16:59

then prosecution should follow

If this is deliberate then prosecution should follow!

looks like fraudulent trading s.993 CA2006

The police should therefore investigate a serious matter that carries up to ten years inside.

The fraud would seem to lie with the banks, possibly helped by the insolvency rules but no collusion is perhaps necessary. Even if this had been spotted and reported to SOCA still no action would have been taken.

No enforcement = no sanctions = No law

I bet the shredders are overheating again!!!!

Still as we have seen with drugs money laundering, governments and law enforcement take a very lenient view and it may even result in a fine which is a small fraction of the amount stolen.

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By Alison Wunderland
26th Nov 2013 20:57

Bankers Bonuses Bolstered by Bogus Bankruptcies
The above is writ large on the side of my double decker Routemaster bus which I purchased 8 years ago as being the only way I could see of getting the message out about the criminal practices of greedy banks in collusion with insolvency practitioners and the courts to rob the hard working private business people of the UK. Why are the media setting about RBS when their partners NatWest are possibly the very worst of all the banks to defraud people. NatWest stole proceeds from letters of credit for export goods, stole direct credit transfers from the Bank of England on my accounts. We have on record a case of NatWest employing the services of an ex-Katanga mercenary to silence a customer who refused to give up after NatWest defrauded him of his businesses and property. This case is covered on my Website www.force4justice.co.uk under "Cases" the PDF file is titled The Quarryman. Check out some of the other cases while you are logged on.

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By peteretherden
27th Nov 2013 21:19

Public Banks & Fair Banking (cf fair trade)
One reform that is clearly needed is a 'Public Bank of Last Resort' that businesses threatened of being defrauded by collusion between private banksters and private bean counters can turn to for Fair Banking services based on Fair Banking (cf fair trade) criteria. Prosecution and imprisonment in the many instances of Criminal Conspiracy to Defraud is the other reform necessary to deal with this category of white collar crimes...and preferably this side of suicides and corporate manslaughter. Next comes the question of why Fair Banking should be restricted to judicial persons. This criminal practice is rife among natural persons...ie. the people referred to by Abraham Lincoln in his Gettysburg Address as those for whom and by whom governments were created. Just a pity he didn't say governments and businesses.

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By Mikolaj
27th Nov 2013 21:23

Banking impropriety

The facts of this case are not so complicated, nor are they so technical that even an MP was able to get his head around them.

There is a 'prima facie' case here and RBS seemingly, has colluded with insolvency practitioners and undermined a good business to offset in some small way their own banking incompetence. Shame on them!

If the justice system in the UK has real fairness at its core, there will be prosecutions; but better not hold ones breath.

 

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By dnaokes
30th Nov 2013 08:56

Fraud and RBS

The corrupt culture at RBS started at board level and, as they deliberately close businesses by unscrupulously calling in loans to collapse them (Front page, Daily Mail, 25.11.13),  its clear that corruption goes right through RBS.

RBS should have been allowed to go into liquidation when their corruption caused their insolvency.

The nation of Iceland did precisely this, arrested and imprisoned its bank directors, and started new banks, taking over the accounts of the failed ones. They are now the most successful economy in Europe.

RBS still needs to be closed, and its directors arrested, or the corruption will never stop.

And there are major firms who are members of the Institute of Chartered Accountants who have clearly been signing clean audit reports on insolvent banks.  Their partners need to be similarly arrested, as do those who were running the Financial Services authority, which was clearly the most corrupt and incompetent regulator we have seen.

 

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Replying to I'm Chuck Bass:
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By The Black Knight
02nd Dec 2013 09:51

Think you might be right!

dnaokes wrote:

The corrupt culture at RBS started at board level and, as they deliberately close businesses by unscrupulously calling in loans to collapse them (Front page, Daily Mail, 25.11.13),  its clear that corruption goes right through RBS.

RBS should have been allowed to go into liquidation when their corruption caused their insolvency.

The nation of Iceland did precisely this, arrested and imprisoned its bank directors, and started new banks, taking over the accounts of the failed ones. They are now the most successful economy in Europe.

RBS still needs to be closed, and its directors arrested, or the corruption will never stop.

And there are major firms who are members of the Institute of Chartered Accountants who have clearly been signing clean audit reports on insolvent banks.  Their partners need to be similarly arrested, as do those who were running the Financial Services authority, which was clearly the most corrupt and incompetent regulator we have seen.

 

Corruption is the only explanation as the inaction of government departments also goes way beyond incompetence.

Can't see it being fixed when MP's don't see anything wrong with fraudulent expense claims.

It's a UK corporate culture problem based on "it's not illegal if you don't get caught"

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