By Kam Sandhu @KamBass
‘Taking on a bank, especially what was the largest bank in the world at one stage, I’m just a bricklayer, and it really is stressful as an SME to take on these people,’ Clive May tells the BBC. May has been working in construction since 1982. After leaving school he became a self-employed bricklayer, eventually setting up his own business – C May Brickworks, which at its peak turned over £3.2m and hired around 100 staff and sub-contractors. The company closed its doors on December 20th 2013, despite a ‘healthy order book’ because May says, of RBS’s actions, triggering a series of events which lead to the demise of his company.
May had taken out an Enterprise Finance Guarantee with RBS in 2010, a ‘loan guarantee scheme to facilitate lending to viable businesses that have been turned down for a normal commercial loan due to a lack of security or a proven track record.’ The scheme was launched by the government’s Department of Business, Innovation and Skills (BIS) in 2009 to encourage lending by banks to small and medium sized businesses (SMEs).
80-90% of all employment in the EU is provided by SMEs and yet these businesses have had greater difficulties in securing loans in the aftermath of the financial crisis with banks tightening credit terms rather than supporting businesses and ultimately securing jobs. The EFG gave banks a 75% government guarantee on loans that defaulted, ameliorating risk and encouraging lending. Companies still had to be viable, with the guarantee providing a last resort. And vitally, the guarantee was provided to the bank, not the borrower; businesses taking out the EFG loan would at all times be 100% liable.
EFGs also require a 2% fee per year on balances, making the loans more expensive than some other options. However, the loan was designed for companies that had exhausted their security, and generally were not eligible for loans elsewhere. Nonetheless, the advertisement of this 2% ‘premium’ also lead to confusion, as borrowers were lead to believe that this was an insurance payment for the scheme. This was what was confirmed to Clive May in writing from his relationship banking manager in September 2011.
In the same month, a BIS paper clearly reiterated that the guarantee for was the banks, which, Clive says, shows that BIS were aware of mis-selling even then:
‘I was told that the 2% annual premium was an insurance. The BIS changed the wording on EFG guidance in September 2011, adding it’s not an insurance to cover the borrower in the event of default. If they had no evidence why insert it but more so they bold texted it too?’
In fact, May was not even eligible for the loan and was not gaining extra working capital. May had an overdraft which, post-2008, became viewed by banks as toxic and capital heavy. Exchanging this overdraft for an EFG without lending any new money reduced the bank’s liability, ‘with the added benefit of the 75% payout in the event of default which was in many cases in the interests of the banks to engineer’ says May. RBS also used the exchange as an opportunity to reduce cash flow and change the terms and conditions of the loan which put increased pressure on the business:
‘The EFG was used to repay part of our overdraft. When it was drawn down RBS reduced our facilities even further so we could not trade.’
May now believes they did this ‘with the sole intention of claiming on the government guarantee.’
In March 2012, May opened up a complaint with RBS about his liability, with evidence including a letter from an RBS manager and a signed witness statement from his accountant. Despite this, the bank refuted May’s statements:
‘RBS’ reaction was dismissal right from the start. They made me feel like a liar and an insignificant customer who, despite having all the info in writing, it didn’t matter.’
One of May’s complaints involved the removal of a second home from his application, which was done at the request of an RBS manager who said at the time that it did not need to be listed. The second home would have made May ineligible for the loan due to the available security. Six months after opening the complaint, May was told it was removed because ‘it was in fact held in your wife’s name due to the death of a relative so didn’t form part of our asset base.’
‘They made up a death in my wife’s family’, says May, in a bid to cover up why his security was altered for the application.
Further, May’s wife is company secretary to C May Brickworks Ltd with 33% shares in the company. Under EFG rules, assets must be pledged if connected persons have more than 10% shares in the company.
This would prove to be just the start of what May would experience when trying to bring a case of fraud and mis-selling against one of the world’s biggest banks.
On the day that the EFG was drawn, C May Brickworks was also transferred into the Special Relationship Department – one step from the Global Restructuring Group – a turnaround division where RBS placed ‘ailing’ businesses.
RBS and GRG
In the recession of the early 90’s, RBS found itself hugely exposed to bad debts in the shape of ‘troubled UK commercial property and corporate borrowers.’ To counter this risk for future, chief executive Sir George Mathewson, decided to revamp the restructuring division into a profit making business. To oversee this, RBS hired Derek Sach in 1992, to reduce the £400m bad debts, and make the turnaround division into a profit making centre for the bank.
Sach also took hold of the West Register, RBS’ property arm which was set up to buy property from its customers, often at reduced prices evaluated by other arms of the bank or the insolvency firms instructed and chosen by RBS.
In an article sponsored by his unit in October 2013, Sach told the Daily Telegraph ‘GRG’s modus operandi is helping to promote a ‘turnaround culture’ in the banking industry. Our approach offers the best possible chance to turn businesses around.’
Sach was seen as somewhat of an experienced hand who had proven his business skills. He had overseen the comeback of the flailing holiday package provider Thomas Cook, and also was credited with providing HMV with a second chance. His work at RBS was also commended as being a success for the banking industry.
While Sach and RBS were being covered in praise from the financial sector, one man was gathering evidence of 15 ‘copycat’ case studies whereby SMEs tilted into the GRG were driven to the point of insolvency through the actions of RBS.
Neil Mitchell, former Torex Retail Chief Executive, would prove to be a thorn in the side for RBS. Mitchell, also an RBS shareholder and claimant, had initially wanted to bring his evidence to the attention of the bank ‘in the spirit of co-operation to help [RBS] quietly investigate internally.’
But he quickly felt the weight of RBS against him. According to Mitchell, RBS refused to look, engage or attend Parliamentary opportunities to study or discuss the ‘crates of evidence’ he had. After taking his case to the police and being promised an investigation, Mitchell received a short and curt letter stating that RBS denied everything.
Mitchell had also taken his case to the government itself, insisting that he had made the case clear to the coalition and Business Secretary Vince Cable, who Mitchell says knew about the cases since June 2011.
It was becoming apparent that there were layers of protection for RBS that extended beyond the bank itself, working to numb and quieten allegations of serious and institutional fraud. Mitchell said in a video he made for his website:
‘There is a lengthening list of Lords, politicians of different political parties, and Her Majesty’s government, departments and regulatory agents, especially her Majesty’s Treasury, UKFI and FSA who have been initially briefed and provided with summary information on this matter whom repeatedly seek ways of avoiding taking personal responsibility and action on this, by always wanting to pass it on to somebody else, so as not to personally act – as it may mean upsetting RBS and the banking establishment.
‘In the case of RBS we [also] have a cover up…accompanied by establishment collusion.’
But Mitchell was not going quietly. In 2012, at the RBS AGM, he stood up to relay his experience in trying to bring his evidence of fraud to the attention of the bank, including the cease and desist order he had to procure against RBS, for the ‘physical and electronic surveillance’ being carried out on him by the bank.
Despite the silence, a new report authored by an Entrepeneur in Residence at the Department of Business, Skills and Innovation was to shed light on the practices and treatment of SMEs by RBS, and it would take into account Mitchell’s evidence.
The Tomlinson Report
In November 2013, Lawrence Tomlinson , Entrepeneur in Residence for the Department for Business, Innovation and Skills, released a damning report that looked into the GRG’s treatment of SMEs. The report was not confined to RBS, though remained its focus. The report, ‘Banks’ Lending Practices: Treatment of Businesses in Distress’ highlighted several tactics used by banks to drive viable SMEs to the wall within restructuring divisions, in order to extract assets, value and money, to boost balances for the bank and drive down their exposure to risk. These included banks engineering default positions, to ‘move the business out of local management and into their turnaround divisions, generating revenue through fees, increased margins, and devalued assets.’
For SMEs, this means that they are placed into groups like GRG under the false impression that they are put there to reinvigorate the business, when in reality, they are being stripped of assets and cash for what is now a profit making centre for the bank.
Tactics highlighted by Tomlinson in the report include:
Reduction in the valuation of assets
Companies’ assets were dramatically devalued, often within short spaces of time at the behest of bank evaluators, affecting the customers’ liability position. Examples included:
– ‘A two thirds reduction in valuation in 2 months, during which the business’ RBS Relationship Manager informed them that ‘ no one has ever been sued for undervaluing a property.’
– ‘A revaluation, in the same month, by the same valuers, reduced the valuation of the asset by £1.3m (over 17%) due to the new instructions given to the valuer by the bank.’
– ‘A desktop valuation (having never visited the property) reduced the value of the asset from £5m to £1.6m in 2 years. This allowed the bank to renegotiate its terms and significantly increase their margins.’
Breach of covenants unduly enforced
Breach of covenants – promises made by the borrower to the bank – were unnecessarily enforced to manipulate default positions. ‘The breach could be as insignificant as being one day late in providing non-vital information on accounts’, even if there were no change in income and payments were being met, these ‘breaches’ were used to ‘trigger’ the move into GRGs.
It was also noted that in some cases, constant pressure was put on business owners to provide non-essential information immediately, leading them to be distracted from their work, in order to meet unnecessary deadlines that were in fact created by the bank to increase chance of breach.
The report highlighted that many businesses were unsure of the reasons why actions were taken against them. Yet, once it is known that the bank is intent on moving the business into insolvency then it is clear why the bank took those actions. One example was given of a business which repeatedly asked why they were referred to the GRG group and was given different reasons each time. Tomlinson advises that if businesses were aware of the bank’s plans they could make different business decisions and also consider whether moving lender was an option.
Overdrafts, as May had, require capital intensive lending, with 100% security usually needed. These have become more of a concern for banks following 2008, and the Tomlinson report highlighted that overdrafts had reduced by £3bn in 2013 alone, 16% more than the previous year. However, changes to the terms of the overdraft could push borrowers into a corner, without the ability to move to other lenders, allowing the bank free reign on the conditions.
Neil Mitchell: “What they did to my company, and what they do is in fact a system, every company that goes through GRG is to have the business relationship banking manager tip the company into this thing called GRG that then sets a new banking contract with them, new levels of fees and interest charges, and all sorts of payments and then also sells them additional products that basically swamps these enterprises with additional costs.
“As soon as the enterprise breaches any covenant or looks like it’s going to be in any trouble, quite often put there by the increased fees by the banks or by the products like interest rate swaps sold by the bank, or property re-evaluations demanded by the bank, then the business gets put into this unit. And effectively they then put the business into administration and sell their assets. And quite often they sell them to their own company West Register, and they then hide those in various subsidiaries of West Register here and in offshore structures.”
Max Keiser: “So it sounds a little bit like the mafia. So in the United States the mafia will torch a dry cleaning shop they might have an interest in, or a restaurant, to get the insurance payment. So here we have RBS who because of the malfeasance of its directors and previous directors found themselves needing a huge bailout and needing lots of cash. So like the mafia in a similar situation, they created a subsidiary, or worked with their subsidiary Global Restructuring Group to target Small to Medium Enterprises and not so small, for demolition, for destruction, to be crushed and sold off for pieces, to game the system and to act like a banking cartel, a banking mafia.”
BASEL III Reforms
The Basel III Reforms are voluntary reforms undertaken by banks following 2008, to hold more capital than risk. However, while this was meant to encourage healthier lending, it had the effect of tightening control and reducing lending and, as mentioned, SMEs have struggled more to secure loans in the aftermath of the last financial crisis.
This risk management changes completely however, when there is (taxpayer) government funded backing of banks’ loans and liability.
Charles Henry Mogford, a convicted criminal, obtained an EFG for £500,000 for his business, Auto Ex Limited, a Land Rover Dealership in Berkshire.
After Mogford’s business had to be relocated for a high-speed rail link, Home Secretary Theresa May lobbied on his behalf to get the loan, but was apparently unaware of a 10 year prison sentence he had received in the US, where he plead guilty to several counts of grand theft and theft of state funds.
Auto Ex Limited also folded and concerns were raised about financial misconduct on Mogford’s part.
While media reports focused on the bad judgement of Theresa May, the responsibility of Barclays, who administered the loan of £580,000 five months before the business went bust, seemed unchallenged despite Mogford claiming that “Barclays were told. Our independent bookkeepers and accountants all knew. It was not a secret.’ Though, Mogford felt it was not necessary to tell the Home Secretary about this.
It is indeed the responsibility of the bank to check viability and vet applications, but Barclays refused to say whether they knew about Mogford’s past before giving out the loan. Yet, it is clear this should have raised alarms and put his eligibility for such a sum of money in question.
Nonetheless, whether a viable business or not, for banks the 75% guarantee and the option to seize assets for the remaining liability provide a win-win. No risk is carried by the bank – only by the taxpayer, which makes lending to risky businesses and owners in the interest of banks, as the public purse still picks up the bill when it goes wrong.
When a BIS spokesperson was asked, they stated the amount government had paid back to banks under the EFG was ‘commercially confidential’ despite being public money.
RBS Reviews: A Whitewash
Clive May continued to find himself being ignored, even after enlisting the help of his MP, David Hanson, who had supported May through his complaints.
‘RBS either through my MP or direct were contacted numerous times, at least 30-40 I’d say. In each response, they said no evidence was found to support my allegations of mis-selling.’
Clearly, with the release of Tomlinson’s report in November 2013, May knew he was not alone, but the outward statements of RBS and other EFG lending banks maintained that there had been no problems and no evidence of mis-selling.
The Tomlinson report lead to an independent audit of RBS. This was carried out by legal firm Clifford Chance. Clive May was interviewed and gave his full account and evidence to the review. Clifford Chance returned that there was no evidence of systemic fraud. RBS CEO Philip Hampton stated the independent audit showed no evidence of ‘wrongdoing’, and called for an end to the suspicion.
Yet, in February 2014, the Department of Business re-wrote to the 42 banks administering EFGs reminding them to train staff adequately.
Move Your Money had also been investigating claims and looking over evidence from clients such as Clive May. They challenged the evidence of the report and claimed that there had in fact been ‘serious widespread and evidenced allegations of criminal fraud.’
By this point, Mitchell had made 27 representations to Vince Cable in 4 years about his evidence. Lawrence Tomlinson had confirmed to Mitchell that the Business Secretary knew about the evidence in August 2013 yet he continued to say he had no knowledge until after the report was released in November. ‘He knew about this for 4 years and covered it up,’ says Mitchell.
After 4 years of complaints and rebuttals from RBS, and no action taken by the Financial Conduct Authority, the law societies nor Governor of the Bank of England Mark Carney to whom May wrote‘What does an SME in the UK have to do to have his case investigated?’, it was only when May took his case to North Wales Police to report RBS for fraud that things started to take a turn in his case. The removal of May’s second home, by the request of RBS, to adjust May’s eligibility for an EFG could count as an act of fraud committed by RBS against the government. Suddenly, May received a letter releasing him from liability under his personal guarantee. RBS gave no reason for doing so.
But May had lost his business and livelihood, he believes, through the wrongful actions of RBS, and the costs incurred by May to maintain cash flow, and pay for legal costs were now spiralling into the hundreds of thousands;
‘An ideal outcome for my case would be closure. A realistic settlement to cover legal fees and put me back into the position I was in before the mis-selling.’
Bank directors were called before a Parliamentary hearing to investigate whether viable companies had in fact been forced to close by the GRG in light of the Tomlinson Report. Senior directors Derek Sach and Chris Sullivan were called to give evidence in June 2014.
While the pair maintained that practices were in line with enabling businesses to succeed, the story started to fall apart. One example cited as a success of the GRG in the hearing was West Midlands based metals processor Independent Slitters. RBS claimed that the company had been happy with the help of GRG and that it had contributed to their business.
However, shortly after the hearing, Chief Executive of Independent Slitters Daniel Wharrad, wrote to Committee Chairman Andrew Tyrie to explain that they had in fact been left less than satisfied, and Wharrad’s company had been ‘manipulated and played to enhance the public perception of GRG’s work.’
But this would not prove to be the biggest deceit of the hearing. The committee attempted to distinguish whether the Global Restructuring Group was a profit making centre for the bank. Sir Phillip Hampton had written to Tyrie following the hearing explaining that it was. Yet incredibly, both Sachs and Sullivan suggested it was not a profit making centre.
‘Parliament expects witnesses to give straightforward evidence. Two senior managers fell short of this standard at a hearing with the Treasury Committee in June.’
‘Anybody can make a simple mistake in their evidence. But this was more than that – it was materially incorrect on a crucial point and unacceptable.’
Andrew Tyrie – After releasing the letters from Hampton and Wharrad
By August, Derek Sach left his position as GRG head with no fanfare, meaning little for the accountability of his reign for two decades. In December, it was an early leave for Chris Sullivan too, with rumours attributing this to the mis-selling scandal that was finally about to burst.
RBS come out on mis-selling
In January 2015, RBS finally admitted to the mis-selling of EFGs and vowed to contact 1800 of the 9000 businesses it had issued the loans with. According to RBS, these 1800 companies were given unclear information when taking out an EFG, and 300 were in default with many others nearing or showing signs of stress.
RBS now says it is conducting a case by case review, and findings will be sent to customers. Clive May awaits his report but remains skeptical of the internal review by a company that has managed to evade its guilt for years, particularly when the review is conducted with ex-GRG staff. Like Mitchell, May has come to the conclusion that the cover up is increasing the scale of these economic crimes.
“The banks commit fraud their solicitors cover it up and the regulator does nothing – that’s the scandal”
A report has also been commissioned into the GRG, which has been stretched out and delayed for months, though there is promise that conclusions will be released by the end of this year. Still, for those it concerns, the attempts to gloss over the structural ways in which this bank drove businesses to the wall is no less of a threat, and for RBS, conflict of interest continues apace and with impunity. PwC are the acting accountants during the investigation. They also previously re-structured company finances when brought in as an administrator for the GRG.
Yet while any threat of independent and appropriate investigations into RBS remain lax, the bank remains vigilant in the surveillance of people bringing cases against them. On September 10, while Clive May delivered a speech for the 33rd International Symposium on Economic Crime, an attendee came to the attention of the organisers. He had asked several questions at the end of May’s speech specifically about the EFG, with several other encounters that evening. Minimal research revealed the attendee had disguised his employment with RBS and his secondary work for a company involved in the EFG review.
May had said during his speech:
“I used to own a company called C May Brickwork Ltd but it is fair to say that company was destroyed by the actions of RBS . If that isn’t an economic crime, then I don’t know what is.
“My story isn’t unique. Thousands of SMEs have been destroyed in a similar way- through economic crime in its widest sense. It is important that people listen to these stories and hear what we are saying. They involve real people, with real families and real lives, losing real jobs and sometimes sadly killing themselves.
“The SME Alliance has been a great help to many of us, it means we aren’t alone and neither were we the failures that the banks had made us feel. We were just conned by bankers helped by lawyers and accountants — people who we should have been able to trust.
“We are almost overwhelmed by the resources that banks like RBS are throwing at us to stop us claiming fair redress.”
May was invited to the symposium through the SME Alliance which he himself had helped to found.
‘SME Alliance was formed out of Twitter whereby like minded tweeters got together to vent anger and exchange experiences. We want to be a major voice for SMEs and to exchange experiences and information to lobby government for positive changes. Although seen as mainly bank complaint oriented, we do have other agendas.’
‘I don’t think SMEs are supported by the government, we are seen as easy prey. When going to government to complain against bank actions, the door is well and truly closed. It’s a pre-determined conclusion because the government backs the banks and places barriers to overcome.’
After RBS came out on EFG mis-selling, Chief Executive Ross McEwan said that he was aiming to rebuild trust within the banking industry. While some steps have been taken to change elements of the business, worrying evidence seems to demonstrate the bank is doing what it can to halt justice for some claimants.
Last Friday when McEwan appeared on LBC, Ian Fraser, a financial journalist and author of ‘Shredded: Inside RBS, The Bank That Broke Britain’ called in to ask about evidence of widespread falsification by RBS on business customer files. Fraser said:
“These were documented at the Cambridge symposium on financial crimes in September by a guy called Andy Keats, they’ve also been documented in The Times and various other internet and national newspapers and the allegations basically are that RBS is on a kind of industrial scale, falsifying the core files on SME customers, and these falsifications are allegedly enabling RBS to then win against these customers.”
McEwan can be heard laughing when hearing this, and when asked how concerned he was said he had looked at the files but ‘sorry, they’re just not true,’ before adding ‘what difference would it have made to the case?’
One of the files belongs to Clive May, who obtained a central file on his case through a Subject Access Request. He compared the letter he was sent with the one on the RBS central file.
The RBS version had 12 extra lines of text which were not on the letter Clive May received. Crucially, the extra text said that May should complete specific forms, return them and seek legal advice on his liabilities – which would include the second home that was removed. This extra text would grant RBS extra protection against the fraud allegation May is now pursuing with the police, as they recommended independent legal advice.
May showed this to Ross McEwan who now says that this was an administrative error, after being forced to admit the files clearly are different to the communication May received.
It seems while the bank may understand it needs to ‘rebuild trust’, the PR campaign still does not tally with the rejection of its systemic problems which continue to take their toll on SMEs.
The Road Ahead
These cases demonstrate the destruction wreaked when financial institutions are incentivised by working against social needs, while having their risks socialised and profit privatised. Susan George, who has written on finance for over four decades highlighted in a recent piece for New Internationalist that‘Finance Watch, a progressive Brussels thinktank, says that only 28 per cent of all banking activity goes to the real economy – the rest swells the financial products sector that makes money from money without passing through such boring phases as production and distribution.’
When banks were given impunity and protection for past economic crimes, wielding power over SMEs and redressing their balances with the assets and livelihoods of their customers became systemic. This is buttressed by the conduct authorities and government officials, whose will not to interfere with the practices of banks, outweighs their will to protect the businesses at their mercy.
The wider question for our economy is understanding what does ‘pro business’ actually mean? It seems we have developed our language and economy around the massaging of bank power. While government has fiercely protected the deregulation of these huge financial institutions in the name of the economy and jobs, it has allowed them to systemically crush SMEs – who again, provide 80-90% of all employment in the EU and are the lifeblood of the economy.
Yet, even in the supposed recognition of systemic crimes, we are given terms to downplay the extent of their corruption. For us, for benefit claimants, for conmen, the allegations are fraud – against the taxpayer or a victim. For banks, corrupt systemic practices are ‘mis-selling’ – a guise of a mistake for what are the largest examples of fraud against the public, the taxpayer and the government. The protection racket extends to our own words.
Clive May was dismissed, ignored, overlooked and refuted for at least 4 years under the weight of RBS, legal firms, conduct authorities and government officials, before his case lead to the admittance of ‘mis-selling’ which in itself demonstrates the real forces being protected under the ‘pro-business’ mantra, by the legal and governmental figures who are meant to protect us. While the GRG has been shutdown, and May awaits the results of EFG reviews, he is well aware the fight for a just outcome is still ahead.