Royal Bank of Scotland has admitted that it mis-sold taxpayer-backed loans to small businesses.
An internal investigation at the lender has revealed serious failings in the way in which it used the Enterprise Finance Guarantee, a government scheme designed to boost lending to smaller companies.
RBS said that it would conduct a full “loan by loan” review of its use of the EFG, which has provided more than £2.3 billion to businesses since it was launched in 2009, and added that any customers adversely affected by the mis-selling would be compensated.
The issue is understood to have contributed to the unexpectedly early departure of Chris Sullivan, the deputy chief executive of RBS, who left the bank on December 31.
RBS is also planning to run an “accountability review” into the mis-selling, meaning that other senior roles could be at risk. The problems came to light after complaints from small businesses and an investigation by The Times, which highlighted allegations that customers were being misled by high street banks over the nature of the EFG.
The scheme provides a 75 per cent government guarantee to lenders willing to support viable small businesses that lack the security to obtain a bank loan. However, RBS has admitted that some of its customers were incorrectly told that the taxpayer guarantee was for their benefit, rather than for the bank.
In certain cases, only when an EFG customer defaulted did the business owner discover that they remained liable for the entire outstanding loan.
Today the lender will begin to contact as many as 1,800 business customers who took an EFG loan and have either defaulted or found themselves in a “stressed” financial position. Vince Cable, the business secretary, met senior RBS executives yesterday to discuss the situation. He said that he was “extremely disappointed” that the part-taxpayer-owned bank had “misused” the scheme.
RBS is the biggest user of the EFG, utilising it to support more than £900 million of lending to about 9,000 small businesses. An initial “sample review” of about a hundred RBS EFG loans led by Alison Rose, the head of commercial and private banking at RBS, revealed instances of mis-selling.
Ms Rose, who took up the role in April last year, expressed anger that “our relationship managers were not clear enough on explaining the liability issue, which is critical to customers”.
Affected customers will be put “back in the position they thought they were in going into the scheme”, she added.
“It’s just not good enough,” she said. “I have made significant changes to how the scheme operates and I am looking to do . . . a remediation. I am making fixing it a priority. We will apologise and put it right.”
Any taxpayer money claimed inappropriately as a result of the mis-selling would be returned, the bank said.
Dr Cable said: “I have asked that RBS puts the situation right as quickly as possible, so that neither RBS customers nor taxpayers are adversely impacted.”
Chuka Umunna, the shadow business secretary, said: “It is hugely concerning that we seem to be looking at yet another instance of firms being mis-sold products by banks, and in this case taxpayers’ money is also at stake.”
The Financial Conduct Authority has been made aware of the issue and said that it would remain in dialogue with RBS during its review.
The bank believes that its financial liabilities to customers over the issue will be relatively small because it typically failed to recover more than 25 per cent of the value of most EFG loans in default from businesses, the amount customers were wrongly told their liabilities were limited to.
The EFG will remain available to RBS customers during the review, for which no formal timeline has been set.
When The Times investigated allegations of Enterprise Finance Guarantee mis-selling last August, one of the most eye-catching cases was that of Clive May, above, the owner of a bricklaying business (James Hardy writes).
He has been a vocal critic of Royal Bank of Scotland since NatWest suggested replacing much of his £245,000 overdraft with an EFG, sold on the basis that he would be liable for only 25 per cent of the debt if his company failed.
In fact, the taxpayer-backed guarantee is for the lender, not the customer, who remains liable for the entire debt. However, correspondence sent to Mr May in September 2011 read: “Your liability to the bank would be 25 per cent of the EFG loan balance.”
Mr May was released from his EFG liability after his vociferous public complaints, but he is seeking compensation.