Andrew Bailey: New Bank of England governor faces court claim over RBS scandal

Northern Irish businessman Chris Gordon alleges financial watchdog failed to properly investigate RBS restructuring unit that destroyed businesses

Ben Chapman
Friday 13 March 2020 13:19 GMT
Andrew Bailey speaks at a press conference at the Bank of England in London in February 2019
Andrew Bailey speaks at a press conference at the Bank of England in London in February 2019 (Reuters)

The City watchdog and its boss Andrew Bailey face new legal action over their handling of the scandal surrounding RBS’s Global Restructuring Group (GRG), which saw companies pushed into bankruptcy to generate profits for the bank.

Northern Irish businessman Chris Gordon alleges that his property development company, Orianna Investments, was deliberately destroyed by RBS causing him more than £1m of losses.

In a sworn affidavit, Mr Gordon accuses the Financial Conduct Authority (FCA) and Mr Bailey – who will become governor of the Bank of England on Monday – of a series of failings in regulating RBS, including its subsidiary Ulster Bank.

The FCA said the allegations were “without merit”. A spokesperson for RBS and Ulster Bank said: “RBS and UBL deny the allegations and will defend the claims vigorously.”

Last year, the FCA’s report on GRG was branded a “complete whitewash” by Conservative MP Kevin Hollinrake, chair of the All Party Parliamentary Group on Fair Business Banking.

The FCA decided to take no action against RBS or its senior executives over GRG, despite an independent review finding “systemic and widespread” problems in the unit.

Mr Gordon claims that Mr Bailey was in possession of evidence which contradicted his public statements clearing senior RBS executives of wrongdoing.

Mr Gordon alleges that the independent review into GRG’s conduct and a separate internal review into RBS’s misselling of complex interest-rate hedging products (IRHPs) were “fatally flawed” by limitations imposed by the FCA. The review into IRHPs excluded all customers of Ulster Bank. As a result, he says the true extent of wrongdoing has not been made public and customers have not been properly compensated.

A hearing for the case in Belfast is set for Monday 16 March, the day Mr Bailey takes up his new role as governor of the Bank of England, following a controversial four-year stint at the FCA which has been dogged by scandals.

Mr Gordon’s lawyers believe that, if successful, the case could allow hundreds of other former RBS customers to make similar claims.

“Thousands of people lost their businesses, homes and in some terrible cases their lives as a result of RBS ‘restructuring’ loans,” said Mr Gordon’s lawyer, Kevin Winters.

“Mr Gordon’s case might finally open the door to justice for many of those victims who were cynically used to help recapitalise the bank.”

Mr Gordon alleges that RBS’s conduct was partly in response to orders from the Treasury, which has been RBS’s largest shareholder since a 2008 bailout.

He claims Treasury officials “intentionally induced” executives at the bank to be “as aggressive as possible in their treatment of borrowers as part of a unified strategy to manage down the size of RBS’s balance sheet, minimise risk and normalise RBS”.

Orianna Investments

Mr Gordon says that when he took out a loan for a holiday property in Donegal before the financial crash, he was sold a complex derivative supposedly to protect him against rising interest rates but which he claims was really designed to generate profits for RBS at his expense.

When he took out the loan, RBS also opened up a hidden £40,000 credit facility in his business’s name designed to cover the potential losses which the bank expected him to make on the IRHP.

As interest rates fell drastically in the wake of the financial crisis, customers ended up owing the bank money under the terms of the IRHP.

“Clearly no customer aware of these realities would ever have bought such a product,” Mr Gordon states in the affidavit.

He says the bank did not disclose the credit facility to him, which meant his business’s borrowing level was higher than he was aware of.

In the years after the financial crisis, as RBS sought to rapidly get rid of small-business customers and shore up its balance sheet, it used this additional borrowing to claim that borrowers had breached their loan terms by exceeding an agreed maximum loan-to-value ratio.

In Mr Gordon’s case, the bank used this breach to justify calling in Orianna’s loans. The company was placed into RBS’ Global Restructuring Group and then liquidated.

A review launched in 2013 into widespread misselling of IRHPs excluded all Ulster Bank customers. Mr Gordon claims that they should have been included and been entitled to compensation.

He alleges that evidence of the IRHPs was removed by RBS during a technology glitch in June 2012.

He further claims that a separate, independent review conducted by consultancy firm Promontory into GRG’s conduct was “artificially constrained” by the FCA in a number of ways.

First, he alleges that the FCA told the independent reviewer not to look at any “causal events” that resulted in a company being moved into GRG.

The hidden credit lines attached to IRHPs which had been used as a justification for moving firms into GRG before liquidating them were therefore not reviewed.

There was “no consideration at all of whether a borrower had been wrongly forced into GRG” despite this being one of the concerns that had prompted a review in the first place.

In addition, Mr Gordon claims that the sample of cases looked at by the review was skewed towards customers who had suffered the least severe outcomes from GRG.

A little over 10 per cent of GRG customers were successfully turned around and sent back to the main part of the bank, but these customers made up 25 per cent of the review.

Meanwhile, more than half of GRG customers remained in the unit, often suffering the worst outcomes, yet this group accounted for just a quarter of the review sample.

Mr Gordon alleges that the FCA had created a sample which “grossly undercounted the problem cases and deliberately and grossly overcounted the easier cases”.

While the review did find “systemic and widespread” problems with how GRG treated customers it said that only 11 per cent of them had been abused. Mr Gordon claims that the true figure is higher.

An FCA spokesperson said: “Mr Gordon has issued a claim in Northern Ireland against a number of parties. Mr Bailey and the FCA maintain that the claim is without merit.”

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