RBS brings in lawyers to review treatment of ailing small firms

By Matt Scuffham

LONDON (Reuters) - Royal Bank of Scotland has appointed law firm Clifford Chance to conduct an inquiry into the treatment received by small business customers in financial distress, responding to suggestions it closed down viable businesses too quickly.

The move comes after an independent report by former Bank of England deputy governor Andrew Large, which was commissioned by RBS, recommended the bank look into concerns over its treatment of struggling small businesses.

RBS has also been accused by government adviser Lawrence Tomlinson of pushing struggling small firms into its "turnaround" unit, so it can charge higher fees (on the basis they have defaulted) and take control of their assets.

"To ensure our customers can have full confidence in our commitment to them, I have asked Clifford Chance to conduct an inquiry into this matter, reporting back to me in the new year," RBS Chief Executive Ross McEwan said in a letter to Large on Monday.

Large told Reuters that Britain's financial regulator was almost certain to take action in relation to the accusations if they are found to be true, adding the bank had taken the findings of his report "very seriously".

"I merely looked at the assertions themselves which were clearly very serious. If they are found to be true it's almost certain the regulator will take quite an interest in it," he said.

Business Secretary Vince Cable demanded an urgent response from Britain's financial regulators and from RBS, 82 percent owned by taxpayers following a 45 billion pounds ($73 billion) government rescue during the 2008 financial crisis.

Asked on BBC radio if a criminal investigation should be launched he said: "That's for the regulators and the police to establish, whether there is a case. The authorities need to establish whether there is something worse than unethical behaviour actually going on here".

The regulator has so far declined to comment.

Tomlinson, a businessman hired as an adviser by Cable's department in April, said RBS had engineered businesses into default in order to move them into its so-called Global Restructuring Group (GRG).

Tomlinson said that manoeuvre enabled the bank to generate revenue through higher fees and the purchase of devalued assets by its property division, West Register.

Britain's Federation of Small Businesses said: "The regulators need to investigate the findings of both the Tomlinson and Sir Andrew Large reports and swiftly address any issues raised to restore trust in the banks."

SIGNIFICANT STRESS

Yet the scrutiny of GRG could expose a contradiction in what RBS had been asked to do following its bailout - stabilise its finances at the same time as boosting support for small firms.

RBS said GRG had successfully turned around most of the businesses it worked with.

"In all cases RBS is working with customers at a time of significant stress in their lives. Not all businesses that encounter serious financial trouble can be saved," it said.

GRG is run by Derek Sach, a former executive of British private equity firm 3i Group. It is part of the bank's non-core division, run by Rory Cullinan, front runner to become head of RBS's internal "bad bank", which is being created after the government decided against breaking the bank up.

Cullinan has overseen a reduction in the group's non-core loans from a peak of 258 billion pounds to around 40 billion.

The latest RBS allegations come as banks in Britain and beyond continue to be the focus of public disquiet.

Tapping in to popular mistrust of the financial sector, the government has ordered Britain's financial watchdog to probe Co-op Bank after the arrest of its former chairman as part of an investigation into the supply of illegal drugs.

Tomlinson was hired by the business department in April as an "entrepreneur-in-residence" to help address the needs of small and medium-sized businesses". He runs LNT Group, based in the north of England, which has annual revenue of 100 million pounds and interests from construction to care homes.

(Additional reporting by William James; Editing by David Holmes and Mark Potter)