By Matt Scuffham
LONDON (Reuters) - State-backed Royal Bank of Scotland used its turnaround division as a "debt collection agency" and systematically sucked cash out of viable small businesses, a UK government advisor told lawmakers on Wednesday.
Lawrence Tomlinson, hired as an 'entrepreneur-in-residence' inside Business Minister Vince Cable's department last April, published a report in November accusing RBS of pushing small firms into default so it could charge higher fees and seize control of their assets.
He told parliament's Treasury Select Committee on Wednesday that he had now been contacted by over 1,000 businesses and that the majority of cases related to RBS and its Global Restructuring Group (GRG) turnaround arm.
The accusation has been denied by RBS's Chief Executive Ross McEwan.
Tomlinson told the lawmakers GRG had been used as a means of enabling RBS, 82 percent-owned by the government, to cut back its small business loan book to 38 billion pounds ($62.90 billion) from 55 billion in the four years after its bailout.
"What happened is GRG was turned into basically a debt collection agency to deal with the non-core as described by the board of RBS and agreed by UKFI (UK Financial Investments) in around about February 2009," Tomlinson told lawmakers.
Tomlinson said RBS engineered viable businesses into default in order to move them into GRG, enabling it to generate revenue through higher fees and the purchase of devalued assets by its property division, West Register.
"I am under no illusions as to how shocking these revelations in the report are and I was truly shocked when I came across them. I didn't believe them," he told lawmakers.
He said West Registry and GRG preyed on businesses with good assets that they could recover their debt on.
"A typical business that West Register and GRG seems to like is one that's got good assets that they can recover their debt on. The asset values can be valued at whatever if you're the bank valuing them for yourself," he said.
McEwan has said that he doesn't believe the bank conducted a "systematic" effort to profit from its troubled business customers.
Britain's financial regulator has launched a review of the accusations and is assessing "whether any poor practices identified are widespread and systematic". RBS, itself, has asked law firm Clifford Chance to examine the accusations. ($1 = 0.6041 British pounds)
(Reporting by Matt Scuffham; Editing by Steve Slater and Louise Heavens)