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Small and Medium-sized Enterprises: Mistreatment

Volume 798: debated on Thursday 27 June 2019

Question for Short Debate

Asked by

To ask Her Majesty’s Government what assessment they have made of the Report on the Financial Conduct Authority’s further investigative steps in relation to RBS GRG, published on 13 June; and what plans they have to mitigate any future mistreatment of small and medium-sized enterprises.

My Lords, global restructuring group was a unit within RBS into which struggling companies were pushed, with little option, when instant repayment demands were threatened. Newspapers have been filled over the last few years with findings about its unfair treatment of SMEs—92% unfairly treated and material damage to 25% are among the many baleful conclusions of an independent Section 166 report by Promontory, eventually commissioned by the FCA and published by the Treasury Select Committee when the FCA refused to do so. It revealed that the infamous “Just Hit Budget!” memo urging staff to “let customers hang themselves” was circulated widely, its content and tone never challenged at senior level, and that it was,

“indicative of an unprofessional culture that set little store by the interests of its customers”.

Neither was it the worst email it found. GRG unfairly destroyed lives, repossessed homes and acted aggressively, without transparency or proper control. The Treasury Select Committee chair summed it up:

“The overarching priority at all levels of GRG was not the health and strength of customers, but the generation of income for RBS, through made-up fees, high interest rates, and the acquisition of equity and property”.

And now the FCA report, although faint-hearted, is nevertheless damning, because it corroborates the Promontory findings: lack of management; failure to manage conflicts of interest; lack of appropriate governance, policies, procedures or processes. However, it stops short and is feeble on enforcement, presenting a catalogue of excuses in chapter 2, and in chapter 8 implying mitigating circumstances for RBS because the bank is systemic and was bailed out—which I do not recall coming about because of good behaviour. It says it cannot take action because commercial lending is not regulated. This is another GRG: the great regulatory gap. I agree with the Treasury Select Committee that commercial lending for SMEs should be regulated. Perhaps the Minister will explain the logic of why charges on homes differs from home lending, which is regulated.

Page 16 lists the Principles for Business that apply to every authorised firm, then says they do not apply because the business was not a regulated activity—except that principle 3, “Management and control”, can sometimes apply and has been used in the context of pursuing banks on the unregulated activity of foreign exchange. The RBS failings clearly fall under the “Management and control” definition:

“A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”.

I give your Lordships 360 pages of the Promontory report as evidence. The FCA then says that,

“Principle 3 only applies to the prudential context of unregulated activities”,

which means having,

“a negative effect on the confidence in the financial system … or a negative effect on the ability to meet … the ‘fit and proper’ test in the ‘suitability’ threshold; or the applicable requirements and standards under the regulatory system relating to the firm’s … resources”.

Grudgingly, the FCA concedes that the market for commercial lending is part of the financial system. Then in a box on page 18, it explains why the FX scandal was considered to undermine confidence, but it does not explain why it thinks GRG does not. Is it implying that commercial lending to SMEs is not sufficiently important? With 5.6 million SMEs employing more than 16.2 million people, 60% of UK employees and 52% of corporate turnover, of course SME lending is systemically important, to the economy and to the financial system. And RBS, the largest SME lender, is systemically important to that market.

On a different count, RBS gave evidence that GRG managed 25% to 30% of the group’s capital, and at one point in the relevant period had almost half of the group’s capital tied up. This is on page 70, in chapter 8, which is all about the systemic importance of RBS and how difficult it was after bailout in the asset protection scheme. However, chapter 8 is itself evidence of the systemic relevance of GRG to RBS and hence to the financial system. A unit tying up half of a systemic bank’s capital, operating without proper governance or management controls, without a second line of defence and with systematic flaws, is a significant threat to RBS and therefore to the entire UK financial system. That is what being a systemically important bank means. The reputational and financial risk to RBS from GRG was known internally, as is explained on page 42.

These control concerns are not limited by the 8% value of the SME lending in GRG; it is about all of GRG and the proper capital control systems in a systemic bank. For the current CEO to say, as he did to the TSC, that it is only a matter for GRG, not the group, is plainly wrong: a group must have controls over where 50% of its capital is at risk. Not to do so is hardly “fit and proper” for any senior banking activity and is wildly deficient under,

“requirements and standards under the regulatory system relating to the firm’s resources”.

Will the Minister explain whether all the systemically important and capital control counts I have elaborated were explored in detail with regard to principle 3? Can arrangements be made for me to see the analysis? It will be impossible to legislate properly in future if that all remains in the dark. Will the Minister say whether the FCA consulted the asset protection scheme and whether there was improper pressure from it or the Treasury? Is that playing a part in suppressing action? If not, why is so much made of it by the FCA?

The FCA poses the question of whether it would it be right to bar people now. The answer has to be yes. Should big miscreants be saved because it would mean public disclosure? If we take that line, only the small will be brought to justice: that is what many think always happens in spades in financial services. The FCA also says that, because the activities are unregulated, no standards have been set by it, so there is nothing to measure “fit and proper” against. Well, shame! I have looked at the rulebook, and it is appalling how a general safeguarding provision has been sabotaged to be nothing of the sort.

I commend again the Australian offence of unconscionable conduct in commerce, which is defined simply with regard to the norms of the day, is not rule-bound, and the courts can interpret it. Courts, like the person on the Clapham omnibus, know a scoundrel when they see one.

My Lords, we are indebted—the appropriate word in this case—to the noble Baroness, Lady Bowles, for securing time for this short debate and for her forensic speech introducing it. I begin by drawing your Lordships’ attention to my entry in the register of interests, in particular as a director of the Credit Services Association, the trade association for the debt collection and debt purchase industry—while noting that its members are overwhelmingly focused on consumer credit collection. I am also a long-standing personal customer of RBS, although I will be checking whether my debit card is still working following this debate.

“UK’s most trusted financial platform … Effortless every day, brilliant when it matters”—

these were the claims in an investor presentation by RBS on its UK personal and business banking. Pre-financial-crisis hubris, perhaps? No, the presentation was made on 24 September 2018, nearly five years after the report by Lawrence Tomlinson which first laid bare the systemic failures of RBS’s global restructuring group, and even after the FCA’s subsequent report had been published by the House of Commons Treasury Select Committee earlier that year. In 47 PowerPoint slides, RBS made no reference of any sort to the problems in the GRG.

Ross McEwan, the RBS CEO, said to the Treasury Select Committee in evidence for its report SME Finance that,

“the culture, structure and way RBS operates has changed fundamentally”.

How well does this claim—worthy of a Conservative Party leadership candidate—stand up to scrutiny? The same Treasury Select Committee report says:

“The overwhelming majority of those responsible for cultivating GRG’s patently unprincipled culture remain employed in RBS’s new restructuring division”.

Some 136 out of 182 employees in the new restructuring division had previously been part of the GRG. Even more disturbingly, of the 32 senior managers in the new restructuring division, 30—I repeat, 30; all but two—had been members of the GRG.

Your Lordships will have had experience of changing culture in organisations—even if, I hope, not necessarily from such a toxic starting point. How credible is the claim that there has been fundamental change when over 90% of the unit’s senior management is unchanged? It is in this context that we should read the FCA’s latest report and form a view as to its completeness.

I am, in general, a supporter of the FCA, and have seen the constructive approach and quality of people it has brought to the regulation of the consumer credit industry. I look back at the journey that financial markets regulation has taken since before the Financial Services Act 1986 to now, and believe that we have a regime more suitable for competitive markets and concern for consumer protection. I conclude, from experience, that the FCA compares favourably in general with regulators in many other countries. But it is difficult not to be profoundly disappointed by this report.

Yes, of course the fact that commercial lending is an unregulated activity, even if conducted by a regulated entity, presents problems, although this must seem like a very arcane distinction to the thousands of victims of RBS’s “unprincipled culture”. Yes, the approved persons regime did not offer the scope that the senior managers certification regime might do for a broader judgment, although it is disturbing that, as I understand it, Andrew Bailey is not certain that even the SMCR would have enabled the FCA to take more decisive action.

However, within all these constraints, and taking just one specific issue in the limited time available, is it not still extraordinary that the FCA discusses the challenges in balancing the GRG’s two objectives—“turning customers around” and “generating a return for RBS”, which the noble Baroness, Lady Bowles, referred to—without any mention of any sort of the incentive remuneration and career appraisal policy that applied to RBS employees in the GRG? How were those employees remunerated, and how were they appraised relative to those two objectives? The FCA is engaging actively in the question of alignment within other areas of financial services, but is totally silent in this report, where it would have been so relevant.

I have two questions for the Minister with a view to mitigating the risk of recurrence. First, like the noble Baroness, Lady Bowles, I ask whether the Government will take the necessary steps urgently to make commercial lending a regulated activity. Secondly, remembering that the Government are a 62% shareholder in RBS, will they report how UKFI, as the shareholder, is interacting with the RBS board—not as a government shareholder but as a normal, responsible investor—to improve the culture of the group?

My Lords, the report we are considering has already attracted a lot of comment—all of it unfavourable. The chair of the TSC said:

“This long overdue report will offer no solace to those who suffered from the disgraceful actions of RBS’s GRG”.

Kevin Hollinrake, co-chair of the APPG on Fair Business Banking, said that the report is a,

“complete whitewash and another demonstrable failure of the regulator to perform its role”.

The SME Alliance said that it was deeply disappointed with the regulator. The Times of Friday 14 June said that the report was,

“a masterful study in pointlessness”,

an insult to victims, and that it demonstrated a,

“sloppiness that underlines the paucity of the FCA’s investigation”.

Last Friday’s Financial Times was also critical. It said that the,

“report into the GRG scandal at Royal Bank of Scotland, which found that nobody was to blame, is a scandal in itself”.

None of this criticism is surprising or ill-founded. The whole sorry history of the GRG and RBS is littered with failures. The first failure was within the GRG. My noble friend Lady Bowles listed these failures and their dreadful consequences. The second failure was within RBS, and extends to board level. Promontory, talking about the issues of malpractice and mistreatment, says explicitly that,

“we view these issues as part of an intentional and coordinated strategy … to focus on GRG’s commercial objective and to place inadequate weight on the interests of its SME customers”.

Promontory explicitly implicates the bank itself—RBS—in these failings. It concludes:

“It is clear that the bank was aware, at least in part, of some of these failures but, it would appear, chose not to prioritise action to overcome them”.

In other words, the GRG was systematically ripping off some of its vulnerable customers and the bank knew this but did not intervene.

This is a gross failure of responsibility on the part of RBS, or at least very clear evidence of complete incompetence—and it gets worse. From April 2009, RBS had adopted a group-wide policy on the FCA’s treating customers fairly principle. This applied to GRG. Promontory notes:

“Despite this, we did not see how GRG management would have been able to satisfy itself that the TCF had been properly implemented and embedded in GRG. In our view, it was not”.

Presumably, either RBS was aware of the failure and did nothing, or it was unaware of it. Either way, there are surely grounds for resignations or sackings.

The third failure is therefore that of the regulator, the FCA. I say this with some reluctance. I have been an admirer of Andrew Bailey and believe that the FCA has become a significantly improved regulator under his leadership, but this belief has been tested of late, what with the LCF and the Neil Woodford affairs on top of the GRG debacle. Now we have the FCA’s report on the GRG affair, which reads as a rather desperate attempt at exculpation. It is clear that the FCA has acted late, reluctantly, defensively and very weakly. I agree with Kevin Hollinrake that the report is a whitewash. It is also an evasion of responsibility. The FCA report fails to discover—or declines to name if it has discovered— those in the GRG in RBS responsible for the malpractice and mistreatment of SMEs and the breaching of the TCF principle.

It is clear, on the one hand, that terrible things happened and, on the other, that nobody was named, punished or sanctioned. Then there is the question of the fit and proper test. The FCA report states on fitness and propriety:

“While those directly affected might think the conduct of senior management was deficient in GRG, we do not believe we would have reasonable prospects of bringing successful prohibition proceedings against any member of senior management”.

That is not only weak but unevidenced. It is either false or, if true, a perfectly clear illustration of the gulf between ordinary, common-sense language and its interpretation by the FCA. The proven persistence, scale and damage of GRG’s malpractice must surely be evidence that those responsible are absolutely not fit and proper persons in any reasonable sense of the words. If the FCA persists in its refusal to use its fit and proper person powers, the Government should ask it to rethink the whole regime. Does the Minister agree?

Perhaps the most worrying aspect of the FCA’s report is on page 73, where it discusses what, had the SM&CR been in place, it could have done about GRG. It reaches the feeble conclusion:

“We cannot say whether we would have been able to bring successful cases against RBS senior management had the SM&CR been in force”.

What does this say about the effectiveness of the SM&CR? Does it mean that the equivalent of GRG’s malpractices, if carried on now, could not lead to the punishment of individuals? What is the Government’s view on that?

This has been a sorry tale of malpractice. There has been wrongdoing but no consequences for the wrongdoers. There has been some compensation for victims, but not nearly enough. There is no clarity about whether our regulatory regime could have prevented this malpractice or could in future prevent such malpractice. There are questions as to whether the fit and proper test is in itself fit for purpose.

Promontory recommended that the FCA should work with the Government to extend the protections available to SME customers. Is that in fact happening and, if so, what progress has been made? Finally, does the Minister agree with the chairman of the Treasury Select Committee, who said that the FCA’s ruling showed that the regulators should be given powers to regulate commercial lending:

“Otherwise, scandalous events such as those at GRG could recur”?

My Lords I shall reiterate some things that have already been said in the excellent preceding speeches. In November 2013, Lawrence Tomlinson delivered his report on the practices of the global restructuring group at the Royal Bank of Scotland. The bank had been rescued from insolvency by the Government and was effectively in public ownership. Lawrence Tomlinson was the special adviser to Vince Cable, who commissioned the report. Mr Cable was the Secretary of State for Business, Innovation and Skills from 2010 to 2015.

The aspersion against the Royal Bank of Scotland was that its global restructuring group, which was tasked with assisting small and medium-sized enterprises in financial difficulty, had driven many of those clients into bankruptcy by increasing the charges it imposed on them, denying them further credit and recalling existing loans. The bankers in GRG were under an injunction to improve the liquidity of the ailing megabank, which led to a so-called dash for cash.

A further charge was that the bank had sequestered the assets of the distressed enterprises by acquiring them at knockdown prices determined by the bank’s internal valuers, or valuers whom it had commissioned. The sequestered assets had fallen into the hands of an organisation called West Register, which was the property division of RBS. Having acquired the assets at fire sale values, the organisation was able to hold on to them until they could be sold at a profit. There was a clear conflict of interest between the bank’s obligation to care for its customers and its pursuit of profits.

The complaints against the Royal Bank of Scotland were numerous and bitter. In consequence of the testimonies gathered by Tomlinson, they merited further investigation. The Financial Conduct Authority was therefore called on to conduct a thorough and independent inquiry. Its recourse was to commission a report from Promontory Financial Group, a global consulting firm that advises clients on a variety of financial matters, including regulatory issues, compliance, due diligence and the like. Since 2016, the group has been wholly owned by IBM. The Promontory report largely substantiated the claims of the Tomlinson report. In the process, it discovered some appallingly callous and unpleasant attitudes on the part of the GRG staff towards their customers, which were revealed by some internal emails, the contents of which were widely publicised.

The FCA proved unwilling to release the Promontory report. Perhaps it did not wish to have its hand forced. Instead, it chose to summarise the report in a brief internal summary and in the final summary published on 13 June. However, meanwhile, the Promontory report has been published at the insistence of the Treasury Select Committee of the House of Commons, which gave the FCA a deadline of 16 February 2018.

An immediate reaction on reading the Tomlinson report might be to declare that bankers had been behaving like crooks and spivs. A response to that could be to declare that, unfortunately, such dealings are in the nature of banking and that, anyway, the bankers were doing nothing illegal. Thus, it could be argued that the bank was merely exercising its legal rights as a lender. By and large, the Promontory report adopted the first of those attitudes. Its central conclusion was that there had been widespread inappropriate treatment of the clients of the Royal Bank and that this treatment had caused material financial distress.

Nevertheless, the FCA’s final report declared that no evidence has been found of criminal intent of the sort that would convince a court of law. As we have heard, it has also insisted that commercial lending does not fall under its regulatory purview. In the main, the FCA’s report evinces the second of the two attitudes that I outlined—albeit that, for the sake of appearances, it acknowledges some faults of the Royal Bank. The report is at pains to avoid attributing blame to individuals within the bank, suggesting that to do so might expose them to personal danger. This seems far-fetched, unless one regards as personal dangers the loss of reputation or the revocation of an honour, as befell the chief executive of the bank.

MPs on the Commons Treasury Committee and the All-Party Parliamentary Group on Fair Business Banking, some of whom have banking experience, described the FCA’s report as a complete whitewash. In partial recognition of its malfeasance, the bank set aside £400 million for the compensation of its victims, to be administered by a High Court judge. In July 2018 it was announced that the scheme would close for customers with fresh complaints. At the time only 803 of 1,230 complaints received had been resolved, with only 370 of these upheld. The payout amounted to only £10 million. This sum can be put in perspective by reference to a statement in the Promontory report to the effect that in 2011, GRG contributed £1.2 billion to RBS’s bottom line.

Where does this leave us? The answer is that there is a deficit in the financial regulation of banks, for which the present Government are wholly responsible. They have failed to act on the recommendations of the Vickers report, which argued that casino banking, with its dangerous speculation, should be separated rigorously from commercial and personal banking. The Government have paid no attention to this. More recently, they have resisted a call for the financial regulation of the FCA to be extended to cover commercial lending. Indeed, the Promontory report warned that not doing this risks a repetition of the sort of events that occurred in RBS.

Under different political circumstances, I would be calling for the Government to act decisively now. However, I do not imagine that we can expect anything of the sort from the new management that will shortly be taking over the Government. There will be very different circumstances when our party takes over the shop.

My Lords, RBS’s inappropriate handling of its SME customers predates the period examined by Promontory and goes back to at least 2005. We know this because there have been whistleblowers, key among them Mark Wright, who gives me permission to use his name in this debate and who alerted senior management at RBS—up to CEO level as early as 2005 and chair level as early as 2006—and followed up with successor CEOs and chairs. When he got nowhere he alerted the FSA and its successor body, the FCA. I became involved in 2016, when the whistleblower’s Member of Parliament, Norman Lamb, was reduced to utter frustration after years of attempting to get the evidence of abuse of customers properly heard and to obtain fair treatment for Mr Wright. None of this is discussed by the FCA in its report on senior management. Nor did the regulator ever act to prevent retaliation against the whistleblower; indeed, it seems it even shopped him to RBS. Needless to say, much of the whistleblower’s life has been seriously damaged.

The FCA commissioned the Promontory report not out the goodness of its heart but because of charges laid in the Tomlinson and Large reports commissioned by my good friend Vince Cable, then Secretary of State at BIS, who had heard so many stories from SMEs. Further pressure came from the Parliamentary Commission on Banking Standards, on which I served. The FCA chose not to publish Promontory and produced its own summary, which—I am being polite—watered down and undermined every criticism and applauded RBS for its tepid and inadequate voluntary compensation scheme. That was whitewash number one. We know what Promontory found thanks only to a leak to an Irish website in 2018, which triggered a demand for publication by the Treasury Select Committee. Instead of allowing Promontory to complete its work with a follow-up report on senior management and its involvement, as originally envisaged, the FCA decided to carry out that second step itself: this report. Surprise, surprise: whitewash number two.

It matters. Promontory made many key findings: one in six SMEs put into the GRG was deemed “potentially viable” but was “caused material financial distress”—in other words, driven to liquidation—as a result of serious,

“failings in GRG’s governance and oversight … and of the priorities GRG pursued”.

That included failings in “second” and “third line oversight”—compliance and audit, to you and me. The report identifies that the notorious Just Hit Budget document instructing staff,

“to get a customer to agree chunky fees and upsides”,

was not an isolated document. The West Register model—West Register was the property arm of RBS, as we have heard—

“was inappropriate and severely flawed”.

Are governance, oversight and priorities the responsibility of junior or senior management? If they fail, is there any possibility other than culpability or incompetence? While Promontory, as I have explained, was specifically required to avoid investigating senior management, it could not help identifying its collusion in this overweening focus on the bank’s interests and lack of concern for SMEs and their owners. The report again and again highlights the conflict between the “commercial interests” of the bank and its duty to its customers. Commercial interest won hands down; I could cite page after page.

That leads me to my concern with the regulator. I fully share my colleagues’ frustration at the inadequate powers of the regulator. This concept of a regulatory perimeter over which the regulator dare not step is indeed a limit, but the regulator also uses it as an excuse, enabling it to avoid rocking the established big banks, no matter where justice lies. I believe that the regulator’s motive for not cracking down is embedded in a belief that the system must not be shaken; financial stability means that SME abuse must, to a significant degree, be tolerated. In the case of RBS, propping up the share price as government seeks to sell off public ownership probably plays a role.

The FCA has never vigorously used the “fit and proper” determination. In the three years it has had the senior management regime, it has used it only once—and then to give a fine of less than 3% of his pay package to Jes Staley of Barclays for using both internal staff and private investigators to hunt down a whistleblower. The industry expected him to be fired. Rather than seize on information from whistleblowers, the FCA prevaricates and leaves them to hang. Nathan Bostock, head of risk and restructuring at RBS from 2009 to 2013, with direct oversight of GRG, has been not black-marked but rewarded, becoming chief executive of Santander UK, and his £1.8 million bonus from RBS was not withdrawn but protected.

New players are changing the landscape of SME lending, but the FCA has just taken steps to discourage people from investing in peer-to-peer platforms, even if low-risk and diverse, by requiring that investors must declare themselves to be sophisticated and experienced to put in more than 10% of their assets. Word on the street is that banks lobbied hard to get these constraints on these upstarts, who are now finally poaching their most attractive SME customers and the savers to whom the big banks never offer more than a pittance.

Will the Minister agree that we need changes? We need a change in culture in the regulator to aggressively pursue wrongdoing and the senior management on whose watch it takes place, using every power to the limit and demanding more if necessary; removal of the regulatory perimeter for all SMEs, and potentially altogether; positive encouragement to whistleblowers, including granting the FCA powers that made its US equivalent, the CFTC, a driver of global clean-up; compensation and the right of the regulator to sue any company that retaliates against a whistleblower; and finally, a rebalancing of regulation to support alternate lenders, even as they grow big and threaten the establishment, rather than to protect the established, large players.

My Lords, I too congratulate the noble Baroness, Lady Bowles, on securing this debate and on the forensic quality of her speech. We needed to add very little once she had completed the charge sheet, but nevertheless other noble Lords have contributed to the testimony of just what a scandal we are considering. Yet the result of the scandal, as identified in this debate, is that the Royal Bank of Scotland offered an apology. The Financial Conduct Authority, which supposedly had a clear role as a regulator, states that it has no powers to make clear what happened, and therefore expresses regret.

It is contended that the Treasury hopes for an extended role for the Financial Ombudsman Service in some aspects of disciplining malpractice in banks but we have seen no clear position yet. As the noble Lord, Lord Sharkey, indicated, there do not seem to be any consequences from this scandal because of the continuation of a large number—30 out of 32—of the senior administrators with the bank.

There has been an explosion at the other end of the Palace of Westminster. Many Members of Parliament, having been made fully aware in their constituencies of the devastating effect on small companies, have demanded action. As they have made their contributions and carried out their analyses—particularly the chair of the Treasury Select Committee, who is in a privileged position to be able to do that and has done so brilliantly—they have exposed just what the scandal represented.

There have been apologies, shrugging of shoulders, an attitude of “can’t do anything about it” and no question of knowing how we are meant to see fair settlements made, but the Government have not yet produced an obvious response to this position. This cannot be. The other place is clearly advocating more trenchant reforms and everyone who has spoken in this debate has identified that the present system is incapable of coping with issues of this importance. A large number of SMEs, an important part of the economy, have been bulldozed out of existence by the crass operations carried out by the global restructuring group of the bank.

The Government need to take seriously some of the proposals now being put forward. There is the suggestion from the other end that a tribunal system be set up to deal with disputes between SMEs and the big banks. It is clear that individual small companies do not have the resources to engage with the major banks in legal and financial struggles and that they will be beaten into the ground, as they have been through this experience.

Most of all, it is clear that the concept of self-regulation is being rejected. It has failed on this occasion in a most lamentable way. We all know the Government’s reservations about additional regulation but they have to appreciate that the report of their regulator—the Financial Conduct Authority—has sunk like a stone and has caused dismay. I trust that the Minister will give additional information on the possible responses to this position in his wind-up speech.

I emphasise that from this development my party has learned the lesson—there have been others, which have also been greatly worrying—that we must have a regulatory architecture involving a business commission to replace the existing network of regulations, which have clearly failed. It is inconceivable that a person running a small company should be told that the regulator, unfortunately, does not have the powers to make any form of restitution.

We are also committed to a national investment bank, with a network of regional banks and a post bank focused on relationship lending, and we mean to keep RBS in public ownership. RBS owes a great deal to the community—for the bailout and the ultimate responsibility for this scandal—and it is important that it is kept under a high degree of public scrutiny. We intend to have banks that serve the public interest and guarantee that the banking industry will support infrastructure, the SMEs and the broader issues of public goals. We cannot afford another scandal like this one, and the Government cannot afford to ignore the necessity for drastic action.

My Lords, I commend the noble Baroness, Lady Bowles, on her choice of subject and the speech she made in introducing it. As the noble Viscount, Lord Chandos, and the noble Lord, Lord Davies, said, it was forensic, well-informed and critically focused.

The Government want a strong, diverse and dynamic economy in which small businesses are respected and valued. As we have consistently said, the mistreatment of businesses by the Royal Bank of Scotland’s GRG from 2008 to 2013 was unacceptable and clearly at odds with that ambition. When discussing circumstances such as these, we should always remember the human element to each case. As the backbone of our economy, small businesses must be able to trust that their financial service providers will support them as they strive to meet their ambitions. The real distress that has been felt by GRG customers must be heard, acknowledged and referred to during our debate. It is vital that lessons are learnt from these events, which has been the theme running through the debate today.

I was shocked to read that 86% of SMEs in RBS GRG suffered inappropriate treatment, a point made by the noble Baroness. RBS has rightly apologised for these mistakes and has set up a scheme to compensate victims, overseen, as the noble Viscount, Lord Hanworth, said, by the independent reviewer, Sir William Blackburne. This scheme has paid out more than £150 million in redress so far, comprising both automatic refunds of complex fees and then payments for direct loss. Approximately two-thirds of complaints have been addressed so far and the Government are closely monitoring the progress of the scheme.

On the Financial Conduct Authority’s investigation—again one of the issues raised during our debate—let me set out the steps it has taken. First, it used its statutory powers to commission a skilled person’s report of how GRG treated its customers. This report identified that there was widespread inappropriate treatment of SME customers by RBS but concluded that,

“there was no widespread or systematic inappropriate treatment”,

of SME customers by RBS in a number of areas. This includes allegations that RBS artificially engineered a position to cause the transfer of an SME into GRG, although the report found isolated examples of serious malpractice.

The skilled person’s report also made findings which indicated that GRG’s senior management were aware, or should have been, of some of the issues identified. The FCA therefore opened an enforcement investigation to understand senior management’s knowledge of the issues in GRG and whether there was any basis for enforcement action. The FCA announced on 31 July last year that it had completed its investigation and concluded that any further action against senior management at RBS GRG,

“would not have a reasonable chance of success”.

I think it was the noble Lord, Lord Sharkey, who asked what the Government’s view was of that. The FCA is an independent non-government body and it would be inappropriate for the Government to comment on its conclusions on that case.

Following this, the Government appreciate that those businesses affected by the actions of RBS GRG would have expected to understand exactly how the FCA came to that conclusion, especially as it would have been viewed as a disappointing outcome by many. The FCA’s final report published on 13 June therefore supplies this clarity, and the Government welcome this transparency.

The noble Baroness, Lady Bowles, wanted more information about exactly how the FCA came to this conclusion. I encourage her to contact the FCA directly on this point. I will make it aware of her request.

Businesses affected by events at RBS GRG, as well as by other historic issues in business banking that have dominated public discourse in this area over the past few years, will rightly ask what has changed to prevent such circumstances arising again. That has been a theme of this debate, particularly in the contribution of the noble Lord, Lord Davies.

First, in future the senior managers and certification regime will allow the FCA to hold managers to account for the way they treat their SME customers. The Government expect the highest standards of behaviour across all financial services firms and believe that this is an important step in restoring public trust in the sector. The SMCR strengthens the regulatory toolkit by promoting individual responsibility for misconduct, holding senior managers to account for misconduct that occurs under their watch and ensuring that individuals at all levels can be held to appropriate standards of conduct. I was asked by the noble Lord, Lord Sharkey, I think, whether the SMCR would prevent such issues happening again. It is a good question. Andrew Bailey was clear in front of the Treasury Select Committee yesterday that the SMCR gives the FCA the ability to act, should circumstances similar to GRG ever occur again.

The second change that has taken place is that all major lenders have signed up to the standards of lending practice. Overseen by the independent Lending Standards Board, the standards for business customers set the benchmark for good lending practice in the UK, including when business customers experience financial difficulty, and contain clear guidance on best practice. If a lender breaches the standards, it may be warned, issued directions as to future conduct and possibly publicly censured by the Lending Standards Board.

The third change is that as of 1 April this year more than 99% of all UK businesses now have access to fast, free and fair dispute resolution in the form of the Financial Ombudsman Service. In response to the point raised by the noble Lord, Lord Davies, I say that the Government’s position is that an ombudsman-style approach is preferable to the tribunal that he suggested as it does not require the regulation of SME lending, it can apply a fair and reasonable test, it does not require legal representation and it has the potential to resolve disputes swiftly and efficiently.

We have been clear that where there has been inappropriate treatment of SMEs by their bank, it is vital that those businesses can resolve these disputes and obtain fair redress. That is why we supported the FCA’s recent expansion of eligibility to complain to the FOS to include small businesses as well as micro-enterprises.

A question that has been raised consistently by the noble Baroness, Lady Bowles, the noble Viscounts, Lord Chandos and Lord Hanworth, and the noble Lord, Lord Sharkey, is why the regulation does not apply across the board. In other words, why do only three of the 11 principles apply, not all of them, and should we not therefore extend the scope of regulation? As I just said, the financial services industry has changed significantly since the very challenging period following the financial crisis. Given the factors that I have just set out, the Government do not believe there is a clear case for bringing SME lending into regulation as there would be a number of direct and indirect costs associated with such a move. Direct costs would include annual FCA fees, product reviews and increased compliance and monitoring costs while indirect costs could include stifled product innovation, a narrower product choice for SMEs, and higher barriers to entry leading to reduced competition in the SME lending market. These changes could in turn impact on the price and availability of credit for small businesses, which would not be a desirable outcome. Having said that, I detect a very strong view from all those who have spoken that there might be a case for looking at this again and that if the principles are good principles, why should they be constrained in the way that they are? That is a message that I will certainly send back to my seniors.

I shall try to deal with some of the other points that were made. The noble Baroness, Lady Bowles, asked whether the asset protection scheme has had an impact. As the FCA report makes clear, no evidence was found that the RBS’s participation in the APS made any difference to the way in which customers were treated. The FCA-commissioned skilled persons review of RBS noted that, in relation to the sample of cases it had reviewed, it has,

“not seen evidence … where the existence of the APS had an effect on how RBS approached the customer”.

Picking up a point made by the noble Viscount, Lord Chandos, I say that we have been clear that banks need to work hard to restore businesses’ trust in the institutions of banks. I am sure RBS will have noted the specific criticism that he made about it in particular. We have welcomed the banking industry’s commitment to establish a voluntary dispute resolution service. Having these standing dispute resolution mechanisms available for SMEs is an important part of restoring businesses’ trust in the sector.

The shareholding which the noble Viscount raised is managed by UK Government Investments on an arm’s-length and commercial basis. Commercial and operational decisions are for the RBS board to make. That said, of course the Government expect the highest standards of conduct from all businesses.

The noble Baroness, Lady Kramer, asked why the FCA did not go to phase 2 of the report. The FCA decided it was more appropriate to undertake a focused investigation itself than to progress to the so-called phase 2, which would be led by an independent third party. This allowed it to proceed straight to consideration of enforcement action, if it were deemed necessary, and ensured that the FCA was able to conclude any investigation more quickly. I need to write to the noble Baronesses, Lady Bowles and Lady Kramer, on some of the issues and questions they raised.

I assure noble Lords that we have taken the matters relating to the RBS GRG seriously and I have taken on board the comments, criticisms and suggestions that have been made during this debate. While we acknowledge the disappointment that many will feel at the conclusions of the FCA’s investigation—a theme running through our debate—lessons have been learned. We have the senior managers regime in place, firms have signed up to the standards of lending practice, and there is a permanent dispute resolution mechanism through extended access to the FOS. We are not complacent. We will continue to remind banks of the importance of earning the trust and faith of small businesses and will continue to monitor progress of the compensation scheme under Sir William Blackburne. With seconds to spare, I thank noble Lords again for their contributions to this debate.