RBS admits mis-selling loan guarantees to businesses

Government-underwritten scheme was not made clear to customers of bank

ROYAL Bank of Scotland has admitted mis-selling loans to business customers under a taxpayer-backed scheme in the latest embarrassing blunder for the statebacked group.

RBS ha s loaned more than £900 million to 9,000 small firms since the Enterprise Finance Guarantee (EFG) was set up in 2009 to help businesses who would otherwise find it difficult to access credit. The bank is the biggest user of the scheme.

But following reported complaints from small firms and discussions with the Government body overseeing the scheme, the bank reviewed a sample of its EFG customer files.

RBS, which is 80 per cent owned by the Treasury, said the review had highlighted a “number of instances where we have not properly explained to customers how borrower and guarantor liabilities work under the EFG scheme.”

It meant that in some cases customers believed a Government guarantee was in place for their benefit, rather than the lender’s, and they did not realise they were liable for 100 per cent of the loan.

RBS said: “We will now be implementing a thorough and proactive review of affected and potentially affected customers to ensure they are put back in the position they believed they would have been in.”

The Financial Conduct Authority confirmed that it had been made aware of the issue and would remain in dialogue with RBS during its review.

However, shadow business secretary Chuka Umunna called for a wider probe into the EFG to establish how widespread mis-selling had been in relation to the scheme and said the episode had raised questions about what ministers had done to resolve the problem.

John Allan, national chairman of the Federation of Small Businesses, said it was “completely unacceptable for firms to be misled in this way”.

“This news will damage further the already poor levels of trust between businesses and the banking industry,” he added.

Business Secretary Vince Cable said he was “extremely disappointed” that RBS had “misused” the EFG scheme and he had met senior management to discuss the findings of the review so far. He added: “I have asked that RBS puts the situation right as quickly as possible, so that neither RBS customers nor taxpayers are adversely impacted.”

The issue is reported to have contributed to the departure of deputy chief executive Chris Sullivan last month. RBS is now running an “accountability review,” meaning other senior roles could be at risk.

The affair is the latest damaging episode related to the lender’s treatment of small business customers after it was previously accused of systematically pushing firms to the wall so it could buy back their assets at rock-bottom prices.

RBS has also been rocked by scandals including foreign-exchange rate rigging, which saw it fined £399m, following on from the earlier Libor fixing affair, as well as recently getting its sums wrong in a regulatory test of its capital strength.

The latest issue centres on the EFG scheme, which provides a 75 per cent Government guarantee to lenders willing to back viable small businesses lacking in adequate security to obtain a bank loan.

In some cases customers only discovered when they defaulted that they remained on the hook for the entire outstanding sum.

RBS will now begin to contact around 1,800 EFG loans customers who took out a loan under the scheme and either defaulted or found themselves in a “stressed” financial position.

The bank said it remained committed to the scheme which it said had backed thousands of firms that otherwise would have struggled to access credit, thereby safeguarding jobs and contributing to the economic recovery.

Alison Rose, head of commercial and private banking, said: “EFG is a hugely important scheme that has helped many businesses continue to trade today.

“This is why it is so important that our staff adhere to the highest standards to ensure that customers fully understand the features of the product. I am not satisfied that we have met those standards in all cases.”

She said RBS would ensure that “neither our customers nor the Government are adversely impacted by the issues identified” indicating that taxpayer money claimed inappropriately as a result of the mis-selling would be returned.