Financiers are not normally ardent Brexiters. But if any swing-voters in the City are looking for a reason to resent Brussels, the Kafkaesque state aid penalties imposed on Royal Bank of Scotland could push them over the edge.
RBS is finally making a profit again, after a disastrous decade triggered by its 2008 implosion and £46bn government bailout. Yet the punishment continues. Aside from the diminished business and the reputational damage caused by its blow-up, the bank is still under the cosh of EU state aid penalties.
RBS was initially told to carve out and sell a chunk of its own business — the so-called Williams & Glyn franchise of 306 branches. It wasted eight years and an extraordinary £2.3bn on the project before concluding that untangling the IT was impossible. A government plea to Brussels for a plan B punishment led to the creation of something called Banking Competition Remedies Ltd.
This entity is responsible for administering one of the most bizarre processes of retribution ever dreamt up. It makes Jeremy Corbyn’s plan for using RBS as a nationalised bank at the heart of a command-and-control economy look like mainstream capitalism.
Here are the basics. RBS, still 62 per cent-owned by the government following the 2008 bailout, was told it must spend up to £775m trying to offload its own customers to its rivals: £425m of the money is being distributed as free funding to other lenders; a further £275m is being given to rivals as giveaway inducements to persuade customers to switch to them. Up to £75m has been set aside for costs.
But if the concept looks warped, the administration process is even odder. In an apparent effort to distance the government from any responsibility for anything going wrong, the Treasury has insisted upon multiple layers of “independence” in the crucial decision of which rivals should be given the money.
First, it asked the Law Society, the Law Society of Northern Ireland, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland to suggest names for a BCR nominations committee. Then, the nominations committee named three executive directors and two non-executives.
That board then outsourced most of the BCR’s work, administering applications and shortlisting applicants for the free RBS funds, to a third-party consultancy. Oh, and according to one person involved, the tender process for selecting that consultancy was outsourced to another consultancy.
Despite the Byzantine governance of the process, it does appear that decent people have ended up running the remedies scheme. The Baringa partner in charge of the project is an experienced SME banker who seems genuinely interested in boosting the quality of banking for small businesses. The BCR board, chaired by Godfrey Cromwell, is packed with SME finance specialists.
But the BCR has been its own worst enemy. First, back in February it rubber-stamped Baringa’s suggestion that Metro Bank should be given the biggest single funding award of £120m. The decision came just after news broke about Metro’s financial misreporting. People involved in the process insist Metro only secured the award because it responded convincingly to robust quizzing about the issue. But the plunge in Metro’s share price amid a strain on capital has cast doubt on the pledges made in its BCR application. The Treasury select committee has signalled plans to investigate.
The optics around the process have not been helped by the fact that another of the first-round awards went to Starling Bank, a start-up lender to which Aidene Walsh — the BCR executive who has led the funding award process — acted as a consultant two years ago.
The BCR’s biggest error has been its haughty manner. Lenders that have pitched for funds point to an unnecessarily opaque process conducted by an authoritarian board. Lord Cromwell wrote to TSC chair Nicky Morgan, asking that its commitment to operate secretly should not be “tested”. There are of course valid commercial reasons for discretion. But the BCR has seemed unnecessarily hostile to scrutiny. That is wholly inappropriate given that the money is being distributed by a majority taxpayer-owned bank, as a penalty for a taxpayer bailout of that bank.
The process will be in the public eye again when the third of the BCR’s four rounds of funding awards is announced next month.
If all of this spurs better services for SME customers it may be deemed worth it. But neither the UK government nor Brussels, which between them established the rules, comes out of this looking good. As per usual these days.