Just as the bailout of RBS and Lloyds (LLOY) demonstrated that policymakers and regulators had allowed the development of lenders that were ‘too big to fail’, the repeated failures of regulators and prosecutors to censure RBS suggests that the the bank was too important to punish.
Back in 2010, the Financial Services Authority tried to get away with a 298-word statement on its decision not to take any enforcement action against the bank. This fob-off was branded “wholly inadequate” by the House of Commons Treasury Committee. Hence the 452 pages on RBS’s failure released the following year.
The official version of events runs as follows: poor decisions were made by the banking group’s management and board. These decisions were allowed by a flawed regulatory structure. But there was insufficient evidence to bring regulatory enforcement actions against management, and neither, we now find, was there evidence of criminal conduct.
Can it happen again? On most of the “six factors” that the FSA adjudged to have contributed to RBS’s decline, the regulatory landscape has changed. Capital weakness is now addressed by capital adequacy requirements. Liquidity is now subject to stress testing and a focus on what assets banks can hold, under the eyes of the Prudential Regulation Authority. A new leverage ratio seeks to keep banks’ notional derivative exposures in check, and plans to ‘bail-in’ creditors are intended to avoid taxpayer bailouts. All in all, we are told, the regulator of the time was too focused on conduct (though not enough to catch payment protection insurance mis-selling earlier) rather than prudential supervision.
When it comes to enforcement, the new ‘senior managers’ regime has made such bankers personally responsible for adverse outcomes in areas of their responsibility. Paul Ashton, head of consulting at KnowCo, points out that the fines and bans handed out to two senior managers at the Co-operative Bank in January can be seen as a forerunner of the new regime, which came into effect in March. “They cannot unfortunately apply these things retrospectively,” Mr Ashton adds.
In March 2017, the High Court is due to hear a civil case from private and institutional shareholders regarding the 2008 rights issue prospectus. Journalist Ian Fraser, author of Shredded: Inside RBS, The Bank That Broke Britain, said the Crown Office investigation’s 160,000 documents “pales into insignificance" compared with the number handed over as part of the civil case. RBS says it has disclosed nearly 700,000 documents including phone call records.
It is clearly a grand undertaking. "I guess it's possible that the Crown Office just found it the whole thing too bewildering, onerous and difficult," says Mr Fraser.
For its part, RBS has said that the criticism of business decisions taken by previous directors "does not mean that they misled investors or acted illegally". It will strongly defend the civil claims.
There is an increasing awareness among investors of their avenue for civil recourse, and opportunities for funding, says Clive Zietman, head of commercial litigation at Stewarts Law, which is acting for one claimant group. "We do have some civil remedies in this country," he says.
The perceived lack of consequences for former RBS directors has had a catastrophic effect on public trust of our banking system. It is hard to see how the outcome of the civil case could do much to change this.
