Treasury Select Committee. SME Lending Enquiry

Transcription

1 Treasury Select Committee SME Lending Enquiry Written Evidence Submitted by Alison Loveday Berg (a Law Firm) 28 th March 2014 BERG 35 Peter Street Manchester M2 5BG Reference: AML/KPC/TSC

2 Page 2 of 19 Executive Summary 1. SMEs in the UK are faced with a negative net lending environment; 2. There is insufficient competition in the UK banking market (over 200), which has and continues to severely curtail the ability of SMEs to seek new lending; 3. There is insufficient information available with regards to lending practices of the top six banks; 4. As a result of the current banking practices the UK will miss one or two generations of entrepreneurs, which can only be a bad thing for banks; 5. RBS and Lloyds favour their own short term income needs at the expense of SMEs and this will have a damaging effect on the economy for years to come; 6. Barclays cathartic remodelling under Mr Jenkins has been short lived and has reverted to type; 7. SME lending is not generally subject to any regulatory influence; 8. What lending is available to SMEs is in practical terms inaccessible to SMEs and access to it is made harder by the efforts of the top six banks; 9. Even where there are regulations such as COB/COBS SMEs are not entitled to benefit from them or have protection under them; 10. SMEs have no rights to data and information; 11. Recommendations: 11.1 Government intervention to raise awareness amongst SMEs of the alternative means of financing available That the Government address the position that banks control almost three quarters of UK commercial banking That the Data Protection Act 1998 be extended to include rights of access to information by SMEs That there is a general over-haul of banking and banking regulation in order to try and bring some competition to the market and to provide SMEs with some protection, which at the moment is non-existent Questions need to be asked of why the Government appears to have ignored the issues happening at Lloyds and the sale by Lloyds of its loan portfolios to aggressive debt purchasers Review the issue of RBS use of GRG and the specialised lending units of the other Banks.

3 Page 3 of 19 Contents 1. About the Author 4 2. Access to SME Lending 4 3. The Banking Environment 5 4. The Royal Bank of Scotland 6 5. The Lloyds Banking Group 6 6. How Do Issues Raised Interplay with SME Lending? 7 7. Regulation 9 8. SME Lending What Needs To Happen? Schedule 1 11

4 Page 4 of 19 Who are we 1. Berg is a commercial law firm situated in Manchester. Berg has represented SMEs since 1980 in respect of commercial and corporate matters, including disputes with Banks. Berg is not on the legal panels of the Big 4 Banks and is therefore independent Berg represents a large number of clients with their banking disputes, including Interest Rate Hedging Product sales, RBS s use of GRG, Lloyds cases involving revaluations and other issues. 3. Alison Loveday is the managing partner at Berg. Alison has regularly appeared in the print media and on BBC Breakfast News, in addition to being interviewed by various radio stations, regarding SMEs and their banking disputes. Access to SME Lending 4. SMEs are openly acknowledged as the backbone of the British economy. The Federation of Small Businesses has consistently asserted that it is the endeavours of SMEs that will end this recession and secure sustained economic growth. However the green shoots of recovery face extinction at the hands of the Banks treatment of SMEs. One or two generations of entrepreneurs are now lost as a result of the Banks behaviour. Why would any entrepreneur re-build a business if, after 10 or 15 years of building one, it was trampled by banks such as RBS or Lloyds and ended in administration and a director s disqualification? 5. The main impediment to effective lending is that Santander, Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland represents 70% of stock lending to businesses. It is obvious that healthy competition equates to more customer lending choice instead of, in essence, the adoption of damaging monopolistic practices. Presently Banks are destroying small businesses, prohibiting them in practical terms from re-banking elsewhere, draining these businesses of cash and restructuring the businesses where the only discernible rationale is to augment the Banks fees and profits. 6. The approach to SME lending is dictated by the mind-set of the major Banks with the attitude of RBS and Barclays being highly illustrative RBS recently told a Treasury Select Committee 2 that it had never breached regulations in the sale of PPI policies to consumers. RBS is adamant that it is only historically seen as having breached the regulation as a direct consequence of the FSA implementing regulations retrospectively thereby changing compliant sales into non-compliant sales. It should be plain to anybody 3 that all of the Banks indulged in sales tactics that were not in their customers best interests in order to increase profit and remunerations for consumer facing employees of the Banks. For RBS to suggest that they have never taken part in sales practices that are in breach of relevant regulations reflects a complete lack of social and corporate responsibility. 7. All of the Banks have denied, some quite vigorously, that they have acted inappropriately in the sale of interest rate hedging products to SMEs. When reviewed (to the end of February 2014) it has been found that 96% of all sales of interest rate hedging products to SMEs breached the regulations imposed by the FSA. 1 Berg is on a residential conveyance panel for one building society. 2 See for example Parliamentary Commission on Banking Standards Written evidence from RBS : at section E E. RBS s Engagement with Regulators on PPI Issues from 2008 Onwards 3 See for example the latest Financial Ombudsman Service statistics:

5 Page 5 of Nor could customers rely on the Financial Ombudsman Service ( FOS ) to provide an effective bulwark of regulatory standards. In 2012 when the FSA announced the review into the sale of interest rate hedging products Barclays issued a press release on 29 June 2012 which stated 4, inter alia: Approximately 5,000 interest rate hedging products have been entered into by SMEs customers since To date, 48 complaints have been ruled on by the Financial Ombudsman Service. Nearly 90% where decided in favour of Barclays. 9. The failure of the FOS to adequately and properly help SMEs is perfectly evidenced with this press release. The FOS has now reversed its previous decisions and 50 to 70% of complaints regarding interest rate hedging products are now found in favour of the consumer. However, FOS, like the FCA, continues to be staffed by ex-bankers or by employees who have an inherent bias towards those institutions who might employ them in the future. To create an environment in which consumers, including SMEs, are offered justice this imbalance needs to be addressed, though that is not the subject of the present enquiry. 10. The most compelling indicator of the Banks unreasonable denial of wrong-doing is in connection with their manipulation of the Dollar, Yen and EURIBOR LIBOR rates. Barclays is currently fighting a case through the Court based upon this denial. It should be noted that the manipulation of Sterling LIBOR is mentioned a number of times within the regulatory findings of both of the US and the UK regulators. Despite this, Barclays denied any liabilities or wrong-doing to UK consumers as a consequence of this fraud. 11. The lack of regulation is patently evident in relation to the payment of excessive bonuses to Bank employees which must surely sicken those businesses who have been placed into GRG and paid crippling fees that have facilitated the payment of those bonuses or are facing the loss of their business. The conduct of the Banks in the period since 2005/06 has exacerbated the economic challenges already faced by SMEs. The Banking Environment 12. We will discuss further below the abilities of SMEs to borrow money from Banks. However, it is essential to understand the banking environment that SMEs find themselves in at present. It is of little use to an SME to be given a loan if the sums that are contemporaneously being demanded in repayment far out-strip the amount being lent. This is set out in a report by the Bank of England Lloyds and RBS find themselves in the position that they must continue to deal with the exceptional economic damage done during the Banking free for all in 2003 to It is understood that the Government is looking to sell its final holdings within Lloyds within the next 12 to 18 months. Lloyds has undertaken a significant turnaround to bring its finances back into acceptable confines. It appears that RBS is at least 24 to 36 months away from being in the same position. However, the Banks still face legal and regulatory challenges by SMEs as a consequence of the treatment of SMEs by both Banks since This legacy issue related to current banking practices by Lloyds, RBS and Barclays could still cause enormous financial damage to the Banks in future years. 4 Products-904.aspx 5 Trends in Lending ; Bank of Scotland ISSN: ; January 2014

6 Page 6 of 19 Royal Bank of Scotland ( RBS ) 14. RBS continues to exploit its SMEs clients. RBS is faced with serious, and potentially fatal, economic issues. 15. RBS strategy is to attempt to repair the damage done in 2007/08 by:-: 15.1 Raising as much liquid cash from SMEs; 15.2 Removing low margin loans and replacing them with loans that have significantly higher margin; 15.3 Converting all lending to LIBOR as the benchmark interest rate; 15.4 Removing medium to high risk loans and assets off its balance sheets; 15.5 Generating a future income stream and removing toxic debt; 15.6 Ensuring that publicly it does not cross over from questionable conduct into obvious fraud. 16. RBS Global Restructuring Group ( GRG ) is seen as a primary facilitator of the above aims. Lloyds Banking Group ( Lloyds ) 17. It would appear that the Lloyd s Banking Group has taken a similar, if not identical, approach to RBS to tackle legacy issues. 18. However the apparently greater urgency behind Lloyds methods suggests a more imminent sale of the Government s stake holding. 19. Berg has found over the last 2 years that Lloyds have been demanding new valuations on SME assets where the SME is asset rich and, usually, cash poor. Berg has challenged the validity of these valuations. Berg can evidence that most if not all of these valuations have resulted in a valuation approximating 50% (or sometimes lower) of the value given to the asset by the customer. 20. In a number of cases the customer has approached another bank and the valuation undertaken by that bank has correlated more closely with the customer s valuation expectations. 21. It was, for quite some time, unclear why Lloyds was instigating these valuations in the context of a forecast improvement in property valuations. The vast differential between valuation and expected value demands explanation. Recent events reveal a motivating factor. 22. Lloyds has entered into agreements to sell the loans to Cerberus Capital Management LP, and its UK subsidiaries, though it is also selling some of its debt to Deutsche Bank. For example, on 6 December 2013 Lloyds sold its Project East to Cerberus, and a similar tranche to Deutsche Bank. Project East is made up of Non- Performing corporate loan involving the hotel trade. Cerberus paid Lloyds 90m for this. This represents a 38.7% discount on the gross unpaid loan balance. Part of this non performing loan book included Berg clients.

7 Page 7 of Berg has questioned Lloyds intentions. Normal defaulting debt is sold at an average rate of 12p to 33p (though it can be as little as 5p). There is no commercial apparent rationale behind Cerberus paying 61.3p for alleged distressed debt where there is, according to Lloyds valuations, a significant shortfall between the debt amount and the value of the security. It is nonsense to pay a much higher rate than the industry standard., Many of these loans are classed as non-performing for the sole reason of an LTV breach, brought about as a result of the re-valuation. This surely cannot be mere coincidence and may point to an engineered default. Berg s Lloyds customers with significant property assets, including all of its hotelier clients, have had their loans defaulted as a consequence of the breach of the loan to value following a revaluation by one of Lloyds panel valuers. One even found out about the assignment and future administration as a result of a press release 6 by Cerberus 7 two weeks before the assignment (22/12/2013) and a month before the threat of administration (07/01/2014). 24. Some of Berg s clients have moved to other Banks, where the valuations have been well above the LTV covenant in stark contrast to the Lloyds valuations. Lloyds does not accept valuations from a valuer that is not on its panel, so it essential for such Lloyds customers to either pay for a valuation by a panel valuer long before Lloyds orders it (and without Lloyds or the valuer s knowledge) or it requires the customer to be able to arrange for another Bank to agree lending which can be impractical when there is an alleged default. 25. If one does a general search of the Cerberus website one can see numerous articles relating to the sale to Cerberus by Lloyds of significant loan debts. We refer the committee to Project East, Project Thames and specifically Project Indie. How Do These Actions Interplay with SME Lending? 26. The Bank of England s Trends in Lending report 8 in January 2014 shows that net lending is once again down. There has been a 0.8% increase in the amount of gross lending. However, the amounts being demanded for repayment by the Banks has, for the second year, outstripped the amounts being lent, providing a negative net lending environment. Please find below the 2012 and 2013 gross lending and repayment schedule. Month Gross lending 2012 Repayments 2012 Gross lending 2013 Repayments 2013 January February March April May June July August September Project East also includes up to 14 three-star Forestdale hotels, which Citibank s former global head of real estate, James Brent, acquired through Akkeron Hotels and up to five Hollybourne hotels. 8

8 Page 8 of 19 October November December During the period 2003 to 2007 indiscriminate lending by the Banks was accompanied by damaging interest rate arrangements and the imposition of inequitable loan agreements that were non-negotiable with manifestly unfair terms. Examples of such Bank-weighted contractual provisions include:-: 27.1 Any debt owed to any third party that may be in default. This can result in a late newspaper bill defaulting the whole loan, despite that the Bank s total lack of connection to the third party and taking into account the absence of any de minimus, sensible restriction upon the operation of this clause Making a single early repayment under a loan can bring to an end an interest rate hedging product, which would result in prohibitive break fees; 27.3 One clause causing major difficulties is where the Bank can subjectively determine that certain events may in the future be likely to cause the customer to default upon their obligations to the Bank. This can operate very unfairly and disproportionately. For example, a minor difference of opinion between two business proprietors could lead to (and did in one client case) to the Bank invoking this provision In the case of Lloyds, facility letters provide a waiver of any and all wrongdoing by the Bank and an undertaking by the borrower that it will not seek civil remedies against the Bank for wrong-doing. 28. The broad wording of these provisions has allowed RBS to find fault where none, on a common-sense analysis, exists. The contractual framework is a charter for capricious decision making by the Banks. Once defaulted, RBS can move the business into its Global Restructuring Group ( GRG ) with its attendant crippling financial penalties. 29. RBS has defaulted significant numbers of loans, so that it can generate immediate fees. Fees charged by RBS to businesses in GRG have been found to be approximately 327,000 per business 9, contrary to RBS s suggesting that GRG is used to restructure a business so that it is financially better. GRG instead bleeds an SME of cash. If the business continues to survive the Bank will continue to demand exorbitant fees, all of which put businesses at risk and none of which is undertaken in order to turn the business into a profitable business, contrary to RBS s stated position. 30. Consequently, SMEs now find themselves in the position where they cannot move Banks because of interest rate hedging products having caused significant damage to their business, or because Lloyds, Barclays or RBS has put them into their specialist lending units. As a result, new lending is almost impossible. 31. At the same time Barclays, RBS and Lloyds are requiring repayments of loans that are significantly over and above the contracted amounts. Businesses have suffered significantly between 2008 and As such it is, and has historically been, quite easy for the Banks to threaten or carry out a breach of the lending agreement. Loan to value ratios have been breached considerably, whether the covenant has in reality 9 Please see Bully Banks questionnaire and interim findings (previously provided to the Committee).

9 Page 9 of 19 been breached or not, EBITA ratio covenants have been breached, profit levels or turnover levels are in default and CAPEX costs on businesses have soared as a consequence of little or no investment in the preceding 5 years. 32. HSBC still includes a clause in facility letters making hedging a condition of lending. When challenged by Berg they refused to take the clause out of the facility, but promised not to enforce the clause. As can be readily understood, a promise from a Bank is worthless, and in 2013 that customer was forced to look to another Bank for lending, with the attendant costs of doing so. That customer had previously been forced into hedging by HSBC and was paid a significant sum of money by HSBC as a result, so the imposition of the clause was very inappropriate given the issues that have been raised over the last five years regarding this practice, and the damage it has done to SMEs and the economy. 33. The Banks have found themselves in a position of unassailable power where they can default loans or threaten to default loans at whim and extract from their customers payments that offend notions of commercial fairness. Any objection by an SME is met with the threat of administration. The Government appears unwilling or unable to intervene. 34. Once an SME has been defaulted, the charges imposed by the Banks causes them to be unable to re-bank. SMEs are faced with punitive Bank charges, the stigma of defaulted debtor and, additionally, interest rates of 8 to 11% above base rate or LIBOR, and for those with interest rate hedging products face prohibitive break fees. Other banks will not lend the amounts required to pay off charges imposed thus refinancing is not an option. 35. Therefore, one must question what use there is in having marginally more lending available when the amounts being demanded to be repaid outstrips this amount 10. This is the same when looking at the large businesses in addition to SMEs. The repayments received to November 2013 mirror almost exactly the amounts in The amount of gross lending in 2013 was only slightly above the gross lending in Regulation 36. SMEs are often astonished that there are no rules governing bank commercial lending. 37. SMEs (and often, their advisors) find the issue of regulation reflective of the total failure of the Financial Services & Markets Act 2000 and regulation implemented under it. Regulation exists under which SMEs have no power or protection, despite this being the aim of such regulation. 38. For example, SMEs must be classified under the terms of FSMA and the Conduct of Business Rules ( COB ) or (post 1 st November 2001) Conduct of Business Sourcebook Rules ( COBS ). The rules are very comprehensive. It states that a business must be classified as a private customer or a retail customer. However, businesses have no rights, at all, under these rules, despite that these rules are supposed to be there to protect them. Classification is intended to determine the level of protection the Bank must offer a customer, and so it is otiose if you cannot then invoke that protection in practical terms because only a private person (not a company) can bring an action for breach of the rules. 10 See footnote 7 above.

10 Page 10 of SMEs find it difficult to appreciate that a bank has no regulation when dealing with SMEs. There is no protection available to an SME customer, despite that there are regulations that exist, such as the COB/COBS rules, FSMA, Consumer Credit Act 1974 and Data Protection Act A level and equal playing field would enable customers to actively negotiate their lending terms but this moderating feature simply does not exist. The legal position is wholly pro-bank :-: 39.1 A bank owes no automatic duty of care; 39.2 A bank cannot generally be negligent; 39.3 A bank can largely impose highly unfair contractual terms; 39.4 If an SME objects their only option is to find another bank that will use similar bank-centric contractual terms. 40. SMEs are also surprised when they find that they have no rights in connection with Data. They must jump through hoops because of the Data Protection Act Everyone knows of the stringent rules regarding Data Protection Act 1998 when calling a bank. However, when SMEs seek to avail themselves of the Act they are somewhat surprised to find that the Act does not apply to them, it only applies to private individuals. Such clients then argue that the Act applies to their directors as individuals, and are as equally surprised to find that the directors have no rights (as directors) under the Act also only the attendant duties. 41. SMEs therefore find that when dealing with Banks, they have no rights to data. Obtaining information is simply not possible.. SME Lending: What Needs To Happen? 42. Berg recommends the following:- Berg 42.1 Government intervention to raise awareness amongst SMEs of the alternative means of financing available That the Government address the position that banks control almost three quarters of UK commercial banking That the Data Protection Act 1998 be extended to include rights of access to information by SMEs That there is a general over-haul of banking and banking regulation in order to try and bring some competition to the market and to provide SMEs with some protection, which at the moment is non-existent. This lack of competition and lack of oversight means that SME lending is so restricted that it is causing harm to the economic growth of the country and a lost generation of entrepreneurs Questions need to be asked of why the Government appears to have ignored the issues happening at Lloyds and the sale by Lloyds of its loan portfolios to aggressive debt purchasers Deal with the issue of RBS use of GRG.

11 Page 11 of 19 Schedule 1 Illustrative Cases/Themes A. RECURRING THEMES There are a number of recurring themes in the cases we are seeing as follows: Longstanding and excellent relationship between business and Bank involving considerable trust and confidence in the relationship manager. Indications that Bank, consistent with its marketing strategy, regards customer as its partner and wishes to work with customer in the best interests of the business. Bank indulging in what has been described as the engineering of defaults, particularly with LTV covenants (e.g. with a low unjustifiable valuation) so that customer placed into GRG and new products with much higher fees can be imposed. In some cases, customer not in default at all. In other cases, on any objective view, matters of complaint extremely trivial and not such as the Bank acting in good faith and in a rational commercial manner, would wish to treat as a default let alone use to close down the business. In some cases, no breach cited the Bank has just become uncomfortable with the sector. Here again, the Bank puts the customer under duress in a way designed not to continue/support the business but to force the business into GRG and ultimately insolvency process. Bank telling customer that GRG there to assist and not being truthful about what GRG would do. Customer given the impression that, consistent with the longstanding/ excellent relationship between the Bank/relationship manager and the customer, GRG s role is to assist the business and ensure its continuation. Turning overdrafts into loans and effecting other alteration of the facilities. This includes the imposition of fees/charges on the customer, increases in interest rates, insistence on expensive fees such as accountants, valuers and IPs all of which were claimed, quite wrongly, to reflect the Bank s increased risk but which inevitably and intentionally at the result of further stressing and ultimately destroying the business. In some cases, this involved the Bank reneging on past agreements to refinance etc. In circumstances where, given the previous good relationship, the customer reasonably expected its Bank and relationship manager to show commercial common sense and flexibility (and where the Bank had led the customer to believe that it would do so) but the Bank s whole approach changed without explanation leading to destruction of the business. IP / Valuation Expert very much acting for bank business owners not kept updated about what going on. Bank kept updated about imminent sale to third party but somehow supresses the sale only for sale to third party to happen later after company under the control of GRG and at an undervalue. Sale of assets generally at undervalue. Sale of assets to West Register / other customer of the Bank.

12 Page 12 of 19 B. SOME ILLUSTRITIVE EXAMPLES Property renovation business Banked with RBS since 1985 in other words over 20 years 25 employees. Overdraft facility of 20M with bank taking first charge on any properties purchased with max 70% LTV. No re-payment schedule. Turnover of 11M In Oct 2008 bank change attitude to business overnight asking it to re-value all properties, cutting facility to 2.5M, demanding payment on historic properties in unrealistic timeframe, imposing new arrangement fees of 128K and imposing cash covenants. Business had no choice but to sell a significant number of properties to pay back the bank. As business was robust and healthy it was able to withstand these pressures and fend off threatened GRG. Circa 150 properties sold for 18M when actual value was approximately 26M. Bank insisted on recovering 100% of pre 2007 properties. Group with Substantial Property Banked with RBS prior to employees Lending facilities inc mortgages of 2.75M against assets of 1.2M Turnover of 17M Breakeven / Group made 1 st ever loss in 2009 Informed of GRG in Feb 2010 No breaches cited by RBS they said uncomfortable with Group s exposure to Commercial Property sector and they were sending in someone to review. They said too complicated and GRG would need to be appointed. GRG said they would not do anything without a report from PWC and would in fact call in all lending if no report. PWC instructed at cost of circa 40K. PWC report a healthy business but bank still force closure of group with each company either being dissolved, wound up or in Administration. Group s property assets sold at alleged undervalue. Hotel Business (with Bank of Scotland) Banked with Bank of Scotland since employees Loan facility expired in Sept 2009, by then BoS transferred to Lloyds Banking Group. No new facility put in place in Bank explained that a transfer to BoS Business Support Unit in Edinburgh beneficial to Co in view of size of loan. IP appointed and Solicitors to do security review and Surveyors to do valuation. Co well advanced with refinancing with another bank when BoS send a demand with one hour to pay this prevents refinance deal and leads to IP selling property at undervalue. Family owned Commercial Property Business Own nursing care homes. Tenanted by national provider of care to elderly. Well known in industry that tenant is in financial difficulty. Tenant started to default on rent payments. Co s investigating whether another national care provider could take over business of tenant via Business Purchase Agreement.

13 Page 13 of 19 Aug 11 bank write contrived Reservation of Rights letter to Co seeking explanation for Director s resignation and on grounds of rent income reduction they want security review and valuation. Valuer appointed to do valuation indicative valuation of 18M this allows bank to assert a possible event of default necessitating a security review and leading to a letter of demand in mid Sept 11. By 18 Sept BPA well advanced but a further week was needed to finalise. Bank putting pressure on with numerous deadlines that kept being extended by a day. On 22 Sept after business hours the bank wanted an assurance the BPA would be signed that night. It was signed the next morning and returned. Bank said too late Administrators already appointed last night out of hours. Valuer does another valuation at 12.6M, some 5M less than the one it did a month ago.a week later the bank helps same interested purchaser of tenant s business finance a deal to buy properties from Administrators for 15M odd which is the exact amount the bank owed. Bank may have also agreed profit share agreement with purchaser. Properties not marketed and previous valuations had valued at over 21M. Commercial Trucks Business Banked with RBS since 1986 in other words for over 20 years Employees 40 Overdraft of 500K and 250K outstanding on Commercial Property Mortgage Breakeven profit Death of 50% shareholder led to request to restructure business going forward with increased overdraft facility to off-set liabilities of deceased shareholder. Restructure plan in place and Co had traded well in financial year since death of shareholder. Corporate Manager at Bank had approved all changes. Bank then change stance and made clear they would not renew overdraft facilities with existing business due to death of 50% shareholder. This led to appointment of GRG and subsequent appointment of IP. Co proposed a pre-pack that would lead to all creditors being paid in full and business carrying on. Bank indicated they supported this process. However, IP then put business into administration (not pre-pack) without reference to Co. Bank then demands repayment of all facilities and leads to closure of business and Co property sold at undervalue. Bank and IP paid in full. No other creditors get paid. Business destroyed. Property Business Bank account with RBS opened in Lending with RBS 700K with a rental property as security. No breaches cited RBS just required new terms and increased rates. July letter from RBS re GRG. Week later letter from IP appointed. Rental property sold to reduce indebtedness to bank. Other Co property was sold to West Register with no marketing for 500K despite conservative valuation of 1.2M. West Register still own, have renewed planning and acquired plans that company had prepared for it. SIIP Collective of Investors SIIP collective of 20 investors owning a property development of 30 mixed commercial and residential units. Set up in 2002.

14 Page 14 of 19 Loan of circa 4M. Exceeded covenants due to poor management by financial adviser. Bank insisting on levying a 7% surcharge on all sales. Investors offered a plan of purchasing five flats that were for sale bringing over a 1M reduction to the loan. Over a three year period the development would have become profitable and could have been refinanced. This was on basis that 7% surcharge dropped. Bank declined this refinancing package. Charges placed on properties in favour of West Register. Construction Business Banked with RBS for over 30 years. Lending facilities of 1.5M 30 employees Turnover varied but net profit of 326K as at entry to GRG Co reached a renewal point in loan and RBS refused to renew. Bank imposed their own Valuers and Quantity Surveyors. GRG appointed. Bank decided the project was not viable and brought in Administrators. Bank took the land owned by the business and other land owned personally by main Shareholder as a result of a PG. Co property then sold to West Register at alleged significant undervalue. Owner Managed Construction & Development Business First banked with RBS in Entered GRG in 2008 when turnover 1.275M. Original construction loan of 650K. Discussions with Bank about proposed development local Business Manager agreed there was adequate margin in the development to mortgage and rent out properties of the market changed. No breaches cited. Customer advised that GRG s involvement would be beneficial as they were experienced in property sales. Valuer appointed by Bank. Fees started to be applied to account - 15,000 lump sum, 3,000 arrangement fee, additional 500 per month etc. Mortgages placed on properties in favour of West Register. West Register would not release charges even though customer seeking to refinance through another lender who would need first charges. Eight properties sold for circa 925K with net surplus after fees of 700K. Customer considers properties worth circa 1.5M. Cheese Processing Business Banked with RBS since 2008 Employees - 30 Overdraft of 200,000 and invoice discounting with borrowings around 600,000 Profit in 11 months - 250,000 Company Solvent Failure to input a small number of credit notes by newly employed accounts clerk led to RBS demanding resignation of finance director and removal of confidentiality of invoice discounting - resulting in loss of creditor confidence. Offer by Lloyds to take over account that would have rebuilt supplier confidence thwarted despite RBS stating they would like to reduce borrowings. Directors induced to invest 375,000 of new capital. Squeeze on invoice discounting facility. Administrator appointed December Bank removed sales ledger documentation against wishes of

15 Page 15 of 19 directors they already had copies. Bank refused to allow directors to be involved in debt collection.- in spite of prior agreement to contrary. Bank collected debts in place of administrator. Fees of 142,000 charged by bank and others. 283,000 of sales ledger debts unaccounted for. No monies available for creditors. Directors being pursued under personal guarantees for outstanding overdraft of 200,000. GRG involved in background. Shopfitting Business Bibby Financial Services provided confidential factoring facilities since 2009 Employees 277 Amount borrowed as part of factoring in management accounts to 31/12/ ,000. Trading profit in nine months, before factoring and consultancy charges - 442,000. These charges amounted to 413,000 leaving a net profit of 29,000. A large proportion of the company s business was the provision of shop-fitting services to B&Q. B&Q agreed payment terms of 60 days later reduced to 30 days. These payment terms were routinely exceeded. Bibby applied excess factoring charges on overdue B&Q debts; required the company to use a firm of accountants to control accounting hence the consultancy charges; and also routinely dictated which creditors including HMRC should be paid. From October 2010 Bibby and B&Q were in direct touch. January 2011 Bibby appointed an administrator. Two days afterwards B&Q paid around 700,000 to the company. Bibby were advised by B&Q that the 700,000 was being paid 3 days before the administrator was appointed. Administrator s expenses (including associates and professionals) amounted to 729,000 for what appears to have been five weeks work for five people. Creditors received 10% of debts. HMRC lost around 420,000. Special Needs School 2 valuations within 4 weeks, the first at double the second In Administration 8 days later Small private sector fee paying school (130 girl students) banked with NatWest for last 20 years. Not for profit charity status entity. School been in business for 108 years. Main asset is school valued in 2007 at 1.3M for loan purposes for major re-fit, borrowings 239K new loan 247K. School is situated in exclusive suburb of major city. School has alternative use for alteration to residential apartments. New valuation (Sanderson Weatherall) is required by RBS on 29th December 2009, value is guaranteed minimum 1.05M, confirmed by Red Book VALUATION. The new valuation is addressed to RBS. Nat West refer the matter to GRG/RBS in January Borrowings at time of referral to GRG are 486K (confirmed by Stephen Hester) in letter to Governors on 12th Feb West Register (Realisations) ltd appoint Knight Frank to do an 'OPINION of VALUE' as defined by Red Book in an Estate Agency Role. The Knight Frank opinion is NOT a valuation. The Knight Frank opinion is NOT for RBS. The Knight Frank opinion is caveated to such an extent that a 3rd party cannot/should not rely on it. The Knight Frank opinion was between 500 to 600K. The Knight Frank opinion was based on an alternative use for residential as per the Sanderson Weatherall valuation. The Knight Frank opinion is dated 27th January 2010.

16 Page 16 of 19 The school was closed on 12th February The administrator was appointed (Grant Thornton) who had been advising the school prior to appointment. Grant Thornton reported that the bank debt was 557K in April 2010 (+ 71K in 2 months?). The school was sold as a school in January 2011 for 775K, despite having valuations of 1M+ as a school. The school was not sold to a West Register Co. Stephen Hester states in writing (12th Feb 2010) that the Governors instructed Sanderson Weatherall with regard to the first valuation. Stephen Hester states in writing (12th Feb 2010) that the second valuation (opinion) was carried out for RBS. Stephen Hester is silent with regard to West Register (Realisations) Ltd instructing Knight Frank. RBS instructed Sanderson Weatherall for the valuation (29th December 1.05M) West Register (Realisations) Ltd instructed Knight Frank for the opinion (27th January 500K to 600K) Notes The Knight Frank 'opinion' doomed the school. Grant Thornton who had been advising the school, did not query the second value opinion which was 50% of the first genuine valuation that Grant Thornton oversaw. Grant Thornton then became the Administrator. Farming, Industrial Property Rental, Multi Discipline Heavy Construction Services & Contracting Business 15 employees/ staff, all laid off in 2009, jobs lost & not replaced Banked with NatWest since 2002 as a sole trader business Long term Loan & Overdraft of 825 K converted from a fixed 14 year mortgage Bankers Reference received in Oct , confirming all prior commitments had been honoured and is good for normal business The business had never exceeded an account limit or failed to pay interest payment at any time before transfer to RBS GRG in July 2009 NatWest loans due for normal renewal on Feb 28 th 2008, 2 days after RBS announce largest Corporate loss in UK history & shortly after shares drop to just 10p from a former high of 600p After verbal agreement to renew the loans in Dec 2008 from relationship manager, head office then decline to renew the loans in Jan 2009, one month later. Transferred to RBS GRG in July 2009, bank says it is due to loss of plant hire contracts letter states that the intention is to return the account to the local relationship manager A far superior major contract guarantee was received one month before transfer to GRG. Transfer to GRG was not prevented, although this was the most profitable single work contract to date GRG s appointment is stated as to assist in the restoration of the business GRG increase bank charges 3 fold, which is the opposite to their claims of assistance. GRG state that the management charges are for increased risk and management costs All day to day banking had been removed from NatWest to another bank, so that there were no transactions to manage. The NatWest bank accounts were left & maintained within their formerly agreed limits

17 Page 17 of 19 RGB GRG were told that 3 6 months worth of future interest could be set aside to prove ability to pay future interest within an independent solicitors escrow account Although any need for management had been mitigated, and risk had been mitigated by the offer to put future interest payments aside, GRG would not back down and maintained the charges. When GRG were asked why they were continuing to apply the charges to the account, when they could not be legitimately justified, GRG manager Matthew Harvey stated It was to centre the business owner s attention and make him talk to them Eventually, the GRG management charges & increased interest payments were refused payment. This lead to a breakdown in the relationship, whereby an LPA Receiver was appointed. A formal demand for repayment had not been issued by the bank prior to the appointment of the Receiver. Around one week before the Receiver was appointed; an individual with privileged information was caught attempting to sell the property with no formal agreement from the bank. Hard copy evidence is retained by a third party. GRG s actions have destroyed the profitable business and lead to insolvency The stress of the incident incurred the owner to suffer a suspected stroke, leading to almost a week s admission within a hospital intensive care unit. Both the owner of the business and his elderly parents are at imminent threat of losing their homes. The owner s parents suffer with health issues and live in constant worry of being made homeless. Business selling Pet Identification tags and service Sales revenue retained by RBS until business failed Banked with Nat West and used RBS WorldPay credit card processing services (WPP) from November Very profitable, award winning business. Failed 30/11/07 - all 30 staff made redundant with 1 minutes notice. 01/2006 after review WPP wrote You are a valued Merchant! We hope your business continues to grow (the business sales processed by WPP had grown by 57% in the past year to circa 1M). 02/06 WPP then FALSELY claimed that circa 55,000 of the businesses 61,000 total sales ( 2.25M), potentially caused RBS a risk of chargebacks should the business fail in the future. WPP immediately terminated the business in breach of the agreement and retained all sales money, leaving the business insolvent and likely to fail. (which would crystallise the risk if it really existed!) Decision was reversed only after threat of injunction. KPMG instructed by RBS to prove risk that WPP already said existed. KPMG produced a completely FALSE report of the business chargeback risk to RBS. Business allowed to trade on, with totally unnecessary and costly security applied to the account. Exactly 1 year later RBS create another FALSE Credit Risk Report recommending Termination. 03/2007 RBS (ICE) Intensive Care Exposure Committee rejected the risk alleged, as fanciful. 04/07 RBS accepted that there was zero risk with current sales and calculate risk regarding all businesses sales as de minimis. RBS did not divulge this information to the ICE committee. 07/07 the business informed WPP that it was moving to Barclays Merchant Services.

18 Page 18 of 19 08/07 business received sale offer of 2.5M from Graham Dacre CBE. RBS risk manager for the business and the FALSE Credit Risk Reports, became Chairman of the ICE Committee in breach of committee rules with 2 conflicts of interest. In breach of a specific directive of the ICE committee, RBS Terminated the business again. 09/07 RBS told by (ICE) Committee to provide reason for Termination, (which Barclays required under VISA rules). No termination reason ever provided, preventing proposed move to Barclays. 10/07 RBS retained all business sales revenue, without explanation again leaving the business insolvent and likely to fail. 11/07 No answers provided by WPP to 102 questions asked by the business and its solicitors. 11/07 RBS solicitors agreed to release some retained funds to pay the business staff, conditional that the business agrees in writing not to pursue the bank with any claims against it. 30/11/07 business closed insolvent, with RBS holding all revenue from previous 6 weeks trading. 12/07 RBS solicitors FALSELY informed business s solicitors that an express agreement existed, whereby RBS would retain all business revenue if card processing facility required after 20/10/07. 02/08 RBS wrote FALSE letter to business landlords purporting to own business assets and requiring entry to business offices. RBS personnel caught in the act of stealing computers and decamped to waiting hire van. 01/09 businesses solicitor told by RBS that retention of funds would continue to prevent business having a fighting fund with which to sue RBS RBS perverted the course of justice with 232 demonstrably FALSE claims within 3 court statements signed as true RBS final disclosures proved the businesses multi million claim against RBS /WorldPay ATE Insurers suddenly pulled out having offered additional insurance, with no reason provided and in breach of insurance rules NSB s case against RBS WPP collapsed, unable to raise 84,000 per day cash, as security against RBS daily costs. (Equivalent to 10% of the annual business turnover for each day in court). C. CLAIMS AND CAUSE OF ACTION Having considered the matter with Leading and Junior Counsel, it is clear that the facts of these cases give rise to a considerable number of potential claims and causes of action. In this context, it has been very surprising to see suggestions in the media from banks that although there may have been moral wrongdoing, there has been nothing unlawful. It is clear to us that in relation to both civil claims and in relation to the regulatory/criminal aspects, this is clearly not the case. While obviously the nature/extent of the claims will vary from case to case, we would give the following general indications: In some cases, there have been breaches of the express terms of the underlying finance/security contracts; for example, where the bank has proceeded on the basis of a default where none existed. Similarly in those cases where its fees, penalties and punitive interest rates have been imposed unlawfully. In most, if not all, the cases, there have been serious breaches of express and/or implied terms of the contracts. These arise particularly in the context of the bank (a) engineering alleged defaults upon which it then purported to rely, (b) acting in bad

19 Page 19 of 19 faith, (c) exercising contractual discretions and powers in bad faith/unconscionably or in an arbitrary, capricious or irrational way. In those cases where the bank was a chargee, it has acted in breach of basic obligations of good faith. There has been misrepresentation and deceit in relation to a number of aspects of the parties dealings including the negotiation/imposition of replacement financing terms which were much more favourable to the bank. In cases where the bank has assumed advisory responsibilities, there has been (at least) negligence and generally far worse. In some cases, the conduct of the bank and other third parties, such as valuers and IPs, will need to be scrutinised very carefully and may give rise to claims in unlawful means conspiracy. There are many serious questions as to the conduct of the bank s valuers and insolvency practitioners. Clearly, where purported (but not genuine, arm s length) valuations have been relied upon to trigger alleged default through LTV provisions, this also interrelates with (1) and (2) above. Financing/refinancing documents were entered into as a result of duress. There are clear indications that the banks were in a dominant position in the relevant market and have abused that position. Serious concerns regarding factoring and card payment services treatment of clients, which appear to be in bad faith. March 2014