Royal Bank of Scotland has been at the centre of allegations that it forced troubled companies out of business for its own benefit. The allegations are, as yet, unproven. But here we take a look at them and examine the whole issue of fraud by false representation.
Whatever their faults, we like to think that banks know what they are doing. And we tend to think that they are not out to actively harm us. It has certainly been the case in recent years that many of us have become more cynical about bankers. Examples of the “greed is good’’ culture have become known to the general public and the term banker has become more a term of abuse than the description of a centuries-old profession. Now, however, some allegations have come to light that may change the perceptions of banks that many of us hold.
This decade has certainly produced instances where the conduct of some banks may have left a lot to be desired. The Libor scandal, the numerous examples of some of the supposedly reputable banks turning a blind eye to the sources of obviously laundered fortunes and a bonus culture that prompted reckless pursuit of even greater rewards are just three obvious examples that spring to mind. But in each of these, it could be argued that the banks were maximising their revenues rather than deliberately setting out to harm their customers. Of course, the Libor fixing had many repercussions for people and the bonus culture led to spectacular failings. But even in those cases, it could be argued that the banks’ priority was to make a bundle of cash rather than damage its clients.
It appears difficult to argue such a defence when it comes to the latest allegations against the Royal Bank of Scotland (RBS). The financial regulator has now ordered a formal investigation by an independent expert into allegations that RBS systematically defrauded some of its small business customers – customers who had turned to it because they were in financial trouble and needed assistance. A City accountancy or law firm will now lead what is termed a Section 166 review of RBS’s treatment of companies that were part of the bank’s restructuring division. This investigation was prompted by a report by an adviser to Business Secretary Vince Cable that states that RBS and its global restructuring group (GRG) forced viable companies into reshaping or even shutting down their business. As a result, these companies had to pay bigger fees to RBS and, in some cases, were even compelled to sell property to the bank at lower than market prices.
In a nutshell, the claim is that RBS’ so-called turnaround unit was forcing good companies to fold so it could make a handsome profit. The report alleges that firms that were not necessarily in immediate financial distress were “engineered” into GRG through small technical breaches of loan terms, such as late filing of minor financial information. This then led to them having high rates and fees imposed on them – measures which sometimes led to the collapse of the business. It is alleged that such collapses then made it possible for RBS to buy the company’s property and assets cheaply.
The report was published after months of investigation. Vince Cable has referred the report to both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) and has stated his desire for an urgent response to the allegations. The allegations include cases of estate agencies being put into administration after so-called “desktop” valuations of their assets that did not involve anyone going to visit the properties in question. The report also claims that properties were valued using unrealistic “fire sale” valuations, which placed a much lower price on them than could have been obtained.
Perhaps most damning is the report’s claim that very few companies were ever actually turned around by RBS. Most, according to the report, either remained in peril or entered into bankruptcy.
It is now for the FCA and PRA to look at the evidence they have been given to see if RBS has a case to answer. Quite what happens from this point onwards remains to be seen. But there can be little doubt that between now and any decision being made regarding any charges being brought, the authorities will be taking a very close look at what has gone on and how it might come under the jurisdiction of the Fraud Act 2006.
Prior to this Act, the law on fraud was complex and in need of reform. The Fraud Act 2006 made it easier for the Crown to prosecute, due largely to the creation in section 1 of a new single offence of fraud - an offence that can be committed in three ways.
The first of these is fraud by false representation. Without jumping the gun, it may well be this one that is in the minds of the PRA and FCA when they examine in detail what has happened at RBS. A person is in breach of this section of the Fraud Act if they dishonestly make a false representation with intent to gain or cause loss to another, or to expose another to risk of loss. For there to be an offence, there does not have to be actual loss or even the risk of loss – there is not even a requirement that the alleged victim believed the false representations. The main requirement is that the person making the false representation has to "know that it is or might be, untrue or misleading". The wording of this section of the Act is written in such a way to cover representations such as the promotion of a scheme that boasts of “high return investments". It would often be hard to establish that a defendant knew in advance that this representation was untrue – but this wording of the Act only requires the prosecution to show that he knew that it might be misleading. This offence is often used to charge people over “boiler room’’ frauds and has also been used to prosecute alleged mortgage fraud.
While the new Act has brought clarity to the law on fraud, it is not without difficulties for prosecutors. For example, if fraud by false representation charges are brought, the Act is worded so that each single representation is treated as a separate count if the allegation is that each representation was made for separate gain or loss. Under the Fraud Act 2006, each occasion constitutes a different offence whereas under the old law there could simply be one single offence of obtaining by deception.
Another section of the Fraud Act that may be considered by the FCA and PRA regarding the RBS affair is fraud by abuse of position. This is an offence committed by a person who occupies a post in which he or she is expected to safeguard, or not act against, the financial interests of another and then dishonestly abuses that position; intending to make a gain for him or herself or to cause loss, or risk of loss, to another. The more precise details of what may (or may not) have gone on at RBS are yet to be fully disclosed, so it remains to be seen whether this particular offence is relevant. The same could also be said of the third offence under the new Act - fraud by failure to disclose. This is defined in the Act as when a person "dishonestly fails to disclose to another person information which he is under a legal duty to disclose and he intends thereby to make a gain for himself or cause a loss, or risk of loss, to another". This offence requires the Crown to prove that the defendant had a duty to make some kind of disclosure. Examples of such duties would be a contract or a professional relationship existing between the two parties.
As we write this, we cannot be sure what will happen with RBS. In many fraud cases, the patterns of behaviour demonstrated by a defendant and the issue of honesty will take centre stage. The behaviour that was exhibited at RBS is now under close scrutiny. It is only through such close scrutiny that the investigators will be able to determine whether there is a clear case of fraud to answer.