£3bn cost of new claims takes RBS losses to £8bn

THE Royal Bank of Scotland is facing full-year losses of up to £8 billion after it announced last night that a further £3.1bn is being set aside for litigation and consumer compensation claims.

By RORY REYNOLDS and MARTIN FLANAGAN Tuesday, 28th January 2014, 3:38 pm

Royal Bank of Scotland has set aside a further 3 billion pounds for litigation and compensation costs. Picture: PA

The taxpayer-owned bank also confirmed that its senior executives would waive millions in bonuses as a result.

The sum for compensation claims includes £1.9bn to cover mainly US action over mortgage-backed financial products and an extra £465 million for customers mis-sold payment protection insurance (PPI).

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The Edinburgh-based group has also set aside an extra £500m in relation to allegations of the mis-selling of complex financial products, known as interest rate swaps, to small firms.

Chief executive Ross McEwan told a news conference last night that “fronting up to our past mistakes is very

expensive”. He said: “I have agreed with my executive committee that we will not pay bonuses to them for 2013.”

The announcement applies to eight senior employees. Mr McEwan has already said he would not take a bonus for 2013 or 2014.

Last year, six executives on the executive committee were handed £6.7m in performance-related bonuses.

He went on: “To me this is about leadership. I know this team is not responsible for the past mistakes … but we are the leaders running this company.”

RBS put out its unscheduled statement late yesterday, shortly before the financial markets closed. Shares fell by 7.3p to 332.39p, cutting about £900m from the value of RBS.

Mr McEwan said: “At the peak of the financial crisis, RBS was the biggest bank in the world.

“When the crisis broke, the bank was involved in a number of different businesses in multiple countries that have subsequently faced heavy scrutiny by customers and regulators.

“The scale of the bad decisions during that period means that some problems are still just emerging. The good news is we are now a much stronger bank and can manage these costs while still supporting our customers.”

He said that the sheer scale of the cost of claims from customers who have been mis-sold insurance was not originally

anticipated.

Mr McEwan said: “Billions of pounds have been spent to resolve conduct and litigation issues in recent years. Costs on this scale were not predicted by anyone when RBS was rescued in 2008. After five years of hard work and tough choices, the path ahead for RBS is much clearer. I am confident that we will build a great bank for the UK and I will have more to say on this in the coming weeks.”

Ian Gordon, of Investec Securities, said the announcement was not entirely unexpected, but the amounts involved were.

Another City analyst said: “The scale of these provisions will clearly impact RBS’s reported results for last year substantially.

“But the somewhat better news is that they do not have a direct impact on RBS’s underlying trading performance.

“The downside is that complications like this do tend to make it a little more difficult to value the shares in future and therefore has implications for any timetable of re-privatisation.

“It does not wipe out the positives that there is a new man at the helm [in Ross McEwan] and may hopefully prove a new broom in terms of underlying performance.”

Finance director Nathan Bostock would not comment when asked whether the losses announced in November and yesterday would amount to £8bn, which would be the largest since it lost £24.1bn in 2008, the biggest annual loss in UK corporate history.

Andrew Tyrie, chairman of the Treasury select committee, said: “RBS is still paying a heavy price for past misconduct. So too are its customers and taxpayers. It is crucial for the recovery that lending, particularly to SMEs, (small and medium enterprises) is not constrained as a result.”

Despite waiving top executives’ bonuses, RBS has indicated it may request permission to pay bonuses of up to double an employee’s salary, which Labour has asked the UK government to block, as the largest shareholder.

Chairman Sir Philip Hampton yesterday confirmed the bank had been having a “shareholder consultation” over the issue “but that the ability to pay competitively … is fundamental to the prospect of getting to where we need to be”.

Martin Flanagan: Light at end of the tunnel is just another trainload of charges

THERE was supposed to be light at the end of the tunnel for Royal Bank of Scotland. Instead the bank faces another financial train of one-off charges clattering down the track.

If the new boss Ross McEwan didn’t appreciate what he was taking on when he succeeded Stephen Hester last autumn, the latest

£3 billion of provisions has ensured he knows the scale of the challenge now.

Suddenly the hoped-for re-privatisation of majority taxpayer-owned RBS from 2015 onwards looks like a pipedream. Although most of the latest wrongdoing did not happen on Hester’s watch, some did, and he cannot be totally exonerated. His presumed legacy has been that, while RBS continued to face operational and public image restoration problems, at least he had done the heavy lifting of sorting the group’s onerous financial yoke and complicated structure.

Yesterday’s unscheduled announcement from his successors, with finance chief Nathan Bostock already known to be leaving , shows that Hester streamlined RBS’s complicated over-reach of operations globally. But it is clearly premature to say the corner has been turned on financial legacy issues.

No wonder the bank said yesterday that the remaining eight members of the bank’s key executive committee had waived any bonuses for 2013. McEwan had already gone public that he did not want to be considered for a bonus for last year.

RBS, beset by government pressures given its share structure and the general opprobrium of the public towards the industry generally, can be forgiven for seeking any public relations low-hanging fruit like refusal of bonuses it can get.

The latest provisions had the City speculating that, with previous announced one-off hits, RBS could be heading for an £8bn loss in 2013. If so, that would be the worst performance since the record £24bn loss in 2008, the year the group was bailed out by the taxpayer.

It pours cold water on the bank’s recovery story without totally derailing it. Headline provisions are not the same thing as underlying trading health and that has been going in the right direction.

The story is also still unfolding, and nobody at the bank is saying that a line can be drawn under provisions.