Royal Bank of Scotland has been ordered to pay $5.5bn (£4.2bn) to US regulators for misselling toxic mortgage bonds in a “stark reminder” of its behaviour in the run-up to the financial crisis.

The penalty from the Federal Housing Finance Agency is one element of a multibillion-pound bill that the 71% taxpayer-owned bank faces to resolve long-running disputes with authorities in the US over the sale of mortgages packaged into bonds more than a decade ago.

Ross McEwan, chief executive of RBS, said: “This settlement is a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions. This bank and British taxpayers have paid a high price for these poor decisions.

“Today’s announcement is an important step forward in resolving one of the most significant legacy matters facing RBS and is further evidence of the determination of the bank’s leadership to put our remaining issues behind us.”

Since its bailout in 2008, RBS has incurred penalties and legal costs of £15bn.



The Edinburgh-based bank is facing another punishment from the US Department of Justice for the same activities, which could cost a further £9bn, and admitted it had not yet engaged in talks about a settlement in this matter.



The FHFA penalty relates to the way that $32bn of mortgages were packaged up and sold as residential mortgage-backed securities (RMBS) between 2005 and 2007, when RBS was the largest non-US bank engaged in this practice. The bonds were sold to US housing agencies Fannie Mae and Freddie Mac – the linchpin of the housing market as they buy mortgages from lenders to allow them to grant more home loans – before the market collapsed during the financial crisis, leaving the buyers nursing heavy losses.

The settlement does not include any admission of wrongdoing by the bank, which shut down the bond-selling operation – once known as Greenwich NatWest – three years ago. McEwan said the team involved in selling these RMBS had left by then.

Analysts at Jefferies said the FHFA bill was $1bn more than they had been expecting, although it is largely covered by existing provisions. RBS shares ended 2% lower at 251.5p – below the 500p at which taxpayers break even on their stake.

McEwan said: “It’s never a great experience as a CEO to be writing such a large cheque ... Unfortunately, this is the price we’re paying to get this organisation into a much better shape.”

Ahead of the FHFA settlement, the bank had put aside £6.6bn to cover the cost of RMBS misselling and the penalty from the FHFA accounted for £3.6bn of this.



The total bill for RBS falls to £3.6bn because of indemnity agreements but the bank admitted it will need to take another £151m provision to cover the rest of the FHFA settlement.

FHFA filed 18 lawsuits in 2011 in relation to RMBS misselling and the settlement with RBS is the 17th and one of the largest.

It is not clear how much of the remaining £3bn of provisions is in preparation for any settlement with the DoJ, which McEwan has said he wants to resolve by the end of this year. “As the year progresses it gets increasingly challenging [to solve this by the end of the year],” Ewen Stevenson, finance director of RBS, told analysts.

McEwan said the settlement with the FHFA was a “good step forward” but did not solve all the barriers facing the bank’s ability to start paying dividends for the first time in a decade.

The bank also needs to make a profit – McEwan has already warned that the bank is course to report 10 years of consecutive annual losses since its £45bn bailout – and pass its annual stress test from the Bank of England. It also needs the Treasury to reach a deal with Brussels over alternatives to the sale of 300 branches – which were to be known as Williams & Glyn – to meet conditions imposed by the European commission at the time of its bailout.

“Today’s settlement removes a significant obstacle that was previously blocking the resumption of dividends,” said analysts at Bernstein. “The W&G settlement with the European commission remains the other remaining significant obstacle and, once resolved, will set RBS up for resumption of the dividend from next year.”

Days before Christmas, the DoJ extracted $12.5bn in settlements from Deutsche Bank and Credit Suisse over RMBS but it is taking legal action against Barclays, which has refused to settle.