Royal Bank of Scotland to sell contentious £3bn property unit

The Royal Bank of Scotland has promised to sell off its controversial £3bn West Register property portfolio, a legacy of six years of business insolvencies in the wake of the 2008 banking crisis.

Explaining the move, RBS's head of regulatory affairs, Jon Pain, said there was "a damaging perception that the bank had a conflict of interest when it purchased a property as part of a restructuring process".

The bank also blamed a recovering property market and onerous new capital requirements for banks holding property assets as factors behind the decision to shut the unit down.

Last October the Guardian revealed there were more than 1,300 UK residential properties in West Register with a value of around £200m. The portfolio also included care homes, apartments, entire streets of houses, pubs, hotels and even a Norfolk pig farm.

West Register was also a central target of a highly critical report by Lawrence Tomlinson, the former entrepreneur-in-residence at the Department for Business, Innovation and Skills. Tomlinson's position at the department came to an end this month.

The serial entrepreneur, who is himself in dispute with RBS in connection with his private business interests, claimed in his report: "West Register's portfolio risks being a significant conflict of interest within the bank … There is a clear risk of a perception arising that the intention is to purposefully distress a business to put them in [RBS's restructuring division] and subsequently take their assets for the West Register."

West Register was hastily set up in the economic downturn of the early 1990s to manage property assets from failed RBS customers. Bank executives had become frustrated that they were being outmanoeuvred by entrepreneurs who were allowing their businesses to go bust and then buying back the assets at bargain prices before quickly selling them on at huge profits.

Criticisms of West Register have centred on the banks role both as lender to distressed customers and bidder for the same customers' property assets.

The activities of West Register, dating back to the 1990s, were so sensitive that executives did not want the business to carry the RBS name, so instead called the new company after the street that ran alongside the bank's then head office in St Andrew Square, Edinburgh.

In its review of Tomlinson's allegations, Clifford Chance noted that the there was "no physical separation" between the RBS bankers responsible for advising customers and the bankers bidding for those customers' properties. The sharing of information, it said, "is possible", but added: "We found no evidence of West Register identifying properties it wanted to acquire or procuring their acquisition."

According to the Clifford Chance report, West Register had made acquisitions from just 166 struggling UK small- and medium-sized business customers, buying properties at an average of about half of the original loan value.

One of Tomlinson's allegations was that West Register had been purchasing properties at below-market prices from ailing businesses to make an "easy profit". But Clifford Chance pointed out that any perceived "gain" from such a deal would be offset by a write-off made by the bank on the customer's loan.

Most of West Register's £3bn assets come from large business which have underperformed, and almost two-thirds of West Register assets are in Germany.

In an interview with the Guardian in January last year, Derek Sach, the boss of RBS's distressed loan operations, including West Register, had defended his record from what were then allegations that the bank was failing to be sufficiently tough on bad property loans.

"There will be quite a lot of property customers who are paying their interest but they are not repaying their capital. And there may be some forbearance on some of those customers," Sach said. "Would the world be a better place by foreclosing on them? I'm not sure that it would. At the end of the day you've still got the same physical asset sitting there — a shop or an office, whatever it might be."

Sach had been recruited to RBS from venture capital group 3i in 1992, towards the end of a two-year recession which had seen many UK banks take a much more draconian approach to struggling corporate customers.

Sach was tasked with ensuring the bank retained as much value from distressed companies as was possible. "If you go back to this period of the 90s, the banks were very gung-ho in appointing receivers ... [and] RBS was top of the league. And, in the space of about nine months, I took it from being top to being bottom of the league by trying to see the good in these things — basically recognising the fact that we owned the economic interest in these business and [had to] managing that."

Powered by article was written by Simon Bowers, for The Guardian on Thursday 17th April 2014 20.43 Europe/London © Guardian News and Media Limited 2010


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