The government is facing calls to beef up the powers of the Financial Conduct Authority (FCA) after the regulator revealed it will take no action against Royal Bank of Scotland (RBS) following the scandal over its treatment of customers in the now notorious global restructuring group (GRG).
The City watchdog took legal advice which found that GRG's activities were not within its remit, ruling out any sanction against the bank’s managers.
The RBS GRG Business Action Group, which will continue to pursue a legal claim against the bank, accused the FCA of being a “supine, toothless regulator”, but the regulator insisted its hands were tied.
Andrew Bailey, FCA chief executive, said: "It is important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.”
He said that punishment from the FCA was "always going to be difficult and challenging" and that "our powers to discipline for misconduct do not apply". Any attempt to sanction senior managers "would not have reasonable prospects of success", because of the lack of evidence of dishonesty or deliberate unfair treatment by bosses, he said.
The GRG scandal has been a long-running sore for RBS, after extensive allegations of misconduct and cultural deficiencies at the bank. Memos from former RBS staff in a previously published report told employees to "let customers hang themselves" and said employees should charge struggling businesses high fees.
The failure to sanction anyone for the scandal has prompted calls from business and politicians to change the law.
Nicky Morgan, the former Cabinet minister who heads the influential Treasury Select Committee, said the FCA’s decision will be “deeply disappointing and bewildering” for victims of GRG. The government should “stand ready” to introduce new legislation and “urgently consider what additional powers the FCA requires”.
Kevin Hollinrake, a Conservative MP, said: “The FCA should release all findings and evidence they have obtained in their investigation of RBS GRG, unredacted so that the individuals who are responsible for this misconduct are in the public domain."
"It is clear that the FCA do not have the powers to adequately investigate and discipline instances of misconduct to a degree which gives victims any confidence."
The FCA insists that its senior managers regime will give it more powers to hold bosses accountable for future even in unregulated areas of banking, making them directly responsible for their operations even if they are ignorant of misconduct. However, Mike Cherry, national chair of the Federation of Small Businesses, said the law will not stop a repeat of the GRG-type scandal.
“As long as commercial lending remains unregulated, small firms will be vulnerable,” he said. “Too often, the regulator doesn’t recognise that small business owners have far more in common with consumers than big corporations. Where you have personal guarantees for example – small business owners putting personal assets on the line to secure a loan – then surely that should be deemed consumer, regulated lending.”
However, some industry figures warned that regulating commercial lending would be ill advised.
Paul Lynam, chief executive of Secure Trust Bank and an influential member of the UK Finance board, said: "A lot of the lending that goes on in the business space is quite bespoke. Trying to create a piece of regulation that deals with something as complicated as that would be, frankly, impossible. It really has to rely on individual contracts.
“Extending the remit of the Financial Ombudsman Service to small and simple homogenous business lending could be a workable solution,” he added.