Published On: Tue, Jan 28th, 2014

RBS Earmarks Nearly £3bn For New Payouts

The Royal Bank of Scotland is setting aside £3bn for new litigation and customer compensation claims, which is expected to push the taxpayer-backed lender into an annual loss of around £8bn.RBS Earmarks Nearly

While members of the bank’s executive board members will not be receiving bonuses, RBS chief executive Ross McEwan said some bankers would get a payment.

He told Sky News that failing to do so would risk RBS losing “exceptional talent”.

In an unscheduled trading statement that deals a blow to the bank’s turnaround hopes, the state-controlled lender said it would allocate £1.9bn to cover claims relating to mortgage-backed financial products.

An extra £465m had been earmarked for Payment Protection Insurance (PPI) compensation payouts.

This was because claims had continued at previous rates – £225m per quarter – rather than falling as expected, and were forecast to continue for longer, according to the bank which is 80% taxpayer-owned.

It takes the total amount set aside for the PPI compensation scheme to £3.1bn, of which £2.2bn had been used at the end of 2013.

A further £500m had also been allocated for claims relating to the mis-selling of complex financial products, known as interest rate swaps, to small firms.

A £200m provision has been made to cover legal expenses.

The news sent a shudder through the City, with RBS’s share price falling late in the day and closing down 2.2 percent.

Mr McEwan said in a statement that “bad decisions” made in recent years meant that “some problems are still just emerging”.

He later told Sky News: “It was a large number to put out in the marketplace today.

“I would say at least now we are in such a good financial position we can take having to put aside close to £3bn to really again look after litigation and conduct issues from the bank’s past history.

“We were the biggest bank in the world and we had businesses on all continents, so I don’t think it’s surprising that some of these things will emerge as regulators and people take litigation against banks.

“What’s really important here is we are in a position to handle these losses now, these provisions.

“We have certainly got a path that we are building for our strategic review to show a really good bank emerging from the last five years of all the changes that have been made.

“When exceptionally large banks go wrong, which is what happened here, it takes a very long time to get them right again.

“I truly believe that we can turn this bank around and make it a great success for the UK.”

Defending the payment of bonuses to some staff, Mr McEwan, who had previously said that he would not take a bonus for 2013 or 2014, said: “I need to be in a position to be paying people fairly for the job that they do. I know that is hard for people to understand but that is the business we are in.

“Right now we are a back-marker on pay. We need to make pragmatic decisions about staying in the marketplace to keep hold of that talent while we change this bank dramatically.”

RBS said the additional cash provisions would be reflected in its full year results to be published on February 27.

The additional £1.9bn for mortgage-backed securities followed “recent third party litigation settlements and regulatory decisions”, said the lender.

It was towards the end of last year that in the US that JPMorgan Chase agreed to pay $13bn (£8bn) to settle complaints over mortgages and mortgage securities.

Around the same time, an RBS subsidiary agreed to pay $153.7m (£95.5m) to settle a US investigation into allegations it misled investors over a sub-prime mortgage product.

Responding to the RBS announcement, Business Secretary Vince Cable: “They are absolutely shocking numbers and taxpayers will be appalled they are still facing the bill for abuses that took place, five, ten years ago, the chronic mis-selling, the swaps that were sold to small business, and insurance mis-selling.

“This is dreadful stuff and the price is still being paid and it’s still damaging our economy.

“The one good thing is that the directors have accepted they mustn’t accept bonuses and the bank under new management is now getting on with serious banking.”

The chairman of the Treasury Committee, Andrew Tyrie MP, said customers and taxpayers were paying a “heavy price” for the past misconduct of the bank.

He said: “It is crucial for the recovery that lending, particularly to [small and medium-sized businesses], is not constrained as a result.”