RBS Royal Bank of Scotland Group PLC

By Max Colchester 

LONDON-- Royal Bank of Scotland Group PLC said Tuesday it was setting aside GBP400 million ($496.2 million) to compensate small-business owners who alleged they were pushed into default by the bank's restructuring unit.

The bank said it was creating a system to refund fees extracted from struggling small businesses that were put into its Global Restructuring Group in the aftermath of the financial crisis. Hundreds of small-business owners alleged that GRG forced them to default on loans so that the bank could charge higher fees or seize their properties and sell them.

An initial report by the U.K.'s Financial Conduct Authority on Tuesday said this wasn't the case, however the regulator did find that around two thirds of the businesses put in the unit wouldn't have necessarily failed and most suffered from "some form of inappropriate action by RBS." The regulator will detail further actions at a later date.

In a statement, RBS said "it could have done better" in its treatment of small business customers.

The bank, which is 73%-U.K. government owned, is now putting in place a complaints process overseen by a former judge to dole out funds to the companies affected. The there will be an automatic repayment of fees to businesses that were in GRG between 2008 and 2013. The GBP400 million covers both the compensation and the cost of setting up the new unit to handle the complaints.

The decision to compensate customers marks a change in tactics for RBS, which spent years denying it had mistreated small businesses. The allegations have hung over RBS, proving a thorn in its side as the bank looks to reshape itself as a U.K. focused corporate lender.

In 2013 RBS commissioned law firm Clifford Chance to investigate the allegations. The report said that RBS didn't systematically defraud customers.

Following the financial crisis the number of customers being referred to RBS's GRG unit rose. A report commissioned by the bank on its business lending warned of a potential conflict of interest at GRG because it selects the struggling businesses it works with from RBS's larger base of customers, and aims to generate a profit. The FCA said there was some evidence of this and detailed a litany of failures including not handling conflicts of interest at its property unit West Register and not putting too much pressure on small businesses to pay of debt and hike prices..

RBS closed both GRG and its West Register unit, which both advises distressed businesses on property matters and bid for their properties.

The U.K. government rescued RBS with GBP45.5 billion of taxpayers' money in one of Europe's biggest bank bailouts amid the financial crisis in 2008. The value of that stake has fallen sharply since then, particularly in the wake of Britain's referendum vote to leave the European Union in June this year.

In August, the lender said it would roll out a new cost-cutting plan after posting a first-half net loss of more than GBP2 billion amid ultralow U.K. interest rates and uncertainty over Brexit.

Write to Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

November 08, 2016 03:42 ET (08:42 GMT)

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