Part-nationalized British lender Royal Bank of Scotland has been accused by a government advisor of pushing struggling small firms into its turnaround unit so it can charge higher fees and take control of their assets.
The allegations prompted Britain's business secretary Vince Cable to demand an "urgent response" from Britain's financial regulators and from RBS, 82 percent owned by taxpayers following a government rescue during the 2008 financial crisis.
Lawrence Tomlinson, a businessman hired as an advisor by Cable's department in April, said RBS had engineered businesses into default in order to move them into its Global Restructuring Group (GRG). He said that enabled it to generate revenue through higher fees and margins and the purchase of devalued assets by its property division, West Register.
It is not unusual for a bank to remove problem loans from its books, especially when it is looking to reduce its exposure to risky assets, as RBS did following its 45 billion pound ($73 billion) bailout.
Cable said he had passed the allegations on to regulators, RBS and Andrew Large, a former deputy governor of the Bank of England who was asked by RBS to undertake an independent review of its lending practices.
"Some of these allegations are very serious and I am waiting for an urgent response as to what actions have been taken," Cable said in a statement on Sunday.
RBS said it was "already committed to an inquiry to investigate how customers are treated by RBS when facing financial difficulties and ensure that we provide them with appropriate support".
"GRG successfully turns around most of the businesses it works with, but in all cases is working with customers at a time of significant stress in their lives. Not all businesses that encounter serious financial trouble can be saved," it said.
Tomlinson was hired by the business department in April as an 'entrepreneur-in-residence' to help "address the needs of small and medium-sized businesses". He runs LNT Group, based in the north of England which has annual revenue of 100 million pounds and interests in construction, software, car manufacturing, and care homes.
Large, a former Bank of England deputy governor, is expected to publish his full report in the next couple of days. In his initial findings, published earlier in November, Large said a small proportion of customers had a strongly negative perception of RBS, in particular relating to the treatment of customers in financial distress and recommended the bank looked into those specific concerns carefully.