Reports criticize RBS' lending to small-businesses

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The reputation of the U.K.'s banking industry took yet another hammering over the weekend following reports that bailed-out Royal Bank of Scotland (RBS) had profited from struggling firms.

In a report published Monday, U.K. government adviser Lawrence Tomlinson accused RBS of pushing viable businesses into its turnaround arm -- allegedly to strip assets and make a profit for the bank.

"There are many devastating stories of how RBS has wrecked good businesses and the ruinous impact this has on the lives of the business owners," Tomlinson said in a statement.

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Tomlinson's report came on the same day that former deputy governor of the Bank of England, Andrew Large, published a review into RBS' lending to SMEs (small- and medium-sized enterprises) for the part-nationalized bank.

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Large recommended that the bank look specifically at some customers' "extreme accusations" regarding the way they were treated during times of financial distress. RBS announced Monday that, following the Large report, it had appointed law firm Clifford Chance to conduct an inquiry into the way it treats small business customers.

The backbone of the U.K's economy is its small and medium-sized businesses. Without confidence and investment returning to this sector, Britain's recovery will be short-lived, business leaders have warned. Therefore reports that one of the U.K.'s largest banks, which is 82 percent owned by the British taxpayer, had profited from struggling smaller firms has sparked another round of controversy and criticism.

Abnormal allegations?

Ian Gordon, banking analyst at Investec, said the RBS allegations – while not new – were "abnormal."

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"The suggestion is that they have deliberately pushed 'viable' businesses into insolvency in order to 'seize' assets at knock-down prices to then adopt a 'hold for value' strategy through their own vehicle," he told CNBC.

"This goes well beyond the 'usual' wall of criticism that banks and/or their agents have failed in a duty to maximise asset recovery values for the benefit of creditors and/or owners/guarantors."

In a public letter to Large, RBS' CEO Ross McEwan admitted that "in many cases the pendulum of risk aversion has swung too hard to one side." He said Clifford Chance's inquiry – reporting back in the New Year – would look into the treatment of customers "when times are tough."

The reports bring yet another bad news story for Britain's banking industry. "Another week, another banking scandal – or at least that's how the public sees it," Andre Spicer, professor of Organisational Behaviour at Cass Business School in London, told CNBC.

"As a result, the reputation of Britain's banks across the country is pretty low at the moment. It's clear from this string of scandals – which quite radically different in nature - that it's not just one part of banking that has problems, it's the whole sector."

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Last week, the former chairman of Britain's Co-operative Bank, Paul Flowers, was arrested as part of a drugs investigation following a newspaper sting.

Flowers had left the bank in June after the collapse of a deal to buy hundreds of Lloyds Bank branches, and The Co-operative Group last week announced that Len Wardle had resigned as chairman.

Last week, U.K. Chancellor George Osborne ordered City regulators to lead an investigation into what went wrong at the Co-operative Bank, which was once heralded as ethical alternative to its rivals, but is now in the middle of a £1.5 billion rescue operation. The Co-Operative Banking Group said it would co-operate with the review.

A number of Britain's banks are also bracing for investigations into the fixing of foreign exchange. Barclays and RBS are among the lenders that have announced they are reviewing their foreign exchange trading operations.

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All this after a difficult few years for the financial sector, which has seriously hammered by its role in the 2008 financial crisis and substantial fines for the rigging of the key bank rate Libor.

Culture shift

Spicer said that these scandals were the result of the slow unwinding of a banking culture which moved its focus from the prudence of the past to "entrepreneurial advantage taking."

"This shift had its upsides – there was lots of money to be made," he said. "But it also resulted in many disasters, which is in effect what these scandals are."

He added that it was a difficult period for the heads of Britain's banks, as many of the mistakes were made under previous CEOs.

The British Bankers' Association – which represents the U.K.'s banking and financial services sector – said the industry was working hard to restore trust and confidence.

"Some progress has been made to restoring confidence in Britain's banks but this is a process that has only just begun," a spokesman told CNBC.

But Spicer warned that there were likely more banking scandals out there. "This is going to continue over the next few years. Forex is going to run for a while, and who knows what else is out there," he said. "The more you look, the more you find."

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google