The Financial Conduct Authority (FCA) is unable to act on shortcomings in Royal Bank of Scotland's support unit for troubled firms, as this falls outside of its regulatory remit, it has concluded.
The regulator has been investigating RBS's Global Restructuring Group (GRG) division following concerns it was artificially distressing and transferring otherwise viable small businesses to profit from their restructuring or insolvency.
An earlier independent review had found there was no evidence of this but it found many parts of GRG's culture, governance and practices were "deficient", which prompted the FCA to take further investigative action.
Following this probe, the FCA said it had found no evidence of dishonesty or a lack of integrity among the senior management, adding there was no credible basis for concluding it had sought to treat customers unfairly.
But while the FCA did identify a number of problems within GRG - including the "significant tension" between its objectives to turn companies around and be a major contributor to RBS's bottom line - it also highlighted that commercial lending is largely unregulated.
Andrew Bailey, the FCA's chief executive, said the regulator's powers to take action in this instance were "very limited" given the fact much of GRG's business was unregulated.
He said: "Taking action was therefore always going to be difficult and challenging but after carefully considering all the evidence we have concluded that our powers to discipline for misconduct do not apply and that an action in relation to senior management for lack of fitness and propriety would not have reasonable prospects of success.
"I appreciate that many GRG customers will be frustrated by this decision but we have explored all the options available to us before arriving at this conclusion.
"The fact that we can’t take action in no way condones the behaviour of RBS. We expect high standards from the firms we regulate and RBS fell well short in its treatment of GRG customers."
Mr Bailey added the FCA had consulted with independent, external leading counsel who confirmed the regulator's conclusions not to take action were correct and reasonable.
The FCA said during its investigation it had found "limited examples" of correspondence within GRG which was "clearly inconsistent" with ensuring customers were being treated fairly, including a memo called "Just Hit Budget", which included extracts which read: "Rope: Sometimes you just have to let customers hang themselves. You have then gained their trust and they know what’s coming when they fail to deliver."
While the regulator said this document should not have been produced, it found no evidence that senior management knew about it or approved of it.
Nicky Morgan, the chairwoman of the Treasury select committee, said: "It will be disappointing and bewildering for those who got caught up in GRG’s actions that the FCA is not able to act. This demonstrates the need for a change in how lending for SMEs is regulated.
