The Royal Bank of Scotland (RBS) have announced a settlement of the litigation over the rights issue in 2008 with three out of the five investor groups who were pursuing the company. They have reserved £800 million to settle all the claims and are continuing to negotiate with the remaining litigants. But private investors may be reluctant to settle because of the high legal costs that will erode any settlement, the low value of the settlement (the claims were originally estimated to be as much as £5 billion as the rights issue raised £12 billion) and the wish to have their “day in court” (they are also pursuing claims against the directors as well as RBS itself).
The legal claims were that the prospectus published for the rights issue failed to disclose all relevant information, and that it was in essence an attempt to shore up the company’s distressed balance sheet but was presented as something completely different. The Government had to step in soon afterwards to keep the company afloat, diluting investors severely. Investors lost very substantial sums and that included many private investors who relied on the high level of dividends paid by RBS and other banks as retirement income. Indeed many were impoverished, and particularly former employees of the bank who seemed to have unwavering faith that it would rapidly recover. I personally am aware of this because I talked to a number of them as a result of my involvement in the first couple of years in one of the claim groups. To give you an idea of the losses, taking into account share consolidations, the price of RBS shares in 2007 peaked at £58. It’s now £2.
The groups who have settled are those mainly representing institutional investors (fronted by legal firms Stewarts Law, Quinn Emanuel and Mishcon de Reya). Those representing mainly private shareholders have yet to settle. Why has it taken so long and probably run up legal costs of over £100 million already in the process? Well one problem was the initially reluctance of institutions to support the legal claims against a Government controlled entity, their business links to RBS and a general reluctance to take the lead or be linked to publicity on the matter. In the meantime private investors had difficulty raising legal funding and otherwise had difficulties with legal representation (the bigger of the two, the RBOS Shareholder Action Group changed lawyers several times).
But the key question investors should be asking the Government is this? Why did the Financial Conduct Authority (FCA) or the Prudential Regulatory Authority (PRA – who regulate banks), not step in to look into the claims made? The claims were in essence that there was a breach of the Financial Services and Markets Act in relation to the required content of a prospectus. So why did not the FCA investigate the matter and avoid the necessity for these horrendous legal bills and the ridiculously long time to reach any kind of settlement (many of the private investors who suffered may have died in the meantime).
The FCA is currently considering its “Mission” in a public consultation. That would surely be a good item to raise therein. What is the FCA for if it cannot pursue errant companies, and those people such as Fred Goodwin, the former CEO of RBS who many people blame for the near collapse of the company?
It would of course be good for the Government for RBS to settle these claims as otherwise the chance of them disposing of their shares in the company is poor. But the recent news that RBS was the worst performing major UK bank in stress tests performed by the Bank of England has not helped. The Bank said “The stress test demonstrates that RBS remains susceptible to financial and economic stress”. As a result RBS will need to take more action such as further downsizing. The prospects for investors are still poor therefore. Those investors who thought what goes down must bounce back sooner or later, will be bitterly disappointed, if they are not already.