(Photo: Reuters)
(Photo: Reuters)

The Royal Bank of Scotland executives may have a spring in their step, when they go to the annual general meeting in Edinburgh today after swinging back into profit but the group's problems are far from over.

From mis-selling derivatives and payment protection insurance (PPI), mounting lawsuits and outrage over continual retail-related tech issues, RBS has a huge and costly albatross around its neck.

RBS gleefully announced that it had returned to profit in the first quarter of 2013, a first since 2011, as impairment charges on bad loans declined due to the bank's restructuring.

RBS reported a pre-tax profit of £826m ($1.3bn, €978m) for the January-March period, the highest since the third quarter of 2011, compared to a loss of £1.51bn a year ago.

It has also paid £390m to US and UK authorities over Libor manipulation and have, at length, said it has put the issue behind them.

But while RBS executives will trundle up to the AGM and undoubtedly say that "progress is great" and "we've only got legacy issues to deal with", there is a whole host of issues that still need to be sorted out.

Mis-Selling Derivatives

In June last year, RBS, Barclays, HSBC and Lloyds were banned from selling complex structured collars, which is an interest rate swap agreement (IRSA), to small-to-medium enterprises (SME), after regulator Financial Services Authority (FSA), now the Financial Conduct Authority (FCA) found them to have mis-sold thousands of derivatives products.

The whole scandal has been a laborious and complicated one.

However, it could cost the banks billions of pounds in redress, administrative costs, as well as litigation and settlement fees.

This is the reason why the initial review was so "diluted" as a review that set out strict rules and criteria for redress could have affected all banks' solvencies.

IRSAs are contracts between a bank and its customer where typically one side pays a floating, or variable, rate of interest and receives a fixed rate of interest payments in exchange. They are used to hedge against extreme movements in market interest rates over a given period.

Companies that have seen the value of these products move against them as rates fell during the recession now owe banks crippling sums of money in interest payments each year.

But if the businesses want to cancel the contracts, they are faced with higher costs.

At the end of June 2012, the FSA released its findings from a review that found that 40,000 IRSAs had been sold to customers and that the banks have to review each case, determine if there has been a mis-sell and, if so, offer a level of redress.

At the end of January this year, the FSA then unveiled its findings from a pilot scheme that examined the sale of 173 IRSAs to British firms found that at least 90% of those did not comply with at least one or more regulatory requirements.

While the banks have almost been forced to determine and deliver offers to customers under the Pilot Scheme, the thousands of other people who were sold these products are still awaiting a determination.

After speaking to many people close to the situation and banks, it is clear that progress at each institution is moving at different speeds.

Several sources close to RBS and its practices told IBTimes UK that the bank had barely made a dent in the thousands of cases up for reviews, which excludes the Pilot Scheme participants, meaning there millions or even billions more in possible redress, consequential losses and administrative costs could be paid out.

While RBS boosted its swaps provision by £50m in the first quarter this year, it did say that this was down to administrative costs.

Its last statement said that in conjunction with the FSA industry-wide review, it booked a charge of £700m in redress and a further £575m was earmarked for client redress, as well as £125m for administrative expenses.

But it isn't an exact science and as RBS warned "it continues to monitor the level of provision given the uncertainties over the number of transactions that will qualify for redress and the nature and cost of that redress."

Furthermore, not all SMEs are waiting for the outcome of the Review, mainly due to the level of delay and waiting time for even a determination.

Litigation is a long and costly legal process too and as IBTimes UK has pointed out for years, businesses are flooding lawyers and consultancies, in order to bypass the FSA agreement.

Shareholders Action Group

News that RBS is preparing to give taxpayers their money back, as it will be ready to return to the private sector next year, may be a hard statement to hear for some investors.

IBTimes UK first revealed in October last year that a group of investors were set to launch a £4bn lawsuit against RBS and three ex-senior executives, Fred Goodwin, Tom McKillop and Jonny Cameron.

Fast forward six-months later and a group of 12,000 shareholders filed proceedings in London's High Court against RBS, claiming that the lender did not fully disclose its true financial condition prior to the government bailout.

"This represents a giant step forward for the many thousands of ordinary people who lost money as the result of inexcusable actions taken by banks and their directors in the financial crisis. Now, for the first time, some of these directors will have to answer for their actions in a British Court," says a spokesperson for the action group in an emailed statement to IBTimes UK.

The group is suing the bank and former executives for apparently misleading shareholders by "misrepresenting the underlying strength of the bank and omitting critical information from the 2008 Rights Issue prospectus.

While the case is undoubtedly going to take a significant amount of time to close, it is a major issue that lurks in the shadow and could cost the bank billions of pounds in settlements.

Complaints and PPI

UK regulators estimate that between 2001 and 2010, the industry sold £34bn of this form of insurance.

However, on 8 March this year, the FCA revealed that UK banks have only paid around £9bn over the past two years to compensate customers mis-sold PPI, in what has become the most expensive financial scandal in British banking history.

RBS said in its last set of results that there was no increase to the group's provision for PPI in the first quarter this year.

The bank's cumulative charge in respect of PPI is £2.2bn, of which 68% accounted for redress and had been paid by 31 March 2013.

While this seems like the nightmare is near an end for RBS, it did warn that "the eventual cost is dependent upon complaint volumes, uphold rates and average redress costs."

"Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different than the amount provided. The group will continue to monitor the position closely and refresh its assumptions as more information becomes available."

But complaints about RBS, and other groups under its wing, have surged.

During the six months from 1 July to 31 December 2012, the Financial Ombudsman Service (Fos) revealed that the total number of new cases received against RBS totalled 8,446.

And out of this amount, 6,750 were PPI related.

Furthermore, RBS-owned Natwest received 8,679 new complaints during the same period and 4,733 related to PPI.

It's no wonder that regulator and the banking industry are considering implementing a deadline for PPI mis-selling claims in order to slow down the backlog in disputes and billions of pounds in payouts.

Natwest Tech Issues

Natwest has run into a number of problems over the last year, related to its ATMs and facilities for customers being able to pay bills.

While the issue seems minor, in comparison to RBS' raft of problems, as late as March this year millions of Natwest customers were left unable to withdraw cash or make transactions.

This was only less than a year after IT problems left many unable to move money or pay bills for days and cost the bank £125m in customer compensation.

While Stephen Hester, the chief executive of RBS, said in the aftermath in 2012 that "we have to learn lessons from what went wrong here and try to make (such failures) less likely in future," clearly there are flaws in the IT system that could lead to further problems and even more payouts.

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