News that RBS admits mis-selling EFG loans to SMEs

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Members of the UK200Group of independent accountancy and lawyer firms have today commented on news that Royal Bank of Scotland (RBS) has admitted it mis-sold a number of loans to small businesses and is preparing to review 1,800 sales.

After reviewing a sample of loans sold under the Enterprise Finance Guarantee (EFG), a Government lending initiative for small businesses, RBS identified a number of instances where the loans were mis-sold. The bank is the biggest lender under the scheme and lent £900m to 9,000 businesses. RBS says it failed to properly explain to customers how the borrower and guarantor liabilities work under the scheme, which provides a 75 per cent Government guarantee to the lender. Some RBS customers were incorrectly led to believe that the guarantee was for their benefit rather than the bank’s. These customers did not realise that they remained liable for 100 per cent of the loan and in some cases only discovered that they were liable for the full sum upon defaulting.

Jonathan Russell, partner at UK200Group member firm ReesRussell:

That RBS have mis-sold the Government Enterprise Finance Guarantee (EFG) is no great surprise. The EFG scheme is not very attractive to small businesses seeking finance if they have any security to offer as generally it is only the bank which derives any benefit or security from the scheme.

I have a number of instances when consulted by small businesses that have been offered the scheme when it has been properly explained and realise that not only had the bank (not just RBS) failed to explain it properly, but also it was not really suitable for their circumstances. The normal case has seemed to be when a borrower offering their home as security with plenty of free equity to cover the advance find that the bank will not lend because of their discount on the free equity and the bank then offers the lending using the EFG. The banks have failed to explain that in the event of default their entire security on their home is used first before the Government guarantee.

A simple example is someone wanting to borrow £50,000 and offering their house worth £250,000 as security but they have a £125,000 mortgage. The bank will only recognise say 25 per cent of the free equity so only £31,250 (250,000 - 125,000 x 0.25) which is not enough security for them to lend so they offer the EFG which they say means the Government guarantees 75 per cent. The customer is led to believe that they have a loan of £50,000 which if they fail £37,500 is covered by the Government (for which they pay a premium of their loan) and they are guaranteeing £12,500. WRONG. The customer is still guaranteeing £50,000 and only if after selling the house the bank is not repaid does the £37,500 guarantee come in to play.

In fairness to RBS, the Government is partly to blame in that they have been pressurising banks to lend to small businesses and they replaced the old Small Firms Loan Guarantee (SFLG) which was a much better scheme and more akin to the customer perception with the EFG which is actually only really of use where the customer has no or very limited security to offer and these are often the cases the bank does not wish to lend on, even with a 75 per cent guarantee.

Daniel Shear, Senior Corporate Finance Partner at UK200Group member firm BKL:

We’re unsure what’s more surprising here – the fact that RBS owned up to the potential mis-sale of loans under the EFG scheme following complaints by some customers without being forced into an agreement with the FCA; or that customers honestly believed the security provided by the Government was for their benefit rather than the bank’s. How could a defaulting customer really expect to benefit? Then again how could RBS really allow customers to borrow under that belief? It just beggars belief.

Anyway, credit must be given where it’s due so we admit it’s positive of RBS to publically admit to this latest mis-selling scandal.  We wonder how many other banks will follow suit. Or are we to believe that all the other banks behaved impeccably when selling loans under the EFG scheme?  We won’t comment on that – we’re too busy watching a pig flying by.


Established in 1986, UK200Group is the leading mutual professional association in the UK with some 150 offices of quality-assured member accountancy and lawyer firms throughout the UK totalling over 550 partners, 150,000 business clients and global links in over 50 countries. UK200Group provide services and products that are designed to enhance the business performance of its members.  Telephone 01252 401050, email or visit 


UK200Group is an association of separate and independently owned and managed accountancy firms and lawyer firms. UK200Group does not provide client services and it does not accept responsibility or liability for the acts or omissions of its members.  Likewise, the members of UK200Group are separate and independent legal entities, and as such each has no responsibility or liability for the acts or omissions of other members.


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