In a final report on the matter out today (June 13) the regulator gave details on how it came to its decision not to take action.
The report stated none of its 11 principles of conduct that regulated firms must abide by, applied to the case.
However, it stated it might have been in a position to take action had the Seniors Managers and Certification Regime been in place at the time.
The FCA had concluded last year it was unable to act on deemed shortcomings in RBS’s support unit for troubled businesses, the Global Restructuring Group, as this fell outside its regulatory remit.
The regulator had been investigating RBS's GRG division following concerns it was artificially distressing and transferring otherwise viable small businesses to profit from their restructuring or insolvency.
More than 12,000 companies were transferred into GRG between 2007 and 2012.
But the FCA’s probe found no evidence of dishonesty or a lack of integrity among the senior management and no credible basis for concluding it had sought to treat customers unfairly.
The regulator did identify a number of problems within GRG however, including the "significant tension" between its objectives to turn companies around and be a major contributor to RBS's bottom line, alongside "limited examples" of GRG correspondence which was "clearly inconsistent" with ensuring customers were being treated fairly.
While the FCA raised these concerns, it stressed that commercial lending was largely unregulated, although RBS is regulated.
The City-watchdog therefore concluded that its powers to discipline did not apply and that an action against senior management would not have reasonable prospects of success.
Today's report stated principle six — which states a firm must pay due regard to the interests of its customers and treat them fairly — was most relevant to the GRG case.
However, principle six does not apply to unregulated activities. In fact, only three principles (numbers three, four and 11) can be used to judge the dealings of unregulated activities, according to the FCA.
The regulator ruled that principles four and 11, which rule that firms must maintain adequate financial resources and must deal with regulators in a cooperative way respectively, were not relevant to its GRG probe.
Principle three deals with a firm taking reasonable care to organise and control its affairs responsibly and effectively in order to maintain the integrity of the financial market.
The FCA ruled that for this principle to apply, GRG’s activities would need to be of a significant enough scale (in size or impact) to negatively impact the ability of RBS to carry on regulated activities.
Although GRG’s activities significantly damaged RBS’s customers, the report stated this was not widespread enough to impact the confidence in or integrity of the UK financial system, so none of the FCA’s principles were applicable in its probe into GRG.
Andrew Bailey, chief executive of the FCA, said: "Our investigation has found that GRG clearly fell short of the high standards its clients expected but it was largely unregulated and so our powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.
"GRG has been highly damaging for those customers impacted and more widely for the reputation of the banking industry. Combined with other issues that have impacted SME’s it is important for all who work in this sector to regain the public’s trust."
The regulator’s report went on to note how the regulatory situation had changed since the case against RBS hit the headlines.
In March 2016 the Seniors Managers and Certification Regime was rolled out to banks. The regulator stated if the SM&CR had been in force during the review period, it would have had a clearer understanding from the start of which individuals were responsible to RBS and GRG activities.
The aim of the SM&CR is to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account.
As part of this, the regime defines the responsibilities and accountability of senior managers in authorised firms in a way which applies to all activities they conduct — whether they are regulated activities or not.
On top of this, the FCA would have had jurisdiction, if there was sufficient evidence, to take action against RBS senior management for breaches of the conduct rules despite GRG’s activities being largely unregulated.
The regulator also pointed out that there has been an extension of the scope of the Financial Ombudsman Service in terms of both increasing the coverage to include many more small to medium enterprises and an increase in the amount that can be awarded in such cases by the Fos.
The changes on SME coverage mean about 210,000 additional firms have access to the Fos process.
Mr Bailey said these were "very important" changes and stressed the FCA will continue to closely monitor the sector and the complaints process to ensure that are put right.
imogen.tew@ft.com
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