RBS to pay US$5.5bn fine over US mortgage-backed securities

The Royal Bank of Scotland Group has reached a US$5.5bn settlement with the US’s Federal Housing Finance Agency regarding its long-running US residential mortgage-backed securities claims

The Royal Bank of Scotland Group plc (together with its subsidiaries, RBS), has announced via statement, that it has reached a settlement with the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, to resolve claims by FHFA in relation to RBS’s issuance and underwriting of approximately US$32bn (£25bn) of residential mortgage-backed securities RMBS in the US. 

As part of the settlement, FHFA’s outstanding litigation against RBS will be withdrawn.

Under the settlement, RBS said that it will pay FHFA US$5.5bn (£4.2bn), of which US$754m (£581m) will be reimbursed to RBS under indemnification agreements with third parties.

Ross McEwan, RBS chief executive, said: “Today’s announcement is an important step forward in resolving one of the most significant legacy matters facing RBS and is further evidence of the determination of the bank’s leadership to put our remaining issues behind us.

‘Stark reminder’

“This settlement is a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions.”

The cost to RBS (net of the indemnity mentioned above) of US$4.75bn (£3.65bn) is largely covered by existing provisions. An incremental charge of US$196m (£151m) will be recorded in the RBS Q2 2017 results which will be published on 4 August.

As at end Q1 2017, RBS held a provision of US$8.3bin (£6.6bn) against RMBS, of which US$4.55bn (£3.6bn) related to FHFA and the remainder principally relates to a number of the matters described below.

RBS is one of 17 financial institutions to have settled RMBS claims filed by FHFA. Following this settlement, RBS’s unresolved RMBS litigation matters involve the issuance of less than US$1bn of RMBS issued primarily from 2005 to 2007, assuming court approval of an agreed and provided for settlement, it said.

Unresolved matters

RBS said in its statement that this unresolved amount does not include the FHFA case involving RMBS issued by Nomura, which RBS said that it estimates its net exposure as approximately US$383m (£295m) and intends to pursue indemnification for.  This net exposure was also included within RMBS related provisions as at Q1 2017.

RBS added that it continues to cooperate with RMBS related investigations and proceedings (both formal and informal) by federal and state governmental law enforcement and other agencies including the US Department of Justice and various other members of the RMBS Working Group of the US Financial Fraud Enforcement Task Force.

The duration and outcome of these investigations, including in particular the DOJ’s civil and criminal investigations, and other RMBS litigation matters “remain uncertain”, including in respect of whether settlements for all or any of such matters may be reached, the statement added.

RBS summarised by stating that it is not making any other adjustments to existing provisions relating to RMBS matters as a result of its latest settlement, but continues to advise that “further substantial provisions and costs may be recognised and, depending upon the final outcomes, other adverse consequences may occur”.

Gary Robinson
Head of Video and Ezines at Open Door Media Publishing. Deputy Editor, International Investment. An experienced journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as a fully qualified IFA, Gary works across both International Investment and InvestmentEurope titles. Previous video production credits include projects on BBC, C4 and SKY.

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