THE recovery of Royal Bank of Scotland risks being hampered in the year ahead by the continuing fall-out over its treatment of small business customers in the aftermath of the financial crash.

A leading analyst has warned the continuing refusal by the City watchdog to publish its full report into the activities of lender’s Global Restructuring Group (GRG) means the controversy over the division will continue to be felt by top brass at the state-backed bank this year.

The Financial Conduct Authority (FCA) commissioned a Skilled Person report into the activities of GRG between 2008 and 2013 in January 2016, but so far has released only summaries of its findings. It recently claimed that it was unable to release its full findings for legal reasons.

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The bank set up a complaint process and refund scheme for SME customers following the publication of the watchdog’s initial summary in November 2016, with FCA chief executive Andrew Bailey stating that “RBS has accepted that it did not meet the standards it set for itself which impacted on how it treated some its SME customers”. However, the FCA ruled then that the “most serious allegations” made against the bank were not upheld in the Skilled Person report, which was carried out by Promontory, the regulatory compliance consultant.

Michael Hewson, senior analyst at CMC Markets, said that, while the bank saw its share price rise by more than 25 per cent in 2016, and made progress with “legacy issues” such as the future of the 300-strong Williams & Glyn branch network, GRG “still has the potential to be significant concern”.

Mr Hewson said: “Ultimately, they have only set aside £400 million [in provisions]. But the more I think about it and look at it, the more I contend that it has the potential to be a significant concern going forward.”

Mr Hewson said the provisions Royal Bank will have to make over GRG will be dwarfed by the scale of the settlement it is likely to reach over the mis-selling of residential mortgage-backed securities in the US. That settlement, which analysts suggest could rise to as high as $12 billion, is now expected to occur at some stage in 2018. However, Mr Hewson said: “It [GRG] is not a concern in the context of the Department of Justice, [but] certainly in terms of reputational damage, I think it is significant.”

The FCA said earlier this month that publishing the full report into GRG “would be unlawful without getting the necessary consents from all affected parties”. And it confirmed it would not seek such consents, saying that not only would that be a “complex and lengthy process”, but it could lead to a heavily redacted version of the Skilled Persons report being published where consents were “not forthcoming”.

Asked whether he thought the FCA’s rationale for not publishing the full report into GRG was convincing, Mr Hewson replied: “No. Ultimately if you want to have transparency that everything has been cleaned up, you have to publish the conclusions of the report. Otherwise you are always going to have a little bit of a bad smell hanging around, with respect to what the conclusions of the report were.

“Obviously, the regulator has its reasons – I’m just struggling to understand what they are.”

When asked if the UK Government, which continues to hold a 71 per cent stake in Royal Bank, should put pressure on the FCA to publish its full report, he believes it would be unlikely that ministers would have the appetite for such a course of action. He said the government “needs to be seen to be standing back and letting the process take its course.”

Mr Hewson added: “Ultimately I’m a big fan of letting the market take care of itself.”

Laith Khalaf, senior analyst at stock broker Hargreaves Lansdown, agreed there is a degree of risk to the bank from the ongoing fall-out from GRG.

But he said it should not be overplayed, stating: “It’s a kind of risk, but the regulator has really told us what their conclusions are; from the investors point of view, that is the most important thing.

“The publication of the report is more of a political issue. If it does get published there are some things in there that could negatively impact the reputation of RBS.”

Mr Khalaf added: “The taxpayer owns about three-quarters of the bank. We have to bear that in mind in terms of balancing the benefits of transparency with the risks to the share price.”

Where the two analysts are more in agreement is over the liability lying in store for the bank as it negotiates a settlement with the US Department of Justice over its role in the mis-selling of residential mortgage-backed securities, which occurred before the financial crash of 2008 and 2009.

Mr Khalaf said the continuing uncertainty over the size of the potential fine is a big issue because no modelling exists which can predict it.

“The problem is nobody knows [how big it will be],” he said.

“Really it’s kind of finger in the air guestimates you are getting. The problem for RBS is that there is a very wide range of outcomes [being predicted]. All of them are bad, but some are worse than others.”

While some sector watchers have said they expect Royal Bank to return to making full-year profits in 2018, Mr Khalaf noted that this view was predicated on the DoJ fine being settled in 2017. On the basis that fine will now be levied in 2018, he expects Royal Bank to make a profit for 2017, but not the year after.

Once the settlement is reached, Mr Khalaf said “RBS can look forward”, but he observed that the share price remains well adrift of where in needs to be for the government to break even on its investment in the lender. The government acquired its majority stake in the bank at 503p per share in 2008, but by the end of 2017 the price remained stuck below 300p.

Mr Hewson highlighted the 25 per cent improvement in the bank’s share price over 2017 as a sign of its improving health, stating that the “underlying business is actually doing okay”. But, noting that the stock continues to lag its peers on share price recovery, he emphasised that “they just need to get out from all the legacy issues”.