RBS warns of higher misconduct charges, obstacles ahead

By Matt Scuffham

LONDON (Reuters) - Royal Bank of Scotland (RBS.L) said costs relating to alleged past misconduct could be substantially higher than expected, potentially hampering plans by the British government to sell more shares in the bank soon.

RBS is facing a number of probes into alleged wrongdoing, disrupting Chief Executive Ross McEwan's efforts to turn around the lender that was rescued by a 46 billion pound ($70.5 billion) government bailout during the 2007-09 financial crisis.

They include an investigation by authorities in the United States into claims it misled investors in mortgage-backed securities and a review of its treatment of struggling small firms by Britain's financial regulator.

The bank on Friday reported a third-quarter operating loss due to restructuring costs and said it expected further charges relating to misconduct and litigation which could be substantially greater than the provisions it has already made.

RBS, which is now 73 percent owned by the government, has given similar warnings in the past given the uncertainty surrounding ongoing investigations. The bank has so far set aside 4.5 billion pounds to cover regulatory and legal actions, including 2.4 billion for litigation.

"Since 2008, RBS has gone through a very difficult period and there are still quite a few obstacles to be overcome before we're back to full health," new Chairman Howard Davies, who took up his position in September, told reporters.

The ongoing investigations threaten to derail the British government's plans to sell three-quarters of its stake in the bank over the next five years.

Britain's finance ministry sold a 5.4 percent stake in August, taking a loss of 1.1 billion pounds, and is keen to sell more shares as early as December, according to sources with knowledge of government thinking.

Court documents filed in the United States in June suggested the bank could have to pay $13 billion to settle the mortgage-backed securities claims. The bank is being investigated by the U.S. Federal Housing Finance Agency and Department of Justice.

Senior RBS executives have said the most damaging issue for the bank's reputation is the investigation by Britain's Financial Conduct Authority (FCA) into the activities of the bank's Global Restructuring Group (GRG) turnaround unit.

RBS was accused of pushing viable businesses into GRG so it could seize their assets and charge higher fees. The FCA has hired Promontory to investigate the claims and the consultancy is due to report back its findings by the end of the year.

Reuters reported in September that RBS executives were bracing themselves for a multi-billion pound compensation scheme after McEwan left a meeting with the regulator in May convinced the bank would face punitive action.

"We're waiting to see what comes out of their results so that we can have the dialogue with them," McEwan told reporters on Friday.

"It's one of those issues that I did say we wanted to tidy up this year. It certainly has some impact on us in terms of the feel around the organisation but I'm not going to give any view on the outcome, we'll wait and see what comes through from the FCA," he said.

Shares in RBS were down 1.7 percent by 1220 GMT.

RBS, which is drastically shrinking its investment bank and international operations, reported a third-quarter operating loss of 134 million pounds ($206 million), down from a profit of 1.1 billion the year before, hit by restructuring costs.

RBS also said it had raised $2.6 billion through the sale of its remaining stake in U.S. business Citizens. The sale will increase the bank's core tier 1 capital, a measure of its financial strength, to 16.2 percent, the best of any UK bank.

(Editing by Mark Potter and Jane Merriman)