RBS agrees multi-billion pound settlement with US authorities to settle sub-prime mortgage scandal

Royal Bank of Scotland has reached a settlement with US authorities to resolve the scandal over its role in the sale of so-called “toxic” sub-prime mortgages that played a major role in the onset of the financial crisis of 2008.

The Edinburgh-based lender has agreed to pay £4.2 billion to the Federal Housing Finance Agency (“FHFA”) as conservator US government-backed loan firms Fannie Mae and Freddie Mac.

The will remove one of the long-standing obstacles to the Government returning the lender to the private sector.

The move comes after the bank agreed to pay a £200 million compensation offer with the RBS shareholder group earlier this year, following a long-running lawsuit after its near-collapse nine years ago.

The deal resolves claims by FHFA in relation to RBS’s issuance and underwriting of approximately US$32 billion (£25 billion) of residential mortgage-backed securities (“RMBS”) in the US. As part of the settlement, FHFA’s outstanding litigation against RBS will be withdrawn, the bank said in a statement.

Ross McEwan, RBS CEO, 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.

“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.”

Financial Impact of the FHFA settlement

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

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

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