RBS faces EU investigation into alternative Williams & Glyn plans

European regulators have launched an in-depth probe into the decision to allow Royal Bank of Scotland an alternative option rather than offloading its Williams & Glyn business.

In February, the Treasury proposed that instead of selling Williams & Glyn, as required by the bloc's regulatory arm as part of its state bailout in 2008, RBS could instead set up a fund to help smaller, 'challenger' banks.

On Tuesday,the European Commission said it had opened an "in-depth investigation" to assess whether this alternative package was "an appropriate replacement" for the previous divestment plan.

Margrethe Vestager, the EC commissioner in charge of competition policy, said: "RBS is the leading bank in the UK SME banking market and received significant state support during the financial crisis.

"The Commission is now seeking the views of all interested parties on an alternative package proposed by the UK to replace RBS's commitment to divest Williams & Glyn. We can only accept this proposal, if it has the same positive effect on competition as the divestment of Williams & Glyn would have had. This is important for fair competition."

In February, RBS said it has already taken a £750m provision within its 2016 annual results as a consequence of the Treasury proposal and was likely to absorb further restructuring charges during 2017 and 2018 by re-incorporating the Williams & Glyn branched back into its various franchises.

The FTSE 100-listed bank apparently only received bids for parts of Williams & Glyn but not the full business, and they would not be completed before the sale deadline of 31 December 2017.

The Treasury said its alternative package for RBS, if accepted by the EC, would even out the distortion in the UK's SME banking market resulting from the state aid to RBS, with greater speed and certainty than would the divestment of Williams & Glyn.

EC rules for state aid mean it can only accept such modifications if they are considered truly equivalent to those originally provided.

"The UK's alternative package comprises a set of novel behavioural measures, the effect of which is difficult to quantify on the basis of information currently available to the Commission," the EU's operational body said in a statement on Tuesday.

The in-depth investigation will provide a one-month opportunity for interested third parties and the UK government to comment on the proposals.

For example, the plan was criticised by the Federation of Small Businesses for not produce a “proper restructuring” of the market, while bosses of some challenger banks had said that the proposals may be better for competition than a Williams & Glyn sell-off.

"This opening of an investigation does not prejudge its outcome," the EC stressed. "The Commission will carefully review the responses received before taking a final decision on whether or not to accept the alternative plan, which if accepted would allow RBS to meet its final commitment under the state aid decision and swiftly close the case."