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RBS investors want review of EU imposed Williams & Glyn sale

The City of London business district is seen through windows of the Royal Bank of Scotland (RBS) headquarters in London, Britain September 10, 2015. REUTERS/Toby Melville/File Photo

By Sinead Cruise and Andrew MacAskill LONDON (Reuters) - Investors in state-backed Royal Bank of Scotland want the British government to intervene in the bank's seven-year struggle to sell a small business lender to meet European Union demands, which they say clash with UK taxpayers' interests. Several top 30 RBS shareholders told Reuters the requirement to sell Williams & Glyn (W&G), an EU condition of a 2008 state bail-out, should be reviewed because RBS has slashed its balance sheet and no longer threatens fair competition in the way regulators first feared. Carving out W&G has already cost RBS, which is 73 percent owned by the UK state, more than 1.2 billion pounds ($1.7 billion) and investors worry the process is harming the bank's recovery and delaying a return to full private ownership. RBS has missed one deadline to sell W&G, which has a 5 percent share of the market for small business lending, and warned it risks falling short of a second at the end of 2017. The Edinburgh-based bank is spending 140 million pounds a quarter to create an independent computer system for W&G, which currently generates around 6 percent of its income. The project is all-consuming for 6,000 full-time employees, equivalent to 1 in 10 of RBS' UK staff, and was described by its chief executive Ross McEwan as the most complex restructuring in global banking. "It's not helping the bank, customers or the economy. It would be better if they decided we could just hang on to it (W&G)," Arthur Sales, a private shareholder who attended the bank's investor meeting last week, said. BREXIT CARD Four of the investors contacted by Reuters said Britain's looming vote on EU membership provides an ideal backdrop for talks on a new deadline or a restructuring of the terms to a sale which was contingent on the full privatisation of RBS. One legal expert, who declined to be named, said the government could scrap the obligation to sell W&G entirely if Britons vote to leave the EU on June 23, as the UK would no longer be bound by the EU's state aid regime. RBS and the UK Treasury declined to comment on the possibility of the W&G disposal terms being redrawn. The European Commission, which has tussled with Microsoft and Google as an antitrust enforcer, has shown no sign of wavering. "We understand that RBS and the UK authorities remain fully committed to this divestment," an EU spokesman said on April 28 when RBS conceded it could miss its deadline. European regulators originally ordered a sale of W&G by 2013 to prevent RBS, Britain's largest small business lender and responsible for 1 in 4 loans in the sector, from having an unfair advantage and posing a systemic threat to its economy. Lloyds Banking Group avoided similar problems when it had to sell TSB because it agreed to let the new bank use its computer systems in a IT hosting and servicing deal. But investors point out that RBS, which has not made a profit since its 45.5 billion pound taxpayer-funded rescue, has already complied with demands to shrink its investment bank, and sell a commodities business and insurer Direct Line. "The punishment does seem excessive," Derek Weaver, another investor at the AGM, said. PENALTIES LOOM The penalties for missing a second deadline to sell W&G by the end of 2017 are unclear, but shareholders are concerned about footing the bill. "If it doesn't happen on time the British government must fine RBS and if it doesn't, the European Commission can fine the British government. I don't think the taxpayer taking a fine for RBS would be politically acceptable," one investor said. Under the original terms, the EC could appoint a trustee to sell W&G "at no minimum price". Investors are concerned this would mean the carve-out bill could eclipse W&G's estimated 1.5 billion pound price tag. There is a precedent in Europe as National Bank of Greece was forced to sell its Turkish Finanzbank for a heavily discounted 2.7 billion euros in December. RBS has said it is exploring other ways to separate and divest W&G, with McEwan pointing to an "open dialogue" with the European regulator. But investors seem unconvinced. "They've been far too complacent. What is clear is they'll have to do whatever they do at the last possible minute," said Xavier VanHove, partner at top-25 investor THS, who said RBS should spin-out W&G to its shareholders rather than sell it. "But, here's the silver lining. This is actually forcing them to look at systems harder than they otherwise might. So this difficult, long and tedious exercise will eventually make RBS a much better and more efficient bank," VanHove said. (Additional reporting by Foo Yun Chee in Brussels; Editing by Alexander Smith)