RBS CEO warns on cost of rectifying past misconduct

A logo of an Royal Bank of Scotland (RBS) is seen at a branch in London February 23, 2012.

LONDON (Reuters) - Royal Bank of Scotland's Chief Executive Stephen Hester has warned that the part-nationalised bank faces hefty penalties for rectifying past misconduct and said the overall cost of dealing with the issues was impossible to forecast.

The bank is under investigation by U.S. and UK authorities for its role in an interest rate-rigging scandal and faces punishment over possible breaches of sanctions against Iran. It has also set aside 1.3 billion pounds to compensate customers mis-sold loan insurance and faces claims from small firms wrongly sold complicated hedging products.

"We have to all deal with the issues of the past and try and reduce the chance of them recurring and that will take a long time and, sadly, a lot of money as well in terms of past restitution," Hester said in a speech at the Bank of England Merrill Lynch annual banking conference in London on Tuesday.

"You saw over the summer with Standard Chartered and HSBC that surprises spring up," he added.

HSBC has set aside $700 million to cover fines that could emerge after a U.S. investigation into transactions tied to Mexico, Iran, the Cayman Islands and Saudi Arabia. Standard Chartered reached a $340 million settlement after New York's banking regulator investigated its transactions linked to Iran.

Hester said the banking industry had to "accept that society has a different attitude and determination to make sure that banks behave in a different way and improve their reputation."

Reuters reported in August that RBS, which is 82 percent-owned by the government, was closing in on a settlement in relation to alleged interest rate manipulation.

Hester said RBS was nearing the point of becoming a recovered bank and should have largely completed its restructuring by the end of 2013. However, he cautioned that the next 16 months carried "important execution challenges".

Shares in RBS were trading at 267.35 pence, down 1.4 percent at 10:00 British time. The British taxpayer is currently sitting on a 21 billion pound loss after Britain pumped 45 billion pounds into the bank to bail it out in the 2008 financial crisis.

(Reporting by Matt Scuffham; Editing by Myles Neligan and Louise Heavens)