Britain's city watchdog taken to court over RBS executives

By Lawrence White and Iain Withers

LONDON (Reuters) - Britain's financial watchdog is being taken to court over its handling of an investigation into Royal Bank of Scotland's restructuring unit which has been criticised for its treatment of small businesses after the 2008 financial crisis.

Scottish businessman and frequent RBS critic Neil Mitchell has filed an application for a judicial review into the Financial Conduct Authority's (FCA) decision not to sanction any executives of the bank's Global Restructuring Group (GRG), according to court documents seen by Reuters on Wednesday.

The case has the potential to reopen one of the longest-running and most painful sagas in the bank's recent history, which has seen RBS criticised by lawmakers and forced to set up a 400 million pound ($511 million) compensation scheme over its treatment of small businesses.

The FCA found, in a much-delayed report into the GRG unit's actions published in February, that there was "widespread inappropriate treatment of customers" and that its bosses chased profits at the expense of distressed businesses.

The full report was published by lawmakers after the FCA refused to do so.

In July the watchdog said it did not have the power to discipline any bosses involved for misconduct, arguing the business of GRG fell outside the scope of its regulatory remit.

It is that decision not to punish any bankers that Mitchell's application is seeking to review, the court documents show.

"We will not comment on the application seeking to review this decision while it is pending," a spokesman for the FCA said.

RBS declined to comment. The bank has in the past rejected the most serious allegations against its GRG unit, but accepted some wrongdoing.

Mitchell has separately formed a company which will seek to manage claims against the bank brought by more than 500 former business customers of the GRG unit, he said in a statement to media on Wednesday.

A high court judge last year dismissed a lawsuit Mitchell brought against RBS for its handling of his own former business Torex Retail. Mitchell said he would appeal the ruling.

($1 = 0.7828 pounds)

(Editing by Keith Weir)