Fixed Rate Tailored Business Loan Mis-selling: Clydesdale & Yorkshire Bank’s Internal TBL Review

Following hundreds of complaints, lobbying and several adverse adjudications by the Financial Ombudsman Service and recent pressure from the Treasury Select Committee on SME Lending, National Australia Bank Group’s Clydesdale and Yorkshire Banks have now begun an (unannounced) internal complaint-led review of past sales of fixed rate loans often sold as Tailored Business Loans (TBLs).

Our lawyers regularly litigate against the banks on the basis that these fixed rate products amount to FSMA-regulated designated investments; however, it is argued by bank legal teams that such products are merely contracts for loans and not contracts for difference (see our previous legal news article: Hidden Swaps in Fixed Rate Loans & TBLs). Such fixed rate loans or TBLs usually contain (or are backed by) swaps or other over-the-counter derivatives and are often widely described as ’embedded derivatives’ or ‘hidden swaps’.

Other Lenders: Aviva / Norwich Union / Nationwide / West Bromwich

Clydesdale and Yorkshire Banks are not the only banks to have mis-sold Fixed Rate Loans. Building Societies such as Nationwide and West Bromwich and major insurers such as Norwich Union / Aviva have also sold Fixed Rate Loans, with connected complex derivatives – often to financially inexperienced SME customers even NHS GPs borrowing from the historic GPCF scheme.

Experts say these contain hidden embedded interest rate or gilts referenced derivatives arguably contrary to the Financial Services and Markets Act and the FCA’s Conduct of Business Sourcebook Rules given they were in fact selling a product containing all the risks of a complex derivative financial instrument (but not all the benefits). The major risk is the contingent liability of the hidden derivative which is inadequately explained to the customer.

Sometimes the lender simply refers to this as an Early Repayment Fee with no reference to the fact it might be a very substantial sum thus making it sound like a residential mortgage Early Redemption Penalty which of course is usually a few to several thousand pounds only. In Fixed Rate Loans the break costs can be hundreds of thousands of pounds.

Evidence from the Treasury Select Committee on SME Lending

On 17 June 2014, David Thorburn (Chief Executive of Clydesdale and Yorkshire Banks) and Debbie Crosbie (Executive Director of Customer Trust and Confidence at National Australia Group Europe) gave evidence to the Treasury Select Committee on SME Lending about the Banks’ mis-selling of fixed rate loans and tailored business loans to SMEs. A full and lengthy transcript of this Treasury Committee session is available online (see the Parliament website or watch on Parliament TV). The salient points arising from Mr Thorburn’s and Ms Crosbie’s evidence to the Treasury Select Committee are:

• The Banks admitted that they had found that they had often mis-sold fixed rate loans and tailored business loans (for example by failing to clearly explain the potential implications of breakage costs) as the Bank had upheld around 60% of approximately 500 complaints that it has considered;
• The Banks admitted that they felt that tailored business loans did not require the complex and extensive documentation that was required for standalone interest rate hedging products;
• The Banks admitted that their parent company sold tailored business loans in order to expand its customer base and attract new profits;
• The Banks admitted that, in some cases, they were selling complex tailored business loans to customers who did not understand the risks of those products in a falling interest rate environment; and
• The Banks accepted that many of the SMEs to whom they sold fixed rate loans and tailored business loans were of limited financial sophistication.

In August and September 2014, following the session before the Treasury Select Committee on SME Lending, the banks confirmed in writing to some of its SME customers that they will be conducting an internal investigation and review of its past sales of fixed rate loans and tailored business loans (where the banks determine that there has been a customer complaint).

We note that it is likely that several decisions earlier this year by the Financial Ombudsman Service (the “FOS”), which have often been findings against the two banks, have also prompted NAB to begin dealing with these complaints internally.

What is the TBL ‘Internal Complaint-Led Review’?

The internal TBL review has arguably been promulgated by a desire of the two banks to avoid more active regulatory intervention following comments made by the Treasury Select Committee on SME Lending.  As a consequence it seems there will be limited guidance on the process for this internal hidden swap review as compared to the IRHP review which was announced in some relative detail by the FSA (now FCA) on 29 June 2012 (see the FCA website on ‘Interest rate hedging products‘).  The two banks publish only general guidance on their general complaints process on their respective websites (see the relevant pages on Clydesdale bank complaints and Yorkshire Bank complaints which offer general guidance only).

As our lawyers are instructed and engaged in a number of ‘hidden swap’ litigation cases against banks on behalf of our SME clients, we have experience and knowledge of the complaint process.  In our experience, Clydesdale/Yorkshire Banks are likely to automatically consider as complaints any case in which litigation is anticipated (perhaps via a pre-action letter before claim) or has begun as these evidence customer discontent.  Whilst the banks are intent on re-assessing previous complaints, customers of the two banks who have complained previously may wish to re-register a fresh complaint to ensure their TBL product is in fact reviewed internally by the relevant bank.

It is not clear whether the two banks will be conducting their ‘internal complaint-led review’ under similar (and unfortunately in fact secretive) rules as their FCA-agreed review of the sales of interest rate hedging products (IRHPs), although it does appear the banks will draw on guidance from the IRHP review.

Procedure of the ‘Internal Complaint-Led Review’

We understand that under the internal complaint-led review:

• A complaint would be led by a case handler who has not been involved in either the complaint to date or the management of customer banking facilities;
• The complaint assessment is intended to take account of the recent analogous decisions of the FOS;
• The case handler is tasked with making an objective assessment, considering the evidence as to whether the Bank met the appropriate standards for the lending process;
• The case handler also considers the wider circumstances of the customer and the suitability of the fixed rate loan or tailored business loan;
• The work of the case handler goes through a quality assurance process and the recommendation of a fair outcome is developed by the complaints team;
• Compensation will not be capped at the FOS level of £150,000;
• Interest will be paid at the rate of 8% simple which is intended also to reflect loss of opportunity; and
• In exceptional circumstances the two banks will consider consequential loss claims drawing on guidance from FOS decisions.

It is important for small businesses not to assume that they will automatically be awarded redress by either of the two banks.

Instead, customers who feel they have been mis-sold fixed rate loans or tailored business loans should effectively put forward a written claim that the relevant bank will consider in accordance with assessment criteria that is only known to the bank.

Customers should therefore seek to ensure that their case is prioritised for redress by ensuring they put forward strong written submissions (which we can assist with).

Making Written Complaint Submissions

In all the circumstances, we consider that it would be sensible for all affected SME customers to make written submissions in order to ensure that the key points of your claim are communicated to the case handler. Please see our article in relation to the IRHP review scheme on making written submissions. The submissions must be crafted to your case and ideally spell out not only the relevant facts but the relevant regulatory and other legal breaches.

We strongly recommend that you seek legal advice from expert mis-sold TBL lawyers before you make any written submissions or agree to be interviewed by the relevant bank case handler or their legal team. Otherwise you may inadvertently damage the prospects of success in your case without intending to do so.

Preserving Litigation Rights – Limitation Warning

There are strict time limits for bringing legal claims against banks for the mis-selling of hidden swaps.  The time limit is generally six years from the date the bank first started mis-selling products or the date of the loan contract.

After the limitation date, claims will face limitation challenges by the bank. However, steps can be taken to protect legal rights and prevent banks from asserting a limitation defence.

Affected Clydesdale Bank and Yorkshire Bank customers should urgently seek legal advice.

LEXLAW have conducted and settled substantially more derivatives litigation than any other law firm in England & Wales and are the leading law firm acting against banks in derivatives mis-selling claims.

_{Please note that for regulatory reasons we do not offer any free advice.}

_{Please note that for regulatory reasons we do not offer any free advice.}