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Posted on Nov 13, 2014 by Cat Maclean  | Tags: TBL, fixed rate loan, FCA Review Scheme, TBL Internal Review, FOS, compensation, mis-selling  | 0 Comments

By Cat MacLean, Partner, Dispute Resolution

Tailored Business Loans (“TBLs”)

If you were sold a Tailored Business Loan (TBL) from the Clydesdale Bank in the past, you may be aware that until recently the Clydesdale Bank steadfastly refused to entertain any claim for misselling TBL products, arguing that as TBLs technically were not separate “standalone” derivatives, but instead were loan with built in derivatives, TBLs did not form part  of the ongoing FCA Review process. However, that is all now set to change with the announcement – finally! – of an Internal Complaints-led Review within Clydesdale Bank on the sale of its TBLs.

The background and the FCA Review process

The FCA Review process had been set up back in June 2012 following an announcement by the then Financial Services Authority (“FSA”), since April 2013 the Financial Conduct Authority (“FCA”), that they would conduct an initial Pilot Review into the sale of Interest Rate Derivative Products, often known as “swaps”. The work on the Pilot confirmed the FSA’s initial findings that there had been significant mis-selling:  of  173 sales to ‘Non-Sophisticated’ customers from across four banks, the FCA found that over 90% did not comply with one or more regulatory requirements. The announcement of a widescale and formal review of the sale of swap products followed, but crucially only those products formally classified as “derivative products” and thus qualifying as regulated products, were to be included in the review. This meant that all products which contained a “hidden” or embedded  swap element were excluded from the review process.  Many of these products were sold by the Clydesdale Bank who sold a products known as a Tailored Business Loan (“TBL”)  in high volume to SMEs.  

The sale of TBLs

Habitually the Bank failed to ensure that its SME customers understood the nature of the risks involved with entering into embedded swap agreements, and in particular, failed to explain or make clear what would happen in the event of interest rates falling to and remaining at historically low levels, as subsequently happened, or that customers would incur significant break costs should they wish to terminate the fixed rate loan early or to reduce the amount of their existing loan.

There was a general failure on the part of the Bank to advise on the availability of a range of alternative financial products such as an interest rate cap product which in many if not all cases would have allowed their customers to take advantage of the fall in interest rates while protecting them from rising interest rates. The Bank also signally failed to advise on, or at the very least explain, the potential break costs under any embedded swap agreement, and how such costs would be calculated, so that customers would be in a position to judge properly the commercial risks involved.

Generally  there was a total and utter dearth of clear illustrations by virtue of notional scenarios of what breakage costs (or gains) would apply if interest rates moved up or down from the various strike rates of the FRHP, or any other possible products had they been offered. If the Bank had provided an illustration(s) highlighting the effects if interest rates moved by 100 bps or 200 bps (+/-) from the strike rate on the notional amounts over a range of period (i.e. 2, 5 or 10 years) as an illustration, that would have clearly highlighted the liability risk of incurring substantial breakage costs – but none were ever provided.

The Clydesdale’s refusal to include TBLs within the FCA Review process

The Clydesdale has faced particular criticism over its refusal to entertain claims by customers who had been missold TBLs. Some customers took their complaints to the Financial Ombudsman and were awarded compensation, but many suffered in silence, unaware that FOS was even a realistic option.

All change: the Treasury Select committee Hearing on 17 June 2014

However, on 17 June 2014, David Thorburn (Chief Executive of Clydesdale and Yorkshire Banks) and Debbie Crosbie (Executive Director of Customer Trust and Confidence at Clydesdale) gave evidence to the Treasury Select committee on SME Lending about the bank’s misselling of fixed rate loans and TBLs to SMEs.

At that hearing David Thorburn admitted to the TSC that these products had similar characteristics to more complex derivative products, such as a SWAP. He also accepted that certain individuals within the Bank clearly promoted these products while failing to adhere to the Bank’s sales standards; that the wording of the Banks documentation was confusing and that upon reflection, the documentation at the time of many of these FRHP’s being sold was wholly deficient; that their parent company sold tailored business loans in order to expand its customer base and attract new profits; that in some cases they were selling complex TBLs to customers who did not understand the risks of these products in a falling interest rate environment; and that many of the SMEs to whom they sold fixed rate loans and TBLs were of limited financial sophistication.

An Internal Complaints-led Review process

 Following this watershed moment the Clydesdale Bank confirmed in writing to some of its clients that they would be conducting an internal investigation and review of its past sales of fixed rate loans and TBLs. However, although it is now clear that the Clydesdale will now conduct an “Internal Complaint-Led Review”, the bank have made it clear that they will not be writing to all of their customers who were sold TBLs – instead it is left very much up to the customer to raise the issue with the bank and to ensure that they are taken into the Internal Review process.

In recent weeks, correspondence with some TBL customers indicates that the bank have clearly just extended the appointment of their swap review team, including the appointment of the Independent Reviewer, Berwin Leighton Paisner, to encompass their TBL complaints and that accordingly the Internal Review will be run essentially along exactly the same lines as those cases which fall within the FCA Review process. What then does this actually mean for missold TBL customers?

The TBL Review process

 It is likely that:

  • If you have not made a complaint, or do not now proactively complain to the Bank you will not be included in the review
  • Once you complain, your case is likely to be handled by a case handler who was part of the Bank’s swap review team
  • The Bank are once again engaged Berwins as their independent reviewer who will oversee the quality assurance process
  • The case handler will make an objective assessment of whether or not the Bank met the appropriate standards for the lending process
  • Compensation will not be capped at the FOS level of £150,000
  • Interest will be paid at the rate of 8% on any sum assessed by the case handler as due
  • In exceptional circumstances the Bank will consider consequential loss claims

Timebar

The Bank has not specified how far back they will be prepared to go in terms of reviewing sales. There are strict legal time-limits for bringing legal claims in court – generally 6 years in England but only 5 in Scotland. It is not clear whether the bank will apply these legal time-limits, or some other limit (bearing in mind that the FCA Review will look at products sold as far back as 2001). If, therefore, you have a TBL, and wish to make a claim, you should look carefully at the date on which it was sold, because after the applicable limitation date, claims will face limitation challenges by the Bank. if you are an affected Clydesdale Bank/TBL customer, you should urgently seek legal advice on the likely time limit which would apply to you.

Financial Ombudsman

If your claim in the internal Review is unsuccessful, the appeal route in practical terms is likely to lodge a complaint with the financial ombudsman service (“FOS”). However, you should be aware that FOS have their own timebar rules and deadlines and it is important to factor this in when deciding when and how to proceed. The FOS rules on timebar are set out in the FCA Handbook and specifically consider the issue of whether a claimant is timebarred if a claim is made outwith 6 years from the date of the wrong complained of.

The FCA Handbook (DISP 2.8) provides that the Ombudsman cannot consider a complaint if the complainant refers it to the Financial Ombudsman Service:

(1) more than six months after the date on which the respondent sent the complainant its final response or redress determination; or

(2) more than:

(a) six years after the event complained of; or (if later)

(b) three years from the date on which the complainant became aware (or ought reasonably to have become aware) that he had cause for complaint;  (unless the complainant referred the complaint to the respondent or to the Ombudsman within that period and has a written acknowledgement or some other record of the complaint having been received);

unless:

(3) in the view of the Ombudsman, the failure to comply with the time limits  was as a result of exceptional circumstances.

Thus FOS policy is clear that there may be circumstances in which a complainant may not be aware until some considerable time later than 6 years from the wrong that in fact a wrong had been committed. Additionally, and helpfully, FOS specifically provide that the usual 15 year long stop date for timebar (which applies in England) should not apply to FOS claims – the rationale being that financial products are “intangible” and can be of a very long-term nature. FOS specifically comment that problems (such as for example with a mortgage product or a whole of life policy) may only emerge or become apparent many years after the contract was taken out, and a considerable time later than the 6 year time limit from when the product was sold.

If you have been affected by the sale of a Fixed Rate Loan or TBL, please get in touch – we are happy to help.

Cat MacLean

Head of Dispute Resolution

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