Pressure turns back on Clydesdale over tailored loans

Ian Rogers

Clydesdale Bank may need to review for a second time its handling of thousands of business loans, if the findings of a House of Commons committee have any weight.

The National Australia Bank subsidiary provided more than 8000 "tailored business loans" during the 2000s in the UK, a period of expansion in England for the Glasgow-based bank.

Customer angst over the interest rate swaps embedded in these loans has bubbled for years, with the bank subject to continuing scrutiny over its willingness to consider redress for loans allegedly "mis-sold".

Scrutiny by the UK Financial Services Authority of loans of this type over the last two years considered 30,000 loans and led to compensation paid by nine banks, including Clydesdale, of £1.79 billion.

Clydesdale has now attracted additional scrutiny in a Treasury Select Committee report on Conduct and Competition in SME Lending.

In the report released late last week the Treasury Select Committee observed: "The lack of public oversight, minimal transparency and limited coverage of the [bank's internal review] scheme mean that the Committee cannot be confident that Clydesdale’s separate internal review will deliver outcomes equivalent to the FCA review upon which it is intended to be based.

"If Clydesdale’s aim is to build public trust in its actions, it should address all three of these problems."

The report revealed that the bank' sales methods came in for internal as well as customer criticism.

Patrick Walton, a former managing partner of Clydesdale’s Financial Solutions Centre in Leeds, "wrote negatively about Clydesdale’s sales process," the committee said.

"Walton said there was immense pressure to sell tailored business loans. He said that the bank had a culture in which there was pressure to sell at all costs that was driven from the top of the organisation, while staff who did not meet targets faced disciplinary action."

The committee said: "Walton described Clydesdale’s culture 'to be the most corrosive and threatening [he had] ever encountered'."

National Australia Bank chief executive David Thorburn "admitted that Clydesdale was undergoing rapid growth pre-crisis and that, sometimes, 'staff overstepped the mark'," the committee said.

Clydesdale sold 11,271 loans across all of its tailored business loan variants between September 2002 and July 2012. This included both fixed-rate products and more complex arrangements.

Of these, between December 2001 and July 2012, the bank provided 8,372 fixed-rate tailored business loans to 6153 customers.

"We have received evidence suggesting that Clydesdale Bank mis-sold tailored business loans," the committee said.

"Clydesdale has itself admitted that its terms and conditions letters
would not pass a plain English test, and that its TBL customers could not reasonably have anticipated the high levels of potential break costs to which they had exposed themselves.

"Many small businesses indeed did not grasp their exposure to such high
break costs, nor could they reasonably have been expected to do so."

"It appears that the bank did not explain the potential scale of break costs in a low interest rate environment because the bank itself had not taken into account this potential risk … The sale of TBLs has led to considerable consumer detriment."

The FCA has been ordered by Economic Secretary Andrea Leadsom to set up an independent examination of possible "systemic failures" in its redress scheme for mis-sold interest rate hedging products covered by regulation.

It followed a critical report by the Treasury Committee this week which called on the FCA to set up such a review, and which also called on the Clydesdale and Yorkshire banks to widen their voluntary reviews of unregulated loans with similar features to IHRPs.

Leadsom said she "strongly supported" the committee's recommendations. Andrew Tyrie, chairman of the Treasury Committee, has welcomed the minister's response.

The committee found that only a fifth of the tailored business loans devised as unregulated products by Clydesdale had been included in the bank's voluntary review of sales and barely 300 customers were likely to receive any redress. It said the bank's scheme had "lack of public oversight, minimal transparency and limited coverage" and should be revisited if the bank wanted to "build public trust in its actions."

The bank said its review was "completely in line with FCA guidance" but it would consider "if there is more information that we can publish about our reviews in light of the committee's comments".

Scotland's The Herald newspaper reports the Financial Conduct Authority has been ordered by Leadsom to set up an independent examination of possible "systemic failures" in its redress scheme for mis-sold interest rate hedging products.