The boss of Clydesdale Bank admitted yesterday that selling complex loans to small businesses confused customers and that the accompanying literature “would not pass the plain English test”.
David Thorburn, also chief executive of Yorkshire Bank, told MPs: “Something did go wrong with some of these products. That’s a cause of great concern and regret to us.”
Speaking to the Treasury select committee, Thorburn said: “With hindsight it was clear we were selling them to customers who did not understand what they were getting into.”
Debbie Crosbie, European executive director for customer trust and confidence for the banks’ parent company National Australia group, said that, in particular, many small businesses “did not appreciate the magnitude of the [contract] break clauses”. MPs heard this could be as much as 25 per cent of the loan, compared with a typical 2 to 3 per cent on a mortgage loan.
Clydesdale has always denied that its fixed-rate tailored business loans (TBLs) contain controversial swaps or derivative products for small and medium-sized businesses (SMES).
But last month the bank raised compensation provisions for loans which did contain swaps as well as “certain TBLs” from £36 million to £152m.
Crosbie said Clydesdale and Yorkshire banks had so far received 550 claims from SMEs over being sold the loans out of a total of 8,300.
She said she thought about 60 per cent of these claims would be upheld, but that current redress estimates were “less than £10m”.
Andrew Tyrie, chairman of the Treasury select committee, said crucially the TBLs fell outside the supervision of the regulator, unlike conventional rate hedging products.
Thorburn replied that Clydesdale and Yorkshire Banks had never designed complex, profitable products to get round regulatory oversight, but he acknowleded: “It isn’t a swap but it has many of the features of a swap.”
The TBL was invented by the Australian parent company, and Clydesdale is understood to be among the bigger sellers of the estimated 60,000 “hidden swap” loans which the Treasury committee is currently investigating.
Thorburn said the TBLs were launched in 2001 but “nobody anticipated” what would happen to break clauses in a long period of historically low interest rates between 2008 and the present day.
Tyrie said after the hearing: “The hedging element of tailored business loans fell outside the scope of regulation, despite sharing – for all practical purposes – the features of other similar products.
“The committee will look further at the regulatory perimeter, as well as the question of responsibility for losses – directly related to the hedging element – incurred by businesses which even the banks could not foresee at the time the loans were taken out.”
MPs suggested to Thorburn that many of the SMEs sold these products were financially unsophisticated.
Labour MP Pat McFadden said the terms and conditions of the products would baffle customers and asked the Clydesdale boss whether he agreed they “would not pass the plain English test?” Thorburn replied: “Yes.”