An influential group of MPs has revealed evidence that Clydesdale Bank often unwittingly mis-sold unregulated ‘tailored’ business loans to customers, because it did not understand the potential scale of ‘break costs’ in a low interest rate environment.
In a report published by the Treasury Committee on conduct and competition in small and medium enterprise lending, MPs stated that Clydesdale did not explain the costs because the bank itself had not take into account the potential risk.
According to the website of legal firm Veritas Treasury, tailored business loans were represented as standard fixed rate loans, but were often based on interest rate swaps, a complex derivative product which has been subject to a major FCA redress programme.
Businesses that were unable to keep up payments on the loan would have had it ended by the bank, which would require the borrower to pay the break costs on the underlying interest rate hedge product, which would be markedly higher given historically low rates.
The report stated that the sale of tailored business loans led to considerable consumer detriment.
“The bank’s failure adequately to assess the potential risk of its product may explain the detriment that the bank has caused to its customers, but does not excuse it,” it read.
It also stated that Clydesdale understood that tailored business loans were unregulated, and that it created them to avoid requirements imposed on the sale of interest rate hedging products.
These have been the subject of a major FCA review, which has now established a redress scheme for consumers with nine banks, which has so far paid out around £1.8bn. According to the committee, the use of tailored business loans has left regulators ‘powerless’.
It added that the bank itself admitted that its terms and conditions letters would not pass a ‘plain English’ test and that its tailored business loan customers could not reasonably have anticipated the high levels of potential break costs to which they had exposed themselves.
“Clydesdale created a product that retained the risks and complexities of the regulated product, but had none of the safeguards,” stated the document.
“The lack of public oversight, minimal transparency and limited coverage of the 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.”
Chairman of the Treasury Committee, Andrew Tyrie, added: “The Treasury should, for the future, undertake a thorough analysis to consider the merits of bringing these products within the scope of regulation.”