Clydesdale / Yorkshire Bank have so far set aside £330 million (as at September 2017) in provisions for conduct risk relating to the mis-selling of Payment Protection Insurance, Interest Rate Hedging Products and Tailored Business Loans.
Tailored Business Loans are a brand name for a certain type of business loans provided by Clydesdale and Yorkshire Bank from around 2000 onwards. It is believed that there are around 11,000-12,000 Tailored Business Loans of which 8,000 of these are fixed rate Tailored Business Loans. Many of the risks of fixing or structuring the interest rate were not explained to the customer during the sales process of the loan. Such risks include the cost of breaking or terminating the loan early as well as not benefitting from decreases in the base rate of interest.
Many TBLs have not been included in the Financial Conduct Authority (FCA) Interest Rate Hedging Product (IRHP) Review Scheme. Clydesdale / Yorkshire Bank have set up a voluntary (non- s.166) review of the sale of Tailored Business Loans which mirrors many of the features of the FCA IRHP Review Scheme. However, this voluntary review only applies to selected TBLs which contain a Structured Collar, or “Category A” products or Capped Rate Loans, “Category C” products.
Even if you don’t have a “Category A or C” product, then you may still have a valid claim. It just means that the mis-selling review will be conducted through the Clydesdale / Yorkshire’s complaints process rather than the voluntary review. It will also mean that there will be no Skilled Person, or Independent Reviewer overseeing the review process.
For a full list of TBLs together with their product name and category, please see the table in the Additional Information Section.
What is a Tailored Business Loan?
TBLs are a particular type of interest rate hedging product that have been sold by Clydesdale Bank, Yorkshire Bank and Northern Bank/Danske Bank (Northern Ireland) from around 2001 onwards. Rather than having the hedging product standalone or separate from the Commercial Loan Facility, TBLs were structured so that the hedge, or interest rate derivative, was hidden within the loan. TBLs are also commonly referred to as “Hidden Swaps” or “Embedded Swaps”.
Due to the embedded nature of these hedging products, they are currently categorised as a Commercial Loan which means that they are an unregulated product. This is potentially one of the reasons why many TBLs are not included in the FCA IRHP Review Scheme (s.166 review).
Obligations of the Sales Person or Adviser for Tailored Business Loans
- In good time, the Bank provides the Customer with appropriate, comprehensive, fair, clear and not misleading information on the features, benefits, risks associated with the TBL
- In good time, the Bank provides the Customer with appropriate, comprehensible, fair, clear and not misleading disclosure of potential break costs of the TBL
- The Bank had due regard to the information needs of the Customer and provided comprehensible, fair, clear and not misleading information about the features, benefits and risks of relevant alternative interest rate hedging products
- In relation to a non-advised sale, the Bank took reasonable steps to ensure that the Customer understands the nature of the risks involved and provided the Customer with relevant Risk Warning Notice or assessed whether entering into the TBL was appropriate for the Customer by determining whether the Customer had the necessary knowledge and experience to understand the risks involved. The Bank has obtained information regarding the Customers level of education, profession or former profession and the relevant past experience of interest rate hedging products.
How was this service mis-sold?
TBLs were sold on the basis of protecting customers from future interest rate rises; however there were many associated risks that were not fully explained to the customers leading to the possible mis-selling of these products.
- Customers were not made fully aware of what the financial impact would be when interest rates fell
- There were high exit fees associated with any cancellation of the product by the customer, sometimes as high as 40% the original loan value.
The mis-selling of TBLs shares many similarities with those of standalone IRHPs, such as:
- Failure to ensure the customer/s fully understood the risk
- Failure to fully inform the customer/s of the associated exit costs
- Allowing “over-hedging” to occur, i.e. when the amounts and/or duration did not marry up with the underlying loans
- Allowing non-advised sales processes to turn into advice being given to the customer/s
- Allowing the rewards/incentives to be a key driver in the above ‘failing’ sales practices.
Currently, there is no clear and definite redress programme for TBLs or associated timeframes; however the FCA has outlined a basic ‘Principles of Redress’ for customers of ‘non-compliant’ sales. The redress awarded needs to put the customer back in the position they would have been in had the breach in the regulatory requirement not taken place. The types of redress that can be expected are:
- Full redress—putting the customer back to the original position had the sale of the TBL not taken place. The redress needs to include all payments made by the customer, any ‘break costs’ paid and an exit from the TBL free together with Compensatory Interest of 8%.
- Partial redress – where the bank agrees to waive any ‘break’ costs paid in an early exit from the TBL.
Table: Tailored Business Loan FCA Category, Product Category and Name
|FCA Category||Product Category||Product Name|
|A||Structured Collar||Discounted Fixed Rate Range Loan|
|A||Structured Collar||Fixed Trigger Rate Loan|
|A||Structured Collar||Flexible Drawdown Participating Fixed Rate Loan|
|A||Structured Collar||Modified Participating Fixed Rate Loan|
|A||Structured Collar||Participating Fixed Rate Loan|
|B||Collar||Range Rate Loan|
|B||Swap||Convertible Floating Rate Loan|
|B||Swap||Discounted Fixed Rate Loan|
|B||Swap||Fixed Rate Flexible Maturity Loan|
|B||Swap||Flexible Drawdown Fixed Rate Loan|
|B||Swap||Ratchet Rate Loan|
|C||Cap||Capped Rate Loan|