Tailored Business Loans (“TBLs”)
What are TBLs?
TBLs are a type of commercial loan. A key differentiating feature of TBLs is that while regular commercial loans have an exit fee typically between 1-3% of the loan value, the cost to the customer to terminate a TBL can be as much as 40% of the loan value.
With a TBL, the bank organises an interest rate hedging product (“IRHP”) to operate in the background in order to reduce its own risk to movements in the interest rate markets.
TBLs are described in some quarters as containing “hidden derivatives”. While this is not strictly correct, the effect on the customer is almost identical to that of standalone IRHPs. The liabilities of a TBL can be just as high as those under an IRHP such as a swap, collar or structured collar.
Who sold TBLs?
Many banks sold TBLs, though the preference of the largest retail banks appeared to be to sell standalone products via their Treasury departments.
Two of the largest providers of TBLs are the Clydesdale Bank plc and its related trading entity, Yorkshire Bank, both part of the National Australia Bank.
Various Irish banks, such as Ulster Bank and the Bank of Ireland, also sold TBLs as did Building Societies such as Nationwide.
Regulatory Landscape
While IRHPs are regulated by the FCA, TBLs are not.
This has led to an iniquitous situation developing whereby customers who purchased IRHPs have been able to seek redress via an FCA ordered Review into the mis-selling of IRHPs by Banks (provided they meet the eligibility criteria), but customers who purchased TBLs have no such option for redress. Instead they have had to rely on the banks themselves determining, via their own complaints handling procedures, whether they consider the TBL to have been mis-sold, and, if so, the extent of redress owed. Unlike the FCA Review for IRHPs, there is no over-sight by a “Skilled Person” / “Independent Reviewer”.
Many customers have received what they deem to be unsatisfactory redress offers and feel that they have been let down by the regulator and their bank.
Treasury Select Committee
The Treasury Select Committee (the “TSC”) published a Report on 10 March 2015, which, in part, addressed the mis-sale of TBLs by Clydesdale Bank in particular.
The TSC has described the fact that TBLs are unregulated by the FCA as a ‘logically inconsistent result of the perimeter of regulation’.
When entering into TBLs, many customers were wholly unaware of the substantial break costs they would be liable to pay should they terminate a TBL before expiry of the term. The mis-sale of these products has therefore, according to the TSC, led to ‘considerable consumer detriment’.
The TSC remarked in its report that Clydesdale had created TBLs specifically to avoid the regulatory requirement that would be imposed upon them were they to sell IRHPs directly, and that in doing so they had created a product that retained the risks of a regulated product, but without any of the safeguards..
Clydesdale’s explanation for why product was sold in this way
In its defence, Clydesdale said that one of the reasons they created TBLs was to prevent customers from having to deal with the complex documentation affiliated with the sale of a regulated product.
According to the chief executive of Clydesdale, “because the standalone [IRHP] is a regulated product you are required to go through a certain process using documentation, which is very complex. That was something we did not need to put our smaller business customers through.”
The TSC, perhaps understandably, was somewhat sceptical about the claim that these products were sold in this way to make it easier for the customer to understand.
What are the banks doing to address the issue?
Banks that sold TBLs have set up their own internal reviews.
The TSC explains in its report that due to the lack of public oversight and minimal transparency, it cannot be confident that such reviews will deliver adequate outcomes.
The TSC has suggested that the Treasury should publish an assessment of the feasibility, benefits and costs of adjusting the perimeter of regulation to cover loans with features of IRHPs, taking into account the possibility that such a widening of the perimeter may inadvertently catch other products, and the negative consequences that this could entail.
Litigation
Some businesses may be able to seek redress via the Financial Ombudsman Service, however this is only open to micro-enterprises and has a limit on compensation of £150,000.
Therefore, for larger companies, litigation is the only realistic option.
Most TBLs were sold prior to 2009. Therefore, the ordinary position is that those claims are time-barred. However, depending on the facts, it may be possible to extend the ordinary 6 year limitation date. This could be based on an argument that key information was deliberately concealed from the customer and/or that the customer could not have known about the potential to bring a legal claim until a much later date and the relevant period, 3 years, should run from that point.
Conclusion
Larger Companies that have been sold TBLs and consider they have incurred substantial losses and wish to explore the possibility of litigation, now have a race against the clock. The likelihood is that if they fail to act immediately, they will lose forever the opportunity to seek redress via the courts.
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