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Bank loans are leaving small firms in bit of a fix

The Clydesdale and Yorkshire banks are promoting themselves in a television campaign as "your local bank", ready to lend.

COMPLAINANT: St Andrews hotelier Jim McGrory went to the financial ombudsman with his case, but to no avail. Picture: Steve Cox
COMPLAINANT: St Andrews hotelier Jim McGrory went to the financial ombudsman with his case, but to no avail. Picture: Steve Cox

However, for the despairing small business customers who have contacted The Herald recently, the banks' so-called TBLs were not tailored business loans but time-bomb loans.

Jim McGrory, a St Andrews hotelier for more than 40 years, was offered a new £562,000 loan by the Clydesdale in March 2007. When he was about to sign the agreement, his manager persuaded him to take a fixed-rate loan.

"I had had fixed-rate loans," Mr McGrory says. "Normally if you came out, you paid a percentage of the loan or around six months' interest payments.

"I presumed, which was a mistake, it was the same type of contract."

The mistake was made by tens of thousands of small businesses around the UK who had no idea that a new breed of fixed-rate loan could disguise a breakage fee which, if interest rates fell sharply, might amount to 20% to 40% of the loan – not the 2% to 4% of traditional fixed loans.

They had no suspicion as the banks did not draw their attention to it, referring to "standard terms and conditions" which included the standard waiver the small businessman had taken "independent advice".

Even where advisers were consulted, they were not derivatives experts and had little chance of spotting the time bomb, as banks were careful never to provide a projection of what break costs might be under different interest-rate outlooks, and never alluded to a worst-case scenario.

"If they had I would never have signed it," Mr McGrory said. "I would have opted for the first loan they offered."

Mr McGrory's contract, and his "terms and conditions" document, each included a one-line reference to possible "break costs". The bank's Treasury salesman's brief phone call to seal the deal was recorded by the bank. The salesman says that during the 15-year term of the loan "if you choose to repay early you could incur some break costs". Based on past experience, Mr McGrory envisaged a penalty of perhaps £20,000.

To small businesses caught in a recession, with commercial property values falling by 30%, changes to business plans and financing became inevitable – but impossible.

When in 2010, Mr McGrory found the bank unwilling to give him an overdraft, he went to Lloyds Banking Group which said it would absorb the cost of exiting his Clydesdale loan, which his manager had just quoted as £18,000.

A few days later the manager called back. "He said actually it's £81,000 – I said you must be joking," Mr McGrory said. "We had a meeting with the bank and my accountant told them £81,000 was scandalous. They said it's now £88,000, because of the market. I said you have sold a small businessman a product designed for plcs or governments."

The fixed-rate loan had an embedded interest-rate swap linked to the money market, which meant the bank pocketed an instant profit likely to have been over £50,000. But it is not regulated by the Financial Services Authority.

Abhishek Sachdev of derivatives specialist Vedanta Hedging, an expert witness to the Treasury Select Committee, explains: "To the untrained eye it may seem as though the complex caps and structured collars are all nasty derivatives and a nice simple fixed rate loan is not going to have any impact. But to the client the break costs can be exactly the same or worse."

Mr McGrory complained to the financial ombudsman. Like almost all similar complaints, it was rejected.

However, the ombudsman recently produced two provisional decisions that fly in the face of its previous pro-bank record.

Crucially, on matters of principle that apply across most mis-selling cases, ombudsman Tony Boorman says: "Small businesses are not well suited to make fixed long-term commitments - a swap imposes an almost insurmountable burden on the SME customer, effectively eradicating any room for financial manoeuvre that it might otherwise have had."

He says "the banks knew the SME customers had limited experience and limited access to professional advice", and adds: "Crucially, nowhere in the documentation made available to the family (either before or immediately after the transaction) is there a clear statement of the possible scale of the fees involved in cancellation."

Bully-Banks, which campaigns against bank mis-selling, says: "The decisions are consistent both with common sense and our understanding of what happened in the majority of cases. We believe that the earlier decisions by the Ombudsman are so flawed that every decision should be immediately appealed by members who have previously had their complaint dismissed."

The Clydesdale's fixed-loan tentacles have spread.

Andrew Pellegrino, a property landlord from Newcastle, was sold a 15-year £3.84m swap by Yorkshire Bank, and is now fighting for survival. He told The Herald: "Yorkshire were adamant interest rates would rise and if I didn't sign the swap documents the bank would not be willing to lend any more to me - I recently asked for a figure to leave the bank and they want £1.05m."

Colin Phillips, who runs a cafe in St Ives, Cornwall, took out an injunction last week to prevent Clydesdale Bank repossessing his property, pending his appeal against the ombudsman's original decision against him. Mr Phillips was sunk by a £104,000 break fee on a £400,000 loan.

The Herald revealed in August Glasgow-based social action charity Destiny Church is suing Clydesdale for £100,000 damages after being faced with a £178,000 break fee on a 20-year swap for an £800,000 loan. The bank said it acted "professionally and fairly with Destiny at all times".

Clydesdale Bank says it is confident that "all regulatory requirements are adhered to when selling interest rate derivative products". However, a spokesman last week claimed its fixed rate TBL "does not contain a 'swap' - the customer purchases a fixed rate loan and nothing more."

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