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Banks 'added hidden profit margins to loans'

Banks routinely added hidden profit margins to the 'Libor' rates they used in selling complex loans to small businesses, in a culture of competition among salesmen to land the highest margin, a new advisory company has claimed.

loss: Entrepreneur Giulio Girasoli says leaving the Clydesdale to bank elsewhere cost him £35,000. Picture: Jamie Simpson

Glasgow-based Aperia Financial has begun handling mis-selling claims against the banks, using ex-banker expertise. It has identified the real-time market Libor rates that applied when loans linked to derivatives were sold to unsuspecting SMEs.

It says its experience so far suggests that Clydesdale Bank ­typically added 0.5 per cent to Libor rates, and sometimes more, with other banks adding 0.25 to 0.3 per cent.

As most of the Clydesdale's fixed rate Tailored Business Loans (TBLs) were 'embedded swap' products, which are outside the scope of the review just concluded by the Financial Conduct Authority, Aperia says it hopes to use its evidence on rate-setting in negotiations with the bank on behalf of clients.

"The customer would have no reference point, would not know what the market rate was," said Gerry Carty, managing director of Aperia. "All the banks would do it but in the Clydesdale's case it was a wee bit more aggressive.

"I think there is a tacit acceptance that the bank might be taking a wee bit, but when it's 50 to 60 basis points if you had a big loan over a long period of time, you could end up with quite a significant overcharge."

One businessman was quoted "1.5 per cent above Libor" for his fixed rate TBL, which was said to "incorporate an interest rate hedging product". But he has since discovered that the 'Libor' rate used by the bank was 5.6 per cent though Libor on the day of the deal was 5.1 per cent.

He is one of 16 businessmen who have separately contacted The Herald during the past 12 months alleging mistreatment by Clydesdale Bank, covering the mis-sale of loans, sudden calling in of facilities, and failure to communicate.

Only a handful have been prepared to be identified whilst still in a relationship with the bank.

Conference centre owner John Glare founded the National Australia Bank Customer Support Group in 2012, after he uncovered email evidence about the loan transaction which created a hidden break fee of £780,000 on his TBL of £3.95million, pushing him into bankruptcy. Mr Carty said the Clydesdale had added 0.6 percentage points to the Libor rate of 4.95 per cent and therefore some £220,000 to Mr Glare's repayments.

He said Aperia had first-hand knowledge of practices in the Clydesdale at the time, adding: "The culture in that department was if one salesperson got a 30 basis points margin, the next salesperson would try to beat that, and it could go up to 80 or 90 basis points."

Jim McGrory, a St Andrews hotelier whose TBL mis-selling claim has been provisionally upheld by the Financial Ombudsman service, had a £562,000 loan charged at 5.79 per cent when Libor was 5.13 per cent, adding 0.66 percentage points to the 1.25 per cent declared to the customer as the bank's risk margin. Aperia says that where an extra margin was not disclosed, it would strengthen any complaint to the ombudsman about non-disclosure of information by a bank.

Giulio Girasoli, who runs the Little Flowers Nursery at Renfrew, has just left the Clydesdale to bank elsewhere after waiting for a fixed rate loan to expire because he could not afford to pay the break fee.

He says his facilities were promptly withdrawn following the bank's transfer of its commercial property portfolio to parent National Australia Bank in 2012, and rebanking has ended up costing him £35,000.

He said: "It is unbelievably difficult in Scotland for small businesses at the moment. I had to operate for 12 months without a facility, it put me into ill-health, and most people would have found that extremely difficult."

One managing director of a successful growth business in the IT sector, whose bank loans had been used entirely to build up data storage capacity over many years, says: "We had millions of pounds of assets, but they suddenly just wanted us to sell things so they could get paid.

"I owed £364,000 on my overdraft and I sold properties at a knockdown price for £425,000, but Clydesdale then demanded the remainder of the sum was used to pay off my fixed TBL, forcing me to pay break charges of £96,000. I was not in default and broke no covenants.

"It has cost me £250,000 in fees, excessive interest rates, and breakage costs to escape from the bank, which for a smallish business turning over £1m - though it is less at the moment as we have been set back-is huge."

A spokesman for Clydesdale Bank said: "Pricing of loans is specific to each deal and reflects the specific risk involved, in some cases it will be linked to Libor, in others it will be a rate the bank is prepared to offer.

"The interest rate payable is always clearly explained within the offer documents before the customer accepts the loan."

He added: "In all circumstances, we make every effort to maintain a constructive dialogue with customers.

"No terms and conditions have changed for those loans transferred to NAB and the expectation is these will be repaid within their agreed term.

"Individual lending decisions are made based on a number of factors, including risk, experience of the business' management team and the bank's need to balance its overall exposure to different business sectors. In addition, we investigate all complaints thoroughly with a view to reaching a fair and reasonable outcome where appropriate."

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