Clydesdale Bank has admitted some of its small business customers have interest rate swap agreements, the sale of which by UK banks is now being investigated by the Financial Services Authority amid claims of a potential new mis-selling scandal.
The bank joins RBS in claiming that it "never advises" its customers – a claim that was challenged in the Court of Session last week in a test case involving RBS now being adjudged.
Following our coverage of the issue a week ago, one small business owner with a £4.5 million loan told The Herald he had been sold what he thought was a fixed-rate loan at 6.2% five years ago by Clydesdale Bank, only to find the rate hiked to 9.2% last year and 12.2% this year, with a £500,000 breakage fee.
The businessman, who did not want to be named and has not complained to the bank for fear of reprisal, said the loan was recommended by his relationship manager at the bank.
"I had absolutely no idea that the bank could do this, I thought I was being offered a fixed rate like a mortgage," he said.
A second entrepreneur and Clydesdale customer, who also did not want to be identified, said: "It was a condition of your facilities to take this out and it was always encouraged."
A Glasgow licensed trade operator told The Herald: "It is widespread across hundreds of millions of pounds of loans in Glasgow alone. Every single major licensed trade operator has got these loans, from the largest right down to the guy who just wanted to expand."
A Clydesdale Bank spokesman said: "Risk management products, such as interest rate protection, can be a valuable tool in helping customers mitigate risks like interest rate fluctuations. We're confident we have a robust and well-established process that ensures all regulatory requirements are adhered to when selling Interest Rate Derivative products. It's important to bear in mind that we don't provide advice and always ask our customers to seek independent advice.
"We fully explain the product features, including benefits and disadvantages, as well as any potential breakage costs to customers who, with their independent advisers, decide their own course of action."
In last week's court case, RBS argued its contractual disclaimers released it from any advice responsibilities towards its customer. But Iain Mitchell, QC for Grant Estates now in administration, said the disclaimer acknowledged the bank was still bound by financial regulation, and he said the proferring of any advice imposed a duty of care. Gordon Deane at law firm Balfour & Manson which represented Grant Estates, said the firm was advising a number of other clients on mis-selling cases.
Cat McLean, head of dispute resolution at MBM Commercial, said: "I think the banks are concerned it is going to be a PPI-type problem all over again. It may only affect commercial clients, but the big issue in every case I am dealing with is that people were not properly advised what a hedge or a swap constituted."
Ms McLean said one MBM client had been sold a hedge without proper explanation of the risks, and later been forced to break it at a cost of £400,000 as a condition of refinancing. Another had offered to sell properties in 2007 to reduce his risk profile but had been dissuaded, and sold a hedge instead.
Another had been told to "come in and sign some paperwork on Friday afternoon" as an afterthought to a loan deal, while a fourth had asked for a fixed-rate loan but had been told he would be better off with a hedge at a cost of "only a few thousand pounds" – with no mention of breakage penalties, which turned out to be £400,000.
But derivative mis-selling is just the visible manifestation of banking power being used unfairly, according to MBM Commercial.
Ms McLean said that in cases where "the bank says we will refinance you but here are the terms, and the terms are exorbitant", the law merely sees two parties making a contract.
"Where one party is backed into a corner and has absolutely no alternative but to agree to those terms, it will be interesting to see if anyone litigates on the basis of 'economic duress'," she added.
The Edinburgh law firm has set up an independent and privately backed entity Restitution to take on cases against the banks that most law firms in Scotland's legal village daren't touch. Around 40 law firms are on bank panels, or trying to get on them, according to senior lawyers. A Glasgow-based managing partner said: "If you give somebody a hard time, they are not going to forget it."
Ms McLean said: "Many business owners with a good legal, as well as moral, case against banks have been deterred from taking action, partly by cost concerns – the banks have very deep pockets – but also by the sheer size of these institutions and the apprehension they naturally feel about taking one of them on in court. This situation is compounded by the fact that 'class actions' (i.e. cases of a similar nature) cannot be taken jointly against a single defender in Scotland, as is permitted in England."
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