Businessman John Glare, founder of the NAB Customer Support Group, has begun a Court of Session action which argues the bank cannot enforce the "break costs" of its fixed-rate tailored business loans (TBLs), because it cannot identify or justify them.
His lawyers will use against the bank its own position, admitted in the past week to The Herald and an MP, the loans were not linked to derivatives or "swaps" in the market.
The break costs, often 20% or more of the original loan, have locked in large numbers of businesses who are unable to escape or refinance, with many now transferred from the Clydesdale and Yorkshire banks to parent NAB in a £4.8 billion portfolio which the Australian bank is winding down and attempting to sell off.
The bank can exclude fixed-rate TBLs from its FSA-approved review of interest rate hedging product sales because TBLs are classed as loans outside FSA regulation – although it has included more complex, less widely-sold, TBLs in the review.
In response to repeated inquiries from The Herald, Clydesdale said last week fixed-rate TBLs are "not linked to an identifiable and distinct swap arrangement, and fixed-rate TBL customers are not contracted into a swap or any other derivative in the market". It has this week given the same explanation to Dundee West Labour MP John McGovern, who had obtained from Treasury Minister Greg Clark an assurance in the Commons a constituent's fixed-rate TBL would now be included in the review. There is still no sign the bank is honouring the minister's promise, its letter telling the MP his constituent's loan was excluded.
However, Mr Glare's action will turn the bank's argument against itself. Gordon Deane, partner at Balfour & Manson in Edinburgh, said: "The bank accepts that fixed- rate TBLs are not linked to an identifiable and distinct swap arrangement. Mr Glare is therefore arguing that the bank did not suffer any loss as a result of his alleged default. This argument is based upon Clydesdale Bank's own terms and conditions."
He went on: "If the Commercial Court accepts Mr Glare's arguments, the consequences for Clydesdale Bank could be very serious.
"Firstly, they would be likely to face claims from current TBL customers, who have been locked into long-term loans at above-average interest rates.
"In addition, they could well face claims for the return of money from former TBL customers who have already paid the breakage charges."
However, industry expert James Ducker at Benchmark Treasury Pricing cast doubt on the legal argument. He said: "The customer does not have a swap directly – that is true. Although when I was booking these deals, the corporate bank did have a swap with Treasury - so there is a cost to corporate bank – which they then pass on to the customer."
But he said the bank's argument also applied to all other swap-linked loans. "We could book lots of swaps, and then the trader may (or may not) do one or more deals in the market – but not for each individual swap."
The bank has told Mr McGovern: "We provide an explanation of break costs in our TBL documentation and describe the economic consequences if the fixed-rate loan is broken early."
It told The Herald: "The breakage fees are fully explained to customers and they are advised to seek independent legal and financial advice before agreeing to the loan."