The Financial Services Authority (FSA) is examining the Clydesdale Bank's "tailored business loans" to determine whether they escape regulation as a derivative.
The Clydesdale product, offered to hundreds of small businesses, embeds interest-rate hedging into a fixed-rate loan, whereas other banks present customers with a separate interest rate swap agreement (IRSA) with its own terms and conditions.
When the FSA announced a review of IRSA sales eight weeks ago, it said fixed-rate loans would be excluded as they were not regulated derivatives.
One London-based hedging specialist said: "If it is a fixed-rate loan it is supposed to fall outside the FSA scheme and is an unregulated product. But now the FSA is getting legal advice on whether it regulates the tailored business loan. There would be no bar to legal action, but given its non-regulated nature it would be more difficult."
The Herald revealed on August 18 that Destiny Church Trust (DCT), a Glasgow-based social action charity, is claiming £100,000 of damages from the Clydesdale after being asked to pay a £178,000 breakage fee on its 20-year loan agreement, covering £800,000 of borrowings, before the bank would sanction the sale of a property for £280,000.
The penalty allegedly led to an agreed property sale falling through, and the decline in value along with maintenance has cost the charity £100,000, it said.
The trust's chairman, Pastor Andrew Owen, said the Clydesdale had failed to warn of potentially "massive or excessive breakage costs", and had provided no explanation of how the charges were arrived at.
The Clydesdale has said it "acted professionally and fairly with DCT at all times and refutes any suggestion that products, and their costs, were not fully explained".
One Scottish lawyer said: "The issue arises when customers are told the level of breakage costs that they may have to pay if they want to try to refinance – these are 10-year fixed rates which look pretty high in today's market. When the bank has been asked to provide details about how these costs are calculated, they have cited commercial confidentiality."
The Clydesdale said: "The bank has voluntarily agreed to conduct a review of the sale of interest-rate hedging products overviewed by an independent assessor appointed by the FSA."
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article