The Financial Ombudsman Service has reversed a key decision in favour of Clydesdale Bank over its sale of an 'embedded swap' loan to a Scottish hotelier, in a ruling that could prompt a wave of new complaints from small businesses excluded from a regulatory review.

The ongoing review by the ­Financial Conduct Authority of mis-sold interest rate hedging products does not cover the 'fixed rate tailored business loans (TBLs)' sold in large numbers by Clydesdale Bank and described by experts - and in one letter by the bank itself - as ­containing an embedded swap or derivative.

The ombudsman, the only avenue of redress for thousands of ­Clydesdale TBL borrowers, has now provisionally upheld the mis-selling complaint of St Andrews hotelier Jim McGrory, which was highlighted by The Herald last November.

Loading article content

When Mr McGrory was offered a new £562,000 loan by the bank in March 2007 on a fixed rate, he expected any penalty for early ­settlement would be at most 5% in line with his previous fixed rate loans.

The bank's Treasury salesman told him in a recorded call "you could incur some break costs", while the paperwork sent out some time afterwards included a passing reference to possible break costs.

When in 2010 the hotelier of 40 years attempted to rebank and exit the loan, he was told the market-related break cost was currently £88,000 or 16% of the loan.

Mr McGrory said: "They sold a small businessman a product designed for PLCs or Government."

Clydesdale Bank has said breakage fees are "fully explained to customers and they are advised to seek independent legal and financial advice".

Tens of thousands of small ­businesses UK-wide face penalties of up to 30% to exit swap-related loans, and typically cite mis-selling through (among other things) banks' failure to disclose the real potential penalties.

However, the Clydesdale's fixed rate TBL is classified as a commercial loan outside FCA regulation, enabling the bank to exclude it from the FCA-led review.

FCA chief executive Martin Wheatley recently told LibDem MP John Thurso at a Treasury Committee hearing, that the fixed rate TBLs were "not significantly different from swaps", and that there was a "potential gap in the regulatory structure".

Mr McGrory's complaint was rejected by the ombudsman last year, but he lodged an appeal.

Rory Stoves at the Financial Ombudsman Service said there had now been an adjudication in favour of Mr McGrory.

In this case, the bank would be asked to put the customer back to the position he was in before the loan was issued.

He said that the bank could challenge the ruling, triggering a referral to the ombudsman for final decision.

On why the decision had been reversed, in line with an apparent change of sympathies by the ombudsman on swaps complaints since the regulatory review was announced in June 2012, Mr Stoves said rulings were on a case by case basis and complainants could submit new evidence.

"We are currently investigating around 250 complaints," he said.

"But we are telling people to go through the review because you can always come to the ombudsman afterwards anyway."

He said the caseload included complaints from Clydesdale ­borrowers excluded from the review though "not a huge number".

Abhishek Sachdev, derivatives expert at Vedanta Hedging, commented: "All cases have to be judged on individual merits.

"It very much depends on who the individual ­adjudicator is, because there can be at times be a worrying lack of consistency in their decision-making process."

Cat McLean at law firm MBM Commercial said that she welcomed the adjudication.

She said firms included in the review, which has so far triggered only one known payment of redress after 15 months, should be aware that the banks' fact-finding interview was not a friendly discussion.

She said: "The banks have a series of set questions aimed at eliciting material which will enable them to exclude the customer from the review and so block any redress".