Thousands of Clydesdale Bank small business customers with fixed-rate loans will not be covered by the banking review aimed at compensating the victims of mis-selling.
The Clydesdale is one of six smaller banks which will be brought into the review process later this month, following the Financial Services Authority's finding that 90% of firms in a pilot study with the big four banks were mis-sold complex interest rate swap agreements.
The Glasgow-based bank has already agreed with the FSA that it will review the sale of loans linked to separate financial derivatives, such as its "forward fixed rate" or "cap and collar" loans. But the Clydesdale has escaped scrutiny of its "fixed rate" loans, believed to be its most widely-sold product of recent years, because the swap element is embedded in the loan and is not a stand-alone derivative. The FSA does not regulate loans. Borrowers, however, have found themselves facing the same huge "break fee" to exit from a Clydesdale fixed-rate loan as to exit from other swap-related products, preventing small businesses from refinancing or rebanking.
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For many businesses, the crisis has been exacerbated by the Clydesdale's withdrawal from commercial property lending, with all loans transferred to parent National Australia Bank prior to being called in as soon as agreements expire.
Now the FSA has confirmed that fixed-rate loans will not be part of the review. A spokesman said: "The review agreed with the banks covers stand-alone products, but doesn't extend to loans, because this is not an area covered by FSA regulation."
Abhishek Sachdev, of derivatives specialist Vedanta – an expert witness to the Treasury Select Committee – said: "The fixed-rate product they have been given could not be provided without having an embedded derivative. The fact the break fee changes day by day with the market shows it's a derivative, and any expert would stand up and say the same."
Mr Sachdev added: "Unfortunately the only option is litigation, on the grounds that if break fees had been properly explained, these SMEs would not have entered into it."
The financial ombudsman has recently reopened the case of Jim McGrory, a St Andrews hotelier, saying his Clydesdale fixed-rate loan "appears to have some similar features to a hedging product". The bank, however, has told Roderick Campbell MSP that Mr McGrory has "a simple fixed-rate loan that does not contain a derivative".
Mr McGrory, who this week attended a meeting in Manchester of small business victims, said: "Most people are inactive because they are terrified of taking on the bank.
"Anyone with a fixed rate has got exactly the same product as the IRSA, just that it is not a regulated product and the bank decided to take it outside the control mechanism."
He added: "Most businesses don't have the money to go to law, but we are going to carry on fighting."
The NAB Customer Support Group is preparing a test case legal action with Edinburgh law firm Balfour and Manson. It has 33 Clydesdale and Yorkshire bank members – 27 of whom have fixed-rate loans with combined borrowings of some £27 million and breakage fees last calculated at around £5m. Spokesman John Glare said the group hoped to make a submission to the Court of Session early this month.
A Clydesdale Bank spokesman said: "Our Fixed Rate Tailored Business Loans do not feature an embedded 'swap' and are outwith the scope of our review of interest rate hedging product sales. Notwithstanding this, a customer's right to complain is unaffected by our review."