The Failings Of A Complaint Handling Process
Almost three years ago I wrote a blog about Clydesdale’s hidden ‘hidden Swap’ bill. At that time, the executives at Clydesdale Bank had recently testified to the Treasury Select Committee’s evidence session on SME lending that the mis-selling of Tailored Business Loans (TBLs) was limited and that no systemic issue of mis-selling had been identified. They also kindly encouraged those customers of the bank who thought they had been mis-sold a hidden swap to come forward and complain. Back then Clydesdale and Yorkshire Bank were still part of National Australia Bank and David Thorburn was Chief Executive.
Stock Market Debutant – Headache!
Fast forward three years and the landscape looks quite different. Thorburn has gone, NAB have finally disposed of their problem child and customers have indeed approached Clydesdale to complain – in their droves. All this time, the provisions for TBLs and Interest Rate Hedging Product (IRHP) mis-selling claims has ticked up, with the latest media reports suggesting that Clydesdale is now potentially facing a class action to the tune of £1bn
That’s a major headache for a newly spun off entity that debuted the stock market only last year.
The Problem With The Product: Explanation Of Break Costs
A TBL is a type of business loan that typically contains some sort of interest rate hedging arrangement attached to the loan. The types of hedging arrangement can vary from a simple interest rate cap or fixed rate to a much more complicated Modified Participating Fixed Rate Loan (a form of Structured Collar). The session of the Treasury Select Committee suggested there were about 12,000 TBLs sold to businesses in the UK. Off parliamentary record, I am hearing from some ex-Clydesdale bankers that this figure was nearer 25,000. Whatever the exact number, the problem appears to be the same, namely that Clydesdale did not properly explain how break costs worked or how much they could be on these tailored loans – now that is a systematic problem.
Break costs are basically an early termination fee that is payable for early exit. Rather than amounting to 1-2% of the notional amount of the loan (like a mortgage); break costs on TBLs were closer to 10-25%. So if you had a £1million TBL, it could cost you as much as £250,000 to exit the loan early. Frightening to think that this was not properly explained at the point of sale.
So having identified the problem, let’s move on to the solution. Make a complaint to Clydesdale.
The Problem With Complaining: Hurdles And Road Blocks
From the hundreds of Clydesdale customers that we have acted for when complaining about the mis-selling of TBLs, the path of complaining can be fraught with challenges and frustrations. Here are some things you might expect to see.
- Disclosure Firstly, just to be clear, you don’t need the bank to provide you with disclosure in order to make a complaint. You can do this without disclosure, but it will help your case if you can get it. It helps because you are able to not only identify the exact type of TBL that you were sold (there are about 16 different structures of TBL), you can also try and piece together the sales process and identify any relevant gaps and failings. If you can do this, it will make your complaint that much more robust and should stand a higher chance of securing a better outcome.If you are a sole proprietor or a partnership of less than 4, you can easily obtain disclosure through a Subject Access Request (SAR). However, if like most of our clients, you are a normal limited company, then SARs don’t apply and you are reliant on a “Request For Information”, which is nothing more than a gesture of goodwill from the bank to provide you with some documentation. Expect the bank to be very selective about what information is discloses.However, the real stumbling block here lies with Clydesdale’s policy on RFI disclosure – they insist that you provide the exact TBL reference number in order for them to provide the disclosure. That works for super-organized businesses that diligently file away all their historical banking transactions and documents, but many of these products were sold over ten years ago and finding the illusive TBL reference number can be impractical.What makes this practice particularly frustrating is that Clydesdales’ RFI disclosure policy is out of kilter with the other UK high street banks who helpfully provide RFIs without the exact product reference number – which seems much more in tune with treating customers fairly.
- Time-barring & Creative Interpretation Another key hurdle relates to time barring. Taking the 6 year rule first, as 2005-2008 were the most active years of TBL sales, it is highly likely that most TBLs will fall foul of the 6 year limitation rule.In terms of the 3 year rule, Clydesdale (and the Financial Ombudsman Service) deem that ‘date of knowledge’ can be taken from the date that break costs were communicated by the bank to the customer. So if you ever enquired about breaking the loan early, you may have been given a quote detailing the ‘mark to market’ cost of breaking the loan. The bank will then assume at that point you were aware that you had a cause to complain. With that awareness established, you have 3 years in which to submit your complaint. However, that doesn’t always work in practice because:
- You didn’t know that you could complain.
- The bank fobbed you off from submitting the complaint in the first place.
- You didn’t appreciate what break costs actually meant.
- You knew that you could complain but were nervous about unsettling the ‘banking relationship’.
- You did complain but the bank never investigated the complaint.
- You never actually received a break cost quote, but the bank has found some creative way to determine that it was ‘reasonably foreseeable’ that break costs were communicated – you might think different.
- The Jurisdiction of the Financial Ombudsman Service (FOS) If Clydesdale has time-barred you complaint, or if you are not satisfied with the offer of redress from the bank, then you may be able to take your complaint to FOS. However, there are a couple of big hurdles here:
- You have 6 months from the date of the bank’s Final Response Letter (FRL) in order to take you case to FOS. If you submit you case to FOS after 6 months and 1 day of the FRL, then the bank will typically look to get your complaint time-barred and you will need to provide ‘exceptional circumstances’ to FOS in order for them to accept your case. Please note that ‘exceptional circumstances’ does not cover being busy with running a business and overlooking the deadline or waiting for your banking relationship with Clydesdale to end so that you feel unimpeded to put the complaint in.
- The other stumbling block is that you will need to be a ‘microenterprise’ in order for FOS to look at you case. Many businesses I speak to fall foul of this criteria as their revenue is typically greater than £1.6million (€2million) and they have more than 10 full time employees. Remember, the bank will try all they can for your case not to go to FOS, so they will look at any connected entities, common directorships and shareholdings and the number of part-time as well as full-time employees.
- Consequential Losses In addition to your claim for the mis-selling of the TBL, you may have a claim for additional losses caused by the mis-selling. Depending on the size of your ‘basic redress’ award, the claim for consequential losses could be substantial. From the many TBL cases that we have processed, I manage my client’s expectations around claiming for consequential very carefully – I simply tell them to expect to get nothing. The banking industries’ track record for paying redress for IRHP consequential losses is woeful.
Failings With The Complaint Handling System And Why A Class Action Is Necessary
It is quite easy to see why the path of complaining to Clydesdale and Yorkshire Bank is riddled with challenges and road blocks. The complaint handling process of Clydesdale appears to have been ‘gamed’ from the outset as an attempt to contain the financial fallout from the mis-selling. This has left many businesses frustrated and angry with nowhere to turn to – too big for FOS and too small for litigation. Some businesses now see a class action as their only hope, so long as they are prepared to pay away 45% +VAT of their compensation if successful, but at least they could get something.
Recall The Executives!
Looking for a wider solution, one idea could be to recall the executives at Clydesdale Yorkshire Banking Group (CYBG) to re-attend the Treasury Select Committee (TSC) and explain themselves/update the TSC. CYBG will no doubt have a much larger sample of complaints to discuss with the TSC than when they last met in June 2014. Some of those cases, as well as how Clydesdale have been handling the complaints, should make things interesting. Furthermore, if a systematic problem can be identified, the TSC could put pressure on the Financial Conduct Authority to implement a wider scale retrospective review of the sale of TBLs, similar to the section 166 IRHP review of 2013.
Extend The Jurisdiction Of The FOS
Another solution is to extend the jurisdiction of the FOS to include many more SMEs by making the eligibility criteria more flexible, say similar to the FCA IRHP ‘sophisticated customer’ assessment. Although this could help plug the current hole in UK financial regulation, it would sadly come too late for thousands of Clydesdale customers affected by TBL mis-selling.
SMEs make a vital contribution to the UK and the cost of failed enterprise caused by the mis-selling of overly complex and unsuitable financial instruments combined with an outdated dispute resolution system in post-Brexit Britain cannot be good for the economy. I can feel another blog coming on!