NAB spin-off Clydesdale faces UK lawsuit
The Australian Financial Review, 16.07.2017
By Adele Ferguson
The ghost of National Australia Bank’s disastrous time in Britain continues to haunt it, with a legal action set to allege thousands of small business customers were fraudulently mis-sold a loan product that destroyed their businesses and torched potentially billions of pounds.
The action, which is similar to a class action in Australia, will be funded by British litigation funder Augusta Ventures and managed by claims management company RGL.
It is against Clydesdale Bank, which was wholly owned by NAB until last year, along with NAB and certain banking executives. The claim will allege Clydesdale Bank mis-sold thousands of fixed interest Tailored Business Loans (TBLs) to small businesses between 2002 and 2012.
An estimated 8000 of these fixed interest TBLs contained embedded or hidden swaps which were not disclosed to customers who thought they were entering into a simple fixed rate loan.
When interest rates plunged during the global financial crisis, TBL customers, with these hidden swaps, suddenly found themselves being charged interest repayments that were as much as three times the bank’s variable rate.
If they broke the contract they were hit with crippling break fees of between 20 per cent and 40 per cent of the principal of the loan.
In the case of customer John Glare, who signed a TBL for £3.95 million ($6.6 million) with Clydesdale in February 2008, interest rates started to escalate to a point where he couldn’t afford to make the repayments. When he tried to break the loan, the exit fee was a staggering £783,383. His business collapsed, he was evicted and became bankrupt in 2011. He took legal action, claiming £4 million in damages, but lost the case.
The sale of products such as fixed interest tailored business loans and the financial havoc wreaked on customers like Glare prompted an investigation by the financial regulator and a parliamentary inquiry into nine banks, including Clydesdale, back in 2014.
The parliamentary inquiry report, released in March 2015, found that NAB and Clydesdale Bank behaved badly. It said Clydesdale Bank had mis-sold TBLs to small business owners, which “led to considerable consumer detriment” and “this gap in the regulatory perimeter meant that the product created by Clydesdale Bank was not covered by the usual safeguards … Some [customers] were probably unaware that the product fell outside the scope of FSMA [Financial Services and Markets Act].” It said regulators had been powerless to provide redress to those affected by wrongdoing.
The 2015 report also criticised the remediation program. The parliamentary committee found a “lack of public oversight, minimal transparency and limited coverage of the [compensation] scheme” meant the committee could not have faith in the process.
RGL chief executive James Hayward told The Australian Financial Review that the legal action was likely to be filed this year in the High Court in London.
He said there were more than 6000 victims of TBLs that have legitimate grounds to join the action. Some had TBLs less than £1 million, some greater than £2 million to £3 million. The losses include overpayment of interest, break fees and consequential damages. Together the losses are in the billions of pounds.
The Financial Review understands there is at least one other law firm considering launch legal action on behalf of customers sold TBLs through Clydesdale Bank.
But victim Jim McGrory has joined RGL. Speaking from Scotland, the hotelier of more than 40 years said he signed up after spending the past eight years trying to fight the bank.
McGrory’s problems date back to 2007, when he borrowed £562,000 from Clydesdale, saying he was told it was a straight fixed business loan. When he tried to refinance the loan in 2010 with another bank he was told the break fee was almost £100,000, which he couldn’t afford.
It cost him a property in Canada – a photo of which hangs on the wall of his house as a reminder of what he lost – and a student rental property in St Andrews, as well as the income generated from both properties.
McGrory complained to Britain’s Financial Ombudsman in 2009, which he won on appeal in September 2013.
The adjudication said the overpayment of interest, £125,000, should be refunded, but he says he hasn’t received a cent because he wanted consequential damages of £500,000 through the forced sale of properties. He said the bank refused to separate the claims so he had no option but to keep fighting.
‘”Life has been deadly for me. I can’t sleep well, my mind is constantly churning,” he said.
NAB demerged from Clydesdale Bank in 2016 after years of disappointing financial returns and reputational damage that earned it the title “the death star”.
Over the years it found itself embroiled in a series of scandals, including the sale of fixed interest TBLs and an industry-wide scandal involving the mis-selling of Payment Protection Insurance (PPI), which cost it a fortune in compensation.
In March 2015 it suffered the ignominy of being slugged with a record fine from the Financial Conduct Authority after finding “serious failings” in its complaints processes for PPI. It was found to be falsifying records and adopting “inappropriate policies” that resulted in the short-changing of victims of PPI who sought compensation.
After years of investor pressure, NAB finally decided to get out of the UK. To do so, the Prudential Regulation Authority requested it enter a conduct indemnity agreement with Clydesdale Bank to cover potential losses related to legacy conduct costs not covered by existing provisions it had made. These legacy issues included PPI and fixed interest TBLs.
That agreement included a capped indemnity of more than £1 billion.
In NAB’s 2017 half-year accounts it said after Clydesdale draws down another £150 million for PPI in its half-year results it would leave the unutilised indemnity amount at £511 million.
In a statement, Clydesdale Bank said it had seen media reports about a potential claim relating to TBLs but it was yet to hear from RGL Management. “It is therefore not possible to comment on speculation around any potential case or the basis for any claim.”
It said TBLs had been subject to “significant scrutiny” and the bank had been working with customers as part of a remediation programme, “in an open and transparent manner”. It said it had made “significant progress” in resolving the vast majority of cases. “Where we have reached a final agreement with customers, the cost of this has been covered by existing provisions as extensively disclosed in our financial reports.”
It told the Financial Review it had agreed to undertake a complaints-led review of fixed interest TBLs, which fall outside the scope of the regulator’s review. “This review encompasses new walk-in and previously closed complaints.”
But it declined to give specific details on TBLs, including the total amount paid in provisions against TBLs to date, the number of people repaid or how many are still in the queue.
What we do know was that at September 2015 – when it was still giving breakdowns – it had raised total provisions for TBLs to £238 million, of which £101 million had been utilised at that time.
Its most recent interim results disclose provisions of £92 million for “customer redress and other provisions” which includes provisions for TBLs.
NAB entered the UK market in 1987 and exited last year under the direction of chief executive Andrew Thorburn. It was time. It had burned money for shareholders and like many other British banks it hadn’t covered itself in glory when it came to the treatment of some of its customers.
NAB might think it has finally washed its hands of its British headache, but victims are coming out of the woodwork, not happy with the remediation program.
They are readying themselves for action, and readying for a legal battle with Clydesdale, which will also embroil NAB.
View the original article on The Australian Financial Review