Yorkshire extends probe into loans

Banking regulator the Financial Services Authority is forcing lenders to compensate small, ‘non-sophisticated’ firms mis-sold complex interest rate hedging products or swaps alongside loans.

Earlier this year four major banks agreed with the FSA to compensate firms sold products called ‘structured collars’, plus review sales of other interest rate hedging products. Yorkshire Bank and its sister lender Clydesdale later joined the review.

Now Yorkshire Bank has written to customers saying as well as reviewing derivatives, it is also looking at some Tailored Business Loans (TBLs) – which fall outside the scope of the FSA agreement.

“In addition to the products above that the bank has formally agreed to review with the FSA, the review will also consider the sales of certain TBL products,” it said.

The bank said “in the case of those TBLs exhibiting comparable features to a structured collar”, it will proactively consider compensating non-sophisticated customers sold these.

Yorkshire Bank’s review stretches back to December 2001, but it has not revealed the possible financial impact. It declined to say how many of its loans could be affected.

Interest rate swaps threaten to be the next big scandal for the beleaguered banking sector. The FSA said it found “serious failings” in the sale of swaps by banks to small and medium-sized firms.

Interest rate hedges can protect firms against the risk of fluctuating rates. However, the FSA said it found examples of poor disclosure of exit costs, failure to ascertain customers’ understanding of risk and over-hedging.

Structured collars limit interest rate fluctuations in a simple range, but can lead to a business paying more if the rate falls below the bottom of the range.

According to the FSA, many of these products were sold between 2005 and 2008 – before the base rate fell to its record low of 0.5 per cent. No total figure has yet been put on what the swaps scandal will cost lenders.

It has been likened to the payment protection insurance (PPI) scandal, where consumers were sold products to protect against falling ill or losing a job. Banks have set aside more than £10bn to repay PPI, with Yorkshire and Clydesdale so far booking provisions of £220m.

Yorkshire Bank’s circular to customers includes 21 different products, including five TBL products which feature structured collars – now banned from sale to small businesses.

“Although the review of Tailored Business Loans falls outside the scope of the agreement with the FSA referred... we are committed to ensuring that sales of Tailored Business Loans are reviewed applying the same approach and principles... to ensure fair and reasonable outcomes for our customers,” said Yorkshire Bank.

The bank is not including fixed-rate loans in its review. It added the FSA has not ruled that it mis-sold any interest rate swaps products. The bank has appointed law firm Berwin Leighton Paisner as independent reviewer.

Yorkshire and Clydesdale, owned by National Australia Bank, are currently engaged in a deep cost-cutting exercise in a bid to turn around their performance. It includes 1,400 job cuts and the closure of 29 business banking centres in the South. Yorkshire Bank is also merging its Leeds back office operations into one site at Merrion Way, closing its Brunswick Point office.

The banks have also ceased commercial property lending, with their Australian parent taking control of a £5.6bn book of problematic loans.