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Clydesdale / Yorkshire – FSA Review

Vedanta Hedging has been discussing directly with the FSA this issue of Clydesdale / Yorkshire hedging for some time.

The complication with this bank is that they sold these products as Tailored Business Loans (TBL’s). These were essentially a loan with an underlying derivative packaged together.

The SME would normally be given a choice of a few products such as a fixed rate, discounted fixed rate, collar, etc.

Since these are of course de facto derivatives, they will incur break costs if they are terminated early in a low interest rate environment. Clydesdale / Yorkshire have at times tried to argue in the past that because these products are packaged together with a loan, they should not be covered by the FSA Rules as a Designated Investment.

Clydesdale / Yorkshire are now part of the FSA review process and they have decided to include a large number of TBL types for this process.

However, they have NOT included Fixed Rate Loans.

We make this important statement on 3 grounds:

1. The attached document Clydesdale TBL Factsheet from Clydesdale’s website,  specifically states on page 3, ‘TBL’s where the interest rate was fixed for the period of the loan or any part of it will not be reviewed.’

2. Clients of  ours that have Fixed Rate Loan TBL products have received letters from Clydesdale confirming that they are NOT part of the FSA Review process

3. Our direct conversation with the FSA on 15th October 2012 confirmed that Fixed Rate Loans were not being included by Clydesdale / Yorkshire

It is of course welcome progress that Clydesdale / Yorkshire have moved forward with the FSA review process.

Vedanta Hedging is working with some Solicitors and Barristers (as well members of the Government) about making the necessary technical and legal arguments about the fact that Fixed Rate Loans should be treated the same as if an SME was sold a stand-alone derivative.

However, at the moment, Clydesdale / Yorkshire are NOT including these products as part of their review. If Clydesdale / Yorkshire are required to include Fixed Rate Loans, then all of the other UK Banks will be required to do the same.

We believe that all of the UK Banks will fight very hard indeed to not have Fixed Rate loans covered under the FSA Scheme. This will affect thousands of SMEs and add further huge liabilities to the Banks.

Note for example a quote from Lloyds, ‘ A spokesman for Lloyds told the BBC that it sold interest rate swaps as hedges to very few of its commercial customers, with 90% preferring to take out a straight fixed interest rate loan’.

Lloyds Banking Group (including Bank of Scotland) have so far not declared any provisions for Swap Mis-Selling redress saying that they do not believe this to be material. This we feel is highly likely to be changed in the future with some provisions being added, since we are advising several large HBOS companies that were sold large swaps in the Peter Cummings era.

If Fixed Rate Loans are included, then Lloyds would be heavily affected since by its own admission, it provides a lot of Fixed Rate Loans to SMEs

If there is some contradictory evidence to the above, we would be delighted to be corrected

 

Nadia Patel

Nadia has a degree in Business Management and a Diploma for Financial Advisers (Level 4). She has ten years of experience in financial services. This includes FSA regulated adviser roles in HSBC, Halifax and Nationwide. As senior manager at Vedanta Nadia is responsible for managing the office, client contact and marketing for the business.

Nadia Patel

Nadia has a degree in Business Management and a Diploma for Financial Advisers (Level 4). She has ten years of experience in financial services. This includes FSA regulated adviser roles in HSBC, Halifax and Nationwide. As senior manager at Vedanta Nadia is responsible for managing the office, client contact and marketing for the business.