When is a Fixed Rate Loan Not a Fixed Rate Loan? Dissecting the Swift Report Bank Confidential 1st March 2022
Loans with embedded swaps, such as Fixed Rate Loans (FRL), can present challenges and risks that may make them toxic financial products. Tailored Business Loans (TBLs) were sold by various banks, including high street names like Yorkshire Bank/Clydesdale Bank, RBS/NatWest, Nationwide, Lloyds Bank, HSBC, HBOS, and Barclays. There have been debates and legal opinions regarding the regulatory aspects and risks associated with these loans, highlighting the complexities within the banking and financial sector.
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WHEN IS A FIXED RATE LOAN NOT A FIXED RATE LOAN? DISSECTING THE SWIFT REPORT BankConfidential 1stMarch 2022
2. LOANS WITH EMBEDDED SWAPS FIXED RATE LOANS Charles Flint QC advised the FCA on whether loan agreements containing embedded swaps fell within the scope of financial regulation, and advised that they did not. These are usually defined as Fixed Rate Loans (FRL). The House of Commons Committee questioned the FCA as to whether this approach was correct. On 6th February 2015 Committee announced that having taken its own legal advice it was satisfied that the opinion given to the FCA entirely correct. CHARLES FLINT QC A person in a suit Description automatically generated with medium confidence Treasury the Treasury was
3. ARE FIXED RATE LOANS TOXIC? Example - 2.5M 25 year loan sold to GP practice in March 2011 All in Rate of 6.5% Loan Margin 2/LIBOR when LIBOR was circa 0.5%, additional 4% per annum. Additional costs paid over margin to date circa 1M. Applied for Exit costs in 2021 on debt now at 2.2m = 900,000 Some Additional Issues Joint & several liability on whole additional break cost Sold to GP s in mid 50 s, the death of any partner breaches covenant & incurs break cost Rather than exiting for a market break cost, the whole contingent liability is recovered FCA s decision means you have no regulatory protection or rights FRL s MORE TOXIC THAN SWAPS!
4. WHAT WERE TAILORED BUSINESS LOANS? VERITAS TREASURY - Tailored Business Loans were sold by many banks and building societies including Yorkshire Bank/Clydesdale Bank, RBS/NatWest, Nationwide, Lloyds Bank, HSBC, HBOS and Barclays. WHO SOLD TBL S? [Tailored Business Loans] are not CFDs because the purpose of the loan is not to secure a profit or avoid a loss by reference to fluctuations in interest rates. FCA STATED JONATHAN FISHER QC Jonathan Fisher QC, who agreed with the FCA on this matter Commercial loans are not listed as a regulated activity in the Regulated Activities Order JOHN SWIFT QC P335 par 50 - It would not have been appropriate to include embedded IRHP s or TBL s within the scheme
5. TBLS OR FRLS? VERITAS TREASURY - They were sold under a range of names including Tailored Business Loans, Treasury Loans and Sterling Fixed Rate Loans. John Swift QC Page 263 par 143 Headed Tailored Business Loans states - Martin Wheatley wrote to the Treasury stating that more than 60,000 TBL s sold since 2001, the Treasury never responded. The facts are only 8,000 CYBG Fixed Rate TBL s were sold from 2001 on, of the 70,000 Fixed Rate Loans sold that is only11% of the loan products The TSC in it s report Conduct and Competition in SME Lending stated Clydesdale Bank plc, through both its own branches and through those under its trading name Yorkshire Bank, sold both standalone IRHPs and loans with embedded swaps. These loans were sold under its 'Tailored Business Loan' (TBL) brand. Page 334 Par 48 The FCA also took advice from leading counsel on its powers in respect of TBL s
6. WHICH CONTRACTS WERE CONSIDERED Ulster Bank BC Question to the FCA FCA Response Q. Ulster Bank (UB) sold a number of products which they classed as Fixed Rate Loans, which however, are stated to be SWAPs in the loan documentation, did the FCA seek any specialist advice in relation to Hedge Products or Fixed Rate loan products sold by UB, in the same manner as they did with Clydesdale Tailored Business Loans? A. We obtained legal advice on whether fixed rate loan products or similar fell within our regulatory remit, which was not restricted to UB. We also note that The Treasury Select Committee s Conduct and competition in SME lending considered this (see paragraph 138), and obtained its own advice from Jonathan Fisher QC which supported the FCA s view.
7. DID THE FCA TELL THE TRUTH? We asked for this response to be reviewed, on 20thMay 2020, and received the following response: I have looked at the information that we have in relation to this question and have concluded that the FCA s response could have been clearer, and may have led to an inaccurate impression. The FCA did seek advice on whether loans with embedded interest rate hedging features fell within our regulatory remit. However, the FCA did not seek specific advice on Ulster Bank products. We apologise for the inaccurate impression created by our response On 19thFebruary 2020 we wrote: Can we therefore ask what the FCA intends to do in consideration of what may have been a substantial regulatory failure by the FCA in NI, where thousands of UB cases may it seems have been improperly excluded from the IRHP Review because the FCA did not investigate the products competently I would ask that the FCA meet with me to discuss this matter in more detail, with the evidence I have supporting my concerns
8. FCAS RESPONSE - DEFER TO SWIFT As you may be aware, there is an independent review into the FSA s and subsequently the FCA s implementation and oversight of the IRHP redress scheme. The review will consider, amongst other things, whether the criteria for eligibility to benefit from the scheme were appropriate. Therefore, it would not be appropriate for us to comment on your remarks copied above until the report from the review has been published. We then wrote to john Swift QC on 16thJune 2020 confirming they had passed this issue to him to address & although we recognised he didn t have the power to instruct a Review. We provided a copy of the FCA s response. After 20 months of waiting for an answer about the Ulster Bank loans and their elibibility to have been in the IRHP Review the answer from the John Swift QC was
9. SWIFTS RESPONSE ON ULSTER BANK FRLS Of 493 pages on the IRHP Review NI & Ulster Bank FRL s are mentioned Feature on = 0 Pages Despite my warning of the Ulster Bank FRL s being an entirely different contract to TBL s Swift used a heading of Tailored Business Loans to deal with all 70,000 FRL s from 9 different banks. Contractual evidence I sent which seemed to establish that the Ulster Bank loans were swaps, was ignored, there was no comment on my concerns, when I had stated to Mr Swift: Surely Northern Ireland consumers in the UK regulatory jurisdiction of the FCA, are entitled to the same rights as all other UK consumers, considering also that almost 1,000 suicides of builders and property related SME s in Northern Ireland were put down to stress and trauma s linked to the banks behaviours, in a matter in which all senior Church Leaders became involved. To which the Swift Review s response was again nothing!
10. NORTHERN IRELAND BANK VICTIMS FORGOTTEN? Our Response to Swift - Mr Fisher agreed with the FCA s opinion by Mr Flint, which in effect meant he agreed with an analysis of a TBL contract which related to the sale of just 11% of the FRL s in the UK, even if that was correct on the one product, that one product is not what one would suggest was a representative sample of 70,000 contracts from at least 8 different banks. With the contractual evidence in front of you stating that these products were derivatives and swaps, why did you then fail to even mention my concerns or deal with the right of those NI consumers to enter the Review process? Not only have you failed to consider whether it was appropriate for the NI Ulster bank victims to be ineligible to benefit from the scheme as was your remit, you failed to even mention the Ulster Bank products and the plight of those Bank s victims at all!
i) Was Charles Flint QC s advice based on an analysis of the Clydesdale Yorkshire Banking Groups (CYBG) Tailored Business Loan (TBL) only? ii) If so, was Jonathan Fisher QC s opinion for the Treasury Select Committee (TSC) based purely on Mr Flint s analysis of the TBL product? 11. THE FCA FREEDOM OF INFORMATION REQUEST iii) If Mr Flint considered FRL products from other banks, which other banks products did he consider and what was the name of those products? iv) If Mr Flint considered only the CYBG FRL loans of which 8,000 were sold in total, how could the FCA or Mr Flint decide that the contracts or hedge trades of the other 62,000 loan products would be constructed in the same way as CYBG s TBL s? v) Apart from the CYBG (now Virgin Money) product is the FCA aware of any other bank that sold FRL products called TBL s?
