Watchdog to probe Yorkshire Bank over mis-selling

David Thorburn
David Thorburn
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YORKSHIRE Bank has been dragged into a scandal over the mis-selling of complex interest rate products to businesses.

The lender yesterday said together with its sister bank Clydesdale, it is being probed by City watchdog the Financial Services Authority over sales of interest rate hedging products or swaps to small and medium-sized enterprises (SMEs).

The FSA has already reached a settlement with Britain’s Big Four banks – Barclays, HSBC, Lloyds Banking Group, and Royal Bank of Scotland – which could see them pay millions of pounds in compensation to businesses mis-sold interest rate swaps.

In June the FSA said it had found “serious failings” in the sale of these products to some SMEs, and said it planned to widen its investigation to other banks.

Interest rate hedges are sold to protect customers against the risk of interest rate swings.

Yorkshire Bank, which is currently undergoing a painful restructuring, said in a statement: “Clydesdale Bank confirms that it has had discussions with the UK Financial Services Authority in relation to a review of sales of interest rate hedging products to small and medium business.

“Clydesdale and Yorkshire Banks will work with the FSA to conduct the review. The conduct of the review does not mean that there has been any finding of mis-selling.

“While Clydesdale Bank is still reviewing the specific detail, it will apply the recommendations to any cases where it is appropriate to do so.”

Yorkshire Bank declined to quantify how much it could have to pay customers in redress, how many products it sold, or to elaborate beyond the statement.

The bank still sells interest rate swaps – but said it urges customers to seek independent advice before taking the products.

The FSA believes UK banks sold about 28,000 interest rate protection products to customers between 2001 and 2012.

These products range in complexity from relatively simple ‘caps’ that fixed an upper limit to the interest rate on a loan, through to more complex derivatives such as ‘structured collars’ which fixed interest rates within a band but added a degree of speculation.

The FSA is thought to be close to announcing which other lenders have been drawn into its swaps investigation, with an announcement likely next week.

The FSA review is the latest problem to hit Yorkshire and Clydesdale banks, headed by chief executive David Thorburn, which are currently slashing jobs and retreating to their northern and Scottish heartlands in a bid to improve earnings.

The FSA’s probe into interest rate swaps found poor sales practices including banks failing to fully explain the cost of breaking the agreement or the risks.

In 2005, hotel group Lakeside Inns took Yorkshire Bank to court over claims it was mis-sold an interest rate product. The bank paid out £253,000 in damages.

Lakeside was sold a product aimed at capping the interest paid on a £1.2m loan at eight per cent, with a lower limit of 4.6 per cent. But when interest rates fell below this lower limit, Lakeside was charged interest at eight per cent.

Speaking yesterday, Lakeside director Jonathan Denby said the FSA investigation was “well overdue”.

“I thought it was risk-free and cost-free,” he said. “It was meant to be a cap against future increases in interest rates. It’s good to see that progress is being made. If Yorkshire Bank is going to hold up their hands and repay the money... I would be very pleased.”

Mr Denby said he has been contacted by businesses concerned they have been mis-sold interest rate swaps by banks. “When it happens it comes as a big shock. The consequences for some people not as lucky as me have been absolutely devastating. Some people have been made bankrupt.”

The FSA declined to comment.