Cold Crumbs of Comfort for Clydesdale Clients - it’s not Cricket


Forgive me for conjuring up, as I did when I read the announcement on the Clydesdale website regarding the review (or lack thereof) of their tailored business loans, a bank manager not from Scotland, or the Shires, but a shorts-wearing moustachioed bear of a man, with hands the size of a red snapper, looking more like he had brushed himself down from his own personal bush-tucker trial, rather than come from a meeting with the Financial Services Authority.


The grin was palpable, and so it might be, as Clydesdale (or National Australia Bank) announced that it would firstly review all Tailored Business Loans (TLBs) except those incorporating fixed rates (i.e. 99%), and secondly that it was exiting the UK lending business and running for the safety of Ayres Rock.


Clydesdale are to a large extent protected by MiFID, the European rules governing sales of derivatives products, in that ‘embedded derivatives’ are excluded from their rules, and the FSA, acting as umpire has very meekly agreed with them. National Australia Bank bowled the FSA a ‘bouncer’ and the FSA have fended it off by holding out a kipper, and have been caught in the slips as a consequence.


What is an ‘embedded derivative’? The impact is rather like playing inside a faster delivery and finding your protective box is made of paper mache; it’s unexpected, painful and can leave you left to fend off one final ball. ‘Embedded’ means in the event of early prepayment of a TBL, instead of the more usual prepayment penalty (zero, 1% of principal, or 3 months interest depending on the loan docs) the customer is charged an exit fee which is calculated the same way as calculating a derivative, in most cases an interest rate swap, which makes the penalty a lot higher, and frankly, unfathomable (for most). It is harder to read, in comes out of the back of the hand; it’s a ripper. The loan document language usually talks in vague terms about ‘replacement costs’ that is, the bank reserves the right to claim compensation for receiving its money back early and unexpectedly because if rates have fallen it misses out on the high, juicy rates it was able to charge back in the vintage years of 2006-2008.


So far, so bad. However, were those ‘replacement costs’ explained in any detail at all, as they were certainly part of the contract? Also, are they ‘provable’? We are party to attempts to explain that both Clydesdale and the Yorkshire  ‘hedged’ their fixed rate exposure (via an interest rate swap) with another bank, and that when they get their money back early they have to go back to that bank and close the trade out.


They maintain in other cases that they will have ‘pulled-in’ fixed rate funding from the market, and will now need to redeploy those funds for the rest of the over, at lower rates.


Streuth!! They need to gather around the square and make their minds up; they have tried to bowl us a googly but the canny batsman at QA Legal have spotted the flight of the ball and intend to whack it straight back over the bowler’s head. Let the sledging stop and listen to the legal arguments. In any case, if the Aussies are locking the pavilion and taking their ball back home, how exactly are they planning to ‘replace’ their investments in any case?


We thought National Australia  were playing a test match; now they are claiming it’s twenty-twenty.


QA Legal 


14th November 2012



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