Tailored Business Loans – What you need to know

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Posted in:Banking and Finance, Corporate and Commercial|March 20, 2015 | Join the mailing list


Tailored business loans were once sold mainly by large corporate banks such as Clydesdale and Yorkshire Bank. Similar loans with slight variances were also endorsed, to a lesser degree, by other financial institutions such as Lloyds and Barclays Bank. But what
exactly is a tailored business loan? How might you have been mis-sold a tailored business loan and what will the implications mean for you now? Find out by following our simple list of frequently asked questions.

What are Tailored Business Loans?

A tailored business loan (TBL) was promoted as being a simple fixed rate loan agreement; however, they are not as clear-cut as first suggested. To minimise risk caused by rate movements in the cash market, the banks deployed undisclosed interest rate hedging
products, known as IRHP, in the background of the agreements.

The sale of IRHP as a stand-alone entity is regulated by the FCA and is therefore subject to their Rules of Conduct (COBS). However, tailored business loans are not so regulated despite utilising a very similar but complicated imitation. This meant that the
selling process of these products could be carried out in an unfair manner, as they were not controlled by regulations set out in the COBS rules.

Customers Completely Unaware

Because of this loophole, TBLs were largely mis-represented as standard fixed rate arrangements to unaware customers; when in actual fact they also included potential breakage costs for interest rate swaps. These costs can be up to half of the original loan
amount. As interest rates dropped in 2008, many SMEs with tailored business loans found themselves locked into high interest rates with the inability to switch to a more competitive product.

In cases where SMEs fail to meet payments, banks have been known to end the loan arrangement and demand payment of breakage costs. This has forced many businesses into closure over the last few years. The vast majority of customers were not made aware of these
breakage costs when entering the loan agreement. Clydesdale CEO, David Thorburn, has since gone on to admit selling complex TBLs to customers who were not made aware of the associated risks.

How Were TBLs Mis-Sold?
Many case reports have indicated that bank sales reps purely focused on the possibility of interest rates rising when selling a TBL to a potential customer. This is unadvised information though and therefore the banks really shouldn’t have been providing advice
on future interest rate movements. As well as this, customers were also not fully informed about breakage costs.

In general, the banks fundamentally failed to ensure that SME customers fully understood the nature of the associated risks involved with embedded swap agreements. They also failed to make it clear the repercussions of interest rates falling and early terminations.
Banks also often failed to provide advice on other alternative financial products, such as interest cap products.

Act Now to Get Compensation

If you have been mis-sold a tailored business loan then you need to act fast if you wish to seek compensation. The potential for legal action is diminishing as time is running out fast. The vast majority of tailored business loans were sold between 2001 and
2009 – meaning claim applications will soon be too late to administer.

If you do wish to seek compensation, the team here at Berg can assist you in your claim and ensure you receive everything you are legally owed. Your case may require a formal complaint to the bank and/or the Financial Ombudsman; alongside litigation. The team
here at Berg are specialists in this area and have experience dealing with this kind of product. So if you need help with your situation or need some simple guidance, give us a call today.

If there are any issues in this update or more generally that you would like to discuss, please contact
Damian Carter
or one of our Banking and Financial Regulatory team on 0161 833 9211.

(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice
should be obtained before taking, or refraining from taking, any action as a result of this article.)

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