By Kam Sandhu @KamBass
15 years is a long time not to be believed. Still, Nigel Henderson remains measured; his calm conceals a man who has experienced a smash and grab on his life’s work. Perhaps his 30 odd years in the hotel industry have given him this public diplomacy, despite now being without his business for more than a decade. His is a case where not one but two forms of fraud seem to have been pioneered. In the years that followed, this template destroyed thousands of small and medium-sized enterprises (SMEs) like his.
Some of these victims are sitting in the room at the Economic Crime Symposium as Henderson recites his case. The event is organised by the SME Alliance – a network of business owners, lawyers and advisors formed to give SMEs a voice against banks. Surrounding Henderson are others with their own stories of forced dispossession; businesses, houses, savings and years of life.
During a period where the country is in a state of delusion about its economy and the role of banks within it, these networks are vital. Many share the experience of being disbelieved, or of the long – and often unending – chapter without redress. In the case of RBS’s Global Restructuring Group (GRG), the unit is accused of artificially distressing viable businesses in order to foreclose and strip value, assets and property for the bank’s own wayward balance sheet. 16,000 businesses were put into the the GRG during the recession, and despite hundreds of allegations and customer accounts coming to the surface, they were not deemed enough of a smoking gun to incriminate the bank. While the world catches up, groups like the SME Alliance allow victims to confirm the things that have happened to them.
One month after the symposium a tranche of documents leaked to Buzzfeed will be made public, revealing in a series of internal emails new evidence of GRG’s ‘Dash For Cash’ project. It’s an event which will offer these SMEs some respite from the silence. But it is still one month away. Henderson pauses to compose himself as he recounts his story; ‘I’m sorry, I’m afraid it doesn’t get any easier.’
Henderson has put his case against the bank, along with more than 100 others, with the RBS GRG Litigation Group – RGL Management. Henderson’s case is the oldest with the group, going back to 1997 when GRG was in its previous iteration Specialised Lending Services (SLS). While this story now benefits from some oxygen of publicity, the toxicity of Fixed Rate Business Loans hiding complex financial derivatives remains under-reported.
Henderson seems to be an early example of this hidden swap scheme. Later versions came with their own names, Tailored Business Loans being the most prevalent. Business owners like him were engaged in a contract they were unaware of, but which pledged all of their assets and locked them into a product with ‘unlimited risk.’
Getting out of the loan meant bearing the costs of the extra agreements which can and has sent many into insolvency. This hedging is done under the guise of fixed rate interest loans sold as a form of protection for businesses.
Fixed Rate Loans
Henderson and his wife Norma took out fixed rate loans in 1997 for the purchase of a new hotel. They felt the fixed rate would provide security against any turbulence from the incumbent Labour government;
“I wanted to know what our monthly outgoings would be, for budgeting and for cash flow purposes. Now 10.22% seems a lot but remember nearly 20 years ago that was about the norm.”
What Henderson was not informed about was ‘breakage costs.’
“Someone has sat down and thought about how to screw people,” says Peter Crowley, an actuary who has taken a closer look at Henderson’s case. In an article, Crowley tries to explain how this loan is used;
“When a bank sells a fixed rate loan, the borrower puts it into its books (balance sheet) at any time after that as loan capital lent less any capital repaid. The bank, however, now puts it into its books as a variable rate loan, plus the associated fixed to floating derivative, which it books at a profit”.
The bank expects rates to fall. Extra income is taken as a profit margin, and sold on in further trading agreements, like the collatoralised debt obligations.
While the business thinks it is being protected against rates rising, it’s actually insuring the market and the bank. “As the market expects rates to fall, they are hungry for someone to underpin the market,” explains Crowley.
This is done without Henderson’s knowledge. Like many others, businesses have had to unpick what has happened to them after the fact. A quality uniquely reserved for banks, leaving victims without the language to explain how exactly, they have been defrauded out of house and home.
These extra agreements can put a business owner into straits if they need to exit the loan. This is exactly what Henderson wanted to do. His fall to bankruptcy came as a result of wanting to pay off his debts.
Getting out Early: Breakage Costs
Early repayment options were always a part of Henderson’s negotiations on the loans he and his wife took from RBS, and they were used for their second hotel. The first, The Park Hotel in Montrose – a coastal resort in Scotland, had strong trade and Henderson hoped after refurbishment costs had been paid, he could use this income to speed up payments on The Portree – the second hotel; “I said I would expect to be in a position to repay the loan in full within 5-7 years….”
Despite these arrangements it wasn’t until the day before the loan was due to close that he had sight of the contract. According to Henderson, the banking manager arrived at his business, The Park Hotel, and pressured him to sign. With the sale due to close the next day, Henderson ceded despite being unable to consult with his financial advisor;
“The relationship manager appeared at our hotel at about 11 o’clock...I said again the issue of making early redemption and he pointed me to clause 6 of the agreement and it mentioned 3 months’ interest.”
For the first few months, the arrangements went ahead without problem. However, when an unsolicited offer far beyond the guide price for The Park Hotel landed on the Hendersons’ table, they were told to accept:
“12 years we had it. We weren’t willing sellers put it that way but our tax accountant said this is a ‘hallelujah offer’. We were aged 50 in 1998 and there was the benefit of a tax break, that was the main incentive for us to sell then.”
The sale went ahead. Henderson was in a position where he could pay off his loans, house and The Portree. He planned to replace his first income stream at a later date. ”We had more cash than we had ever had in our business lives,” he explains.
Henderson requested the remaining money in deposit should be used to pay off The Portree. He expected the three months’ interest penalty but his RBS banking manager informed him days later that it would cost £120k to get out of the loan and, as they were split between he and his wife, this would be doubled to £240k.
“I was dumbstruck. I just didn’t know what to answer and that was it, he put down the phone. I must have said I need to think about that. The phone was put down and never again was any reference made about repaying the loans despite my asking, I never spoke to him again.”
What followed was a series of exercises that distracted Henderson and his advisors, even tempting them with the idea of settlement and compromise, but they came to no end. In later weeks Henderson says he was given lower breakage costs but the payoff of the loan was never actioned despite his requests. In the meantime, Henderson was sinking further and further into debt as the thousands of pounds of monthly interest on the loans now came from his smaller and only income stream at The Portree which could not keep up. ‘The bank knew that’, he says.
Henderson searched for other hotels to replace The Park as he had planned. Again, he was ignored by his banking manager.
While he sank further into debt it was becoming impossible for him to refinance. ‘Other banks would not touch him,’ explains Crowley. He could not get new finance till the Portree was paid off. But he was stopped from paying with the money he had in deposit.
Soon, Henderson was placed into Specialised Lending Services and he hired a solicitor to intervene. They were told the bank was sympathetic to the Hendersons’ situation and wanted to seek a resolution. In a report later written by this solicitor he set out numerous ways in which he felt the bank failed to act ‘fairly, constructively and consistently’ including ‘failures to negotiate, failure to respond until the last minute, and ‘unduly harsh action’ before describing proposals that were rejected with no concessions. “They never gave a figure and refused to say what figure they would accept so to a certain extent we were working in the dark,” Henderson says.
“In hindsight they were determined to bring us down. Whatever we tried to do, they wouldn’t accept the offers made.”
Tailored Business Loans – Clydesdale Bank
Interest Rate Hedging Products (IRHP) are a form of derivative contract sold by banks, and regulated by the Financial Conduct Authority (FCA). They are sold as a separate contract from any loan due to regulation requiring lendees to be made aware of risk. ISDA Master Agreements have been formulated to allow Over The Counter (OTC) derivative trading – and they include agreements on thresholds and eligible collateral.
30,000 of these products were sold to SMEs between 2001 and 2012. After complaints, the FCA set up a review, and found 92% were mis-sold.
The Tailored Business Loan (TBL) was a product created by Clydesdale Bank under National Australia Bank ownership, and were sold as fixed rate loans. But these embedded within the loan the complex parts of the IRHP without the knowledge of the business owner who made one payment and had one contract with the bank. The hedging instrument was in the background of the agreement, and businesses still took on the complex and risky parts of the IRHP without any advice or communication of risk.
Each bank has its own version; Treasury Loans – Lloyds Bank, Sterling Fixed Rate Loans – RBS, and they were sold by HBOS, Natwest, Barclays, Ulster, Allied Irish, Santander and more. In total around 70,000 of these hidden swap loans have been sold, and Clydesdale sold the most – 11,000.
Still, the FCA has not brought the loan into its remit nor its investigation in 2013, deeming them a commercial loan not used for investment.
Some businesses say they were sold these loans on the advice of the bank who told them interest rates were going to rise despite bank employees not being allowed to give advice on interest rates.
For years, Clydesdale denied that their TBLs contained derivatives or swaps, or that they were mis-sold, despite at the same time raising compensation provisions for loans which contained swaps in 2014, from £36m to £128m.
With no help from the FCA, SMEs were forced to turn to the Financial Ombudsman, and the first SME made their complaint about TBLs in 2013. A year later, Herald Scotland reported that £250k had been paid in compensation for a TBL, after a customer was forced to exit his loans when Clydesdale withdrew from property lending. While the customer easily found a new lender, he was then informed the breakage costs to move would be £182,000.
These agreements could promise years of payments into the market on behalf of the business. And when they want to exit the loan or switch to a cheaper option they must fulfil the demands of the product, communicated as ‘breakage costs’. This demand can run for the length of the loan. Again, something businesses are unaware of until they want to leave.
“I’ve seen in excess of 50% charges,” Steve Middleton is a mediator, who has been acting on behalf of some of the businesses affected, “we’ve probably solved 15 cases in the last year and a half.”
He explains that the risk for businesses can extend beyond the collateral they have agreed for the Fixed Rate Loan;
“The risk to you is unlimited. The bank will take a hedge, and you are insuring the bank’s leverage and its position.”
“In all of the deals with all of the banks, it says unlimited, without limit. For instance, a HSBC one I did a report on the other week, tells you that the assets that you put up for security will cover all liabilities with the bank, including the hedge, without limit. “
Middleton says that the FCA asked the wrong question when considering the inclusion of TBLs in the IRHP review;
“The hedges underlying the TBL contract are an investment. So what’s happening at the moment, it’s clever wording if you say what’s a Tailored Business Loan? It is a commercial loan….you undertake a deal with the National Australia Bank (NAB) trading desk and get a confirmation just the same as you would on an ISDA deal. So back to the FCA point, if they are as I say an investment, then yes of course the FCA should get involved.”
In 2015, the Treasury Select Committee released the report ‘Competition and Conduct and SME Lending’. It contained notes from a meeting with David Thorburn, the then-Clydesdale CEO – on the TBL product. They highlighted that IRHPs and TBLs were very similar but the commercial loan arrangement of the TBL made them, ‘legally a very different product’, largely because commercial loans are ‘not listed as a regulated activity in the Regulated Activities order 2001 – this in turn limits the power of the FCA to enforce or investigate.”
However, it is the responsibility of the FCA to investigate products that are deliberately designed to circumvent regulation and, in the same report, Steve Middleton highlights this admission from Clydesdale. It is recorded by the TSC;
‘Indeed, Clydesdale told the Committee that avoiding regulation was one of the reasons they created TBLs. In particular, Clydesdale wished to avoid the complex documentation that the sale of regulated products required.’
The report continues;
‘We have received evidence Suggesting that Clydesdale Bank mis-sold Tailored Business Loans. Clydesdale has admitted that its terms and conditions letters would not pass a plain English test…”
“Tailored Business Loan – and a stand-alone IRHP are extremely similar if not identical. But stand-alone IRHPs are regulated, while loans with embedded interest rate hedging facilities are not. It is a logically inconsistent result of the perimeter of regulation that products whose effects may be identical fall on both sides of the perimeter.
“Clydesdale understood that TBLs were unregulated. It created TBLs to avoid requirements imposed by the regulator on the sale of a regulated product, IRHPs….Clydesdale created a product that retained the risks and complexities of the regulated product, but had none of the safeguards.’
Rehypothecation is the ‘re-use’ of collateral posted by clients, to back the bank’s own trades and borrowing. Banks are able to use client security for their own trading collaterol in other agreements.
The role of this technique in the financial crisis was not quantified until a paper released by the IMF in 2010 showed use of rehypothecation was 50% larger than first anticipated, and that it made up half the activity in the shadow banking system.
The IMF also estimated that US banks received $4 trillion worth of funding through rehypothecation before 2008 with only $1 trillion backed with collateral, creating a ‘churn factor’ of 4.
It has been a mix of invention and regulation by the US and UK that has allowed this market to swell under its own hubris. The US brought the derivatives market to the UK, but while the US has a cap on rehypothecation at 140% of a client’s debit account, the UK has no limit whatsoever.
This allows for a daisy chain of trading built on little security or in the case of the financial crisis, built on low credit rated collatorolised debt obligations disguised with AAA ratings by credit agencies.
The toxic Fixed Rate Loans have largely been sold between 2005-2015 according to Bully Banks. If banks are able to use SME assets to enhance their own borrowing at unlimited risk to the customer and without their knowledge, the implications could be huge. Particularly as we see derivative trading continuing to spread aggressively beyond collaterol held by banks (see above image & caption from Forbes). It can amount to business customers having their houses and assets ‘re-mortgaged by the bank without their knowledge’ according to Middleton. ISDA agreements set out that customers may not see their collaterol returned in the event of bank insolvency. With many warnings of a looming crash, the liabilities of SMEs and bank use of these contracts becomes more pertinent.
What we do know is that banks are desperate. Yesterday RBS failed further stress tests by the Bank of England. This is the institution whose return to private ownership was a benchmark for the economy’s full return to health for the government. RBS has had 8 years of abject failure, posting losses for each of those years. It is also in the hole by more than the £50bn we put in as taxpayers. RBS was happy to loot SME customers by driving them to insolvency in the GRG case, in order to improve this balance sheet. Both the GRG and Fixed Rate Loans demonstrate the abuse of SMEs and their assets has happened since 2008.
Twice the number of Fixed Rate Loans were sold compared to IRHPs, but banks are still evading redress for customers says Middleton;
“David Thorburn was asked if they were also reviewing the fixed rate loans because obviously they carried exactly the same problems as the SWAP, he intimated that they were going to review them in the same manner. But they only reviewed the ones where there was already a live complaint or there had been a previous complaint. So they ran that up to March 2015… after March 2015, they go back to the 6-year rule. And that was never advertised.”
The six year rule bars complainants from seeking redress, their case deemed as ‘timed out’. Most of Clydesdale’s TBLs were sold between 2001-2009.
“If you were Cat B (IRHP review) which was the vanilla swaps which were comparative to the Fixed Rate, the banks had to write to the customers to give them the opportunity to be a part of the review. That’s the difference, Clydesdale never wrote to any of their customers to have the opportunity to have their case reviewed.”
Use and Abuse of SMEs
The financial crisis of 2007/8 was a crisis of financial sector making – driven by greedy traders, and supported by regulators and ratings agencies. This was not seen or predicted by mainstream economists before the fall. Allowing banks to continue deceiving customers is a high-risk move for regulators.
The sale of Fixed Rate Business Loans with hidden derivative products has been done through a series of lies – offering advice on interest rates rising despite bank staff being prohibited from doing so, embedding IRHP within loans to escape regulation, not disclosing the associated risks and break costs for the loans, sending companies into administration to back agreements made without their knowledge. There are also ways of manufacturing defaults so that it looks to the client that the bank has reason to take more collateral.
Henderson says he can remember Specialised Lending Services pressurising him to release more security on his house and other assets.
“The only way they could get their hands on our personal assets which I had steadfastly refused them to give them any security on – they bankrupted us, then they stepped over us as the creditor and took our house.’
Henderson’s Portree Hotel, bought for £800,000 was sold for £157,000 by the bank.
“And within months of the new purchaser buying it he sold it on for how much? Just a whisker short of £800k.”
The bank continues to play games with Henderson. When requesting his loan documents and files available to him under a subject access request, Henderson was told they had been destroyed. After the Buzzfeed ‘dash for cash’ investigation he was contacted by the bank who said they were now releasing his files.
Middleton has raised several concerns over incorrect documentation provided by banks, where dates on sales files have been altered or the banking information is incomplete. Several times, this has later been admitted as an ‘error’ by the bank or some technical process. ‘People don’t know what they are looking for’, so they don’t know whether they have the correct information, explains Middleton.
Against this catalogue of errors and evidence of systemic abuse, banks are still able to use their power to shut out complainants by insisting the fault still lies with SMEs themselves. This has been widespread in the GRG case, and as businesses continue to find themselves in positions of insolvency through FRLs without the support of the regulator, many more are unaware of the redress they are owed and are subject to the same intimation Henderson experienced;
“That was what they said in court and some of the papers that they believed the business would have failed in any event. Had we no borrowing and no requirement for borrowing how could we have failed? With the cash there to expunge the borrowing in total how could we?”
This is the first in the Real Media series ‘All About The Money’ (AATM) curated by Ranjan Balakumaran and Kam Sandhu. AATM aims to demystify finance and present economics in plain English.