Why Small Businesses Should Review Their Lending History? Most of us will be aware of the scandal many banks had to face when it was revealed banking customers all over the country had been mis-sold payment protection insurance (PPI). Lloyds bank alone has already paid out over £12 billion with the industry as a whole giving out over £24 million.
Bubbling alongside it has been another scandal all of its own, but this time it’s business owners who’ve been misled. Between 2001 and 2013 thousands of small businesses were sold Fixed Rate Business Loans. These loans were sold to many SMEs looking for commercial loans for investment and claimed to offer protection from fluctuations in the market.
Over the past few years, it became clear that the full ramifications and risks of these loans were never explained to businesses taking them out. In response, millions has been set aside by the offending banks (namely Clydesdale / Yorkshire Bank who offered their own products by the name of Tailored Business Loans or TBLs for short) to compensate businesses who have been affected. With so many UK businesses taking on these loans, what were the hidden risks and what should business owners do to find out if they’re eligible for compensation?
TBLs were in theory supposed to protect businesses. They worked in the same way as a commercial loan in almost all ways, except that they had one ‘embedded’ clause featuring an interest rate hedging product (IRHP). IRHPs are standalone products sold as add-ons to loans in order to protect businesses from interest rate rises. However, they also come with risks.
For example, repayment interest rates have remained fixed for businesses based on the high rate they were sold at during the economic boom, despite a significant drop in overall rates post-2007 when the recession hit. The cancellation fees, also known as break costs, for these loans can also be huge. Businesses looking to renegotiate their loan or cancel their agreed terms, saw them hit with a penalty of a figure rising to up to 50% of the total loan amount.
While IRHPs are a regulated product under the FCA guidelines, the structure of TBLs, with the IHRP embedded into the commercial loan, mean that they’re not covered by the authority. This is a crucial issue facing thousands of businesses at the moment. These embedded hedging products are classified as commercial loans, so an ‘unregulated’ product. Accordingly, businesses that hold these products are not eligible to be included in the Financial Conduct Authorities’ (FCAs) Interest Rate Hedging Product Review Scheme, potentially denying thousands of businesses the rightful compensation they are entitled to if the product has been mis-sold. This means that companies have to take the route of relying on the banks’ own complaints process.
This ‘loophole’ means many businesses are missing out on compensation that they deserve, and in a turbulent economy, SMEs need all the help they can get. If you are a business owner who has taken out a loan since 2001 then it might be worth taking another look at your policy or contacting an expert to see if you have been misled by your bank. If you have been then you have every right to be correctly compensated for it.