The parlous history of NAB’s Clydesdale Bank (Part 2): Will Clydesdale boil over?

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Hardly reported by the Australian media, the NAB is facing a serious and potentially costly class action from bank victims in the UK. Dr Evan Jones completes his two-part series.

[Read Part One: The Clydesdale and Yorkshire Bank: Long under the media radar]

NAB’s Clydesdale subsidiary (Part Two)

The toxic facilities

Traditional borrower facilities – personal or commercial – are subject to variable interest rates. The borrower rate varies (roughly) according to the lender’s funding costs. Some bright spark(s) decided that, with the spate of sophisticated derivatives, the lender could offer the borrower a fixed (or partially fixed) interest rate (giving borrower “security” of financing costs against potentially rising rates), but with the lender’s variable costs relative to fixed returns mediated through an interest rate swap agreement (IRSA) with a third party.

Formally, the bank lender thus eliminates its risk carried by offering fixed rate loans. But the IRSA attracts a commission (why?) and a breakage fee is applicable (determined by the swap’s "mark to market" saleability) if the agreement is voided prematurely. Who pays the costs associated with the IRSA?

After 2001, the NAB pushed the bulk of its loans to Clydesdale small to medium enterprises (SMEs) and farmers in this fixed interest rate with swap form. They were part of a larger package labelled "tailored business loans" (TBLs). A group set up by Clydesdale victims, the NAB Customer Support Group, outlines the facility on its website.

The NAB pushed the fixed interest swap TBLs partly because it was taking the IRSA commissions in house, thus raking in a sizeable extra sum. The breakage fee was attributed to the borrower — thus the labeling of the facility as an embedded swap (although see below).

The fixed interest swap TBLs were pushed to the borrowers with minimal information and with no advice (indeed implicit denial) as to the potential dangers therein. Documentation developed initially for the new product was discarded for documentation that omitted key information. Flyers that were supposed to provide crucial information were not distributed to customers.

The Commons Treasury Committee, in its March 2015 report, made the following claim:

150. Clydesdale understood that TBLs were unregulated. It created TBLs to avoid requirements imposed by the regulator [the Financial Conduct Authority] on the sale of a regulated product, IRHPs [Interest Rate Hedging Products]. It claims that this was to simplify the associated documentation, and to make the product easier for customers to understand. The use of TBLs has left regulators powerless to enforce compensation for customers to whom products were mis-sold, as they have done with IRHPs. Clydesdale created a product that retained the risk and complexities of the regulated product, but had none of the safeguards.

Come the GFC in Britain, interest rates plummetted (after March 2009). The breakage fee is computed as a staggering percentage of the loan principal. Economic conditions have deteriorated dramatically. Business conditions are bleak, customer property has lost value and the customer is tied in to fixed interest rates significantly higher than the prevailing rate. The prohibitive breakage fee locks the customer into this parlous, often hopeless, situation.

Clydesdale sold 11,270 TBLs between late 2001 and 2012, of which 8,370 were fixed rate swap loans.

Abhishek Sachdev of Vedanta Hedging, interviewed by Adele Ferguson in March 2015, estimated that the typical fixed rate swap borrower would have claims for overpayment of interest, the break fees and consequent damages, summing to over £500,000. With over 8,000 such borrowers, the claims could total more than £4 billion ($7-8 billion).

But Sachdev also noted:

"… there are dozens of clever loopholes and justification within the internal review process that NAB will use to justify paying only a fraction of the actual claim value."

Clydesdale’s CEO David Thorburn (no relation to NAB CEO Andrew) and Debbie Crosbie, "Executive Director, Customer Trust and Confidence" (sic) National Australia Group Europe, gave evidence to the Treasury Committee on 17 June 2014. The most casual engagement with this testimony leaves one with a feeling of disgust.

One learns in this exchange (pgs 2 and 5), Thorburn speaking:

"There is no individual swap associated with these loans. It goes into a portfolio that our parent company manages, hedged in its own balance sheet."

So the loans did not have embedded swaps, but the NAB and Clydesdale attributed break costs to the borrower as if they were. It would appear that attributed break costs are discretionary. More, the bulk of the profits on these loans (p34) was transferred to the parent group. Clydesdale was merely the unsophisticated sales front outfit.

The NAB Customer Support Group subsequently issued its own response, 3 July 2014, to Thorburn’s misleading answers to Committee member questions. The CSG response highlights that loan officers and commission-driven NAB Treasury staffers deliberately misled potential borrowers and Thorburn merely reproduced the patter.

The duplicity of Thorburn and Crosbie is comprehensive. The attempt to avoid criminal culpability for fraudulent selling and fraudulent misrepresentation is transparent.

There is an element in NAB senior personnel reactions that amounts to: “How was anybody to know that the GFC would turn up?”

This is a denial comparable to that by bank management iof the early 1980s in the offerings of foreign currency loans (FCLs) to unsuspecting SMEs and farmers in Australia. Loans denominated in Swiss Francs, U.S. Dollars or Japanese Yen were aggressively marketed to or imposed on SMEs/farmers with the drawcard of significantly lower interest rates. Who could believe, the “professionals” claimed, that the Aussie dollar (floated in December 1983) would plummet in value in 1985 against major currencies, especially the Swiss Franc? Apart from Blind Freddie, professional status demanded such acumen, but insider knowledge was kept well-hidden from frontline lenders. The prospect of a dollar devaluation was cynically denied as a real possibility to FCL borrowers.

Tellingly, senior NAB management under Nobby Clark knew that FCLs were a scam facility and declined to join the mad rush of the other three major banks into pushing same. Staff were advised that they were to offer FCLs only as a last resort to prevent existing customers going elsewhere.

So where is the collective memory for this essentially unforgettable period? Only several years after FCL cases are disappearing from the courts, the NAB is at the forefront of another madcap facility pushed to customers through misrepresentations, lies and silences.

Post-financial deregulation, there have been three large scale scams engineered (with subsequent attribution of all blame to the customer) by one or more of the Big Four banks against SMH/farmer customers – the 1980s FCL scam (Westpac, CBA, ANZ), the CBA takedown of BankWest customers after its takeover of Bankwest in late 2008, and the NAB/Clydesdale pushing of fixed interest swap TBLs. The first involved 4,500 to 5,000 borrowers, the second approximately 1,000 borrowers (some involving very large sums), and the third over 8,000 borrowers.

Numerically, the NAB/Clydesdale scam is thus the largest perpetrated against SME/farmer borrowers following financial deregulation. The FCL saga received massive media coverage, the BankWest takedown and the Clydesdale toxic facilities near zero coverage. The vibrancy of the small business and the family farmer sector are apparently no longer newsworthy.

Change of personnel at top — no change in NAB culture

The exposure of the 2003 disastrous speculative trades employed by the NAB’s “rogue” currency trading desk lead to the resignations in February 2004 of CEO Frank Cicutto and Board Chairman Charles Allen. Before resigning, Allen appointed Scot John Stewart as replacement CEO. It was a rushed decision, based on Stewart’s claimed “insider” status.

Stewart had been hired by Cicutto only several months previously, in September 2003, to head the NAB’s British operations. Stewart had gained his reputation as CEO at Woolwich Building Society, which he demutualised, expanded and flogged off to Barclays in early 2003. Stewart left his own toxic legacy to the NAB (he was himself forced out in July 2008).

Stewart sold the extremely troubled Irish and Northern Ireland subsidiaries in December 2004 — a sensible move. Clydesdale and Yorkshire was to be another matter.

The Scot had brought in Lynne Peacock, a colleague at Woolwich, to Melbourne in April 2004. Peacock was named “Executive General Manager, People and Culture” to oversee a culture-change program, expected to take 18 months to two years to complete. But a priority for Peacock was the linking of pay to individual performance. Apart from its shonky conceptual underpinnings and measurement difficulties, such a push was beside the point given the NAB’s then profound cultural problems.

Cultural change was readily consigned to the too-hard basket. Rather, Stewart engaged in a massive advertising and public relations program. The latter was represented by the issuing in August 2004 of a 'Statement of Corporate Principles', entirely platitudinal ('We will be open and honest / We will tell it like it is (no spin)') — designed to be flouted. The September decision to sponsor the 2006 Melbourne-based Commonwealth Games was part of the PR push.

NAB dysfunctionality further entrenched at head office and Clydesdale

Peacock returned to the UK in October 2004. Stewart had designated her as the new head of Clydesdale, with Yorkshire (decided in September and effected in December) to be subsumed into Clydesdale. Peacock’s salary was boosted 30 per cent to £525,000 for the occasion. The package involved a potential doubling of that figure if she met certain “performance hurdles”.

The NAB’s European operations had a regular turnover of CEOs. One person on the list was Fred Goodwin, later infamous as the man who drove the Royal Bank of Scotland to a gigantic loss during the GFC. Goodwin advised the NAB on the takeover of Clydesdale and of Yorkshire, and became CEO of NAB Europe for the period 1995-98.

Goodwin’s Wikipedia entry notes:

‘Around this time he gained the moniker “Fred the Shred” from City financiers, reflecting a reputation for ruthlessly generating cost savings and efficiencies whilst at Clydesdale.’

As noted, Targett became CEO of NAB Europe (2002-03), apparently just to get him away from head office.

Peacock was appointed to the top job (after December 2004, that of Clydesdale), where she remained until mid-2011. If management turnover was a problem for operational continuity, Peacock’s longevity appears to have been notable for its ineptness. Peacock presided over the unraveling of the three disasters outlined above.

An issue arose soon after Peacock had taken over, involving the incorporation of Yorkshire into Clydesdale. Trouble at t’mill. 

Quoting my 2007 article:

In 2005, [Amy] Davies was lured to NAB Europe from Price Waterhouse Coopers to assist in post-Enron compliance procedures. Within a year, she had been sacked for "behavioral" reasons. Ms Davies fault was to have discovered a discrepancy of £128 million in ledger transfers between the two subsidiaries [Yorkshire was in the process of being subsumed within Clydesdale]. Although initially offered full support by senior management, within a month she was removed from the investigation. When she continued to discover further discrepancies incidentally, she was sacked on the spot.’

This affair was reported in the Scottish press (no longer available) but ignored in the Australian press. A minor incident perhaps, but not unrepresentative of the evolving dysfunctional culture at Clydesdale, and a foretaste of larger things to come.

In store for the NAB, including Clydesdale, was a claim by Stewart in October 2004 that the bank would “adopt a more aggressive risk profile” in seeking to gain market share. Stewart would adopt the mantel of Cicutto. The series of calamities to 2003 and their causes were to be swept under the carpet, while new calamities were to be set in train.

Stewart’s claim was made in the context of the NAB’s annual report for 2004 (October-September). Net profits for the NAB were down almost 20 per cent from 2003 to under $3.2 billion. This decrease included a dramatic reduction of profit for Clydesdale and Yorkshire to $442 million, compared to an average net profit of $750 million over the previous four years.

Clydesdale moves south, compounding the fiasco

The use of fixed interest with swap loans for SMEs/farmers began in 2001, linked to the bank’s desire to expand its financial services and, ultimately, as an “integrated” package to clients, as well as to expand the client base.

The expansion of infrastructure to accommodate this grand ambition apparently begins in financial year 2003. There occurs the beginnings of an aggressive move south by Clydesdale & Yorkshire to pursue affluent communities and compete with Britain’s largest banks. The first “integrated financial services” centres, to deliver “integrated financial solutions”, are established, beginning with Liverpool, Bristol, Reading and Southampton.

Exactly when – and under whose direction – these first centres were established is not clear. Steve Targett quits as head of NAB Europe in February 2003. John Stewart is hired in August and probably formally takes up the Clydesdale CEO reins in October 2003 (the new financial year), only to leave for head office, Melbourne, in February 2004.

Stewart brought with him Lynne Peacock and Mike Williams from Woolwich via Barclays. The expansion of the integrated financial services centres escalates under Stewart. With Stewart soon back in Melbourne, it appears that the responsibility for the establishment of the centres resides with Williams as Head of Clydesdale’s Business and Private Bank and, after October 2004, formally under Peacock’s authority.

The move south – accompanied by the toxic brew of hubris and incompetence, the perpetrators well remunerated – was a fiasco in itself.

A Clydesdale whistleblower is reported by Fairfax thus (March 2015):

[It was] the pressure to meet targets and make bonuses created a culture that was the most "corrosive and threatening". "There was pressure to sell at all costs that was driven from the top of the organisation," he says.’

In the process, the operations and reputation of established relationships, especially in the farming sector, were severely compromised. Peacock left in mid-2011 and Williams was forced out only in 2012, following a head office review under CEO Cameron Clyne. Williams’ departure message to staff, 20 April 2012, claimed only successes (marred only by the GFC) during his tenure. Peacock was readily appointed to a number of British boards, including the Nationwide Building Society, highlighting that “market intelligence” is something of an oxymoron.

Will simmering Clydesdale boil over?

In late 2014, NAB CEO Andrew Thorburn and Board Chairman Ken Henry thought they could readily put Clydesdale to rest with an initial arbitrary $1 billion set aside to clean up the mess.

But Clydesdale’s victims are not going away.

Of note, the banking Royal Commission, formally established on 14 December 2017 by Letters Patent, includes in its Terms of Reference, (section (i)):

‘Our Letters Patent … require and authorize you, to inquire into the following matters: ... any matter that has occurred or is occurring overseas, to the extent the matter is relevant to a matter mentioned in paragraphs (a) to (h)’ .

The NAB’s Clydesdale victims have confronted a British political and bureaucratic class partially supportive (Treasury Committee members and individual politicians), but with no support amongst senior ranks where it matters. In addition, the British courts appear to be universally antagonistic.

Clydesdale victims have sought legal assistance, only to find that some law firms and lawyers have “changed colour” in the process. This selling out the client is not unknown in Australia, not least for NAB victims, where victims find that their own lawyers are de facto working for the bank as well. What is it about the banking sector/legal “professional” relationship victims don’t know about?

The errant banks are to be saved from themselves at the victims’ expense.

Perhaps Clydesdale victims will find in our banking Royal Commission a vehicle for the belated public exposure of their experience, the character of the putrid facilities that ruined their lives and of their claims for adequate compensation.

As for the NAB, it’s chock full of contradictions. CEO Andrew Thorburn purportedly possesses “a strong Christian faith. Board Chairman Ken Henry was previously one of the most senior public servants in the land, purportedly committed to serving the public interest. And, in December 2015, the NAB Executive signed up to the Banking and Finance Oath.

In April 2016, the NAB  joined with the Australian Bankers’ Association to claim that the Oath was being embodied in:

‘… comprehensive new measures to protect consumer interests, increase transparency and accountability and build trust and confidence in banks.’

On its own account, the NAB claimed specifically:

‘Banking has always been about service, integrity, trust and ethics. Today’s announcements are designed to reinforce these standards and enhance our customers’ experience with us.’

There are parallel worlds being posited here. Contrast this with an Australian whistleblower’s evaluation when s/he exposed a scam in early 2015 (here and here) with the NAB’s “wealth management” division.

The whistleblower reportedly had this to say (in Sydney Morning HeraldMarch 2015):

“The revelations in the UK are merely an extra nail in NAB's proverbial ‘cultural coffin’ and is further evidence of wide-scale, systemic cultural and operational dysfunction extending beyond NAB Wealth," the whistleblower says. “This is what happens when a 'path to least resistance' approach is adopted to risk management in a commercially aggressive sales environment where incentives are rewarded accordingly — new products are developed and implemented without effective people, process and technology controls designed to mitigate customer loss and regulatory scrutiny.”

As the Americans say, “go figure?”

There is no sign that the NAB’s dysfunctional culture has been confronted, and a three decades-long list of victims, not least foreclosed and destitute Clydesdale borrowers, remains waiting for redress and justice.

Dr Evan Jones is a retired political economist.

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