The parlous history of NAB’s Clydesdale Bank (Part 1): Long under the radar

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Clydesbank Bank branch near Partick, Glasgow (Image by Steve Houldsworth CC 2.0)

Little reported in Australian media, the NAB has come in for serious criticism in the British Parliament as a bank that engages in unethical practices. Dr Evan Jones commences his two-part series.

NAB’s Clydesdale subsidiary (Part One)

The Clydesdale and Yorkshire Bank: Long under the media radar

The National Australia Bank previously owned a subsidiary in Britain: the Clydesdale and Yorkshire Bank (Clydesdale). When Andrew Thorburn became NAB CEO in August 2014, he soon announced an intended divestment of Clydesdale. The NAB finally sold off Clydesdale in early 2016, with a “de-merging” to NAB shareholders and a partial listing.  

In non-existent to spotty coverage in the Australian press over many years (usually in reporting of the NAB’s financial results), Clydesdale has been nominated as a headache for head office. But the reasons have rarely been pursued and never in depth. Post 2007, the troubles have crudely been attributed, echoing bank spokespersons, to the “difficult market environment” prevailing in Britain brought on by the global financial crisis (GFC).

The tenor of the commentary has been to emphasise the dangers of Clydesdale’s parlous operations for the NAB group’s profits, shareholder returns and share price. The victims – customers and bank staff – have remained in a shadow.

Ongoing neglect of Clydesdale by the Australian press proved impossible in the wake of the publication of a report by the Treasury Committee of the House of Commons on 10 March 2015 – 'Conduct and Competition Lending in SME Lending' –which received widespread attention in the British media.

The report broadly focussed on the difficulties of the SME (small to medium enterprise) sector (including farming) acquiring suitable finance facilities — a long term dilemma. But it also devoted attention to a particularly pernicious form of SME facilities involving extant complex loan facilities. It was the latter dimension, and its adverse aftermath of destitute and foreclosed businesses and farms, that provided the initial motivation for the Committee inquiry to be set up.

The NAB comes in for specific criticism as a bank that engaged in unethical practices over an extended period, and which had consistently denied justice to its victims with tightly controlled investigations and paltry compensation offers.

On the latter, the Committee report notes:

160. However, Clydesdale’s review [of interest rate hedging products, IRHPs, under the rubric of Tailored Business Loans, TBLs] excluded fixed rate products. This represents 80 per cent of all TBL sales [EJ: 74 per cent?]. Customers with fixed rate products can complain to the bank through its usual internal complaints process. Clydesdale told us that this exclusion was on the grounds that there was no equivalent product within the [Financial Conduct Authority] review [of regulated loan products].

161. The lack of public oversight, minimal transparency and limited coverage of the scheme mean that the Committee cannot be confident that Clydesdale’s separate internal review will deliver outcomes equivalent to the FCA review on which it is intended to be based. If Clydesdale’s aim is to build public trust in its actions, it should address all three of these problems.

The standout local articles on the imbroglio are from Fairfax columnist Adele Ferguson, ‘NAB’s UK headache becomes a migraine’, Australian Financial Review, 16 March 2015, and ‘National Australia Bank's “Death Star" destroyed dreams’, The Age, 21 March 2015. In the latter, the stories of two Clydesdale victims are briefly recounted.

Media coverage returns to being spotty. Out of the blue, in 2017, Australian readers discover that the NAB is facing a potential class action from sometime Clydesdale borrowers regarding TBLs — this from Adele Ferguson in July 2017 and from Clancy Yeates in December 2017.

Clydesdale’s problems were particularly manifest in three areas — the fixed interest swap facilities (the bulk of TBLs), the “payment protection insurance” (PPI) scandal (shared across the British banking sector), and the aggressive move south beyond Scotland and Yorkshire.

NAB senior executives in collective denial

In April 2014, NAB CEO Cameron Clyne announced that he would retire at the end of July. Having been in the job since January 2009, supposedly committing himself “100 per cent”, Clyne claimed that he was retiring to spend more time with his wife and family (no kidding). Clyne proved himself not up to the top job for which he was admirably remunerated.

In May, regarding the Clydesdale fiasco, Clyne (Michael Bennett, Clyne keeps faith in UK sell-off, The Australian, 9 May 2014):

… said the conduct problems would not deter potential buyers of its British arm, given the problem was industry-wide and not new.…

Mr Clyne has opted to work through the challenges rather than take a hefty loss through a fire sale. “It’s a known issue, an industry issue, so I don’t think it’s necessarily a factor in whether or not people are interested in acquiring Clydesdale,” he said of the conduct woes.

The problem was not new, but problem it remained for lack of attention. Certainly the PPI scandal was industry-wide, but why did Clydesdale go along with it? Clydesdale’s involvement in fixed interest embedded swap loans was bank-specific — massive in scope relative to its loan book. Clyne was in denial.

Clyne spent his entire time in the top job ignoring not merely Clydesdale’s festering problems but the plaints of domestic victims. He treated the Code of Banking Practice as if it didn’t exist. He allowed staff to abuse the farm debt mediation process. He hid behind an expensive PR apparatus that also included a hypocritical substance-less Indigenous Australian community support program.

As I keep repeating, I wrote to Clyne in July 2010, citing a litany of stories of NAB victims who had contacted me, desperate for a sympathetic ear.

In the letter, I claimed:

In my view there is a good argument for a strategic reorientation of reconciliation towards these people. Compensation is in order. What is several hundred million dollars (perhaps even a billion) if the bank were to clean the slate and build a new reputation on competence and rectitude? The bank would be home clear indefinitely for dominance in the SME/family farmer market. Whatever the immediate cost, there are ready savings and significant long term profits to be had.

Clyne replied, via a flunkey, that I should bugger off. In retrospect, I dramatically under-estimated the likely clean-up bill. Clyne may have had a better idea of the real prohibitive cost of the NAB genuinely committing itself to its long term motto — “More Give. Less Take”. Clyne chose to get out rather than face the music.

Clyne excelled himself by leading a delegation of Australian business “leaders” in a visit to Israel, becoming willing pawns in yet another PR stunt by the Australia Israel Chamber of Commerce at precisely the time when the IDF was massacring Palestinians in the concentration camp that is Gaza. Clyne – and the NAB in general – showed no remorse. This is the kind of action that one would expect from a company long accustomed to lacking both the requisite intelligence and basic morality amongst its senior ranks.

After the March 2015 UK Parliamentary Committee report came out, the new NAB CEO Andrew Thorburn (in office from August 2014) acknowledged that he had been exposed to it and that the bank would respond in due course. It hasn’t.

Quoting Ferguson:

In the face of all of this. It would seem bad banking is the norm. Not so, says Andrew Thorburn.

"Do I think we have systemic issues in NAB? No I don't. Do I believe we need to get better at processes, automation and handling customer complaints better and have simpler products and services? Yes I do. We have a complex large institution and we do a lot of things right... banking still to me is still an honourable profession. We do so many good things."

Comprehensive head in the sand, wilful denial.

The NAB’s Chief Financial Officer Craig Drummond (ex-Bank of America Australia and Goldman Sachs JB Were) was later quoted (Richard Gluyas, ‘How NAB spread itself too thin, The Australian, 25 March 2015):

‘… there was “fundamentally no new news” in the committee’s report. “Obviously we take the report seriously, but there was nothing in there that shocked us,” he said.’

So we know all about our long term bastardry — so what?

A month later, this (Ferguson, ‘More questions over NAB culture after huge Clydesdale fine’, 16 April 2015):

The record fine of £20 million ($38.8 million) imposed by Britain's Financial Conduct Authority (FCA) found "serious failings" in its complaints processes for payment protection insurance (PPIs).…

The FCA found problems with the bank's complaints handling process in relation to PPI. It found the bank's complaint handlers failed to properly assess whether the product was suitable for the customer. It also identified a complaints team that deliberately misled the Financial Ombudsman between 2011 and July 2013.

The upshot, according to the FCA, is that more than 70 per cent of customer complaints, and there were about 140,000 of them in total, might have been either unfairly rejected or given "inadequate redress". This is a polite way of saying more than 90,000 people could have been diddled.…

NAB's total provisions for PPI compensation currently sit at £806 million, of which £291 million has been paid out. With a review of previous policies rejected, it could well blow out.

Move along now, nothing to see here.

Yet a further month later, with Thorburn actively planning the divestment of Clydesdale (Clancy Yeates, ‘NAB seeks $5.5bn to fund exit from Clydesdale and Yorkshire’, 7 May 2015), he claims:

"But when we looked at the economics of [divestment], despite having the £1.7 billion [capital provision enforced by the UK regulator], the economics still favoured moving forward. One of the biggest risks they've got is conduct risk, as all banks do in that market, and essentially we've taken that issue off the table for investors and for the bank."

Well no. Thorburn hadn’t taken the issue off the table at all. Tell that to the victims.

Clydesdale’s dysfunctionality a product of Head Office

The seeds that sowed Clydesdale as a “problem” bank go back at least to 2001. But the problem is cemented from the beginning in the late 1980s. The evolution of the strategies and culture at NAB’s head office in Melbourne provide an important backdrop.

During the 1980s and 1990s under Neil “Nobby” Clark (1985-90) and Don Argus (1990-99), the NAB engaged in aggressive expansion. The NAB moved into New Zealand. The NAB also acquired the Glascow-based Clydesdale Bank in 1987 (along with the Northern Bank in Ireland, those branches rebranded as National Irish Bank and Northern Bank). The NAB acquired Yorkshire Bank in 1990, subsumed into Clydesdale in 2005.

By the early 1990s, with the other three major banks hobbled by the aftermath of their greater involvement in “foreign currency loans” lending, the NAB succumbed to hubris. CEO Argus lobbied aggressively to overturn Australia’s “four pillars” policy, which prevented any merger/takeovers between the four major banks. Argus was unsuccessful and the NAB’s overseas acquisitions became more important for the NAB’s expansionist ambitions. Longstanding employee Frank Cicutto replaced Argus as CEO in 1999, but he carried on the uncritical market share pursuit of his predecessors.

One action of the NAB under Cicutto was the introduction into the UK subsidiaries in 2001 of the fixed interest rate with swap facility for SMEs/farmers. There was no reporting of this development in the Australian press.

The move appears to have been a byproduct of the ambition of the NAB to become an allfinanz institution — the then current “name of the game”.

The NAB becomes allfinanz and moves into unchartered territory

A key step was the acquisition of the MLC insurance company in June 2000, through which the NAB moved into “financial advice” and “wealth management”.

The NAB’s November 2001 announcement to the Australian Stock Exchange notes:

'In Great Britain and Ireland, the personal financial services segments were restructured in preparation for the impending launch of the MLC-based wealth management offering.'

At the same time, the bank was pushing “risk management” advice and “products”.

The ASX announcement notes:

The Groups (sic) business customer franchises were strengthened in all regions through innovative product and service offerings. In Australia a key priority was to leverage MLCs superior superannuation capabilities into B&PFS [Business and Personal Financial Services] large customer base. The Tailored Business Loan, a package of treasury risk management tools and debt sold through the Groups Risk Management Specialists, proved successful in all regions.…

The [Wholesale Financial Services] Division continued to focus on providing clients with innovative risk management advice and execution in foreign exchange, interest rates and commodities. Sustained volatility in foreign exchange and interest rate markets during the year resulted in strong sales of risk management products, especially to business markets clients in Australia, New Zealand, Great Brain and Ireland, as well as solid risk management income.

The sophisticated facilities developed for corporate and institutional investors were thus being pushed across into the SME/farmer domain. The bank spiel says 'increase the range of options'; the detached observer sees 'an increase in the range of risks' — the latter to be foisted on the customer.

The King James version of the Good Book says:

'Pride goeth before destruction, and an haughty spirit before a fall.'

During the late 1990s and early 2000s, the NAB brought on itself, in its subsidiaries and at head office, a series of catastrophes with substantial adverse financial implications. The crises were fuelled by unchecked hubris, systemic incompetence and unmediated corrupt practices. They are outlined in my ‘Illusion and Reality at the National Australia Bank’October 2010, and ‘Illusion and Reality at the National Australia Bank Part II’July 2011. They are summarised briefly in an article I wrote for U.S. news website Counterpunch in December 2007, after the NAB bought the mid-western U.S. Great Western Bank.

There is a curious dimension to this period of transition.

An ABC radio program in January 2004 noted:

"… the focus is now squarely on risk management under Frank Cicutto — the Chief Executive who upped the risk profile of the bank in the pursuit of higher profits, the chief executive who sidelined managers regarded as conservative. One of those shifted was Steve Targett. Once touted as a successor to Don Argus as Chief Executive, he was instead shunted off to a London outpost of NAB's empire…"

Targett publically questioned Cicutto’s hiring of known aggressive currency traders. Targett, a derivatives expert, was then head of the bank’s wholesale financial services division. Did Targett support the initial extension of swap-linked facilities into SME lending? When he was “shunted off to a London outpost”, did he support the active pushing of such facilities in the NAB’s British and Irish subsidiaries which he headed? It is peculiar that someone labeled as a conservative regarding his employer’s risky strategies should be at the helm of a division and then a subsidiary which were at the centre of the extension of risky facilities.

Peculiarly, it appears that the NAB pushed the swap-linked facilities to SMEs/farmers only in its European subsidiaries. It does not appear that it pushed them on to borrowers in Australia (at least not on any discernible scale), nor in its New Zealand subsidiary. This latter divergence is more notable when one confronts the fact that the New Zealand subsidiaries of all three of the other Big Four Australian banks were all actively pushing such facilities.

This scam desirably became the subject of investigation by New Zealand’s Commerce Commission. However, the Commission reached a derisory settlement with the ANZ, ASB (that is, CBA) and Westpac in October 2015.

An informed New Zealand contact claims that:

"It was just a joke in terms of the assets that they stole from their customers! No doubt they had hedged their risk and off-loaded it via wholesale interbank markets (as per the practice during the foreign currency loans era)."

Dr Evan Jones is a retired political economist.

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