Treasury Committee
Oral evidence: SME Lending
Tuesday 17 June 2014
Ordered by the House of Commons to be published on 17 June 2014
Watch the meeting
Members present: Mr Andrew Tyrie (Chair); Steve Baker, Stewart Hosie,
Mr Andrew Love, Mr Pat McFadden, John Mann, Mr George Mudie, Mr
Brooks Newmark, Jesse Norman, Mr David Ruffley, John Thurso.
Questions 392 - 656
Witnesses: David Thorburn, Chief Executive, Clydesdale and Yorkshire
Banks, and Debbie Crosbie, Executive Director, Customer Trust and
Confidence, National Australia Group Europe, gave evidence.
Q392 Chair: Thank you very much for coming to give evidence to us this
morning. There is a good deal of concern about this issue, has been a
good deal of concern not just on this Committee but more widely for
some time, and there is quite a lot to get through in a short space of
time. Can I begin by asking you, Mr Thorburn, what is the benefit to a
customer of having a tailored business loan compared to a standalone
interest rate hedging product?
David Thorburn: The difference was simplicity essentially. A standalone interest rate
hedging product will have a separate ISDA agreement quite separate to the loan. The
documentation associated with it is really complex and really extensive. A tailored
business loan provides potentially a similar outcome to an interest rate hedging product
but without the complexity so the documentation is much, much simpler. It was modelled
on a domestic mortgage product to try to make it more understandable. In a nutshell that is
the difference between the two.
Chair: Is it not going to be much more complex? Is it not much
easier for the customer to be able to see that there are two quite distinct
transactions taking place here of a very different nature, one a loan and
the other a hedging product? Is not all logic pointing to exactly the
opposite? Is not what you are offering something that is much more
complex?
David Thorburn: It depends on the nature of the tailored business loan. If I might explain,
a tailored business loan can mean many different things. It was a brand name for a range
of products for us, so just to be precise about it.

Oral evidence: Treasury Committee, HC 204

1

 Chair: We are talking about embedded swaps here.
David Thorburn: There is not an embedded swap in any of these products, and I can
explain how this worked if it is of interest to the Committee but none of these products
have an individual embedded swap.
Chair: Are you saying that none of the loans you have given contain
a swap?
David Thorburn: Unless it was a very large loan—we are talking about £5 million, maybe
£10 million, something of that nature—no. The products were sold by the wholesale
division of our parent company, NAB. The average size of these transactions might have
been £500,000, £700,000. NAB would simply take the interest-rate exposure of these
collectively into its portfolio and intermingle it with its portfolio management activities in
its wholesale bank. Almost without exception it would not have an individual hedge on the
other side of these loans.
Chair: But from the customer’s perspective what he has is a hedged
product.
David Thorburn: From the customer’s perspective for the period of the loan—and we are
talking about fixed-rate tailored business loans because they were not all fixed-rate but
that is probably the one that I would imagine you have in mind—what the customer got in
that case is guaranteed payments for the duration. It is certainty of payments for the
duration of the loan regardless of what happens with interest rates over that time.
Q393 Chair: What benefit is there to the bank?
David Thorburn: Pardon?
Chair: What benefit is there to the bank?
David Thorburn: The original concept of these products developed by our parent
company was to give SMEs access to some of the hedging instruments—particularly to
hedge against interest rate risks—that they did not previously have. That was the
motivation. Clearly also it is a commercial endeavour. In selling these products there are
profits and new customers. It was used to attract new customers to the organisation as
well.
Q394 Chair: Have any customers asked you if they can see the
hedging product separated out?
David Thorburn: I was never personally involved in the sale of these products at all so it
is not something that we have recorded. It is not something I have ever heard asked.
Q395 Chair: Of course by being classified as a tailored business
loan they do not come under the direct regulatory supervision of the FCA,
is that correct?
David Thorburn: Yes that is correct.

Oral evidence: Treasury Committee, HC 204

2

 Chair: Was that at any time a motivating factor in the decision to
offer tailored business loans to your customers?
David Thorburn: I do not believe so. We have obviously—
Chair: Have you checked?
David Thorburn: Yes, I have. We have looked very hard, and are still looking very hard,
at what went wrong with some of these products because something did go wrong with
some of these products and that is a matter of great concern and regret to us. In looking
back at the original motivation when the products were created in 2001 I have seen no
evidence of people trying to avoid regulatory involvement.
Chair: If an investigation is launched and that investigation looks for
e-mails on this issue they will find none. That is what you are telling us in
evidence. As far as you are aware, because you have looked as you have
just said a moment ago, they will find no e-mails that discuss internally
the advantages to the firm of the avoidance of the regulatory perimeter?
David Thorburn: Our group audit function is currently investigating the background to all
this to understand what went wrong. I do not think it is going into that degree of forensics
looking for individual e-mails that would say that. The motivation here I think
fundamentally was commercial and to provide a service to customers.
Chair: Is this not pretty basic? Is it not pretty basic to go looking to
see whether your business was seeking—what your motivation was in
seeking to offer tailored business loans as opposed to standalone
products?
David Thorburn: I cannot guarantee there is not an e-mail where someone said something
but looking back in time I do not believe that was the motivation at all. Indeed our parent
company sold these through a regulated sales force even though the product was not
regulated. These people were CF30s under the FCA and previously the FSA.
Chair: You said earlier that you had looked at this and you have
corrected that a little just a moment ago to say that you have not gone
into the forensic detail required to be able to give such an assurance.
David Thorburn: Not at this point. We have seen nothing that suggests that anyone had in
mind in the design of these products avoiding regulatory oversight. As I say, although it
was not required, the sales force that sold them were voluntarily regulated.
Q396 Chair: Are you still offering these products?
David Thorburn: No, we stopped the sale of these products in 2012.
Chair: Why?
David Thorburn: Because of the difficulties surrounding their sale.
Chair: What were those difficulties?
Oral evidence: Treasury Committee, HC 204

3

 David Thorburn: In particular, for the more complex products, the fact that with the
benefit of hindsight it was clear we were selling them to customers who did not always
understand what they were getting into in a falling interest rate environment. That was a
matter of great concern to us.
Chair: At the beginning you told me that it was simplicity that led
you to offer these.
David Thorburn: Yes, we further simplified the products so we still offer a fixed-rate
business loan, a simpler fixed-rate business loan, to our customers today but the more
complex ones—the category A and B products, as the FCA describes them—have been off
sale since this situation arose.
Q397 Chair: Back to the original question I asked you, which was
question 1, do you think that, with the advantage of hindsight, it is
simpler to offer these products as tailored business loans compared with
offering them as a standalone products?
David Thorburn: Yes, I think it is a lot easier for the customer because they do not have to
wade through an ISDA; they do not have to deal with the complexities of the standalone
product.

Q398 Chair: You have now withdrawn these products knowing that
that will lead to greater complexity.
David Thorburn: No, we still do the simple, straightforward fixed-rate business loan
where they do not need a separate ISDA. We still sell that.
Chair: Can you just say that again?
David Thorburn: We still have a straightforward fixed-rate business loan that does not
require a separate ISDA but we no longer sell the more complex products, the category As
and Bs.

Q399 Chair: I must admit I am somewhat confused. Is this a
simpler product or a more complex product? I am talking about tailored
business loans.
David Thorburn: If I can explain, tailored business loans mean a great many different
things. Most of the tailored business loans we sold were variable rate. A smaller
proportion of them, around about 8,000, were fixed rate.
Chair: This is a matter of terminology.
David Thorburn: They are very different products.

Oral evidence: Treasury Committee, HC 204

4

 Chair: We are talking here about those with a hedge embedded in
them somewhere, are we not? We all know what we are really talking
about, do we not, Mr Thorburn?
David Thorburn: Yes, we do. These products do not have hedges embedded in them. That
is the problem.
Chair: Let us just concentrate on that. Can you give me the answer
to that question? Are you now offering more complex products than you
were?
David Thorburn: No.

Q400 Chair: You are offering simpler products as it were?
David Thorburn: Yes.

Q401 Chair: Are you offering products with the swap embedded or
separated out?
David Thorburn: 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.

Q402 Chair: Are you offering hedging embedded as part of the loan
or separated out?
David Thorburn: There is no individual hedge. I am not trying to avoid your question; I
am trying to be precise in my answer to your question.
There is no individual embedded swap in any of these loans. The swaps are aggregated by
our parent company as part of the broader balance-sheet management activities and
funding.

Q403 Chair: We understand that but to the customer he is facing a
product that may cost him money, is he not?
David Thorburn: Only in certain circumstances. If there is a break cost, yes.

Oral evidence: Treasury Committee, HC 204

5

 Q404 Chair: He needs to know what the terms are and you have
told us at the beginning that those terms were simpler, were better
understood by a customer, when packaged together as part of the loan
deal.
David Thorburn: Yes.

Q405 Chair: But you are now telling us that you have stopped
selling these because you think they are complex.
David Thorburn: What I am saying to you is that the complex products were of the nature
of structured collars, or individual collars, and are no longer sold. We still sell a
straightforward fixed-rate loan. That is the distinction.
Chair: All right, I am going to move questioning on but I think there
will be more exploration of this from colleagues.
John Thurso: Can I just follow on from some of the Chairman’s
questions and start first by asking about TBLs? For the purposes of my
questions I am referring to the TBLs that are fixed rate that you have
hedged out otherwise, so they have a break cost at the end if interest has
gone the wrong way. I will use the phrase TBLs with that definition if I
may.
When were these products first thought up and why were they
brought out for sale?
David Thorburn: They were introduced in 2001 and as I mentioned earlier the wholesale
division of our parent company was used to providing hedging instruments to corporate
customers globally and felt at the time there was demand among the SMEs to access fixedrate products and some of the other categories that we talked about earlier. It devised a
way of hedging its interest rate risk and then providing these individual loans to SMEs. It
was a commercial endeavour. It was to expand its customer base and provide a service to
customers.

Q406 John Thurso: It would be fair to say therefore that this was a
product that was driven by your parent, NAB, which had come up with it
and said, “Hey, you guys, this is something we think is good. You should
be going out and selling it”.
David Thorburn: That is correct.

Oral evidence: Treasury Committee, HC 204

6

 Q407 John Thurso: In their treasury department, that would be a
pretty lucrative and profitable product to have created.
David Thorburn: I would imagine it was for a time, yes.

Q408 John Thurso: So the motivation for the bank would be, “This is
offering something for customers but this is a highly lucrative form of
business and if we can push quite a lot of this, we will make more
money”?
David Thorburn: It was an opportunity for a parent company with subsidiaries that did not
have that degree of sophistication to make that available to its customer base and therefore
our business grew in the UK on the back of that.
Q409 John Thurso: Who was the target customer in the UK?
David Thorburn: It was quite a broad range. It was anybody who wished to borrow
initially over half a million pounds and latterly it came down to about quarter of a million
pounds. It was a very broad range of SMEs.
Q410 John Thurso: If we look at SMEs these are people with very,
very limited financial sophistication—you would accept that I am sure?
David Thorburn: Yes.
Q411 John Thurso: How was the sales process conducted with those
target clients? What was said to them about the product they were being
offered and encouraged to buy?
David Thorburn: There were a number of different components to the sales process. It
would involve the relationship manager initially in discussion with the customer about
lending opportunities, talking about the various risks that the customer might face
including interest rate risks and introducing the concept of these products.
If the customer was interested in that, a representative from our parent company would
come to a subsequent meeting, explain the range of products, explain the features of them
and also issues such as break costs.
If the customer was interested, a strategy paper would then be prepared and submitted by
the representative of our parent company, which set this out in more detail and gave a
range of options but did not point to one. They did not recommend one. They gave a range
of usually three options. There was usually a meeting and a further discussion at that point
around the products. If the customer was interested in going further, it would become an
offer letter normally, which again would include a separate flyer which set out the nature
of the products and had an explanation of break costs. The final stage in the process, if the
customer signed the facility letter—sorry, there were two more stages. One is that on the
way through, we would say to the customer that they should take independent advice
before they entered into these products. That was another part of the process. Then finally

Oral evidence: Treasury Committee, HC 204

7

 before the transaction was committed, there would be a phone call to either the
representative or another representative of our parent company who would remind them of
the risks of the break costs before they committed to the transaction. That is the normal
process.

Q412 John Thurso: Just to unpick that, the first point is that the
relationship manager would depend on assistance in the form of treasury,
which implies that it is something of reasonable complexity. It is not
something the relationship manager would normally deal with so you get
the expert in.
David Thorburn: There is an element of that but it was to make sure the process was
properly controlled and adhered to. That is all these people did, the representatives of our
parent company. They were trained to sell this product range. They were regulated.

Q413 John Thurso: It was of sufficient importance that the normal
relationship manager who might do your overdraft and your
straightforward loan unassisted would want to be assisted by head office
in the process of administering this sale.
David Thorburn: Yes that is particularly so because if you look at the full range of the
tailored business loans, a subset of them were things like structured collars or collars.
They are complicated, and they are beyond the ability of the relationship manager.

Q414 John Thurso: You would then go through the process that you
have described with quite a lot of paperwork. We have agreed that these
are pretty unsophisticated people so effectively they were receiving pretty
full-on advice from the bank as to what might be best for their business.
David Thorburn: With the benefit of hindsight it was not good enough for structured
collars, so we accept that fully. We regret that and have learned from that. But there was a
really sincere attempt here to design a process with various break points and a
recommendation of independent advice so that the customer had time to assimilate it and
would understand what they were getting into.
Q415 John Thurso: In evidence to us a lot of people have stated
they felt they were being advised by the bank and this was the best thing
to do. Would you accept that most of these people felt they were being
advised as to what was the appropriate course of action?
David Thorburn: My colleague, Ms Crosbie might like to come in because she is leading
our work in the redressing programme, but some people have crossed that line—we can

Oral evidence: Treasury Committee, HC 204

8

 see from the correspondence, our staff have done that—and where they do, that is
unacceptable and we will remediate it.
Debbie Crosbie: Yes, it might be helpful to make you aware that over that period, the 13year period we are discussing, there were just over 8,300 loans, fixed-rate loans, the ones
that you have focused on, sold. To date we have received 550 complaints about the sales
process and on most occasions, we believe when we examine the case file the sale was
conducted in a manner that was I think entirely fine. We absolutely accept though that
there were a number of occasions where, because of the interest rate environment that we
found ourselves in, the customers did not anticipate the magnitude of those break costs and
that is why we have set up this specific review. Where customers feel that is the case, we
have absolutely encouraged them to come and talk to us and we will make sure that if we
find that to be the case we will put that right for them.
Q416 John Thurso: I think some of my colleagues will follow up on
that with you but let me ask you this, and I will ask it of either of you: do
you feel that Clydesdale or Yorkshire encouraged any pressure for sales to
be made given that these are lucrative products as we have established.
We are talking about pre-crash. Was there pressure put on managers to
sell these products as opposed to other products?
David Thorburn: If I look back to that time, it was a period where the organisation was
trying to grow quite fast, expanding into the south. There was a lot of organisational focus
on doing more business with existing customers, attracting new customers, so to that
extent, yes. It was an environment of growth and in the tailored business-loan product we
felt that we had something that, because of its relative simplicity, was a bit different from
some of the other banks. Therefore we put quite a lot of emphasis on introducing this
service to customers. It should not have gone beyond that to anything associated with a
pressurised sales environment. Sometimes staff overstepped the mark and when we find
evidence of that, we will fix it for the customer. That is kind of a long answer but I just
want to be open with you. It was a time of growth and we did focus on the product but it
should never have crossed the line into being a pressurised sale from a customer
perspective.

Q417 John Thurso: You are saying in effect that it was a good
product in which you had faith?
David Thorburn: Yes.
Q418 John Thurso: You were in a competitive situation as a slightly
challenger bank to win more?
David Thorburn: Yes.

Oral evidence: Treasury Committee, HC 204

9

 Q419 John Thurso: You had a higher cost of capital because of the
regulatory questions that we talked about before so there was quite a lot
of perfectly understandable management emphasis on having strong
targets for selling these products, believing them to be appropriate for the
businesses. That would be a fair characterisation?
David Thorburn: Yes, I think so.
Q420 John Thurso: Do you believe now looking back on it that that
process had sufficient checks and balances to ensure that the people
making the sale genuinely made sure that the people purchasing the
products understood the potential risks they were taking on?
David Thorburn: I think the heart of the matter here in what went wrong—and of course
there are some individual behavioural aspects that are not acceptable as well—the key
driver of most of the customer detriment here, which we very much regret and we will
make redress to customers, is the more complex products. It is the structured collars.
About 25% of the more complex tailored business loans we sold were structured collars
and they were to SMEs where we now know people did not understand and we are in the
process of putting that right. That is the key thing that stands out from this whole exercise
for us and something we really regret.
Q421 John Thurso: A number of customers have written to this
Committee both as part of NAB support group and individually, and I just
pick three.
One says, “My Clydesdale business manager approached us with
two treasury officials and advised it was in our best interest to assess our
floating rate as bank interest rates were bound to rise, be better
protected to fix all our loans. They bombarded us with phone calls,
pushing like American salesman down on one knee”.
Another said, “The main issue is that in 2009 the bank forced us
into transferring a large proportion of the variable-rate loans we had on to
three fixed-rate TLBs”.
The third one is, “I think there has been clear deceit on their part,
particularly with Clydesdale, in terms of what they said to me and what
was delivered”.
That is just a selection. That is pretty damning. Do you not think it
would be better to have a full scale review of that sales process to ensure
that the many customers out there who are complaining feel there is a
real form of redress in the same way that the FCA are doing for the plain
vanilla products?
David Thorburn: Those are unforgivable, those situations that occurred, and you have to
take customer testimony on face value. That is unforgivable and has to be fixed and put
right.

Oral evidence: Treasury Committee, HC 204

10

 What we have found as we have gone through several thousand files with the interest-rate
hedging product review and the voluntary review we are doing of the more complex
tailored business loans—and we are going through these very thoroughly in accordance
with the FCA’s guidelines—is that there are some exceptions like that but that kind of
behaviour is not widespread, I think it is fair to say. In the main, people were responsible
and stuck to the process. Where we found people did not stick to the process that is
unacceptable and needs to be sorted out. That has been our finding to date. We are still
going through the tailored business loan review. If we find more and more examples of
that, we will need to reconsider.
Q422 Chair: Martin Wheatley has said in evidence, and I am
quoting, “A customer who has taken out a loan with an embedded
interest-rate hedging product” that is a swap, “may be faced with exactly
the same repayment features and exactly the same break costs as a
swap”. If it behaves like an elephant, looks like an elephant, is it not an
elephant?
David Thorburn: You are right because the thing that matters here is the impact on the
customer really, whether or not the swap is embedded.

Q423 Chair: For all practical purposes from the customer’s
perspective this is a swap, this is it not?
David Thorburn: You could regard it as that. The problem from the customer’s—

Q424 Chair: Could you regard it as anything else but a swap?
David Thorburn: Pardon?
Chair: Could you regard it as anything else but a swap?
David Thorburn: It is a bit of an academic exercise really because it is the impact on the
customer that matters. That is why we have a voluntary review of tailored business
loans—which are not regulated—which mirrors the interest rate hedging product review
because we do not want to hide something like that.
Q425 Chair: I do not think it is an academic issue, but if it is, it is
one that the Committee will probably want to pursue. I suppose
occasionally we have to get into academic issues as well.
From the customer’s perspective is this a swap or not?
David Thorburn: It is not a swap but it has many of the effects of a swap.

Q426 Chair: Martin Wheatley is saying it has; “may be faced with
exactly the same… features… as a swap”. Do you agree with that?

Oral evidence: Treasury Committee, HC 204

11

 David Thorburn: In terms of break costs, potentially that is correct.

Q427 Chair: Why did you say to me in evidence a moment ago
tailored business loans do not contain a swap?
David Thorburn: Because they do not have an embedded swap, a mirror-image swap, that
we have used to create the product. They are in a broad portfolio of aggregated hedging.

Q428 Chair: It is true that they are aggregated up, they always
are, but that, to be frank, is somewhat misleading, is it not, as evidence?
David Thorburn: No, there is no intention to mislead at all. Our concern in all of this is
that regardless of how NAB hedged its interest-rate risk position, it is the impact on the
customer that matters. When a customer does not understand the break costs, that is our
concern here, not if it was engineered.
Q429 Chair: If a customer got as far as grasping any of this and he
asked a simple question, “Am I getting a swap here?” was your bank
answering yes or no?
David Thorburn: I am speculating, I do not know whether that question was asked and
what people would say

Q430 Chair: What do you think the correct answer should be?
David Thorburn: I think the correct answer should be, “You are getting a tailored business
loan that gives you certainty of interest over that period of time but has break costs
associated with it”.
Chair: If I may say so that reply sounds like a bit of a hedge.
Q431 Steve Baker: Ms Crosbie, you mentioned in passing that the
magnitude of the break costs was a consequence of the interest
environment. Could you just briefly explain how?
Debbie Crosbie: Yes. The question was referring to our fixed-rate business loans and our
fixed-rate tailored business loans operate in a way whereby when the customers agreed the
deal with the bank, the payment does not change. It is an agreed payment for a fixed
duration which is why we believe these products are more simple than the more complex
ones that you were referring to. When the customer decides that they want to terminate the
contract early, what we look at is the difference between the interest rate that is prevailing
at the moment and when the interest rate was set, and for the remaining period of time, the
customer is charged the difference effectively of those interest rates.

Oral evidence: Treasury Committee, HC 204

12

 Q432 Steve Baker: Is it the case that monetary policy has directly
exaggerated the height of these break costs?
Debbie Crosbie: I think what you can absolutely see is that because we have had an
interest rate fall and it has stayed very, very low for very long periods, for customers who
bought into these contracts when interest rates were 4.5% to 5%, what you can see is a
level of magnitude of course that I do not think that customers could reasonably have
anticipated.
Steve Baker: I think we can look forward to raising that with
Government.
Q433 Mr Newmark: I am fascinated with your title, Debbie. It looks
like something created in the BBC’s W1A: Executive Director, Customer
Trust and Confidence.
Debbie Crosbie: Yes.
Mr Newmark: Why do you think your institution decided to create a
particular title called Executive Director of Customer Trust and
Confidence? What led to that? I have not seen another bank around that
has created that title.
Debbie Crosbie: I think there are two aspects that are important in my job. David has
already outlined that there is no doubt that there are things that have happened in the past
that the bank regrets. We are committed to putting those right. My division is responsible
for making sure that where things have gone wrong we look at why they went wrong and
how we make sure we avoid those problems in the future.
Second, we absolutely recognise that the industry needs to rebuild customer trust and
confidence. I do not think that is a simple thing to do and I think you have to have very
focused effort and David has created a division for that. I am a board director. I report to
the board every month on what we are doing to make things simpler and more
straightforward for customers, and it is to create that focus around that.

Q434 Mr Newmark: So the title came about because there was a
recognition there was a problem, right?
Debbie Crosbie: I think we recognised the banking industry has a lot to do to repair its
reputation and we believe we are an important part of that.
Q435 Mr Newmark: David, I may be flogging a dead horse here but
I am really fascinated by this.
What is the difference between the break-cost calculation of a
standalone fixed-rate interest-rate hedging product and a fixed-rate
tailored business loan because there seems to be some sort of difference
between the two?
David Thorburn: No, there is no difference. They are one and the same.
Oral evidence: Treasury Committee, HC 204

13

 Q436 Mr Newmark: There is no difference? There seems to be from
some of the calculations that I have seen. You are saying that the break
cost for both should be identical.
David Thorburn: Yes.

Q437 Mr Newmark: If there are cases in which they are not, that
should give rise to concern.
David Thorburn: As long as it is for the same loan for the same duration broken at the
same point in time and entered into at the same point in time it should be the same.
Q438 Mr Newmark: Okay. The FCA director of supervision, Clive
Adamson, said that if there was no understanding of break costs given to
the customer and if there was a poor disclosure of exit costs then it was
highly likely there would be a mis-sale. Would you agree with that
statement?
David Thorburn: Yes, I think it would, yes.

Q439 Mr Newmark: Then how did Clydesdale ensure customers
understood the potential scale of break costs involved with these tailored
business loans?
David Thorburn: It was the process I described to Mr Thurso earlier on. I am happy to
repeat it if you like, but various interactions with the treasury salesperson; strategy papers;
a flyer that set out the nature of the products. I gave a worked example of the break-cost
process.

Q440 Mr Newmark: I say this because I have a quote here. Again, I
am trying to understand this. Did your sales team understand the
potential size of the break costs involved because they are the people
who are at the front end of what seemed to be a lot of the problems with
these tailored business loans?
David Thorburn: Yes, they did and they were able to give worked examples.
Where this went wrong and where we did not foresee potentially the scale of break costs
was in a situation where interest rates fell sharply from a relative high to a historic low and
stayed there for a long period of time. That exaggerates the break costs required for
customers caught at that moment in time.

Q441 Mr Newmark: You are saying that they did understand what
they were selling.

Oral evidence: Treasury Committee, HC 204

14

 David Thorburn: Yes, they did, but no one foresaw that interest rate movement that
exaggerated the break costs.

Q442 Mr Newmark: A property developer wrote to the Committee
saying, “In breaking news to me my relationship manager was visibly
stunned by the magnitude of the break cost and evidently had fully not
understood what he had been involved in selling to me a year earlier”.
Does that surprise you?
David Thorburn: It must have been one of the examples I am talking about. In normal
circumstances the break costs were relatively predictable on a normal interest rate cycle.
When the emergency rate was brought into place and held for a long time, all of a sudden
everybody was surprised at the scale of the break costs. I am sure that is why that
relationship manager reacted that way.
Q443 Mr Newmark: Looking forward, Debbie, with the role that you
have now, do you think that you have effectively fixed the problem on
two sides, first of all with respect to giving satisfactory redress to your
customers so that they have confidence in the institution?
Second, whether it is this particular instrument that we are talking
about or a new instrument—because people are always trying to come up
with instruments to protect customers from volatility, which I assume
what this was about, but end up hurting a number of people—there was a
lot of mis-selling of swaps—not just by your institution but just generally
in the industry—and these customers are not sophisticated people. These
are people who are running ordinary, small businesses on the whole and
it ended up destroying what were otherwise very healthy businesses. Do
you think institutionally at least you guys now have it right so that this
really could never happen again, on the redress side and then going
forward?
Debbie Crosbie: Yes. First, on the redress side, David has already outlined that we are
fully participating in the FCA review. He has also outlined that voluntarily we have opted
in our complex TBLs and they are governed and redressed in exactly the same way as the
FCA’s formal review. We deal with the independent review and the skilled person in the
same way so we believe that with the external perspective we absolutely can make sure
that customers get fair-redress outcomes.
On the fixed-rate loans, to which Mr Thurso referred, we have also undertaken a review of
our past complaints. I have said we have about 550 past complaints. We are well advanced
in reviewing those complaints. Yet again I would say if any other customer has a problem
we are very happy to look at that on a case-by-case basis. In terms of redress we think we
are very well advanced and we think we have a fair process.
The other thing I would add is that the redress programme that we are running for fixed
rates has been fully informed by any adjudications we have had from FOS and we have made
sure that our processes line up with what FOS expects us to do.
Oral evidence: Treasury Committee, HC 204

15

 Looking forward we have also undertaken a pretty sizeable review of the sales process.
We absolutely accept, and we regret, that there are a number of customers who have been less
sophisticated and have not been able to properly understand those more sophisticated
products which is why we no longer sell them.
You have talked about the break costs. Again we understand that customers want to have
more certainty in the process so while it will present more risk to the bank we are looking at
introducing a cap on our break costs to make sure that while customers are in the position—
Mr Newmark: Sorry to interrupt. The cap is fine. The problem
seemed to be a lack of transparency and clarity to the customers so they
understood that if there was a break this is the potential cost to you, and
spelling it out really clearly rather than it being hidden in small print or
using waffly words.
Debbie Crosbie: We understand that and we have looked quite hard at the way in which
we describe that. As David has outlined, for any deals that we do now, we provide specific
examples—calculations that are relevant to customers—so that they can understand.
Mr Newmark: All right, so they understand that, if it breaks under
these circumstances, this is how much it is going to cost you?
Debbie Crosbie: That is exactly right, and as I say the cap is a very important way of
making the customer understand the limit of their exposure over the longer period.
Q444 Chair: Have you been taking instructions or strong guidance
from your parent company, National Australia Bank, with respect to this
type of lending?
David Thorburn: No, the control is with the board of the Clydesdale bank. Our parent is
very interested in what has gone wrong here but the decision making is driven by our
board here in the UK.
Q445 Chair: You have had no guidance from National Australia
Bank on the decisions that you have been taking with respect to
commercial lending in this area?
David Thorburn: You mean the recent redress exercises or since 2001? Over what period
of time?
Chair: In the last two or three years; over the period in which this
has become a concern.
David Thorburn: Okay. That is clear. We have driven this. Obviously we report to our
parent company. Both Ms Crosbie and I regularly present to, for example, the group riskmanagement committee what has happened here. They have a lot of concern and interest
in it but the strategies we are pursuing to sort this problem out and go forward have been
developed by us and our parent has been informed of them. They have not been developed
by the parent.

Oral evidence: Treasury Committee, HC 204

16

 Q446 Chair: That is not quite the question. I am going to have one
more go. The question is: have you been given guidance by your parent
company on what strategy to pursue with respect to these loans?
David Thorburn: Not really, other than they hear what we propose to do and give us
feedback.
Q447 Chair: You are not getting out of this because you had
guidance or an instruction from them to do so?
David Thorburn: No.
Q448 Chair: On the contrary, you are saying you came to them
and said, “We’d like to get out. What do you think?”
David Thorburn: Yes.
Chair: Correct?
David Thorburn: Yes.
Q449 Mr McFadden: Good morning. Mr Thorburn, you will have read
the standard tailored business loans terms and conditions that the bank
issued. Do you think these would pass any kind of plain English test?
David Thorburn: No. I think the standard terms and conditions were unfortunately the
usual bank terms and conditions, which customers do not find very easy to understand.
There were other documents that were used in this process, such as the flyer that
accompanied the facility letter, which I think is pretty plain English. The terms and
conditions themselves, no, they were not. That is one of the things we have learned, that
that kind of language is unhelpful to customers.
Q450 Mr McFadden: Let’s just clarify that. The terms and conditions
letter, which you issued with the loans, you acknowledge, would not pass
a plain English test?
David Thorburn: Yes.
Q451 Mr McFadden: You referred in one of your earlier answers, to
the Chairman I think it was, to these products as being modelled on a
domestic mortgage product. Could you give me an idea of the comparison
of the break costs with a domestic mortgage product with the kind of
break costs that your customers were incurring with these products?
David Thorburn: Yes. There are a couple of differences there so I cannot give you a
precise number, a worked example, but one of the differences between the two main areas
is that although someone may have a 25-year mortgage, they would tend to fix the term for
two, three, maybe five years maximum, whereas some of these business loans were fixed
for up to 20 years, so you have a huge difference in the break costs because of the different
term of them. The other one is that the standard practice in this country is to have a cap on
mortgages for domestic customers and, therefore, there is a limit beyond which the

Oral evidence: Treasury Committee, HC 204

17

 customer’s break costs cannot go. For a business mortgage, that was not the case. There
was a full economic cost recovery within—
Q452 Mr McFadden: What would be a typical break cost for
somebody who wanted to pay off their mortgage early? This is usually
written in. What is the typical break cost for doing that?
David Thorburn: Somewhere in between—I do not know exactly, I am kind of
guessing—1% to 3% of the capital loan perhaps.
Q453 Mr McFadden: Break costs on these loans could be 25%?
David Thorburn: Yes.
Q454 Mr McFadden: That is a massive difference. It is not small
differences.
David Thorburn: That is right. It is not quite apples with apples. When break costs get up
to 25% you are looking at a long-term loan typically that has normally been taken out in a
higher interest-rate environment and then broken in the environment we find ourselves in
today.
Q455 Mr McFadden: Do you think many of your customers would
have thought the break costs would be similar to a mortgage and then
found out they were massively different?
David Thorburn: That is possible. There was a worked example in the documentation the
customers were given that set out—a pretty straightforward example—a 10-year loan for
£1 million and so on and gave an example of the break costs. So it should have been fairly
obvious that it wasn’t the same as a mortgage. Customers do not always read what you
give them, so it is possible.
Q456 Mr McFadden: How could it be obvious to the customer if your
sales staff did not know what the break costs were?
David Thorburn: Are you referring to that earlier example we were talking about?
Mr McFadden: Yes, and facilities like it.
David Thorburn: The sales staff had access to all this information, so they knew in a
normal interest-rate cycle what the break costs would be. What nobody anticipated is what
would happen to break costs when rates came down to the emergency rate that we are still
at today, 0.5%.
Q457 Mr McFadden: We have had evidence from one of your
customers who says that the bank said to them, “We told you there were
breakage costs so you should have understood” and he concludes, “The
bank understood what it was selling and relied upon the fact that I did
not”. Doesn’t that quote get to the heart of the trust problem between the

Oral evidence: Treasury Committee, HC 204

18

 massive levels of information available to a bank, when it is selling these
products, compared with the information available to the customer? This
is at the heart of the trust problem with every mis-selling scandal.
David Thorburn: Obviously, I hate to hear examples of that; when a customer feels like
that. That should never be the case and, as Ms Crosbie said earlier, in the redesign of the
products and the process, we are trying to make absolutely sure that cannot happen again.
Q458 Mr McFadden: You have entered into a review of these
products because you say they were unregulated and you are doing a
parallel review to the FCA?
David Thorburn: Yes.
Mr McFadden: Why does that include only 2,000 of 11,000 products that were sold?
David Thorburn: The parallel review that we entered into was for complex tailored
business loans that had the same characteristics as interest-rate hedging products within
the Financial Conduct Authority’s review. What we excluded from it were variable-rate
tailored business loans and fixed-rate tailored business loans that do not have the same
characteristics as the more complex interest-rate hedging products, like structured collars.
Q459 Mr McFadden: Have you had customer complaints about the
products that are excluded from your review?
David Thorburn: Yes. As Ms Crosbie said, we have had 550 over the last 13 years.
Q460 Mr McFadden: These are the ones that are excluded from
your review?
Debbie Crosbie: Those are the excluded ones, yes, but we are undertaking a voluntary
review of complaints to make sure that those 550 people get the same level of redress and
treatment where they believe the sales process did not work for them.
Q461 Mr McFadden You have referred to the break costs as being
dictated by what happened, but surely that is no reason not to explain
them. In fact, it seems to me to be a reason to look back and to explain
them in more detail, given that basically you are saying, “We couldn’t
envisage the reality”. But it is the reality that your customers are putting
up with. Again, we have had evidence from one customer who said, “If
the bank had told me, ‘Do you understand that on day one you have
break costs in excess of £1 million related to a £3.9 million loan?’ do you
honestly think I would have said, ‘That’s acceptable’?”
Debbie Crosbie: We are listening to that evidence with interest and we have a different
view of those numbers, but I don’t think it is perhaps helpful to go into the detail of that.
We believe we did try to explain to customers what the break costs were. We absolutely
accept the language we used and that we can improve that process that we have outlined. I
would say again that we are in dialogue with that customer. If that customer believes that

Oral evidence: Treasury Committee, HC 204

19

 the process was not adequately explained to them we will absolutely look at that complaint
and we are very keen to reach an agreement with that customer.
Q462 Mr McFadden: The letter with your standard terms and
conditions says you cannot tell the customer what the break costs would
be but they might be substantial. Do you honestly think that the word
“substantial” is going to lead someone to the understanding that it might
be 25% of the value of the loan?
David Thorburn: There was also a worked example given in the flyer that was attached to
the facility letter, which gave them an idea in certain interest rate circumstances for a £1
million loan of what the break costs might be. In a normal interest rate cycle, that was a
reasonable attempt to illustrate what the costs would be. Where that fell down was that
interest rates did something none of us anticipated and all of a sudden, the break costs
were much larger. For people caught up in this review of complaints, we are going through
it with them to try to help customers with that issue and put that right as much as we can.
Q463 Mr McFadden: I come back time and again in looking at this
to the information imbalance. I am not sure you quite knew what you
were selling and I am pretty sure that the customers in many cases did
not know what they were getting into, and I think that the fact that you
had such an information imbalance between the bank and a customer
here has led people to be in a situation and be faced with bills that they
could not possibly have envisaged. If that is the case something has gone
very, very badly wrong, do you not agree?
David Thorburn: On the information imbalance, there is always that issue that the bank
has a lot more information and sophistication compared with the customer, so I understand
that and the process should be designed to close that gap and help the customer understand
what they are getting into. That process was carefully thought through and there was an
honest endeavour to do just that. Where it fell down is that it did not anticipate the
situation of interest rates going from 4.5%, 5% to 0.5% and staying there for a long time.
So when we illustrated to people potential break costs, we did not see that scenario coming
because that had never happened in history. So I do not think that is an information
balance as much as an unfortunate set of circumstances that occurred that no one had ever
experienced before and that exaggerated the break costs for a number of our customers.
We are trying to help with that right now with this review.
Q464 Mr McFadden: I will just finish with this. In terms of the
regulator, they have launched their review with standalone products and,
as you have said, it does not cover yours. As a bank, do you have any
objection if—either by ministerial decision or through Parliament—the
terms of that review are extended to include products which would
include yours and others where the swap is effectively embedded in the
loan? Because, from the customers’ point of view, there is no difference.

Oral evidence: Treasury Committee, HC 204

20

 David Thorburn: If a review like that is mandated by the regulator and by Parliament, we
will go along with that. Of course we will. We will always comply with something of that
nature.
Mr McFadden: Thank you.
Q465 Chair: You are agreeing though, aren’t you, Mr Thorburn,
that it was a mistake to sell these products?
David Thorburn: It depends on which products you are talking about. The complex ones,
yes, definitely. The fixed-rate ones, most of our fixed-rate tailored business loans no
longer exist because they have run their course; they have done what the customer wanted
them to do. They have been repaid. The best part of two-thirds of these fixed-rate tailored
business loans are a matter of history now. That is a product that does what it says on the
tin, in the same way that a fixed-rate mortgage does when you buy a house or a personal
loan for a car. The shortcoming on that product was when we illustrated the break costs we
did not foresee the interest rate circumstances that took place between 2008, 2009 and
today. I think the product actually works but we didn’t see that scenario playing out, and
that is why we are doing this complaint review now to try to help customers deal with it.
Q466 Stewart Hosie: Mr Thorburn, sorry if this is slightly repetitive
but I think it is worth going over this again. You have been at pains to
stress that many of these TBLs did not have embedded swaps. You
described the fact though that this was hedged against in aggregate form,
as you put it, by the parent company doing its normal balance sheet
management. However you have accepted that the impact on the
customer is the same, particularly in relation to break costs. These loans
were hedged against. There was a swap against them, whether it was
embedded or not. Do you understand how frustrated customers, the
public and many of us feel when the first point of reference from
Clydesdale is that these were not embedded swaps; there were no
embedded swap products, when we all know the products were swapped
against. They were hedged against even if it was at an aggregate level.
Do you understand the frustration we have with that?
David Thorburn: Yes. Apologies. I was trying to answer the question precisely and we
have ended up going down a path on that which, from a customer’s point of view, is
neither here nor there. I accept the point you are making that the effect on customers is the
same and the important thing from our point of view is the customer impact rather than
what you call it or the hedging that your parent may have entered into to make these
products available. So apologies for that; that was creating some frustration. It was not
intentional.
Q467 Stewart Hosie: No, it is not just today; this has been going on
for some years.
But, given the TBLs were hedged against, and hedging was the
bank’s way of ensuring its own balance sheet, you have said—and indeed
in that last answer I think you said—no one could foresee interest rates

Oral evidence: Treasury Committee, HC 204

21

 falling. Of course that is true, but why should the customer be paying for
the failure of the bank properly to ensure its own balance sheet because
that is the effect of this?
David Thorburn: The effect of these products, we enter into a contractual arrangement
with the customer where they have certainty of payments over the term of the loan but in
the event that they want to terminate that loan earlier than that contract, there will be break
costs, which we do our best to explain to them. That is a real economic cost to our group,
so effectively the contract is that we will pass on the economic costs if they terminate this
loan early. That is what is going on—
Q468 Stewart Hosie: But that economic cost to the bank is clearly
the whole point. It is impossible for you to have known what the break
cost would be and, therefore, utterly impossible for the customer to have
known what the break cost would be because the hedging you took out to
ensure your balance sheet failed spectacularly when interest rates
changed. Is that not correct?
David Thorburn: That is not correct. First, the bank did not do any of the hedging. Our
parent company did the hedging, and nothing has failed in relation to their own interest
rate hedging as such. It is simply the case that there is an economic cost to our parent if
someone terminates one of these loans early and that is what is passed back to the
customer. You cannot be precise because you do not know when the customer may break
early, so you give an illustrative example.
Q469 Stewart Hosie: But that is the whole point. You do not know
what the economic cost would be, not just because of when the customer
may break but because you do not know what the interest rate will be at
that time.
David Thorburn: That is correct, yes.
Stewart Hosie: You might be right that it worked for the company, that you were
protected, but it certainly did not work for the customer that the hedging delivered such an
economic cost, which is passed on to the customer in certain circumstances in relation to
interest rates. Is that not correct?
David Thorburn: Yes, that is correct.
Q470 Stewart Hosie: Let’s move on to the review you are
undertaking then. Do you think there are common characteristics of misselling between the review of standalone interest rate hedging products
and certain tailored loans? Do you think the nature of the mis-selling was
the same?
Debbie Crosbie: What we found—and today we are only part way through the complaints
review—is the mis-selling that we see and the lack of understanding through the sales
process that was evident in standalone review, we do not see that mirrored. What we do
see is that customers did not understand and in many cases anticipate the magnitude of
break costs that they got into, but that wasn’t about the sales process in the first place. In
Oral evidence: Treasury Committee, HC 204

22

 the fixed-rate tailored business loans that we have sold, we believe that most customers
understand how the product works. They understand that it is for an agreed period of time.
They pay a fixed payment for an agreed period of time. What we have seen, though, is that
customers have not anticipated the magnitude of break costs. That is why when that is the
case, and we find that we did not disclose them in enough detail, we have paid redress.
Q471 Stewart Hosie: That is extremely helpful because it goes back
to the description David had earlier of the sales process; a long,
complicated process with a number of meetings and interventions by the
parent company including you said, I am sure, another meeting and a
phone call where the customer was warned of the break costs. If a
customer is able to identify that that process did not happen, that that
warning was not explicit, that would count as a mis-sell would it, in terms
of your review?
Debbie Crosbie: We believe that once you examine that process, and find that it had not
been carried out in accordance with what we had agreed is appropriate, we would
absolutely redress a customer and we have done so on a number of occasions. There are a
number of customers we have already reached settlements with.
Q472 Stewart Hosie: Indeed. You have agreed to include certain
tailored business loans in the review of the standalone interest-rate
hedging products.
Debbie Crosbie: Yes.
Stewart Hosie: How were those ones, the ones that are being considered within the scope,
determined?
Debbie Crosbie: The FCA standalone review detailed a set of products and they refer to
them as category A, B and C. We accepted that a number of our tailored business loans
had very similar characteristics, in that they would also be categorised as A, B and C.
Where we found that to be the case we have opted all of those products in, which includes
the 2,127 that you have referred to. Any products that have been excluded from that
review are fixed-rate products and we believe they are different, simpler to understand
because the customer gets a fixed payment for a fixed period of time and that payment will
never change as long as the customer does not want to terminate the agreement early.
Q473 Stewart Hosie: I am conscious of time, so I will not come back
on that specific point just now but one final question. If I have understood
it, some 19% of the TBLs you have are included in this?
Debbie Crosbie: Yes.
Stewart Hosie: Can you give the Committee a categoric assurance that the remainder
have not been excluded because of the size of the portfolio, the potential exposure, if misselling was identified?
Debbie Crosbie: Yes. I can absolutely assure you of that. The reason why products are
excluded is because they have different characteristics. We shared with our regulator the

Oral evidence: Treasury Committee, HC 204

23

 products that we believe displayed similar characteristics. We worked closely with them
and they agreed with us and I may add that we did that voluntarily because we absolutely
accept that—as in David’s earlier point—regardless of how we call these products, if it
feels the same to the customer, we believe it was right to put them in the review, which is
why we have those products there.
Stewart Hosie: Thank you.
Q474 Mr Mudie: Just one question arising from Mr Hosie’s
questions. Did you supply customers—tailored business loan customers—
with written figures for break costs at any time in the sale process?
David Thorburn: Yes, we did.
Q475 Mr Mudie: What did you provide them with, what figures?
Because you have been saying to the Committee that the interest rate fall
took the bank by surprise, took everybody by surprise, and so it was
impossible. Do you have figures? Can you demonstrate that each of your
customers who took out one of these loans had what you would expect to
give a normal customer seeking a mortgage or seeking a loan away from
the commercial side?
David Thorburn: Yes, I think the thing you were referring to, there was a double-sided
flyer that was attached to the offer letter and it talked about the nature of the product and it
gave a worked example of the break costs. It was based on a £1 million loan over 10 years
and an interest rate fall of 1%, and it set out what the break costs would be in those
circumstances, which was fine for a normal interest rate cycle but a 1% fall is not what
happened in 2008/2009.
Q476 Mr Mudie: No, so what example did you use when you gave
that flyer? What was the interest rate used?
David Thorburn: From 5.25% to 4.25% from memory, the ordinary rate.
Q477 Mr Mudie: You never envisaged it going either way. Do you
have a breakdown at the bank of when you gave these loans since 2002?
David Thorburn: Yes, we do.
Q478 Mr Mudie: So you would be able to tell the Committee how
many were given after 2007 and 2008?
David Thorburn: Yes, we could. Yes, we could write to the Committee.
Q479 Mr Mudie: Did the flyer change?
David Thorburn: The process changed many times over those years.
Mr Mudie: No, did the flyer change?
David Thorburn: I can’t remember whether it did or it did not.

Oral evidence: Treasury Committee, HC 204

24

 Q480 Mr Mudie: But that was crucial, wasn’t it? It is one thing to
say in 2002 it was 4% or 5% and who would envisage it changing much;
but in 2008 and 2009, we all knew what was going on.
David Thorburn: Yes.
Mr Mudie: And you cannot remember. Do you think you could check and tell the
Committee?
David Thorburn: Yes, we would be happy to write to the Committee and confirm that.
Q481 Mr Mudie: Going back to the interest rates, what is the
difference between the individual fixed-rate hedged loans and the tailored
bank loan fixed rate? What is the difference between the two?
Debbie Crosbie: I think the question you are asking is what is the difference between the
more complex ones that look and feel the same as the review, and the fixed rates?
Mr Mudie: No, I am sorry, when you say the “most complex” there are two loans that are
described to the FCA and one loan is the individual freestanding—
Debbie Crosbie: Standalone, right, okay.
Mr Mudie: Standalone and the other is a tailored business loan. What is the difference
between the two? First, if I came to you for a fixed-rate loan, would I have to take a swap? Is
that bank policy?
David Thorburn: No, you would just get a tailored business loan, which had a very similar
effect.
Q482 Mr Mudie: No, no, if I came for an individual loan; I wasn’t
coming for a tailored bank loan. I wanted a loan of a million quid and was
a fixed rate available to me?
Debbie Crosbie: Yes.
David Thorburn: Only as a tailored business loan, yes.
Q483 Mr Mudie: No, no, no, if I came in and I wanted to borrow a
million quid and I said, “I’d like it at a fixed rate”, was it ever available
since 2002?
David Thorburn: Just as a fixed-rate loan?
Mr Mudie: Yes.
David Thorburn: We did not call them that.
Mr Mudie: What did you call them?
David Thorburn: A fixed-rate loan that any other bank does and a tailored business loan
that we do that would be the same thing. The same thing, it is just a name.

Oral evidence: Treasury Committee, HC 204

25

 Q484 Mr Mudie: So when did fixed-rate loans end as far as being
just a fixed-rate loan? I came, you knew the score, and I knew the score.
I could get out of it by just saying, “I’m coming out of it”. You can’t
remember?
David Thorburn: I can only go back to 2001, and since 2001 we always called them
tailored business loans. It is just a brand name that our group uses for these products.
Q485 Mr Mudie: Okay, so take your tailored business loan and your
individual standalone, what is the difference?
David Thorburn: Between a fixed-rate tailored business loan and a standalone—
Mr Mudie: A standalone.
David Thorburn: A standalone product: the closest to that would be a swap; coming back
to an earlier conversation, it would be. Standalone could also be a collar or it could be a
cap. It could be a—

Q486 Mr Mudie: No, no, I accept that but if I got a standalone, I would take a swap.
I would get my loan and that would be explained to me. What you explained to the Chairman
was you seemed to suggest that the tailored business loan was better because it was less
complex. The further explanation to that was because the other one was individual, separate
from the loan but linked, but it was a separate swap—
David Thorburn: Yes.
Mr Mudie: —you had to explain the complexities but you did not have to do this with a
business loan.
David Thorburn: That is right.
Mr Mudie: Why not? That suggests if Andy here goes in for a standalone you tell him all
the details of the swap. I come in and get a business loan, you think it is much simpler just to
sell me the loan and briefly explain the—yes?
David Thorburn: Yes, because the standalone is a regulated product you are required to
go through a certain process, uses the documentation, which is very complex. That was
something we did not need to put our smaller business customers through. If they wanted a
loan that was fixed for a period of time we didn’t need to put them through all that. We
could with our parent company create this product that made it more straightforward.
Mr Mudie: Which one are you talking about there?
David Thorburn: That is the tailored business loan.
Q487 Mr Mudie: The tailored loan. It was still the same risk, the
same breakage costs. It was the same loan but you sold it as a part
embedded or hidden in the business loan and you did not feel the need to
explain it. Why is that not mis-selling?
David Thorburn: We felt we explained the features and benefits and risks of the product
as well as we could. There was no intent to mislead or otherwise in all this.

Oral evidence: Treasury Committee, HC 204

26

 Q488 Mr Mudie: Did I get the same flyer, however out of date?
David Thorburn: The process was enhanced on the way through, so for most of the time
there was that flyer. I cannot remember whether the contents of the flyer changed.
Q489 Mr Mudie: So, you cannot tell me, when I took that business
loan, when you sold those 11,000 business loans, that each and every
individual got a flyer, however out of date?
David Thorburn: I cannot guarantee that.
Mr Mudie: You cannot guarantee that?
David Thorburn: No.

Q490 Mr Mudie: So why then, when you cannot guarantee that,
have you not automatically included or why have you included only—what
is it?—19% of the business loans as an automatic review, and the other
81% have to complain? As you said earlier—what was it?—25% or 30% of
them have disappeared.
David Thorburn: Over 60%.
Mr Mudie: Over 60% have disappeared?
David Thorburn: Have been repaid. They have run their course.
Q491 Mr Mudie: If 60% then, it is not such a great task. The remaining difference
between—20%—you are so worried about your customers, why were they not automatically
thrown into the review? You cannot say it is logistics. It is only, what, 2,000 or 3,000
additional loans. So why weren’t they? What is your caring bank’s excuse for treating them
differently?
David Thorburn: Because there is no pattern of complaint from the customers over the
whole 13 years this product range has existed. 550 customers have complained about the
fixed-rate tailored business loan so if there was stronger evidence of shortcomings in the
sales process we would do that but that hasn’t been so thus far.

Q492 Mr Mudie: There is no legal reason? This is just your
decision; there is no legal reason for not including them in the review?
David Thorburn: That is correct. It is just a judgment at this point and that judgment is
always open to change as we go through these reviews.
Q493 Chair: Do you think it is a reasonable principle of lending that
you should ask the customer to take on risks, all the risks that the
customer and you, between you, can reasonably foresee?

Oral evidence: Treasury Committee, HC 204

27

 David Thorburn: With these products we were trying to help customers hedge their
exposure to interest rate risks, but if they were not able to see the contract through to
completion, there was a cost associated with that. With these products, we were looking to
be fully indemnified from that cost. With the benefit of hindsight today, with new products
going forward we would like to take a different approach. That was the approach at the
time and it was—
Q494 Chair: Can I just ask the same question? I don’t know
whether you want me to repeat it, but was that a “Yes” or a “No” to the
question that the customer can be reasonably expected to take on risks
that you and they can, between you, foresee?
David Thorburn: For products of this nature in the main I think that is the case—
Chair: Right, and—
David Thorburn: —but what we want to do, if I may finish, is to cut their exposure to
break costs in future and we are trying to work out what represents a reasonable risk for us
going forward in relation to that.
Q495 Chair: Do you think it is unreasonable to expect a customer
solely to bear the risk in a product that neither you nor they could
reasonably foresee at the time the contract was signed?
David Thorburn: I think specifically none of us could reasonably foresee the fall in
interest rates that occurred over that period, and that is why we are proactively
reviewing—
Q496 Chair: This is an exception, an unusual risk and I think we
are all agreeing with you that that is what it is.
David Thorburn: Yes.
Chair: But the question I am asking is: given this huge left-field risk, is it reasonable for
that to lie in your contract terms with the customer rather than the bank?
David Thorburn: Yes, I think in a normal interest rate cycle it is. What we need to guard
against is—
Chair: But this is not a normal interest rate cycle.
David Thorburn: —a not normal interest rate cycle.
Q497 Chair: I will ask the same question again. Given the
exceptional nature of this risk that has materialised, which was, therefore,
a risk that could not reasonably have been foreseen by either party. Is
that something that should usually lie—where there is this huge difference
of information and understanding, as Pat McFadden was suggesting—with
the customer or the bank?

Oral evidence: Treasury Committee, HC 204

28

 David Thorburn: In these exceptional circumstances we want to look at the cases where
the customer has complained to us and feels that cost was excessive and not properly
explained and try to help them deal with that cost.
Q498 Chair: Okay. Could I just have an answer to the question: do
you think it is reasonable that in those circumstances the risk should lie
with the bank or with the customer?
David Thorburn: We are trying to find a balance in these exceptional circumstances. The
time of the extreme fall in interest rates, we are trying to find a balance through there
where the bank shares some of that.
Q499 Chair: Your view is that it should not lie with the bank but be
shared?
David Thorburn: That is what we are trying to do. We are trying to strike a balance in our
complaint handling.
Chair: We have got to an answer. It has taken a bit of time.
Q500 Jesse Norman: Ms Crosbie, I want to get some numbers out, if
I may, about the complaint system that you have. How many complaints
have you received directly regarding the sale of fixed rate?
Debbie Crosbie: Fixed rate, 550 complaints.
Jesse Norman: So 550, you said out of 8,000?
Debbie Crosbie: 8,372.
Jesse Norman: Loans offered?
Debbie Crosbie: Of the fixed rate.
Jesse Norman: And made, yes.
Debbie Crosbie: Yes.
Q501 Jesse Norman: How many of those complaints have been
upheld?
Debbie Crosbie: We are working our way through that. While we might not uphold them
all, on evidence to date, we expect that something in the order of 60% of our customers
who have complained will receive some form of redress. That is mainly aligned to the
situation we have all discussed around break cost.
Q502 Jesse Norman: That implies a little over 300; 323—
Debbie Crosbie: As I say, we are working our way through it. We are only half way
through that so that is a forecast.

Oral evidence: Treasury Committee, HC 204

29

 Q503 Jesse Norman: You have gone through about 250 complaints
so far?
Debbie Crosbie: Roughly. I don’t have the precise number of where we are. We are about
50% through that.
Q504 Jesse Norman: What are the characteristics of a mis-sale of a
fixed-rate tailored business loan?
Debbie Crosbie: A number of these complaints are not about the sales process. As I said,
in most of the complaints we review, the customers were keen to protect themselves from
a rising interest rate environment. I think that is one of the things that is quite important
for the Committee to understand. We do see a demand for customers who are in business,
they want certainty over the period that they have contracted the loan for. They want
certainty in terms of what they are paying. What we do find, though, when customers’
circumstances have changed and they want to break the contract earlier than they
originally anticipated they wanted to hold the contract for, is that there are some customers
who are surprised at the level of break-cost charges. That is where we are working with
customers to redress them and on many occasions waive those break costs.
Q505 Jesse Norman: If I may digest that, when you have had a missold TBL that you have been able to see one reason has been the selling
process—
Debbie Crosbie: We have occasions where—yes.
Jesse Norman: —and another reason has been break costs?
Debbie Crosbie: That is correct.
Jesse Norman: Have there been any other reasons for mis-selling?
Debbie Crosbie: Sometimes people complain about the general level of services, for
example. There is a range of issues. Sometimes the complaint can start in one particular
area and then the customer can widen it. So we look carefully at all the reasons.
Q506 Jesse Norman: So, based on the half of the complaints you
have had so far, you think about 60%. That is around about 300something of the 550 will prove to be upheld?
Debbie Crosbie: They will receive some kind of redress. That might be that we believe the
sales process was adequate but the customer does not believe it was the case, and we
accept, because of the exceptional circumstances we have all discussed, that it is
appropriate to provide some level of financial redress.
Q507 Jesse Norman: Of the 250 that you have assessed, how many
actual outcomes have been received?
Debbie Crosbie: In terms of final letters?
Jesse Norman: Final settlements agreed, redress and all that stuff.

Oral evidence: Treasury Committee, HC 204

30

 Debbie Crosbie: In the fixed-rate review—I would need to check—I think it is
approximately between 50 and 60.
Q508 Jesse Norman: Fifty and 60. So would it be fair to say that you
have found then 60% of the 250 you have done so far have been upheld?
Is that what you said?
Debbie Crosbie: No. We consider it upholds—sometimes we don’t agree with all elements
of the customer complaint, but we do believe, because of the circumstances, it is
appropriate to pay financial redress, so the number I am referring to is where we have
agreed to pay some form of financial redress to the customer.

Q509 Jesse Norman: How many of the 250 you have worked through
so far have you agreed with the customer or agreed that there is some
form of redress owing?
Debbie Crosbie: We have come to decisions on roughly about 250 but obviously we have
to have discussions with the customer. We have to explain our outcome and we have to
agree a settlement, and we are keen to do that. So I think to date we have managed to
achieve that in roughly 50 cases but we are working through them.
Q510 Jesse Norman: What I am trying to get a handle on is: of the
250 you have worked through, for how many have you come out with a
view, “We were right and the customer was wrong” and how many have
you come out with a view, “The customer is right” and then there is a
further question as to how you give them redress.
Debbie Crosbie: In about 60% of the cases, we believe there is some form of redress due
to customers.
Q511 Jesse Norman: It is about 150 then of the 250—
Debbie Crosbie: That would be about right.
Jesse Norman: —of which you have processed and handled about a third?
Debbie Crosbie: Yes.
Q512 Jesse Norman: And you have been going for how long?
Debbie Crosbie: This review started in earnest in late January.

Q513 Jesse Norman: In late January. So when do you expect you will
have worked through all these cases?
Debbie Crosbie: We expect to complete all the review of the files by September this year,
and obviously we are reliant on discussions with customers to settle.

Oral evidence: Treasury Committee, HC 204

31

 Q514 Jesse Norman: Do you think it is possible that, of 550 that you
have received, having worked through them, you will identify further
cause for concern in the other 7,500?
Debbie Crosbie: An important part of our process is to continually look at what we
discover on the way through, and I think it is possible that we may discover more on the
way through that may ask us to look at more files.
Jesse Norman: So you acknowledge the possibility that there could be more than the 550?
Debbie Crosbie: Absolutely.
Jesse Norman: Even though only 550 have complained?
Debbie Crosbie: Have complained. Yes, we do.
Q515 Jesse Norman: That is helpful. How much redress has been
paid out to customers with a fixed-rate TBL?
Debbie Crosbie: I think the number is quite low. I would have to confirm the number but,
as I said, we are in the process of going through those files. So it will climb when we settle
with clients but I would have to check the number for you.
Q516 Jesse Norman: Quite low, less than £10 million, less than £100
million?
Debbie Crosbie: It would be less than £10 million for fixed rates.
Q517 Jesse Norman: So it is a very modest amount. What is the
total capital value of the 8,000 TBLs that you made?
David Thorburn: Most of them don’t exist now so it is not a number we would have.
Jesse Norman: Sorry?
David Thorburn: Most of them don’t exist now. They have been repaid.
Jesse Norman: What was the total asset value of them, so we can get some sense as to
what your rate of payout is?
David Thorburn: I have no idea, I am sorry.
Debbie Crosbie: We would have to come back. A number of them roll into other loans, so
while—
Jesse Norman: If you could give us that information, I think it would be helpful to know
what percentage, your payout.
Debbie Crosbie: Yes. We will submit it in writing.
Q518 Jesse Norman: Some of these customers obviously have gone
to the Financial Ombudsman Service. How many have made that appeal?
Debbie Crosbie: Sorry?

Oral evidence: Treasury Committee, HC 204

32

 Jesse Norman: How many of your customers have gone to the Financial Ombudsman
Service?
Debbie Crosbie: In total, of the 550 complaints we think roughly half of them took up
their rights with FOS.
Q519 Jesse Norman: How many cases have been upheld by the
Ombudsman?
Debbie Crosbie: We have had 67 adjudications to date, not all of them upheld. I think
roughly—I need to check the final number of cases upheld. What I would also say is that,
regardless of whether customers have FOS rights, and there are a number of our customers
in that 550, we will still deal with them in the same fashion. So whether they are timebarred or excluded for any other reason we are dealing with them in the same fashion.
Q520 Jesse Norman: Have the Ombudsman’s adjudications been at a
higher percentage rate than the ones that you have adjudicated or—
Debbie Crosbie: No, that is not the case. We find that our decisions are very closely
mirroring the Ombudsman’s decisions. In fact, we meet the Ombudsman very regularly.
We discuss the adjudications and where we see evidence that there is any deviation in the
way that we make decisions we make sure our methodology is reviewed to include those
outcomes.
Q521 Jesse Norman: Thank you for that. A final question or question
and a half. The law firm Carter-Ruck said that your complaint-handling
conduct was “Extraordinary and wholly at odds with the approach taken
by every other institution with which we are dealing”. Tim Murphy, from
Seneca Banking Consultants, said to this Committee, “We have no faith in
the internal procedures now. We just do not get anything out of internal
bank procedures”. Why should customers have confidence in the
complaints procedures that you have or that you have outlined today?
Debbie Crosbie: The voluntary review that we have opted in our more complex products,
as I have outlined, is overseen by the skilled person. So that deals with that. The fixed-rate
review, we are absolutely committed to making sure that the outcomes we deliver are lined
up with FOS, and as I have covered, we find that our judgments are very similar to FOS.
The other thing I would say is that the FCA talk to us very regularly about our complaints
handling in this area. We update them on the voluntary review on a weekly basis, and I
also update both the board and the FCA on all our complaint handling in regard to this
matter very regularly.

Q522 Jesse Norman: Have you looked at strengthening the credibility
of the complaints procedure in order to address some of these issues?
Debbie Crosbie: We very carefully look at our complaints procedure, and I would say that
if any customer is unhappy with the procedures with this review, I would be very happy to
look at the case again.

Oral evidence: Treasury Committee, HC 204

33

 Q523 Jesse Norman: You have both accepted that these TBLs have
the functional equivalent of embedded swaps within them. So is there any
reason why you should not recognise that formally and invite the FCA to
adjudicate on the swap issues from their regulatory perspective?
Debbie Crosbie: We have shared all our plans with the regulator very regularly. I update
them personally very regularly and they seem to be satisfied with what we are doing to
date. If the regulator—
Jesse Norman: Would you be happy with that formal extension because that would
obviously give a lot of comfort to potential complainants?
Debbie Crosbie: If the regulator was keen to do more with us of course we would cooperate as we do with them on all other matters.
Jesse Norman: The same for you, Mr Thorburn?
David Thorburn: Yes.
Jesse Norman: Thank you very much. Thank you, Mr Chairman.
Q524 Chair: Have you made a lot of money operating outside the
regulatory perimeter prior to the compensation you are going to start
paying?
David Thorburn: If you are talking about this product range, this would have been a
profitable product range over the period up until this all began, yes.
Q525 Chair: As a proportion of your total lending, what kind of
profitability on commercial lending are you talking about?
David Thorburn: The whole tailored business loan range, most of the revenue, somewhere
between 90%, 75%, in fact went to the parent.
Chair: Sorry, I wasn’t able to catch that. Can you say that again?
David Thorburn: The bulk of the revenue on the sale of these products went to the parent.
It did not go to Clydesdale Bank.
Chair: But it has been good business, hasn’t it?
David Thorburn: Yes, it has. Yes.
Chair: Thank you very much for coming to see us—what is now almost this afternoon. It
has taken slightly longer for us to go through the areas we wanted to cover. We may have
more questions that we will want to put in writing and we are very grateful for the evidence
you have provided.
Examination of Witnesses
Witnesses: Chris Sullivan, Deputy Group Chief Executive, Royal Bank of Scotland, and
Derek Sach, Head of Global Restructuring Group, Royal Bank of Scotland, gave evidence.

Oral evidence: Treasury Committee, HC 204

34

 Q526 Chair: Thank you very much for coming to see us this
morning. I am sorry that the beginning of the hearing has been a bit
delayed by the previous session we just had, which overran a little.
Why is it that there is still a net reduction in lending for Q1 2014 on
top of the £2.4 billion reduction seen in the last nine months of 2013? Mr
Sullivan?
Chris Sullivan: Primarily that is caused because of the rundown of the poor-quality
lending book of the pre-2008 period.
Chair: Sorry, for the pre—
Chris Sullivan: The pre-2008 period where RBS lent excessively, well above its market
share, in particular around property. We have been trying to make the bank much more
balanced and safe and, therefore, running down the property-related lending of particularly
poor quality. So some £2.3 billion was taken out of that particular portfolio, which
obviously caused a net reduction in total RBS charge, although you would look at normal
lending and you would see that RBS is still the biggest lender of new loans in the UK.
Q527 Chair: This shrinkage is caused entirely by what one might
call the Goodwin overhang?
Chris Sullivan: It is not entirely that. There has been a situation over the last five years or
so where customers have repaid consistently more than they are contractually obliged to.
We have seen increases in our deposit accounts during this time, so there is a bit of a flight
to safety with some customers. Although you are seeing some very encouraging signs now
of lending starting to move upwards. So many steps that we have taken to encourage
people to take loans responsibly, showing I think a 20% improvement year on year as we
speak.
Q528 Chair: With all that risk aversion there must be some
cracking good business opportunities out there.
Chris Sullivan: We have never been averse to taking appropriate risk and I think the
problem—
Chair: No, the risk aversion among the customers. If you can—
Chris Sullivan: That was primarily why we asked Sir Andrew Large to come in and look
at us and say, “What could we do to improve customers’ opportunities to borrow from
us?”
Q529 Chair: Yes, which brings us to the Clifford Chance review as
well. You have described that as independent. Doesn’t Clifford Chance do
business for RBS, other business?
Chris Sullivan: Derek, do you want to answer that?
Derek Sach: Yes, we do business with all the large corporate lawyers. You have to choose
somebody of stature. In the case of Clifford Chance, they provided a partner with relevant

Oral evidence: Treasury Committee, HC 204

35

 experience who has never done any work for RBS. You have to presume that people such
as that do have integrity. Having seen the report, I have no reason to believe that they did
not exercise complete independence and even the FCA has commissioned them to do a
similar piece of work for themselves.
Q530 John Mann: How many drafts of the report were submitted to
you?
Derek Sach: I have no idea because I had no part in it, being the subject of the report. All I
was asked to do at the very end—
John Mann: Mr Sullivan?
Chris Sullivan: I have no idea either. I never saw a single draft.
John Mann: So you have no idea of the drafts of the report?
Q531 Chair: Before we move on from that question, are you confident that drafts
were not seen by—
Derek Sach: Drafts were certainly fact checked by the organisation because, obviously,
when you prepare a lengthy document there are going to be errors of fact that need to be
corrected.
Q532 John Mann: How do you know that, Mr Sach?
Derek Sach: I was asked to check some aspects of the numbers that were used here and
there in the report.
John Mann: So there were drafts that were seen?
Derek Sach: There was certainly one but whether there were more I don’t know.

Q533 John Mann: Was anything altered in the drafting process?
Derek Sach: So far as I am aware, only errors of fact.

Q534 Chair: It might be helpful if we have that confirmed in writing; it would be of
some value to us.
Derek Sach: Yes, sure.
Chair: Thank you.
Q535 John Mann: You have been with GRG for a long time, Mr
Sach. How much has it contributed to the bank’s profits?
Derek Sach: It does not contribute to the bank’s profits at all. Our main objective is to
restore the customers’ health and strength and—

Oral evidence: Treasury Committee, HC 204

36

 Q536 John Mann: You are saying GRG makes no money for the
bank?
Derek Sach: In total, if you look at what GRG achieved over the five-year period in
question, the customers that we looked after in this particular area—the SME area—lost
£2.1 billion for the bank.
Q537 John Mann: My question is: what does GRG make in terms of
profits for the bank?
Derek Sach: It does not make a profit for the bank. It has income in the form of fees. It
sometimes has equity realisations if it has taken an equity stake in the past in something,
but against that, you have the cost of running it and also these connections there are the
impairments.
Q538 John Mann: So GRG runs at a loss is what you are saying for
the bank?
Derek Sach: If you look at the portfolio we look at, yes, it runs at a loss.
John Mann: I am talking about GRG as an institution within the bank.
Derek Sach: It runs at a loss.
John Mann: It runs at a loss?
Derek Sach: Yes.
John Mann: Has that loss increased or decreased over the last 10 years?
Derek Sach: Increased dramatically if you do it year by year in 2009, 2010, and it is
starting to come down now because the impairments are falling.
Q539 John Mann: How do you calculate the fees that you charge?
Derek Sach: The fees are related to a number of factors: the amount of work that people
are doing on a particular connection; the increase in risk that may be apparent in any
particular transaction.
Q540 John Mann: Why is it that in the Clifford Chance report they
could not work out how the fees were calculated?
Derek Sach: I think, yes, that is a reasonable criticism that it is not as transparent as
ideally it would be for customers. It is something that we have been working on since
2012 to try to improve people’s understanding of the fees we charge and to make the fees
less onerous for them. We have always wanted to be very much at the leading edge of
restructuring and I was a founder member of that sort of movement in the 1990s in the UK
when we—
Q541 John Mann: Clifford Chance cannot work out how much the
fees are but you say that the fees are not calculated to make a profit for
the bank?

Oral evidence: Treasury Committee, HC 204

37

 Derek Sach: No. The fees are there partly to offset the costs that we incur, but also very
often to compensate us for the additional risk.
Q542 John Mann: They are compensating you for risk, so you are
making a profit out of the fees then?
Derek Sach: No, because unfortunately a number of the customers who come to us do
cause losses for the bank. We lose capital, so overall there is a loss.
Q543 John Mann: But they do not all choose to go into GRG and
you choose the fees but, according to Clifford Chance, no one can work
out where the fees come from. The Clifford Chance report identified that
some perfectly profitable businesses were going into GRG. Why is that?
Derek Sach: I do not think the Clifford Chance report said that profitable businesses were
coming into GRG.
Q544 John Mann: Clifford Chance identified a number of cases
where no event of default had occurred.
Derek Sach: That would be correct because an event of default is when a customer cannot
pay his interest or his capital repayment and yes he could still be profitable; I acknowledge
that. But they are transferred to us because there is a belief that we can manage them better
than the frontline.
John Mann: And make a profit out of them.
Derek Sach: No, our objective is to restructure them. We restructured in each of the
difficult years numbers like 850 customers that we reorganised. If I could give you an
example: something called CFN in Skegness, a manufacturer of polythene bags, lost a
major customer and had some difficulties. We helped them recruit a new CEO. We
introduced them to someone who worked alongside him to help him develop a new
strategy. We lent them some more money, and 70 jobs were saved in an area that is
probably quite difficult for employment.

Q545 John Mann: How come Clifford Chance identified that in your
appraisal system you particularly highlight cases where individuals have
generated strong revenues in your section?
Derek Sach: People have a balance scorecard, and, yes, strong revenues would be
something that perhaps someone has done. But along that, they would have restored
probably half a dozen customers back to health and strength and—
Q546 John Mann: It sounds to the small business community, and
the rest of the world, that this is a profit centre within the bank whereby
you are maintaining your profits at the expense of small businesses, some
of which are perfectly viable, to which you give no choice. You are
exploiting the lack of competition in the market, aren’t you, and the lack

Oral evidence: Treasury Committee, HC 204

38

 of choice for small businesses and that is what you are about in your
section?
Derek Sach: We are not about that. We are very much about helping businesses. Our main
focus is not only on restructuring their finances but helping them restructure the business,
and this is happening on a large scale for these SMEs. During the period we handled
something like 10,000. Less than 10% of them end up in insolvency.
Q547 John Mann: The Clifford Chance report says that the GRG
training manual suggests threatening to remove distressed businesses’
overdrafts as a way of gaining leverage. It also says that your internal
valuations were not carried out in accordance with best practice. Despite
that, it is a report that you have commissioned, and you have had drafts
of it, it is a pretty damning report and the impression it gives is that GRG
is there to boost up the bank’s profits at the expense of the small
business customers who are stuck because they cannot go somewhere
else. That is a reasonable summary, is it not?
Derek Sach: No, I do not think it is. If you take the two points you have raised, on the
training point I would acknowledge there is an unfortunate phrase in a 50-page document
that is pre-reading for a training course. I agree with you that the way it is written is
unfortunate because it seems to indicate that, as you say, an overdraft should be used to
threaten someone. The intent is if there are no defaults but you can see that someone is
headed for difficulty. Bear in mind that these are restructuring specialists who also have
been involved closely with people who restructure big companies like Thomas Cook
where we save companies at short notice; 30,000 jobs saved because we put up £25
million more than our share. It was intended that you should draw to the customer's
attention that the overdraft in due course would be hitting its limit and we would not be
minded to increase it unless they made some changes to the way the business was
operating. That particular phrase has been changed.
On the question of valuations, the valuations Clifford Chance are referring to are
valuations that are used informally as opposed to any that are used formally where outside
valuers are instructed.
Q548 John Mann: That is what SMEs are complaining about. Has
anyone from GRG met any Government Ministers in relation to its
performance and its role with SMEs in the Treasury or the Business
Department over the last two years?
Derek Sach: Not that I can immediately recall but I have certainly been consulted
personally by people from the Treasury, the Bank of England and BIS on things like the
Business For Growth organisation and are there other ways of increasing and improving
lending to businesses.
Q549 John Mann: But nobody has met, or been asked—I am not
suggesting you would be running to meet as it would be a Minister’s
responsibility—no one from the Business Department, no Treasury

Oral evidence: Treasury Committee, HC 204

39

 Ministers have been to meet you after the kerfuffle following the
Tomlinson Report?
Derek Sach: No, definitely not since then.
Chris Sullivan: I have met many Ministers and Treasury officials over the last five years
and discussed a number of people who have been in GRG and various other parts of the
bank. It is worth noting that—
Q550 John Mann: And on GRG?
Chris Sullivan: Yes. I have spoken to members of this particular Committee about
constituents who have been in GRG.
Q551 John Mann: No, I am talking about Government Ministers in
the context of Tomlinson specifically.
Chris Sullivan: In terms of Tomlinson, we did an independent report via Clifford Chance
and I have done a number of other independent reports around allegations from Mr
Tomlinson. Those reports have all proved the allegations to be fallacious.
Q552 John Mann: I am only trying to clarify that neither the
Business Secretary and his Ministers nor the Chancellor and his Ministers
have come and met you and asked questions in relation to this, and you
are saying that they have not.
Chris Sullivan: No, they have not.
Derek Sach: I have to say I would be very happy to talk to a wider audience than this one
if people were interested, and tell them a lot more about what we do because I genuinely
believe that we do good overall. If you handle 10,000 customers I acknowledge there are
bound to have been some mistakes. I also understand the difficulty that entrepreneurs who
fail, or who are close to failing, find themselves in. It is a very traumatic and difficult
experience for them. The slightest sign of irritation or not treating them absolutely
properly is bound to cause upset, but overall we get quite a lot of letters thanking us for
what we have done.
To give you another example, a firm called Independent Slitters in Oldbury, a small firm,
made an unfortunate diversification. We worked with them, helped them unravel the
unfortunate diversification, lent them more money and 20 jobs were preserved. Again,
they are very enthusiastic. They have been in the local press in the West Midlands and
they cannot thank us enough for what we did. But, as I say, we have a machine. There are
1,300 people sitting out there today watching this, or will watch this when it is on the
internet, who feel very aggrieved by the comments of Tomlinson, that he should impugn
their integrity in the way that he did.
John Mann: My comments were quoting from your own internal
Clifford Chance report.

Oral evidence: Treasury Committee, HC 204

40

 Q553 Chair: If we were to poll these 10,000 customers with
respect to their confidentiality of reply, is it your view that the majority
would be expressing gratitude for their contact with GRG?
Derek Sach: We do the same survey that Chris’s division of the bank does, asking
customers questions about satisfaction. Overall, we are probably about 3% to 5% perhaps
behind them. In terms of quality of relationship manager, because our people have a lot
more time to spend with the customer and are very thoroughly trained in their
restructuring skills, they tend to score a little bit better.
Q554 Chair: Is the answer that a majority would be expressing
gratitude?
Derek Sach: I would hope so, yes. We do not ask them that question but they are asked if
they are satisfied with what we do, are we delivering what we promise, and so on. Then,
yes, the majority would.
Q555 Chair: When you say that the fees are—I think I was quoting
you but correct me if I do not have it quite right—“not ideally as
transparent to customers as they should be”, that is about as big a
euphemism as it is possible produce, is it not? Frankly, opaque to the
point of incomprehensibility might be closer to the mark.
Derek Sach: I think that is a little extreme, but certainly they could be clearer, I fully
acknowledge that. It is something that we are working on and we have introduced recently
a 90-day moratorium on adding default interest to customers who get into difficulty. That
is something every bank does so it will be interesting to see if the industry follows suit to
give them a period of time to try to sort their affairs out. We have also undertaken to give
people 30 days notice of changes in fees because, again, that gives them a chance to
discuss if they do not understand.
Q556 Chair: Your earlier point a moment ago was that you get
involved because—again, I am more or less quoting, I hope—“There is a
belief that we [that is RBS] can restructure these businesses for their own
good”, for their benefit, and therefore the businesses have benefited from
your involvement. Whose belief is this? Who forms that judgement?
Derek Sach: I believe we have been a feature of the restructuring scene for quite a long
time. I joined RBS at the end of—
Q557 Chair: That was not quite the question. I am sorry to
interrupt. The question is somebody at the beginning of each of these
processes before a firm encounters GRG forms a judgement about
whether there are benefits to be had from restructuring. My question to
you is who forms that judgment?
Chris Sullivan: It is probably worth me taking that. It is a great question. We would rather
that GRG or the restructuring unit was never necessary in the bank. Its primary use is
when one of our customers gets into financial difficulty.

Oral evidence: Treasury Committee, HC 204

41

 Q558 Chair: We will be pressed for time today. We do know that.
The question I am trying to get at is who is forming this judgment?
Chris Sullivan: It will be formed by a combination of the relationship manager who will
see an event, some deterioration in business performance, a particular contract that is lost,
excessive use of overdraft, excessive limits, behaviour that is generally—
Q559 Chair: At that point they go and consult GRG. Is that correct?
Chris Sullivan: No. At that point they go and talk to our Credit Department and then a
group is put together of the relationship management team, the Credit Department and a
member of GRG to discuss the case to see whether or not we believe the GRG unit would
be beneficial in terms of getting involved.
Q560 Chair: In forming that judgment and in offering the advice in
that group you have just described, is GRG acting as a cost centre or a
profit centre?
Chris Sullivan: GRG is acting as a service to the client.
Q561 Chair: I am going to ask the same question again. In forming
that judgment is GRG acting as a profit centre or a cost centre?
Chris Sullivan: A cost centre. In the terms you just asked they would be a cost centre.
Q562 Chair: Then GRG is not, as is commonly supposed, a profit
centre?
Chris Sullivan: It is absolutely not a profit centre.
Q563 Chair: In the bank?
Chris Sullivan: In the bank, absolutely not.
Q564 Chair: It is inappropriate to describe this activity as has been
described?
Chris Sullivan: Totally inappropriate.
Q565 Chair: The activities of GRG are a business cost.
Chris Sullivan: They are a business cost, helping customers if they can to get back to
normal.
Q566 Chair: Having worked in a bank, and there are people around
this table who have, the distinction between profit centres and cost
centres is well understood and is a crucial one for the internal running of

Oral evidence: Treasury Committee, HC 204

42

 the bank. You are saying this essentially operates entirely as a cost
centre.
Chris Sullivan: Absolutely, unequivocally I am saying that this is a cost centre.
Q567 Chair: It has always done for the period we have under
review?
Chris Sullivan: Correct.
Derek Sach: If I could just add to that, the asset remains with the donor division, because
there are many divisions across RBS and we manage their assets. The asset remains with
them and any income accrues to the division.
Chair: That is very helpful clarification.
Q568 Mr Ruffley: Mr Sullivan, on the question of the terms of
reference it was quite specific—was it not?—and I am quoting from the
terms of reference, “The independent review will be undertaken by
Clifford Chance. It will review the most serious allegation made in the
Tomlinson Report”, namely, that RBS through its GRG division was
“culpable of systematic and institutional behaviour in artificially
distressing otherwise viable UK SME businesses and through that putting
businesses on a journey towards administration, receivership and
liquidation”. What do you say to those people who believe that is quite a
high hurdle? It is very easy to refute the charge. Why was that remit so
narrowly drawn?
Chris Sullivan: That was the allegation that was made and it was a very, very serious
allegation that needed to be proven to be untrue and was.
Q569 Mr Ruffley: There were several allegations, were they not? I
am asking you why you chose one particular one.
Chris Sullivan: Because that was by far the most serious.
Q570 Mr Ruffley: Let us turn to some of the charges referred to in
the Clifford Chance report. I just want to have another go at a question
Mr Mann asked. RBS in terms of its internal valuations, and I quote,
“Internal valuations were not carried out to the standard of the Red
Book”. What action are you taking in relation to that deficiency?
Chris Sullivan: That is not really my area. Mr Sach could answer that for you.
Derek Sach: That reference is to valuations that people do within GRG as part of the
process of looking at a customer and seeing their state of health. You have to remember
that 60% of this particular portfolio is property. They are pure property transactions. They
are not businesses that are going on to the next generation or anything. They are often just
a one-off property transaction, and 20% is very heavily property-related; hotels, pubs, that
sort of thing, nursing homes.

Oral evidence: Treasury Committee, HC 204

43

 It is often very useful for someone internally to say, “I would estimate that property is
worth X”. But no significant decision is ever taken on the basis of that sort of valuation. It
is an informal part of the internal process. If we want to take action and the customer
disagrees, then we would have a formal valuation done by a third party that the customer
would instruct in nearly all circumstances. The reason we do it internally sometimes is
because it saves the customer money because you need a figure to talk. Particularly in
2009 and 2010 most of this property was unsaleable, so somebody saying, “This is worth
£1 million” is a sort of benchmark and to spare the person £5,000 to get a valuation—
Q571 Mr Ruffley: I take the point. Can we have another go at this
charge about the training manual? You said you had amended the
wording of the training manual. What about the underlying business
practice of threatening to remove a business overdraft in order to get
more leverage in negotiations about equity? I know you have changed the
wording of the manual, but what about that practice?
Derek Sach: The reality is not so either.
Q572 Mr Ruffley: You just deny that ever took place?
Derek Sach: Yes, and I have found no examples of it. Clifford Chance asked me about
that in my interview with them and it would be something that concerned me. I and they
can find no evidence of that happening.
Q573 Mr Ruffley: No evidence of that. Clifford Chance say in turn
that they could not understand the RBS fees in your part of the bank, and
I quote, “We found it difficult to understand how the bank calculated the
fees it proposed to customers in any particular case and therefore found it
difficult to assess allegations of unfairness”. Those are Clifford Chance’s
words. I declare an interest, having formerly worked at Clifford Chance,
many years ago. If very clever lawyers at Clifford Chance found it difficult
to understand how the bank calculated the fees does that not suggest
they are too complicated for customers?
Derek Sach: Yes, and I acknowledge that we have been working on this since 2012 to try
to make them simpler. We stopped charging a number of fees to make it clearer for
customers during 2013 before any of this occurred and, more recently we are giving
people 30 days notice of any change or charge and suspending default interest for 90 days.
Q574 Mr Ruffley: You are quite proud of suspending the default
interest for 90 days and stating that other banks do. Are you the only
major SME lender who now does not charge for the 90 days?
Derek Sach: So far as I am aware.
Q575 Mr Ruffley: Has that come as a direct result of this report?
Derek Sach: Yes, in parallel with it.

Oral evidence: Treasury Committee, HC 204

44

 Q576 Mr Ruffley: Clifford Chance found that RBS sought to
encourage or incentivise a specific course of action by the customer for its
pricing, such as an exit or sale of assets to reduce the customer's debt. It
is clear that Clifford Chance did not want to pass any censorious
judgment. They merely say, “It is difficult for us to say that it is wrong in
principle for the bank to use fees as a lever”. Have you amended your
practice in that respect, even though Clifford Chance does not wish to
pass judgment?
Derek Sach: I think they are observing something that we do and you are probably
familiar with and, again, I do not think RBS would be alone. If the customer
fundamentally disagrees with, say, the desire to sell a property within a certain timeframe
or he is confident he can sell it within six months, you may reach an agreement with him
that he can have six months to sell it, but if he has not sold it by the end of six months
then, because we feel we are taking additional risk, the interest rate would go up. I do not
think that is unfair practice and I think it is a reasonable commercial thing to do with
somebody.
Q577 Mr Ruffley: I have a final question for Mr Sullivan. There were
also allegations in the Tomlinson Report, and you having acknowledged,
Mr Sach, this did happen in some cases and was inevitable, given that
you have several thousand customers, of rude, insensitive or aggressive
behaviour on the part of a minority of your employees. Can I ask, Mr
Sullivan, did you ask Clifford Chance to do any detailed report on
instances of that kind, and if not, why not?
Chris Sullivan: I did not commission the report so again you should ask Mr Sach. But,
quite clearly we would not condone any behaviour that is aggressive or impolite and
certainly all our relationship managers are well aware of that.
Mr Ruffley: What active steps have you taken since the Tomlinson Report to ensure that
instances like this are kept to a bare minimum?
Derek Sach: If I could make it clear that the Clifford Chance report and the management
of all the process was managed by John Kane, who is the head of regulatory affairs in the
bank, working closely with the bank’s legal department. Like Chris, I would never tolerate
aggressive behaviour in any of the team and because of the nature of the work they do they
are trained in how to deal with people in what are very difficult circumstances. There were
13 customers that referred to aggressive behaviour. Our internal legal department
investigated all of them completely independently of me or anybody in GRG and found
that there was absolutely no evidence to substantiate that behaviour.
Also—can I make it clear?—the 135 cases that Clifford Chance looked at were very much
an adverse selection to try to find if the, I think appalling, allegation that was made of
systematically distressing companies had happened, then we would want to find it because
even if there was one, that is one too many. So they were targeted at the very worst 135 in
the portfolio and the 13 are out of that 135. I would hate the Committee to say that is 10%

Oral evidence: Treasury Committee, HC 204

45

 are going to say that, because I think they were a particularly distressed and feeling harddone-by group of customers.
Mr Ruffley: That is very helpful, thank you.
Q578 Chair: Can we just go back to this question of whether you
are a profit centre or a cost centre? I did not have to hand the Large
review, although I have had several conversations with Sir Andrew about
this. I am just reading from the review on page 52, “GRG is run as an
internal profit centre”. He then explains that this leads to conflicts of
interest for GRG for RBS's treatment of customers. For the avoidance of
doubt, he then explains what a profit centre is, “with its profit and loss
account based on the incremental income that it generates for the bank,
less its operating costs”. Why did Andrew Large get it so wrong? I
presume you are sticking by your evidence.
Derek Sach: Yes, I am and he will have seen a piece of paper that records for GRG the
costs and the income. But what it does not record are the impairments and the internal
costs allocations. The thing we are judged on is very much our costs. We submitted a note
to this Committee when we were going to come here in March that explained we are not a
cost centre and we also—
Chair: Not a profit centre.
Derek Sach: Sorry.
Chair: That is all right. It might have been a Freudian slip or not. Do
carry on.
Derek Sach: That we are not a profit centre and a copy of that was sent to Sir Andrew.
Q579 Chair: So he just got it wrong?
Derek Sach: I believe so, yes.
Q580 Chair: Therefore the whole of that part of Sir Andrew's report
is, to put it mildly, misconceived because on the basis of this point he
carries on to explain the governance process for the critical decision of
whether a business has reached the point of non-viability. It is therefore
opaque both to the relationship management part of RBS and to the SME
itself, that may be unaware of or unprepared for the consequences of
changes because, and I am paraphrasing now, it is unclear whether GRG
is taking its decisions on the basis of what is in the interests of the firm or
in the interests of the bank.
Derek Sach: There is another piece that I think you would find he is linking that to.

Oral evidence: Treasury Committee, HC 204

46

 Q581 Chair: I have paraphrased that to avoid reading out a whole
paragraph.
Derek Sach: I appreciate that. Just the one important point that he picks up on somewhere
around there is that GRG has the right to insist on the transfer of a case. That is designed
very much for the larger customers, things that belong to the investment bank—
Q582 Chair: When he says, “GRG retains the ultimate authority
over which customer relationships are transferred”, he was also pretty
much wrong there. He was misleading us. That only refers to large
customers. Is that correct?
Derek Sach: Yes, and I am not sure he would have even known that because he would
have seen some part of our policy and procedures that does make that statement. But it is
only ever used for the large companies where investment bankers tend to want to hang
onto their customers rather more than perhaps the people who manage SMEs. We have
checked and that right has never, ever been used in the whole period on an SME. But, as
Chris described earlier—
Q583 Chair: It is a bit depressing that your chairman called in
arguably one of the best men around in this field with huge experience
both of commercial banking and central banking and he has written a
report and drawn conclusions that are fundamentally misconceived.
Derek Sach: I think he has misunderstood the nature of how those two things would link
together because we have never, ever used that right on an SME. If you have not done that
then that rather weakens his first argument.
Chair: It is very helpful that we have clarification at this point.
Q584 Steve Baker: Mr Sach, you mentioned that you are overall
judged on your costs. Could you just explain how you measure the
performance of the individuals in your team and how you therefore
incentivise them?
Derek Sach: They will have a balance scorecard in the sense that they will be expected to
restore customers back to the good bank. They will be expected to restructure customers.
They will not be expected to receive complaints or if they do receive complaints there
should not be very many. There will be a lot of subjective judgment on how well they
handle things, their capacity for work and their ability to come up with answers to difficult
problems. A whole range of things and yes, for each grouping of people there will be a
cost base that is primarily salaries they will have to keep control of.
Q585 Steve Baker: Presumably there is a bonus pool. How does that
scorecard feed into the calculation around who is getting what?
Derek Sach: The whole of GRG's bonus system is discretionary, including mine, and there
is no formulaic bonus system whatsoever. I have always fought—I do not have to fight
because I can insist—that bonuses are going to be discretionary. People often say, “If I
restructure 10 companies I surely should get more than someone who does five” or
Oral evidence: Treasury Committee, HC 204

47

 whatever. But the difficulty has to be taken into account and sometimes five difficult
problems in a depressed area of the country is a much greater achievement than maybe
restructuring a very large corporate where you have a lot of other professionals all around.
So, it is all discretionary and let me say that people who handle these SMEs get relatively
small bonuses in relation to their salaries.
Q586 Steve Baker: Could you give us an indication of what sort of
levels and quantum those bonuses and salaries are?
Derek Sach: As a percentage, most of them would be in the 20% to 40% bracket.
Q587 Steve Baker: Of a salary of on average what sort of level?
Derek Sach: Their salaries would probably range from £30,000 to £50,000, £60,000.
Q588 Jesse Norman: Mr Sach, I am going to go back to this issue of
profits and profit centres. Just to be clear, Andrew Large, banker for 20
years, chairman of the Securities Investment Board, member of the
management board of the Swiss Bank Corporation, deputy chairman of
Barclays Bank, Bank of England Monetary Policy Committee member; you
would expect him to know what a profit centre and a cost centre of a
bank was, right?
Derek Sach: Yes.
Q589 Jesse Norman: It is evidence of catastrophic misjudgment or
misunderstanding or misinformation if he has failed to understand the
nature of your business.
Derek Sach: I think that is a rather extreme statement of what he has said. He has linked
two facts together in a way that to me is not logical, particularly because the second one
just is not exercised and is not there, so far as these customers are concerned.
Q590 Jesse Norman: You entirely discount the possibility that he
might understand the true function of business better than you are
prepared to admit?
Derek Sach: Yes. I am not trying to cover anything up.
Q591 Jesse Norman: You said that people's bonuses are calculated
on the basis of costs. It is very easy to run costs, right? You keep your
salaries low, you try to avoid impairments and if businesses fold, they
fold. Why is that not an effective way of managing costs if you are a
member of GRG?
Derek Sach: I am sorry, I am not sure I follow exactly what you
mean.

Oral evidence: Treasury Committee, HC 204

48

 Q592 Jesse Norman: I am saying if you are entirely cost-focused it
sounds like your bonus system is not giving any credit to people who
extract businesses that avoid costs and in fact, potentially generate
upside for the bank.
Derek Sach: They get credit for restructuring businesses. That is the
thing they are really about; something like 850 a year.
Q593 Jesse Norman: I understand the advertisement. Let us pause
there for a second. A cost avoided is an upside for you, is it not?
Derek Sach: A loss avoided, yes.
Q594 Jesse Norman: A loss avoided.
Derek Sach: Yes, and that is always is going to be a much bigger number than any fees
you can earn. As I said to you, we lost on this segment of the bank £2.1 billion over the
five-year period of 2008 until 2013.
Q595 Jesse Norman: Is the bonus conversation you described
affected by losses incurred or not incurred on the portfolio you are
responsible for?
Derek Sach: In the thing that Andrew Large refers to as a profit and loss, the losses and
any recoveries are not part of the equation. That is why it just is not a profit and loss. It is a
record of income and costs. It is not a profit and loss account.
Q596 Jesse Norman: But the point I think that we are trying to get
to is the question of whether or not there is upside for the bank and
whether or not the job of GRG is to gain upside and what kind these
upsides are. One of our concerns, and one of Andrew Large’s concerns
appears to be that one of the things that GRG was doing was seeking to
make profits for the bank at the expense of the wellbeing of some of the
companies involved. That is why he potentially sees it as a profit centre.
Derek Sach: It cannot be a profit centre because we are making a loss on this particular
segment that we are looking after, but you can minimise the losses and, yes, you are right
there are occasions when upsides are earned. Again, they are rarely of any significant
amount of money in this sector but if you take larger companies, something like
Samsonite, where we took the risk of putting up some more money when the banks had to
convert their debt to equity, we managed to recover 500 million by putting up 20 million
at a moment of difficulty.
Q597 Jesse Norman: When there is a conflict between the bank and
its customers, is your policy to put the customer first or the bank first?
Derek Sach: The customer always.

Oral evidence: Treasury Committee, HC 204

49

 Q598 Jesse Norman: So why is it that one GRG employee has been
quoted as saying, during the crisis, they were called in and told, “Save
companies if you can but first and foremost get our money back and save
the bank”?
Derek Sach: I do not know where that is coming from.
Q599 Jesse Norman: We can supply the information if you want. I
think it comes from the Channel 4 video report that they did on this.
Derek Sach: Oh well, the Channel 4 video report is one of these whistleblowers.
Q600 Jesse Norman: It is certainly a former employee.
Derek Sach: So they say, but I honestly do not know.
Q601 Jesse Norman: So you would discount that?
Derek Sach: I am not sure I do discount it because I do not believe anyone would have
said it and I am not sure—yes, I know which was the Channel 4 one, I spoke to the
director of that programme and told them the subject of the programme, both the husband
and wife had been disqualified as directors for seven and five years respectively. I was
told by the director that was not really relevant.
Q602 Jesse Norman: I cannot comment on that but the same report
quoted whistleblowers saying, “It was an immoral survivalist tactic the
bank used, which had a huge amount of losses on their balance sheet to
try to survive something. They have managed to destroy a number of
businesses that did not need destroying.”
Chris Sullivan: There was no upside, absolutely no upside in this bank or any bank in
destroying a perfectly viable customer. Viable customers are sources of income generated
for the organisation. If they become non-viable then we damage the organisation as a
whole.
Derek Sach: We would never get any advantage from destroying a customer. Insolvency
is always the last resort.
Q603 Jesse Norman: Are there any rules or regulations that prevent
you from charging whatever you like to customers?
Derek Sach: Not that I can immediately think of other than just—
Q604 Jesse Norman: You can charge whatever you like?
Chris Sullivan: There are codes of conduct.
Q605 Jesse Norman: Codes of conduct, okay.
Derek Sach: But we wouldn’t, we are always reasonable—
Q606 Jesse Norman: It sounds like Mr Sach is disagreeing with you,
Mr Sullivan.
Oral evidence: Treasury Committee, HC 204

50

 Q607 Derek Sach: I am not disagreeing at all, but I cannot think of
a regulation that says you cannot charge more than X. But internal
pressures—Mr Sullivan and others sit on what we call the Executive
Committee of GRG so there is considerable oversight of what we do within
the bank.
Q608 Jesse Norman: Is it true that RBS staff were pressured to raise
the amount of fees charged to GRG customers?
Derek Sach: No.
Q609 Jesse Norman: Why could Clifford Chance not understand your
fees? I just do not understand that. Why was it not possible for them to
understand? It sounds like they could not understand any single case of
your fees, in any particular case.
Derek Sach: I do not know even which cases they looked at.
Q610 Jesse Norman: I think that is very—
Derek Sach: So I cannot comment. Yes, fees historically have—

Q611 Jesse Norman: Presumably they raised these fees with you?
They said, “Could you explain it to us?” Were you able to explain these
fees?
Derek Sach: Yes, all the cases are different. The complexity varies,

Q612 Jesse Norman: But it does sound as though your institution
could not retrospectively explain the fees to Clifford Chance in any
particular case; that is what it sounds like from their report.
Derek Sach: I was never asked about any particular case and if I were to see a particular
case I would have an explanation as to why the fee is what it is.
Q613 Jesse Norman: But you would accept that if it is the case that
others down the chain—you are after all the boss—could not even in
retrospect, with thoroughly intelligent people on the other side, justify or
explain those fees it is not clear that there is any accountability behind it
at all. It sounds like they are charging whatever they like. Whatever the
market will pay. There is not a structure to it.
Derek Sach: I do not think that is the case. The fees are for different purposes.
Q614 Jesse Norman: But you have not given any evidence as to why
not. All we know is that Clifford Chance have said these could not be
justified in any particular case. They have discussed it with RBS and there
has been no justification. Now you are saying, “Well, I do not think that is

Oral evidence: Treasury Committee, HC 204

51

 the case” but that is not evidence; that is a psychological first-person
report of your view. You are in charge; you would be expected to have
that view.
Chris Sullivan: I do not think we said there is no justification. There is absolutely
justification. What Mr Sach is saying to you is that every single case is different. There are
different levels of risk, different levels of stress within the organisation, different facilities
for each customer. On the basis of the mix of all of those things the relationship manager
will take a decision that would relate to the amount of risk the bank was were taking and
an appropriate reward for that risk. The appropriate reward element comes from market
practice and internal checks that are made both by the managers of the bank and then the
internal audit department above them.
Q615 Jesse Norman: But you would agree not having a decision
procedure that allows some kind of basic structure for the charging of
fees across different clients is a very strange thing, do you not think?
Chris Sullivan: That is not true, we have one.
Derek Sach: No, but there are—
Q616 Jesse Norman: You have one so you could give that to Clifford
Chance; they could have understood that; they could have seen how it
worked in each case?
Derek Sach: There are guidelines for different levels of risk.
Q617 Jesse Norman: Why did Clifford Chance not explain this or
mention it? Why were they not able to understand why these fees are
being charged? Did you give them to Clifford Chance?
Derek Sach: I imagine they saw them—they saw 1,200 documents—but I do not
specifically know whether they saw that. Over the period we have become more and more
focused on being able to explain things and being transparent. In the early days of 2008,
2009 you were looking at an organisation in terms of GRG that multiplied 10-fold over
nine months as the bank was obviously in a very difficult circumstance. But the fees are
charged for different purposes. There are fees for the time spent—which I think as lawyers
they would find hard; we do not keep timesheets; there is an estimate—but any fees that
are charged are always approved by somebody else so it is not just the relationship
manager.
Q618 Jesse Norman: Thank you. Final question. I do not think it is
appropriate to talk about the early days. As I understand it you joined
RBS in 1992 to set up a specialised—
Derek Sach: I did.
Q619 Jesse Norman: —lending service that became GRG. So by 2008
this institution had been running essentially under your guidance for 16

Oral evidence: Treasury Committee, HC 204

52

 years. You cannot suggest it is somehow a new thing. I do not know how
long you have been charging inexplicable fees.
Derek Sach: No, the quantum was just phenomenal. Any business that multiplies 10-fold
in nine months is going to have stresses and strains. But one of the things I did when I first
joined RBS was to take them from top of the league—appointing more administrators or
receivers as it then was than any other bank in the UK and RBS was very small then—
within a year to being bottom and appointing fewer. The mission was to try to do
something constructive for these customers and that has always been the ethos, and it still
is, of what GRG does. It is about restructuring. I was very much a founder member of the
London approach and the Bank of England’s initiatives in the 1990s, which led in London
to a complete world-leading position on restructuring. That has persisted right the way
through.
Q620 Jesse Norman: Final question just on this, Clifford Chance
stated that it found it difficult to assess allegations of unfairness regarding
fees and so the question is this: is a fee that cannot be explained a fair
fee?
Derek Sach: I would say it is not a transparent fee if it is not well explained to the
customer.
Q621 Chair: Is an untransparent fee an unfair fee?
Derek Sach: You are bandying words—“untransparent”.
Chair: I think it is fairly reasonable.
Derek Sach: If fee is not a transparent—
Q622 Chair: In other words, were the fees fair?
Derek Sach: Generally banks need to be much more transparent and we are trying much
harder.
Chair: All right, unless you want to carry on with that line of
questioning I think we have arrived at a pretty clear conclusion on
that.
Jesse Norman: I think if Mr Sach were on the other side of a nontransparent fee he might be inclined to call it unfair, Mr Chairman.
Q623 Chair: We will think about that as a group privately.
You said that the bank was in very difficult circumstances, I think
that is undeniable. Was there no pressure within the bank to rebuild the
balance sheet in the short term as fast as possible?
Derek Sach: There was a need to, yes, rebuild the balance sheet and improve capital but
so far—

Oral evidence: Treasury Committee, HC 204

53

 Q624 Chair: Therefore was there not a time problem, time horizon
differential, between the interests that you might have perceived on
behalf of a customer and what would be best for the ban? That is, when
you said earlier destroying a customer would never be in the interests of
the bank, if you had a shorter time horizon it might well be in the
interests of the bank if it could strengthen the balance sheet.
Derek Sach: That is absolutely right and, as you will know, the Asset Protection Agency
came into being in 2010 and they were always pushing us to go for more foreclosure for
exactly that reason, which is something I robustly resisted throughout the period. There is
quite a bit of correspondence between me and them of threats and counter threats and not
being prepared to do that.
Q625 Chair: So those who have made that general allegation are
barking up the wrong tree?
Derek Sach: Yes, and one other explanation for that as well is in the totality of the GRG
portfolio, which peaked at £80 billion, the portfolio we are looking at here, the UK SMEs,
were only six. So in particular as we move through 2010 and 2011 we were focused on
capital targets to reduce the risk-weighted assets because at one time we had about a third
of the group’s capital under our management. One was not frankly going to spend a lot of
time squeezing some poor entrepreneur in Bromsgrove to realise his £1 million when we
had huge exposures of £1 billion or more where the risk-weighted assets could be £2
billion or £3 billion. So that is where all the focus of capital reduction went. It was never
applied to these people.
Q626 Chair: It is helpful that we have that repudiation of the
frequently made allegation with respect to RBS. You said earlier, with
respect to this profit centre, this vexed question of profit centre versus
cost centre issue, that you clearly were not a profit centre because your
costs exceeded your profits. Was that what I heard you to say?
Derek Sach: We have never made a profit because we have costs. We do have income and
we have big losses, which are the impairments of those customers, and a cost that we have
never even tried to identify is the cost that divisions like Chris’ has to pay for all the
centralised computers, offices and all the infrastructure.
Q627 Chair: The fact you never made a profit has no bearing on
whether you are a profit centre; it is whether you are seeking to generate
income with a view to minimising your losses.
Derek Sach: Yes.
Q628 Chair: So that amounts to a profit centre by another name?
Derek Sach: I do not think it is a profit centre as such, but, yes, we are earning income
that is offset against the losses.

Oral evidence: Treasury Committee, HC 204

54

 Q629 Chair: You checked the Clifford Chance report for errors of
fact. Did the Large report go to your bank in draft?
Chris Sullivan: Yes.
Q630 Chair: Why in that case was this glaring error, which was
central to a large chunk of these recommendations, not flagged up?
Chris Sullivan: I can only surmise that the view was taken that that was a
misinterpretation of a profit and loss. You asked a question, is this a profit centre? Quite
clearly it is not operated as a profit centre and the description was overlooked.
Q631 Chair: But he put this before you in draft you have just told
us, and you allowed him to go ahead with page 52, which is a key part of
his report, which you are flatly repudiating today, line by line. Why were
you not repudiating it flatly when he showed it to you in draft?
Chris Sullivan: Because it was not put to us in the manner in which you put it and the
connection that Mr Sach quite clearly said to you was not an appropriate connection. So
the comments that did, I think, emanate from that particular part of the report, which said
we must ensure that the GRG behaviour is completely aligned with the customer and with
the rest of the core bank was the element that we were looking at and was the element we
took action on.
Q632 Chair: That is a very confused reply, if I may say so, to a
simple question, which is, why did you not just say to Andrew Large, “You
have it wrong”?
Chris Sullivan: Because we were not looking at every individual single sentence within it
to—
Chair: But this is not an individual single sentence—
Chris Sullivan: We were looking at the underlying.
Chair: —this is a main conclusion on the basis of which he makes
recommendations. He says that RBS governance structures do not do
enough to address potential conflicts of interest, and he then cites GRG as
needing—
Chris Sullivan: That was the element we took action on.

Q633 Chair: So it is true? There were conflicts of interest. He was
right.
Chris Sullivan: We took action to ensure there were not.
Q634 Chair: So was GRG a profit centre at the time that he made
his report?

Oral evidence: Treasury Committee, HC 204

55

 Chris Sullivan: No, it was clearly not a profit centre as you alluded to it. It had a statement
of its income and its costs in isolation from all the other economic elements of that
customer’s relationship with RBS.
Chair: Sir Andrew will have an opportunity to respond to the slightly
bizarre story that seems to be developing.
Q635 Mr Love: In an earlier answer to a question on valuations,
Mr Sach, you drew a distinction between formal external valuations and
the internal valuations that your group carries out. What do you use the
internal valuations for? What purpose are they?
Derek Sach: We try to do things with customers in a consensual—believe it or not—and
as cheap and effective manner as we can. As I said, in the very difficult period of 2009 to
2010 selling properties was a fairly academic pastime because there was not a market. So
to use an internal valuation in our discussions with customers, if they were broadly in
agreement, was quite an effective way of progressing and saying, “All right, from a
security point of view we have a property that is worth, say, £1 million”. If ever we were
doing anything to rearrange their affairs or doing something legal then they would want a
proper valuation. That would be done through the Red Book using a formal valuer
externally to the bank.
Q636 Mr Love: The Clifford Chance report comments about the use
of the assumption of a short marketing period being used consistently for
internal valuations. Did that mean that with internal valuations the price
was suppressed from what you would get for the formal external?
Derek Sach: Everyone would understand the basis on which it was done but the object of
the exercise would be to get a fairly realistic valuation, which, as you say, is probably
going to be a shorter time for marketing than if you go for the Red Book; 12 months,
willing buyer, willing seller.
Q637 Mr Love: Let me turn to West Register. According to your
reports, it purchased and held many properties sold by distressed SMEs
on your patch. Did West Register intend to turn a profit on those
properties?
Derek Sach: No, and again it is an area of loss mitigation. West Register was set up 20
years ago and it has waxed and waned since. It probably peaked in the late 1990s with a
portfolio of about £1 billion and reduced again to no more than about £10 million in 2007.
You are right that since then it has bought a lot of properties rather than dump them on the
market and get absolute fire-sale prices for them. During the period in question we bought
160 properties from SMEs for a cost of about £450 million. The actual loans we would
have made on those properties are more like £900 million to £1 billion. So, even if we
were to sell them in a year or two’s time and make a book profit on the price we bought it
in at, overall, we have still lost a lot of money.

Oral evidence: Treasury Committee, HC 204

56

 Q638 Mr Love: Explain to me what the role of West Register was. If
it was not intended to turn a profit are you in fact saying, “We were
buying these properties out of the goodness of our heart in order to
sustain the business”? If it was not a profit centre what was it?
Derek Sach: Most of the properties that West Register has bought in this cycle have been
from pure property positions, as opposed to a trading company. Its origins were doing
things like, say, in the leasebacks for trading companies where you could provide some
cash for the company and relieve them of perhaps a big burden of overhead. This time
round a lot of them would have been incomplete developments that needed to be
completed. Often the entrepreneur did not have the ability to do that. In every case where
we have bought one it is always marketed on the open market. If any other purchaser bids
more than West Register they can buy it and West Register is never allowed to bid again.
So, to keep it absolutely fair and without anyone feeling they are being dispossessed of
their property unfairly, if someone bids more than West Register they get it.
Q639 Mr Love: You will be aware of the controversial nature of
West Register and the accusations made about under-valuation of
customers’ assets. You did not ask Clifford Chance to test the accuracy of
the valuation methodology. Why not?
Derek Sach: I did not instruct Clifford Chance, so I honestly cannot comment on why we
did or did not ask them to do any specific thing. But they do comment that there is no
evidence that West Register tried to buy things at under-price, because these assets are
marketed and if somebody else bids more they will get it. That to me is a market price.
Q640 Mr Love: That may well be the case but, Mr Sullivan, perhaps
you can shed some light on why Clifford Chance, were not asked to look
at this. This was obviously an area of great controversy, the valuations
that were made of assets and the consistent complaint that they were
under-valued. It would have been simple to ask Clifford Chance to look
carefully at this to see whether there was any merit in the criticism. Why
was it not done?
Chris Sullivan: I did not instruct Clifford Chance either but, nonetheless, I would have
been very comfortable to do so. It is worth understanding where West Register was used.
Generally West Register would buy a property or such like from a customer that had
failed. So the business could not meet any of its debts and was not then trading. Therefore,
this asset had to be realised. Bids were put out and taken from the external world. If we
believed that the market was not valuing those highly enough then West Register would
put a bid in at a higher level, thus reducing the loss that the bank made and holding that for
some time to realise at perhaps a better point of the cycle. So this was not taking properties
off people and profiting from them, it was mitigating the loss the bank already had.
Q641 Mr Love: Surely the first test in all of this is to check for
manipulation of valuations and to see whether there was a systematic
bias. Surely that could have been done fairly simply.
Chris Sullivan: But as Derek says—

Oral evidence: Treasury Committee, HC 204

57

 Mr Love: That would have answered the criticisms that have been made about valuations.
Derek Sach: I am sure Clifford Chance did address this. They addressed the main
accusation of deliberately distressing companies. Alongside it, or as you go through the
first three or four pages, there are about eight separate sub-headings of things that Clifford
Chance addressed, one of which is West Register and buying at the right valuation. I am
sure it is there in some way.
Q642 Mr Love: Let me reverse this. Probably you do not know the
answer to this but perhaps you can find out for us. Did Clifford Chance
ever suggest that this would be a sensible thing for them to do in order to
address this criticism that was being made? Presumably, if you were not
involved in the report, you cannot tell us whether that is the case.
Chairman, I think it would be helpful if we could have more
information on exactly what Clifford Chance were or were not asked to do
in this regard, because it would seem sensible for them to have looked at
this systematic bias issue and they clearly have not done so.
If I can come on finally to this issue of threatening the removal of overdrafts. You
indicated earlier—and you mentioned also the unfortunate drafting of the manual—that you
were not aware that anyone had taken this seriously. Mr Sach, do you deny that there was any
behaviour of this sort that went on in your particular division?
Derek Sach: Yes, we would not treat someone in that fashion. We would say to them, “If
you are not prepared to make changes you are going to reach your overdraft limit and we
will not be renewing it” or “we will not extend it” but we would not threaten to do what I
think is suggested there, just threaten to take it away on a capricious basis to force
someone to do something.
Q643 Mr Love: Do you think that someone saying, “If you do not
play ball with us we will not renew your overdraft” is a threat?
Derek Sach: I think that is the commercial way that banks have to operate because we
have to have a regard to our shareholders to protect our money.
Q644 Mr Love: I fully understand that. What I think we are trying
to get to the bottom of is this criticism that was made that it was the
threats that were issued against your small business customers that made
them feel that you were not on their side; that this was a regular
occurrence reported by a number of small businesses that they were told
that overdraft facilities would be cancelled. You only need to give a day’s
notice to withdraw overdraft facilities. This was used regularly in order
to—if I can put it colloquially—soften up the customer.
Derek Sach: Yes. I mean I can only say that is not done. Invariably we extend people’s
overdraft and the forbearance, which we are quite famous for and again got into conflict
with the APA over, is we frequently allow customers to go over their overdrafts. In
addition to that, over the last three years we have formally advanced £100 million of new
money—more than £100 million, £120 million—to these SMEs to help them with their

Oral evidence: Treasury Committee, HC 204

58

 problems. We just do not do that. We have been examined as well by other independent
people with a different perspective. The APA commissioned McKinsey to look at us in
2010, and they concluded that we were a good comparator with other organisations they
had seen in Europe and the United States. The FSA did a visit to GRG with a team of
about half a dozen people in 2011. They produced a report whereby they said we were fit
for purpose. So again these things would have been looked at by both of those.

Q645 Stewart Hosie: Mr Sach, you said a bit about the salaries of
your staff. You said they were in the £30,000 to £60,000 range. These
seem very modest for people who the bank would put in to restructure
businesses that would have substantial liabilities if they get it wrong, not
just to the bank but at the moment to the taxpayer.
Derek Sach: These are the sort of range of salaries of the typical person who is dealing
with an SME. We are looking at a very discrete part of the overall portfolio, the 10,000
SMEs. But let me just check with Chris. I would not like to mislead you.
Chris Sullivan: We are talking about the relationship managers who would be dealing
with small to medium-sized enterprises. We are not talking about relationship managers
who would deal with very, very large restructurings, so I think the £30,000 to £60,000
range that Mr Sach described is appropriate.
Q646 Stewart Hosie: It did strike a number of us as very low salary
figures for staff—
Chris Sullivan: It is not often we get accused of that.
Q647 Stewart Hosie: I am sure your staff will be pleased to hear
that. It has been said earlier that GRG can insist on a transfer of a
business into GRG, but it has never been used for any SME. This is for
larger businesses. Can I confirm, Mr Sach, that what you said at the
beginning would still apply, that the assets and income from the business
being transfer would still remain with the donor division?
Derek Sach: Yes.
Stewart Hosie: So, even though you insist on it and handle it
completely, the assets and income still remain with the donor division?
Derek Sach: Yes. What transfers is the management.
Q648 Stewart Hosie: All right. If I can also go back again to where
you spoke about how you deal with businesses in relation to valuations in
a cheap and effective manner. You will be aware—and we are all certainly
aware—that businesses have come to us complaining bitterly about
multiple valuations at your insistence but at their cost. That does not

Oral evidence: Treasury Committee, HC 204

59

 really chime with the cheap and effective manner argument that you
made earlier.
Derek Sach: We would never charge for the internal valuation but, yes, on occasions the
documents will require, or the situation they are in will require, that a formal valuation is
undertaken and, yes, regrettably they do have to pay for that.
Q649 Stewart Hosie: Again the criticism is that these are multiple
valuations. It is not just once, it is every six months or every year. You
will be familiar with these arguments, I am sure.
Derek Sach: I am not familiar with people having to have multiple valuations at our
request. Sometimes a customer will want to have his own. Usually we try to agree with
them who is going to do the valuation. We have a panel of valuers who we use and we will
offer them four or five and say, “Is there one of these that you would like to use?”
Q650 Stewart Hosie: I was going to ask about that because, again, it
has been put to me that the bank have insisted on a particular firm,
whereas the business would prefer a different firm who have much more
understanding of that portfolio. Why would the bank insist on one from
their panel rather than a professional valuer who knows the portfolio
better?
Derek Sach: Like all hypothetical examples you need to see the particular to be sure, but I
would surmise that, for some reason or another, the bank would not be confident that the
valuer the customer wanted was going to provide the right valuation. I would have to look
at the particular situation.
Q651 Stewart Hosie: Of course, but presumably it would be the
correct valuation rather than the right valuation?
Derek Sach: Well, valuation is an art as well as a science so I am—
Q652 Stewart Hosie: Let’s talk about valuations then. You made the
point earlier, quite understandably, that over a number of years recently
properties in particular may be unsellable. But there are instances where
the bank may deem that to be the case but the business will say, “I
understand why the valuation may fall but it is fully tenanted. There is an
income stream in terms of the loan I had. Affordability was not an issue”.
Do you understand why sometimes businesses—particularly in property—
thought some of the decisions taken by the bank were slightly irrational?
Derek Sach: Businessmen will often have that view and I appreciate that they can be in a
difficult position. But the example you describe where they were able to service their loan
we would more or less never ever foreclose on that. That again has been the subject of
criticism by people like the APA. I have always taken the view—and this the team would
agree with—that if a property customer like that can service their loan, as you say it is
fully tenanted, then it must make sense to carry on with that business.

Oral evidence: Treasury Committee, HC 204

60

 Q653 Stewart Hosie: You said that the bank would not foreclose in
those circumstances. I appreciate that. But the bank may decide to
reduce facilities, to reduce exposure, indeed to suggest that a business
re-bank, and they may well do that on the back of a business review,
again, which the business pays for.
Derek Sach: Again, in GRG I do not believe we would be very likely to say, “We are
going to reduce your facility” like that. We would say to a customer, “We disagree with
what you want to do, therefore we think it would be a good idea if you were to re-bank
within the next six months” or something like that. I think that is a good, open and honest
conversation to have with customers. They are always upset the day you have it but,
assuming they are successful in re-banking, they are quite pleased because they have gone
somewhere that wants them as opposed to somewhere that doesn’t rate their future.
Q654 Stewart Hosie: But in terms of requesting or suggesting that a
business re-banks, if that is done on the back of a business review, which
the company pays for, there have again been allegations that the
businesses themselves do not get sight of the reviews that they pay for,
which the bank request. Is that correct?
Derek Sach: I do not believe that ever happens because the customer is paying for it and,
whether it is a surveyor’s report or one of the infamous independent business reviews—
which I have to say I am not a proponent of—the customer always gets sight of it.
Stewart Hosie: Always?
Derek Sach: I cannot think of a circumstance where he wouldn’t. In 10,000, yes, I would
accept that you could find an exception of everything somewhere but the policy and
philosophy is the customer has to agree it. It is not worth an awful lot if he just says, “It’s
not right”.
Q655 Stewart Hosie: One final question. You said in relation to West
Register that even if the properties in the portfolio now were sold marked
up from the book price, the price at which you bought them, the bank
would still lose money. That of course is not necessarily true, is it, if the
price increases over the next few years from the book price?
Derek Sach: Let me take you rapidly through the whole process: we lend a man £1 million
to buy a property for £1 million in 2007 at the height of the boom. West Register buys it in
in 2011 for, let’s say, £500,000—so we have lost £500,000—and with good fortune we
sell it next year for £550,000. End to end we have lost £450,000. I accept West Register
shows it has made £50,000, but end to end the West Register UK property companies have
lost something like £120 million over this period. I will confirm the figure for you. So
even over the book values they have lost money. Admittedly, most of them are large
properties. They are not SME properties.
Stewart Hosie: That is helpful. Thank you.

Oral evidence: Treasury Committee, HC 204

61

 Q656 Chair: Thank you very much for coming to give evidence this
morning, now afternoon. It has gone on a bit longer than expected but
there has been a great deal of concern publicly, widespread concern,
about RBS’ lending practices over the last few years, so you understand
the reason. We all have constituents who have come to us with
complaints and we have come to the conclusion that there is unlikely to
be all this smoke without some fire somewhere, which has been borne out
by a number of the reviews.
It has been an uncomfortable hearing perhaps at one or two points but you have given
very direct replies, if ones that have surprised the Committee from time to time. Thank
you very much for coming in to see us.

Oral evidence: Treasury Committee, HC 204

62