The Commerce Commission says it has reached a $19 million settlement with ANZ over the marketing, promotion and sale of interest rate swaps to rural customers between 2005 and 2009.
Talks with Westpac and ASB, the other two banks investigated by the Commission in relation to interest rate swaps, are continuing.
The ANZ settlement will see ANZ establish a payment fund of $18.5 million, to be used to make payments to up to 178 eligible customers who are those who registered their complaints with the Commission.
The Commission will also get $500,000 towards its investigation costs. On top of this some money from the payment fund will be distributed to charitable organisations to assist the rural community.
The Commission says ANZ has also agreed to admit in High Court proceedings that it engaged in certain conduct that was misleading to some eligible customers. The Commission will be seeking High Court declarations that the bank’s conduct breached the Fair Trading Act 1986, with a hearing expected early next year.
Commerce Commission chairman Mark Berry said the investigation into ANZ looked primarily at whether the bank marketed interest rate swaps in a way that may have misled customers as to their benefits, risks and suitability.
"The Commission considers that ANZ’s behaviour led some customers to believe that margins on the loan connected with the swap would not change, early termination amounts would be similar to break costs for equivalent fixed rate term loans, and that swaps would be for them a good substitute for a fixed rate term loan. In reality, ANZ could, and in some instances did, increase margins, and early termination amounts could be significantly higher," Berry said.
"The Commission’s conclusions have not been tested in court and ANZ says that it does not accept them."
Berry described the settlement as a very good outcome because contested court proceedings would have meant uncertainty and lengthy delays in achieving any possible payments.
"We are pleased to be able to deliver payments to eligible customers much more quickly than might be achievable through the courts. The payments to be made under the settlement are, in our view, a reasonable approximation of the potential losses that the Commission could have recovered on their behalf, if we had been successful at trial. These payments will include amounts that eligible customers incurred by way of extra margins and additional early termination amounts for those who broke their swaps, or extra costs for those who did not.”
"We are also pleased that ANZ has put its hand up and admitted that some of its conduct was misleading," Berry added.
Over the coming week the Commission will contact the 178 customers who may be eligible for a payment under the settlement. Payment offers will be made to them in 2015 with the Commission expecting funds to be distributed by the end of September next year.
ANZ pleased to be first to reach 'an arrangement'
In ANZ's statement, Graham Turley, the bank's managing director for agri business said ANZ was pleased to be the first bank to reach "an arrangement" with the Commerce Commission and Financial Markets Authority (FMA).
"Over the past couple of years we’ve been working with the Commission and FMA to resolve outstanding historical issues with a small number of mainly former National Bank rural customers who have raised issues. We’ve agreed to put a sum of money into a fund which the Commission will determine how to distribute. It will be administered by a third party and a significant amount of money will also go to help the good work of Rural Support Trusts," Turley said.
“We had already begun a process several years ago to help many rural interest rate swaps customers disadvantaged by the changed interest rate environment after the global financial crisis. Notwithstanding customers had access to, and often took legal and other professional advice before entering into their rural interest rate swaps, this arrangement with the Commission brings certainty and avoids years in the courts for everyone," Turley added.
FMA says ANZ's conduct was misleading
The FMA said it too has reached a settlement with ANZ having looked at the bank's sale, promotion and marketing of the rural interest rate swaps under the Securities Act 1978. The FMA said it found ANZ’s conduct misleading, especially in regards to;
· Statements that interest rate swaps were like fixed-rate loans, but more flexible;
· A failure to disclose a right to charge margins without any intervening event. And;
· A failure to disclose materially different early termination amounts for the swap agreement compared to a break fee on a fixed-rate loan.
However, the FMA said ANZ doesn't accept the FMA’s views and argues there are "various defences available to it." Nonetheless as part of the settlement ANZ has provided the FMA with enforceable undertakings in relation to the bank's future conduct.
"Specifically, the undertakings require ANZ to engage a third-party to review its processes and procedures for future sales and marketing of interest rate swaps and forex forward contracts. The report from the third-party will be provided to ANZ and then to the FMA," the FMA's head of litigation Paul O’Neil said.
"Following consultation with the FMA, ANZ will implement the recommendations in the review."
Here's the FMA-ANZ agreement in full.
ASB 'co-operating', Westpac 'engaging'
Meanwhile, an ASB spokeswoman says ASB continues to cooperate with the Commerce Commission’s ongoing investigation.
"As the Commerce Commission has previously stated, different facts and circumstances apply to each bank. As discussions are continuing, we have no further comment at this time," the ASB spokeswoman said.
And a Westpac spokeswoman said; "We continue to engage in constructive discussions with the Commission."
Here's some background from the Commerce Commission
Interest rate swaps are a financial derivative product that allows a borrower to manage the interest rate exposure on their borrowing. They were typically provided to large corporate and institutional customers, but from 2005 they were offered by various banks to some rural customers throughout New Zealand.
In August 2012 the Commission began enquiring into whether interest rate swaps were misleadingly marketed from 2005 to 2009. On 17 December 2013, the Commission announced that it has advised three major New Zealand banks (ANZ, ASB and Westpac), that it intended to issue legal proceedings in March 2014 over their sales of interest rate swap contracts to rural customers. In April 2014, the Commission announced it was assessing new information and furthering discussions with each bank.
11 Comments
Interesting to note how much more effective the Commerce Commission is at ensuring victims are recompensed as compared to the defunct Securities Commision and its replacement the Financial Markets Authority which appears similar to it's predecessor ie all words, no efective or timely action.
I must say I am astounded at the small size of the reparations, given the old NBNZ was supposed to be one of the bigger rural lenders. The publicly disclosed fixed payment bank liabilities via uridashi bonds etc (view figure 3.13 page 20 of 60) that the banks were exposed to around 2008 is stated as ~NZD 60 billion. I thought the banks would have passed the risk to farmers in much greater size. Begs the question who really ate the marked to market costs as fixed term debt issuance rates collapsed post GFC?
Disclosure Statement - I am a pre-positioned OBR lender to the ANZ, hence my 'crocodile tears' are subject to excuse.
This is a partial guess without looking at all the facts, but the settlement related to the misselling of the product.. not the total mark to market losses. So, for settlement purposes, the settlement would be the difference between what the farmers paid under the swap, versus a traditional fixed rate product. Also, the 60 Billion figure you mention is across the whole book, and includes what the banks in house treasury would have used to hedge their mortgage book
The ANZ settlement will see ANZ establish a payment fund of $18.5 million, to be used to make payments to up to 178 eligible customers who are those who registered their complaints with the Commission.
The Commission will also get $500,000 towards its investigation costs. On top of this some money from the payment fund will be distributed to charitable organisations to assist the rural community.
Aprroximately an average payment of $104,000 per farmer/farm unit ?
Hmmmm-
Farmers we have spoken to, many of whom are heavily in debt, say the swaps cost them hundreds of thousands of dollars in extra interest. For some, the figure was more than $1 million.
That, they say, has stripped the profit from their businesses and turned a financial crisis into a disaster. Read more
An advocate for farmers who were sold crippling interest rate swaps is disappointed with ANZ's "small change" settlement of $19 million, and has raised the possibility of a class action. Read more
I would hope that the court takes a critical eye to people with risk of $1million who would enter into such policies without high levels of due diligence.
Surely such large investment wants sizable degree of dilligence and independent assessment... not just passing risk on to banks shareholders and savers.
True, and many of the claimants claimed they lost money because they "fixed" high with a swap and then rates fell. The exact same thing would have happened using a fixed rate term loan so only those that can legitimately make a claim that they didnt understand it only fixed the base rate, not the margin, would have any argument for a claim.
Well even in those circumstances the claim would have to hinge on the Bank doing a poor job, there is no rule saying that people have to be protected from bad decisions or poor investment choices, or even entering contracts which they don't understand.
What needs to be proven is that the bank took advantage of these people, that the bank didn't properly have the risk information available (which I think is what the real case hinges on), that the bank _knowingly_ allowed & even _encouraged_ people to sign knowing that those people didn't understand what they were signing and didn't have proper financial explanation and that the customers hadn't waived that right (that the banks representatives didn't adaquately explain the product or the risk and often didn't understand it themselves, and got people to sign because bank said "sell this" to reps and the reps didn't check that they had either sort appropriate levels of advice for this risk category or knowingly waived their right to seek independent advice)
Enforceable undertakings are just that. the proposition that they mean less as not gone past the judge is a poor one.
however the thinking behind such PR/image driven chatter is well recognised the world over:
http://nzh.tw/11368042 If you want to see the settlement agreement between ANZ and FMA scroll down the bottom of this link.
The settlement is based on Com Com finding banks breached the Fair Trade Act by selling a product through misleading conduct, therefore miss selling.
The FMA breaches were in relation to security disclosure documents or lack of them.
Agree with you Stephen the amount 19 m is paltry, considering the impact on rural business
Cowboy, the argument as in the UK is around sophisticated and unsophisticated borrowers.
Many of the Bank staff pushing the sell didn't even understand what they were doing., let alone the farmers.
Some farmers were told if they didn't accept the product, the bank will have to review the business relationship, in other words DCM
Incentivised lending at its worst. The banks relied on past relationships and farmers trusted their banks.
Swaps selling was Charlie Grahams baby along with Turley and Rural growth Funds, another missold product with serious consequences.
The bank did take advantage, sold Swaps as " fixed rates with benefits" Talking up the interest rate at the same time scare mongering.
There is a law that consumer can not be mislead or miss sold a product has to be "fit for purpose"
Here's what Labour's Damien O'Connor has to say on the ComCom-ANZ deal;
ComCom gutless and ineffective when it comes to protecting Kiwis
The Commerce Commission’s announcement that it had reached an agreement with the ANZ bank over swap loans is both sad and cynical, Labour’s Primary Industries spokesperson Damien O’Connor says.
“The Commission has found failings by the bank but then lets them off the hook with a paltry $18.5 million payment for total absolution. Even Mother Teresa would struggle with this level of forgiveness for a bank that between 2005 and 2009 pocketed $6 billion in pre-tax profits.
“They have eliminated any possibility of a further investigation into the selling of millions of swap loans by the ANZ to New Zealand farmers between 2005 and 2009.
“The Commission has proved once again it is too gutless to take on the big boys. This decision fails to expose a practice that misled farmers into taking loans with unknown and hidden costs, leaving thousands out of pocket.
“The supermarkets walked away free, Chorus continues to overcharge for access to its copper network and the banks will now carry on milking farmers. The Commission needs to grow a pair or move over for an organisation that will act on behalf of hard working Kiwis, not the corporate giants.
“Many farmers were prevented from coming forward by confidentiality clauses in bailout packages when banks realised they were going to have to explain their swaps selling practices.
“In both the UK and Australia banks have been held to account for practices that were deemed misleading and unethical for lenders and investors who were ill equipped to understand these complex financial products. New Zealand has failed to do the same,” says Damien O’Connor.
Lest we forget. There is a post-script to that
Back in 2009-2010 at the height of this saga, one Janette Walker, who was destroyed by this was a regular contributor to these pages, expressing her pain, until the day she capitulated and had to give up. Lost her farm completely
She rates a mention by Bernard Hickey in his daily bulletin with Marcus Lush
The decision is worth approximately $96,000 (average) per farmer
Hardly touches the sides
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