Sorry tale of swaps no one understood
It has been a victory - of sorts - for farmers with the Commerce Commission last week saying it intended filing court action next March against the ANZ, ASB and Westpac banks for "misrepresenting" the sale of interest rate swap loans to rural customers.
I say a victory of sorts because there's a lot of water under the bridge yet to get compensation for farmers, some of whom ended up more heavily indebted and losing their land.
Sold between 2005 and 2008, interest rate swaps were marketed to farmers as a way to beat rising interest rates. When the global financial crisis hit in 2008 farmers with swaps saw the interest they were paying rise when rates were falling rapidly elsewhere. The banks charged huge break fees for those wanting to exit the swaps.
At issue is whether the banks breached the Fair Trading Act as some farmers didn't seem to really know what they were buying into. These are sophisticated financial derivatives. To be fair, Federated Farmers has said some of its members were happy with using swaps.
While you could argue the farmers should have got independent legal advice, most trusted their bank advisor to have been acting in their best interests. As it turned out, in my view, they were acting in theirs.
The three banks have said they're co-operating with the commission, with Westpac and ANZ saying they would defend the mis-selling allegations. But the ANZ has said there are "historical issues", with the three-year limitation period under the Act to obtain compensation for farmers having already passed (see our story on page 5). The commission said it had taken all factors into consideration before threatening legal action.
It seems to me the best outcome for taxpayers and the farmers would be for the banks to agree to a process where each sale of these swaps is re-examined and compensation paid where wrong was done. Not every case will fall into this category but the commission has received more than 140 complaints from farmers to date. As part of the court action it will seek compensation for losses suffered by affected farmers who assist in the legal action. It also says the door isn't closed for those that have already settled - it will depend on the circumstances. In the UK - where interest rate swaps were sold heavily to businesses and rural lenders - the banks involved are up for billions after agreeing to re-examine their sales on a case-by-case basis and offer compensation.
Here the banks aren't saying how many of these products were sold to farmers. The commission is seeking further information from them to reach a view on the scale of the alleged loss. Consider also the explosion in farm debt - from 2001 to 2009 agriculture sector credit almost quadrupled from $12.8 billion to $46.8b.
One other bank, which is yet to be named by the commission, is also under investigation and could be joined to any court action if it goes ahead. Its investigation is limited to farmers at this stage but it has also asked for complaints about the mis-selling of swaps from any other businesses.
Federated Farmers has taken what I'd call a muted approach publicly on the issue - it could have done more to openly criticise and publicise what went wrong. But it is understood to have been active behind the scenes, particularly around helping its members on debt mediation with the banks. Its complaints to the commission - along with a series of articles from August last year in this paper and our sister publication Straight Furrow - sparked the investigation which began well over a year ago.
The biggest campaigner has been farm debt negotiator and Federated Farmers board member Janette Walker who in a 2010 submission on a review of the New Zealand Code of Banking Practice wrote that an example of the code being breached was "the aggressive marketing of SWAPs facilities" (interest rate swaps). She wanted to see a regulatory body overseeing the introduction of new lending products to ensure that integrity and transparency are maintained.
Federated Farmers' submission to the same review also raised concerns, saying "some farmers have even claimed to us that their bank has admitted to them that their staff did not adequately understand swaps."
The 2012 Code of Banking Practice, the banks' voluntary code, makes no mention of interest rate swaps, break fees, or a set formula, despite the submissions. It's pretty clear to me whose interests they represent - that of bank shareholders.
This is the last issue of the business section for 2013 and we'll be back on January 19 2014. We wish you a Merry Xmas and it's already shaping up to be a prosperous New Year, or as one economic commentator has said "a little ripper".
Bring it on.
Sunday Star Times