NZ could follow UK swaps lead

21:45, Dec 19 2013

New Zealand could follow the UK's example on how to deal with an interest rate swap mis-selling scandal.

This week, the Commerce Commission announced it planned to launch legal action under the Fair Trading Act alleging that ANZ, Westpac and ASB had misrepresented interest rate swaps to farmers and other rural borrowers during 2005 through to 2008.

The swaps were, farmers claim, sold as protection against interest rates rising, but when the Global Financial Crisis struck in early 2008, borrowers found the interest rates they paid spiral up driving some to the wall.

Similar claims in the UK led to the Financial Complaints Authority there investigating the big banks which had sold swaps to urban businesses like pharmacies, and in June last year, banks including Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland agreed to join a "redress" process under which claims of mis-selling would be assessed and compensation paid.

Together, Britain's Daily Telegraph reported, the largest banks have set aside about £3 billion (NZ$6b) to compensate customers mis-sold interest rate swaps, though some believe the final bill could exceed £10b.

Farmer's advocate Janette Walker, who first uncovered the damage swap sales to farmers had done in New Zealand, said dealing with claims on a case by case basis outside of the courts could work here too.

But she said: "There would need to be oversight."

The process would have to be overseen by independent bodies, she said, including Parliament's primary industries select committee, which she hopes to find a place on should she be elected to Parliament as a Labour candidate in the next general election.

Walker said she expected the banks to settle before the case got to court, as in the ANZ bank settlement with the commission in 2009 and 2010 which saw more than $500m in compensation paid to investors in two managed funds, who thought they were buying safe alternatives to term deposits, but instead saw the value of the funds plummet when global financial markets crashed in late 2007 and 2008.

That could open the door to a UK-style redress scheme, Walker said.

Though the redress process in the UK, which is funded by the banks there, is becoming a model the UK uses to deal with mis-selling scandals, and is mirrored another UK scheme under which the banks there are compensating customers they mis-sold personal loan payment protection insurance to.

But it is not without its critics, and the banks have been accused of foot-dragging. The FCA said it expected all swap mis-selling claims to be dealt with within 12 months, but progress has been slow, and in October, the Daily Telegraph reported the disappointment of Sajid Javid, Financial Secretary to the Treasury, on the FCA's inability to speed things up.

Former ANZ banker Sarah Lockhead-MacMillan agreed that was a possibility, but she said the sales were so extensive, and that many swaps were properly sold that: "The untangling of this will be very very tough."

ANZ, Westpac and ASB all say they are cooperating with the Commerce Commission's inquiry, but Westpac added that it planned to vigorously defend the claims.


Fairfax Media