Interest rate swaps are not an appropriate product for most farmers, Rabobank NZ's chief executive says.
Interest rate swaps were not a suitable product to promote to rural banking customers, according to the chief executive of Rabobank New Zealand.
"We were certainly aware that other banks were offering swaps to farmers at the time, but we took the view that our main rural products allowed farmers to manage their interest rate risk equally as well as a swap, without some of the downsides," Ben Russell says.
"We felt that our main product was a good one and that we didn't need to promote a product that wasn't really set up for the rural audience we were targeting."
Since allegations of mis-selling of swaps by some banks surfaced in August, Russell has been keenly following the story and now he has shared his views.
The Commerce Commission is currently assessing information it has received from the Sunday Star-Times and farmers before deciding whether to launch a full investigation of the sales under the Fair Trading Act.
"This debate has been interesting, but there is nothing inherently wrong with interest rate swaps as a product," Russell said. "The issue is that they're not really a product that should be mass marketed. They're for a specialised financial market . . . and take a bit more explaining than a standard fixed-rate loan.
"We didn't feel that swaps were an appropriate product for the rural market. From memory, we did have about five customers
who specifically requested swaps and who we felt understood what they were getting into and understood the benefits and risks of the product, so we were quite happy to provide a swap contract with those clients.
"So we didn't have any philosophical objections to the product. But for the majority of our rural clients, we didn't feel that it was necessary for them to be able to manage their interest-rate risk," Russell said.
In view of the unceasing allegations surfacing about the mis-selling of swaps, does Russell believe that a full-scale inquiry is now justified?
"All I'd say is that banks need to be very careful about the products they promote to any customer group," said Russell.
"I think there is a real obligation on bankers, or anyone who is promoting financial products to any person, to understand the products in full and to explain it very clearly to the client. That's a non-negotiable part of being a banker in Rabobank's view."
"I don't want to be necessarily critical of other banks, and it's very hard to generalise across the whole industry, but, by the same token, if customers feel that they've been in any way misled, or not had the product properly explained to them, then they've got every right to investigate whatever remedies are open to them."
Just as one farmer operates differently to the next, so do banks.
"Rabobank is a co-operative bank," Russell explained. "For us, it's not so much about promoting products but having the right product for the customer, and we didn't feel that swaps were the right product for the majority of our rural customers."
". . . It doesn't mean we're not commercial - we need to be profitable and make money - but at the heart of the bank is doing the right thing by the customer. I think that culture has served the bank well in all sorts of different ways."
Russell does not believe that some banks have any case to answer in relation to farmers getting stuck at very high interest rates as, in that regard, swaps are no different to a fixed-rate loan.
Regarding the increase of certain banks' margins on the loan, however, Russell believes farmers have a more legitimate cause for complaint.
Given the estimated hundreds of millions of dollars the banking sector harvested from marketing swaps between 2006 and 2009, has Rabobank ever regretted not selling more swaps ? "No, I'm delighted we didn't sell swaps to people who didn't understand them. I don't regret any of the swap loans which we did sell, which you could count on one hand. We haven't had a single complaint about how we handled those, but I'm pleased that we stuck with the rural products which have been designed and customised for our rural market.
"There was a lot of pressure at the time to start offering swaps because our customers were saying, ‘Well the other banks are offering these swaps - they seem to be a good thing. Why aren't you guys offering them?' So we did come under some pressure to offer them but we decided not to."
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