ASB to pay $3.2m in interest rate swaps case
24 December 2014
The Commerce Commission has reached a $3.2 million settlement with ASB Bank Limited in relation to its marketing, promotion and sale of interest rate swaps to rural customers between 2005 and 2009.
The settlement will make available $2.7 million to compensate the 40 eligible customers who registered their complaints with the Commission. ASB will also pay $250,000 to the Commission’s costs and another $250,000 to the Dairy Women’s Network.
The Commission’s investigation into ASB looked primarily at whether the bank had marketed interest rate swaps in a way that may have misled customers as to their benefits, risks and suitability. The Commission considers that ASB’s behaviour was likely to have breached the Fair Trading Act.
The Commission’s conclusions have not been tested in court and ASB says it does not accept them. However, ASB has agreed to make an out of court admission that some of its conduct breached section 9 of the Fair Trading Act in relation to some named customers.
The smaller settlement amount compared to the recent ANZ settlement is due to two facts. Firstly, ASB chose not to increase farmers’ loan margins, meaning that the settlement relates primarily to early termination fees paid by eligible customers. Secondly, the Commission received a much smaller volume of complaints about ASB’s swaps.
Commerce Commission Chairman Dr Mark Berry said the settlement was a good outcome for the 40 eligible farmers. It is the Commission’s expectation these farmers will be compensated 100 percent of their reasonably recoverable losses.
“ASB’s behaviour led some customers to believe that early termination amounts would be similar to break costs on equivalent fixed rate loans, and that swaps would be a good substitute for them for a fixed rate term loan. In many instances this was not correct, and some early termination amounts could be substantially higher.
“But we are pleased ASB’s case has turned out to be narrower and only concerns early termination fee losses. ASB did the right thing by its customers when it could have tried to move margins, and we recognise that it honoured customer’s expectations in that regard despite the bank facing increased funding costs after the global financial crisis,” Dr Berry said.
Dr Berry said securing a settlement was important as it meant the uncertainty of contested and lengthy court proceedings would be avoided.
“There was no guarantee of court awards for each complainant given the amount of time that has passed since these swaps were sold. By reaching this settlement farmers have certainty and will not need to go through the stress of proving their individual losses to the court in relation to events that occurred seven to 10 years ago.”
In January, the Commission will begin contacting the 40 customers who may be eligible for a payment under this settlement. Payment offers will then follow, with funds expected to be distributed by the second half of 2015.
As a result of the Commerce Commission investigation, the Financial Markets Authority has engaged with ASB in relation to interest rate swaps. Any matters arising from this engagement will be announced separately.
“Settlements with ANZ and now ASB bring the total amount of compensation to be paid to rural customers stemming from our investigation to $21.2 million. We expect to be able to announce the outcome of the Westpac case early next year,” Dr Berry said.
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 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.
More information about the interest rate swaps case can be found on the Interest Rate Swaps page.