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Questions plague swaps scandal

 SCOTT HAMMOND/Fairfax NZ  Jeanette Walker, who exposed the swaps scandal, says farmers deserve to know the full story. SCOTT HAMMOND/Fairfax NZ Jeanette Walker, who exposed the swaps scandal, says farmers deserve to know the full story.
The Commerce Commission made no effort to discover ANZ's motives for selling interest rate swaps to farmers, leading to a suggestion the regulator "wimped out".

ANZ this past week agreed to pay $19 million to settle the commission's investigation into the bank's alleged mis-selling of swaps to farmers between 2005 and 2009.

The money will be used to compensate the 178 farmers who laid complaints with the Commerce Commission over the way the bank marketed the complex swaps. They represent a minority of the 1500 farmers to whom ANZ sold swaps.

The swaps were complex loan arrangements marketed as similar to fixed rate loans, the commission said, but farmers were unaware the fixed rate contained a "margin" that the bank could move if its funding costs rose or if the financial position of borrowers worsened.

When the global financial crisis struck in late 2007 and early 2008, ANZ lifted its margins, plunging some farmers into deep financial trouble from which some would not recover.

Commission chairman Dr Mark Berry said it had not inquired into ANZ's motivations for selling the swaps, which effectively moved the risk of the bank's funding costs rising onto the shoulders of farmers at a point in time when rural interest rates were at historical lows. "We can't speculate as to what the banks' motivations were," Berry said.

The commission had not sought evidence of why National Bank, which ANZ bought in 2003, sold the loans.

"All we had an inquiry into was how was the product actually being sold," he said. Breaches of the Fair Trading Act were the "sole line of inquiry".

Berry said the commission had also sought no evidence on whether bonus structures within the banks had incentivised the sales, something that has been a big focus of regulators in the UK and US when inquiring into bank mis-selling.

Labour MP Damien O'Connor said the failure by the commission to seek evidence of why the ANZ promoted the swap loans continued a long New Zealand tradition of "narrow" inquiries and commissions.

It would not have happened in the UK or US, he said. "This is all too comfortable for everyone but the farmers," he said. "The gutless Commerce Commission have wimped out."

His colleague Clare Curran, who believes it is time to strengthen the Commerce Commission, was similarly unimpressed.

"I'm underwhelmed and I wish they would do their job."

The woman who uncovered the swaps scandal, Jeanette Walker,

said farmers deserved to know the full story of how ANZ came to bring swaps to market.

The commission has also investigated Westpac and ASB, both of which have yet to strike a deal with it, though many now expect that to happen before Christmas.

There were 44 complaints against ASB, and 37 against Westpac.

ANZ, which denies it mis-sold the swaps, has said the swaps were a legitimate tool to manage interest rate risk and that farmers were fully informed about the risks of using them.

Although the bank admitted it had misunderstood the risk of the swaps, it argued many farmers were "sophisticated business people running large commercial operations".

"ANZ's managers expected at the time . . . that margins would not increase, as margins on rural floating loans had been decreasing for over 20 years," it said in the settlement.

When ANZ did lift margins, it said it did so legally.

"Any margin changes followed the GFC, an unprecedented and unforeseen event," it said. The bank had absorbed "most" of the funding cost increases, it said.

Berry acknowledged the settlement was "not perfect", but said it was a pragmatic one which weighed up public interest with the interests of the complainants, and the uncertainties of taking a case to court. He said many complainants were happy with it.

One complainant, Don Charleston, is angry the commission has effectively deserted farmers who dared not complain, "shackled" by fear the banks would foreclose on their loans.

The settlement bars the commission from helping any new complainants who come forward.

But Berry said he would imagine customers will be approaching the bank and asking whether there is "something in it for them".

ANZ would not say how it would treat new approaches from customers.

"Well before the commission's investigation we began a process of helping rural interest rate swaps customers disadvantaged by the changed interest rate environment after the global financial crisis," the bank said.

"We're pleased the matter is now closed."

It may not be. Civil cases against the ANZ and Westpac are being pursued through the courts.

 - Sunday Star Times

Source: NZ


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