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Critics slam bank compensation for rural interest rate swaps as woeful
Tue, 17th Feb 2015
FYI, this story is more than a year old

Critics of bank settlements over interest rate swap loans claim farmers haven't been paid as much in compensation as they would have if the matter had gone before the courts.

Westpac Banking Corp's New Zealand unit has today agreed to pay $2.97 million in a settlement with the Commerce Commission over the way the bank sold interest rate swaps to farmers between 2005 and 2012.

The Westpac deal takes total compensation payable by it, ANZ Bank New Zealand and ASB Bank to $24.2 million and ends investigations by the commission and Financial Markets Authority.

Labour's Primary Industries spokesman Damien O'Connor said the commission had proven about as "useless as tits on a bull" because it failed to follow through with threatened court action against the banks, opting instead for the certainty of a negotiated cash settlement.

"This deal means - along with agreements struck with ANZ and ASB - that banks have financed their way out of court action with nominal payments to a few hundred farmers, a small number of those affected," O'Connor said.

"The reluctance of the commission to follow through with court action undermines the integrity of our legal system and reinforces the growing view that money buys justice," he said.

Janette Walker, a former farmer who now negotiates on behalf of farmers with the banks over debt problems, originally pushed for the commission's investigation after becoming aware of the scope of the problem when surveying rural debt in 2010. She said farmers were likely to have got more compensation if legal action had gone ahead.

"I'm really disappointed, gob-smacked at the miserly amount the banks have had to pay in compensation. It's woeful," she said.

Some farmers have also negotiated confidential settlements with the banks outside of the commission's efforts and Walker said these amounts have been more generous. She claimed to have seen one settlement where one farmer alone was paid around a quarter of the total compensation achieved in settlements with the three banks.

Commerce Commission chair Mark Barry said it was a good outcome because payments to be made under the settlement were a reasonable approximation of the potential losses that the commission could have recovered through any court proceedings.

"In reaching the settlement farmers have certainty and will not need to go through a potentially lengthy court process," he said.

Interest rate swaps are a financial derivative product that allows a borrower to manage the interest rate exposure on their borrowing. Typically aimed at large corporate and institutional customers, from 2005 they were offered by various banks to some rural customers nationwide.

Westpac didn't accept the commission and FMA's view that it had misled rural customers on the benefits, risks and suitability of the loans but it did admit having breached the Fair Trading Act in relation to some customers.

A total of 179 farmers laid complaints with the commission but Walker said about 1500 farmers had been affected and many were reluctant to come forward despite the commission getting assurances from the banks there would be no repercussions against those who complained.

Walker said by her estimates around $8 billion was lent on the interest rate swaps during the period investigated at rates ranging from 9 percent to 12 percent, and hefty break fees were also charged to those who found themselves locked into high interest rates they couldn't get out of when rates went down.

As a result of the commission's investigation, the FMA entered into a separate settlement with Westpac that involves the bank appointing a third party to investigate the way it markets and sells interest rate swaps and its Notice Saver PIE, a savings account that prevents customers withdrawing their money for 32 days as an inducement to save and is marketed as having higher interest rates and tax advantages.