ANZ to pay $19 million in interest rate swaps case

ANZ Bank has agreed to a $19 million settlement with the Commerce Commission and the Financial Markets Authority in relation to the marketing, promotion and sale of interest rate swaps to rural customers between 2005 and 2009.

The settlement will see ANZ establish a payment fund of $18.5 million, to be used to make payments to eligible customers (those who registered their complaints with the Commerce Commission). 

The Commission will also receive $500,000 towards its investigation costs, and some monies from the payment fund are able to be distributed to charitable organisations for the assistance of the rural community. 

The antitrust regulator had investigated the alleged mis-selling of interest rate swaps in the rural sector by the New Zealand branches of the Australian-owned ASB, ANZ and Westpac banks between 2005 and 2009, citing possible breaches of the Fair Trading Act, and said it was also looking at other institutions which sold the swaps.

In April the FMA joined the probe, expanding the investigation to see if laws including the Securities Act 1978 and the Securities Markets Act 1988 had been breached.

In a statement this morning, the FMA says it considered that ANZ’s conduct relating to the sale and marketing of interest rate swaps to certain rural customers was misleading, with particular reference to:

• statements that interest rate swaps were like fixed-rate loans, but more flexible
• a failure to disclose a right to charge margins without any intervening event
• a failure to disclose materially different early termination amounts for the swap agreement compared to a break fee on a  fixed-rate loan.

The FMA noted that ANZ does not accept the FMA’s views and states further that it has various defences available to it.

However, according to the Commerce Commission, ANZ has agreed to admit in High Court proceedings that it engaged in certain conduct that was misleading to some eligible customers.

The commission will be seeking High Court declarations that the bank’s conduct breached the Fair Trading Act 1986. A hearing of that application is likely to take place early next year.

The investigation into ANZ looked primarily at whether the bank marketed interest rate swaps in a way that may have misled customers as to their benefits, risks and suitability. 

Commerce Commission chairman Dr Mark Berry said, “The commission considers that ANZ’s behaviour led some customers to believe that margins on the loan connected with the swap would not change, early termination amounts would be similar to break costs for equivalent fixed rate term loans, and that swaps would be for them a good substitute for a fixed rate term loan. In reality, ANZ could, and in some instances did, increase margins, and early termination amounts could be significantly higher.” 

The Commission’s conclusions have not been tested in court and ANZ says that it does not accept them.

“We believe that this settlement is a very good outcome, as contested court proceedings would have meant uncertainty and lengthy delays in achieving any possible payments. We are pleased to be able to deliver payments to eligible customers much more quickly than might be achievable through the courts. The payments to be made under the settlement are, in our view, a reasonable approximation of the potential losses that the Commission could have recovered on their behalf, if we had been successful at trial. These payments will include amounts that eligible customers incurred by way of extra margins and additional early termination amounts (for those who broke their swaps), or extra costs (for those who did not).”

“We are also pleased that ANZ has put its hand up and admitted that some of its conduct was misleading.” 

The commission‘s settlement agreement sits alongside a separate agreement between the ANZ and the Financial Markets Authority. 

“Over the next week we will be contacting the 178 customers who may be eligible for a payment under this settlement. Payment offers will be made to these customers next year and we expect the funds to be distributed by the end of September 2015,” said Dr Berry. 

Discussions with the other two banks (Westpac and ASB) investigated by the commission in relation to interest rate swaps are continuing.

Interest rate swaps are a financial derivative product that 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 has 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.

Responding to the announcement by the Commerce Commission and Financial Markets Authority today Graham Turley, Managing Director for ANZ’s Agri business, said that ANZ is pleased that it is the first bank to have reached an arrangement with the Commerce Commission and Financial Markets Authority.

“This brings remaining claims over historical rural interest rate swaps marketed, promoted and sold between 2005 and 2009 to a conclusion.

“Over the past couple of years we’ve been working with the Commission and FMA to resolve outstanding historical issues with a small number of mainly former National Bank rural customers who have raised issues,” Mr Hurley said.

“We’ve agreed to put a sum of money into a fund which the Commission will determine how to distribute. It will be administered by a third party and a significant amount of money will also go to help the good work of Rural Support Trusts.

“We had already begun a process several years ago to help many rural interest rate swaps customers disadvantaged by the changed interest rate environment after the global financial crisis.

“Notwithstanding customers had access to, and often took legal and other professional advice before entering into their rural interest rate swaps, this arrangement with the Commission brings certainty and avoids years in the courts for everyone.”