ANZ Bank New Zealand has agreed to a $19 million settlement with the Commerce Commission after an investigation into the marketing and sale of interest rate swaps to rural customers between 2005 and 2009.
Under the settlement the local unit of Australia & New Zealand Banking Group will establish an $18.5 million fund to pay affected rural customers and pay $500,000 toward the regulator’s investigation costs and a donation to rural charities. Investigations are continuing into Westpac Banking Corp and ASB Bank.
The commission began its probe in August 2012 into whether the swaps, derivatives that allow a borrower to manage their interest rate exposure, were misleadingly marketed and breached the Fair Trading Act. The Financial Markets Authority joined the investigation in April this year, widening its scope to assess whether the Securities Act and the Securities Markets Act had been breached. ANZ Bank also reached a settlement with the FMA today, agreeing to a third-party review of the way it markets interest rate swaps and forex forward contracts.
ANZ Bank has agreed to admit in High Court civil proceedings that “it engaged in certain conduct that was misleading to some eligible customers”, the commission said, although its statement also said the lender doesn’t accept the regulator’s conclusions, which hadn’t been tested in court. The FMA’s statement says the bank doesn’t accept its views in agreeing to a settlement.
The FMA said ANZ Bank’s sale and marketing of the swaps to rural customers was misleading in likening the derivatives to fixed-rate loans, not disclosing the lender’s right to change margins and failing to disclose difference in early termination charges compared to the break fees on fixed-rate loans.
The commission said some customers were misled as to the benefits, risks and suitability of the swap products.
“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,” commission chairman Mark Berry said. “In reality, ANZ could, and in some instances did, increase margins, and early termination amounts could be significantly higher.”
The commission would be contacting 178 bank customers who may be eligible for payment over the next week and expects to have funds distributed by the end of September next year, berry said.
Interest rate swaps are typically used by large companies and institutions but from 2005 banks started marketing them to rural customers in New Zealand.