“Barely
a squeak” - that's like everything else here about the world
economic crisis. 'Just doesn't exist' here – LOL
NZ:
Farmers fail under 'missold' swaps
In
Britain, it's being called a scandal. In New Zealand, there's been
barely a squeak.
MORE
LENDING: Claims that complex “interest rate swaps” were missold
to farmers who did not understand them are surfacing.
12
August, 2012
But
with around one in 10 farmers in dire straits with high debt burdens
and devalued farms, claims that complex “interest rate swaps”
were missold to farmers who did not understand them are surfacing.
The
swaps, traditionally used by sophisticated businesses with expert
finance staff, were sold in 2007, 2008 and even 2009 by some banks to
farmers as insurance against interest rates - and hence floating rate
farm mortgages - rising rapidly, farmers say.
But
when the opposite happened, the farmers who bought them were left
locked in to high interest rates which they could not escape without
paying hefty break fees.
Already
heavily indebted, some farmers have lost their farms as a result of
the instruments.
In
Britain in March, the Treasury began an investigation following
reports by the Telegraph newspaper that both farmers and small
businesses such as hotels and golf clubs had been sold swaps they did
not understand.
The
same claims are now being made here, and one senior financier, who
asked not to be named, likened the swap sales to the sale of Swiss
franc and US dollar-denominated loans marketed by some banks to cow
cockies in the 1980s as a means of getting lower interest rates.
They
too went spectacularly wrong as a result of currency movements
leaving some facing loan rates of more than 40 per cent.
Farmers
who naively bought swaps following contacts from banks, have suffered
two effects.
Firstly,
they have been locked into paying interest rates of around 10 per
cent, and the break fees on the contracts - similar to the
residential mortgage break fees which caused an urban outcry in 2010
- are far too high to allow refinancing with another bank.
Sunday
Star-Times spoke to one farmer who estimated the cost to break his
swap as $1 million, leaving him paying nearly 10 per cent interest
for the next couple of years compared with about 6 per cent for an
ordinary floating rate farm mortgage.
“The
bank says we are not making any money,” he complained. “But how
can we? We have paid $1m more interest than we should have paid had
we been in a normal floating rate loan.”
The
second effect is the swaps have damaged farm balance sheets as they
must be accounted for as a significant liability.
“Now
I can see it is just a form of gambling, and I don't gamble,"
the farmer said.
Federated
Farmers president Bruce Wills, an ex-banker, said there were some
problems in some cases with the way the interest rate swaps were
sold.
“Senior
bankers have told me that some of these products have been pushed out
there without enough explanation or understanding.”
Accountant
Stephen Stafford-Bush, chairman of the Institute of Chartered
Accountants influential regional advisory committee, is more
forthright, and says he believes the swaps were missold in many
cases.
“The
big question mark is have the banks acted illegally? Probably not.
Have they acted unethically and immorally? In my view, yes," he
said.
Stafford-Bush
said many farmers who have come to him did not understand the risks
they were taking. He said interest rate swaps were a commercial
instrument suitable for large, sophisticated companies, not family
farms.
A
senior financier said the swaps were sold to farmers with the idea
they could manage their own interest rate risk. "But these guys
are out milking at 6am," he said. "Then they are out
calving later. They weren't foreign exchange or interest rate money
market dealers. They were farmers. They did not have the expertise or
the time to do it."
Stafford-Bush
feels there should be more “shared blame” instead of the
financial costs falling entirely on farmers.
Farmer
Theresa Nicholas said the swap sales and subsequent pain have
remained under the radar because farmers suffering under the swaps
were too afraid to speak publicly in case they anger their banks,
which have the power to put them off their farms.
Similar
claims have been made in Britain, and some will speak to the media
only on condition of anonymity.
Nicholas
said politicians did not want to know, and the Banking Ombudsman
Scheme had a cap of $200,000 for complaints, which is too small to
cover swap complaints.
A
class action lawsuit was being discussed but several years of good
dairy payouts, and a more sensitive treatment of affected farmers by
banks derailed it.
Nicholas
said farmers were able to negotiate some concessions with banks, such
as lower interest rates, but had to sign gagging contracts enabling
the banks to shut down criticism.
It
is not known how wide the sale of swaps to farmers was, and the banks
wouldn't say when questioned by Sunday Star-Times, answering specific
questions with general descriptions of how they sell interest rate
products now.
A
Westpac statement said only: “Interest rate swaps make up a small
component of our lending book. They are not sold without having a
financial markets specialist give an explanation on how they work, so
the customer can understand how they might fit their circumstances.”
Adam
Boyd, ASB's general manager Global Markets New Zealand, said ASB does
offer interest rate swaps to a limited number of rural customers to
fix the interest rate on a customer's floating rate debt facilities,
producing similar outcomes to fixed rate loans.
All
customers are provided with a disclosure statement that outlines the
benefits and risks swaps before entering into an agreement with the
bank, he said.
"Modelling
may also be provided on a case-by-case basis. In recent years there
has been a general trend among rural customers towards floating rate
debt facilities, with less demand for interest rate swaps."
An
ANZ spokesman said interest rate swaps are one of a number of
products that businesses, including farming businesses, have used to
manage interest rate risk.
"We
give customers general information on how the product works and, as
with other products, advise them to seek independent advice before
entering into a swap to ensure they fully understand the product and
its suitability for their business."
Former
farmer Jeanette Walker said the swap sales reveal much about banks,
but also about how farmers wrongly trusted bank managers.
"People
have to get to understand that banks are not your friends. Bank
managers are not your business partners. They are in the business of
getting the biggest return possible for their shareholders. They are
not your mates."
There are many reasons that may have triggered mis selling of IRSA. Firstly, banks sold all IRSA’s through certain teams. These teams were more concerned with the high commission rates than the interest rates.
ReplyDeleteVisit us now for more information.
Interest Rate Swap Mis Selling
Thanks
The sale of the swaps to NZ Farmers, the scale of which is not yet fully known, is a current issue among derivatives experts who believe the Commerce Commission needs to examine at whether farmers had the sophistication, size, tools and support to "manage" their interest rate risk. To know more about Interest Rate Swap Mis Selling Click here.
ReplyDelete