Westpac settles NZ mis-selling case

Westpac New Zealand has agreed to a NZ$2.97 million settlement deal to end an investigation into its marketing, promotion and sale of interest rate swaps to farmers between 2005 and 2012.

Westpac is the third bank to agree to a settlement in the investigation by New Zealand's Commerce Commission and the Financial Markets Authority. Settlements with ANZ and ASB were announced late last year, bringing the total to be paid out by banks to farmers and the Commission to NZ$24.2 million.

In a statement, the Commerce Commission said that, when marketing the swaps, Westpac "gave some rural customers the impression that margins on interest rate swaps loans would not change during the life of the loan or on restructure. However, under Westpac's contractual terms the bank could, and in some instances did, increase margins. As a result the Commission believes Westpac's behaviour was misleading and was likely to have breached the Fair Trading Act."

Interest rate swaps are financial derivative products that allow borrowers to manage the interest rate exposure on their borrowing. Typically provided to large corporate and institutional customers, from 2005 they were offered by the banks to some rural customers throughout New Zealand.  Farmers were surprised when the banks increased margins on top of underlying swap rates and charged break fees to those wanting to take advantage of a sharp fall in short term rates through 2008 and 2009, sparking complaints to the Commerce Commission.

As a result of the ensuing investigation, ANZ agreed to pay NZ$18.5 million into a compensation fund. ASB paid a total of NZ$3.2 million.

The Commission said the smaller amount paid by Westpac, compared to the ANZ settlement, reflected two things:  "Westpac did not have an across the board practice of increasing margins on interest rate swaps, and Westpac did not differentiate its break costs under a swap and under an ordinary fixed rate loan."

Under the settlement Westpac will make available a total of NZ$2.47 million for the 38 eligible customers who registered complaints with the Commission. Westpac will also pay NZ$250,000 towards the Commission's costs and another NZ$250,000 to Rural Support Trusts.

The Financial Markets Authority has entered into a separate settlement agreement with the bank. As part of this settlement, Westpac has agreed to appoint an independent third-party to review its sale, promotion and marketing of two sample products  -- interest rate swaps and its Notice Saver PIE (Portfolio Investment Entity).

Both the FMA and the Commerce Commission noted in their statements that Westpac "says it does not accept" the Commission's opinion, but "has admitted that some of its conduct breached section 9 of the Fair Trading Act in relation to some of its rural customers."

Westpac's head of agribusiness, Mark Steed, described the swaps episode as "a historical matter arising at the time of the global financial crisis," involving "a small number of customers."
"Although those customers entered into swaps a number of years ago and had access to legal and other professional advice at the time, we are pleased to have reached this settlement and provide certainty to those affected," said Steed.
"The agreement reached with the FMA will result in a review of the processes Westpac currently uses to market similar products."
Opposition Labour Primary Industries spokesperson Damien O'Connor described the Commission as "about as useless as tits on a bull."

"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. Many farmers were forced to sign confidentiality agreements when refinancing with the banks," said O'Connor.