ASB to pay $3.2m in interest swaps settlement

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ASB Bank has agreed to pay $3.2 million in the latest settlement with the Commerce Commission on the sale of interest rate swaps to farmers between 2005 and 2009.

It follows a $19 million settlement reached between the ANZ Bank and the regulator earlier this month and comes one year after the commission first advised it intended issuing legal proceedings in March 2014 against three banks - ANZ, ASB, and Westpac Banking Corp - over the issue.

ASB's settlement will make $2.7 million available to compensate the 40 eligible customers who registered their complaints with the commission, $250,000 will go towards the commission's investigation costs. and a further $250,000 to the Dairy Women's Network.

The commission said it considered that ASB had been misleading in the way it marketed interest rate swaps and therefore breached the Fair Trading Act. However the commission's conclusions have not been tested in court though and ASB says it does not accept them. However, ASB has agreed to make an out of court admission that some of its conduct breached section 9 of the Fair Trading Act in relation to some named customers.

The reason ASB has paid a lot less than the recent ANZ settlement is for two reasons: it chose not to increase farmers' loan margins, meaning its settlement relates primarily to early termination fees paid by eligible customers; and there were a smaller number of complaints about ASB's swaps.

Commerce Commission chairman Mark Berry said the settlement was a good outcome for the 40 eligible farmers and he expects these farmers to get back all of their reasonably recoverable losses.

"ASB's behaviour led some customers to believe that early termination amounts would be similar to break costs on equivalent fixed rate loans, and that swaps would be a good substitute for them for a fixed rate term loan. In many instances this was not correct, and some early termination amounts could be substantially higher," he said in a statement.

"But we are pleased ASB's case has turned out to be narrower and only concerns early termination fee losses. ASB did the right thing by its customers when it could have tried to move margins, and we recognise that it honoured customer's expectations in that regard despite the bank facing increased funding costs after the global financial crisis," Berry said.

Reaching a settlement avoided the uncertainty and cost of a lengthy court proceeding where there would be no guarantee what each complainant may get given the amount of time that has passed since the swaps were sold, he said.

ASB said it was pleased to have resolved the matter, although discussions are still being held with the Financial Markets Authority on the matter.

"The agreement, and the commission's decision to not take court action, recognises ASB's different circumstances. ASB decided to not increase margins on loans to rural customers with interest rate swaps through the relevant period, despite ASB facing significantly increased funding costs in the GFC," said Steve Jurkovich, executive general manager corporate, commercial and rural.

"This meant that when funding costs increased, ASB's rural customers with interest rate swaps did not incur the margin increases imposed on customers by some of the other banks at that time.

"We acknowledge, nevertheless, that some of our rural customers incurred significant break costs from terminating swaps."

Jurkovich said the problems arose from unprecedented and unforeseeable circumstances during the GFC.

In January, the commission will begin contacting the 40 customers who may be eligible for a payment under this settlement and funds are expected to be distributed by the second half of next year.

The commission is continuing to talk to Westpac about its involvement in interest rate swaps and Berry said the outcome of those negotiations should be announced early next year.

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.