Westpac is facing a claim that it made misrepresentations to get a long-standing commercial customer to buy interest rate swaps that lost it $3 million.
North Island motel operator Silveroaks Group claims in a lawsuit that it was "deliberately and wrongly pressured" into making an early decision on the swaps transactions, which benefited Westpac at a time when interest rates were likely to soon come down.
Silveroaks alleges it was in the best interests of two Westpac employees who dealt with the motelier to promote the swaps as their sale contributed, or had the potential to contribute, to the pair's pay packets.
The names of these Westpac employees are redacted in the version of Silveroaks' High Court claim that was provided to media yesterday.
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The swaps transactions, entered into in 2008, involved loans worth almost $15 million and allegedly locked two Silveroaks companies into comparatively high interest rates shortly before a "substantial and protracted downturn" in floating rates for commercial borrowers.
Westpac, according to Silveroaks, allegedly knew this decline in rates was likely to occur and was or should have been aware that the swaps transactions imposed unacceptable financial risks on the motel operator.
The motelier claims Westpac employees represented in October 2008 that interest rates for bank lending were likely to increase in the near future by significant amounts but made no adequate mention of the likelihood of rates decreasing.
Silveroaks claims Westpac presented the swaps as a way of reducing interest rates and borrowing costs and says this would have been achieved had the option of moving to floating rates been recommended.
The motel operator says Westpac's representations amounted to misleading and deceptive conduct.
If not for this conduct, Silveroaks says it would have instead moved to floating rate facilities and claims it has lost $3 million as a consequence.
It is seeking this amount in damages from the bank in the High Court, plus interest and costs.
About four years after entering the swaps, Westpac put Silveroaks into receivership on debts of almost $18 million. The motelier later refinanced its way out of the situation.
Westpac, in its defence, says it made it clear to Silveroaks that interest rates were trending downwards.
The bank says Silveroaks wanted to achieve immediate interest costs savings, which it got.
Westpac says it told Silveroaks of the risks of swaps transactions and denies claims of misleading conduct, negligent misstatement, breach of fiduciary duty and breach of contract.
Interest rates swaps are a financial product that can allow borrowers to manage their interest rate exposure.
Between 2005 and 2009, a number of New Zealand banks marketed and negotiated hundreds of millions of dollars of swaps contracts to their clients.
Three banks' dealings with rural customers over the swaps came under the spotlight of the Commerce Commission and the FMA, which together recently settled with ANZ, ASB and Westpac.
The trio of financial institutions paid more than $24 million in the settlements, with Westpac contributing $2.97 million.
See the full Westpac/ Financial Markets Authority settlement here: