Commerce Commission still working on probe of sale of interest rate swaps

Thursday 28th February 2013

The Commerce Commission says it is still working on its investigation into whether interest rate swaps were misleadingly marketed after claims from farmers that they got locked into confusing contracts with excessive break fees.

The commission began its probe in August last year and has received 42 complaints since concerns over the way the financial derivatives were sold first aired in the media, chairman Mark Berry told Parliament's primary production select committee.

The swaps allow clients to manage the interest rate exposure on their borrowing and are typically marketed to large corporations and institutions. However, from 2005 banks began marketing them to their rural and commercial clients.

Farmer lobby Federated Farmers was among groups seeking a review by the regulator, saying the instruments were mostly sold to its members between 2007 and 2009, with concerns about them only surfacing in the wake of the global financial crisis.

Fed president Bruce Wills called the swaps "incredibly complicated instruments." Farmers had reported that margins had been changed on fixed term swap rates and that loan contract clauses might have been changed to allow that to happen.

"There appears to be considerable confusion about swaps, with them being sold to farmers as though they are fixed rate products," Wills said. While farmers had to take responsibility for their financial decisions, the lobby group "will not excuse the wilful mis-selling of any product, financial or otherwise."

Not many farmers use swaps and some that do rate them highly, he added.

Labour's primary industries spokesman Damien O'Connor said last week that "the practice of selling complicated finance products to farmers has been far more extensive than previously stated."

"This is a serious issue that needs careful consideration because it has major implications for primary sector financing where debt currently runs at close to $50 billion," he said.

The commission's Berry said his investigation's primary aim is to establish whether the swaps were marketed "in ways that may have misled customers as to their true risk, nature and suitability."

The regulator had received a large amount of information from complainants and banks and will shortly widen its inquiries, seeking further information from people who have entered into interest rate swaps.

BusinessDesk.co.nz

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