FMAexpects to settle with bank

‘We understand the FMA has not commenced an investigation in relation to ASB’s sale of interest rate swaps.’

THE Financial Markets Authority (FMA) expects to reach a settlement with ASB which will subject the bank to similar scrutiny now faced by ANZ over its future sale of interest rate swaps.

On Christmas Eve, ASB agreed to pay $3.2 million to settle claims that it mis-sold interest rate swaps to farmers, following ANZ’s $18.5m settlement in early December.

The deals ended an investigation by the Commerce Commission into the sales of interest rate swaps to farmers between 2005 and 2009, which the banks sold as a means of managing interest rate risk, but which some

ASB Bank farmers say left them with desperately high interest costs even when lending rates plummeted after the Global Financial Crisis (GFC), that began in 2008.

It was New Zealand’s own version of the US, UK and European swap mis-selling scandals, and it is not over yet, with Westpac still under investigation.

But while ANZ also did a deal with the FMA, ASB has not yet.

The ANZ’s deal with the FMA required it to have its interest rate swaps and foreign exchange forwards sales practices reviewed by an independent consultant by the end of March, and again six months after the bank gets a derivatives dealer licence.

It showed the securities regulator’s willingness to use its new powers to grant licences to influence financial services companies’ behaviour.

FMA spokesman Andrew Park said a settlement was expected in the coming weeks with ASB, aimed at addressing concerns the regulator had over the way the bank had sold swaps.

ASB acknowledged talks the FMA were continuing.

‘‘We understand the FMA has not commenced an investigation in relation to ASB’s sale of interest rate swaps,’’ ASB said.

However, it has ‘‘raised with us some broader issues around the origination and distribution of de-

with rivative products. We will be engaging with them on these issues in the New Year.’’

The terms of the final settlement with the FMA are expected to be similar to those ANZ agreed to.

Like ANZ, ASB disputed some of the Commission’s findings, though it did acknowledge it breached the Fair Trading Act in the way it sold the swaps to farmers, including that some of the benefits claimed for swaps proved to be over-stated. It said: ‘‘Based on historical experience, ASB should have foreseen the risk that a material difference between the cost to break a swap and an equivalent fixed rate term loan could occur as it did in the Global Financial Crisis’’.

As a condition of settling, ASB required the commission to acknowledge that it had behaved differently to ANZ in using a key power that the swaps gave it.

That power was the ability to lift the ‘‘margin’’ it charged on its swaps loans should its cost of funding increase, which happened after the financial crisis struck.

Some farmers believe this ability was the real reason banks sold the swaps. But while ANZ had used that power, thereby lifting borrowers’ costs, ASB had not.

The ASB settlement agreement reads: ‘‘The Commission agrees its public statement will include an acknowledgement that the smaller settlement amount compared with the Commissioner’s recent settlement with ANZ arises from the fact that ASB did not increase margins on loans subject to swaps sold to its rural customers . . despite facing increased funding costs in the aftermath of the GFC.’’

ANZ admitted it had done that, but said it had absorbed some of the extra funding costs.

The Commission agreed to take no action on any ASB complaints made by borrowers who had not already complained to the Commission. There were 178 complaints against ANZ, 44 against ASB, and 37 against Westpac.