Westpac is alleged to have sold interest rate swaps to businesses despite knowing a likely fall in interest rates would leave its customers facing losses, the courts have heard.
A civil claim in the High Court at Auckland, brought by motel operator Silveroaks Group against Westpac and understood to be seeking $6.5 million in damages, is being closely watched by the banking and regulatory sector as it represents a test case into the legitimacy of the widely sold swaps.
The Financial Markets Authority and the Commerce Commission are both investigating the sale of the instruments, with the latter regulator having announced it intends to file proceedings against ANZ, ASB and Westpac.
Westpac is defending the Silveroaks claim. It is understood the bank - and others - sold hundreds of millions of swap contracts between 2008 and 2012.
The swap contracts effectively provided fixed interest rates that were beneficial for borrowers in a time of rising rates, but crippling when rates decline - as occurred in the aftermath of the global financial crisis when central banks worldwide loosened credit strings.
According to an interlocutory judgment by Associate Judge Jeremy Doogue published last week, Silveroaks entered into swap contracts in 2008.
Its claim filed to the High Court alleged the deals were a breach of contract, amounted to deceptive and misleading conduct under the Fair Trading Act, and included negligent misstatements.
Associate Judge Doogue summed up Silveroaks' claim: ''They say they would not have entered into the transactions but for inaccurate and misleading advice which they say the defendants gave them.''
Silveroaks claims Westpac neglected or downplayed the possibility of interest-rate falls, which would leave anyone holding swaps exposed.
The company claimed Westpac knew interest rates were likely to fall, but sold the swap contracts anyway.
The family-owned Silveroaks was nearly crushed by debts to Westpac, with the bank appointing receivers in 2012 seeking repayment of $17.9m
After forced sales and refinancing from ANZ, the North Island motel operator exited receivership and launched its claim against Westpac.
Its business had been shrunk from six motels to four as a result.Investigations by regulators, the Financial Markets Authority and the Commerce Commission into the sale of the swap contracts lag behind those undertaken in the United Kingdom.
However, attempts by the Financial Conducts Authority in the UK to compensate businesses lumbered with huge losses from the swaps have foundered over claims by some borrowers that the process was too slow and weighted in favour of the banks.
Private court action is now likely. A report in The Independent said the potential liability to British banks from the swaps scandal could exceed £22 billion ($38b).
Silveroaks also claimed in its High Court filings that Westpac was subject to a conflict of interest.
The company claimed the selling of swaps allowed Westpac to hedge its own external borrowing costs, but ''imposed unacceptable financial risks'' on borrowers.''
The plaintiffs assert that the defendant's managers would have appreciated if the expected downward movement of interest rates occurred, the defendants would be exposed to an erosion of profits returned from its operations generally and the profits it might make by selling swap transactions to customers such as the plaintiffs would offset the effect of failing profits,'' Doogue said in his judgement.
Silveroaks also claimed Westpac manipulated the payments it receivedto its own advantage by directing them first to lower-interest facilities, ensuring the company continued paying higher rates, and also made it impossible to convert swap facilities to floating rates.
The judgement by Associate Judge Doogue mainly concerned an application by Westpac demanding that Silveroaks be more specific in its claims.
Associate Judge Doogue summed up the application: ''A very large number of particulars are sought and the requirements of the defendants go into an unusual level of details. They have been criticised by the plaintiffs for being pedantic and oppressive.''
He dismissed the majority of Westpac's demands, noting that most of the information sought would be provided later as statements of claim and defence were finalised.
The judge said that if the bank had specific matters ''where particulars are genuinely needed'' it could bring another application.Author : MATT NIPPERTSource : stuff.co.nz