About the Spanish “swaps” in the banking practice

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“Swaps”. Perhaps not a word that would mean much to the people who live outside Spain but the truth is that this is a hot topic right now in the Iberian Peninsula. The reason, as always, has something to do with the banks. In this case, the word “swaps” refers to a high risk product offered by the Spanish banks to their clients from year 2006 onwards with the purpose of protecting borrowers from the risks of high mortgage interest rates.

The “swaps” were in most of the cases an addendum to mortgage loans whereby the parties, that is the bank and the borrower, agreed to subject the mortgage to a fixed interest. However, the real deal was much more complicated that what it initially looked in the sense that the agreement was linked to the fluctuations of the “Euribor” (this is the interest rate for which European banks lend money to each other) and therefore if the resulting interest rate was higher than the agreed rate, any excess would be covered by the bank. On the other hand, if the resulting interest rate was lower than the agreed rate, then the borrower was obliged to pay for the difference. And this is exactly what happened in late 2007 onwards. The “Euribor” went down noticeably due to the worldwide financial crisis and those borrowers who were benefiting from the “swaps” agreement suddenly ended up paying much more for their mortgages.

It then emerged that the “swap” was an ideal product for the good times, where interest rates are usually higher but a real pain for recession times, where interest rates decreased to historical minimums. The problem is that most of the borrowers who entered into this type of agreements had no idea of the potential risks involved. They were under the idea that they were contracting some sort of insurance that would freeze the mortgage interest rates for a few years and therefore protect them from escalating interest rates.

The above has caused a recent trend to sue the banks asking that those agreements be declared null and void and that large compensations be paid. The reasoning behind those claims is that the “swap” is a complicated and high risked product that should only be offered to individuals with a minimum financial knowledge. Both, the Spanish Consumers Act and the Stock Market Act as well as the European regulations in this field, impose banks and financial entities the obligation to carry out a test on the clients to ensure that they have enough financial knowledge to understand this type of agreements. We are now seeing many cases where those tests were not carried out. Furthermore, recent Court decisions have shown that the terms of the “swaps” agreements were sometimes even too complicated for the own staff at the bank.

Hundreds of claims have been lodged recently and a relevant part of them have been successful. Obviously, this does not mean that all claims can be successful as each case is different but the truth is that the Spanish Courts are and will be inundated with this type of claims for a while.