SWAP contracts and its problematics

8 September, 2011 No Comments

SWAP: also known as IRS, CLIP, CLIP BONO, SAFE QUOTAS, or COVERAGE OF RATES, adds to the nightmare of owners of mortgages …..

SWAP is a contract external to the mortgage that is sold to prevent any increase in rates. It is a type of insurance that financial institutions (banks, etc) offer to their clients and ensures that they will not pay more in case that mortgage interest rates go up.

Initially, these type of contracts were created to ensure the completion of certain financial transactions with respect to currency fluctuations or inflation in a particular territory.

Interest rate SWAPS began to be offered to individuals who hired financial products such as mortgages early in 2007. Mainly due to the increasing euribor at the time, in which these contracts provided protection to clients with mortgages or loans subject to variable interest rates.
But 2008 was the year in which interest rates started to drop, the financial crisis arrived and the economy stagnated. Customers who had Swaps, had tp keep paying the difference between the initial interest rate and the current interest rate. To this, add that in order to cancel a SWAP clause a customer had to pay a significant sum of money.

SWAPS have been considered high-risk products that are poorly suited to the investor’s profile, who could be individuals and SMEs who are poorly trained in investment products that entail higher complexity. Although these contracts are perfectly legal, the amount of lawsuits filed by customers who manifested that they were not properly informed before and after the signature, what the contract exactly meant, its risks, or the real cost of cancellation. In other words, the client did not know the consequences of a lower Euribor, and what to do to get rid of the contract, and this section especifically was filled with conditions referred to as “draconian”, unclear and unbalanced for the client. In many of the cases the signature was based on good faith and trust placed by the customer on the financial institution.

The possibility of whether any financial institution that closed this type of contracts could be held criminally liable, if a complaint was filed, has been widely discussed. It would be based on 2 premises:

1-It is important to provide the client with all the information, as the Securities Exchange Act mandates, in accordance to the instructions of the Bank of Spain. Explain all the risks the product involves. In this case, the problem was that the risks the client was assuming in case of a decrease in interest rates was not clearly stated.

2 – Lack of clarity and little or no risk information at the time of the contract’s signature, may be considered as the presence of vice in the customer’s consent (art.1266 cc), which therefore nullifies the contract.

After completion, in the ICAB (Barcelona School of Lawyers, magazine Mon Jurídic, No. 252 11.10) of a journey about swap contracts, they came up with the following conclusions:

* The client was signing a contract to request a financial contract in addition to other particular conditions. Both contracts were written by the bank, which leads to an adhesion contract with speculative character, because the contract depends on the evolution of interest rates in order to assess the amounts to be liquidated, the last depending also in what was specified in the contract. However, the client simply thought he was signing an insurance contract to keep his interest rate fixed.

* The commercialization of a swap to a customer is considered a risky investment product since it can produce, depending on the market, both profits or losses .

There is no uniformity in the criteria, the amount of complaints, nor the ability to take protective measures, which is of great significance because the determination of the amount influences on the procedure to follow.

If the complaint asks to nullify the contract and asks for the return of the excess sums, take the following into consideration:

1-the amount is considered undetermined based on the request to nullify a contract without an exact amount.

2- the amount to be refunded can be determined at the time of filing the complaint.

3- the financial risk is taken as reference to calculate the amount.