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alt="swap" The bank must explain the complexity of the financial product

A recent Supreme Court judgment 22 December 2015 stated that both banking and consumer rules indicate that it must be the financial entity who bears the obligation to clearly explain the financial products it sells and that information must be clear, accurate and complete.

The case dates back to 2007 when a group of companies entered into a SWAP. A SWAP is a derivative financial instrument, which aims to (in a nutshell) an exchange of money in the future. It is extremely difficult to understand it and, therefore, it is considered a complex product that is usually sold as an insurance against rising interest rates. In 2009 the liquidations began to be negative and, consequently, the client (a group of ten corporations represented by the same manager) failed to pay and decided to sue the bank (CajaMadrid - Bankia) for revocation of the contract. By then the amount overdue was more than 200,000 euros.

The lawsuit was dismissed at first instance and confirmed by the High Court on appeal. Overall, both judgments ruled that the claimant had not established that the bank had not clearly explained the contents of the purchased product. The Supreme Court, however, construed that the financial institution borne the burden of proving that such contracts had been clear, precise and sufficiently explained. We understand that such reasoning applies to other products such as “preferentes”, “subordinadas” and similar financial products.

The Supreme Court admitted the appeal (casación) and procedural infringements (infracción procesal) ruling that is constant jurisprudence of the Civil Chamber that the legislation MiFD (European Markets in Financial Instruments) provides that, in the marketing of complex products by financial institutions to non-professional investors, there is an asymmetric information imposing on such entities the duty to "provide customers with a comprehensive and adequate information about the product characteristics and specific risks that may be taken into account at the time of hiring them (Judgments 588/2015 of 10 December and 671/2015 of 10 December). ". For the Highest Court the transposition of the Directive to the rules of the market was "an outstanding importance to the proper understanding by the customer of the risks assumed when hiring investment products and services and requires that the market operating companies to observe very high information standards to offer to potential or actual customers.".

According to this reasoning, if the first instance court considered that there was no evidence enough to substantiate that the information provided by the bank was sufficient to meet the demands in the lawsuit, this lack of accreditation can not negatively impact on the client but on the bank who was the one obliged to fulfill these information duties. The Chamber of Supreme Court adds that it is not possible, as the first instance court understands, found the inexcusable error of the customer at the time of hiring the SWAP, because  if he did not know what he was signing he should not have signed, asking for more information instead, because it is the business investment service the one obliged to provide it. The client must be able to trust the advising entity is not omitting information on any relevant issue.
Summarizing, the jurisprudence states that in the case of contracting complex financial products is the bank the one to provide the customer with the necessary information, especially if the latter is not a financial expert. And this lack of information has been repeated many times, especially with the famous SWAP that were marketed as insurance against rising interest rates attached to the loans (personal loans, mortgages), so that the client understood that, if a rate rises, a bank would pay an amount to cover such a rise. What it is not usually explained what was happening in the case of that such rates fall. And what happened was that the bank turned succulent negative liquidations that, having known, the client would never have signed such a financial product. Leading to the annulment of the financial product in error vitiated consent. Note that in these cases, the parties must reintegrate the amounts received by each of the parties (usually from 2007 all liquidations were favorable to the banks).


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