Equity Release Contracts Full of Cracks (I)

April 18th, 2011

The clients thought they’d be soon grinning from ear to ear once their application was approved, but the lenders knew that this ability to grin could be quickly challenged by grimace…

The equity release fiasco threatens to not only leave hundreds of deceived investors destitute, but also physically eliminate a few after enduring years of unbearable stress when faced with a prospect of financial ruin when retirement has been reached.

“I should have known better” is the statement I come across the most, and I fully agree but let me qualify this statement to add that yes, but when are told the truth and not lied to in such a vile manner as the Rothschild, Danske Bank, Sydbank/Nykredit, Landsbanki, Jyske etc., assisted by their cronies, did to pensioners, mostly from the United Kingdom. Interestingly, all these banks were paying commissions to unregistered and unregulated pseudo-financial professionals to bring in the punters on to the dock…

But enough of this now, let’s get with the positive side, because recent Supreme Court case law in Spain seems can make these contracts not worth the paper they are written on, and consequently, courts of first instance are now ruling in favour of consumers of financial products that were not only ill-advised, but also, ill-chosen, given that these products could have never been suitable for them due to their profile.

The case in particular refers to, again, hundreds of investors who signed what they thought were safe deposit contracts, and ended up losing almost all the capital. It was won by the creditors in the first instance, appealed by Caja Rural but thrown out and finally went to the Supreme Court, who could not be more in agreement with their subordinate peers. The latter ruling consists of 45 pages that I will try to condense, as it mainly refers to a number of legal arguments of difficult rebuttal. The excerpt below can accurately summarize, in a nutshell, what happened:

This product was sold and contracted in an indiscriminate manner by the branch offices of Caja Rural in the Valencia area, by the branch manager directly and without explaining the client the particulars of the product, inasmuch as it was not a typical fixed deposit but something different where they could lose part or all of the capital, especially considering that they were pensioners, agriculture-based workers, builders, etc. with a conservative mentality, averse to assuming risks and that had never invested in sophisticated financial products. Also, most of the customers would have not read the contracts as they would trust what was told to them, aloof of any damaging potential consequence but also, unable to discern the risk associated with this investment as the contract was not possible to understand unless they were financial-savvy.

The Supreme Court articulates the ruling on the basis of parameters that were breached by the bank:

Parameters based on financial services’ applicable legislation, which is deemed to have been breached.
Parameters based on civil and consumer protection laws, in particular, in respect of lack of consent of the client due to error, impregnated with negligence, during the formation of the contract, and breaches of consumer protections legislation referring to clarity, transparency and simplicity of contracts.

Although not part of this court ruling nor mentioned in it, and to get it out of the way, I confirm that all references are made to applicable Spanish law, and not Luxembourg, Swiss, Icelandic or any other convenience laws, as these banks were pretending to, according to article 90 of the Consumer Protection and other Complementary Laws Act 1/2007, which stipulates that any of the following will be deemed null and void:

Submission to Courts or Judges different to that of the address of the consumer, the place where the obligation is to be carried out or where the property is located.
Submission of the contract to a foreign law in relation to where the consumer undertakes to contract or where the business carries out its activity directed to promoting contracts of equal or similar nature.

The applicable law objection is easily dumped by on wayside, but requires explanation to avoid it being used to interfere in the more important nullity of the whole contract. By the way, all the above banks are susceptible of being fined for inserting clauses declared abusive, and consequently, null and void.

Theory of the “Customer Profile” or “Client Profile”

Considering that most of these contracts were signed prior to the 21st of November 2007, when the Mifid Directive was introduced in Spain, the Courts were guided by the Ley del Mercado de Valores y Código General de Conducta de los Mercados de Valores, which is the Stock Exchange Act and General Code of Conduct of the Financial Markets, in respect of the information to be supplied to consumers, and Royal Decree 629/1993 in respect to norms of conduct in the financial markets and obligatory registries.

The above legislation has developed what is known as the theory of the customer, or client profile. Article 79 of the Stock Exchange Act stipulated, prior to further amendments (this article was amended 3 times), among other points, that credit entities that act in the financial markets will have to observe the following principles and requirements:

Behave diligently and transparency in the interest of their clients and in the defense of the integrity of the market.
Develop an ordered and prudent administration, looking after the interests of the clients as it they were their own
Ensure that the clients had all the required information.

Act 47/2007 introduced article 78, differentiating between a “retail” client, as opposed to a “professional” client:

[..] including other banks or financial entities, or those of whom experience, knowledge or qualifications in the financial markets is presumed, to the extent of being able to undertake to make their own decisions over financial products and value their risks correctly. Business people will be deemed professional clients provided they have assets of at least 20m euros, of their annual return is over 40m (hardly a pensioner). Any client may request that he is considered a professional client, but the acceptance of this application will be made subject to the company assessment over the experience and knowledge of the client in relation to the operations or services he requests, ensuring that he is able to make his own decisions and can value the risks correctly.

When carrying out the assessment as above, the financial service provider will have to ensure that at least 2 of the following are met:

That the client has transacted a significant volume of operations in the financial markets, with a frequency (average) or at least 10 per quarter during the last 4 quarters.
That the sums invested exceed €500,000
That the client has held a professional job, for at least 1 year, in the financial sector that would require knowledge of the operations or services granted.

Any other client that does not come under the above will be deemed a retail client.

Realistically, how the hell were the “equity release” providers meant to have applied the above complex legislation if the agents used by them were not qualified in the European Union to provide this advice, were not regulated in Spain to provide this advice, and had little, or not knowledge, of Spanish language, without mentioning that, as a result of these grave, could have never understood the extent of these protection laws?

Furthermore, Annex to Royal Decree 629/1993 stipulates that all operators in the financial services markets must act, when exercising their activities, with impartiality and without placing their interest before those of their clients. Article 4 and 5 of this annex are particularly important, when construing the doctrine or theory of the investor profile:

Article 4:

The entities will request from their clients the necessary information for its correct identification, as well as information on its financial situation, financial experience, investment experience and objectives of the investment when the latter is relevant for the services that are to be provided.

Article 5:

The entities will offer and provide to their clients any information they have that may be relevant to adopting investment decisions, and will dedicate time and attention to ensure that the best product or service is obtained, in relation to the objectives pursued.
The entities shall have available any information systems updated so that the relevant information is provided correctly.
The information provided to the clients must be clear, correct, precise, sufficient and delivered on time to avoid an incorrect interpretation, stressing the risks undertaken on each operation, in particular high risk financial products, so that the client is in knowledge of the precise effects the operation entails. Any prediction must be correctly justified and expanded with the necessary explanations to avoid misunderstandings.

And so we reach article 7, that clearly stipulates a prohibition openly flaunted, still today, by entities, in particular Rothschild:

Entities will refuse any operation from non-authorized intermediaries, as well as those in which they have knowledge that the relevant legislation applicable to the former may be infringed.