The services provided by some banks to professional small and medium-sized enterprises (SMEs) with regard to interest rate derivatives leave room for improvement. This is the single most important conclusion from a preliminary investigation by The Netherlands Authority for the Financial Markets (AFM) into the provision of interest rate derivatives in the Netherlands.
In the opinion of the AFM, it is very important that SMEs can count on proper provision of services in the area of interest rate derivatives. SMEs are a vulnerable group because of their often relatively limited financial resources and their lack of knowledge and experience with interest rate derivatives.
In addition, SMEs might experience barriers to calling in assistance, for example, due to the costs, or because they fear that this might damage their relationship with the bank. The AFM has not investigated the extent to which the contracted products are suitable for the clients concerned.
In its investigation, the AFM has included those banks with a licence in the Netherlands and which can be considered as the principal offerors of interest rate derivatives to semi-public organisations and SMEs.
Lack of clarity concerning advice
The AFM notes that some banks do not always make it sufficiently clear to their clients that they do not provide advice when offering interest rate derivatives. This is so, despite the fact that the banks generally do actually provide advice about other banking products. During the period investigated, the majority of banks had offered interest rate derivatives on the basis of execution-only services. When a bank provides advice, there is a heavier duty of care. Banks need therefore to be clear about what services they are providing.
Confusion about the nature of the services provided can lead to undesirable risks. The client often does not see the difference between the two types of services, and thus may have the impression that he has received advice concerning interest rate derivatives. It must be very clear to the client that the bank will not be advising him about interest rate derivatives, so that he is more aware of his own responsibilities when buying these products.
Lack of balanced information provision, client classification and documentation
The AFM has observed that the information provided about interest rate derivatives is often portrayed in an overly positive manner. Negative scenarios remain underexposed. Clients can therefore be confronted with unexpected setbacks, for instance in the event that a derivative with a negative market value is terminated before the end of its term.
Banks also often inadequately inform their SME clients about whether they are classified as professional or non-professional, and what consequences this has for them. This information is important because the banks’ duty of care for professional clients is more limited than for non-professional clients.
The investigation also showed that client records kept by banks leave much to be desired. The files often did not contain a proper periodic review of the client relationship. In addition, discussion reports from which the procedures for concluding transactions could be reconstructed were frequently missing. It was also not possible to properly determine whether, and how, banks assessed whether the services provided were suitable.
During the second half of 2013, the AFM is conducting an additional investigation into the services provided by banks to SMEs with respect to interest rate derivatives. A number of banks have announced steps for
improvement. The AFM will monitor these changes closely, and will hold consultations with the sector concerning the desired provision of services. The AFM is also making an assessment of other problems and the extent to which they play a role in the financial services provided to SMEs. Information regarding such problems can be passed on to the AFM via the email address firstname.lastname@example.org.
For semi-public organisations, as well, risks have been identified, and the provision of services with regard to interest rate derivatives needs to be improved. In this segment, the AFM has established, among other things, that the nature of the services provided is not always clear, which only becomes apparent when there is a need for advice during the term of the product.
The AFM also notes that the information provided about the products has not been in balance. New regulations from the government must ensure that, in the future, semi-public organisations will only use interest rate derivatives in a suitable and responsible manner. Banks have also, in many cases, adjusted their policy for these client groups. Partly due to the new regulations and the amended policy, the AFM has decided not to include the service provision to semi-public organisations in its follow-up investigation. Risks arising from interest rate derivatives contracted in the past do, however, remain an important focus.
The AFM is committed to promoting fair and transparent financial markets.
As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.