A series of controversial cases singling out the banking sector have arisen recently and have affected the contracts business people and private individuals have with their financial institutions (swaps and preferred shares). For this reason, we thought it timely to inform you of the basic rules which all financial institutions must abide by and which you should be aware of in order to avoid becoming one of their victims.

If you think about your company’s financial products, you probably have investment funds, fixed rate securities or shares. If this is the case, then you are affected by the MiFID Directive(Law 47/2007 y RD 217/2008, the adaptation of the Markets in Financial Instruments Directive). The aim of this regulation is to protect you when you sign a contract with a financial institution which, as a professional body in its sector, has the advantage over you the individual. For this reason, a series of obligations have been imposed on entities which they must abide by before, during and after an investment.

We outline as follows:

a) Before investing a bank must:

1) Classify you as a client. You will almost certainly have received a letter telling you what type of client you are. This letter is important so you should take another look at it. If you are not a stock market raider or the director of a large corporation, your company will be classified as a “retail client”. Most people and companies fall into this category, and are afforded the greatest level of protection as they are considered to have less knowledge and experience of financial markets.

If, on the other hand, your bank rates you as a“ professional client”, be aware that this means giving up part of your MiFID protection (you will receive less information and fewer warnings from your bank). So, you must be sure that you are capable of deciding on your investments and evaluating their risk. If you are not sure, don’t accept the rating.

2) Carry out the Appropriateness Test. Given that the institution should only be offering you products that it considers appropriate to your business, it is obliged to ask you about the kinds of financial products and services you are familiar with; the kinds of banking operations you have carried out previously, their frequency and volume and also about your level of education and your profession. This questionnaire is called “The Appropriateness Test and only stops being compulsory when you want to contract non complex products such as treasury bills, listed shares, fixed rate securities or some investment funds.

When the product is complex however, the Appropriateness Test is always obligatory. So, think again. Have you contracted hedge funds, options, futures, warrants or the famous swaps? All are examples of complex products and you need to check they carried out the test and to recheck your answers.

In Estudi Jurídic we have defended companies in swap matters. Our experience shows that the Courts will declare these contracts null and void and oblige the banks to reimburse the customer, basing their judgement on the information in the Appropriateness Test and the inadequate advice provided by the bank. In fact, one of the most recent judgements published in this respect (Court of First Instance number 11 in Oviedo) emphasises that the financial institutions, who are, after all, the ones that design these products, must make an additional informative effort, the more limited their clients level of financial education is and condemned the bank because in the information they gave to the client certain key aspects of the contract were omitted. This lead the client to get the wrong idea of the real risk they were assuming and to a mistake about the essence of the contract.

3) Carry out A Suitability Test. If you want your bank to assess you on your investments, or to manage your investment portfolio, they must first analyse your financial situation and your investment aims. To do this they will get you to fill out a questionaire called the “Suitability Test”. This concerns your sources of income, property, the length of time you wish to maintain the proposed investment and your investor profile so as to evaluate your “appetite” for risk.

Thinking back again, did you go to your branch to ask them to recommend a product because your company had surplus reserves which you wanted to invest? If you did, then please recheck your Suitability Test and your answers

Many of the complaints and claims from customers affected by the well known “preferred shares” have their legal basis in the non compliance of the MiFID Directive; for either non application, or deficient application, of the Suitability Test. In actual fact, some Courts have declared preferred shares contracts null and void, considering that these products were not suitable when taking into account what the clients were looking for: basically yield and secure savings. The characteristics of these preferred shares are, in fact, the complete opposite of the financial security these clients were seeking. For if the bank doesn’t make a profit, clients don’t receive any interest and if the bank goes bankrupt, their money is lost. Preferred shares are not covered by the Deposit Guarantee and Bank Protection Fund and are sold on the secondary market, which means that their selling price could be much less than the original capital deposited, or they might not even find a buyer, something which is, unfortunately, happening at the moment.

b) During and after investing, your bank must:

1) Achieve the “best execution”. When you order the buying or selling of a financial product, the institution must execute your order to try to get the best possible result (“the best execution”). This means the operation must be carried out in the most suitable market (stock,traded options…) and must always take into consideration the price and cost that these suppose for the client.

And be aware that if you think your order has not been executed as well as it should have been, you do have the right to claim that your banking institution justify the investment proceedure they carried out.

If you feel at all prejudiced by your banks’ proceedures you should contact the bank’s Customer Service Representative. All institutions are obliged to have one. If you haven’t been attended to within a couple of months, or if the reply you receive is not satisfactory, get in touch with the Investor Care Department at the CNMV, the National Share Market Commission (www.cnmv.es).

2) Keep you periodically informed (at least once a year) of your investments so that you can track their evolution and be aware of their composition and yield and the sum total of expenses and commissions arising during that period. They must also notify you in advance of any important changes, giving you time to react if needs be.

To sum up, we would urge you to follow this advice when dealing with a banking institution:

  1. Make sure it is registered with the CNMV. If it isn’t, it is NOT an authorised body.
  2. Ask for everything in writing concerning the characteristics, risks and cost of the products they offer you and the investment recommendations they make.
  3. Read the information carefully and don’t sign anything before getting all your doubts cleared up. To help you make your investment decisions the bank is obliged to provide you with impartial, clear and non misleading information.
  4. Take your time. Make your decision when you are well informed, not in a hurry and not under pressure.
  5. Keep all documents: this will allow you to track the evolution of your investments and have proof for claiming.
  6. Check any documents you signed some time ago with your bank and that you haven’t looked at since. That small print can have a bigger impact on your business than you think. Nevertheless, keep in mind that MiFID has been aplicable since 2008. Before that, unfortunately, you are not covered by this byelaw.
  7. Claim. You are within your rights to claim and in Estudi Jurídic we are always here to help you.