Swap and Duty to Inform. Supreme Court. July 2018.

Swap and Duty to Inform.

Case law continues to emphasize non-compliance with regulations regarding Swap and the duty to inform about risks, both in relation to the possibility of negative periodic settlements and in relation to high cancellation costs.

In this regard, it continues to emphasize that specialized knowledge of this type of financial product is necessary in order to exclude the existence of error or to consider that it was inexcusable.

Supreme Court Judgment of July 17, 2018

For your interest, we provide an extract from the Judgment, particularly from its Fourth Ground:

“Case law on breach of information duties and its impact on error as a defect of consent. Application to the case at hand.

1. There are now multiple judgments from this chamber that constitute repeated and consistent case law, to whose content we adhere, which consider that a breach of such regulations, primarily regarding information about the risks inherent in swap contracts, both with respect to the possibility of negative periodic settlements in high amounts and to a similarly high cancellation cost, may give rise to a presumption of error in those who contracted with such information deficit (among all, plenary judgments 840/2013, of January 20, 2014, and 491/2015, of September 15). […]
2. […] In this case, the duty to inform cannot be deemed satisfied by the content of the swap contract itself; mere reading of the contractual provisions is not sufficient and requires supplementary activity by the bank, carried out sufficiently in advance of signing the contract, aimed at explaining the nature of the contract, the manner in which settlements will be made, the specific risks assumed by the client, such as those that subsequently materialized in the high negative settlements made, and the possibility of a high early cancellation cost (judgments no. 689/2015, of December 16, and 31/2016, of February 4). Nor is a mere illustration of the obvious sufficient, i.e., that since it is an aleatory contract, there may be positive or negative results, but rather the information must be more specific and, in particular, adequately warn the client about the risks associated with a prolonged and abrupt drop in interest rates (judgment 195/2016, of March 29, citing previous judgments 689/2015, of December 16, and 31/2016, of February 4).
3. We have also stated in numerous judgments that specialized knowledge of this type of financial product is necessary in order to exclude the existence of error or to consider that it was inexcusable. The simple fact of being companies with a certain volume of business and longevity in the market does not mean that their managers had specialized knowledge of this type of complex and risky financial products, given that these were companies operating in a sector completely unrelated to finance and investment. The experience of being a company representative and having contracted non-complex banking products (loans, credits, discount lines, etc.) does not in itself justify the inexcusability of the error (judgments 60/2016, of February 12, and 10/2017, of January 13). As we stated in judgments 769/2014, of January 12, 2015, and 676/2015, of November 30, it is the investment services firm that has the obligation—active and not merely of availability—to provide the information required by such legal regulations, and it is not its clients—who are not professionals in the financial and investment market—who must ascertain the relevant matters regarding investment, seek expert advice on their own, and formulate the corresponding questions. Without expert knowledge of the securities market, the client cannot know what specific information to request from the professional. On the contrary, the client must be able to trust that the investment services entity advising them is not omitting information on any relevant matter. Therefore, the party legally obligated to inform correctly cannot object that the party entitled to receive such correct information should have taken the initiative and obtained the information by their own means.
4. What is determinative is not so much that the information requirement appears formally fulfilled, but the conditions under which it is materially fulfilled. The information duties incumbent upon the financial institution, specified in the aforementioned regulations, are not satisfied by a mere reference to the fact that, since a variable reference is established as a limit to the application of the fixed rate, the result may be positive or negative for the client depending on the fluctuation of that reference rate, which is the most that can be deduced from the statement of the bank employee who spoke Chinese and acted as interpreter, to which the Provincial Court attaches such importance. It is not a matter of Bankinter being able to predict the future evolution of interest rates, but rather of offering the client complete, sufficient, and comprehensible information about the possible consequences of upward or downward fluctuations in interest rates and the high costs of early cancellation.
5. The defendant entity provided the client with a financial advisory service that obligated it to strictly comply with the aforementioned information duties; the omission of which does not necessarily entail the existence of error as a defect of consent, but may affect its assessment, insofar as the information—which must necessarily include guidance and warnings about the risks associated with financial instruments—is essential for the retail client to be able to validly give their consent, it being understood that what vitiates consent through error is the lack of knowledge of the product and its associated risks, but not, by itself, the breach of the duty to inform.In turn, the duty to inform that rests on the financial institution directly affects the concurrence of the requirement of excusability of the error, because if the client needed that information and the financial institution was obligated to provide it in a comprehensible and adequate manner, then the mistaken knowledge about the specific risks associated with the complex financial product contracted, which constitutes the error, is excusable to the client.
6. Given that the appealed judgment is contrary to the uniform case law of this chamber regarding information and consent in interest rate swap contracts, the cassation appeal must succeed, the appealed judgment must be annulled, and the appeal filed by Bankinter against the first instance judgment, which is hereby confirmed, must be dismissed.”

Casimiro Galán Garrido