The 17th Provincial Court of Barcelona has rendered null and void a structured deposit marketed by Barclays (now Caixabank) and has ordered the bank to reimburse the €90,500 two retail investors lost on a €100,000 investment because the information provided at the point of sale was deficient.
The bank offered a deposit that promised to pay a 16% return but ended up incurring in losses of 90.5%, according to Juan Ignacio Navas (pictured), partner and managing director at Navas & Cusí, the law firm defending the two investors.
'No oral or written information about the product was provided,' stated the court. 'The advice provided did not match the real risks embedded in the product.' The sentence also pointed at another court ruling in December 15, 2014, which established that 'effective and irrevocable consent to invest in the product could only be drawn from the full disclosure of information', according to the court.
The investors - a technical engineer and a shop assistant - visited a Barclays Bank branch seeking advice to invest €100,000 they had saved and the branch's deputy manager recommended the Bono Autocancelable RBS-BBVA-SAN 16% (of which there is a second tranche - Bono Autocancelable RBS-BBVA-SAN II) as the best suitable investment to meet their goals because of its potential for a high return and the remote chances that the product would deliver a loss, according to the court.
The product, a five-year capital-at-risk growth structured bond featuring a knockout/worst-of payoff profile was linked to a basket of Santander, BBVA and Royal Bank of Scotland (RBS) shares. The product promised to mature early and pay a 16% fixed coupon if the level of each share in the basket was at or above 50% of its initial value. However, the condition was not met at maturity and the initial investment was eroded one-to-one with the worst performing shares in the basket, those of RBS.
Barclays did not disclose the risks of the product and the different market variables that could increase the risk of the investment which are 'essential substantive elements informing the contract between the two parties', according to the ruling. The court also criticised the UK bank for not carrying out a suitability test, as required by current regulations under the Mifid directive.
Barclays stated in its pledge that the information supplied was sufficient and that the contract included an explicit warning about the 'high risk' of losing the capital invested. However, the court ruling dismissed the claim on the basis of another ruling (on February 3, 2016), which concluded that the bank should have provided real examples and evidence of specific risks.
"Unfortunately, this did not happen and the product was sold as a safe deposit, when it was actually a high-risk product that eventually lost more than 90% of its value," said Navas, adding that Barclays acknowledged, to the securities regulator (Comision Nacional del Mercado de Valores) in 2010, that it had made an error when assigning the risk to the bond. "[Barclays] rated the product as medium-low risk, when in fact was a high-risk investment," said Navas.
Barclays stated that the error could have resulted in recommendations that would have not occurred if the right risk rating had been assigned to the product, according to the court. In its defence, the bank also claimed that the couple had previously invested in high risk products. However, the court stated that this would not make the couple experienced investors if the risks around those products was not disclosed.
The ruling goes against an earlier decision by tribunal 25 of Barcelona, which originally ruled in favour of the bank. "The bank's attitude is difficult to understand: pre-sale disclosure was deficient; the contract did not disclose all the relevant information about the risks of the product, as it has already acknowledged to the regulator," said Navas. "In addition, [Barclays] did not inform its clients regularly about the performance of a deposit that was linked to three banking shares that fell sharply during the life of the product. Justice has been done as the bank sold a risky product as a safe product to clients that were not sophisticated investors and had no financial knowledge. Hopefully, the judicial reprimand will help them modify bad practice."
Caixabank will assume the liabilities and those from any other Barclays' products, following its acquisition of the UK bank's retail banking operations in Spain at the end of 2014. This is the second time that Caixabank has recompensed investors for unsuitable sales. In January 2015, the bank was ordered to reimburse €1.5m plus interest to an investor who bought a structured product that the bank 'wrongly' sold as a medium/low risk investment, when it was a 'highly speculative investment', according to the court.
Click in the link to read a summary of the court ruling (in Spanish).
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