Deutsche Bank is under pressure to sell complex foreign exchange products in Spain as regulators await the results of an internal investigation into contracts that have pushed some small businesses into financial difficulty and led to a series of out-of-court settlements.
The Financial Times reported last month, Deutsche launched an investigation codenamed Project Teal after customers complained they had been sold sophisticated merchandise they did not understand.
The German lender has opened an investigation after worrying about circumventing EU Mifid II rules designed to protect small businesses from risky loans. He confirmed the investigation to the FT and said a “limited number of customers” could have been affected.
“Internally, this problem is considered toxic,” said a person briefed on the investigation. The European Central Bank, Germany’s BaFin and Spain’s financial regulator CNMV are monitoring the matter closely and will determine whether action should be taken after the internal review, people familiar with the situation said.
The case adds to the pressure on Deutsche CEO Christian Sewing, who has pledged to improve the lender’s internal controls after repeated breaches and billions of euros in penalties over the past decade.
Some leading Deutsche investment bankers in London and Spain appear to have targeted small, financially unsophisticated import / export firms with annual turnover of 10-100 million euros for more than a year. decade until 2019.
A IMF Document 2009 examined the role of this type of instrument, sold by various banks around the world, in fueling the financial crisis.
“[The SMEs] trust their banks and don’t know that these products will put them in a risky position, ”said Prosper Lamothe Fernández, professor of finance at the Autonomous University of Madrid. He evaluated the contracts of the companies concerned and provided expert testimony in class.
Fernández estimates that between 300 and 500 Spanish companies could have suffered product losses as early as 2006, including transactions with lenders other than Deutsche. The average results were between 5 and 10 million euros, said people familiar with several of the disputes.
The losses pushed some customers into serious financial trouble and a few companies sued Deutsche in Spain. Some of the cases were dismissed, but the German bank settled with several others, people involved in the arbitration said.
Azimutel, an electronic components wholesaler based in Gandia, Valencia, bought a series of currency hedging products in 2007, which pushed it to the brink of bankruptcy, according to court documents.
In 2011, a Madrid court annulled the contracts and ordered Deutsche to pay Azimutel € 1.4 million. Deutsche’s appeal against the verdict was dismissed in 2014. The court ruled that the bank had failed to meet its obligations under EU customer suitability law. Azimutel declined to comment.
Several other small businesses – some currently in talks with Deutsche, as well as others already established – declined to be interviewed, citing confidentiality demands.
The products concerned are foreign exchange swaps, derivatives known as “targeted redemption and term bonds” (Tarn and Tarf). They were touted by Deutsche sellers as a cheaper way to hedge exposure to currency pairs, such as dollar-euro, than traditional ones. exchange rate insurance.
Small businesses were told the products were “zero premium,” with no upfront cost and could even make money for customers, according to people familiar with the matter. In a stable currency market, derivatives have sometimes benefited clients. However, if volatility increases and the exchange rate breaks a predetermined barrier, the cost could quickly multiply.
“It is impossible for the customer to quantify or calculate the cost of the product,” said Julio Ribelles, a Valencia-based lawyer who has successfully represented Azimutel and other plaintiffs against Deutsche. “You basically bet against the bank, but they know the formulas, they have the algorithms and the specialized software.”
The practice at Deutsche continued even after Mifid II, which came into effect in 2018, banned the sale of sophisticated derivatives to small businesses. The rules allow customers to ask to be treated as more sophisticated in order to access a wider range of products, and Deutsche has encouraged its customers to do so.
Deutsche Bank told the FT that it “disagreed” with the idea that it had wrongly sold complex derivatives to a large number of Spanish SMEs for many years, and that these products had grown some clients on the verge of bankruptcy. “This description of events is similar to unfounded allegations already made by a Spanish law firm apparently to encourage speculative legal action against the bank,” he said.
A person briefed on the matter said Deutsche was aware of less than 10 abuse-selling disputes in its two-decade history of selling products in Spain, including some the bank has won. The person added that these products were “widely sold in Spain by a wide range of banks”.
“As usual, we are following the evidence and diligently researching any potential similar activity,” Deutsche added. “We do not intend to comment further until all elements of the investigation are completed.”
The Spanish financial regulator CNMV was informed of such incidents by companies involved as early as 2011 but took no action. The CNMV said it is aware of the situation but will only comment when a decision or action is taken. BaFin and the ECB declined to comment.
Larger, more sophisticated companies have also suffered heavy losses on similar contracts. Spanish wine exporter J García Carrión is currently to pursue Goldman Sachs before the High Court in London to demand partial reimbursement of $ 6.2 million for losses caused by currency derivatives. Goldman argues that the products were not too complex for a multinational.
Additional reporting by Ian Mount in Madrid