The four banks on trial for mis-selling swaps to Milan violated U.K. rules by failing to tell city officials they had lost the protection typically given to clients, a prosecution witness said.
UBS AG, Deutsche Bank AG, JPMorgan Chase & Co. and Depfa Bank Plc entered into a client relationship by agreeing to arrange a 1.7 billion-euro ($2.4 billion) bond sale in 2005, David Dobell, a former regulator and partner of London-based consulting firm CCL Partnership LLP, told a Milan court today. The banks arranged the swaps through their U.K. units under English law. “They were required to observe FSA principles,” he said.
British rules prescribe that a client should be told in writing that when it will be treated as a market counterparty rather than an intermediate customer, and so lose the protection the Financial Services Authority gives to clients signing contracts under English law, Dobell said. The banks’ advice and execution weren’t “governed by the observance of FSA rules,” Dobell said, citing the documents he’d seen.
Prosecutor Alfredo Robledo said the banks misled Milan by telling the city they could save it about 55 million euros with a bond sale and a series of swaps. Robledo says the banks earned 101 million euros in hidden fees. The banks deny the charges.
“In my experience, it is rare for an intermediate customer to opt out,” said Dobell, who in the 1990s worked in the supervision department of the FSA’s predecessor, the Securities and Futures Authority.
By arranging the bond sale, the banks provided advice to the client and were in breach of the FSA’s rules on integrity, paying regard to client interests, and ensuring their advice was suitable, Dobell said.
A spokesman for the FSA declined to comment.
The banks’ duty was to ensure “the advice is suitable and that the risks have been understood by the client,” he said. “The FSA doesn’t expect that every transaction is profitable, but banks must explain all the advantages and disadvantages of a specific transaction,” enabling Milan to seek further advice.
Deutsche Bank, Germany’s biggest bank, lost a case over interest-rate swaps last week in the first ruling by the country’s highest court on derivative sales. The court said the Frankfurt-based lender didn’t adequately disclose risks and ordered it to pay 541,074 euros in damages to its customer, Ille Papier Service GmbH.
The trial continues in Milan on April 13.