Prudence more important than speed in the reassessment of interest rate derivatives

Shortcomings to be solved

Rabobank has completed its reassessment of the interest rate derivatives for all the 1,300 ‘vulnerable’ SME customers holding these instruments. The bank is working together with the customer to find a solution where necessary. Its prudent approach means that Rabobank still needs to carry out its additional reassessment for the other 6,700 SME customers this year and offer solutions where needed. The Netherlands Authority for the Financial Markets (AFM) concludes in its report on the provision of interest rate derivatives services by banks to Dutch SMEs that the quality of the reassessment is now adequate. Initially the rate of progress was too slow and the quality of the reassessments of interest rate derivatives was generally not satisfactory, but the AFM says that both these points have clearly improved over the course of 2014.

‘Prudence is more important than speed. A careful reassessment was in our customers’ interests. This took longer than originally expected,’ says Rabobank Executive Board Member Rien Nagel. In its annual review interview with its more than 8,000 SME customers with a loan involving an interest rate derivative, Rabobank expressly devoted attention to this product. This revealed that the product was suitable for the vast majority of these customers. The derivative adequately met the needs of the customer for whom it was concluded, namely the hedging of interest rate risk.

Redefined reassessment

Rabobank redefined its reassessment in 2014, on its own initiative and with the encouragement of the AFM. This led to an additional reassessment, which has been completed for the 1,300 ‘vulnerable customers’. These are SME customers with an interest rate derivative which are also under Special Asset Management, those with a complex interest rate derivative or those that are over-hedged, meaning that their interest rate derivative has a mismatch with either the term or size of the underlying loan. Based on the redefined criteria, Rabobank will discuss this product with the other 6,700 customers holding interest rate derivatives once again this year. Several hundred bank employees are involved in this process.

Mistakes are being corrected

The reassessment shows that there were shortcomings in the service provided in relation to a derivative instrument for a limited number of customers. ‘As soon as we identify this, we solve it together with the customer in a way that suits their specific situation. We found a solution for around 200 customers in this way last year. We are currently discussing solutions with a further approximately 200 customers,’ adds Rien Nagel. The solution can range from providing information again or explaining the situation to restructuring the derivative, converting it to a fixed interest rate or a combination of these solutions. If the solution is needed due to a mistake by the bank and the customer has suffered a loss, the costs of this will be paid by the bank. 

Currently, the bank is dealing with complaints relating to interest rate derivatives from around 150 customers. The bank’s efforts are directed at finding a solution in consultation with these customers. Customers who do not find a satisfactory solution with the bank are free to take their case to the independent financial ombudsman Kifid or put it before the courts.

Communication on progress

Rabobank will continue to communicate on the progress of the reassessments via its website. SME customers with a loan including an interest rate derivative will be informed personally regarding their individual reassessment by their account manager at their local Rabobank. ‘All SME customers involved will be sent a letter confirming the conclusions and agreements made,’ explains Rien Nagel. Customers with questions regarding their interest rate derivatives may at all times contact their local Rabobank. If the discussion with the local Rabobank does not lead to a solution, they can ask to be put in touch with the central Interest Rate Derivatives Expertise Team at Rabobank. 

Also read: 

Rabobank in talks with clients on derivatives

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Marie-Christine Reusken

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