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English speaking lawyers in Malaga (Andalucia / Costa del Sol) specialized in urban & rustic property law

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PREFERRED SHARES: THE GREAT SCANDAL

PREFERENTES dosBy the end of 2008, Spanish saving banks and banks already had clear reports stating that current high interest rates may drop and the property bubble was about to burst. In addition, they also knew that the lucrative business of saving banks in the construction sector by means of credits for developers and mortgages for individuals, was about to go to ruin.

Regarding that their core business in the housing sector was about to finish and that saving banks could not issue shares as banks could, they “invented” the sale of a product to obtain funds known as participaciones preferentes (preferred shares). This financial term may be defined as debt securities issuances for an undetermined period of time, in which saving banks pay returns depending on their profits. But they may not even pay anything at all—although this product offered up to 7% returns—, because the payment of these returns depended on the financial entity profits. Thus, as a result of the housing sector slump and saving banks loss, there was no profit. Furthermore, these preferred shares have no voting rights and are not guaranteed by the Deposit Guarantee Fund—which covers people’s savings up to 100,000 Euros—and has no maturity, that is, they are perpetual.

Most of the investors who purchased these preferred shares were retail clients of these financial entities. Most of them thought that this product was similar to fixed income deposits. In most cases, these clients did not have any knowledge about financial risks neither any intention to risk their savings—their money was invested in fixed term deposits and one day they received a telephone call from the bank convincing them of the “advantages” of purchasing preferred shares; however, most of the disadvantages were not explained to them, because the bank employees did not probably even know what they were offering. They just followed the financial entity instructions.

Result: 300,000 people affected by the purchase of these preferred shares which may amount to 30,000 million Euros, although this sum may be higher.

Financial entities are allowed to sell this type of products if they carry out the following: study of the investor’s profile and performance of the private investor test for suitability. In most cases, it is obvious that financial entities should have not sold the aforementioned preferred shares to most of their retail clients, because they did not match the suitable profile to purchase this type of products and had limited savings to be invested only in conservative products, such as fixed income deposits.

Holders of the aforementioned preferred shares have the following options:

A) Secondary market offering, although they may be sold at a loss considering current circumstances.

B) Conversion into shares of the entity—this is the solution offered by saving banks. However, this exchange is also at a loss, as Bankia has already done two weeks ago—in this case, its clients have lost up to 70% of their investment when the preferred shares were converted.

C) Going to the arbitration offered by the Government—we sincerely have misgivings about its results and clients may also have to assume significant losses.

D) Going to court through civil proceedings to claim for the invalidity of the contract which served as a basis for purchasing preferred shares.  This is the most recommended procedure for all people affected, as court orders which have been already known are pronounced in favour of these people. Although this action may imply a longer procedure to recover the invested money, the result is much more advantageous.

We finally recommend you to consult an expert before taking any decision if you are a person affected by this matter, so that all possible options are explored particularly.

 

Author: Gustavo Calero Monereo, C&D Solicitors (lawyers)
Torrox-Costa (Malaga/Costa del Sol/Andalucia)

 

 

CURB ON “FLOOR CLAUSES” IN MORTGAGE LOANS

On the 30 September 2010, Court no. 2 of Seville gave judgment declaring the "floor clause” introduced by the respondent entities Spanish bank BBVA, Saving Banks Cajamar and Caja de Ahorros de Galicia in the mortgage loan deeds formalised with them abusive and therefore null and void, for considering that the minimum threshold interest rates set by them are abusive and detrimental for the consumer.

Although the judgment has been appealed by the three financial entities mentioned, the Court has ordered the provisional application of the resolution. Therefore, as from 27 January 2011, they will not be able to include the said clause in their mortgage loans, and from 11 April, they will not be allowed to charge the clients with the difference between the minimum interest rate as per Euribor plus the interest rate agreed with the client, and the minimum threshold interest rate or  “floor rate” set by the said bank entities in their mortgage loans.

The so called “floor clause” means that in times of low mortgage interest rates, such as the ones we have lived through and are living through at present, the client is committed to pay a set minimum interest rate, which means that even if interests go down, their mortgages cannot benefit from lower interest rates

According to ADICAE (Association of Banks, Saving Banks and Insurance Companies of Spain), in Spain, there are currently 3.8 million clients who have this “floor clause” included in their mortgage loans and have not been able to take advantage of lower mortgage interest rates over the last years. The said association considers that in 2010, Banks and Saving Banks obtained a revenue of 7,000 million euros thanks to these clauses. These results show the importance and relevance of this judgment.

Therefore, as from 11 April, the entities BBVA, Saving Banks Cajamar and Caja de Ahorros de Galicia are obliged to recalculate repayments in all loan agreements taking into account a variable interest rate according to the Euribor benchmark rate, plus the interest rate negotiated with the client, and not according to the minimum threshold interest rate or “floor rate” established in their mortgage loans. This means that, since the interest rates applicable will be lower, the monthly repayments of those clients who have a mortgage loan with any of these entities will decrease.

Commercial Court no. 11 of Madrid has currently admitted the biggest joint action filed in Spain against 45 bank entities for the application of these “floor clauses”. It is likely, that before the end of the year, we know if such a number of saving banks and banks have to follow the path of the other three mentioned, which will be the most logical and coherent outcome.

However, whichever the result, it is likely that this issue of "floor clauses” reaches the High Court, who will then be in charge of taking the definitive decision about these provisions being abusive or not.

In the meanwhile, I would advise you to check your mortgage loan deeds , so that you may see if you have benefited from this judgement and if from 11 March, your bank is applying the resolution.

We will keep you informed on new updates.

 

Author: Gustavo Calero Monereo, C&D Solicitors (lawyers)
Torrox-Costa (Malaga/Costa del Sol/Andalucia)

 

 

Contact

C&D Solicitors S.L.P.
Calle La Noria , Edif. Recreo II, 1-15
29793 Torróx-Costa (Málaga), Spain
(Entrance at backside of building)

T/F: +34 - 952 532 582
M: +34 - 677 875 078 (Gustavo Calero Monereo)
M: +34 - 659 218 470 (Francisco Delgado Montilla)

Open: Mon, Wed, Fri: 08:30 - 15:30
Tue, Thu: 09:30 - 14:30 & 16:30 - 19:30