Review of the Case Law of Complex Financial Products in Spain · cases, Banco Santander once again tops the ranking with 28.12%, followed by Banco Popular with 12.71%, BBVA with 12.96%,

Review of the Case Law of Complex Financial Products in Spain

2017

ContentsMETHODOLOGY 3

INTRODUCTION 4

1. Swaps 6

1.1. Swaps 2017 6

1.2. Comparison of decisions on swaps in Appellate Courts 2012 - 2017 8

2. Structured products 9

2.1. Structured products 2017 9

2.2. Comparison of Appellate Courts decisions on structured products 2012- 2017 10

3. Supreme Court Rulings (comparison 2012 - 2017) 11

4. Major decisions 2017 15

Court of Appeal Rulings 16

5. Other Major rulings in 2018 19

6. Conclusions 22

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MethodologyWelcome to the sixth edition of the JAUSAS Review of Complex Financial Products.

The criteria followed to determine the scope of the study remains unchanged from the previous edition. The Provincial Appellate Court (Audencia Provincial) rulings refer exclusively to swaps and structured products, as those relating to preferred stock and subordinated debentures continue to be upheld in almost all cases. We have maintained the same criteria as in previous years with regard to Supreme Court (Tribunal Supremo) rulings, and have examined decisions on swaps, structured products and preferred stock. With regard to these latter, the trend set by Provincial Appellate Courts in upholding almost all claims seems to be supported.

In preparing this study, the CENDOJ and Westlaw (Aranzadi) databases of Provincial Appellate Court and Supreme Court rulings have been used.

As in previous years, Provincial Appellate Court rulings have been classified by product, and the number and percentage of decisions handed down in favour of and against investors has been indicated. We have also divided the decisions analysed into private investors and SMEs, in consideration of the still notable differences between success rates of the claims filed by each group. In addition, we have compared results from previous years and have drawn conclusions on how data have performed over time.

For Supreme Court rulings, the decisions in favour of, and against, investors this year have been compared with those of previous years, and each product has been studied separately.

Likewise, we have highlighted the most important rulings of 2017 in the Supreme Court and the Provincial Appellate Courts, as well as those from the first quarter of 2018, including some First Instance decisions.

Copyright Jausas Legal y Tributario SLP.

REVIEW OF THE CASE LAW OF COMPLEX FINANCIAL PRODUCTS IN SPAIN

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IntroductionAfter some years in which the number of court decisions against financial institutions soared, 2016 and 2017 have seen a drop in the number of rulings.

The rulings handed down on appeal dropped from 512 decisions in 2016 to 409 rulings in 2017, due to the sharp drop in claims filed for swaps, despite these continuing to be considerable.

Meanwhile, Supreme Court rulings have doubled, from 79 to 158 in just one year. This number of rulings is unprecedented and, according to Professor Angel Carrasco Perera, they represent half of the rulings of the Civil Chamber of the Supreme Court. (1)

In terms of financial product, only from the perspective of swaps and structured products, there has been a positive avalanche of civil and criminal claims related to the collapse of Banco Popular, which has had some bearing on first instance rulings that will be included in the observatory once they reach the appeal stage.

For the swap, which is the star product of this study, we must highlight that comparisons since 2012 show that, over the past six years, Provincial Appellate Courts have decided in favour of investors on 3,410 occasions. Of those, 2,075 were small and medium enterprises (SMEs) and 1,335 were private individuals. This fact shows the extent to which there has been generalised bad practices in the marketing of swaps.

The Supreme Court ruling of 19 February 2018 on swaps is of particular interest, as it changes the legal doctrine relating to the time bar on annulment due to invalid consent, and indicates that, as of that ruling, the period will be calculated from when the swap agreement matures (rather than on the occasion of the first negative settlement). This will mean that, on the one hand, there may be a rise in the number of claims brought by investors who signed very long-term swaps (normally for very high monetary amounts). On the other hand, the success rate for the investor will rise because many Provincial Appellate Courts (and the Supreme Court thereafter) will consider the deadline countdown to start as of the first negative settlement.

(1) CARRASCO PERERA, Ángel. Professor of Civil Law of Universidad de Castilla-La Mancha, Academic director of Gómez-Acebo & Pombo. El estado actual de la jurisprudencia sobre la validez y nulidad de los contratos de permuta financiera (swaps). May 2017. http://www.gomezacebo-pombo.com/media/k2/attachments/el-estado-actual-de-la-jurisprudencia-sobre-la-validez-y-nulidad-de-los-contratos-de-permuta-financiera-swaps.pdf

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Moreover, we must also highlight the decision of the Spanish National Markets and Competition Commission (CNMC) of 13 February 2018, which imposed a hefty fine of 91 million euros on Caixabank, Banco Santander, BBVA and Banco Sabadell for the sale of derivatives above market price. The decision is an important one because: a) the claimant was a company, operating in renewable energies; b) it documents the existence and widespread nature of bad banking practice by financial institutions in project finance products marketed between 2006 and 2016; c) it highlights that the obligations of loyalty, transparency and information of the financial institution are equally enforceable when the client is classified as a professional investor; and d) it clarifies the obligations of financial institutions and the agent bank, ruling for investors in respect of certain issues that arise in multiple civil proceedings (particularly when the claim amount is high).

The decision of the CNMC was the motivation behind the creation of the first JAUSAS “Observatory on the Case Law of Financial Derivatives at Renewable Energy Companies in Spain” (Observatorio de Jurisprudencia de Derivados Financieros en Empresas de Energías Renovables), the results of which are much more favourable to the investor than those of the general analysis of this report.

For structured products, the report shows that success rates of investors have levelled out.

Our findings on the products included in the observatory show that the foreseeable trend is that the number of lawsuits will increase (as will the number of rulings), particularly those affecting renewable energy companies and interest rate derivatives, where there are big sums of money involved.

Jordi Ruiz de VillaPartnerBanking LitigationJAUSAS


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Análisis de las sentencias de 2013

In 2017, the Provincial Appellate Courts handed down a total of 409 rulings relating to swaps—a drop of approximately 20% on last year, which saw 512 decisions.

As we indicated in last year’s edition, the number of rulings handed down for these products is on the decline (although the decline is gentler this year, compared with 30% the previous year). The most likely reason is that financial institutions stopped marketing these products on a general basis when they saw that they were being voided by the courts.

The reduction in the number of decisions has gone hand in hand with an almost equal reduction in rulings in favour of investors, from 85.60% to 67.50%, as can be seen in the table below:

1. SWAPS

TOTAL PRIVATE (41,.56%)

SME(55.75%)

TOTAL RULINGS

RULINGS AGAINST THE CLIENT

RULINGS FOR THE CLIENT

409 170

133 (32,50%) 46 (27,06%)

276 (67,50%)

*5 Cooperatives (4 in favour/ 1 against)

*1 Barcelona Association of Commercial Agents (in favour)

*1 Grouping (in favour)

*1 Association of Affected Users (in favour)

*1 Sole proprietor limited liability company (in favour)

*2 Subjective Group of Private individuals and SMEs (2 against)

124 (72,94%))

228 11*

84 (36,84%) 3 (27,30%)

144(63,16%) 8 (72,70%)

1.1 Swaps 2017

OTHERS(2.69%)

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The main ground for dismissing the claims filed was that the annulment action based on invalid consent was time barred, although in a minimal number of decisions (i) it had not been proven that the bank failed to provide sufficient and adequate information on the purchasing of those products and (ii) the action to void the contract was processed incorrectly, and the annulment action was not subsequently brought based on invalid consent. The number of rulings on claims for damages for harm and loss suffered (rather than invalid consent) continues to be minimal, although they have been upheld in a few cases with very significant monetary amounts (see the section on major rulings, cases defended by JAUSAS).

The rulings handed down by the Provincial Appellate Courts in 2017 found that the four-year window within which to bring an action to void the contract will start to run once the customer has actual knowledge of their mistake when they entered into the contract. In the majority of cases, that coincides with the first negative settlement on the product.

The major rulings from 1Q 2018 show that it is highly likely that the claims dismissed due to being time barred will reduce in number, following the ruling of 19 February 2018 in which the Supreme Court changed its position on swaps and confirmed that the four-year window to claim runs from product maturity.

By client type, favourable decisions for SMEs and private individuals have dropped, although that drop is less severe for the latter. Private individuals have a very high success rate, with 72.94% of their decisions being favourable (124 rulings out of 170) compared to 63.16% (144 decisions out of 228) for SMEs.

Those figures are interesting in light of the JAUSAS “Observatory on the Case Law of Financial Derivatives at Renewable Energy Companies in Spain”, which analysed data from 2011 to the first quarter of 2018 and found that, after the Supreme Court Ruling of 22 December 2015, 90% of Court of Appeal rulings were favourable to the investor, whereas before that ruling, and taking into account Supreme Court decisions, only 78.4% of them were favourable to investors.

As we also indicated in the previous edition, the number of inflation swaps continues to be inconsequential (approximately 3%) compared with interest rate swaps.

Turning to the institutions with the highest number of court cases, Banco Santander once again tops the ranking with 28.12%, followed by Banco Popular with 12.71%, BBVA with 12.96%, Bankinter with 11%, and Bankia and CaixaBank, with approximately 8% and 9%.


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The decisions handed down by Appellate Courts on swaps reflect the declining trend, above all in relation to SMEs, for the reasons given above. Despite that, the success rates for claims filed for those products remain high (63.16% for SMEs and 72.94% for private individuals) and we believe that the trend may reverse itself in view of the Supreme Court’s recent doctrine.

If we aggregate the rulings we will see that in six years, a total of 3,410 rulings have been handed down by Provincial Appellate Courts in favour of investors, of which 2,075 were SMEs and 1,335 were private individuals. That is a clear indication of the generalised bad practice of financial institutions.

2012 20142013 2015 2016 2017

SMES

PRIVATE

393(70,68%)

512(70,91%)

308(87,25%)

262(75,22%)

389(64,83%)

378(77,77%)

259(83,80%)

144(63,16%)

246(82%)

219(92,02%)

176(88,40%)

124(72,94%)


1. SWAPS

1.2. Comparison of decision on swaps in Appellate Courts 2012-2017

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2. STRUCTURED PRODUCTS

2.1. Structured products 2017

In 2017, the Provincial Appellate Courts ruled on this kind of product on 102 occasions—9 rulings more than the previous year.

In absolute terms, success rates in court actions concerning structured products are down on last year, dropping from 75.30% (70 rulings out of 93) in 2016, to 53% (54 rulings out of 102) in 2017. The drop is the result of many suits from private investors being dismissed because the Appellate Courts found that the bank did provide adequate information when contracting.

Therefore, the success rate for private investors dropped in 2017 to 54.50% (48 rulings out of 88), compared to 79.6% in 2016 (66 rulings out of 83).

On the contrary, for SMEs, the success rate in 2017 doubled, growing to 50% (6 rulings out of 12), which is a major increase on 2016, at 25% (2 rulings out of 8). However, as in the previous year, the statistical value of the rise in the success rate is limited due to the very low number of court decisions.

Of the entities with the greatest number of litigations, of the 102 rulings analysed, Banco Santander once again tops the ranking as the most sued bank, with 34.3% of cases, followed by Caixabank with 24.5% and Bankinter with 14.7% of claims for structured products.

TOTAL PRIVATE(86,3%)

SME(11,8%)

OTHERS(1,9%)

TOTAL RULINGS

RULINGS AGAINSTTHE CLIENT

RULINGS FORTHE CLIENT

102 88

48 (47%) 40 (45,5%)

54 (53%) 48 (54,5%)

12 2*

6 (50%)

6 (50%)

2* Association and joint action SME with

individuals (100%)


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The conclusion drawn is that slightly more cases have reached appeal stage than last year and that increase is proportional to client type.

The success rate among private individuals has dropped because it is often the case that private investors fail to prove that they did not know the features of the products they purchased or that they had been incorrectly and incompletely informed of the features and risks of the products.

On the contrary, rulings for SMEs, while still insignificant in number, are on the rise in both prevalence and success rate.


2. STRUCTURED PRODUCTS

2.2. Comparison of Appellate Courts decisions on structured products 2012- 2017

2012 20142013 2015 2016 2017

SMES

PRIVATE

10(30%)

3(50%)

34(41,18%)

20(42,5%)

3(33,33%)

5(38,46%)

2(25%)

6(50%)

16(40%)

38(56,72%)

66(79,6%)

48(54,5%)

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The table below shows that the number of rulings handed down by the High Court (Alto Tribunal) continue to rise year after year. In 2016, that rise was exponential and, in 2017, the Supreme Court virtually doubled its number of rulings compared with the year before. Therefore, the trend for the number of Appeal Court decisions has not yet been replicated in the Supreme Court.

3. SUPREME COURT RULINGS (COMPARISON 2012-2017)

2012 20142013 2015 2016 2017

IN FAVOUR

AGAINST

2 2

11

7

5

18

2

65 109

14 49


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Below we will analyse the decisions handed down by the Court by product category, including preferred stock, swaps and structured products.

This year, the Supreme Court has handed down more rulings on preferred stock, nearly all of which being successful. Of a total 13 rulings, 12 favoured the investor, which equates to a 92.3% success rate.

Preferred Stock

2012 20142013 2015 2016 2017

IN FAVOUR

AGAINST

0 1

00

3

3

1

0

13 12

1 1

13

Swaps

Currently, decisions relating to this kind of financial product occupy the Supreme Court’s time. It is notable that the number of rulings has risen from two rulings in 2012 to 139 rulings in 2017.

The 139 rulings in 2017 reflected a rise of 127.8% on the 61 rulings in 2016.

Despite this, the success rate of claims from investors that reach the Supreme Court has dropped slightly, sitting at around 68% (compared to 80% the previous year).

With regard to decisions against the client, (i) the majority are dismissed on the basis that they are time barred, as the timeframe from the first negative return has elapsed (note the change in criteria on 19 February 2018) (ii) the next most frequent are those that do not admit the appeal due to a defect in the cassation procedure (note the Resolution of the First Chamber of 27 January 2017 introduces new restrictions for cassation appeals), (iii) lastly, there were 6 rulings on derivatives embedded in other financial agreements, which were dismissed due to technical defects in the claim being submitted, stemming from the failure to request the annulment of the credit facility and instead focusing solely on the embedded derivative.

2012 20142013 2015 2016 2017

IN FAVOUR

AGAINST

1 0

11

4

1

15

0

49 94

12 45


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The number of rulings for structured products handed down by the High Court follows the same trend as in previous years. This year, the Supreme Court handed down 6 rulings: 3 in favour and 3 against, showing a success rate of 50%.

As at appeal stage, the High Court has ruled against investors in all cases in which they have filed a claim despite knowing or having been adequately informed of the features and risks of the products.

Structured products

2012 20142013 2015 2016 2017

IN FAVOUR

AGAINST

0 1

01

0

1

2

2

3 3

1 3

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SUPREME COURT

Supreme Court Ruling 140/2017 of 01.03.2017 [Interest rate swap]: The Supreme Court ruled in favour of a Foundation that had contracted an interest rate swap with a notional amount of 3 million euros. The Supreme Court reiterated in its decision that it is not the client who must take the initiative to seek out information on the product, but rather that the Bank is obliged to offer that information.

Supreme Court Ruling 191/2017 of 16.03.2017 [Interest rate swap]: The Supreme Court ruled in favour of the investor, which, in this case, was a group of companies engaged in agricultural and farming activities. The High Court reiterated the information duty held by banks, which, for this kind of product, extends to the risks resulting from a slump in the Euribor and the financial risks of cancelling them.

Supreme Court Ruling 269/2017 of 04.05.2017 [“Trident” structured product]: The Supreme Court ruled in favour of a private individual who invested 300,000 euros in a “trident” structured product. The High Court reiterated that the information duty is not discharged by merely making contractual documents available to the client. Moreover, the fact that the client was a business owner and that they had previously engaged in share sale and purchases and investments in complex fixed-income securities was not a reason to expect them to know the product risks. Lastly, the fact that the investor contracted another product that was the same for the same value, offered by the Bank as a restructuring solution, once the client had lost a significant amount of capital, does not invalidate the objections to the initial contract and does not mean that the investor had accepted the error.

4. MAJOR DECISIONS 2017


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Supreme Court Ruling 335/2017 of 25 May 2017 [interest rate swaps]: The Court upheld the claim filed by a renewables group of companies, concluding (contrary to the ruling of the Madrid Court of Appeal) that swap contracts are complex and high-risk, and can have serious financial repercussions for a client not classified as professional. The Court added that the bank’s obligations were not limited to furnishing information and checking that the client understood the product and its risks, but that it must also assess whether the product was the most suitable one in view of their investment objective, warning them of the risks associated with a prolonged and abrupt dip in interest rates, and that the risk could be real and devastating depending on the amount of the notional sum. Lastly, the High Court stated that even though the client is a trading company and director in other companies, their mistake is still excusable if they do not have specialist knowledge in this specific type of financial product.

Supreme Court Ruling 434/2017 of 11.07.2017 [Preferred stock]: The Supreme Court ruled in favour of a private investor who invested more than 1 million euros in preferred stock. What is important about this ruling is that it clarifies the case law position on the effects of the annulment; it confirms that the restitution effects apply to both parties—both the seller and the buyer—and that the amounts that the Bank paid to the client should be subtracted from any damages awarded.

Supreme Court Ruling 472/2017 of 20.07.2017 [Structured note]: Despite ratifying that the annulment actions due to invalid consent had been time barred, the High Court did eventually uphold the claim for damages in favour of a private investor who had suffered losses of 15,500 euros, on the basis that the duty to inform had been breached. The Supreme Court held that the bank was liable in contract as it had not clearly and accurately warned that the product purchased was not aligned with the investor’s risk profile or their investment objectives, as the investor had gone to the bank with the intention of taking out a deposit.

COURT OF APPEAL RULINGS

Ruling of the Murcia Court of Appeal 12/2017 of 09.01.2017 [Interest rate collar]: The ruling of the Murcia Court of Appeal upheld the annulment of a collar agreement with an initial investment of 5 million euros based on invalid consent. The decision was justified by the credit institution’s breach of the legal duty to provide information. The court found that the client being a trading company is not sufficient to prove financial knowledge.

Ruling of the Barcelona Court of Appeal 128/2017 of 29.03.2017 [Interest rate swap]: The ruling handed down by the Barcelona Court of Appeal overruled the first instance ruling and annuls two interest rate swap agreements, as well as the master financial transaction agreement signed by the financial institution and a Spanish public

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limited liability company. Both swaps were signed due to two financial lease agreements on industrial units, the first of a nominal amount of 2,345,761 euros and the second of 1,804,981.64 euros. In both cases, there was a lack of prior information about the products sold and, in particular, about the financial risk of a sharp drop in interest rates and the consequences of cancelling the products early.

Ruling of the Tenerife Court of Appeal 148/2017 of 06.04.2017 [Interest rate swap]: The Tenerife Court of Appeal found two swap agreements, and the respective master financial transaction agreements totalling 3.5 million euros, to be void due to invalid consent. The underlying reason was that the banking institution had not correctly informed the client, a Spanish public limited liability company, which was not involved in the financial market and did not have sufficient technical or financial knowledge to understand the economic repercussions of the product they had purchased.

Ruling of the Guipúzcoa Court of Appeal 96/2017 of 17.05.2017 [Structured deposit]: The ruling of the Guipúzcoa Court of Appeal declared a structured deposit for 1 million euros purchased by a private investor to be void based on invalid consent, having found that the bank had not provided the client with adequate precontractual information on the features and risks of the product.

Ruling of the Madrid Court of Appeal 232/2017 of 19.05.2017 [Interest rate swap]: The ruling of the Madrid Court of Appeal upheld the claim filed by a cooperative that had suffered heavy losses as a consequence of a swap that it had been forced to take out at the same time as a mortgage loan that it applied for to finance the building of a school. The bank was ordered to pay damages for the harm and loss suffered, in the amount of nearly 2 million euros.

Ruling of the Alicante Court of Appeal 364/2017 of 15.09.2017 [Interest rate swap and preferred stock]: The Alicante Court of Appeal found that the financial institution was contractually liable and had to pay damages in the amount of 1,208,115.58 euros to a company owning a 5-star hotel, after providing insufficient information in the purchase of an interest rate swap with a notional amount of 10,000,000 euros. It was also ordered to pay 300,000 euros for poor selling practices of preferred stock. The claim was not for annulment based on invalid consent, but rather for damages. [DEFENDED BY JAUSAS]

Ruling of the Madrid Court of Appeal 468/2017 of 16.11.2017 [“Trident” structured product]: The ruling handed down by the Madrid Court of Appeal overruled the first instance ruling and voided two “trident” structured products each for 1.5 million euros. As a result, the investor company, which was engaged in the real estate sector, was able to recoup its losses, which amounted to more than a million euros. The Court of Appeal found


18

the information given by the bank to be obscure and incomprehensible to the lay-person, as it neither explained the material risks nor covered all possibilities.

Ruling of the Madrid Court of Appeal 332/2017 of 27.11.2017 [Structured deposit]: The Madrid Court of Appeal affirmed the first instance ruling in favour of a construction company because it could not be shown that the bank had discharged its duty to provide information. The Madrid Court of Appeal reiterated that having considerable financial resources and being classified as a premier banking client does not in itself make the client an expert in investment.

Ruling of the Guipúzcoa Court of Appeal 312/2017 of 13.12.2017 [Structured deposit]: The Guipúzcoa Court of Appeal voided a structured deposit with a nominal amount of 700,000 euros based on invalid consent. Despite finding that the evidence itself did not infer whether or not there was invalid consent, an analysis of the situation in its entirety found that the client was not provided with adequate information.

Ruling of the Barcelona Court of Appeal 675/2017 of 18.12.2017 [Interest rate swap]: The Barcelona Court of Appeal found in favour of the private investor and terminated the interest rate swap agreement, for a nominal amount of more than 5 million euros, due to the bank’s failure to provide information.

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In the first quarter of 2018, other relevant rulings included:

Supreme Court Ruling 23/2018 of 17.01.2018 [Interest rate swap]: The Supreme Court overturned the ruling of the Barcelona Court of Appeal that found that the client (in this case, an SME) had knowledge of complex financial products due to having purchased another swap with the same financial institution. The Supreme Court confirmed the annulment of the swap based the financial institution’s failure to provide sufficient, clear information on the risks of the product, and ordered it to return the amount of 1,057,843.57 euros. The High Court found that the investor, despite having purchased other financial products, did not have full knowledge of the risk assumed until the product produced a negative settlement and it was informed of the cost of cancelling.

Ruling of the Girona Court of Appeal 17.01.2018 [Interest rate swap]: The Girona Court of Appeal approved the first instance ruling and ordered that the financial institution compensate an energy supply company for lack of sufficient information supplied when purchasing an interest rate swap (an action for damages rather than for annulment based on invalid consent). The investing company signed a financial lease agreement, then was unexpectedly compelled by the financial institution to take out a swap, without having the chance to examine its risks. [DEFENDED BY JAUSAS]

Supreme Court Ruling 30/2018 of 22.01.2018 [Interest rate swap]: The Supreme Court ruled in favour of the investor (in this case, a General Association of Users formed of governors and small local councils with no investment profile) and voided the swap agreements with an initial nominal amount of more than 10 million euros. The High Court reiterated its position in relation to contract annulment due to invalid consent when the error is the result of failure to discharge the duty of information, fundamentally on the inherent risk of swap agreements, both in respect of the possibility of a significant negative settlement and a high cost of cancellation.

5. OTHER MAJOR RULINGS IN 2018


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Supreme Court Ruling 37/2018 de 24.01.2018 [Interest rate swap]: The High Court overruled the decision of the Seville Court of Appeal, which found that the client (in this case, an SME) had not acted with due diligence, which would have enabled the client to anticipate the repercussions of the contract’s provisions or the various factors that could have a bearing on the behaviour of the product. However, the Supreme Court affirmed the annulment of the two swaps (which had a nominal amount of more than a million euros), due to finding that the bank had breached its duty to provide sufficient and clear information on the risks of the purchased product.

Supreme Court Ruling 89/2018 of 19.02.2018 [Interest rate swap]: The Supreme Court ruled in favour of the investor, a public limited liability company that had signed a swap with a notional amount of 3 million euros. The High Court found that the bank had not provided clear and complete information for the client to have sufficient knowledge of the features and risks of the product. The prior signature of other contracts and the acceptance of a negative settlement had not been a reflection of the client’s understanding. In addition, through this ruling the Supreme Court clarified its position for calculating the time bar on actions to void this kind of swaps. The High Court established that the calculation must not be brought forward to before contract performance on the basis that the client may have been aware of their mistake, as this would contradict the wording of section 1301.IV of the Spanish Civil Code (which states that the period in which the action can be exercised begins “from contract performance”, i.e. from its maturity).

Supreme Court Ruling 90/2018 of 19.02.2018 [Interest rate swap]: The Supreme Court overruled the decision of the Madrid Court of Appeal, which had found that the contractual provisions of the client (in this case, a private individual) and the financial institution were proportional and that, in terms of the lack of information on the manner in which to terminate the contract, it should have been presumed that it would be through sale on the secondary market. However, the High Court voided the swap because it found that the information on the cost of product cancellation is a core element to enable understanding of the product risk, and that may mean that the client would not have purchased the product had they known them.

Ruling of the Madrid Court of Appeal of 15.03.2018 [Notes, preferred and subordinated stock]: The Madrid Court of Appeal affirmed the first instance ruling voiding the acquisition of notes, preferred stock and subordinated stock for a nominal amount of more than 2 million euros due to invalid consent, and also voided an out-of-court settlement for a product swap. The Court of Appeal held that it had been successfully proven that the financial institution had not offered adequate products for the conservative profile of the investors and had not informed them of key products features, and affirmed the annulment of the settlement. [DEFENDED BY JAUSAS]

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Supreme Court Ruling of 160/2018 of 21.03.2018 [Structured product]: The Supreme Court overruled the decision of the Barcelona Court of Appeal, which dismissed the appeal on the understanding that the client was aware of the product they purchased and that, as a result, the consent given was valid. The High Court found that the client had not had an expert profile in financial products, so there was a presumption of ignorance and the bank had a legal duty to inform of the risks and the features of the products on offer. Therefore, due to the absence of any proof that the bank provided that information, the Supreme Court voided the structured product contract for a nominal amount of 300,000 euros. In addition, the ruling cited the Supreme Court ruling of 89/2018 of 19 February mentioned above, to reiterate that the calculation of dies a quo of the annulment actions under section 1301 of the Spanish Civil Code begins as of the date the parties perform the contract.

Ruling of the Gavà Court of First Instance 2 of 23.03.2018 [Santander Securities]: The Court voided the contract for “Santander Securities” signed by a real estate company for the amount of 1,000,000 euros and, by extension, the credit facility associated with it for the same amount. The Court found that, although the company director had certain economic and investment knowledge and could be expected to assume a certain amount of risk, error as to the core elements of the contract could not be disregarded. It therefore concluded that the lack of information from the bank was significant, taking into account the enormous difference between the results that the bank presented as likely and the real possible results, taking into consideration the nature and features of the product. [DEFENDED BY JAUSAS]

Ruling 116/2018 of the Madrid Court of First Instance 77 of 07.05.2018 [Auto-call structured products]: The Court voided the contracts marketed by the Bank, and ordered it to repay the amount invested by an architectural studio (500,000 euros), by finding that it had not been proven that the client had been given sufficient pre-contractual information on the nature and the risks of the products, and that merely delivering the contracts was not sufficient. Likewise, the ruling found that due to the client being a retail customer with a conservative-moderate risk profile, they were not suited to the Bank’s products. [DEFENDED BY JAUSAS]


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1) One more year, there has been a large number of court decisions on complex products, in addition to the decision of the Competition and Markets Commission. Case law clearly leans towards protecting the investors, increasingly the most qualified ones.

2) Despite the reduction in Appeal Court rulings, the number of cases ruled on by the Supreme Court continues to grow exponentially, more than doubling since last year, which was already considerably higher than the year before.

3) From a qualitative point of view, the success rate for investors has dropped with regards to swaps and structured products, basically because Courts dismissed claims for annulment due to invalid consent on the grounds that they were time barred claims.

4) However, we expect this trend to change in the coming months, since, as it has been said, the Provincial Appellate Courts will have to adjust their interpretation of the statute bar according to rulings handed down by the Supreme Court as of February 2018.

5) On structured products, the number of decisions handed down rose slightly, although not at the same rate as swaps. As we anticipated in last year’s edition, the success rate for SMEs of structured products on appeal has grown considerably, since in 2016 it was just one out of four decisions, while in 2017 this was one out of two.

6. CONCLUSIONS

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Review of the Case Law of Complex Financial Products in Spain

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Documents

Review of the Case Law of Complex Financial Products in Spain · cases, Banco Santander once again tops the ranking with 28.12%, followed by Banco Popular with 12.71%, BBVA with 12.96%,