Mis-selling of Preferred Shares to Spanish Retail Clients

pref15ZUNZUNEGUI, F.: “Mis-selling of Preferred Shares to Spanish Retail Clients”, Journal of International Banking Law and Regulation, Volume 29, Issue 3, 2014, pp. 174-186.
The distribution of preferred shares to retail clients in Spain is the greatest case of mis-selling of financial products. Despite its complexity and risk, they were offered by credit institutions, mainly savings banks and after the Lehman collapse, as an alternative to time deposits. After identifying the problem, this article reviews the applicable legal framework to propose changes to improve investor protection.

Extract of Conclusions
Preferred shares are high risk complex financial products placed at the branches of credit entities as an alternative for term deposits. Banks and savings banks offered them as if they were profitable fixed income with a safe coupon when, actually, it is a variable income that is not that attractive because of liquidity issues, which profitability is conditioned to a good operation by the issuer. They are own resources for banking institutions and a perpetual debt for investors.

Banks contend that if clients did not know it, they should have asked before buying. However, according to the information received from institutions, clients believed they were purchasing fixed-income securities by secured bonds that could be redeemed at anytime. Furthermore, branches presented them as a preferred product adapted to their profile. This being the case, why do mistrust their long life bank that also has taken the initiative to offer them the product? Being provided with clear information on what they were buying, fixed-income security by attractive bonds, there was no need to make any question. CNMV has confessed that banks kept liquidity fictitiously by reallocating preferred shares to other clients of the same bank branch. These bad practices were possible thanks to AIAF’s opacity, the fixed-income market in which preferred shares were traded. It was precisely AIAF’s reform that has shown the situation of lack of liquidity of these shares. When prices and positions were disclosed, investors could realise that what they bought was not what they were offered.

Failure of the investor protection system is caused, as any accident, by several linked causes as the trading of complex and high risk financial products among retail clients, conflict of interest arising the allocation of own products to reinforce the issuer’s solvency, along with the breach of the rules of conduct, in particular the one obliging not to offer inadequate products and the one prescribing warning of risks of the purchased product. All those circumstances have led to the current situation described, which can be characterised as the greatest case of mis-selling of financial products in financial history.

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