Spanish bank sold hybrid financial instrument to octogenarian with Alzheimer’s

Judge orders lender to return funds invested

A judge has ordered nationalized Bankia to refund investments made by an octogenarian couple, the husband an 81-year-old suffering from Alzheimer’s disease, in a complex financial product that was mis-sold to them as something similar to a bank deposit.

Savings bank Caixa Layetana, currently part of Bankia, was for decades the bank of choice for people in the town of Mataró in Barcelona province and the couple in question made their first bank deposits at Layetana when they were 16. Little could they have imagined that a bank they had trusted all their lives would sell them preferred shares that subsequently lost a great deal of their value.

A preferred share is a form of debt that may be perpetual and which normally yields higher interest rates than a bank deposit, but is a much riskier investment.

The Mataró couple was first sold 30,000 euros’ worth of preferred shares by Layetana in 2002 at the recommendation of the bank’s staff. After preferred shares had later become all the rage among banks looking to shore up their balance sheets during the financial crisis when they were shot off from the wholesale markets, the couple bought a further 6,000 euros of the hybrid product in 2011.

When they were sold the second batch of preferred shares, the husband, who was diagnosed with Alzheimer’s disease in 2004, did not even enter the office at the bank where his wife was recommended to buy the shares.

The woman, a former seamstress, was given a test to gauge her profile as an investor

The woman, a former seamstress, was given a test to gauge her profile as an investor as required under the European Union’s Markets in Financial Instruments directive. The test should show that preferred shares were an unsuitable product for someone of her financial acumen and risk-aversion profile. However, undaunted by this, a bank official persuaded her to buy the shares without consulting any of her superiors and without giving the woman time to consider the merits of the investment. In a declaration before the judge, the employee in question herself acknowledged that she was not sure of the difference between a bank deposit and a preferred share.

As a result, a judge in a Mataró court ordered Bankia to refund the total amount invested both in 2002 and 2011, with the corresponding interest that would have accrued on a bank deposit. He also heavily criticized the employees who had dealt with the couple. “It is difficult to understand how elderly people, traditional savers all their life, essentially worried at a certain period of their lives about always having access to their savings […], would freely and voluntarily subscribe to a contract involving complex financial operations,” the judge’s ruling read.

Under the terms of the European bailout for Spain's banks, retail investors stand to make substantial losses on instruments such as preferred shares which they acquired from banks that were subsequently nationalized.

Bankia and other nationalized banks NovaCaixaGalicia and Catalunya Banc have agreed to arbitration to determine if their customers were mis-sold complex products. The government has also introduced rules regarding the sales of complex financial instruments such as preferred shares, largely restricting them to professional investors.

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