An urgent process of arbitration

The government and the Orderly Bank Restructuring Fund (FROB) have opted to establish an arbitration procedure that will hopefully resolve — without overloading the courts — the claims of holders of preferred shares, who consider themselves to have been cheated by the banks, who stand accused of having sold these complex financial products as if they were risk-free deposits with total liquidity.

The arbitration is aimed at dealing promptly with the claims of the individuals concerned by means of a procedure that begins with a claim filed before the bank in which the claimant owns shares; then the review of the case by an expert, and its forwarding, if he sees fit, to the Consumer Affairs Department, the agency that will make the final decision on the amount to be reimbursed.

As an urgent procedure, the arbitration process is well thought out. Only experience will show if it is a procedure as swift as is being claimed. To begin with, the intention is to cool a political powder keg that affects more than 400,000 clients and has grave social implications, particularly as it coincides with evictions.

It is a sound decision that priority be given to quantities under 10,000 euros; sound, too, that once the bank expert’s recommendation is known, the shareholder may resort to the courts if they feel unfairly treated; and it is at least acceptable that, in any case, once the agency has recognized the shareholder’s right to receive back the sum invested, they should lose the difference between the return paid on the preferred shares in question, and the remuneration on a bank deposit, there being no write-off of capital.

Yet there remain obvious risks of a massive judicial conflict. On the one hand, because the investment is to be returned in the form of shares that, on the market, have a value near to zero. The loss of a large part of invested capital is very probable among those who cannot prove to an expert that there was bad faith in the bank’s action of selling them the shares, so that these cases will not proceed to the Consumer Affairs Department’s arbitration.

These people will probably go to the courts to argue, not only that they were originally cheated by the bank’s commercial office, but that they have received discriminatory treatment in the arbitration process.

In any case, the underlying risk for the government and the Bank of Spain is that the courts may accept the conclusions of the National Securities Commission (CNMV) on the deplorable marketing of the preferred shares. The CNMV considers that the placement of the shares was erroneous from the beginning by a basic case of fraud: there was no market to define their price, so that when a client sold his shares by way of the bank, the latter placed them at the initial nominal value, without taking into account the depreciation in their value. This was always to the detriment of the new buyer.

Should the courts accept the Commission’s view, the effort of setting up a convincing process of arbitration will serve for nothing.