At the very beginning of the credit crunch, known in Spain as ‘la crisis’, some banks financed themselves when they badly needed money by selling Preference Shares: it was an easy way for them to raise money.
Preference shares investments are again in the news because there have been recent favourable court rulings in favour of the investors. So, if you are currently out of pocket, it is worth checking to see if you can recover part or all of your original investments.
Since the financial crisis started, many Spanish banks and ‘cajas’ have been restructured via mergers, take-overs or have been sold to other financial institutions. Many well-known names have disappeared leaving some customers worried about their investments.
Investing by buying preferred shares has turned into a nightmare for many unsuspecting consumers, who did not have either the knowledge or professional advice to understand the risks involved.
Investment in preferred shares in major Spanish banks has not been the guaranteed investment that many people, who needed to maintain their income levels, were expecting.
What are Preferred Shares?
Investing money in debt of any Bank. This means that you loan your money to the bank appointed in exchange for this investment, and they will pay some interest thanks to the benefit achieved in its activity. According to the prospectus itself, the preference is a complex product and detail of the risks was not properly understood by many investors.
It is very important to understand that the issuance of preference is not considered a deposit and therefore not covered by the Deposit Guarantee Fund in the event that things go badly wrong for the Bank.
Preferred is a commercial term, not supposed to have preferred creditor status. These risks might have not been mentioned to you but might be now exposed at your Bank. Trying to sell the preference of some banks may be impossible, and you need to take legal advice about your options following the recent judgements, as you might be entitled to some compensation.
What about the interest on the preferred shares?
You will only receive interest if the Bank has capital and profits. This is bad news for any entity nationalized by the state.
What about my capital invested?
If the bank has been nationalized, then preference shares do not pay any interest (because there are no benefits), so the problem is that there is no possibility of any buyer and the chances are nil of selling, as they have no value.
Could I sell my shares?
No, the bank has no obligation to repay or refund your money in the preferred shares, since they are perpetual (lifetime). If the bank is bankrupt or with financial problems, the consequence is that nobody will buy a product that repays nothing and where you can lose everything.
So were investors deceived?
Usually, the type of client was retired, conservative investors who were poorly informed. People who trusted the Bank Director’s advice and now could lose everything.
It is a tragedy to see that these shares were sold as a “deposit-like” at 8% interest, a very tempting rate and also very conservative. But, in fact, they were very far from risk-free.
What action can I take if I have these investments?
We advise that you seek professional independent advice from a Law Firm with experience of having been successfully involved in such cases.
It is typically the now-defunct CAM Bank (now part of the Banco Sabadell Group) which is most affected. The drama of the preferences for CAM Bank management was that the bank did not sell what was best for their customers because the risks involved were not always explained in detail.
If you have lost all your money on the preferred CAM 22/10/2011, or if you are one of those who invested some money into any other preference shares schemes of any bank, do not hesitate to contact experts in this field.
You will need to bring with you a copy of the contract you signed with the bank, and the bank receipts of the money paid. The Courts are now holding recent sentences in the consumer’s favour, so it might be well worth to check whether you could have a case.