Property investors sue AIB over alleged misselling of financial derivatives

A retired Dublin property investor and his wife are suing Allied Irish Banks over the alleged misselling to them of financial derivatives in "notional" amounts of some €45m.

Robert Madden (72) said he and his wife Rosaleen (79), Terenure Road East, Rathgar, built up a substantial assets portfolio over many years generally based on acquiring a property and paying down most or all of the loan before moving to another purchase. They initially focussed on residential properties but later also acquired commercial properties.

Every single loan taken out with AIB over their 40 years banking with it was based on variable interest rates and they had never asked AIB to fix interest rates concerning their indebtedness, Mr Madden said.

He claims the derivative products entered into in 2006 were contrary to this “prudent” banking relationship, wrongly inflated the amount of his indebtedness and AIB had also overcharged “hundreds of thousands of Euro so far” on various facilities.

He said rents on various properties of the couple secured in favour of AIB amount to €3m a year but liabilities under the derivatives amount to some €1.3m annually. He would be able to pay more towards his underlying debts were it not for the derivatives, he claims.

He and his wife had also entered into other facility agreements with AIB about November 2009 for various sums, including for some €30m. Those agreements were governed by tracker rate ECB provisions which were “entirely inconsistent” with the derivatives, he said.

Mr Justice Peter Kelly yesterday granted an application by Michael Howard SC, for the couple, to fast-track the action in the Commercial Court. Counsel for AIB did not object to the case being fast-tracked but said it denied the claims.

The case concerns two derivative instruments, one for €5.1m and the second for €39.8m. Both were entered into in 2006 with termination dates in July 2013. The first was between AIB and Mrs Madden and the second was between the couple and the bank.

In his affidavit, Mr Madden said the derivatives, unlike their other loan agreements with AIB, provided for fixed interest rate repayments over longer periods of time than the underlying indebtedness. This was “a hallmark” of misselling of derivatives, he claimed.

The stated position of he and his wife was always they wanted variable interest rates, he said. However, he noticed in recent years he was continuing to pay very high interest rates despite media reports interest rates were very low.

Ultimately, after correspondence and meetings with AIB, and having seen media reports about interest rate products being missold, they were compelled to issue the proceedings, he said in an affidavit.

The couple claim the derivatives were entered into contrary to their stated position for variable interest rates, without their full knowledge, without the effect of the instruments being explained to them and without due diligence by the bank.

AIB was required under the Central Bank’s Code of Conduct for Investment Business Services of Credit Institutions to treat them, jointly and individually, as private clients, but failed to do so, they claim.

They also claim it should have engaged in a “Know your Client” process with them to ascertain their financial objectives before entry into the derivatives.