13 September, 2023 by Olaf Storbeck in Frankfurt

Deutsche Bank continued to sell risky foreign exchange derivatives to companies in Spain that had suffered big losses from such products even after an internal inquiry found long-standing mis-selling.

An internal probe that began in 2019 after a whistleblower complaint found that staff exploited flaws in the bank’s controls and broke EU rules, pushing small and medium-sized Spanish companies to buy highly complex products that were promoted as safe and cheap hedges against foreign exchange risks.

The products generated huge profits for Deutsche but exposed clients to extensive risk and losses in some cases.

Deutsche has disciplined about a dozen staff in response and also paid tens of millions of euros in settlements to larger clients that bought the derivatives from its investment bank.

But according to people close to the businesses involved and documents reviewed by the Financial Times, smaller companies that bought the products from Deutsche’s international private bank are still being asked to pay up on large losses caused by derivatives that were mis-sold starting more than five years ago.

“No foreign exchange market professional would ever buy this kind of instrument,” said Prosper Lamothe, a finance professor at the Autonomous University of Madrid, who has investigated some of the cases. He added, that Deutsche had been “exploiting” the ignorance of its customers.

In one case that was reviewed in detail by the Financial Times, a family-owned fruit and vegetable wholesaler with €3mn in annual sales was sold derivatives over the past five years covering €19mn of foreign exchange exposure.

“No foreign exchange market professional would ever buy this kind of instrument.”

Prosper Lamothe, Autonomous University of Madrid

The Canary Islands business, which has just four employees, sells pumpkins, carrots, oranges and other produce to clients in Switzerland. It wanted to hedge its Swiss Franc exposure and, according to the owner, was offered products that Deutsche said would be low cost and low risk. He said he only realised what he had been sold in early 2023 and that the product had caused the business €1.5mn of trading losses.

“Deutsche Bank has long brushed aside pleas to settle those cases, arguing that the contracts signed by the affected clients are legally binding,” said Julio Ribelles, a Valencia-based lawyer who represents some of the affected companies.

People familiar with Deutsche Bank’s internal discussions said the bank had stopped selling the products to new clients after the probe found mis-selling. They added that until this summer, the bank did continue to offer new derivatives to existing clients in an attempt to offset previous losses. Ribelles said this created a risk of losses “snowballing over time”.

According to these people, Deutsche stopped offering derivatives to these existing clients only after the Financial Times made an inquiry in August. They also pointed to a recent rule change by the Spanish regulator CNMV that has made it harder and more expensive to sell complex derivatives to SMEs. They added that the bank was now trying to settle the remaining cases. “We are in talks with a small number of clients regarding outstanding transactions,” said one of the people, acknowledging some of the cases were “not easy to solve”.

Other people with knowledge of the bank’s policy told the FT that some senior managers were unimpressed with how the bank had treated affected clients, blaming the lender’s international private bank for the slow response and saying that the investment bank had been quicker off the mark.

These people also said that the cost to Deutsche of waiving client losses was large and that it had been trying to spread the impact on profits over a longer time, hoping losses would become smaller and easier to settle if the Euro strengthened with rising interest rates.

Until earlier this year, Deutsche’s international private bank was run by former Credit Suisse banker Claudio de Sanctis, who was then promoted to the management board and is now in charge of the bank’s retail operations.

Chief executive Christian Sewing has been promising to put past misconduct problems, which include the manipulation of benchmark interest rates and the mis-selling of mortgage-backed securities, to rest. He has said he wants to reposition the bank as the “global Hausbank” of corporate clients and has promised “to support our clients in a spirit of partnership and remain part of the solution”.

“Deutsche Bank’s treatment of SME clients in Spain has long been completely at odds with this promise by Sewing,” said Ribelles. Sewing and De Sanctis declined to comment.

Some of the affected companies have been pushed to the brink of insolvency, people familiar with the cases told the FT.

A Madrid-based importer of sporting goods made in Asia told the FT that it had to fire a quarter of its 40-strong workforce after its auditor earlier this year uncovered €1.5mn in trading losses on Deutsche derivatives that it needed to provision for.

The company imports sporting goods worth $7mn a year but was sold derivatives covering an import volume of €35mn by Deutsche Bank, according to documents seen by the FT. The company only sells products in Spain, but Deutsche also sold it €27mn in derivates to hedge exports.

Lamothe estimated that Deutsche earned more than €2mn in fees from derivative trades with that client. “We’re facing an existential crisis,” a senior manager of the business told the FT.

Lamothe told the FT that he was personally aware of “at least 15 such cases”, adding that there could be hundreds of other companies that were still unaware, because trading losses might not have come to light yet.

Alfonso Ramos, a Madrid-based lawyer representing the fruit and vegetable wholesaler, estimated that on the Canary Islands alone there were up to 50 companies in a similar situation. “But only very few have the power and determination to take legal steps,” he added. Spain is one of the biggest markets for Deutsche Bank’s international private bank, which has more than 650,000 clients and 2,300 employees in the country.

One of the lawyers for the Spanish companies said that changes to derivatives contracts made by Deutsche last year mean it is now harder to sue the bank. The bank added new clauses stipulating conflicts must be resolved in private arbitration tribunals rather than public courts. While private-sector tribunals can work faster than courts, they act without public scrutiny and can be expensive.

According to Ribelles, a company with an average loss of €1mn could expect to pay about €70,000 in arbitration costs plus legal fees, and could have to cover the bank’s costs if it lost. He added that it was impossible to appeal tribunal decisions and that Deutsche Bank had failed to make the implications of the new rules clear to clients. “Deutsche Bank effectively sneaked in new rules that are severely limiting the SME’s legal rights”, he said.

Deutsche Bank declined to comment on the specific cases but said the facts as described by the FT were “largely taken out of context”. It added that it had “taken appropriate action including improving our processes and enhancing our controls” after reviewing “parts of our sales activities in structured FX derivatives”. The bank added that implementing changes that came out of the mis-selling probe was “an ongoing process”.

People familiar with the bank’s view pointed out that the type of derivatives sold “are widely used by many organisations and sold by many banks”. They added that some of the clients made financial gains from the products in the past, and disputed the claim that the clients were unaware of the risks or treated unfairly by Deutsche.

These people also denied that the bank changed the contracts to make it harder for clients to sue, but acknowledged that “there was an exercise last year to update all [Master Agreements for Financial Transactions],” and that this had followed recommendations from the Spanish Banking Association. They also said the bank’s preferred option of arbitration over open court was “not uncommon or unreasonable for derivatives disputes”.

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