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Sale of Bermudan swaps to SMEs and duties of banks: increased scrutiny by the financial regulator and the courts

Belgian Supreme Court, 26 June 2015

As demonstrated by a recent FSMA investigation of four Belgian banks and a number of court decisions, there is increased scrutiny in Belgium by the courts and financial regulator in the context of the banks’ duties to SMEs when selling Bermudan swaps.

Increased scrutiny by the regulator – FSMA investigation of four banks

The Belgian Financial Services and Markets Authority (FSMA) carried out an investigation regarding the compliance by Belgian banks with the conduct of business rules when selling so-called Bermudan swaps1 to SMEs.2 Following this investigation, the FSMA published a report on 19 May 2015 entitled “Interest rate derivatives to cover variable rate loans to SMEs”.3 The FSMA concluded that none of the four Belgian banks involved in the investigation could demonstrate that they had always complied with applicable conduct of business rules relating to the sale of these Bermudan swaps to SMEs.


The FSMA stated that the banks involved in the investigation were not always able to prove that they had adequately checked whether SME clients fully grasped the concept of Bermudan swaps or the potential impact of an interest rate drop. Nor could the credit institutions prove that these Bermudan swaps truly matched their clients’ needs. This means the banks were in breach of their duty to provide adequate and sufficient information, as well as their duty to advise clients based on their profile (taking into account knowledge of and experience with a specific product, financial situation, investment goals). Based on a review of the procedures in place and the client files, the FSMA rejected the claims by one of the banks that it had not provided investment advice and that only the appropriateness test and not the suitability test applied. This demonstrates that the regulator will consider very critically claims by an institution that no investment advice is provided. 

Remedial actions imposed by the FSMA 

The FSMA ordered the banks that were subject to the investigation to take the following remediation steps: 

  •  Banks had to offer each non-professional client (including SMEs) the option of exchanging its Bermudan swap for a plain vanilla swap which conformed with its needs (including as to the term and amount) and at the historical interest rate of the initial Bermudan swap. This had to happen within four months after the publication of the report, at the expense of the bank. 
  • Provisions in the swap agreements that are misleading or “unbalanced” and to the detriment of the client will be deemed as null and void.
  • Banks must pay commercial compensation to every client who has entered into a Bermudan swap. The amount will be determined by mutual agreement between the bank and the client. The report does not include specific guidelines on the calculation of compensation.
  • Banks must ensure that employees who market and sell complex financial products, such as Bermudan swaps, have the sufficient qualifications, knowledge and expertise to do so. 

Note that the FSMA has no legal power to adjudicate disputes between financial institutions and individuals or companies. Such disputes (including eg claims for damages) are within the power of the civil courts and tribunals. The FSMA states that its investigation solely relates to a review of compliance by the financial institutions with conduct of business rules and not to civil damages. 

Increased scrutiny by the courts 

Supreme Court and Brussels Court of Appeal decision 

One month after the FSMA report the Belgian Supreme Court4 upheld a judgment, mainly on formal grounds, of the Brussels Court of Appeal.5 The judgments of the Brussels Court of Appeal and the Belgian Supreme Court (judgments) discuss the information and client profiling duty of banks when selling Bermudan swaps to SMEs. 

Client bears burden of proof 

The judgments establish that a client bears the burden of proof for showing that a bank has provided insufficient information on a Bermudan swap. A bank is under a duty to use best efforts to provide adequate information. The level of information required depends on the complexity of the agreement and the experience and knowledge of the client. Often, a bank will lawfully fulfil this obligation by providing standardised documents on the financial instrument concerned as long as the information is correct, clear and not misleading. 

Client’s own obligation to find out about swap 

The judgments confirm that a client must inform himself about the nature, object, extent and risks of any agreement, and ask additional questions if certain aspects remain unclear. A bank can assume that a client has done this. 

Client profiling 

The judgments also confirm that a client bears the burden of proof for showing any breach of a bank’s duty to provide appropriate investment advice or asset management services based on the client’s profile and needs. Again, banks undertake a best-efforts obligation to provide these services based on a correct profile. A properly completed standard client questionnaire is enough for a bank to complete an accurate client profile. Once there has been a commercial relationship for some years (in casu more than ten), it will even be assumed that a bank has sufficient knowledge of a client’s financial situation. 

Court of Appeal of Antwerp 

In a recent but unpublished interlocutory judgment the Court of Appeal of Antwerp took a more critical stance towards a bank that had sold a Bermudan swap to an SME. According to reports on the case, the Court of Appeal held that the information provided was unclear, even incomprehensible, and misleading for someone who is not a professional. However, the court held that the client was also partially responsible as he was not diligent with respect to his own duty to investigate. Following the interlocutory judgment, the question of damages is to be addressed in a separate judgment. 


Even though the principles set out in the judgments are not new, it is noteworthy that the Brussels Court of Appeal and the Belgian Supreme Court have confirmed their applicability to Bermudan interest rate swaps between banks and SMEs. Banks and SMEs have a shared responsibility when assessing the appropriateness of more complex swaps. Banks have a best-efforts obligation to provide and gather information, but clients need to be critical as well. Clients bear at least part of the burden of proof concerning the alleged lack of information provision and collection by the banks. 

In its report, the FSMA clarifies that it only supervises general compliance by credit institutions with relevant regulatory conduct of business rules. The FSMA cannot decide upon individual cases, which is the exclusive responsibility of the courts and tribunals. Decisions in individual cases therefore do not impact the conclusions of the FSMA and the imposed remediation. The court cases demonstrate that the duties owed by banks with respect to Bermudan swaps are also subject to increased scrutiny by the civil courts. As the decision of the Belgian Supreme Court was mainly based on formal grounds, there is still a risk of divergent decisions by the courts and tribunals, depending on the specific factual circumstances of the case.


1. A Bermudan swap is a more complex interest rate swap in which the credit institution may terminate the swap agreement at (a) present date(s) in return for a lower fixed interest rate. In a plain vanilla swap, the credit institution has no such option. 
2. Only Bermudan swaps entered into after 1 November 2007 were taken into account. 
3. (French language version of the report) 
Supreme Court 26 June 2015, not published. 
Brussels Court of Appeal 30 September 2013, TBH 2015/2, 213.

Northern Europe