BGH decision dated 22.03.2011, XI (ZR) 33/10
In this 2011 decision, the BGH stated that banks advising on swap transactions have to assess the investor’s ability to bear risks, in accordance with the doctrine of “investor- and investment-specific advice” developed by the BGH. This obligation applies except in the context of long-standing business relationships or if the client’s knowledge of the specific risks of complex swap transactions could be assumed. Even if these exceptions apply, the bank has to ensure that the client has sufficient knowledge of the associated risks.
Furthermore, the BGH decided for the first time that the bank must inform the investor of an initial negative market value because this constituted a conflict of interests between the client and the bank. The bank also had to disclose to the investor its profits from arranging the underlying risk structure.
However, banks recommending investment products were not obliged to inform their clients that they would make a profit where this was obvious. A disclosure obligation only arose under additional circumstances, such as advising on a swap agreement with an initial disadvantageous risk structure for the investor – that is, an initial negative market value – which created a conflict of interests.
BGH decision dated 20.01.2015, XI (ZR) 316/13
This case dealt with a Cross Currency Swap. The BGH restated the general principle that a bank had to inform the investor of an initial negative market value since it was an actual, as opposed to merely apparent, and severe conflict of interest which potentially endangered the interests of the investor.
However, on the specific facts, the BGH held that the bank did not have an obligation to inform the investor of the initial negative market value. Although the bank had advised the investor regarding the Cross Currency Swap, it was not the contractual counterparty to the Swap. Therefore, the BGH did not find any conflict of interests that would have required disclosure to the investor.
BGH decision dated 28.04.2015, XI (ZR) 278/13
In its most recent decision, the BGH has now held that these information obligations apply to all types of swap transaction, because embedding a gross margin into the risk structure (which creates an initial negative market value) is not limited only to more complex swap products. According to the BGH, in less complex swap transactions, there would generally be an acute conflict of interests because the client would not expect a gross margin to be embedded into the risk structure of a swap transaction.
In conclusion, a conflict of interest creating an obligation on the advising bank to disclose an initial negative market value will arise in any kind of swap transaction where the bank is acting as counterparty to the investor.