26 April 2023 Credit Suisse AT1 bondholders file suit against Swiss regulators

Credit Suisse AT1 bondholders file suit against Swiss regulators​

What do you need to know this week?

Last week, the FT reported that Credit Suisse AT1 bondholders have officially filed a suit against the primary Swiss banking regulator. The article notes that the primary cause of action against the regulator seems to be a constitutional challenge to the legitimacy of Finma’s (the regulator) role in facilitating the sale.

Specifically, the article cites unnamed sources who have reviewed the outline of the claim. They report that it “accuses Finma of having acted unconstitutionally…[in] failing to behave ‘proportionately’ and in ‘good faith’ when it ordered Credit Suisse to cancel the $17bn of convertible ‘AT1’ bonds” last month.

The AT1 bondholders, represented by powerhouse US-based litigation firm Quinn Emanuel, seek to repeal Finma’s decision. It is unclear if this claim entitles the claimants to compensation and, if so, how much they may seek.

Unlike many other legal regimes, including the US and UK, the substance of the complaint filed against Finma is not available to the public. This largely reflects the Swiss law and culture surrounding its banking industry, which prioritises secrecy so as to encourage confidence in its markets.

Why is this important for your interviews?

The claim in essence does not question the general right of Finma to intervene as it did. Instead, it seeks to review the grounds for its decisions.

As the FT article notes, this is a subtler approach than what the bondholders’ initial outcry implied might be their cause of action. Their public indignation seemed rooted in the notion that the Swiss regulator committed a fundamental error in wiping out bondholders while rescuing shareholders. Specifically, that such a move violated a fundamental principle of investing which states that in the event of distress, shareholders should never obtain preferential treatment before creditors, including bondholders.

If such a position informed the cause of action itself, it would in effect be challenging the regulator’s ability to act as it did. But instead, as the article states, “the case hinges on constitutionally-enshrined protections for due process”. The claimants will presumably argue that Finma breached these due process protections when it “conflated” its “right to act” with the “necessity” to do so.

In any event, this claim may further undermine Switzerland’s reputation for stable banking, which has already been rocked following the dramatic collapse and sale of Credit Suisse to rival Swiss mega-bank UBS several weeks ago, which TCLA has covered in previous articles. Accordingly, this could have wide-reaching implications for the European financial markets.