Defaulting on bonds worries more and more clients

An increasing number of our clients are resolving their bond portfolio and requesting early redemption of their bonds. Some are having considerable difficulty getting their money from the issuers. Such cases have always occurred on an individual basis. Now, however, their number is beginning to increase and the overall situation in the bond market is characterised by considerable nervousness. What does this mean for retail investors?

akcie, dluhopisy
5 minutes of reading

Chapters of the article

What is the purpose and importance of bonds?

A bond is a security with which the legal system associates the right to repay a certain amount owed, possibly also the payment of specified returns and other obligations. It thus provides its issuer (the issuer) with a source of financing without the need to take out costly loans. The issuer may be not only the state or a region, but also commercial companies.

Currently, many people are reacting to the high inflation rate and trying to save their savings. They are looking for a suitable platform to keep the value of their finances from declining and are therefore contacting financial advisers for advice. There are thousands of them in the market, from the top ones who are continuously educated and have extensive knowledge of financial instruments and investments, to those who will recommend almost anything that will bring them a high commission. And it is the high commissions that some issuers promise to advisers, who in turn offer their financial products to a wide range of recipients regardless of whether it is right for them.

The bottom line is that not only from the point of view of investors, but also from the point of view of issuers, mass distribution of bonds may in some cases appear short-sighted. Doing business primarily with other people’s money carries with it a considerable risk of loss and can thus ultimately be a threat to all involved.

Are you dealing with outstanding bonds?

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Is it better not to buy bonds?

The aim of our text is certainly not to discourage readers from buying any type of bonds or limiting their investments. However, it should be stressed that there are now a large number of offers on the market and not all of them are worthwhile for everyone.

The basic advice to clients is therefore to be cautious in choosing qualified advisers who will act primarily in their interests and not in their own. There are a number of reputable managers on the market who can advise and spread the investment well. Which leads to another piece of advice, namely that it pays to “not bet all on one horse”.

How to deal with unscrupulous financial advisers?

Taking a clear legal position on a situation where a client, on the advice of a financial adviser, buys sub-prime bonds that are not repaid is not easy and, in fact, impossible. It is always necessary to study exactly what the financial adviser promised the client, what information he provided to the client and on what basis the client made his investment decision.

If financial advisers have explicitly misrepresented themselves, lied to clients about certain investment instruments and may have misled them, and if such conduct is proven, these clients may be able to bring criminal charges. This could be, for example, a fraud offence or other criminal offence. If clients have been harmed by the loss of their investments, civil proceedings may also be taken to seek compensation.

In any event, we recommend that clients do not leave the situation alone, but gather as much documentation as possible and always consult their options with an attorney so that they can make an informed decision on how to proceed.

What can be done against issuers that do not report on their commitments?

Bond default cases cannot be generalized, but they do have one thing in common: our clients do not generally take action against non-serious financial advisors, but seek to recover their claims directly from the issuers. So either they do not blame the financial advisors at all or they do not feel they have enough evidence or documentation to support their position.

Moreover, it should be said that pointing out only that the financial advisor cooperated with the issuer on a commission basis is not relevant in the Czech context. The vast majority of advisers work in this way here and there is nothing illegal about it. However, many EU countries have already banned or at least restricted this practice and have found other models for financing these services.

Therefore, if an investor wants to deal directly with the issuer, he should first of all study the terms and conditions of the issue, where the procedure is usually outlined. Another important guide is the Bond Act. Both regulations provide for a bondholders’ meeting, which can be called in certain exceptional cases. However, before that, it is appropriate to approach the issuer itself and resolve the situation with it.

If neither procedure is effective, a court case is initiated, usually preceded by a pre-action summons. But here the investor is engaged in an unbalanced struggle with a large corporation, and here, too, the representation of a lawyer is appropriate.

In this context, some financial analysts wonder whether we should expect a collapse in the bond market. We will leave it to them to answer that question. From a legal practice perspective, we can say that we are looking at a period of several years when we will see more of these cases than we have seen to date, and we find that very worrying.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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