The Commerce Commission plans to prosecute three major banks for allegedly misleading rural customers.
The commission says ASB, ANZ and Westpac breached the Fair Trading Act by misrepresenting interest rate swap contracts sold to rural customers. It plans to take action against the three banks in March 2014.
Interest rate swaps are financial derivatives which allow borrowers to manage the interest rate exposure on their borrowing.
Jeanette Walker, who pressured the commission to investigate the swaps, said farmers bought $6 billion worth of the products thinking they were the same as fixed rate loans.
The former farmer said they did not realise their banks could raise interest rates if the Reserve Bank dropped the Official Cash Rate. That meant farmers ended up paying 10% to 15% interest when the rate for a normal loan was just above 5%, forcing some out of business.
Some farmers have complained that when interest rates fell, they were locked into the higher rates which they could not get out of without paying an expensive buy-out option.
Ms Walker said some lost their properties as their loans spiralled out of control. She said there was a similar case in the United Kingdom where compensation was paid.
"There's no question in my mind the banks mis-sold and misrepresented the product, and if you look at the UK's example, the banks chose not to contest litigation and have been working on compensation packages. I'm feeling pretty confident the same thing will happen in New Zealand."
Ms Walker said she expects that many farmers could eventually receive millions of dollars in compensation.
Federated Farmers said the Commerce Commission's decision to investigate vindicates the complaint it made in November 2012. It said while swaps have worked well in places, they have caused problems in others.
President Bruce Wills told Radio New Zealand's Checkpoint programme all farmers should scrutinise lending arrangements carefully.
"It's not just the interest rate swap product, there's many, many different banking products. And I guess our advice has always been to members: make certain you fully understand what you're signing. If you don't, seek advice from your financial experts - accountants, solicitors and the like."
The Commerce Commission said it is also investigating other institutions which sold interest rate swaps.
