Colm’s columns

Colm Rapple
Irish Mail on Sunday, August 8, 2010

Some of the substantial awards made by the Financial Services Ombudsman to investors who lost money as a result of bad advice from service providers are not being paid out as a result of flaws in the regulatory system. The Ombudsman has drawn attention to the problem but no-body seems in any hurry to do anything about it.  It’s yet another example of how little has changed, particularly at that level of financial regulation that impinges directly on consumers.

Many of the complaints upheld by the Ombudsman over the past year or so relate to bad or inadequate investment advice. Some of the awards made were substantial. We don’t have details but the advisers involved presumably range from employees of banks and insurance companies to small broker type operations.  Awards can be appealed to the High Court and there are individual cases involving as much as €700,000 waiting to be heard.

Some of the advisers involved have gone into liquidation. But others, including some of those with Court appeals outstanding, have indicated that they won’t be able to pay because their professional indemnity insurance won’t cover them. According to the Ombudsman some advisers are having difficulties in renewing their professional indemnity policies.

That has to be of concern to all financial advisers and all of their customers.  One easy answer would be to have Ombudsman awards covered by the Investor Compensation Scheme. But that will require legislation and that will take time. The EU Commission is preparing a directive on this area and the Department of Finance is waiting for it before amending the Irish law.

In the meanwhile, consumers have reason to be wary of all financial advisers but particularly smaller operations that might be more reliant than banks or insurance companies on their professional indemnity insurance to meet any liabilities arising from complaints to the Ombudsman.

That’s not how it should be, since there is no reason to believe that the advise given by small independent advisers is likely to be less good than that given by employees of financial institutions.

It sounds like a problem that should be of major concern to the Financial Regulator.  Unfortunately that doesn’t seem to be the case.

I e-mailed the Regulator’s press office

“Hello,

In his recent report the Financial Ombudsman refers to the failure and/or inability of some financial advisers to pay the compensation awarded and the refusal of some professional indemnity insurance companies to pay.

What has the Financial Regulator done about this?

Has any action been taken to prevent such advisers from continuing to trade?

Are any checks taking place on whether other advisers are effectively insured for professional misconduct? Are any major financial institutions involved?

Can I speak to someone about this please.

Regards”

The response wasn’t very illuminating. It simply repeated what had been in the Ombudsman’s report

“We are aware of the concerns raised by the Financial Services Ombudsman. However, we cannot comment in relation to supervisory matters involving individual firms. Any requirements in relation to establishing an investor compensation fund for paying unpaid compensation awards funded by the financial services sector would require legislative changes by government.”

Regards,

Five e-mails later, having asked again about possible inadequacies in indemnity insurance I got the following response:

“No - the regulator has not identified policies with inadequacies in this regard. During a review of PPI (professional indemnity insurance) providers, insurers were asked to confirm whether there are specific terms under which they will not make a payment on a claim further to an FSO (Ombudsman) award.   The results showed that there are no specific exclusions for FSO awards under PII cover.   A PII provider may refuse to indemnify policyholders in relation to an FSO award where the policyholder has breached one of the terms and conditions of the policy (obviously this would apply to any breach of terms and condition not just those which led to an FSO award).   In some cases the PII providers will not cover instances where a fine had been imposed against the policyholder.”

So, while the indemnity policies are considered adequate by the Regulator, there is still no guarantee that they will paid out when faced with sizeable awards made to investors by the Ombudsman. It’s a matter that should be of major concern to the Financial Regulator but it doesn’t seem to be.  Despite being specifically asked, the Regulator wouldn’t say if any advisers who have failed to pay awards are still operating as financial advisers. Understandably some with High Court appeals pending are still operating but what about the others?

The Financial Ombudsman scheme is aimed at protecting consumers against the worse excesses of the financial services sector and, a lot of the time, it does that very efficiently. But unfortunately there is no guarantee that the Ombudsman’s awards will be honoured, even with compulsory professional indemnity insurance. It is not a problem of the Ombudsman’s making .  Rather it’s a problem for the Regulator to solve but with a little more urgency than it seems to be applying at present.

Colm Rapple
Irish Mail on Sunday , July 11, 2010

There wasn’t a lot of good news for struggling home-buyers in the report of the Government’s expert group on mortgage arrears issued during the week. The proposals boil down to little more than imposing a model of best practice on lenders. They are going to be told to give borrowers every chance to pay before taking legal action. Not a big deal! That’s what lenders should already be doing, if only in their own self interest.

There is little in the proposals to hurt them.  They will be barred from imposing penalties on borrowers who are meeting new agreed repayment schedules. But few lenders are doing that in any case. The only other major imposition on lenders is that they charge no more than the average variable rate to borrowers who are availing of Mortgage Interest Supplement. That shouldn’t be a major problem for reputable lenders. The average variable rate is relatively high and all lenders will benefit from a proposal that the State provided Supplement should, in future, be paid directly into the borrowers mortgage account.

Apart from those proposals on penalties and the maximum interest rate payable by those getting Mortgage Interest Supplement, borrowers will gain little from the proposals. The small protections offer, won’t come free. In order to benefit, borrowers will have to comply with the lender’s resolution process supplying full financial details, income, expenditure, assets and liabilities and then accepting whatever solution the lender comes up with, subject only to appeal to the Financial Ombudsman.

Some borrowers will also lose significantly from the proposed changes in Mortgage Interest Supplement. There are a few pluses but they are well outweighed by the negatives. Married couples will be able to qualify in future even if one is still employed but subject to a means test which will include both incomes.

But borrowers are not to qualify for the Supplement for six months after they have suffered a drop in income and it will only be payable for a fixed period at the end of which the claimant will be considered for social housing.  Another negative is that the Supplement will not be payable if the lender has recourse to a guarantor, for instance a parent who guaranteed a child’s loan.

In essence, lenders have a lot to gain from these proposals. All they have to do is adopt the flexible approach to mortgage arrears that they should always have had. Flexibility in this context doesn’t include debt forgiveness or interest rate cuts. That may come but not yet. Later this year the Law Reform Commission is to recommend changes in bankruptcy and debt enforcement laws that may allow people to more easily walk away from debt but it could take years for the law to be changed.

In Britain there is provision for those in debt to enter individual voluntary arrangements with their creditors as an alternative to bankruptcy. This allows individuals to negotiate debt reductions and gain court protection. Up to 75% of an individual’s debts can be written off.

If that was available in Ireland, mortgage lenders might be inclined to do more than simply rearrange repayments while still charging interest on all outstanding balances. Farmers were able to secure major debt write-offs in the early 1980s when the initial EU bubble burst. Property developers are currently hoping to do likewise. But home buyers haven’t sufficient clout.

Many people who are not in financial difficulties and, even some who are, believe that that is as it should be. Why should those who gambled on the Celtic tiger be let off some of their debts because their gamble failed? The Financial Regulator, Matthew Elderfield, is against debt forgiveness for more practical reasons. He recently pointed out that the cost would have to be borne by the taxpayer or other borrowers. It would be impossible to limit the aid to deserving cases and it would only encourage people to renege on their loans.

The mortgage arrears group is now working on its final report which will propose measures for helping those who are beyond the help of short-term solutions such as a switch to an interest only loan, or an extension of the loan term. They will be taking various overseas models for their inspiration. In Scotland, for instance, there is a scheme whereby the home is taken over by a housing association or local authority and rented back to the occupier.

There is another scheme where the Government or the lender takes an ownership stake in the home. The money paid for the part-share is used to partly discharge the mortgage.

Some variations of both of those schemes are likely to be recommended here.  The ideal would be to establish a State property company comprising elements of the local authorities and the Office of Public Works that could manage such residential schemes and the large developments that NAMA is going to end up owning.

Colm Rapple
Irish Mail on Sunday, 27th June 2010

Urging consumers to shop around is never going to create a fair and competitive market for financial products. That plain fact has been highlighted once again by the confusion created by the EU Consumer Credit Directive that came into effect on June 11. One of its requirements is that credit card issuers take account of the annual €30 stamp duty in the interest rates they quote. It adds to the cost of running up a credit card debt and, of course, it is important that consumers know the full cost of a loan.

But there are many other factors that can add significantly to the cost of credit card debt that are still not taken into account and which many consumers aren’t even aware of.  Many credit card companies charge far higher rates of interest on cash withdrawals, for instance. But marketing efforts will be based on the lower rate charged on debt run up as a result of purchases made with the card.

With some cardholders that higher interest rate, often more than 20%, can continue to be charged for months or years. This is because monthly repayments on the card are used first to reduce the debt due to purchases and it is only after they have all been cleared that any surplus is used to reduce the debt resulting from cash withdrawals.

That isn’t the case with all credit cards but it is with many of them although you’ll have to read the fine print in the terms and conditions to discover if it applies to your card. It isn’t part of the information given on the National Consumer Agency’s comparison website.

But back to the stamp-duty issue. The EU Directive lays down some rules on how it should be taken into account and if every card issuer does it in the same way, the results will be comparable. But instead of doing the doing the calculations themselves bot the Financial Regulator and the National Consumer Agency are currently leaving it up to the banks to sort it out among themselves.

To be fair, some of them already have, although not all, and even when they do, consumers will be no better off.  The annual stamp duty is charged on all cards at exactly the same rate so for comparison purposes it matters not a whit whether it is, or is not, included in the cost of credit. It simply adds to the confusion.

It might have some relevance in comparing the cost of credit card debt with a personal loan, or instance. But even there it is likely to add to the confusion unless all the calculation are done on the same basis and neither of our regulators are willing, it seems to dictate what that basis should be.  Maybe it’s because they are all too well aware that, whatever the basis, the result can be highly misleading.

The objective is to have the banks declare interest rates known as annual percentage rates (APRs) which include not only the interest charges on a loan but also all the other costs involved, set up costs or in the case of credit cards, the annual €30 stamp duty.

For a person with an average credit card debt of €5,000 over the course of a year, the stamp duty adds little to the overall percentage cost of the loan. But it does for someone with an average debt of only €100. So the calculation of a supposedly comparative APR depends on the size of the loan and on the speed of repayment.

AIB and Bank of Ireland have calculated the new APRs on the basis of a debt of €1,500 paid in equal instalments over 12 months. That’s the rather unrealistic assumption (as far as credit cards are concerned) laid down in the directive. Both offer cards with low interest rates on purchases. The rate on AIB’s “Click” card which was quoted as 9.5% before taking account of the stamp duty is now being quoted at 13.6%.  Bank of Ireland’s “Clear” card used to quote a rate of 10.9% but it now quoting 13.3%.

Both have done the sums on the same basis, it seems, so how they have reversed their pecking order is unclear.

In both cases the rate charged on cash advances is about twice that charged on purchases – over 20%. But both offer one concession over many other cards. No interest is charged on cash withdrawals if the balance is paid in full when due. Many banks charge interest on cash withdrawals from the date of the withdrawal and, as mentioned above Bank of Ireland card holders who make partial repayments can continue to pay interest at a high rate for a long time on a single cash withdrawal.

Consumer interests would be best served by outlawing this type of practice rather than trying to provide consumers with necessarily confusing information in the hope that they’ll be able to make their own best choices.  It is becoming increasingly clear that the old culture needs to be eradicated at all levels of financial regulation. Financial products are too complicated to rely on competition to force the inefficient and the downright extortionist out of the market.

 Colm Rapple
Irish Mail on Sunday, 13th June 2010

The Financial Regulator and his staff tended to treat bankers with both “deference” and “diffidence” according to the new Central Bank governor, Patrick Honohan. During the week he cited it as one of the prime causes of the regulatory failures that prepared the way for the collapse of our banking system.

“Deference” is the willingness to accept the judgement of others in preference to your own, while “diffidence” entails a lack of self-confidence and assertiveness. They are the very attributes that regulators should avoid and are certain to be eschewed in the new financial regulatory regime being put in place by Dr Honohan but what about the other State appointed regulators.  How well are they regulating their charges?

We seldom get anything other than cursory, minimalist reports.

At last count there were 213 regulatory bodies of which 205 were public sector regulators. That includes 114 local authorities. The way in which they exercise their regulatory powers can have a major impact on the economy and society, perhaps not on the same scale as the shortcomings in financial regulation, but sizeable non-the-less.

Many of the regulated groups expect to be treated with deference and diffidence, just as the financial institutions were. Unfortunately the evidence is that they all too often are so treated. They include many professionals particularly in the medical and legal spheres who have managed to defend their self-regulatory regimes that ensure that they are treated with a large degree of deference.

The elevated status that many of them aspire to, and often achieve, may have something to do with our colonial past. But as far back as 1842, in a book describing his journeys through Ireland, J. Stirling Coyne wrote that since the Act of Union in 1800, “physicians and the professors of law and medicine may be said to form the (Irish) aristocracy”. Old habits die hard.

The lessons to be learnt from this week’s reports on banking regulation have wide application far beyond the banking and financial services sector. The Government is committed to reforming the regulatory regime but the only firm policy statement on the issues involved, published as a White Paper, in 2004 was compiled when the concept of light touch regulation was very much in vogue. The stress was on reducing the burden of regulation in order to improve competitiveness.  In a foreword the then Taoiseach, Bertie Ahern warned that “bad or cumbersome regulation created barriers to efficient markets, thereby discouraging competition and innovation”.

But what some people view as bad or cumbersome, others see as absolutely necessary. The question is where to draw the line and it is clear from the now well documented experience of financial regulation, that it is not only the letter of the law that is important but also its application.

The Government is still very concerned about the cost of regulation on business. Earlier this year a report by the Economist Intelligence Unit was presented to a newly established Regulatory Forum that is to meet once a year. A Government statement issued at the time promised legislation to force energy, communications, and transport regulators to review their strategies and produce annual output statements. There was also a promise to make them more accountable to the Oireachtas.

In the light of the failures of the financial regulator to foresee the potential doomsday scenario, the other regulators were also told to ensure that their regulatory frameworks are sufficiently robust to be able to respond to major sectoral or economic shocks.

So we may be moving in the right direction. But the failures outlined in this week’s reports are unlikely to have been confined to one regulatory body. So who is overseeing the regulators? There is a lack of accountability according to the Economist Intelligence Unit report.

Oireachtas scrutiny is ineffective. Government departments don’t, in many cases, have the expertise to supervise the regulators and there is little accountability for wrong regulatory decisions. The report also criticised the appeals processes operated by some regulators.

More recently there has been criticism of the cumbersome procedures facing regulators who want to prosecute offenders. At a recent conference barrister Remy Farrell outlined how regulators could only prosecute in the District Court where penalties were low. Prosecutions on indictment can only be taken by the Director of Public Prosecutions.  Change was needed, he said, to promote more robust regulation.

It’s clear that, in addition to rooting out any tendency on the part of regulators to deference and diffidence, our whole regulatory framework needs an urgent review.  A good start would be to introduce much more transparency and accountability.

Colm Rapple
Irish Mail on Sunday, June 21, 2009

The Mandarins in Dame Street and Merrion Street have still to accept the need for a fundamental change, not only in the structures of our financial regulatory system but also in its deep seated culture of secrecy and unaccountability. That’s very clear from Brian Lenihan’s proposals for a restructured Central Bank that were unveiled during the week.

When the present structures were established six years ago there were ample warnings that they would be inadequate, that the interests of banks and business would continue, as they always had, to take precedence over those of consumers and the public at large.

The warnings were justified. But instead of picking up on some of the alternatives suggested at that time, Brian Lenihan seems intent on creating a unified Central Bank which, of necessity, will have to give more weight to overall bank stability than to detailed regulation. At the same time he wants to hive off some specific consumer protection functions to a new entity composed of the National Consumer Agency and the Competition Authority.

Both bodies have suffered in the past from a lack of resources and they have also been hampered in their work by being given limited remits. Of itself this change will do nothing to enhance consumer protection. It was originally proposed that the Consumer Agency would have powers to challenge the decisions of other regulatory authorities such as those overseeing telecoms, transport or energy.

But the final legislation didn’t allow for that. So the Agency is only allowed talk to these other agencies and express opinions but no more. Presumably that will continue to apply to any decisions made by the Central Bank.

There was no indication in the Minister’s announcement during the week that he wants an urgent change in the “principles-based” approach to regulation which has been shown to be totally ineffective. It’s based on the notion that a regulator can lay down principles and rely on bankers to comply with them. It assumes high standards in high places within the financial services sector. And that assumption doesn’t hold, as we now know all too well.

We do, of course, need some major changes in the structures of the Central Bank and the Financial Regulator but not for its own sake or because the Government wants to be seen to be doing something. But rather because what is really needed is a complete change in the culture of the regulators and that will only be achieved within new structures with some major change in personnel.

That need was recognised by a committee chaired by former Minister Michael McDowell on whose recommendations the current structures are based. He and the majority of those on the committee were strongly of the view that the financial regulator should be totally independent of the Central Bank.

But the Department of Finance and the Central Bank fought hard to maintain its power base and succeeded. The cosy cartel of bankers and mandarins prevailed and continue to control developments. The Financial Regulator was set up as a separate entity but within the ambit of the Central Bank in the same premises with interchangeable personnel.

It is now proposed to bring the entities even closer together, simply hiving off the consumer information and education role to the National Consumer Agency which is in the process of being merged with the Competition Authority. But it seems that the actual consumer protection role will remain with the Central Bank where it will undoubtedly take second place to more general central banking objectives.

The current discredited boards are to be replaced by a commission of, as yet, unstated size. Mr Lenihan hopes to make the new body more accountable to the Government and the Oireachtas but the commission is to be chaired by the Governor of the Central Bank who by dint of Irish and EU law has to be independent of Government.

The Central Bank by its very nature, and by law, has to be secretive and independent. In addition to outlining in greater detail how consumer interests are going to be better served by this new body, Brian Lenihan needs to explain how financial regulation, under the aegis of such a Central Bank can be truly accountable and transparent.

Colm Rapple
Irish Mail on Sunday January 18th, 2009

“Told ya so!” reads the balloon caption emanating from the picture of Karl Marx gracing the mug I got as a Christmas present. But Marx, were he still alive, would doubtless have more than that to say. However, there are plenty of other “told ya so’s” out there and, like Marx, most of them didn’t get it completely right. In so far as they did, it had more to do with luck than with economic insight, research or experience.

There was a general realisation that the property bubble had to bust at some stage. But most commentators, including the prestigious Economic and Social Research Institute, predicted a soft rather than a hard landing. That was the central forecast in the ESRI’s medium term outlook published only eight months ago based on fair assumptions built into a very sophisticated economic model.

There were those who warned about a more traumatic busting of the bubble but no-one foresaw the combination of global economic shocks which hit us at the same time as the inevitable slow-down in the domestic economy as the property boom came to its inevitable end.

We were always going to have an economic downturn but without the external shock it would certainly not have been as bad as it has turned out to be. And no one is claiming to have foreseen the extent of the world financial crisis.

But whether the downturn was going to be slight or severe, we should have been preparing for it.

It was all too clear that the tax base was not adequate to deal with any kind of downturn in the property market, whether great or small. But few commentators were critical of the ideologically motivated erosion of the tax base.  The Celtic Tiger preceded the tax cuts and while it may have been encouraged on its way by some of the cuts that followed in its wake, they clearly went too far.

In 2000 income tax rates were lowered from 24% and 46% to 22% and 44%. Now they are down at 20% and 41%. Were they back up at even 22% and 44% the Exchequer would be about €2 billion a year better off – the amount that the Government is committed to saving by its current round of pay and spending cuts.

The tax cuts did little or nothing to promote economic growth during the good years. They were part of the return we got from the Celtic Tiger, paid for from the exceptionally buoyant tax yield from the property sector. But in retrospect we would have been just as well off without them. We might have avoided the mad spending sprees that pushed asset prices to clearly unsustainable levels. Certainly the State finances would now be in a much healthier state.

But there were very few who argued, as this column has consistently done,  against the tax cuts. To do so, required a vision of sustainable social and economic growth far removed from the liberal free market model that was so seldom questioned by commentators during the go-go years, not least by some of those who now claim to have predicted the current recession.

Until relatively recent times, there were few voices raised in protest at the laxness of the regulatory systems supposedly charged with ensuring the effective operation of  free markets in areas such as financial services, telecommunications and energy supply where owners and managers have long experience of circumventing attempts to impose competitive pressures on their operations.

The cosy relationship between Financial Regulator and financial institutions, often enough raised in this column, was seldom questioned elsewhere until the horse had effectively bolted.

No one seemed to have studied why our energy costs, which were amongst the lowest in Europe when ESB and Bord Gais operated monopolies, are now, in a supposed free regulated market, amongst the highest. Ironically the truth is that, in order to entice new entrants into the market, the Regulator was forced to not only concede buy to actually demand higher prices.

Those who forecast the recession can claim to have long advocated cut-backs in  Government spending. But that was mainly because it’s a natural part of the liberal, free market, reduced government, agenda to which most subscribed. So it’s not surprising that it is currently being pushed as a primary solution to the Government’s budgetary problems.

But the truth is that we need not only to raise taxes but also more Government spending, at least in the medium term. Higher taxes, even on the wealthy and higher paid,  just might impact adversely on confidence at this time although the risk is possibly worth taking.

Government spending needs to be prioritised, made more efficient and effective, even possibly cut in some areas. But we spent far less of our national income on public services than other euro-zone countries. If we want the type of state services that we deserve and demand, we’re going to have to spent a lot more.

According to figures included in a euro-zone economy commentary published by the OECD during the week in 2006 we were spending 34% of GDP on state services. The next lowest was Spain at 39% while Belgium, Finland, Austria, Italy and France were all spending more than 48% of their GDP on state services.

We trailed most of the others in practically every area except health where we actually topped the league table. In 2006 we were spending 7.7% of GDP on health compared with 6.3% in Germany, 6.8% in Belgium and 7.2% in France.

Clearly we could be getting better value for some of our money but the case for massive spending cuts is based on assumptions every bit as unsound as those on which  some of those economic forecasts were based.

Colm Rapple
Irish Mail on Sunday, December 28th, 2008

No-one has yet put a firm figure on the number of borrowers who are going to have their loans restructured, reduced or written off by the banks over the coming year. Neither do we have a figure for the amount that will be written off. But we can be sure that many borrowers won’t be paying back their loans in full and those with the largest liabilities are likely to benefit the most.

Who’s going to make the decisions? Which borrowers are going to be let walk away from their debts? Will the Government representatives on the banks’ boards have an input? Is there a possibility of political interference in the decision making? Will it all be done behind closed doors?

Similar issues have been faced in the past, particularly in the mid-1980s when thousands of farmers, with the help of a dedicated IFA team, negotiated significant reductions in their bank liabilities. Their problems were partly the result of a property bubble, much as today. Farmers had been encouraged to expand on the back of the massive gains arising from EEC entry in 1973. But farm incomes plummeted after 1979.

The individual rescue packages were all negotiated behind closed doors and the affected farmers were ordered to keep their deals secret. That suited both the IFA and the banks. The process was never reported in the media at the time although some indication of the scale of the problem and the extent of the loan write-offs became evident from the published accounts of the then State owned ACC (Agricultural Credit Company). It 1985 it got an injunction preventing the publication of an internal report on the extent of its bad debts but it subsequently admitted that it had some £52 million (€66m) in non-performing loans, a very large sum in those days.

On thing very clear from Dáil debates and reports from that time is that ACC and private banks all came under great political pressure to reduce or write-off farmer loans. TD’s were expected to make suitable representations on behalf of constituents. The deals were clearly influenced by political pressure and the extent to which individual borrowers had the backing of pressure groups such as the IFA.

This time political pressure is likely to be even more persuasive, given the extent of the State’s current involvement in the banks. Politicians certainly have more power over the banking system than they ever had. Deals will be done with land speculators and developers covering the extent of any write-down of loan liabilities, the forced sale of assets, loan extensions and, perhaps, interest rate reductions.

As currently structured the bank recapitalisation plan doesn’t provide any mechanism through which the public interest can be taken into account in such deals. Yet the public interest is unlikely to coincide with either that of the banks or the borrowers. Nor it is likely to coincide with the interests advocated by politicians making representations on behalf of individual borrowers.

The conflicts of interest are likely to be most acute when decisions have to be made over the sale of assets. A fire sale of some property assets could present local authorities with a golden opportunity for increasing the stock of social housing but would not be in the interests of either the banks or the developers. On the other hand an orderly disposal of properties may not be possible given the competing interests of individual lending institutions.

There are no easy answers but the operation of a free bargaining process between lenders and defaulting borrowers is unlikely to yield the best result. There’s much to be said for the imposition of some central control over the management of bad banking debts. The idea of transferring this so called toxic debt into a nationalised Anglo Irish Bank seems worth considering.

There is certainly a need for more transparency.  As yet we don’t even know the true extent of the bad debt problems. The banks’ published accounts are believed to underestimate their extent while the independent report, commissioned in recent months from Price Waterhouse Coopers, was never made public.  But some estimates suggest that the figure could run into billions.

Whatever the figure, the banks are going to take a major hit. Thanks to the injection of fresh capital, they should be able to survive. The cost will be borne by the bank’s shareholders – the owners who gained in the good times and now have to carry the can. Their losses are already reflected in the value that new investors are currently putting on their shares.

With no bank failure in prospect, taxpayers are unlikely to suffer any direct cost, but everyone is suffering from the recession which has at least been deepened by our own domestic banking crisis.

Little of the cost has so far been borne by the executives who oversaw the imprudent extension of credit which left the banks exposed to the bad debts that they now face. They can rightly claim that while many were forecasting some slow-down in the Irish property boom, no-one expected a conjunction of world financial crisis and domestic slow-down. Had the U.S. sub-prime crisis never occurred, the chances are that the Irish property bubble would have deflated rather than burst. But it’s the job of bank executives to take account of the unexpected in their risk assessments. So bank shareholders have every right to hold their managers accountable. There’ll be some interesting annual general meetings in 2009.

But of more concern to the rest of us, are the specifics of how the banks’ bank debt problems are resolved.

Colm Rapple
Irish Mail on Sunday October 5, 2009

Irish Nationwide is to pay a fine of €50,000 for embarrassing the Financial Regulator, the Central Bank and the Government.  The official line is that the building society breached the Regulator’s Consumer Protection Code. But the fact is that it didn’t put any consumers at risk in its attempt to attract deposits from abroad in the wake of the Government’s decision to totally guarantee Irish bank liabilities. It’s offence was to do, in a much too public way, what other financial institutions were undoubtedly doing in less obvious ways.

The Government guarantee was no secret and foreign bankers and would be depositors were obviously going to be attracted by it and transfer money into Irish accounts. But drawing attention to that fact was considered to be an unprofessional act threatening the integrity of the market.

The Financial Regulator was hardly expecting financial institutions to resist from their ever-constant aim of maximising profits. No, it was just expecting them not to broadcast the fact that it was still business as usual.

Obviously the powers that be were upset. The Financial Regulator is not known for imposing fines willy nilly. It very seldom imposes monetary sanctions on the financial institution or individuals that it regulates. Indeed this is the first time ever that a fine has been imposed for a breach of the Consumer Protection Code.

Yet, while the Code only came into effect in July 2007, there have been plenty of instances of the abuse of consumers. Some have been highlighted by the Financial Ombudsman, others should be obvious to anyone able to take some time to examine the operations of the banks. That’s supposedly what the Financial Regulator does.

But the plain fact is that the Regulator has always been more concerned with the health of the financial system as a whole than with the treatment of consumers. By all accounts it hasn’t been very successful in that first role and has also fallen down badly on the second.

The Consumer Protection Code is prefaced with twelve general principles. Irish Nationwide was adjudged to have breached the first of those which requires financial institutions and regulated individuals to “act honestly, fairly and professionally in the best interests of its customers and the integrity of the market”.

They are also required to “act with due skill, care and diligence in the best interests of customers” and “not recklessly, negligently or deliberately mislead a customer as to the real or perceived advantages or disadvantages of any product or service”.

Those are just three of the principles which we all know were regularly breached in the past and are undoubtedly still being breached.

It has become common practice for banks to cut the interest rates on existing savings products while offering better rates to new customers. Existing customers can always switch, of course, but they are seldom told of the advantages of so doing. Similarly new credit cards with lower interest rates are often marketed to new customers while existing customers are left with poorer value products.

Personal Retirement Savings Accounts (PRSAs) are still being sold to young people who would be better off putting their money into regular saver accounts that would allow them access to their money when they need it for a house deposit.

The many instances of banks encouraging customers to over borrow could hardly be said to be in the best interests of those customers and the integrity of the market.

Those are some of the general practices which could be claimed to breach the Consumer Protection Code. There are also many specific cases, some of them outlined in the reports of the Financial Ombudsman.

He considered a total of 4,534 complaints last year and found in favour of 2,675 of them.. They included complaints of misselling of investment products, over charging, and maladministration.

The Ombudsman normally orders the payment of compensation when he finds in favour of a complainant. But that doesn’t preclude the Financial Regulator from deciding that the financial institution or individual involved was in breach of the Consumer Protection Code and imposing a fine. The Regulator also has the power under the 2004 Central Bank Act to direct that a person, or persons, should be disqualified from managing a regulated financial service.

So the Financial Regulator doesn’t lack the power to take action in the consumers’ interest. But the move against the Irish Nationwide was the first to be taken for breach of the Consumer Protection code and it was hardly a consumer matter. In a better climate the building society might have appealed the Regulator’s decision and might well have won.

Such appeals are heard by the Irish Financial Services Appeals Tribunal,  a low profile body whose members are appointed by the President. It has only ever heard one case and that from a company that had been refused a licence to transmit money abroad. It’s not that people readily accept the decisions of the Financial Regulator. It’s just that it doesn’t apply many sanctions and when it does it’s usually by agreement.

Indeed it only announced the Irish Nationwide fine after the building society agreed that it was in breach of the code. It possibly felt that this wasn’t the right time to dispute the matter.

It has become very evident that former minister Michael McDowell was right when he fought very hard for a Financial Regulator completely independent of the Central Bank.   He failed and it was simply hived off from the Central Bank complete with the culture of banks first, customers second.

Colm Rapple
Irish Mail on Sunday, August 31, 2008

The banks are to pick up the tab for the major breach of payment card security which hit Galway and the east coast in recent weeks. Over 10,000 credit and debit cards were illegally skimmed and cloned for fraudulent use abroad. While customers won’t be out of pocket as a result of the scam, they have every reason to be concerned. It should never have happened and it highlights the somewhat lackadaisical attitude adopted by the card issuers to fraud.

In this case they’ll have to bear the cost themselves but, all too often, it’s the customer who bears the cost. One of the less publicised consequences of the switch to chip-and-pin cards was a major transfer of liability from card issuer to customer.  That shift was built into the assumption that only the card holder should or could ever know the PIN number associated with a card.

Once case brought to the Financial Ombudsman involved an elderly cardholder who had €7,000 withdrawn from her account over the course of ten days at ATM machines. She was in a nursing home and had never before used the card to withdraw money. She was only awarded €1,500 compensation while no negligence was attributed to the bank.

The Financial Regulated did raise the matter with the Irish Banking Federation suggesting that the banks should have procedures in place for quickly identifying potential fraudulent withdrawals. But if there were any action taken or guidelines drawn up, the details have yet to be published.

If a fraudster does manage to get hold of both card and PIN, the assumption is that the card holder had been negligent. There may not be any negligence involved in losing a card. It’s admitted that it can be stolen. But, under the terms and conditions, the PIN number should be firmly locked inside the cardholder’s brain, never written down or divulged.

The loss of a PIN is automatically deemed to be the cardholder’s fault unless he or she can conclusively prove otherwise.

You’ll even be deemed negligent if you reveal your PIN to a mugger who demands not only your wallet but also those four magic figures that can turn your credit or debit card into cash.

There is a certain logic in that. If a mugger took your cash, you’d have to bear the cost yourself so it makes some sense for you to also bear the cost of losing your card and pin, at least up until the time that you report them lost.

Just be aware that the lost of your card and pin cost you substantially more than the amount of cash that you might normally carry about with you.

But the fact is that you don’t have to be blatantly negligent to lose both your card and pin. Even without the addition of skimming devices the pin input pads in use at retail checkouts and restaurants are not secure from prying eyes and a would-be fraudster can quickly become very skilled at reading the number being input, even at some distance.  He or she doesn’t even have to become skilled if working in a retail outlet which customers regularly frequent.

In some retail outlets security cameras are trained on cash points, a practice that can make it easy for in-store fraudsters to read PIN numbers.

Of course, along with the PIN, the fraudster needs the actual card if it is to be used in a country that has embraced the chip and pin technology. That’s why our recent fraudsters quickly used their skimmed cards in Italy and Canada. All they had to do was put the PINs onto old type, for us, magnetic strip cards.

But, in any case, getting both your card and PIN need not be too difficult. A person moving away from a checkout or cash point is particularly vulnerable to having a card stolen before they put it back into a wallet, pocket or purse. A well organised fraudster, having simply read the PIN over the card holders shoulder, could spent thousands of euros before the shocked victim had time to ring the bank.

You may be liable for that loss. To realise the extend of that exposure you need to read all the fine print of your credit or debit card agreement.

In Britain your liability is capped at £50 sterling unless the bank can show that you acted fraudulenty or without reasonable care. In Ireland, however, the onus is on you to prove that you didn’t act fraudulently.

The Bank of Ireland places particularly onerous conditions on its card holders. While it accepts liability for any transactions carried out after a loss has been reported, the onus is on the customers to prove fraud in other cases.

A clause in the terms and conditions states that “Use of the PIN, in conjunction with the credit card shall be regarded as conclusive evidence that the relevant transaction was carried out by the cardholder.”

That type of clause transfer liability very firmly onto the shoulders of the cardholder. It’s time that the balance was redressed. Since the banks have obviously failed to adequately tackle fraud, it’s time that the Financial Regulator took some firm and decisive action. Given it’s record, however, that may be asking too much.

Colm Rapple
Irish Mail on Sunday, 23rd September 2007

It’s a pity that Northern Rock will probably go down in Irish folk memory as the bank that nearly went bust – even though it never did. But the image of people queuing up outside its Harcourt Street offices to withdraw their savings will stick. The fact that the panic was unnecessary will be forgotten. Also forgotten will be the great service that the Newcastle based bank did for Irish consumers when it took on the cosy informal cartel of Irish deposit takers eight years ago.

It entered the Irish market with a low cost operation offering deposit rates well in excess of those then on offer from Irish banks and, unusually for the time, it didn’t limit the good rates to those depositing sizeable sums or willing to give long notice of withdrawals. Deposits could be opened with as little as €1,000 and the money accessible on demand.

While the best rates ere, and are, paid on its innovative internet accounts, it was also offers very competitive rates to those accessing their accountsby phone or post.

It shook up the market although not as much as it might have done if Irish consumers were a little more adventurous or inclined to shop around. The consumers’ worst enemy is inertia, a tendency to stick with the familiar while ignoring the opportunities for shopping around. But even those who didn’t move to Northern Rock are gained from its entry to the Irish market. There is no doubt that deposit interest rates have been higher on average ever since, had it not entered the Irish market.

There were, of course, other developments since. RaboDirect, a subsidiary of the large Dutch Rabo Bank, entered the Irish market with an initial offering similar to Northern Rock. It’s rates tended to lag a little behind those of its British competitor although more recently it has been offering better rates on smaller sums – up to €15,000.

The larger Irish retail banks have not tried to compete in this market presumably because most of their long-term customers are willing to leave their money with them at lower rates of return. It’s the inertia factor again and up to now it is unlikely that it had anything to do with attitudes to risk. There has been no perception of risk attaching to institutions such as Anglo Irish Bank, Irish Nationwide or First Active that continue to offer better than average deposit rates.

Unfortunately that may have changed as a result of the Northern Rock debacle.

There is a real danger that competition in the banking sector will be stultified as consumers fight shy of the unfamiliar. The winners will be the retail banks with their large customer bases. Consumers will be the losers as these banks see less need to compete on price.

The truth is, of course, that depositors were not taking a significant risk
by putting their money with Northern Rock even before the British guarantee was put in place. After suffering a run on its deposits and accumulating a costly liability to the Bank of England, it remains a profitable bank. Investors still believe that it has more than enough assets to cover all liabilities and still leave something over for shareholders.

Rabo Bank is larger than Bank of Ireland and AIB combined and much more broadly based than Northern Rock. It may well be the safest of the banks operating in Ireland but none of them are particularly vulnerable. So depositors should continue to shop around and get the best deal possible but it’s going to be hard to get that message across to consumers.

The financial regulators both here and in Britain seem to have been taken by surprise at the “panic” that gripped Northern Rock depositors. There was similar surprise among commentators at the way depositors ignored the soothing statements from central bank officials and politicians. RTÉ even got a psychologist to explain why depositors had reacted the way they did. But it doesn’t take a lot of explaining.

People who keep significant sums of money on deposit are generally risk adverse. Even the 4.5% gross (3.6% after tax) paid by Northern Rock on internet accounts is not enough to keep pace with inflation. The accumulating interest is not enough to prevent depositors from suffering a drop in the purchasing power of their nest eggs but they are willing to accept that to eliminate risk. Deposit accounts tended to be viewed as practically risk-free.

They still are although many people will find that hard to accept in the future.

All too many of them will be pensioners etc. who need to get the best possible return on their savings but may be discouraged from doing so because of a fear of loss.

There’s a need to re-establish a sense of reality in order to alleviate understandable worries among all depositors and also to maintain interest rate competition among the deposit taking institutions. Otherwise many people will opt for low interest accounts that they perceive as secure or even go back to keeping their money under the mattress

It’s a job for the Financial Regulator and maybe even for the EU which dictates that guarantees are limited to no more than 90% of a deposit up to a maximum of €20,000. That threshold needs to be significantly increased. Finance Minister Brian Cowen could also help to promote competition by improving the rates on An Post Savings Bonds which currently offer a less than competitive guaranteed annual tax-free return of 2.6% over three years. It would greatly enhance the attractiveness of the scheme if at the very least an equivalent gross rate of 3.25% was paid to those many pensioners who are not liable for DIRT.