Colm’s columns

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, 20th June 2010

On a conservative estimate there could be 10 billion barrels of oil, or the equivalent in natural gas,  under the seabed off the west coast of Ireland. That’s about enough to supply all of our needs for a hundred years. But junior minister Conor Lenihan is intent on giving it away. Oil companies already have rights to some of the most promising areas off the west coast. Oil and gas have been found and not only in the Corrib field off Mayo.  Now Mr Lenihan has invited applications from the oil companies for valuable options which would allow them first refusal on exploration licences over the remaining 250,000 square kilometres of our Atlantic shelf. That’s an area three times as large as the Irish land mass.

The companies can cherry pick the best prospects, undertake to do, or buy, some seismic studies, pay a fee of only €1,520 and gain an option to get a full exploration licences at any time within the following two years. Such a licence would allow them to exploit any find at the current generous fiscal terms.

Even the Government, in an official document, describes those terms as “amongst the most attractive in the world”. For many finds the State take will be no more that a 25% corporation tax charged on profits after allowance has been made for all exploration and development costs.  For very large finds the take can go up to 40% but even that’s low by international standards.

In North America the minimum Government stake according to a report prepared within Mr Lenihan’s department is 42% and it can rise above 60%.  South American governments get between 25% and 90%. The take in sub Saharan Africa ranges from 44% to 85%.

Our very favourable licensing terms have been defended in the past on the basis that we still need to prove the potential of Irish waters to yield sizeable oil and gas finds.  Once we’ve made that big strike, it has been argued, we can then up the anti for new licences.  It might be a valid argument if we hadn’t already licensed many of the most promising areas, most of them at the previous give-away terms under which the State can get no more than a 25% profit tax irrespective of the size of the find.

There is no case at all to be made for now letting the oil companies lay claim to the most promising of the remaining area of the Atlantic margin at the current terms.  There’ll be nothing left on which we can demand the type of return due to the Irish people for the exploitation of their natural resources.

There has long been a suspicion that oil has already been found in commercial quantities off the west coast and that it suits the oil companies to underestimate the prospects while they hoover up rights to more of our hydrocarbon resources. Mr Lenihan says that his decision was reached after consultation with the industry and is designed to boost the level of exploration activity.

Applications don’t close until May next so maybe he is also hoping for some good pre-election publicity. The announcement of an oil find wouldn’t go amiss and there are a few oil finds out there that have yet to be declared commercial. They might be so declared after these proposed new licences have been issued.

There is the Dunquin find west of Kerry. The licence was issued to Tony O’Reilly’s Providence Resources but it brought in ExxonMobile in return for a free ride. The Italian ENI group also has an interest. Davys stockbrokers have conservatively estimated that it could contain  9 tillion cubic feet of gas equivalent to 1.5 billion barrels of oil. That’s about the same size as the Corrib find.

The Dooish prospect off the Donegal coast was drilled by Shell in 2008. It has been keeping quiet about the prospects but gas flowed from earlier drillings in 2001 and 2003 with a “substantial gas condensate column” confirmed.

A prospect west of Clare known as Spanish Point was first drilled in 1981 and has yielded both oil and gas flows.

Those are just some of the known prospects that have already yielded finds.  But the State take from any of them will be small and long delayed. The licences were issued when the maximum tax was 25% and it’s only charged after all of the exploration and development costs have been written off.  It will be many years after oil or gas has started flowing before a cent of tax is paid.

The terms are decidedly lax in one other important way. There is no requirement to land any find in Ireland. Departmental officials did recommend that the State should be able to demand payment in kind of the extra tax introduced to licences issued after 2007.  But that proposal was overruled by the Minister or the Government. It never found it’s way into law.

Gas found off the west coast would almost certainly be landed in Ireland but oil could go anywhere. It could be piped from sub-sea facilities into tankers for shipment to refineries anywhere in the world.

It’s time to rewrite those old licensing terms perhaps by, at least, imposing a royalty levy on all oil and gas production. Until that’s done, no new licences should be issued.

 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.