Financial Regulator imposes first ever fine but not to protect consumers
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.