Next week, Minister for Finance Paschal Donohoe will haul in the bank chiefs for a dressing-down about their response to the tracker mortgage scandal. They will know their way to his office. His predecessor, Michael Noonan, had a habit of doing the same – though his summonses were related not to the tracker scandal but to the banks' slow progress in cutting standard variable mortgage rates.
The two episodes show how, as well as taxpayers, consumers have also been sacrificed on the altar of rescuing the Irish banks.
A quiet acceptance seems to have emerged across “the system” that customers could be charged a bit extra to help the financial sector back to profitability – and that banks needed time to deal with “problems” such as the tracker issue.
When the heat gets turned up, the minister of the day is forced to call in the banks. The difference this time is the scale and nature of what has happened. People were overcharged – very significantly – in the name of underpinning profits. And now the fact that some institutions are still battling with the Central Bank, not identifying those affected and refusing to come up with appropriate compensation can only mean one of two things.
One possibility is that they now fear this problem is even larger and potentially more costly than they thought. If this is not the case, then their actions are even more baffling. The banks have now left themselves exposed to significant further damage to their reputation and to action by the Government, which owns a large part of the sector and controls how regulation is set up and how it is taxed and levied. For the banks, this is right up there with windsurfing in Storm Ophelia in terms of strategic planning.
Penalising punters
In Ireland, the odds always seems to be stacked against the punter. Consumer protection in Ireland does not protect the consumer. Not far off two years after the Central Bank probe began, most of those affected have not even got the money they were overcharged back, and some have still to be restored to their proper interest rate. A significant number – at least 7,000 – have not yet even been told they are affected. The Central Bank just does not seem to have the ability – or the powers – to get this done in any kind of reasonable timescale. We are in the land of the “process” and the process goes on interminably as lawyers dot their i’s and cross their t’s.
As well as getting their money back, customers are also due compensation. And how do you compensate someone who lost their home, or had to go short for years because of overpayments? This has to be dealt with. But first, please, can we get to first base and find a way – quickly – to give people back what they were overcharged, identify the remaining cases and get everyone back on the correct interest rate?
There is a bigger story here. The banks went bust in late 2008. European Central Bank rates had fallen to the floor and, by definition, the tracker rates followed. The banks were losing money on trackers, had stopped offering them to new customers and used this as a reason to deny existing customers coming off fixed rates their entitlement to move back on to a tracker rate.
Trickery and bullying
They were clearly seen as “fair game”. The tracker scandal is a grubby affair, a concerted attempt by the industry to lower its exposure to these loss-making tracker loans, in some cases by tricking and bullying its customers – and in others by interpreting contracts in their own favour.
Alice in Wonderland wordsmiths were put to work to justify this. One letter from AIB argued that a customer could not have been warned that a tracker rate would not be available when they finished their fixed-rate loan because the bank had not stopped offering trackers at that time. Yes, I had to read this flurry of negatives a few times too.
Decisions were taken at a high level in the banks to do this, yet we have no idea who knew, or whether the banks colluded in any way, or what the regulator or the Department of Finance did or did not know. In some cases, there is a question of whether criminal offences were committed. Where does interpreting a contract in your favour end and criminality begin?
And the wider picture, the drive to get the banks back into profit, hit consumers in other ways. Central Bank figures show that average new variable mortgage rates are still 3.3 per cent here, compared to a euro area average of 1.83 per cent. Mortgage rates have edged lower over the past couple of years. But we still pay a lot more and bank profit margins here are among the healthiest in the euro zone. Another thing for Minister Donohoe to mention is his meetings.
Michael Noonan huffed and puffed, and AIB, then fully State owned, obliged by trimming its rates and others followed. The Government wanted the bank to cut interest rates all right – just not too quickly. It knew the AIB sale was coming.
Paschal Donohoe faces a challenge of a different order. He can harangue the banks. But, beyond that, what can he actually do if they don’t play ball? Will he give the Central Bank new powers? Or threaten changes to regulation of tax policy? It is high stakes stuff, particularly as the State hopes to sell its remaining stake in AIB in the years to come.
The Minister, the Central Bank and the banks are all now in a very tricky position. This one isn’t just going to “go away.”