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Archive for March 8th, 2011

Two weeks ago in the UK, the Lloyds banking group was forced to make a GBP £500m provision in respect of overcharging by one of its group companies, the Halifax Building Society. It was established that the Halifax had been overcharging mortgage customers when it failed to reduce its mortgage interest rates in line with reductions in the base rate by the Bank of England. Some 300,000 customers will receive refunds of an average of GBP £1,667. There was no mention of any refunds to customers in Ireland despite the fact that the Halifax did brisk business here from 1999 to when it was closed in 2010. And separately, a couple of days after the Lloyds announcement, the UK’s Financial Services Authority – very roughly the equivalent of our own Financial Regulator – fined that model of Teutonic efficiency, Deutsche Bank for mis-selling mortgages and harassing customers in arrears. I make the point that other countries experience problems with their own banks – it’s not a distinctly Irish problem. This entry examines recent overcharging in the Irish market.

Firstly here’s a summary of the recent history of overcharging in the Irish banking sector

(1) In September 2010, the Irish Independent reported that Anglo Irish Bank (“Anglo”) was to repay up to €100m in respect of overcharging on loans taken out in 1999 -2004. At the time the Anglo CEO Mike Aynsley is reported as saying “There is a statute of limitations and, theoretically, we’re probably not compelled to go back beyond a six-year period, but because we believe there are important ethical issues …. we’re doing it and we will compensate people accordingly” The Australian banker who was appointed to the poisonous CEO role in September 2009 went on to say “we suspect it was driven by some kind of process errors” but he did not rule out more deliberate machinations at the bank – “we don’t know yet” he is reported as saying. And whilst the Anglo CEO was putting an upper limit of €100m on the size of the problem whilst suggesting the final cost might be closer to €30-50m, an independent consultancy was apparently suggesting that the overcharging might be closer to €200m and might have started before 1999 and continued after 2004. A legal opinion published in the same article claimed that if the overcharging was the result of fraud then the statute of limitations would not apply. It would seem that the bulk of the overcharging took place before David Drumm became Anglo’s CEO in January 2005 having joined the Group in 1993 and having established Anglo’s US operations in Boston in the late 1990s before he returned to Dublin in 2003 as Head of Lending.

(2) In December 2010, the Irish Times reported that AIB had been fined €2m by the Central Bank, “ the largest fine in Irish retail banking history – after it was found to have overcharged customers” According to the Central Bank of Ireland statement “the majority of these overcharging instances are historic in nature. Most affected customers have been refunded with appropriate interest. The firm has undertaken to repay, with appropriate interest, all those outstanding amounts that have not already been repaid.” It was not clear from the Central Bank what precise instances of overcharging AIB was being fined for, but AIB has a rich history of overcharging which includes €4m in 2010 resulting from charging business banking fees to personal customers. AIB had previously admitted in 2009 to overcharging 400 tracker-mortgage holders by an average of €1,000 each. But all of this paled into insignificance alongside the foreign exchange overcharging scandal in 2006 which cost the bank some €66m including a €20m donation to charity in lieu of payment to overcharged customers who could not be traced. Most of the overcharging related to foreign exchange transactions but €9m related to miscellaneous overcharging.

(3) In 2005, Bank of Ireland had to refund €1.8m to 50,000 customers who had been charged tax on transactions between 1992 and 2005. Also in April 2005, the bank admitted it had overcharged 65,000 customers who had taken out personal loan protection insurance and refunded €18m. The bank had some problems in 2009 when its systems double-charged customers who had made ATM withdrawals in September and October but the problem was quickly spotted and rectified.

(4) In 2005, Irish Nationwide Building Society (INBS) was reported to have significantly overcharged one business customer by €170,000 on a €2m loan because an interest rate some 1.25% higher than that agreed had been applied.

(5) Permanent TSB, part of the Irish Life and Permanent group has gone relatively unscathed in this area but in 2005 was found to have overcharged €600,000 to mortgage customers over a three-year period and €100,000 to business customers overcharged by the bank since 1997

(6) In 2005, EBS reported overcharging “400 of its commercial customers over a six-year period” in a case very similar to Anglo’s where the wrong interest rate was applied to loans. The amount overcharged was not revealed.

(7) Ulster Bank, National Irish Bank, MBNA and others have also been found to have overcharged customers in the last decade.

Back in 2005, a year in which €170m of overcharging was identified, Mark Fielding of the small business representation group, ISME said “it seems there has been a systematic movement towards ripping off the customers. It is incredible that all of those mistakes were just mistakes. It just beggars belief” 2005 was the year of overcharging scandals and the assumption seems to have been that all historical overcharging was uncovered and going forward, there were better systems in place to avoid recurrences. But as we now know, that was not the case – Anglo’s announcement last September 2010 would eclipse all the historical incidences if the claim that the overcharging was €200m was true but even if the Anglo’s CEO estimates were accurate, it would be the second highest revelation of a single bank overcharging its customers.

Are there more overcharging cases to be revealed? Difficult to say but in the residential mortgage sector I am amazed that there have not been actions against the banks under the Financial Regulator’s consumer code which required banks to ensure financial products, including mortgages, were suitable for the customers to whom they were sold. It also seems incredible that banks are allowed increase their standard variable rates to more than 4% above the Euro base rate. In the commercial sector, there have been allegations of machinations at Anglo which resulted in interest overcharges on commercial loans. Mike Aynsley says the problems related to 1999-2004 and he doesn’t discount deliberate overcharging. Was Anglo unique? Of course it will be the case that some borrowers are now so under water with their debts that any correction of historically-overcharged interest will be inconsequential as the refund would simply be offset against loans still outstanding. But are there others for whom refunds would be significant?

This post will remain open and will be amended with any updates on overcharging in the Irish banking sector.

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It says something about the secrecy of NAMA that we have not had a detailed update on tranches absorbed by the agency since 23rd August, 2010 – nearly seven months ago. Let’s review what we know about NAMA’s progress in absorbing the remaining loans.

(1) In August 2010, NAMA announced that it had absorbed Tranche 2 bringing to €27bn the then-cumulative total value of loans absorbed at face value.

(2) In December 2010 the NAMA chairman, Frank Daly provided a pre-Christmas update and said that €71bn of loans had been absorbed and indicated that another €2bn (deduced from the total earmarked to be absorbed €73.4bn per Frank’s statement less €71.2bn already absorbed) remained which were understood to be Paddy McKillen’s loans.

(3) In February 2011, the word from NAMA was that the loans absorbed still stood at €71bn but the outstanding loans had crept up to €5bn from €2bn previously. Absorption of the remaining €5bn was to take place “as soon as practicable” and the €5bn was understood to include €2.1bn of Paddy McKillen’s loans plus those of other developers who had objected to NAMA absorbing their loans.

(4) Yesterday, AIB announced that it had transferred further loans to NAMA “Allied Irish Banks, p.l.c. (“AIB”) [NYSE:AIB] announces that on 4th March 2011 it transferred loans to NAMA totalling €1.1bn. These loans are part of the previously advised final tranche to be transferred to NAMA at a discount of c. 60%” said the brief press release.

(5) Today, the press (here and here for examples) is reporting that there is now €4bn of outstanding loans to be absorbed by NAMA. The Irish Times goes further and claims “of the €4 billion in big loans outstanding to Nama, they include about €1.1 billion relating to developer Paddy McKillen” which is odd because as we all know from the extensive coverage of Paddy’s ongoing court case, Paddy has €2.1bn of loans, not €1.1bn and they were reported to comprise €0.9bn at Anglo, €0.3bn at Bank of Ireland and €0.9bn at AIB.

So there are a few questions that suggest themselves now, with respect to NAMA’s straggling loans

(1) What is happening with Paddy McKillen’s loans? AIB’s announcement yesterday of the transfer of €1.1bn of loans together with press reporting today that Paddy McKillen’s loans to be absorbed are now €1bn down from previous reporting and the understanding that Paddy had €0.9bn of AIB loans, all suggest that NAMA has now absorbed €1bn of Paddy’s loans following the agency’s announcement a month ago that it was going to consider whether or not to make a fresh decision to absorb Paddy’s loans following the Supreme Court’s determination that NAMA’s decision in December 2009 to absorb Paddy’s loans was not validly made.

(2) If yesterday’s announcement does mean that some of Paddy’s loans have been absorbed by NAMA then what is delaying the absorption of the remaining ~€1bn of Paddy’s loans? There is intense activity around Paddy’s Maybourne  group at present with many high-profile investors being mentioned as interested in buying part of the luxury hotels group which is heavily indebted to NAMA/NAMA Participating Institutions.

(3) What is preventing the absorption of the remaining €4bn of loans? Is it related to the ongoing Paddy McKillen appeal at the Supreme Court and remember the judges there have still not ruled on three of the strands to Paddy’s appeal. Will the delay in absorbing these loans be affected by the Fine Gael/Labour Programme for Government which promises to “end further asset transfers to NAMA, which are unlikely to improve market confidence in either the banks or the State”

In addition to the €4bn (or €5bn if you don’t believe today’s press reporting) of straggling loans, there is some €12bn which comprises sub-€20bn land and development lending at AIB and BoI (€16bn if you include associated lending). According to what I would describe as emphatic statements from both Labour and Fine Gael, these smaller-value loans will not be absorbed by NAMA.

Lastly Fine Gael and Labour will have the opportunity to match their deeds to their communicated intentions of making NAMA more transparent, by forcing the agency to produce a detailed update on loans absorbed – it is astounding that since the detailed updates last August which analysed €27bn of loans, we have had no detail at all on the €45bn subsequently absorbed.

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