One in four people entering insolvency negotiations with creditors have voluntary surrendered their homes, a firm working in the sector said this morning.
Grant Thornton Debt Solutions, which operates as a personal insolvency practitioner (PIP), said before it submitted clients’ paperwork to the Insolvency Service of Irelandit engaged in pre-negotiations with creditors. In 80 per cent of cases it received approval in principle from stakeholders to do a deal.
As part of a personal insolvency arrangement, 25 per cent of the 20 cases dealt with so far opted for voluntary surrender of property. This effective returning of the keys to their properties to the bank, allowed debtors to leave behind unsustainable mortgages, GT Debt Solutions said.
Visa, MasterCard and major banks agreed to pay retailers at least $6billion to settle a long-running lawsuit, which alleged that the card issuers conspired to fix the fees that stores pay to accept credit cards. As part of the settlement, announced late Friday, stores from Rite Aid pharmacies to Kroger supermarkets will be allowed to charge customers more if they pay using a credit card.
The pact, which lawyers involved in the case are calling the largest antitrust settlement in U.S. history, is seen as a major victory for merchants who have long complained about the billions of dollars in so-called ‘swipe’ or ‘interchange’ fees they pay to banks for each purchase made using plastic.
A whistle-blowing ANZ Bank employee has accused the bank of bullying struggling home loan customers to help achieve record profit.
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.
The credit-crazy Noughties came to an abrupt end in August 2007 when a growing ‘credit crunch’ caused lending levels to collapse.
This led to the infamous run on Northern Rock, the near-collapse and taxpayer-backed rescue of several UK banks, and the worst economic recession since the Great Depression of the 1930s.
Today, although the financial tsunami of 2007/09 has retreated, financial regulators are still clearing up some nasty-looking scandals left behind after this crashing tide went out.
Yet another banking scandal
In the past 20 years, tens of millions of us have lost money in mis-selling scandals involving mortgage endowments, personal pensions, with-profits policies, unapproved-overdraft fees, payment protection insurance, and so on.
This list of regulatory failures goes on and on, so it’s no wonder that public trust in banks is at an all-time low. What’s more, we have good reason to be worried by the behaviour of banks, because today saw yet another scandal added to this long list.
In a shock regulatory announcement released late this morning, Lloyds Banking Group admitted that it had set aside £500 million to compensate yet another batch of ripped-off customers.
When Lloyds slipped up
During the banking meltdown of September 2008, the former Lloyds TSB was forced into a shotgun marriage with ailing lender HBOS. HBOS was itself a product of the merger of Halifax — the UK’s biggest mortgage lender — with Bank of Scotland.
Alas, HBOS’s rash lending during the boom times came back with a vengeance, blowing a big hole in its finances and causing shares in the newly formed Lloyds Banking Group to plummet.
Now it turns out that — just as there is never just one cockroach under the fridge — there are more problems at HBOS than first thought.
Awards averaging £1,667 each
Today, Lloyds confirmed that it had reached a voluntary agreement with financial watchdog the Financial Services Authority (FSA) to set aside £500 million to compensate over-charged Halifax mortgage borrowers.
It turns out that confusing wording in some Halifax mortgage contracts led to some borrowers being treated unfairly. These customers were offered Halifax-branded home loans linked to its standard-variable rate (SVR), between 20 September 2004 and 16 September 2007 via its Bank of Scotland arm.
In January 2009, the Halifax increased the ‘SVR cap’ on home loans from 2% above the Bank of England’s base rate to base rate + 3%. Lloyds now admits that Halifax did not have the right to force this increase on all these customers, hence its decision to back down on this 1% rate rise.
Having pushed these contracts too far, Lloyds has agreed with the FSA to make goodwill payments to all borrowers concerned. Hence, a “pro-active customer review and contact programme” is to begin immediately. Around 600,000 borrowers with Halifax home loans will be contacted by Lloyds, of which half may be due compensation.
With 300,000 customers in line for awards, the half a billion pounds set aside works out at £1,667 per borrower. These refunds will be paid in April via a credit to customers’ mortgage accounts.
Then again, as I often remark, “averages invite comparisons”, so some Halifax borrowers may receive only a few hundred pounds, while others could be in line for payouts of several thousand pounds.
Bad news (and good news) for taxpayers
As you’d expect, this news hit the Lloyds share price, which is down 2% at 68p as I write. At a stroke, today’s news has wiped £900 million from the market value of Lloyds.
Now for the extra-bad news: all British adults will lose out because of this mess-up at HBOS. That’s because, following a £17.4 billion government bailout of Lloyds, taxpayers own 27.6 billion shares in Lloyds. In effect, we own over two-fifths (41%) of Lloyds’ share base.
Thus, thanks to the drop in Lloyds’ share price, the UK’s 48 million adults have lost almost £370 million today, or roughly £8 each. What on Earth did we do wrong?
Finally, it’s worth pointing out that we taxpayers bought our stake in Lloyds at an average price of 63.2p a share. Therefore, we are sitting on a current profit of 4.8p a share, or £1,325 million. That should cheer you up a bit!
In the past year some 206,121 people lodged a complaint with the Financial Ombudsman Service (FOS). The FOS does not say how many of these complaints were about the miscalculation of interest charges, but it is safe to say that bank customers are not at all happy with the service they are getting.
‘Most of the complaints we receive about interest miscalculations are to do with credit cards,’ says Philippa Cook of the FOS. Many complaints are the result of the consumer not understanding how interest charges are applied, but if there is a mistake, the FOS sends the complaint back to the bank to work out any compensation – which is not entirely reassuring.
Which? confirms that credit card companies are the worst offenders too. ‘The methods that the credit card companies use to calculate interest are so labyrinthine that even the experts can’t work it out,’ says Martyn Saville, senior researcher at Which?.
Mark Christian, a partner in the Banking Alliance, which runs a bank-account checking service for businesses, says ‘We have been consulting to banks for 25 years in more than 20 countries, so we had a pretty good idea there was a problem. The Gordon Brown-sponsored report from 2001 estimated that £3 billion to £5 billion overcharging is probably the tip of the iceberg.’
Part of the problem in challenging the banks and building societies is that, on overdrafts in particular, interest is charged on the daily cleared balance – which is not the same as the balances shown on your bank statements. It may take up to three or four working days for a balance on your account to be ‘cleared’.
In addition, interest is calculated by reference to a fixed percentage over bank base rate, or in the case of some financial institutions, by reference to its own ‘base rate’, which may be linked to the more volatile Libor (the rate at which banks lend to each other).
This means that in order to calculate the interest charge on an overdraft you need to do a daily calculation using an interest rate that may fluctuate frequently. If the interest rate charged is incorrect, then the daily cleared balances will be wrong too because of the compounding effect of incorrect charges.
If you are checking interest charges on a mortgage, you need to know precisely how the lender calculates charges as this can vary widely. A few lenders still calculate the interest charge for the coming year based on the previous year-end balance outstanding. This means that during the course of the year no allowance is made for monthly repayments of the capital borrowed.
The effect of this is that the true rate of interest is higher than the rate quoted. Other lenders calculate interest on a daily basis and some on a weekly, monthly or quarterly basis. All this makes checking difficult.
Savings accounts are another problem, particularly variable-rate instant-access accounts, where the daily balance can vary widely. In the face of these complications, most people give up unless the mistake is so obvious that it can be spotted without going through these tedious calculations. There are firms that will check your bank accounts using a computer system, but most are based in the US or Australia.
Checking company bank account interest charges is even more complicated, because most firms are charged interest on the daily cleared net amount owing on all their accounts together. This is the sum of all the overdrawn balances on each account less the sum of the credit balances.