Ombudsman confronts Irish Nationwide

Brendan Burgess

Brendan Burgess

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The Financial Services Ombudsman has issued its quarterly report today[broken link removed] and of great interest is that it ordered a Building Society to change its practice of charging 6 months interest on the early redemption of commercial property loans. As it's the second such case in the year, they referred the issue to the Financial Regulator.

According to today's Irish Times the Ombudsman had planned to name the Society but decided against it as the Building Society indicated this week that "it was prepared to legally challenge the matter"

I am assuming that they are planning to legally challenge the order to refund the interest charged rather than the decision to name the Society in public.

There are only three building societies left in Ireland:
The EBS
The Irish Nationwide
The ICS Building Society.

I don't know which one it is but the Irish Nationwide is the only one which charges 6 months' early redemption for people who want to switch loans.


Building Society repaid €29,000 to persons who switched their commercial mortgage and society directed to change its policy of fixed interest redemption charge

The Complainants, who had a commercial mortgage account with a building society,decided to change their mortgage to another financial service provider. When they applied to change, their original building society charged a redemption fee of €59,000 under the terms of the contract. They paid the redemption fee under protest, but complained to the Ombudsman that the fee was unfair and unreasonable.

Having investigated the case, the Ombudsman ruled that the provision in the mortgage agreement which the building society relied on to impose the fee was based on a fixed formula which could not, on any reasonable construction, be deemed to be a genuine preestimate of the loss arising from the early repayment of the mortgage loan . Therefore it was, in reality, a penalty and amounted to a clog or fetter on the equity of redemption and accordingly was invalid and unlawful. The Ombudsman gave his opinion that a fair measure of the loss to the Financial Service Provider would be €30,000. He therefore directed that the sum of €29,000 be repaid to the Complainants by way of compensation and this was accepted by the building society.

As the Ombudsman later received another complaint during 2005 along similar lines he has directed the society in question, to change its fixed fee policy and has also informed the Financial Regulator.
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Re: Building Society referred to IFSRA by the Ombudsman

the guy I bought a house from a while ago was an IT contractor - good money - bad regularity - saw his old loan doco - Irish nationwide were charging twice the current central bank euribor rate - that's how they make it - take in risky loans and milk those assets after - caveat emptor.
 
Re: Building Society referred to IFSRA by the Ombudsman

I toally agree with caveat emptor all the way but have INBS of other lenders been found guilty or sharp practice or misselling/mis-charging which is another ballgame altogether?
 
Re: Building Society referred to IFSRA by the Ombudsman

basic premise of contract law is that the contract must be understandable - just because you did not read the fine print does not constitute mis-selling - all the recent UK mis-selling scandal revolved around salesmen not explaining the contract / not providing clients with fine print sale doco
 
Re: Building Society referred to IFSRA by the Ombudsman

Again I agree but I am referring to cases of obvious mis-selling or overcharging which I am sure have occurred with certain financial institutions and which cannot be dismissed on the basis that the borrower didn't read the documentation etc. Have INBS ever been found guilty of deliberate mis-selling and/or overcharging? Have other financial institutions?
 
Re: Building Society referred to IFSRA by the Ombudsman

I have no problem with the Irish Nationwide or any other lender charging a higher rate to borrowers who are more risky. Many people with a credit problem could not get a loan elsewhere and were delighted to get a loan from the Irish Nationwide.

But what was most objectionable about their practice, is that interest rates dropped by 10% between 1993 and 2003 and they passed on only 5% cuts to some or most borrowers. They did not inform the borrowers of the rate they were on so most did not know. Many were in arrears, so even if they did know, they could not move elsewhere.Add 20% penalty interest onto the arrears and it explains why some of us have been so active in trying to get the Irish Nationwide to change their lending practices.

Brendan
 
Re: Building Society referred to IFSRA by the Ombudsman

According to today's Irish Times the Irish Nationwide has been granted leave by the High Court to bring judicial review proceedings against the Ombudsman's direction.

It's a very encouraging sign to see the Ombudsman standing up to the Irish Nationwide. Lots of others seem to back down when dealing with them.

Brendan
 
The Irish Nationwide has just issued a press release announcing that Dr Con Power has resigned as a director. Con is also the Chairman of the Financial Ombudsman's Council.

Brendan
 
Surely that constituted a huge conflict of interest? I've never looked into who sits on the ombudsman's council, but I would have thought it should exclude anyone with significant ties to any financial institution.
 
The full composition of that council is [broken link removed]. I see Mr Power is described as an 'economic consultant'...
 
the best gamekeepers are often the former poachers themselves :D

sharp practice is seldom learnt overnight :rolleyes:
 
derryman said:
the best gamekeepers are often the former poachers themselves :D
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But being a gamekeeper and poacher at the same time surely involves a serious conflict of interest?
 
I would have expected the other financial institutions to object to his being on the council. It gives IN a nice advantage when someone has an incentive to uphold complaints against all the other banks while always ruling in IN's favour. I could be doing him a huge injustice. He may be entirely scrupulous and above board, and never allowed his connection with IN to influence any of his decisions.
 
The Financial Services Ombudman Council, of which I am Deputy Chairperson, is precluded by law [Central Bank and Financial Services Authority of Ireland Act 2004, No: 21 of 2004] from having hand, act or part in the consideration of any complaint referred to the Ombudman Bureau.
The Bureau's website describes me only as Deputy Chairperson - notwithstanding my request that it be suitably informative; I am a life-long consumer advocate, independent since 1/1/2003, having been for over 20 years a director of the Consumers Association of Ireland and for 3 years its chairperson. I was the inaugural chairman of the Insurance Ombudsman Council scheme which was assimilated into the statutory Bureau from April 1, 2005.
 
Here is a press release which I have just sent out:

Irish Nationwide withdraws its High Court challenge to the Financial Services Ombudsman

Issued by Brendan Burgess , Consumer Campaigner


11 May 2006


In the High Court today, the Irish Nationwide read out the following settlement terms to their High Court challenge to the Ombudsman:

They have agreed that in future they will charge consumers termination payments which will be a genuine pre-estimate of the loss incurred by the Irish Nationwide ( and not the 6 months interest they are charging at present)

They will pay all the costs of the Ombudsman

In return, the Ombudsman will withdraw his direction ordering them to remove the 6 months interest rule from their rule book.

This was the case which led to the resignation of Con Power as a director of the Irish Nationwide as he is also the Chair of the Ombudsman’s Council.

Brendan Burgess who campaigns on behalf of the Irish Nationwide borrowers said after the case was withdrawn: “This is great news indeed. The ramifications for the Irish Nationwide are huge. This provision has been in place for over 20 years and they should identify these cases and make appropriate refunds with interest. If the principles of this case can be extended to the other lending practices of the Irish Nationwide, it will put a huge hole in the profitability and reserves of the Society. This has huge significance for the valuation of the Society in the context of its imminent demutualization. The board must now face up to the fact that the regulatory landscape has changed. The Financial Services Ombudsman will be strengthened in his resolve by this case and it might also give some confidence to the Financial Regulator, IFSRA, to challenge the lending practices of the Irish Nationwide

Any customer of the Irish Nationwide who paid a penalty on early redemption of a mortgage should apply for an immediate refund and if they are refused, they should appeal to the Ombudsman”

Background

In December 2005 , the Ombudsman gave the following ruling against the Irish Nationwide Building Society. As it was his second such ruling, he ordered the Irish Nationwide to change its rules and he “informed the Financial Regulator”.

http://www.financialombudsman.ie/news-updates/case-studies-oct-dec-2005.pdf

Building Society repaid €29,000 to persons who switched their commercial mortgage and society directed to change its policy of fixed interest redemption charge
The Complainants, who had a commercial mortgage account with a building society, decided to change their mortgage to another financial service provider. When they applied to change, their original building society charged a redemption fee of €59,000 under the terms of the contract. They paid the redemption fee under protest, but complained to the Ombudsman that the fee was unfair and unreasonable.

Having investigated the case, the Ombudsman ruled that the provision in the mortgage agreement which the building society relied on to impose the fee was based on a fixed formula which could not, on any reasonable construction, be deemed to be a genuine preestimate of the loss arising from the early repayment of the mortgage loan . Therefore it was, in reality, a penalty and amounted to a clog or fetter on the equity of redemption and accordingly was invalid and unlawful. The Ombudsman gave his opinion that a fair measure of the loss to the Financial Service Provider would be €30,000. He therefore directed that the sum of €29,000 be repaid to the Complainants by way of compensation and this was accepted by the building society.

As the Ombudsman later received another complaint during 2005 along similar lines he has directed the society in question, to change its fixed fee policy and has also informed the Financial Regulator.

The Irish Nationwide appealed the decision to the High Court. Although the papers were not published, it appears that the Irish Nationwide was appealing the right of the Ombudsman to order the Society to change its policies. Last week they sought to join the Government in the action as they appeared to be appealing the constitutionality of the Act which set up the Ombudsman. On Friday they withdrew the appeal to the Supreme Court

What are the implications for the Irish Nationwide?

Any customer who was charged an early repayment penalty at any time over the past 6 years will be able to apply for a refund. If the Irish nationwide refuses, they can go to the Ombudsman

Existing customers who want to terminate their loans will be charged less for doing so.

The Irish Nationwide made no actual or contingent provision for in their accounts for this adverse decision against them.

The amounts must be significant as they would not have gone lightly to the High Court and Supreme Court if they were only isolated cases. This case led to the loss of Con Power as a director of the Irish Nationwide and ultimately the postponement of the AGM of the Society.

Questions

How will the Financial Regulator react? They should now order the Irish Nationwide to identify all such customers and make refunds with interest. They should go beyond the 6 year limit faced by the Ombudsman?

Will the Ombudsman apply the same principles to the penalty interest which the Irish nationwide charges on arrears? This penalty interest has been a huge contributor to the profits of the Irish Nationwide. At one stage, they were charging 20% per annum on top of the ordinary interest rate.

 
In relation to the demutualisation:

1. Will the resolution of this action further delay / speed up the process?

2. Will this financial hit adversely affect the actual windfall amount? I would imagine that anything that affects the actual worth of the group would have a significant impact.
 
Looks like it may have an impact an the demutualistaion.

http://www.unison.ie/irish_independent/stories.php3?ca=184&si=1612132&issue_id=14030

(free registration required)

Reacting to the High Court outcome, campaigner on behalf of Irish Nationwide borrowers, Brendan Burgess said the ramifications for the Irish Nationwide were huge. "If the principles of this case can be extended to the other lending practices of the Irish Nationwide, it will put a huge hole in the profitability and reserves of the Society. This has huge significance for the valuation of the Society in the context of its imminent demutualisation."
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Hi PMI

Please don't post off topic comments in the middle of another thread

Brendan
 
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