From The Sunday Times, March 3
Time is right to stop banks’ big brushoff
Victims of mis-sold financial products need longer to seek legal redress
Victims of mis-selling are being urged to put pressure on politicians to change laws that block complaints about financial products sold more than six years ago.
The Sunday Times, which is campaigning on the issue, has been inundated by readers who have lost large amounts of money on endowment mortgages, risky borrow-to-invest schemes and payment protection insurance.
The financial services ombudsman has thrown out their complaints because he deals only with products sold in the past six years. Our readers are also being denied justice through the courts after the Supreme Court ruled last year that legal action for alleged mis-selling must be taken within six years of a product being sold.
It often takes much longer than six years for consumers to realise that a product has been missold, by which time it is too late to do anything about it. Banks are being accused of hiding behind the six-year time limit, knowing that it leaves customers with nowhere to take mis-selling complaints.
Bryan Fox of Bryan F Fox & Co solicitors represents a group of borrowers who planned to sue over endowment mortgages. They include a 72-year-old retired businessman who was left with a shortfall of more than €100,000 when his policy matured last year.
Fox’s clients have been forced to abandon their plans, however, because the loans were taken out more than 20 years ago. “The only route left open is the political route,” Fox said. “Nothing can be done through the Irish courts.”
Ireland’s restrictive six-year statute of limitations could be appealed to the European Court of Human Rights. “An appeal to Strasbourg is theoretically possible — but only if you had unlimited amounts of time and money,” said Fox.
Rather than forcing consumers to go to Europe to enforce their rights, the government could change the rules of the ombudsman’s office to allow him adjudicate on complaints about products that are more than six years old. For example, the financial ombudsman service in Britain gives consumers three years from the time they become aware of potential mis-selling to make complaints.
The government could also open access to the courts by extending the statute of limitations. The Law Reform Commission has proposed introducing a two-year window for legal action involving financial products. This would begin from the time that consumers become aware of a problem — not from the date they bought the product. Alan Shatter, the justice minister, has yet to act on the recommendation.
Endowment mortgages are top of the list of mis-selling gripes among our readers. They were encouraged by lenders to take out these loans in the 1980s and early 1990s as a smarter alternative to traditional annuity mortgages, where capital and interest are repaid over the term of a loan.
With endowment mortgages, borrowers repaid only the interest, while contributing simultaneously to investment policies sold by life insurance companies. These policies or endowments were supposed to repay the amount borrowed at the end of the loan.
Borrowers were told there could even be a windfall if the endowments exceeded their performance targets. According to the Central Bank, endowments accounted for a third of mortgages approved in Ireland between 1989 and 1992.
Many have fallen far short of target, however. The policies would have had to grow by at least 7% each year to be able to repay the related mortgages — a hugely ambitious goal for any investment. Even if this growth was achieved, endowments would still have come up short because of hefty charges and commissions paid to those who sold them.
With many of the mortgages sold in 1989-92 now falling due for payment, borrowers are facing large shortfalls, with some endowments covering only about half of the amount owed.
Endowments accounted for 9% of complaints about investments made to the ombudsman last year, although he did not disclose how many of the policies related to mortgages. None of the 16 cases on which he made a decision in 2012 went in the complainants’ favour, although one was partly upheld.
Michael Noonan, the finance minister, brushed off the endowment mortgage scandal when questioned in the Dail last year. “I have been informed by the Central Bank that, where the proceeds of an endowment policy are insufficient to repay the capital element of an endowment mortgage, borrowers should be given ample time to make alternative repayment arrangements,” he said. “If the policy is not on track to repay the mortgage, the life company will recommend an increase in the premium.”
Increasing premiums gets banks off the hook by eliminating endowment shortfalls. It achieves nothing, though, for borrowers who believe they were mis-sold and now have nowhere to seek redress.
€22,000 shortfall
John from Limerick considered legal action against Bank of Ireland over a shortfall of €22,000 on an endowment mortgage of €43,000 that he must repay later this year. He cannot access the courts, however, because of the six-year statute of limitations. A complaint to the ombudsman in 2011 was also time-barred because the mortgage was taken out in 1988. The Central Bank told him it could not investigate individual complaints, even though hundreds of other endowment policyholders are in the same position.
“The banks know they are well protected by the six-year rule,” John said. “Those with endowment mortgages have been badly treated by the system and the banks.”
He believes his endowment policy could never have repaid the mortgage, even if it met the projected investment growth of 7.5% a year for 25 years, because the charges were so high.
This was why he refused to take the bank’s advice to increase the payments after it warned that the endowment policy would fall short of target. “If I increased the payments, I would only have been solving Bank of Ireland’s problems,” he said.
“They should have to pay the shortfall in full because the endowment policy could never have delivered what was promised.”
Bank of Ireland said it could not comment on individual cases but added: “We annually send customers a written review projecting what the final value of the policy will be.
Where the return/projection shows a shortfall, we advise the policyholder that the premium should be increased.”
Six-year rule ‘protects only the banks’
Noel is canvassing politicians in Co Mayo for support in changing the law that limits the
ombudsman to handling complaints about financial products sold in the past six years.
Noel’s endowment policy is worth €31,074 but he owes €57,139 on the mortgage, leaving a shortfall of €26,065 that must be met at the end of this year.
“We took out the mortgage 20 years ago and it’s still affecting us today,” he said. “The
ombudsman’s six-year rule is ridiculous and serves only to protect the banks.”
Noel had been led to expect a surplus of more than IR£13,000 (€16,500) when the mortgage matured. Irish Life provided the endowment policy in 1993, while the mortgage provider was Irish Life Homeloans, now owned by KBC Bank.
“The surplus was based on the endowment policy growing by 9.25% a year,” said Noel. “I believed this was easily achievable because they told me that growth was much higher than 9.25% in the past.”
In its final response before Noel took his complaint to the ombudsman in 2011, Irish Life reminded him that he was warned of a potential shortfall. “We regret that your plan has not performed as well as expected. However, we feel the documentation provided to you at the point of sale did clarify that our projections were not guaranteed.”