Cliff Taylor: Banks sail on despite overcharging scandal

Sometimes things are drawn up in "corporate speak" and their importance can slip past. So we heard this week that Springboard Mortgages, a former subsidiary of Permanent TSB, had been fined €4.5 million by the Central Bank and had returned another €5.8 million to customers in redress and compensation. This related to charging customers too much on their mortgage accounts.

It is the first major settlement in an investigation process started by the Central Bank in 2015 – and fines and redress schemes by other banks will follow. The initial reaction on reading the news might be a shrug about the banks being caught up in yet another mess and of an administrative process to fix things up.

However, behind the press release talk of enforcement investigations and consumer codes being broken lies one fact: all the major lenders charged significant numbers of customers higher interest rates than they were entitled to on their mortgages on a systematic basis.

More than 9,000 customers loans may be involved and a quick calculation suggests it will cost the banks about €500 million in fines, restitution and compensation. As overcharging scandals go, this is in the big league.

Of course, after their period of mock contrition with Central Bank fines and appearances before Oireachtas committees, the banks will sail on. Meanwhile, the damage to those overcharged has been done and the amounts they are getting in compensation amount to a paltry few thousand. The rest of the money they are getting is their own money back, just a few years later.

It is hard to say for sure how many lost their homes or went bankrupt as a result. In many cases the overcharging was part of a wider picture of financial distress. However, the sums of money involved are not trivial. The average overpayment in the Springboard case was more than €19,000. Indications coming from other banks suggest they also overcharged by significant amounts.

Housing boom

What happened was, in most cases, not that complicated, as David Hall of the Irish Mortgage Holders Organisation, who has advised some of those affected, has said.

The customers involved typically took out mortgages in 2006-2007 at the peak of the housing boom. They went on fixed rates for the first year or two of their loan, which offered certainty on repayments.

Their original contract gave them three options when the fixed term ran out: taking another fixed-rate loan period, going on a standard variable rate or going on the tracker rate, which was a certain fixed amount above the European Central Bank (ECB) rate.

However, when they came to the end of their fixed-rate term, the tracker option was not offered. The banks only told customers that they could take another fixed rate or go on the standard variable rate.

In some cases, there was a twist; for example, the bank used the decision by the customer to break a fixed-rate contract early to argue that they were thus disqualified from getting a tracker rate. And some of the contraventions involved not warning customers sufficiently about the consequences of their decisions.

But the outcome was always the same. The customers ended up paying too much, particularly as the ECB cut its rates in response to the financial crisis and tracker rates plummeted, while standard variable mortgage rates were kept high to bolster the banks’ finances.

Hall estimates that up to 9,000 cases may be involved, and from the numbers in the public domain for the different banks already this figure looks entirely plausible. On the basis of the Springboard figures, this indicates total overcharging across the industry was somewhere from €150 million-€200 million. Perhaps Springboard is worse than the average. Or perhaps not.

Correct rate

This week, for example, Ulster Bank said reports that 2,000 of its customers were affected were fairly accurate. The other banks have also started to put people back on the correct tracker rate and offer redress for overcharging.

Chief executives shake their heads and say there was no organised policy. But come on, guys: after all the overcharging scandals of recent years, do you really think we will swallow the line that this was some kind of administrative error? The banks were losing a bag of money on their trackers and were trying to minimise these losses by pushing people into more expensive loans.

The string of settlements with the Central Bank will now filter through. The penalties may sound large, but the costs will be easily absorbed by the institutions involved.

In the case of former Permanent TSB subsidiary Springboard, a fine of €4.5 million is being paid to the Central Bank. Some €5.8 million is going to customers in redress and compensation, but a quick calculation suggests that all but €1.6 million of this is purely giving customers their own money back.

Yes, customers will be put back on their correct interest rates and get their money back – and that is significant. But the amount of actual compensation to customers for what happened is small enough – a few thousand euro for most. The Central Bank is taking more in fines than customers are getting to account for the distress and upset caused to their lives.

The book on this will be closed after the Central Bank process and yet again we will not know who made the key decisions in the banks or why. Banks have knowingly overcharged customers for a lot of money. Again. And after a period during which they will try to make a virtue of giving customers their own money back, they will sail on regardless.