If ‘moral suasion’ fails, the Central Bank must change its tune

Central Bank governor Philip Lane signalled this week that he was running out of road trying to coerce Ireland's more stubborn, lawyered-up banks into doing the right thing by customers caught up in the tracker mortgage scandal.

Many overcharging cases have been clear-cut, where customers were denied their right to cheap loans linked to the main European Central Bank (ECB) rate – typically after coming off a fixed-rate period. Others weren't properly informed that they would lose their entitlement to a tracker loan if they came off a fixed period ahead of schedule. Another group were put on the wrong rate.

These make up most of the 13,000 cases reported by the Central Bank this week where banks have accepted – albeit far too late for many long-suffering customers – that they had wrongly left mortgage holders out of pocket for up to a decade.

Almost two years after the Central Bank ordered 15 lenders (subsequently whittled down to 11) to trawl through their books to find overcharging cases, only three – Permanent TSB, AIB and, in recent months, Ulster Bank – have actually started paying refunds and compensation. Lane told the Oireachtas finance committee on Thursday that the remainder are set to follow suit in the coming months.

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Those are the acknowledged cases.

However, the regulator has said it is “concerned that two lenders may have failed to identify populations of impacted customers or failed to recognise that certain customers have been impacted by their failures”.

Well-remunerated lawyers

It has made it clear to the unnamed lenders that it believes these borrowers are impacted and entitled to remediation. The firms’ well-remunerated lawyers have clearly argued otherwise. They would probably win a court case because the language of the contracts was suitably ambiguous.

The Central Bank is holding out hope that the banks will ultimately decide in favour of customers in these borderline cases.

"It's an important opportunity for the lenders to show that they're different culturally – and, when they have caused harm, that could take the burden off the individual on a voluntary basis," Derville Rowland, director general of financial conduct at the Central Bank, told the committee.

In some cases it seems to have worked. However, Taoiseach Leo Varadkar signalled on Wednesday his patience is running out with the industry, threatening "enhanced powers for the Central Bank or increased taxation imposed on banks".

However, bringing in new powers won’t help most tracker-mortgage victims. Even laws enacted in 2013, allowing the regulator to force banks to pay redress to customers, can’t be used for misdemeanours prior to then.

Changes to tax rules – such as limiting banks’ current ability to use crisis-time losses to minimise tax bills for decades to come – or increasing the €150 million-a-year bank levy are crude tools and may lead to unintended consequences.

The right thing

Either could put off would-be new entrants to a market where Irish variable mortgage borrowers are paying an average rate of about 3.4 per cent, compared to 1.8 per cent across the broader euro area. They would also fail to differentiate between banks that are trying – belatedly – to do the right thing and the diehards.

Instead, for banks that refuse to bow to what Lane referred to this week as “moral suasion”, it’s surely time to use words they understand: capital, dividends and bonuses.

If supervisors at the Central Bank and the ECB feel that individual banks are dragging their heels on tracker mortgages – and haven’t set aside enough money to deal with the issue – it is within their gift to order the lenders to hold more capital in reserve on their balance sheets, depressing their shareholder returns.

Investors keep a close eye on the minimum capital reserve targets set by the ECB for banks annually. Any increase would rattle equity and debt investors in a firm.

Regulators have also gained much more of a say in recent years on whether individual banks can pay a dividend to shareholders – and how much.

And then there's the elephant in the room as Minister for Finance Paschal Donohoe meets top executives in the main banks next week: bonuses. While bailed-out banks have been banned since 2009 from rewarding executives with long-term incentive plans, there has been a growing hope in the industry that the Government may revisit the issue in the not-too-distant figure.

The Central Bank's frustration with the pace of banks' progress was reflected by the fact it recently initiated enforcement investigations into Bank of Ireland and KBC Bank Ireland (adding to actions already in train against Permanent TSB and Ulster Bank).

It’s hard not to feel sorry for Bank of Ireland’s new chief executive, Francesca McDonagh, who inherited the mess when she took over three weeks ago.

But how the recent recipient of an Order of the British Empire for services to banking handles the tracker-mortgages issue from here may come to define her.