INBS windfall within reach as Bill passed

The Irish Nationwide Building Society is finally free to be sold to a private buyer but dissident members are far from happy, writes Laura Slattery

Carpetbaggers at Irish Nationwide Building Society (INBS) moved one step closer to their long-awaited windfalls on Wednesday night, as the Building Societies (Amendment) Bill passed through the Dáil.

The Bill, which allows INBS to shed its mutual status and sell itself to a private buyer, will be welcomed by most savings members of the society, many of whom joined INBS for the sole purpose of collecting cash on its demutualisation pay day.

Its 125,000 members could receive a sum of between €12,000 and €15,000 as a result of the society's sale, with the money likely to find its way into their hands some time in 2007.

But some dissident members who fought a long, embittered fight for demutualisation aren't happy.

The Bill, they say, has been rushed through without consideration for the victims of predatory lending practices at INBS, some of whom were charged tens of thousands in penalties recently ruled to be "invalid and illegal" by financial services ombudsman Joe Meade.

The ruling, in which the ombudsman ordered INBS to refund a penalty of €29,000 to a commercial borrower who repaid his loan early, could expose the building society to compensation claims from other borrowers.

Irish Nationwide member and chartered accountant Brendan Burgess, with the backing of television personality Eddie Hobbs, sought last minute amendments to the bill that they believe would have protected the rights of affected borrowers.

The demutualisation windfalls should not be distributed to members on the backs of penalised borrowers, according to Burgess - part of the proceeds of the sale should be set aside as a compensation fund for those who have suffered through illegal lending practices.

Hobbs, the former finance spokesman for the Consumers Association of Ireland, also called on the Government to appoint an independent auditor to investigate the extent of the building society's potential liabilities.

An independent expert could sign off on borrowing practices before a conversion motion is proposed and before the windfalls are divvied up, Hobbs suggested.

INBS's past lending practices could diminish its attractiveness for potential buyers, hurt the asking price and thus dent the expected windfalls, Burgess argues. Why else would INBS legally challenge the ombudsman's decision.

He fears that if a potential buyer is not made aware of the extent of the claims against Irish Nationwide, they could wind up feeling ripped off and thus seek to shoot down as many claims as their legal advisers can manage.

Any non-independent due diligence process could focus on minimising exposure, which would be bad news for the affected borrowers.

Neither amendment was incorporated into the much-delayed bill, which the Government was intent on passing before its summer break.

But Burgess is more optimistic about the implications of the ombudsman's ruling.

Meade judged that Irish Nationwide could not impose an early repayment fee that was anything more than "a genuine pre-estimate of the loss arising from the early repayment" of the loan.

"What he said was Irish Nationwide couldn't profit from the penalty," says Burgess.

He hopes that the ombudsman will apply the same principle to the society's practice of charging 20 per cent penalty interest on arrears - a policy that made it very difficult for borrowers who fell behind on repayments to get out of arrears.

At least one case relating to the 20 per cent penalty interest has been taken to the ombudsman, he says, although Meade's office can only deal with complaints relating to the past six years.

Part of the reason borrowers fell into arrears in the first place, he points out, is that Irish Nationwide did not pass on interest rate cuts during the 1990s.

As the society specialised in lending to people with poor credit histories, it could afford to keep charging higher rates. The borrowers had nowhere else to go.

Borrowers were effectively penalised several times over, Burgess says, and many people were forced to sell their homes and businesses.

Although Irish Nationwide has now stopped charging penalty interest on arrears, its earlier lending practices have left a legacy of misery, according to Burgess. It is a mess that still needs to be sorted out.

The ombudsman told The Irish Times yesterday that he has seen "some extra complaints" in relation to Irish Nationwide arriving in his in-tray since the INBS was forced to drop its legal challenge to his ruling.

But Meade revealed on Wednesday that INBS's agreement to refund €29,000 to the complainant, announced in the High Court earlier this year, was not honoured until he wrote to the building society last month and pursued the matter again.

The ombudsman said he was "far from impressed" with Irish Nationwide's delay.

But seasoned campaigners are not exactly surprised by the less than consumer-friendly attitude of the INBS management, nor by the board's downplaying of its exposure.

No provision has been set aside for refunding borrowers affected by the unlawful early repayment penalties.

The ombudsman referred the practice of unlawful early repayment penalties to the Irish Financial Services Regulatory Authority earlier this year.

But so far it has made no move to direct the society to compensate other borrowers who were charged the illegal penalties.

Burgess, who chairs the financial regulator's consumer panel, says he is "mystified" by the regulator's inaction.

Both Hobbs and Burgess expect that the regulator will wait for INBS to change hands, rather than force the board, dominated by chief executive Michael Fingleton, to cough up.

The conversion resolution, which will spell out the details of who gets what under the demutualisation, must be approved by the financial regulator, but Burgess believes this will be just a formality.

Without proper corporate governance specifying a minimum number of directors, the bill effectively allows a board headed by Fingleton and chairman Michael Walsh to distribute a €1.5 billion windfall as they see fit.

But what Burgess and other dissident members fear even more than the idea that the board might pocket about 15 per cent of a sale is the outside possibility of a management buyout.

Plans for an MBO could explain why Fingleton was so adamant that INBS would not demutualise until the new bill allowed for a private sale rather than a flotation.

A mutual society owned by members and controlled by Fingleton is one thing, says Burgess, but a private bank run by INBS's current management is "a horrible thought".