Q&A: Why was Ulster Bank fined and where does it leave the other banks?

Tracker enforcement actions against AIB and Bank of Ireland are ongoing

The Central Bank's move to fine Ulster Bank in the Republic €37.8 million for its involvement in the industry-wide tracker mortgage scandal, dating back more than a decade, brings the total levied against lenders to date to almost €82 million.

Permanent TSB (PTSB) was fined €21 million in May 2019, a record at the time. And in late 2016 PTSB's former subprime lending unit Springboard Mortgages was landed with a €4.5 million fine. KBC Bank Ireland was fined €18.3 million last September.

But enforcement investigations against the two main banking groups in the State are ongoing. AIB has set aside €70 million to cover likely fines against the bank and its EBS subsidiary. Bank of Ireland has also ringfenced an undisclosed amount for a penalty.

The Central Bank, which started an examination into the tracker mortgage issue in late 2015 and began enforcement investigations the following year, has had to take care to carry out thorough, forensic work to build bases against individual firms.

Law changes in 2013 doubled the maximum monetary penalty the regulator can impose on a financial firm for rule breaches, from €5 million to €10 million, or 10 per cent of turnover, and for individuals from €500,000 to €1 million.

The fines levied against PTSB, KBC and Ulster Bank cover rule breaches that occurred both before and after 2013 change.

Banking sources extrapolated from the original PTSB fine that the sector could face up to €350 million of penalties, on the basis that it equated to about 5 per cent of its total operating income for the previous year. However, the KBC Ireland and Ulster Bank fines show that the calculation is more complicated and makes it difficult to draw implications for other lenders.

Ulster Bank said last month that it is quitting the market. Why is it agreeing to pay the fine?

Ulster Bank remains a regulated bank for the foreseeable future, as it seeks to sell off most of its €20 million loan book and offload its deposits and branches. The ultimate threat hanging over the bank remains the fact that it has as much as €2.55 billion of surplus capital, according to some estimates, that it will find very difficult returning to its UK parent, NatWest, by slipping up on its obligations.

Did the long-expected fine play any role in NatWest’s decision to wind down Ulster Bank?

A spokeswoman for Ulster Bank said on Thursday that the phased withdrawal decision “is in no way linked” to the tracker mortgage investigation.

The Central Bank would only have revealed the fine it was imposing on Ulster Bank in recent days or weeks, at most. NatWest started its review of Ulster Bank last summer and it was pretty clear last September, when The Irish Times reported that it was actively considering exiting the market, which way this was heading.

The real reason why NatWest decided to pull the plug was the fact that it was increasingly clear that Ulster Bank would not be able to generate sustainable long-term returns for the UK bank. This was a function of the small size of the bank after more than a decade of contraction, weak loan growth in the Republic, ultra-low interest rates internationally and the fact that a lot of expensive surplus group capital is trapped in Ulster Bank.

Still, it’s hard to think that the investigation didn’t feed into NatWest’s overall negative review of the Irish market. After all, this is the bank’s fourth Central Bank fine in less than a decade.

In 2014, it was hit with a then-record €3.5 million fine for a serious IT systems failure in 2012. Two years later, it was fined €3.3 million for technical breaches of anti-money-laundering and terrorist-financing regulations. And last May, the Central Bank fined Ulster Bank €4.6 million for failing to have the correct checks in place to ensure it was reporting accurate mortgage arrears figures to regulators.

Where does the money that is paid in fines end up?

All fines collected by the Central Bank are returned to the exchequer. This is the regulator’s 142nd settlement under its so-called administrative sanctions procedure since 2006, bringing total the total to over €165 million.

Remind me how the whole tracker saga started?

Tracker mortgages – which are cheap loans that track the main European Central Bank (ECB) rate – were introduced in the Republic in 2001 by Bank of Scotland and quickly became a popular product across the industry.

All was good for the banks as long as their own funding costs were in sync with Central Bank rates. However, as the financial crisis set in in 2008, lenders saw their financing costs soar and they quickly started to withdraw tracker products from new customers.

In Ulster Bank’s case, the Central Bank found that the lender failed to clearly disclose to customers how they would lose their right to return to their tracker loan after a period on a fixed rate.

The bank also “devised and sought to implement a customer campaign to encourage certain tracker customers to convert their tracker rates to fixed rates during 2008” without informing borrowers of the consequences. While this particular campaign ultimately failed, there were plenty of customers that in the normal course of managing their loans opted for fixed-rate periods and paid the price.

In 2011, Ulster Bank decided to only return customers who complained about being on the wrong rate to the correct tracker rate, after calculating what it would cost to do the right thing by all affected customers. The 352 borrowers who did complain were handled on a case-by-case basis and not all afforded the same redress, the Central Bank said.

The regulator also found that Ulster Bank failed to properly implement “stop the harm” principles when the Central Bank started the tracker mortgage examination (TME) in 2015, resulting in some selling properties as they dealt with financial stress without being informed that they may be entitled to redress and compensation.

How much has Ulster Bank paid out in refunds and compensation?

Over €128 million. The wider industry, which has admitted to more than 41,000 cases, has paid out more than €735 million to date. While the Central Bank has said its formal examination has concluded, the Financial Services and Pensions Ombudsman is continuing to work through individual complaints that may lead to further groups of customers falling in line for compensation.

Banks have set aside €1.5 billion of provisions in recent years – with Ulster Bank accounting for €300 million of this – to deal with redress, compensation, administrative costs tied to the examination, and fines.

Is the Central Bank investigating individual bankers – either former or current – for their actions in relation to the tracker debacle?

The regulator has said in the past that it is looking at the conduct of firms and senior bankers, but has not gone so far as to say whether any individuals are subject to a formal enforcement investigation.

Under current rules, the Central Bank must first find against a firm before taking cases against individuals. Planned legislation to give rise to a so-called a senior executive accountability regime (Sear) is aimed at allowing the regulator to find against individuals first, but the Heads of Bill still haven’t been published, two years after they were promised.

This has led to frustration.

"It is time that those people directly involved at a senior level in the bank are held to account. People rightly demanded that senior management involved in Davys were named and, ultimately, they had to step down from their position," said John O'Connell, general secretary of the Financial Services Union, referring to recent senior exits from Davy as a result of €4.1 million fine and reprimand. "Why would we hold our banks to a lesser standard?"

Meanwhile, the Central Bank told the Oireachtas Finance Committee last October that it has submitted reports of suspected criminal offences to An Garda Síochána in relation to its industry-wide investigation into the State's tracker-mortgage scandal. It has refused to comment on which firms they relate to.