27 October 2017

Major Irish Mortgage Lenders Release Statements to Address Tracker Mortgage Controversy and Future Compensatory Measures to be Implemented

Earlier this week, Ireland’s five primary mortgage lenders; AIB, Ulster Bank, Bank of Ireland, Permanent TSB and KBC Bank Ireland, released statements to outline their plans for compensating customers affected by the tracker mortgage controversy and detailed the measures that they will be implementing to prevent similar scenarios from occurring in the future.

These statements follow a week of intense meetings between Finance Minister Paschal Donohoe and the lenders’ chief executives and chairmen regarding the compensation of customers who were refused tracker mortgage interest rates by the banks. The Minister has described the banks’ treatment of affected customers as “disgraceful” and has stated that the past and current banking culture was “unacceptable to him”.

These developments come in response to mounting Government, media and public criticism of a once-widespread practice in the Irish financial industry whereby thousands of customers were overcharged on their mortgage repayments by their banks.

In 2015, it was revealed that roughly 1500 customers of Permanent TSB had been denied tracker mortgage interest rates and were consequently charged much higher rates than had been initially agreed upon with the bank. A Central Bank investigation into the matter found that Permanent TSB had failed to adequately inform the affected customers of the repercussions of their decisions to switch from a tracker mortgage interest rate to a fixed rate. If a customer did so, they were no longer contractually entitled to be offered a tracker rate when the period of the fixed rate had ended, and were then forced to pay the bank much greater amounts of money than had originally been agreed upon. Additionally, it emerged that many tracker customers were encouraged by the bank to switch to fixed rate interest options, on the basis that these repayments would be more regular and so would be easier to plan for. Because of these practices, concerns arose that the bank was deliberately misleading its customers to maximise its profits.

Since then, reports have emerged which incriminate many of Ireland’s major mortgage lenders of engaging in similar practices, with the number of affected customers estimated to be at least 13,000. It has been reported that as a direct result of the scandal, 23 homes were lost, alongside 79 buy to let properties.

The scandal has raised discussion in relation to the efficacy and powers of the Central Bank, which is responsible for supervising, regulating, and enforcing consumer protection interests in dealings with financial services providers. The Unfair Contracts Directive 1993/13/EEC, along with the related Directives which give it effect in Irish law, grant the Central Bank the power to seek a court order for a declaration that a term in a mortgage agreement is unfair. The Central Bank may also seek a court order for an injunction to prevent the use and enforcement of such an unfair term.

However, despite claims by the Central Bank that it has “extensively engaged” with the lenders responsible for the scandal to resolve the issue, some feel that its approach to such has not been adequately timely or successful. As of today, only 25% of affected customers have been compensated or have received redress for their losses.

The Central Bank’s investigation into the scandal involves the identification of affected customers, the prevention of further economic harm, and the provision of compensation and redress. Lenders are required to review all mortgages involving tracker interest rates from the date when the lender commenced offering them until 31 December 2015.

The Central Bank does not currently have the statutory power to compel lenders to implement redress and compensation programmes in respect of failures that occurred prior to the introduction of the Central Bank (Supervision and Enforcement) Act 2013. However, where it is identified that customers have suffered a detriment in these instances, the Central Bank has clearly outlined its expectations that lenders will provide appropriate redress and compensation. The regulator’s Principles for Redress emphasise that these redress and compensation programmes must be implemented in a timely manner.

As part of its investigation, the Central Bank has thus far imposed a fine of €4.5 million on Springboard Mortgages, the former subsidiary of Permanent TSB that was responsible for the mismanagement of customers’ mortgages, and is also pursuing enforcement investigations into tracker mortgage-related matters at Permanent TSB and Ulster Bank.

The regulator invoked its powers under section 22 of the 2013 Act to set a timeline of September 2017, by which all lenders must have identified all impacted customers. It is currently planning to pursue two unnamed major Irish lenders to the full extent of its powers for their failure to comply with this deadline.

Lenders are also required to rectify their interest rates which are applied to impacted customers’ accounts by February 2017,

As of today, €160 million has been paid to affected customers by Irish lenders in compensation and redress schemes. The Central Bank has further stated that it expects compensation and redress proceedings to have been commenced by all lenders to identified affected customers by the end of the year.

The statements made earlier this week by the five primary Irish mortgage lenders appear to indicate that the Central Bank investigation into this matter is proving to be effective and is successfully gaining momentum.

AIB expressed its intention to identify all its 3416 affected customers by the end of this year, with compensation proceedings intended to be finished by the first quarter of next year.

Ulster Bank similarly stated that 1000 of its affected customers will be compensated by the end of December, with a further 2500 to receive compensation by early 2018. Additionally, the bank is offering an extra amount of €50,000 to any customers who lost their homes as a result of being denied tracker interest rates.

Additionally, Bank of Ireland has announced that it intends to begin its compensation process for its 4300 affected customers by 10 November.

Permanent TSB declared that it had identified 1971 affected customers, who will be switched to tracker interest rates by the end of the week and offered redress and compensation by the end of the year.

KBC Bank stated that it has identified 1041 customers who had been affected. However, the bank admitted that there were likely to be at least 600 more affected customers who have not yet been identified. The bank stated that all affected customers will be identified and notified by the end of the year.

Although these compensation schemes clearly indicate that the Central Bank’s investigative and enforcement proceedings have been successful, concerns remain that many affected customers have still not been identified by their lenders, and financial advisers have warned that there are potentially thousands more affected customers which may be identified in further reviews.

Mortgage holders are therefore advised to check their loan documentation, as many of those affected are likely to be unaware that they have been overcharged by their bank and may be entitled to compensation.

Moran and Ryan have already issued proceedings against banks in relation to these issues, so if you think you may be affected please contact our office to set up a consultation.