THE FINANCIAL Services Ombudsman has strongly criticised what he termed as “unwarranted and unsolicited” moves by banks to entice people off low-rate tracker mortgages.
Bill Prasifka said his office had witnessed a sharp rise in the number of complaints relating to banks offering financial inducements to customers in return for switching mortgage contracts.
The cost to banks of tracker mortgages has risen significantly during the financial crisis, as the interest on such loans is fixed at a set margin above the European Central Bank base rate, which no longer reflects the banks’ own borrowing costs.
“It is very hard to see how banks trying to entice people off their tracker mortgages were acting in the best interest of their customers,” Mr Prasifka said.
Publishing his annual report for 2009 yesterday, the ombudsman said there had also been a significant rise in the number of complaints about the size of the breakage fee charged by some lenders for switching from a fixed-rate mortgage to a variable rate.
In some instances, the amounts varied between €20,000 and €45,000 where only six months of a mortgage had elapsed. Mr Prasifka, who took over the post in February, said the recession had seen an “explosive increase” in the number of complaints over the selling of investment products.
His report showed complaints by consumers about financial institutions rose by 28 per cent to 7,619 last year. Some 4,668 complaints were made against firms in the insurance sector, while 2,951 complaints were levelled against financial institutions such as banks and building societies.
However, Mr Prasifka told The Irish Timesthere had been a fall-off in the level of investment complaints so far this year as certain policies began to unwind, and some markets began to show signs of recovery.
Many of the complaints upheld by the ombudsman related to investment advice, misrepresentation, or poor investment performance, his report indicated.
However, it noted that because of the severity of the downturn, some financial providers had gone out of business and were subsequently unable to pay the awards made by the ombudsman.
“The fact that the consumer may not get compensation directed by the ombudsman is a problem,” the report said.
To remedy the problem, the ombudsman has submitted a proposal to the Financial Regulator and the Department of Finance for the establishment of an investor compensation fund funded by the financial services sector.
Mr Prasifka yesterday also repeated his call for the legislation to be amended to allow his office to “name and shame” financial providers guilty of wrongdoing or not acting in the best interest of their customers. He said there was a public interest in identifying such financial service providers, so customers could inform themselves about what to look out for.
Although the office had not yet seen a significant rise in the number of complaints about mortgage arrears, he said, the matter was likely to be a “big issue in the future” given the number of people in financial distress.
GROUNDS FOR COMPLAINT TWO CASE STUDIES
Case Study 1
One complaint received by the ombudsman related to an amount of €18,000 which an 80-year-old grandmother had told the bank was for a “burial fund and emergency expenses” for herself and her husband. She told the bank staff that this was the first time in her life she had such a substantial amount of money. She had intended lodging the cheque to a current account but the bank advised her otherwise.
Several months later, when she spoke to branch personnel, she was distressed to learn that €10,000 was invested in a long- term investment policy with an insurance firm tied to the bank.
The investment left her with no immediate access to the money and its value had dropped to €8,500 and was subject to a €355 early withdrawal penalty. When she demanded the return of the €10,000, the insurance company refused as it was of the view that the investment was sold in a “correct and proper” manner and that the bank had acted in her interests at all times.
The ombudsman’s investigation noted that while the €10,000 investment did provide guarantees in relation to the return of the initial capital at maturity, this was only after a six-year time span.
The insurance company told the ombudsman that the life expectancy for a woman of 79/80 was in the region of 10 years and a six-year equity-linked investment time-frame would not be considered overly long, based on her life expectancy and given that she had access to €8,000.
After reviewing the case, the ombudsman was satisfied the woman of advanced years was a genuine person who had little knowledge of the finer points of investments and had an overriding need of security of capital with immediate access. The €10,000 investment did not meet these criteria, he ruled. He directed the insurance company to buy back the investment for the original €10,000 and pay this amount to her.
Case Study 2
In April 2007, a husband and wife in their mid-60s, who had recently retired from farming, were invited to invest the €2 million proceeds of a land sale in certain bonds which the bank was marketing on the understanding the capital was guaranteed.
After several months they were concerned about the fall in the value of bonds to €1.88 million but were assured matters were fine. In May 2008, they asked about cashing in their bonds after further losses, but were persuaded by the bank not to do so as matters would improve.
In August of the same year, the couple took up the matter with the bank again when their investment fell further to €1.6 million. The bank official dealing with them said “they had nothing to worry about because it was a guaranteed fund”.
Six weeks later the bank reluctantly admitted the couple had been given the wrong advice. They subsequently cashed in their bonds, realising a loss of €540,000. The ombudsman ruled the couple had at best been confused or at worst been completely misled by the bank and awarded the maximum compensation of €250,000.
