AIB AIB at the Oireachtas Finance Committee next Wednesday

I have sent these questions to some members of the Committee

Some questions for AIB representatives at the Oireachtas Finance Committee

From Brendan Burgess www.askaboutmoney.com



Prevailing Rate Tracker Redress Scheme

Last year the Ombudsman upheld a complaint against you for your failure to offer a tracker mortgage to a customer in line with their mortgage contract. They ordered you to write down the value of the mortgage by 12% of the balance due when the fix rate ended and to pay interest charged on the write down since then.

In line with Central Bank policy, you have now rolled this out to 6,000 customers with the same contract. This was the single biggest refund programme in the tracker scandal and it has cost you €300m.

But is it correct that you have paid simple interest instead of compound interest when calculating the interest refund? When you are charging interest to customers do you charge simple interest to any of them?

Did you specifically ask the Ombudsman or the Central Bank if his reference to interest meant simple interest or compound interest, or, as you did with the original contract, just choose an interpretation that suited you best?

You have shown no remorse for the original failure to offer these 6,000 families trackers in line with their contract. You have disgraced yourself by showing no remorse over your failure over the last 5 years to face up to the issue and redress these customers. You had to be dragged kicking and screaming before the Ombudsman and the Central Bank to be forced into doing the right thing.

You can’t every undo the damage you have done to all these customers over the past ten years. But isn’t it time now for you to stop this carry on and refund interest in the same way that you charge it i.e. on a compound interest basis and stop forcing these put upon customers to individually go to the Ombudsman?

For reference. Actual wording of the Ombudsman’s decision:

(b) repay the Complainant, to an account of her choosing, the difference between (1) the amount of interest she actually paid from 30 April 2010 to date, and (2) the amount of interest that she would have paid on the reduced (written down) capital balance from 30 April 2010 to date.



Cash back mortgages

Cash back mortgages are used by some lenders to keep the rates for existing customers high. For example, if we compare your two brands – AIB and EBS



AIB – no cashbackEBS – cash backAdditional interest on a €300k mortgage
Lowest variable rate <50% LTV2.75%3.3%€1,650
Lowest fixed rate 3 year fixed2.35%2.9%€1,650
90% LTV variable3.15%3.7%€1,350


With a lowest rate of 2.9% , the only way EBS can get new business is to offer cash back.

But an existing customer of EBS is stuck on this very high rate. So AIB, permanent tsb and BoI uses cash back to keep existing rates very high.

Would it not be better for all customers and all lenders if cash back were banned and lenders were forced to compete on mortgage rates and mortgage rates alone?
 
If you are in the constituencies of any of these TDs, you might forward the above, or indeed, you own suggested questions, to them.

Deputies​

Mick Barry Solidarity - People Before Profit
Pearse Doherty Sinn Féin
Bernard Durkan Fine Gael
Mairéad Farrell Sinn Féin
Steven Matthews Green Party
John McGuinness - Chair Fianna Fáil
Jim O'Callaghan Fianna Fáil
Neale Richmond Fine Gael
Peadar Tóibín Aontú

Senators​

Pat Casey Fianna Fáil
Aidan Davitt Fianna Fáil
Alice-Mary Higgins Independent
Marie Sherlock Labour Party
 
Three from AIB
Colin "I don't know what compound interest is" Hunt
Helen "it was not a breach of contract, it was a service failure" Dooley
Jim "they were not impacted" O'Keefe
 
Pearse

Capital Requirement and risk weighted assets and their impact on mortgage rates.

AIB has 30% RWA. What can be done to bring this number down to the Eurozone average?

Is there anything the bank can do?

Hunt: The primary driver of higher interest rates is the loss experience of the Irish banks.
So it's a reflection of historical experience.
The severe default losses will remain part of our modelling framework in perpetuity.
The best way we can influence this is that the lending we do today is prudent, so we don't experience

I expect that those risk weights will reduce over time.

I can assure you that as the risk weights come down, that will have a compression impact on the spread between the european rates and Irish rates.

Pearse:
Where do you see AIB's capital requirements going in the next 5 years. Do you see the RWAs dropping from 30% to 11%

Hunt:
Specifically looking at mortgages: We feed in the data. We don't have responsibility for the risk rates - they are handed to us. I want to see them coming down. As they come down yo will see a compression of the margin spread.

I want to hold adequate capital.
 
Pearse:
I would love to know if you have any

You had to make an additional provision of €300m for prevailing rate.

It is frustrating for us as we have pointed it out.

They had to go through the Appeals Process

And this year, you had to make a provision of €300m.

And can you update us on that.

Any update on the fine from the CB
Have the Gardai been on to you about the Tracker Scandal

Hunt
We applied the FSPO decision in one case to everyone else in that group.
These customers have now been compensated fully in line with the FSPO's decision in that one case.

We don't know what the ultimate fine will be. We have provided €70m

The Gardai have not been in touch.
 
Jim O'Callaghan
The trackers

The Ombudsman orderd you to pay interest.

In respect of this interest. Did you calculate it on a simple or comound interest basis.

I will



Jim O'Keeffe
The calculation was clearly laid out by the

From memory, it was on a simple basis.
We confirmed back to the FSPO that this was the way who confirmed that simple interest was appropriate.

I will confirm that I have not got my fact wrong

Cash back mortgages
If you look at EBS , it's 3.9% - it's

Do you agree with m e, that the purpose of cash back is to facilitate the application of higher rates.

Hunt: I would fundamentally disagree with you.
Mortgages are a fundamental part of our business. We are the biggest lender.
We have three different brands - EBS, AIB and Haven

We are giving our customers an unrivalled choice.

We are conscious that switching is very important.

O'Callaghan: Why is it that interest rates are higher on cash back than non cash back.

40% of the market wants cash back as part of their solution

AIB has led out on price for both the front and back book.
So with EBS we price differently and have always done so.

O'Callaghan
Does the inclusion of cash back mean that rates will be higher.

O'Keeffe: Not necessarily
 
O'Callaghan
We want to see a competitive market.
What needs to be done to make the Irish market more competitive?

Hunt:
I regret the departure of Ulster Bank and KBC
But competition comes in different forms.
 
Jim O'Keeffe
The calculation was clearly laid out by the

From memory, it was on a simple basis.
We confirmed back to the FSPO that this was the way who confirmed that simple interest was appropriate.

I will confirm that I have not got my fact wrong

This is extraordinary.
I don't believe that the FSPO has confirmed to them that they should pay the interest on a simple basis.

It is also extraordinary that Jim O'Keeffe has any doubt about it and needs to "confirm that he has not got his facts wrong."

I will send a transcript of this bit to the Ombudsman for him to comment one way or another.

Brendan
 
I thought the question about whether the Gardai had been in contact about the Tracker Mortgage Examination was interesting. That question didn’t come from nowhere. I wonder what gave rise to the question being asked in the first place.
 
Senator Higgins

Is it correct that you have paid simple interest instead of compound interest?

Is it consistent with your approach to charging interest to customers?

O'Keeffe That's what the Ombudsman said

Higgins: But did you charge interest on a compound basis

O'Keeffe: we wanted to make sure it was in line with the Ombudsman decision. That's all we looked at.

It would have been different.

They were writing down the balance in the first place, so it's very different from what was being charged.

It was a composite of that write-down and the interest

O'Keeffe
Please put that in writing. It's not just compliance with the FSPO.

It's not just about complying, it's about fully redressing people.

O'Keefe : We will come back to you in writing.
 
The Ombudsman did not specify simple interest or compound interest.
Frankly, I don't think he considered the matter.
The wording of the decision could be interpreted either way but no one would try to claim that interest should be refunded on a simple interest basis.
The Ombudsman was caught in a difficult position in that AIB implemented his decision to the letter. I don't think that the decision was badly worded - I didn't query it at the time.

But AIB exploited that.

But every complaint is judged on its merits.
And the Ombudsman will have an opportunity of issuing a fresh decision in the cases which are currently before him.
He will have a choice
A) Give a write down of 12% and pay simple interest on that because it's enough in total.
or
B) Give a write down of 12% and pay compound interest in line with normal banking practice.

Brendan
 
I think that the follow on questions from Senator Higgins were good.

"Even if you are complying with the FSPO decision, did you do the right thing? Did you refund interest on the same basis that you charged it i.e. on a compound basis?"
 
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