Long thread: My draft submission to the CCPC on the BoI acquisition of KBC

[Brendan Burgess]

The Competition and Consumer Protection Commission is carrying out a Phase 2 investigation into the acquisition of mortgages and other assets of KBC by Bank of Ireland.

I would urge KBC mortgage holders who will be impacted by this to make a submission.

My draft submission follows and I welcome any comments. I have split it over 4 posts to make it more readable.

Thanks to SPC 100 who reviewed an initial version of this and made some great suggestions.

 

[Brendan Burgess]

Submission to The Competition and Consumer Protection Commission Phase 2 Investigation of the Bank of Ireland acquisition of certain assets of KBC.

Brendan Burgess Consumer advocate and founder of the consumer forum Askaboutmoney.com

10 November 2021

This submission replaces the submission made for the Phase 1 Investigation.
There is no confidential information included in this and the CCPC may disclose it or publish it without redaction

Full disclosure: I have 19 shares in Bank of Ireland worth €100. These were purchased to allow me to attend the AGM and raise issues on behalf of mortgage holders.

My comments are limited to mortgages for owner-occupied homes. My comments do not apply to Buy to Let mortgages or SME loans.

Summary and recommendations

• The exit of KBC from the Irish mortgage market will have a negative effect on competition and will lead to even higher rates in the mortgage market in Ireland
• However, it is better that the mortgage book be taken over by an active lender than by a fund which does not issue new mortgages.
• Conditions should be placed on the takeover to protect KBC’s mortgage customers from the very high mortgage rates charged by Bank of Ireland

Existing KBC customers will pay much higher rates on their mortgages if they are acquired by BoI without any conditions being imposed on the acquisition.

The CCPC should not just assess competition based on the number of lenders in the market. The behaviour of the lenders and their treatment of customers are more important factors than the absolute number of lenders.

KBC competes for new business on mortgage rate alone and does not use cash-back incentives to attract new business.

BoI keeps its rates for existing customers high and attracts new customers with cash-back incentives. Without these incentives it would get little or no new business at the rates they charge. As they have high rates for new customers, they are under no pressure to reduce rates for existing customers.

A typical KBC customer who is on a <80% LTV whose fixed rate is due to expire today, could fix again for 3 years at 2.3%. It would cost them a full 0.7% extra if their loan is bought by Bank of Ireland. That would cost them €2,100 in additional interest each year or €24,757 in additional interest if there is 20 years remaining on the loan.

 

[Brendan Burgess]

Measuring the cost to existing customers of paying cash back to new customers.

Bank of Ireland has a High Value Fixed Interest Rate product which does not pay cash back but has a lower rate. This product allows us to see clearly impact on rates of cash back.

The product is available to new customers only. So a customer of KBC moving to Bank of Ireland would not be able to avail of these lower rates.

This table shows how much extra existing customers are paying each year for the cash back. A new customer of BoI can choose between fixing for 5 years at 3% and getting 2% cash back, or fixing at 2.5% for 5 years and getting no cash back.

KBC customers will get the worst of both worlds. They won’t get cash back, but they will pay higher mortgage rates as if they had got cash back.

The CCPC should not ban the acquisition

The best outcome for KBC customers and the market generally would be if a new lender acquired KBC’s mortgage book and competed fully in the market for new business. But with the effective ban on repossessions and capital requirements based on the reckless lending policies from 15 years ago instead of the prudent lending policies today, it would be unlikely that any other lender would commit capital to the Irish market.

The worst outcome for existing KBC customers would be for the CCPC to prohibit the acquisition which would result in KBC selling the mortgage book to a fund. As the fund would not be open for new business, they could increase rates without worrying about reputational damage. Furthermore, the opportunities for trading up and porting the tracker would be lost.

We need new lenders in the Irish market. If we make it difficult or impossible for them to leave, then they will be less likely to enter. So, while the departure of KBC is regrettable, it should not be stopped.

Consequently, the acquisition by BoI should be approved subject to reasonable conditions which would maintain competition

 

[Brendan Burgess]

How can existing KBC customers be protected from the BoI policy of charging existing customers high mortgage rates?

Option 1: Bank of Ireland changes its policy across the group and stops discriminating between new and existing customers.

Option 2: KBC should be managed as a separate unit competing with Bank of Ireland

Option 3: Bank of Ireland continues its cash back regime but treats KBC customers as new customers and pays them the cash back on the mortgage balance transferred

Option 4: Bank of Ireland pays the KBC customers the costs of switching to another lender within 12 months of their existing fixed rate ending.


Option 1: Bank of Ireland changes its policy for all customers

• It stops offering cash back
• It allows existing customers to avail of rates on offer to new customers

This would be great for competition in the Irish mortgage market. The cash-back system is purely an attempt to confuse customers and to keep the interest rates on existing mortgages high.

Of course, the Central Bank should ban cash-backs and they should ban all lenders from discriminating between new and existing customers. But in the absence of such a ban, it would be great if BoI took the lead and stopped the practice. As a market leader, they initiated the practice and others followed. If they cease it, the others may also cease it.

Option 2: KBC should be managed as a separate unit competing with Bank of Ireland

• BoI should maintain KBC’s policy of not offering cash back.
• BoI should maintain KBC’s policy of allowing existing customers to avail of the deals on offer to new customers
• At present KBC mortgage holders who have a KBC current account get a 0.2% reduction in the mortgage rate. Bank of Ireland would be contractually obliged to continue to offer this. Some or all of these customers have a no-fees current account with KBC. Bank of Ireland would have to offer this facility as well.
• The new entity should compete fully and independently in the switcher market including taking mortgage customers from Bank of Ireland.

This requirement to operate KBC as a separate unit should stay in place until the CCPC is satisfied that normal competition has returned to the Irish mortgage market

Bank of Ireland cannot argue that this would be administratively difficult or expensive as they had a separate brand and lending policies with the ICS Building Society until the European Commission told them to dispose of it as part of the restructuring.

AIB has three separate brands with different lending policies, AIB Mortgages, EBS and Haven.

Option 3: Bank of Ireland continues its cash back regime but treats KBC customers as new customers and pays them the cash back on the mortgage balance transferred.

One argument the lenders use against stopping cash backs is that most of the existing customers have received cash backs. As a result, if they were now to get lower interest rates, they would be benefiting on the double – cash back and lower mortgage rates.

But the KBC customers chose KBC because of their low interest rates. They did not get cash back, but they will now be paying for the cash-backs with higher interest rates. Bank of Ireland should recognise this and treat the KBC mortgage holders as new customers so they would get cash back.

Option 4: Bank of Ireland pays the KBC customers the costs of switching to another lender.

If Bank of Ireland does not want to set up a separate unit and if it does not want to stop cash-backs across the bank, then it will be very unattractive for KBC customers. It will be in the interests of these customers to switch to a non-cash-back lender like AIB or Avant. This is a time-consuming process and costs about €1,500. Bank of Ireland should pay this cost as it is not the customer’s fault.

Some limit would be placed on this, for example, the switch would have to be applied for within 12 months of the transfer or within 6 months of the existing fixed rate ending.

 

[Brendan Burgess]

The CCPC should advocate on behalf of mortgage consumers and seek the banning of cash back and the discrimination against existing customers

Treating customers fairly is a fundamental principle of the Consumer Protection Code. Yet the Central Bank and the Minister for Finance refuse to prohibit lenders from this discriminatory practice.

If this behaviour were prohibited, then the Bank of Ireland acquisition of KBC mortgages would no longer be an issue.

If the acquisition goes ahead and this anti-consumer behaviour continues to be tolerated, then we will be reduced only one mainstream lender AIB treating customers fairly with three mainstream lenders engaging in the cash-back process – Bank of Ireland, permanent tsb and EBS.

End of submission

 

[RetirementPlan]

Fully agree on the stopping of the cashback offers - maybe this should be done across the board. I cringe when I see the ads calling extra lending 'cashback'.

 

[Baby boomer]

The CCPC should advocate on behalf of mortgage consumers and seek the banning of cash back and the discrimination against existing customers

Treating customers fairly is a fundamental principle of the Consumer Protection Code. Yet the Central Bank and the Minister for Finance refuse to prohibit lenders from this discriminatory practice.

If this behaviour were prohibited, then the Bank of Ireland acquisition of KBC mortgages would no longer be an issue.

If the acquisition goes ahead and this anti-consumer behaviour continues to be tolerated, then we will be reduced only one mainstream lender AIB treating customers fairly with three mainstream lenders engaging in the cash-back process – Bank of Ireland, permanent tsb and EBS.

End of submission

Excellent submission, Brendan. I hope it gets traction but I wouldn't be holding my breath

 

[NoRegretsCoyote]

The CCPC should not just assess competition based on the number of lenders in the market. The behaviour of the lenders and their treatment of customers are more important factors than the absolute number of lenders.

Unfortunately that's not how regulators look at things.

They look at market power and contestability.

Will BoI have more market power than at present? Yes, as there is one less player on the market.

Is the Irish mortgage market contestable? Yes! Avant Money and Finance Ireland have entered the market presumably as they see profits to be made, and nothing is there to stop other potential entrants.

As others have pointed out, "originate and distribute" has replaced "originate and hold" as a strategy for lenders, and this acquisition won't change very much.