Section 7 of the FF Bill - any merit in it being its own bill?

gnf_ireland

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Reading through the ministers statement yesterday and those from other sources, there appears to be a belief within the financial community that the Variable Rates bill may be a long and drawn out process.

Brendan mentioned yesterday and in the papers as well this morning relating to Section 7 - treating new customers and existing customers equally. It is a few lines which would make a large difference to a reasonable number of customers.

While it does not solve everyone's scenario, there can be few 'constitutional' distractions to it and therefore could be implemented quickly if there was the political will to do it. I believe Fianna Fail have this political will, especially in a minority government scenario.

I would love to see Michael McGrath split out this section into a different bill, just to see how the Central Bank and Dept of Finance try and defend it !

Are there any downsides to this proposal?
 
Brendan mentioned yesterday and in the papers as well this morning relating to Section 7 - treating new customers and existing customers equally. It is a few lines which would make a large difference to a reasonable number of customers.

This is a ridiculous suggestion. All businesses operate by segmenting customers and by offering marketing incentives to prospective new customers. You're suggesting this should be illegal in the case of mortgage banking? Wow.

If we insist on having politicians micromanaging mortgage banking, we will never have competition in the sector as new players will be scared off entering a fixed market.
 
All businesses operate by segmenting customers and by offering marketing incentives to prospective new customers.

Correct - some companies do this. For example Utility companies are a good example where a fixed term promotion is offered where a customer gets say 12% off their electricity for 12 months before falling back to standard base rates. After their promotional period is up, all customers are then equal. Once their contract is up, they are free to move to another provider with about 10 minutes of effort using bonkers.ie. These companies are also upfront about their promotions and what base rates the customer will fall back on etc. These companies also allow customers to move to any active offer on the market currently.

There are banks, such as KBC, which are charging customers different rates based on the date they drew down their mortgage. The customer drew down their 60-80% variable rate on say 1st January and got 3.75%. On 4th January the rate dropped to 3.65% but the customer did not get this rate cut because it applies to new customers only. 25 years later, the two customers are likely still to be paying different rates for their mortgage, unlike the electricity scenario. Changing mortgages is a lot more complex than changing electricity, and many people are blocked from doing this for a variety of reasons.
Extend this to KBC (and others) customers on a 4.25% SVR rate with a 65% LTV - they are unable to access the new LTV products offered by their own bank.

Can you provide me with a similar scenario anywhere in the business world? I genuinely would love to hear one


Maybe if the banks acted with a bit of integrity there would be no need for this type of legislation. As said multiples times yesterday, competition will not solve this issue for the majority of people caught in it. Competition will assist new mortgage customers more than existing ones. Existing customers should be allowed to switch to a new offer within their bank - which is exactly what "treating new and existing customers fairly is about"


PS: on a personal note, I don't have an objection with the likes of P-TSB's 0.5% 12 month discount to attract new business. They are 100% upfront about it and the rates you go back to are very clear. Other banks offer 2% cashback for example, and use this to keep their interest rates artificially high. I am on the fence on this one if I am honest. The bigger issue is where customers on SVR's are not allowed to move to the LTV rates even though they qualify for them, and therefore are paying over the odds for their mortgages. I believe all customers should be allowed to move to the latest offer by the bank, no different to if I want to change my price plan with Vodafone tomorrow I can do so. Otherwise, competition will not solve the problem for existing customers - and new customers become existing customers very quickly !!
 
I really don't see how this is a practical idea.

The circumstances of every borrower are different so how can a lender be expected to treat different cohorts of borrowers equally?

If a lender is treating existing borrowers poorly, then our laws and regulatory codes should facilitate switching to the greatest extent possible.

I appreciate that some borrowers will not be in a position to switch, which is why I would favour a relative cap of the rates that a lender can charge (akin to the French model where lenders cannot charge more than 133% of the average variable rate in the previous quarter). There should be no competition or constitutional law concerns with such a statutory cap.

I would have no problem with the introduction of a regulatory ban on cash back offers so that lenders would have to compete on the terms of the loan products themselves.
 
@Sarenco is this not as simple as a law requiring a bank (or any institution) to make current offers available to all customers (new and existing) on the basis that they qualify for them?

You could also include say a cap on customer acquisition incentives to say 10% of the interest earned in the first year of the mortgage, but limited to 12 months

The circumstances of every borrower are different so how can a lender be expected to treat different cohorts of borrowers equally?
Agree they are different, but the banks appear to categorise them into PDH/BLT and LTV rate bands. Once in this category, you should be treated equally.
 
I do question how much this would actually cost banks in reality - all they would have to do is ask the customer to print off a form and make an appointment at a branch and very few would even bother to do it (as per the other thread).
 
None of these little rules ever cost banks or other businesses that much in the bigger scheme of things, but they do discourage other operators from entering the market with competitive offers. It was only when the Groceries Order was got rid of that Aldi & Lidl were able to offer really competitive supermarket pricing. As long at it was there, consumers were being screwed by a set of laws that was supposed to be there to protect them and save them money.

There's no economic or moral rationale for making it illegal for banks to offer selective discounts such as loyalty discounts to longstanding customers.
 
@Sarenco is this not as simple as a law requiring a bank (or any institution) to make current offers available to all customers (new and existing) on the basis that they qualify for them?

How do you determine what constitutes the qualification criteria and then define it in statute? There are numerous, every varying, factors that go into every individual underwriting decision.

The ability to easily move your business to another provider is the ultimate form of consumer protection. This, in my opinion, should be the policy focus (with an appropriate safeguard in place for those that cannot switch providers).

We should be seeking to enhance competition in the money lending business - not introducing price fixing measures that ultimately harm consumers.
 
@T McGibney Ok, so how would you propose to handle the issue of the customer with a SVR with bank ABC who signed up in say 2011 and now paying 4.16% with a LTV of 65% who cannot switch should be handled. Lets say they now have 2 young kids so childcare costs exclude them for switching. The same bank offers 3.36% to a new customer on the same LTV.

Or are they just a casualty of the process and they have to wait until they are in a position to switch and speak with their feet?

The difference between groceries and mortgages is you can walk into Tesco tomorrow morning and buy a bag of apples for €3 euro. Its a once off transaction and has no relevance on the time you go to buy the second one a week later. You can go into any store at that point and pay anything from €1 to €10 for a bag of apples. You are not restricted to going into Tesco alone.
Imagine if Tesco dropped the price of the apples to €1, and you went in to buy them. You were charged €3 because you paid €3 last week, and the customer behind you is charged €1 for the same apples, and the same pattern goes on for the next 25-35 years.

I fully appreciate that legislation is not ideal here and would be completely unnecessary if banks acted somewhat reasonable in this area. But they are not, and customers of the banks are being screwed by the same people that bailed them out (and I can assure you are am not a left wing type person).


So straight out - how would you fix the above situation or would you do nothing and let them continue to be overcharged?
 
How do you determine what constitutes the qualification criteria and then define it in statute? There are numerous, every varying, factors that go into every individual underwriting decision.

Correct - but once that decision is made, the banks have categorised them into the offers they make available to them, whether they are based on LTV, PDH/BTL etc. Myself and someone else who goes through the underwriting process who both come out with an acceptance, are then offered a PDH 60-80% LTV rate. From this point onwards we are identical to the bank, unless we default or something.
 
This is a ridiculous suggestion. All businesses operate by segmenting customers and by offering marketing incentives to prospective new customers. You're suggesting this should be illegal in the case of mortgage banking? Wow.

Incentives, yes, discriminating against customers purely whether they are new or existing, no!

Things like cash back, offers on insurance, or promotional rate discounts for a limited period are incentives that may be acceptable. Independently treating the variable rates and how they increase or decrease for new and existing customers in unfair and discriminatory.

For variable rate mortgages, the rate may increase or decrease overtime, but in the current scenario banks are decreasing the rates for new customers and not existing customers even they have a so called variable rate and match identical criteria like LTV etc. Significantly in this scenario the banks can vary the rates to customers in isolation so not all customers benefit despite being sold a variable rate.

With the approach defended by some banks, it could be possible for them to raise variable rates for existing customers in order to offer lower rates to new customers.

Importantly most customers are not aware that the variable rate for their LTV category may be cut but not applicable to them because they are an existing customer.

Do you think this is fair?
 
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@T McGibney Ok, so how would you propose to handle the issue of the customer with a SVR with bank ABC who signed up in say 2011 and now paying 4.16% with a LTV of 65% who cannot switch should be handled. Lets say they now have 2 young kids so childcare costs exclude them for switching. The same bank offers 3.36% to a new customer on the same LTV.

Or are they just a casualty of the process and they have to wait until they are in a position to switch and speak with their feet?

The difference between groceries and mortgages is you can walk into Tesco tomorrow morning and buy a bag of apples for €3 euro. Its a once off transaction and has no relevance on the time you go to buy the second one a week later. You can go into any store at that point and pay anything from €1 to €10 for a bag of apples. You are not restricted to going into Tesco alone.
Imagine if Tesco dropped the price of the apples to €1, and you went in to buy them. You were charged €3 because you paid €3 last week, and the customer behind you is charged €1 for the same apples, and the same pattern goes on for the next 25-35 years.

I fully appreciate that legislation is not ideal here and would be completely unnecessary if banks acted somewhat reasonable in this area. But they are not, and customers of the banks are being screwed by the same people that bailed them out (and I can assure you are am not a left wing type person).


So straight out - how would you fix the above situation or would you do nothing and let them continue to be overcharged?

Competition is the only way to ensure that service providers don't rip off captive customers. The more the State, and more particularly politicians, seek to micromanage a market, the further that market creeps towards an oligopoly that perpetuates the ripoff.
 
@T McGibney
The difference between groceries and mortgages is you can walk into Tesco tomorrow morning and buy a bag of apples for €3 euro. Its a once off transaction and has no relevance on the time you go to buy the second one a week later. You can go into any store at that point and pay anything from €1 to €10 for a bag of apples. You are not restricted to going into Tesco alone.
Imagine if Tesco dropped the price of the apples to €1, and you went in to buy them. You were charged €3 because you paid €3 last week, and the customer behind you is charged €1 for the same apples, and the same pattern goes on for the next 25-35 years.

Tesco is an excellent example, in that a major plank of their retail strategy is providing selective incentives to long-term and repeat customers via their clubcard offers, in addition to cross-selling discounts for those who buy both motor fuel and groceries from them.


I fully appreciate that legislation is not ideal here and would be completely unnecessary if banks acted somewhat reasonable in this area.

Businesses never act reasonably or unreasonably. They act rationally.
 
Competition is the only way to ensure that service providers don't rip off captive customers. The more the State, and more particularly politicians, seek to micromanage a market, the further that market creeps towards an oligopoly that perpetuates the ripoff.

Competition helps new customers and customers who have one off transactions and have the choice to go elsewhere the next time. Agree 100%

Most people have mortgages for 25-35 years, and very rarely switch them. Even those who want to switch, a lot of them cannot. You also have to qualify for a mortgage and go through a legal process to acquire one, which costs in the region of 1.5k.

Competition will only help existing customers if there are facilitates in place to ensure that existing customers can avail of the latest offering by the institution. Without that there is nothing stopping banks increasing rates for existing customers who cannot move to fund cheaper mortgages for new customers.

I 100% agree with you in a functioning market, where everyone could switch easily and there were no blockers to switching. Sadly the mortgage market will never be that simple.
 
Competition helps new customers and customers who have one off transactions and have the choice to go elsewhere the next time. Agree 100%

Most people have mortgages for 25-35 years, and very rarely switch them. Even those who want to switch, a lot of them cannot. You also have to qualify for a mortgage and go through a legal process to acquire one, which costs in the region of 1.5k.

QED. Solve the latter and you solve the former. And the legal costs will come down too.
 
Tesco is an excellent example, in that a major plank of their retail strategy is providing selective incentives to long-term and repeat customers via their clubcard offers, in addition to cross-selling discounts for those who buy both motor fuel and groceries from them.

The difference though is each transaction in Tesco (or any supermarket) is once off - a mortgage is a 25-35 year commitment where you are locked into it unless you have the ability to switch and not everyone has.

I think there is a difference between the principle of treating new and existing customers equally and saying they have to be identical.

For example, I have no issue with KBC offering a current account discount of 0.2% on a mortgage rate if you have mortgage and current account with them, as long as it applies to all customers equally. I have no issue with any bank offering a customer one 'free month' every 5 years of their mortgage if they have never missed a payment for the previous 5 years, as long as it applies to all customers equally.

I don't have issues with cross selling or incentives at all - as long as they are not restricted to getting customers in the door and then screwing them.
 
QED. Solve the latter and you solve the former. And the legal costs will come down too.

And those who cannot switch ? What about them?

Ok, so how would you propose to handle the issue of the customer with a SVR with bank ABC who signed up in say 2011 and now paying 4.16% with a LTV of 65% who cannot switch should be handled. Lets say they now have 2 young kids so childcare costs exclude them for switching. The same bank offers 3.36% to a new customer on the same LTV.

So straight out - how would you fix the above situation or would you do nothing and let them continue to be overcharged?
As I asked above, how do you propose to help the above category of customer? Competition/switching does not solve their issue? Same with negative equity customers?
 
And those who cannot switch ? What about them?

Micromanaging the market into an oligopolistic cartel situation won't help these people.
As I asked above, how do you propose to help the above category of customer? Competition/switching does not solve their issue? Same with negative equity customers?
I've already told you.
 
The difference though is each transaction in Tesco (or any supermarket) is once off - a mortgage is a 25-35 year commitment where you are locked into it unless you have the ability to switch and not everyone has.

I think there is a difference between the principle of treating new and existing customers equally and saying they have to be identical.

For example, I have no issue with KBC offering a current account discount of 0.2% on a mortgage rate if you have mortgage and current account with them, as long as it applies to all customers equally. I have no issue with any bank offering a customer one 'free month' every 5 years of their mortgage if they have never missed a payment for the previous 5 years, as long as it applies to all customers equally.

I don't have issues with cross selling or incentives at all - as long as they are not restricted to getting customers in the door and then screwing them.

Tesco do offer finance products though. With clubcard points.
 
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