Sunday Times article on simple vs compound interest AIB prevailing rate
- Thread starter bungaro
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"“We confirmed with the ombudsman in detail that we were applying [interest] in the right manner,” Jim O’Keeffe, AIB’s managing director for retail banking, told the Oireachtas finance committee last year. “It is absolutely in line with how the ombudsman wanted the decision to be applied.”
End of story?
PS - I've just read Brendan's excellent piece, also in today's ST Business Section. Unsurprisingly, it's on the money; well done Brendan!
www.thetimes.co.uk
End of story?
PS - I've just read Brendan's excellent piece, also in today's ST Business Section. Unsurprisingly, it's on the money; well done Brendan!
Flaithulach state needs guiding hand of troika
Most people act fairly responsibly on personal and family finances. They think long-term. They try to live within their means, save during the good times and pa
www.thetimes.co.uk
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Brendan Burgess
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Hi Groucho
Let me clarify.
1) The Ombudsman issued a decision in favour of Karen back in 2020.
The wording said:
(a) apply a once off reduction (write down) of 12% off the capital balance on the
mortgage loan account as it stood at the end of the fixed interest rate period which
expired on 29 April 2010; and
(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.
2) I did a rough check of it and it seemed about right.
3) It never remotely occurred to me that b) meant simple interest and not compound interest.
4) It was a long time later when I realised that they calculated the interest using simple interest.
5) I raised the issue with the Ombudsman assuming he would just direct AIB to pay it on a compound basis.
6) I was surprised when he issued a response:
In Karen's case, there is nothing further we can do.
I did follow up with a letter to the Ombudsman suggesting that in future cases where interest is refunded that he specify that it be refunded on a compound interest basis. I also suggested that he direct the bank to provide a schedule of the calculations.
Unbelievably, AIB refused to provide a schedule of calculations and the Ombudsman did not direct them to do so.
Brendan
Let me clarify.
1) The Ombudsman issued a decision in favour of Karen back in 2020.
The wording said:
(a) apply a once off reduction (write down) of 12% off the capital balance on the
mortgage loan account as it stood at the end of the fixed interest rate period which
expired on 29 April 2010; and
(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.
2) I did a rough check of it and it seemed about right.
3) It never remotely occurred to me that b) meant simple interest and not compound interest.
4) It was a long time later when I realised that they calculated the interest using simple interest.
5) I raised the issue with the Ombudsman assuming he would just direct AIB to pay it on a compound basis.
6) I was surprised when he issued a response:
In Karen's case, there is nothing further we can do.
I did follow up with a letter to the Ombudsman suggesting that in future cases where interest is refunded that he specify that it be refunded on a compound interest basis. I also suggested that he direct the bank to provide a schedule of the calculations.
Unbelievably, AIB refused to provide a schedule of calculations and the Ombudsman did not direct them to do so.
Brendan
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Brendan Burgess
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It was my mistake to confirm that AIB had implemented the decision in full.
But...
Every Ombudsman decision is separate and judged on its own merits.
I understand that a number of people have raised new complaints with the Ombudsman on the Prevailing Rate issue.
They say that they consider that the redress paid by AIB was not acceptable in that they have not calculated the interest on a compound basis. But otherwise they would accept this payment in settlement of their complaint.
The Ombudsman has yet to decide.
It is a bit of a tough one for the Ombudsman
They can say: 1) "We gave you a good generous settlement, and although no bank has ever paid simple interest or charged simple interest, we are not revisiting this issue".
or
2) "We uphold the complaint and direct that you write down the balance by 12% and pay interest on that on a compound interest basis, in line with normal banking practices."
But...
Every Ombudsman decision is separate and judged on its own merits.
I understand that a number of people have raised new complaints with the Ombudsman on the Prevailing Rate issue.
They say that they consider that the redress paid by AIB was not acceptable in that they have not calculated the interest on a compound basis. But otherwise they would accept this payment in settlement of their complaint.
The Ombudsman has yet to decide.
It is a bit of a tough one for the Ombudsman
They can say: 1) "We gave you a good generous settlement, and although no bank has ever paid simple interest or charged simple interest, we are not revisiting this issue".
or
2) "We uphold the complaint and direct that you write down the balance by 12% and pay interest on that on a compound interest basis, in line with normal banking practices."
Brendan Burgess
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My estimate is that AIB is hoping to save €12m by paying simple interest instead of compound interest. I think I estimated it was about an average of €2k per customer.
But it was behaviour like this that really annoyed the Central Bank and resulted in the huge fine.
Overall, the Ombudsman's decision was inspired. The 12% write down + interest, even on a simple basis, gave a higher amount than if he had ordered giving a tracker at what I argued was the prevailing margin - 1.5%. And a tracker at 1.5% has little value as you can fix at 1.95%.
Brendan
But it was behaviour like this that really annoyed the Central Bank and resulted in the huge fine.
Overall, the Ombudsman's decision was inspired. The 12% write down + interest, even on a simple basis, gave a higher amount than if he had ordered giving a tracker at what I argued was the prevailing margin - 1.5%. And a tracker at 1.5% has little value as you can fix at 1.95%.
Brendan
Thanks for the clarification, Brendan.
While I accept that every decision is separate and judged on its merits, surely the decision maker must be bound to some extent by precedent?
Otherwise we're into the wild west!
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Brendan Burgess
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Hi Groucho
That is why there are such delays in the Ombudsman's office.
Each case is judged on its own merits.
There were examples in the past of contrasting decisions on the same issue.
But I agree, if the Ombudsman rejects a complaint on this issue, it would be a waste of time for others to submit claims on the issue. And likewise, if he upholds a complaint on the issue, everyone else should complain if the Central Bank does not intervene.
Brendan
That is why there are such delays in the Ombudsman's office.
Each case is judged on its own merits.
There were examples in the past of contrasting decisions on the same issue.
But I agree, if the Ombudsman rejects a complaint on this issue, it would be a waste of time for others to submit claims on the issue. And likewise, if he upholds a complaint on the issue, everyone else should complain if the Central Bank does not intervene.
Brendan