Key Post Template for complaint to Ombudsman about AIB's failure to apply compound interest

Brendan Burgess

Founder
Messages
43,749
AIB is now writing to people who complained about the failure to pay compound interest on the 12% mortgage write down.

It is not enough to just say "They should have paid compound interest". You have to make the case.

So I have drafted the attached template.

It is based on the template AIB used to reject the complaint.

"We have not refunded compound interest as this would mean we pay you interest we never charged you. To explain, when interest was charged to your account and your repayments were made in full prior to each subsequent interest charge, this previous interest charge was repaid, and therefore compound interest was not charged.

We believe that the approach we have taken is fully aligned to the FSPO decision.”

If they said something different in their response to you, then you should adapt this template accordingly.

Feel free to make additional arguments or to take a completely different approach in your complaint.

AIB has tried to muddy the waters by complicating the issue. This seems to have worked with the Central Bank who did not understand what AIB was up to.

So my strategy is to make it as simple as possible and focus on the principle of simple vs. compound.

It would be very helpful if others take the complex approach and explain it in a different way. For something to sink in, it often takes a few different approaches or analogies.

Other issues
This deals only with the simple vs. compound.

If you have suffered personal stress you can apply for compensation for that as well. But do not discuss that in this thread.

You must complain to AIB first before submitting a complaint to the Ombudsman
If you have not complained to AIB, you can't complain to the Ombudsman.

So complain to AIB first. It will take them months to issue a template rejection of your complaint, but you that's the system.

Brendan
 

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Brendan Burgess

Founder
Messages
43,749
Template response to be submitted to the Ombudsman on why AIB should pay compound interest on the 12% capital write down.

AIB Mortgage Account number:

AIB Complaint number:

Submission to Ombudsman

We decline mediation.

AIB has made its position very clear on this issue in many other cases so there is nothing to be gained by mediation. Under the circumstances, we now formally decline the offer of mediation and ask that this case go directly to investigation and adjudication.



Preliminaries


  • The only issue to be resolved in this case is whether AIB should apply compound interest or simple interest to the 12% write down. We are not seeking additional compensation.
  • The Ombudsman has already issued a legally binding decision on this issue in Susan’s case. We are not asking you to change that decision. We are simply asking you to clarify it.
  • There is no dispute between AIB and us about the facts. The only issue under dispute is their interpretation of the Ombudsman’s decision in Susan’s case.
  • We have accumulated all the information necessary for the Ombudsman to make a decision:
  • Appendix 1 Schedule of calculations provided by AIB.
  • Appendix 2 Schedule of calculations showing the refund if compound interest is applied.
  • Appendix 3 Final Response Letter from AIB.
  • This issue affects a lot of people and will give rise to a lot of complaints to the Ombudsman. A decision from the Ombudsman one way or another would save a lot of time for complainants, AIB and the Ombudsman so we would respectfully suggest that you prioritise this complaint.
Establishing the facts

In Susan’s case, the Ombudsman issued the following direction in relation to the interest:

(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.

You will see from AIB’s own calculations in Appendix 1 that AIB did not actually carry out this calculation but took a short cut.

They took the amount of the write-down - €X and applied the monthly interest rate to it.

This short cut does not achieve the same result as intended by the Ombudsman as they applied simple interest to the amount of the write down. They did not add the interest to the balance on a quarterly basis as they are required to do under Section 5.2 of the mortgage contract.

Had they compounded the interest on a quarterly basis, they would have achieved the same result as directed by the Ombudsman in Susan’s case.

They did not make full allowance for the Time Value of Money as they are required to do under the Central Bank Tracker Mortgage Redress Guidelines

Had they compounded the interest on a quarterly basis, the interest refund would have been €Y instead of €Z . So, a further payment from AIB of €Y -€Z is required to settle this complaint.

AIB’s explanation for using simple interest.

We do not object to AIB’s shortcut of applying interest to the amount of the write down, but we do object to their use of simple interest instead of compound interest.

AIB said the following in their final response letter:

“We have not refunded compound interest as this would mean we pay you interest we never charged you. To explain, when interest was charged to your account and your repayments were made in full prior to each subsequent interest charge, this previous interest charge was repaid, and therefore compound interest was not charged.

We believe that the approach we have taken is fully aligned to the FSPO decision.”

This is a nonsense argument which does not stand up to examination. It’s actually very simple. But because it’s so simple, AIB is trying to make it complicated to confuse things.

The mortgage contract specifies that compound interest will be charged.

5.2 Charging

(a) It is a fundamental term of this agreement that interest on the Mortgage Loan shall be compound interest and all interest debited to the loan account, including surcharge interest, shall of itself be subject to compound interest until paid in full. …

(b) Interest on the Mortgage Loan is computed according to the custom of the Bankers on a day-to-day basis and will be debited to the loan account at quarterly or such other periodical rests as the Bank in its absolute discretion shall decide.



The Central Bank’s Principles of Redress specify that the redress should take into account the Time Value of Money

This is what the Central Bank said in the Principles of Redress (our emphasis)

1.1.3 Impacted customers are to have the option of receiving direct payments in respect of Adjusted Amounts as opposed to Adjusted Amounts being set off against the balance of their mortgage accounts (see below for when the account is in arrears). These repayments to take into account the time value of money.

AIB took into account the full time value of money in all other tracker redress cases.

All the other banks took into account the full time value of money in their other tracker redress cases.

All banks take into account the full time value of money in non-tracker refund cases.

There would be no reason for the Ombudsman to intentionally depart from this long-standing practice in Susan’s case.

There would be no reason for AIB to interpret the Ombudsman’s decision as suspending the full Time Value of Money in this case.

Let’s see how compound interest works in practice.

This is simplified to illustrate the principle. For example, we are assuming the interest is charged on the opening balance for the year, whereas in practice, it is calculated daily.

First let’s look at what would happen if AIB had made a mistake in the other direction.

Imagine that we took out a mortgage of €100,000 two years ago at 5% interest. Our statement will be as follows:

OpeningInterest at 5%Repayment madeClosing
Year 1€100,000€5,000€15,000€90,000
Year 2€ 90,000€4,500€15,000€79,500
Interest charged€9,500


But recently AIB discovers that there was a keying error. We had actually drawn down €112,000.

They will now issue a revised statement as follows:

OpeningInterest at 5%Repayment madeClosing
Year 1€112,000€ 5,600€15,000€102,600
Year 2€102,600€ 5,130€15,000€ 92,730
Total interest€10,730


Correct calculation of additional interest using actual repayments made:

Revised interest€10,730
- interest already charged€ 9,500
= additional interest to be charged€ 1,230


Proof: €12,000 @ 1.05 ^ 2 = €13,230 - €12,000 = €1,230




We would not attempt to argue that AIB should have taken into the account the repayments we would have made, had they charged the right amount from the start. We would not argue “If AIB had the correct opening balance of €112,000, our repayments should have been 12% higher, so we should have been charged less interest.” The fact is that, while the repayments should have been 12% higher, we didn’t actually make the higher repayments, so the actual repayments should be used.

Wrong way of calculating interest undercharged:

OpeningInterest at 5%Repayment which should have been
made
Closing
Year 1€112,000€5,600€16,800€100,800
Year 2€100,800€5,040€16,800€ 89,040
Interest which should have been charged€10,640


Revised interest€10,640
Interest already charged€ 9,500
Additional interest to be charged€ 1,140


The exact same principle applies to an ordinary mortgage in arrears. The lender charges interest based on the repayments made and not on the repayments which were due.



Now let’s look at what happens where there is an overcharge instead of an undercharge. It’s the reverse.

Same as before, we took out a mortgage of €100,000 two years ago at 5% interest. Our statement will be as follows:

OpeningInterest at 5%Repayment madeClosing
Year 1€100,000€5,000€15,000€90,000
Year 2€ 90,000€4,500€15,000€79,500
Total interest charged€9,500


AIB discovers that they had keyed in our opening balance incorrectly, and it should have been 12% lower. They should issue a revised statement as follows:

OpeningInterest at 5%Repayment madeClosing
Year 1€ 88,000€4,400€15,000€77,400
Year 2€ 77,400€3,870€15,000€66,270
Total interest€8,270
Interest refund€1,230





AIB is arguing that if the balance had been reduced by 12% from the start, the repayments would have been 12% lower, and so more interest would have been due:

OpeningInterest at 5%Repayment which should have been
made
Closing
Year 1€ 88,000€4,400€13,200€79,200
Year 2€ 79,200€3,960€13,200€69,960
Total interest charged€8,360
Actual interest charged€9,500
Refund due according to AIB’s method€1,140


AIB says “we have not refunded compound interest as this would mean we pay you interest we never charged you. To explain, when interest was charged to your account and your repayments were made in full prior to each subsequent interest charge, this previous interest charge was repaid, and therefore compound interest was not charged.”

This is patent nonsense.

The overcharge calculation is exactly the same as the undercharge calculation.

When they undercharged us 12%, we could not argue that we had paid the interest so there should be no interest on interest. Now that they have overcharged us, they can’t argue that they have not charged us interest on interest.

When they undercharged us, they use the actual payments rather than the higher payments we should have made. So now, they should use the actual payments when they have “overcharged” us.



AIB says “We believe that the approach we have taken is fully aligned to the FSPO decision.”

This is what the Ombudsman’s decision actually said in Susan’s case.

I direct the Respondent Provider to do the following;

(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.


Applying simple interest to the amount of the write-down does not comply with that decision.

Applying compound interest to the amount of the write-down would comply with that decision.

In drafting his decision, the Ombudsman would not have deemed it necessary to specify that AIB should use the actual repayments made. Any reasonable person would have assumed this. But as AIB has exploited this omission, it is now necessary for the Ombudsman to clarify the issue in his decision in our case.

Please issue a clear direction to AIB to resolve our complaint.

We would ask that the Ombudsman to issue the following direction in our case to AIB:

We note that 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 in [insert date here] has already been applied to the account and that interest has been calculated on this on a simple basis and refunded to the complainants.

We now direct AIB to repay the Complainant, to an account of their choosing, the difference between (1) the amount of interest they actually paid from [insert date here] to July 2020, and (2) the amount of interest that they would have paid on the reduced (written down) capital balance, allowing for the actual repayments made, from [insert date here] to July 2020.


Or alternatively.

(1) calculate the interest actually charged on that write down, compounded quarterly in accordance with Section 5.2 of the contract from [insert date here] to July 2020.

( 2) deduct the interest already refunded from the amount calculated in (b) above and pay the difference into an account of the Complainants’ choosing.

(3) provide the Complainants with a schedule to show how the interest refund was computed.


In the unlikely event that it was the intention of the Ombudsman to depart from normal banking practice and to direct AIB to use the repayments which would have been made instead of the repayment originally made and, therefore, to pay simple interest and not compound interest, then we would ask the Ombudsman to explain the rationale for this.
 
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Sox123

Registered User
Messages
37
Hi Brendan
I was on this blog back before we were compensated Redress last year. I was of the opinion the FSPO decision was final ? I am still receiving letters from BDO stating my case is still under investigation?
I will check my letter later I would think it’s standard same as the all 6000 tracker cases thanks
 

Brendan Burgess

Founder
Messages
43,749
1) The Ombudsman's decision in Karen's case was final. I took my eye off the ball and had not noticed that they paid the interest on a simple basis. So we had made no submission on that.
2) The Ombudsman must look at every case separately. So everyone who has got the refund on the simple interest basis should make a complaint to the Ombudsman about it.
3) The Ombudsman will then direct AIB to pay compound interest or he will have to explain why he thinks it's ok for a financial institution to pay simple interest.

BDO runs the Independent Appeals Panel
If you have a question about that, please start a separate thread as it has nothing to do with the simple vs. compound issue.
 

Brendan Burgess

Founder
Messages
43,749
I have updated the template based on suggestions from people who have used it and adapted it to their complaints.

Please use the updated version.

Brendan
 

Squirrelstown

Registered User
Messages
14
Thanks Brendan - I have lodged my complaint using the template, will keep you updated, I would suggest everyone else affected sends one too. It doesnt take long. Well worth an hour of your time.
 

KurtKasino

Registered User
Messages
34
Brendan - Just confirming that I have lodged my complaint with the Ombudsman using the template. I would also encourage everyone else to do the same. Lets not let AIB off the hook here!
 

Brian C

Registered User
Messages
7
Brendan, do you need to have been turned down by AIB before writing to the Ombudsman, or can you bypass AIB on the basis that AIB are rejecting all "compound interest" complaints? Txs
 

kopkidda

Registered User
Messages
151
Hi Brendan,

Is there a 12 month window to complain to AIB about this? So anybody who hasn't appealed to them can't now?

Thanks
 

Brendan Burgess

Founder
Messages
43,749
You have 6 years to complain to the Ombudsman after "behaviour complained of".

So what is the behaviour complained of? I would argue that it was the failure to pay compound interest instead of simple interest. So you have plenty of time.

In general, the banks are not enforcing the time limits.

AIB may have said that in the ordinary Tracker Mortgage Review, you had one year to go to the Appeals Panel. But they can't set a one year limit for the Ombudsman.

Unless they have said, that they would not invoke the time limit for one year.

Make the complaint and see what happens.

Brendan
 

Brendan Burgess

Founder
Messages
43,749
I couldn't locate the actual letter sent by AIB in the first place to customers explaining the 12% write down.

Did they mention a year?

Can you post an image of the letter about "what to do if you are not happy"

Brendan
 
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