Friday 30 September 2016

'Caveat emptor' applies to all - not just the hoi polloi

Published 25/06/2015 | 02:30

Somebody buying an important product such as a mortgage should ensure that they understand what they are doing
Somebody buying an important product such as a mortgage should ensure that they understand what they are doing

The old Latin tag "caveat emptor" or "buyer beware" is a fundamental axiom of capitalist societies and should be the default position of any sensible government.

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Somebody buying an important product such as a mortgage should ensure that they understand what they are doing. After all, the idea that mortgage costs can vary because they are linked to central bank rates is hardly radical or obscure.

While this is true, it is only part of the truth. Banks and other financial services organisations are notorious for making small print impenetrable. They are also notorious for repeatedly breaking the law by robbing customers and helping customers to rob the State.

Just read the reports of the financial ombudsman or yesterday's damning Central Bank report on mortgage providers. That's why we regulate them already.

Banks can blind and dazzle customers, which is why the Central Bank already sets limits on what many lenders can charge.

There is an even more fundamental problem; we have not had a capitalist banking system for years.

Banks were nationalised and prevented from going bust by forcing the taxpayer to pump more than €60bn into the system. We have had welfare for the rich and capitalism for the hoi polloi.

To insist now that the little people must abide by the rules when the banks run roughshod is a little rich.

Almost every single lender offering a mortgage to Irish borrowers has been saved from oblivion by guarantees and bailouts from taxpayers here or overseas.

This is not to say our banks are evil. The people in charge are trying to nurse their institutions back to good health. Profitable banks are essential for a healthy economy, so that suits everybody.

The problem is that there is not much lending going on elsewhere in the economy so the banks believe they have no alternative to screwing mortgage holders who have taken out a variable mortgage.

This is partly true but there are other solutions. Our banks still cost more to run than their counterparts abroad. Passing the headquarters of Ulster Bank and Allied Irish Banks headquarters every evening, I marvel at how many lights still shine in empty offices compared with other buildings. It is a small but telling example of continued profligacy.

Squeezing one class of mortgage holder to pay for past mistakes is only a short-term solution.

One day, a disrupter will enter the market. An internet bank with no expensive legacy issues or tracker mortgages will sell cheap mortgages and trigger a stampede that leaves other banks in trouble once again.

For all the fine words from ministers today, it will be interesting to watch whether that new bank will be allowed to operate properly or whether the existing cartel will find a means of strangling the competitor at birth.

The tragedy with this kerfuffle is the missed opportunity.

When Government ministers were in opposition, they spoke of forcing banks to issue non-recourse mortgages. They also spoke about encouraging fixed-cost mortgages that are not dependent on changes to the central bank rate.

What we really need is an end to both trackers and variable mortgages.

In the meantime, people wanting to put a roof over their heads will continue to be forced to take out expensive variable rate mortgages to pay for past mistakes and present-day extravagance.

Analysis

Irish Independent

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