Friday 19 December 2014

It's time to enforce rules so customers get a fair deal

The regulations were thrown out completely for the banks at great 
expense to the public.

James Fitzimons

Published 27/07/2014 | 02:30

The offices of Berehaven Credit Union, Main Street, Castletownbere, West Cork. Berehaven Credit Union was wound up by order of the High Court. Photo: Niall Duffy
The offices of Berehaven Credit Union, Main Street, Castletownbere, West Cork. Berehaven Credit Union was wound up by order of the High Court. Photo: Niall Duffy

Light-touch regulation at the banks, and that's how it all began. Financial institutions try to work within the regulations, but sometimes they go a bit too far and bend the rules to breaking point and beyond. The Central Bank is there to make sure they toe the line. There's a fine line between compliance and what constitutes a breach. The end justifies the means if you can afford the financial sanctions that the system might impose. Only two have been wound up and that took six years.

The Central Bank has Structural, Systemic and Prudential Regulations to vet, monitor, and control financial institutions and make sure our financial system works. There are public interest issues too as the system doesn't work without public confidence. In spite of all it costs to run it, the system didn't work when we needed it.

The early warning system that systemic control provides was turned off when the financial crisis hit. Light-touch regulation is what stopped the Prudential Regulations from working. Prudential Regulations monitor what the institutions are doing to make sure they stay on track.

The systems were sound, but their application was not. Too much red tape is never good, but for the big boys it was thrown away completely. They called the shots - as most still do - and when regulation was holding them back, it was changed to suit them, on grounds of public interest.

Structural controls that vet the service providers who are approved didn't work either. We were not Germanic enough to hold the line. Anglo Irish Bank was the first to fall and it brought the rest down.

In the six years since the financial crisis began, the authorities haven't been able to restore public confidence in the system and it's holding us back. Light-touch regulation gave financial institutions more discretion than they should have had, and that brought the system down.

Anglo is gone, we bailed out the rest, and more will follow. Banks in Europe are up for the chop when they try to satisfy the EU's capital adequacy tests later this year. In spite of the mistakes they've made they are trusted more than their customers to do what's right.

Last week, it emerged that the new Personal Insolvency Legislation is even more flawed than we thought. You need the agreement of 65pc of your creditors to get a deal, and they'll make you suffer in the process. Even then, disgruntled creditors may veto the deal, creating a fee fest for lawyers - as if it wasn't costing enough already. The system is so badly flawed, few have expressed any interest in using it. When the recent defects were identified, even Enda Kenny was in no hurry to fix it. He's afraid the Government would lose face, having to change the legislation so soon. It should be seen as an opportunity to overhaul it completely and make it work for consumers. We've done enough for the banks already. More loans are being restructured, but it's not enough.

We need to move away from punishing the victims even though that's what the EU demands. Structural and Prudential controls failed because of light-touch regulation.

We've learned our lessons and it's time to put the past behind us. Crushing the likes of Berehaven Credit Union isn't the answer, but it might justify someone's job in the Central Bank. If they did it when it counted, we wouldn't be in the mess we are in now.

The Central Bank came up with all sorts of rules for banks to deal with distressed borrowers. But it's all about the punishment and how much food you need to live on before the bank gets the rest.

Any loan can be restructured, all it takes is a little flexibility. Mortgage terms are being enforced rigidly against borrowers by banks that do what they can to circumvent the rules.

We can't have a free-for-all, but we are where we are, due to a global crisis that nobody anticipated. Nearly 100,000 private dwelling house owners restructured their mortgages to make living within their means possible.

Not everyone is happy with the deals they got, but it's better than what they had. Banks should roll out the red carpet for insolvent customers who would rather restructure what they have, than walk away from their obligations.

We need the Insolvency Service to fall back on and many more will use it before it's over, but the majority should be able to restructure to what works. That's how we will save the banks. Financial institutions are there for profit, and that's how it should be, but then you can't appoint them as the final arbiter for dealing with distressed borrowers, as it conflicts with their primary objective. That's why Richie Boucher, from Bank of Ireland, refuses to do certain deals.

It will take a radical change in Conduct of Business rules to give customers a fair deal. Meanwhile, it could be expensive to fight the banks and that's why the Insolvency Service of Ireland needs to be given a new mandate to help distressed borrowers to get a better deal. There's nothing more we can do for the banks, it's time to support customers to restructure their affairs.

If customers can't afford to do that, the Central Bank needs to help. The easiest way is to take power away from the banks by opening their decisions to external review - such as the CRO - for business. The deals they offer will soon change, unless they are undercapitalised and then it becomes the Government's problem again. This time they can't wash their hands of it.

James Fitzsimons is an 
independent financial 
adviser specialising in tax and financial planning

Sunday Independent

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