Report: On April 20th, 2004, the Irish Financial Services Regulatory Authority (Financial Services Regulator) received an anonymous call alleging overcharging by AIB on certain foreign exchange (FX) transactions.

Background

The allegations were raised with compliance officers of AIB at a scheduled meeting on April 30th, 2004. On May 6th, 2004, AIB confirmed that an error had been made in the margins applied to certain non-cash foreign exchange transactions over £500 (and latterly €600) between September 1995 and April 30th, 2004.

In May 2004, in confirming that an error had been made, AIB apologised unreservedly for not discharging its obligations to the Financial Services Regulator. It also agreed to repay the excess charged over the notified level on the basis that it acknowledged that the onus is on a financial institution not only to be market competitive in what it charges its customers, but also to comply with its regulatory obligations.

The Financial Services Regulator immediately began an investigation and appointed inspectors to conduct an on-site inspection at AIB Bankcentre, Dublin, which commenced on May 7th. In addition, AIB conducted a broad review of regulated charges levied on customers in order to identify the extent of the problem, and whether there were other issues. This review was later extended by AIB after consultation with the Financial Services Regulator.

Reports of the alleged foreign exchange overcharging appeared in the media on May 6th. In its first public statement on the matter, AIB indicated that the amount charged in excess of the amount notified to the previous regulator was approximately €14 million, excluding interest.

Following more detailed analysis, it transpired that the original amount had not included electronic payments, and following discussions with the Financial Services Regulator AIB agreed to place a good faith deposit of €25 million with the Central Bank to cover the expected cost, including interest, of compensating customers. These funds were transferred on May 11th, 2004.

On May 11th, Deloitte & Touche LLP, a firm of independent investigating accountants, was appointed by the board of AIB to assist with the investigation into regulated charges. The Financial Services Regulator is a party to this contract. Mr Lauri McDonnell, former comptroller and auditor general, was also appointed as an independent assurer to provide certification on the integrity and independence of the investigative process.

Instances of customers being charged in excess of the rate agreed with those customers were uncovered in a broader review of non-regulated charges undertaken by AIB itself and these are also included in our findings

Progress to date

When this issue first emerged publicly in May, the Financial Services Regulator stated that it was our initial priority in the investigative process to identify the amounts involved, the number of customers affected and the method by which those customers may be compensated.

While the investigation is continuing, and a final report will be published at its conclusion, at this stage we are in a position to publish the following findings on an interim basis. The following also takes account of the independent investigator's main findings to date:

1. AIB failed to properly notify the regulator as required by law in relation to certain regulated charges which it levied on its customers.

2. Under the current law, there is no legal obligation on AIB to pay back to customers the amounts it charged over and above the notified rate (including where it had failed to notify the rate) on the assumption that the rates charged were competitive, and that the contract with the customer was honoured.

3. Notwithstanding the legal position in relation to this money, AIB has stated that it will pay to its customers an amount to take account of the excess of the notified rate for FX and for certain other breaches of the relevant legislation, including interest at the standard market rate (EURIBOR rate). The FX amount is €25.6 million, including interest. Other notification breaches identified during the investigative process amount to €0.5 million, including interest.

4. The extended investigative process undertaken by AIB in consultation with the Financial Services Regulator also identified 24 other cases where AIB had charged in excess of the rate agreed with the customer. AIB will pay back, as required by law, these amounts. This amount is €8.1 million, including interest.

Eight significant items in areas such as student loans and variable rate mortgages to which promised discounts were not applied, overdraft facilities amendments and early settlement of finance and leasing consumer leases accounted for €7.4 million of the total amount of €8.1 million. There were also cases uncovered where customers were charged less than the amounts agreed.

5. The total amount to be refunded to customers in relation to all of the above items is €34.2 million, including interest.

6. The total amount for the FX issue was arrived at by a detailed statistical analysis by AIB. The independent investigating accountants reviewed the process followed by AIB. The total number of FX transactions affected is estimated at three million.

7. The failure to notify the correct amount in relation to FX appears to date from September 1995.

8. The process for identifying FX customers and making the appropriate refund will consist of two phases.

The first phase will use electronic records, and will facilitate an automated process, which is expected to result in refunding about 70 per cent by value of the affected transactions and will involve 50 per cent in number of transactions.

AIB will then commence the second phase of which the main component will be a manual process to match the residual transactions to customers.

The identification of FX customers who were charged a rate in excess of that notified from November 1997 onwards is likely to be straightforward as there are electronic records available for the transactions involved.

The identification of FX customers who undertook transactions prior to this period will prove more difficult. AIB will seek to encourage customers to come forward and seek recompense if they believe they have been affected by the charging issue. AIB estimate that 10 per cent of customers (by value) will be difficult to identify, and this money will be returned to AIB once 90 per cent in value is paid back or two years have elapsed, whichever is sooner.

9. The Financial Services Regulator will monitor the process of identification and payment to FX customers to ensure that the maximum number of customers are identified.

10. AIB's own records will fully identify the customers affected by the other, non-FX, cases identified (see point 4 above) to which monies will be paid.

11. The Financial Services Regulator is satisfied that the investigations to date have been thorough and have identified the central control issues within AIB. AIB is continuing to undertake further sampling work at branch and area level to determine whether any further issues arise.

12. The charges AIB were actually levying in relation to FX (while in excess of the notified charges) appear to have been in line with those charged by its competitors. On this basis, on receipt of the refund from AIB, the affected FX customers would probably have carried out their transactions at a rate below the market rate.

13. Internal controls in AIB in relation to compliance with Section 149 of the Consumer Credit Act, 1995, require strengthening.

14. Controls in relation to monitoring the application of non-regulated charges agreed with or communicated to customers also require strengthening.

15. There are potential control weaknesses in the context of two IT systems used in FX transactions at both head office and branch level with regard to access levels for making changes to charges. AIB is reviewing the strengthening of controls on these systems.

16. AIB did not identify any breach of the lawto the Financial Services Regulator until May 6th, 2004, and this followed an anonymous report to us in relation to FX charging discrepancies.

17. AIB has established a customer helpline (1800 787 564) for customers with queries.

18. While AIB has stated that it will pay the money to customers in this case, the Financial Services Regulator is of the view that the forthcoming legislation (Central Bank and Financial Services Authority of Ireland Act, 2004) provides much better statutory protection for consumers by empowering the Financial Services Regulator to direct an institution to make refunds to their customers in cases such as this.

The Financial Services Regulator views breaches of any consumer protection law as a serious matter. We are committed to policing and enforcing a consumer-focused regulatory regime rigorously.

Next steps

Following this initial investigative process to identify the amounts and customers involved and the method of compensation, our investigations are now focusing on when the discrepancy first came to light, how it was handled and how it persisted over an extended period.

AIB has committed for its part to taking any appropriate disciplinary action which may be required from the findings of this part of the investigation.

We have asked all other credit institutions to examine further their charges to customers, and to report to us on this matter by the end of September this year.

The AIB board has assured the Financial Services Regulator that it has already taken action to ensure that there are arrangements for staff at any level to escalate matters of concern to the chief executive and, if necessary, to the chairman on a confidential basis.

The Financial Services Regulator will publish a report on its investigations into these issues when those investigations are completed.

Conclusion

The Financial Services Regulator must use its resources in an efficient and effective manner.

We lay down clearly the broad principles on which institutions should operate. We require that the board and senior management exercise proper control over the bank and ensure that there are comprehensive risk management and control functions in place which are properly resourced, have the necessary authority to address issues at all levels and have a clear programme for checking that responsibilities to customers are met.

It is the responsibility of the AIB board to ensure that the business conducted by the AIB Group is carried out in compliance with the relevant legislation and regulatory requirements in the financial services industry, which will serve to maintain the ongoing trust of customers

In order for any financial supervisory system to operate satisfactorily, it is essential that there is an open and co-operative relationship between regulated entities and the regulator. A cornerstone of such a relationship is that regulated entities advise the regulator as soon as possible when deficiencies are discovered in systems or practices. This enables the two parties to work together in resolving the deficiencies in order to protect the integrity of the financial system and to act in the best interests of the public. Failure to inform the regulator at an early stage is not acceptable.

The Financial Services Regulator is of the view that the new legislation will provide much better protection for consumers than that currently in place. Breaches of Section 149 of the Consumer Credit Act 1995 are viewed as serious matters and such breaches will have associated penalties.

Furthermore, the Financial Services Regulator's sanctioning powers will include the power to direct institutions to pay refunds to customers. The Financial Services Regulator is committed to policing and enforcing that regime rigorously. We believe that this solution will shift the balance in favour of the consumer.

The Financial Services Regulator is also of the view that in considering how to deal with regulatory issues, financial institutions must consider factors outside their specific legal and regulatory obligations. In particular, financial institutions should seriously consider their responsibility to maintain the trust and confidence of their customers, and should demonstrate the importance they place on consumer protection matters.