Irish Nationwide Building Society (INBS) has brought a High Court challenge to a decision of the Financial Services Ombudsman requiring it to refund €30,000 of a €74,000 early loan redemption charge, which the society had imposed on a commercial borrower after he paid off his loans before their full term had expired.
Ombudsman Joe Meade directed the refund after finding the charge was, in fact, an "unlawful penalty clause". He also directed that the society's practice of levying automatic charges of six months interest for early repayment of commercial loans be altered to take account of his decision.
In seeking court leave yesterday to challenge those decisions, Brendan Watchorn, for the society, complained that the Ombudsman had effectively directed his client to change its rules regarding commercial lending. If the decision was not overturned, this would affect consumers and all commercial lending, he said.
Mr Justice Micheal Peart granted leave to the society to bring judicial review proceedings aimed at quashing the Ombudsman's decision as set out in a final report of January 24th, 2006.
The proceedings arise after the Ombudsman approved a decision by the Deputy Financial Services Ombudsman upholding a complaint by John Scully, Roagstown Golf and Country Club, Swords, Co Dublin, relating to an early loan redemption charge imposed in relation to commercial property loans taken out by Mr Scully and his late wife in late 1998 and early 2000 and repaid by 2003.
Mr Scully and his wife took out commercial property loans from the society and in each case, the interest on the loan was fixed for a definite period. After the period of fixed rate interest had finished, the loans charged interest on a variable rate. When Mr Scully sought to redeem the loans, the society insisted on imposing a penalty of six months interest.
Mr Scully later complained to the Ombudsman about the € 74,000 charge imposed. While finding there was nothing to preclude the society from charging a redemption charge for the early redemption of the loans in 2003, deputy Ombudsman Gerry Murphy did not accept that the charge levied was the amount which the parties had agreed would be payable.
The deputy Ombudsman said the society had simply calculated the charge by reference to six months interest at the prevailing rate on the amount of capital being repaid and the redemption charge on the three relevant accounts amounted to €74,000.
In its challenge, the INBS will make a number of arguments, including that the Ombudsman exceeded his powers under the Central Bank and Financial Services Authority of Ireland Act 2004.
