OPINION:Banks and building societies have yet to provide consumers with adequate, even basic, information, writes JOAN MORRISON
THE FINANCIAL Ombudsman’s report last month highlighted how elderly people were being sold inappropriate investment packages by some financial institutions. Many targeted were in their late 70s and mid-80s. The money in question constituted their life savings and some suffered considerable losses. He said there was a need for all financial institutions to undertake a “root and branch” review of all investments made to the elderly since 2006.
Why 2006? In August 2006 the Financial Regulator brought in the consumer protection code for the financial services. This changed the relationship between financial service firms and their customers. Up to then the principle of caveat emptor traditionally governed the relationship between sellers and buyers of financial services products, in line with general trading practice. It was not the duty of sellers to ensure that the actions buyers took were in their best interests.
Now financial firms must act “in the best interest of customers” – customers must be provided with suitable needs-based products. This had most significance for banks, as these requirements were effectively introduced for intermediaries (brokers) in 2001 and for the insurance companies in 2003.
The subprime providers, being non-deposit entities, and their agents did not come under regulation by the Financial Regulator until February 2008. Registration to be completed by end of April 2008. This was an unfortunate delay since subprime mortgages were being advertised as far back as 2005. If the Financial Regulator had not delayed his action, how many of the most vulnerable borrowers could have been saved from unsuitable mortgages? (It is reported that Start alone sold €680 million in loans in 2006 and “significantly more” in 2007 and were having redundancies in early 2008.)
The Office of the Consumer Director is charged with promoting the interest of the consumer. The insistence that financial institutions provide information in a meaningful way is an important part of its function. However, it is still not that easy to get even basic information in order to make an informed decision.
Bank and building society depositors receive an annual deposit statement showing the interest rates from the previous year but they are not advised of the different interest rates available, thus they miss out on achieving higher returns. Irish banks in Britain give this information as standard practice as they subscribe to the voluntary British banking code. It was originally included in the Consumer Protection Code consultation paper but was removed in the final code.
We have a similar situation with deposit interest retention tax on these statements. Many financial institutions will go to great lengths to avoid showing the Dirt deducted.
They put net interest on statements without stating that it is net – just the word “interest” is used in spite of the fact that it is the gross interest that was quoted initially. Not only does this make checking difficult, it can cause the wrong figure to be included in tax returns where the gross interest should be given.
The code allows this bizarre position provided the institution “informs consumers how they may obtain a certificate detailing the tax paid”, but even this is not always followed.
It is even more annoying now that the banks have to supply information on gross interest earned (over €635) automatically to the Revenue Commissioners but their customers have to initiate tedious formalities in order to get the information that concerns them.
While the Consumer Director has shown concern with advertising over non-compliance with the code, little action has been taken.
A letter was sent in June 2007, warning them of the new standards. Another reminder had to be sent a year later in July 2008 as they were still not complying. The code requires that they “make full disclosure of all relevant information, including all charges, in a way that seeks to inform the customers”.
We have quite some way to go before financial institutions provide consumers with adequate, even basic, information. This lack of enforcement together with a culture of deference shown to the institutions has proven to be disastrous. We now need much stronger regulation by people who have experience in the business, with a forensic approach to investigation, authority to name offenders and a passion for fairness.
Joan Morrison is a former chairwoman of the Consumers Association, first chairwoman of National Consumer Advisory Council and a member of the first consumer consultative panel of the Financial Regulator.