Financial Reform-Shame to waste a crisis!

I have survived the Christmas, thanks to the good weather did not eat or drink as much and watch as much bad TV. The dry and fine weather meant I could get out on the farm down home in Borrisokane and do some long overdue work cutting some ditches and clearing scrub. Like every other sector farmers have been hit by the recession and I am expecting interesting negotiations with those renting my land in the coming weeks on prices for this year. On a positive note I got a letter from Tipperary GAA letting me know I had won €200 in the weekly lotto draw. Would be great now if the Premier followed that up with an All-Ireland in 2009 as well!

The fresh air gave me some time to reflect on 2008 and of course the 2 big stories of the year were the collapse of our banking system and big shift in consumer spending and habits. So in this blog and the next will look at those issues in depth. But as well as looking at the problem I will try and come up with some possible solutions.

We need a radical overhaul of the financial services sector, people talk of regulatory reform but the fundamental issue is that the system is sales and commission driven and shareholder value trumps everything else. Of course it makes sense to incentivise people, but there have to be some limits and safeguards in place. Unlike buying a pint of milk, consumer protection for consumers purchasing a mortgage needs to be strong and effective, because if things go wrong its very serious for the individual. And as we have seen in recent months, if things go wrong on a grand scale, its very serious for all of us. We have seen this at its worst in the US. Sub prime lenders employed people on a commission basis who went out and sold mortgages to people to buy houses they couldn't afford. The salespeople didn't care whether people could afford the mortgages or not, they got paid for selling them. The sub-prime lenders didn't really care either because they repackaged these mortgages and sold them onto respectable financial institutions who are now dealing with these toxic assets and the fallout. It says a lot about the sharp suits in these institutions with their MBAs that they paid good money for such lousy assets.

The only difference here is that the sub-prime market was only getting going when the bubble burst, things could have been a lot worse if the credit crunch started now instead of August 2007. But a lot of other things were going on here, banks were shovelling out money on personal loans, mortgages, credit cards. I know of cases where people got huge bonuses and holidays for selling products that were definitely not in the interests of the customer. The salesperson didn't care, they got the bonus and if there is a problem it's the customers problem. The Financial Ombudsman has done excellent work on exposing some of the worst cases, but I suspect these are just the tip of the iceberg. I accept that customers have responsibility too, but for many people financial products and services are mind boggling and they are quite literally at the mercy of the salesperson.

At another level banks as we have seen shovelled out money to property developers and builders as if they felt they could defy logic and the premise that what goes up must come down. Like sheep the banks cheered on by stockbrokers, economists and other "experts" lent billions. That policy came home to roost for all the banks, especially Anglo Irish which is most exposed and we are all suffering as a result. No one has taken responsibility for this, Sean Fitzpatrick and David Drumm in Anglo did resign, but their resignations were related to concealment of directors loans. I am sure their resignations will be temporary hiccup, they will take comfort from other high fliers such as Kryan McLoughlin who had to resign as a director of Davys a decade ago due to embarrassing personal tax issues, but is now more powerful than ever. Indeed as Deputy Chairman of Davys which is heavily involved in the Aer Lingus takeover bid on behalf of Ryanair and as a director of Ryanair itself, he will be playing a crucial behind the scenes role in 2009. (The Ryanair takeover of Aer Lingus would be a disaster for consumers in my view, this is something I plan to return to in early 2009)


An apology for only $59.95!

So what can be done? Well Barack Obama's new Chief of Staff Rahm Emanuel is on record as saying, "never waste a crisis" That idea that our current difficulties present opportunities to reform the system in a way that was unthinkable a year ago to prevent a repeat of what has happened.

It might have been necessary initially given the urgency of the situation for the Government to engage solely with the banks, but now there is no excuse. If we are to reform the financial services system, the Government needs to engage with all the stakeholders including consumer organisations, rather than just the banks. Secondly all need to accept that "principles based" or light touch regulation has failed (or as I would refer to it soft touch regulation) and we need a rules based system. Thirdly the Government needs to carry out the review of the effectiveness of the financial regulator in its consumer protection role as promised in the report of the Consumer Strategy Group. Fourthly we need to investigate the possibility of a free impartial financial advice for consumers along the lines being discussed in the UK and that's just for starters. This is one of the issues which the Carnegie Commission on Civil Society is looking at as part of our work and we plan to hold an event in London in February to look at reform of the financial services sector for the benefit of all. So after that I may even have more ideas.

The heavy levy!

In November the Government announced a new package of measures in the private health insurance market. This was in response to the surprise decision of the Supreme Court in July to quash the existing risk equalisation scheme that was a key part of our private health insurance market. Up to then there were a number of basic principles underpinning the private health insurance system here, such as community rating, risk equalisation, open enrolment and lifetime cover, (explanation of these terms here). Once the risk equalisation scheme was declared illegal, one leg of the stool was gone and the Government had to come up with a solution.

The Government claimed that the abolition of the risk equalisation scheme would lead to a massive increase in premia for older people. Obviously no one would be in favour of that, but I don't really know how that could be the case. Most older people are insured by VHI, they have 99% of the over-80s, and 90% of the over-60s in the market. Also I know the Government was in turmoil following the medical card fiasco, but looked more like a manufactured crisis to me. Yes companies could design schemes that were more attractive to younger people, but they could not refuse to allow an older person to join and as far as I know all schemes have basic entitlements. So rather than coming up with a solution that would have ensured the viability of the market overall and protected the sector from the collapse of one company, the Government in my view has come up with a scheme designed to protect the state company VHI, allow it to maintain its dominant position, stifle competition and most importantly drive up costs for consumers and indeed force some people to give up on private health insurance.


Do you talk "Insurance Jive"?

The Government response was two-fold, the three companies VHI, Quinn Healthcare and Hibernian Health will have to pay a levy of €160 on all adults over 18 and €53 on all on children insured by them. It is being claimed that this levy will fund additional tax relief for the over 50s. Basically the three companies will receive money from the state for the tax relief (as this is given at source) and will have to pay the levy on all their customers. It has been claimed that because VHI has a higher number of older customers it will receive more than it has to pay in the levy, some claim up to €30m, while the other companies will pay more to the state that they will receive in tax relief payments. So in effect this is risk equalisation by the back door.

When she made the announcement the Minister for Health Mary Harney T.D. stated that she hoped the levy would not be passed on to the consumer. Some chance of that, we can see what has happened, VHI and Quinn have increased their premiums by 23% and 16% respectively and Hibernian yesterday also increased their premiums. The end result of all this is that younger people, many with families may have to cancel their policies and are less likely to take it out in the first place, because the prices are going up and they are getting no additional tax relief. This is especially so in the current economic environment. That is not good news because stated Government policy has been to encourage people to take out health insurance as early in life as possible. In 1999 the Government promised to introduce lifetime community rating, the idea that those joining later in life could be charged more and also I believe would have to include provisions for reductions for those who have been members for a long period. Nothing happened, although they are promising to introduce it now again ten years later. At the moment a person joining at 60 will pay the same premium as a person who joined at 30 and has been paying the premium for 30 years. The only difference is that as you get older the period you need to wait to be covered after joining increases from 6 months for those under 55, a year for those 55 to 64 and 2 years for those over 65.

The new scheme will apply retrospectively from January 1st 2009 once the legislation is published and passed in next legislative session. Hibernian Health has launched an "Axe the Levy" campaign and both they and Quinn have stated they are considering their legal options. Its unlikely the Government will change their mind now, although they may accept some adjustments to the promised legislation. They also say this is a temporary 3 year measure to allow time to come up with a comprehensive plan for the sector. Could we be going the route of universal health insurance as promised by Obama in the States?

We definitely need a well thought out plan for the future of the sector in Ireland, that meets our health needs and is competitive and affordable. If a universal plan can do that, I say yes. In the meantime we are stuck with a levy and a plan that appears designed to prop up a state company, where consumers and patients are the main losers.

Look this gift horse (voucher) in the mouth!

Its that time of year again, where many of us drag ourselves around the shops to buy those presents for family and friends. I am not one of those organised people, who draft a list in September and has all the gifts bought and wrapped by November. I usually leave things until the last minute, indeed I can remember some years where I only started on Christmas eve, not to be recommended! For people like me, the gift voucher is the great saviour. If I know that a friend likes reading rather than spend half an hour thinking what book they would like and worrying I might buy a book they won't read. I get them a gift voucher which they can use at their leisure, or so you think! Not only can they be a convenient and safe option as a gift, many people also like getting them, including yours truly. A survey in the UK found that over 40% of people would prefer to receive a gift voucher rather than a traditional present.

Earlier this week on behalf of the Consumers’ Association of Ireland (CAI) I was advising consumers on Today with Pat Kenny among others to be careful when buying gift vouchers as presents for family and friends. I was pointing out that there are a number of pitfalls which consumers need to avoid when buying a gift voucher so that they don’t end up giving a present with a lot of strings attached. At the moment each retailer and business is free to determine the terms and conditions of the vouchers they sell.

One of the biggest issues with gift vouchers is the expiry date. Its important that consumers check this, ask the salesperson if the voucher has an expiry date and if so when will the voucher expire? Some businesses impose a short timeframe of only 6-12 months, so if the voucher is presented after that date there is no legal obligation on the issuer to accept it as payment. The Fine Gael spokesperson on Enterprise, Trade and Employment, Leo Varadkar highlighted this back in February, with one example where the voucher expired after 3 months. Ideally there should be a date on the voucher and there should be no time limit. If there is an expiry date, best to buy one where it will last for at least 2 years. In many cases retailers will accept a voucher after that date, but I have come across cases where they do not. The National Consumer Agency have a list of expiry dates from some of the larger businesses and retailers.

Its also important to know that if the retailer or business closes down, the voucher cannot be redeemed, likewise if the shop/business changes ownership there is no guarantee that they will accept vouchers issued by previous owners, so if you are giving a gift voucher for a large sum there is a risk involved. A relative of mine got a voucher for a travel agent for €400, but within a few months they closed down and she had no comeback.


In Prague for the weekend, but seeing more of the bars than the shops!

CAI would like the law changed to enhance consumer protection. In a number of states in the US, such as Illinois, New Hampshire and California there are specific laws on gift vouchers. In particular the law should include provisions that all gift vouchers would have a lifetime of 5 years, a requirement that the issuing date and all terms and conditions must be included on voucher and that no fees or charges can be applied. Also where there is a small balance left on the voucher, e.g. 5% of the value of original sum, the consumer has the right to seek a cash refund. And in case people think I am advocating that consumers hold unto their vouchers for 5 years, I am not. It makes sense to use the voucher as soon as possible as with inflation it loses value over time.

At Debts Door

The Minister for Social and Family Affairs answered a number of questions in the Dail on Tuesday in relation to number of people seeking assistance from the Money Advice and Budgeting Service (MABS). Its shows that the number of new clients going to MABS in the 11 months to the end of November has from 12,400 for the whole of last year to 15,600 up to the end of November. These figures show a 25% increase and that doesn't include the Decemeber figures. On top of that the numbers calling the advice line which was established in October 2007 is almost 11,500. MABS is an excellent service and I would encourage people who are under financial pressure to seek their assistance. I have heard stories that there are waiting times at some offices, not sure if this is true. If it is then the Government need to provide more resources to the MABS service, because the reality with increased demand, the pressure will grow on the hard working MABS staff who can only see so many people in a day.

Likewise we hear of the pressures on organisations such as St Vincent De Paul where demand for assistance and financial help have grown massively too. And in recent days the Irish Times have been running stories about areas (such as my own next of the woods in South Meath) where the recession is biting. I am old enough to remember the late 1970's and early 1980's when money was scarce and inflation from memory was in the 15-20% bracket. My father died suddenly in 1978 when I was 7 and since he was a farmer our whole livlihood was wiped away. There were no EU farm subsidies back then, you lived from what you produced from the farm. Apart from the emotional loss for my mother and my 3 siblings and I, financially times were very tough too. The memory of those difficult times have stayed with me and that is why I really believe the Government needs to do more to assist people whose are facing tough times. If we give people a hand up now they will be able to rebuild their lives and start contributing again when they are back on their feet.

In their pre-budget report the UK the Government have reduced VAT from 17.5% to 15%, have announced a package of measures to assist those in financial difficulty with mortgage debt such as a £200m mortgage rescue scheme, 3 month stay on repossession and increased resources for money and debt advice. Here apart from a slew of direct and indirect taxation the only positive step has been to increase mortgage interest relief marginally for first time buyers.

We have had the bail out for the banks, its time for the Government to come up with a strategy to support ordinary consumers who have lost their jobs, livlihood and income because of the recession along the lines of what the UK Government have done.

The Never Buy Insurance Policies!

I got a call this week from a sales rep at O2. You see back in July I bought an iPhone, or as one of my friends calls it, the Jesus phone. I am fairly happy with it, the GPS comes in handy when I am lost as I was last weekend...there are a few problems such as texting and I understand from a friend that integrating it with blue tooth in his car is a problem.

Anyhow the sales rep from O2 wanted me to buy insurance to cover my phone in case it was stolen, lost or broken. Basically for €9 a month I could insure my phone if I lost it, or if someone stole it and made loads of calls to Australia. My response was why? Insurance in basically there to cover substantial loss, i.e. if my house burned down, I wouldn't have a home and would still have a big mortgage, so it makes sense to pass the risk to my home insurance company in return for an annual premium. The same applies to motor insurance in that if you cause or are in a serious car collision, the costs could be exorbitant. Indeed motor insurance is unique in that we are required by law to have it if we have a car.


The "Never Pay Policy" sounds good!

But the idea that I should pay €108 a year to insure a phone which I could buy if it was stolen or lost for between €129 to €229 is mad. And even if someone steals my phone and makes calls I would like to think I will know soon enough to be able to cancel it with O2. A few years ago when I bought my mp3 player in Scotland for £50, I couldn't believe it when the assistant almost insisted I take out an insurance policy on it.

These policies are all the rage, because on one hand the providers whether they be telco companies, white goods retailers or airlines make a nice profit on these worthless policies and they also then of course try to fob people off if they have a problem by telling them to make an insurance claim even if they are responsible for dealing with the consumers problem. Thats bad news because the insurance industry is notorious for anti-consumer practices, as someone once put it they will insure you if you fall out a window, but not when you hit the ground.

Consumers should run a mile from these dubious policies, they are expensive and of little value in my humble opinion.

Ad Attack

In recent days RTE highlighted a report which found that broadband customers rarely get the maximum connection speeds advertised by internet service providers. The study on broadband available in Dublin, Cork, Galway and Limerick found that on average consumers benefit from just 60% of advertised speeds. Now in the past telco companies covered themselves by stating in their ads that their offers provided speeds of "up to" so many megabytes. However I thought that had all been sorted out since Comreg and Advertising Standards Association of Ireland (ASAI) had agreed a new set of advertising rules for internet providers last March. Individual consumers can check their speeds, this is one company I have used to check the speed of my broadband at home, but I am sure there are more.

Of course the regulatory regime here for the advertising industry is weak. As in other areas we have "self regulation" or what could be called light touch regulation. I would call it soft touch regulation. Obviously advertising has a role to play in informing consumers about new products or services, it can also promote competition by letting consumers know about cheaper prices or better services. And lets be honest some ads are really good and on TV can be better than the programmes.


A Leonard Rossiter Classic!

However advertising can also be deceptive and misleading as outlined above re broadband. In that case consumers are not getting "what is says on the tin" and are being ripped off by being provided with a service which is poorer than what they are paying for. But the current regulatory regime doesn't promote good practise because if a consumer believes that an advert is misleading all they can do is complain to the ASAI and a number of months later they will either uphold or refuse the complaint. By that stage the advert has served its purpose and may no longer be in circulation. Even where the ASAI has found that an advert was in breach of their codes all they can do is direct that the advert not be run again and/or make recommendations for future ad campaigns. They have no power to impose fines or penalties on those found in breach of their advertising standards even though the misleading advert could have generated considerable revenue for the company. See here for a list of the most recent cases.

As I discussed in this blog last March there is also considerable global pressure for greater regulation of junk food advertising towards children, which many believe is contributing to child obesity. CAI linked up with the Childrens' Rights Alliance to call for greater restrictions on junk food advertising here and it is positive that Minister Eamon Ryan has included a provision for this in the Broadcasting Bill which is going through the Oireachtas now. Likewise there is growing pressure to restrict alcohol advertising which appears to be targeting young people, but so far the Government have caved into the drinks lobby and only introduced "voluntary codes" which are unenforceable, weak and ineffective.

What we need to protect consumers is an advertising code underpinned by law, policed by a powerful regulator where ads can be stopped or taken down immediately and where financial penalties can be applied to act as a disincentive.