Wednesday, October 29, 2008

Watchdog teeth and fake grass!!!

I have been critical of the Financial Regulator for being too timid in the past. However I am happy to acknowledge when they prove me wrong by their recent decision concerning Quinn Insurance. I don't know the full details of the case but from press reports it would appear that the Financial Regulator investigated and came to the conclusion that regulations were breached and issued quite a hefty fine. Leaving aside the particular case my view is that such action sends out a strong message to a very powerful sector of our society, i.e. the Financial Services Sector that they are not above the law.

The challenge of being involved in any consumer organisation is that the consumer generally thinks you are too soft on the vested interests, while the vested interests take a radically different view and use all opportunities, both directly and indirectly to undermine you and your organisation. And of course the indirect approach is more difficult to counter. In the United States there is a growing phenomenon where big corporations fund individuals or groups who establish organisations through various means (usually one person outfits) who portray themselves as advocates for a cause when in fact their primary goal is to undermine a campaign or cause by spreading misinformation and muddying the waters. Some examples are fake environmental groups funded by the oil industry that contradict the views of environmental organisations. All you need is one person and organisation with a plausible name and a website and hey presto you are in business. What these fake organisations do is called astroturfing, to distinguish them from real "grassroots" organisations. And it may not always be easy to flush them out, but I suppose key questions to determine their bone fides would be, who is running and behind the organisation, does it have a real "membership", do they have any conflicts of interest and are these declared and how is the operation being funded and by whom?

Astroturfing at play!

It came to mind when I was asked about CAI by a consumer who thought we were too soft on the banks and the financial services sector. I outlined what CAI had consistently called for and I also informed him that I didn't have any bank shares nor do I work in the financial services sector. But I understand his frustration as the banks, stockbrokers and insurance companies hold huge sway in our society and have huge influence on our political system. The most recent example was the bank guarantee scheme, which had the fingerprints of the banks all over it and as a result it was great for the banks but bad for the taxpayer and the consumer. That nexus of the political and economic world was exposed in the tribunals, where companies make donations to politicians and political parties "to support the democratic process". They may be acting within the law, but the perception (it may well be false) among the public is that they are paying for access and influence and also improving their chances of getting state contracts. On the other hand CAI and many other campaigning organisations have to work very hard on limited resources to get a meeting and a hearing. As we have seen time and time again those who make donations have easy access and sometimes informal means by which to influence decisions.

I admitted to my acquaintance that it is definitely not a level playing pitch, but things are better now. There is more independent regulation now of a number of sectors. I think Joe Meade in the Financial Ombudsman's office sets a good example, he is willing to take on the big boys on behalf of the ordinary consumer. Without him does anyone really think the average consumer would have a hope of taking on the AIBs, Davy Stockbrokers and Quinn Insurances and any other large financial company. I have no problem with actors in the broader consumer movement railing against the actions of individual regulators (as I have done), but what surprises me is that some appear to be opposed to the idea of strong, effective and independent regulation. That is playing into the hands of the vested interests who want to retain or return to self and weak regulation. I recently wrote on the need to revise the regulatory regime being proposed for the legal profession, because what is on offer is not much of an improvement on the unsatisfactory process we have at the present time. We have a long way to go and a hard fight ahead to get real and effective regulation for the consumer on all fronts, but it is a battle worth fighting for.

Sunday, October 19, 2008

A French Lesson for Irish Consumers?

I really wish I had paid more attention during french classes at school. I was over in Paris for two days this week attending a seminar and meeting with some old friends and like every time I am there my lack of french comes home to roost. OK I can order a beer or find out where the toilets are, but once it gets more complicated than that, like having to ask directions I have to revert to English.

Could we as consumers learn in the debris of the financial crisis here at home from the French as well. Yes some of their banks have come a cropper on the international markets, but primarily for investing in toxic assets from the US and of course there have been now three cases of rogue traders doing serious damage to the balance sheet. The most famous of course has been Jérôme Kerviel who it is alleged cost the Société Générale bank over €4bn. On Friday when I was there another scandal broke concerning Caisse d'Epargne when four traders cost the company €600m, which given the numbers being thrown around in recent weeks sounds like small change. I had never heard of the bank before, but happened to pass what looked like one of their older branches when I was walking home from dinner on Friday night and took a photo.

The French mortgage market from what I understand is radically different from ours and that in the UK and as a result French consumers are insulated from the worst excesses of the current turmoil, where individuals and families are under terrible financial pressure with rising debts and home repossession. Most home loans are given out on long term fixed interest rates, they don't have the plethora of variable and tracker mortgages that were so popular here. And by long term I don't mean 3-5 years, I mean 20-25 years. That means that French mortgages holders know how much the mortgage will cost them many years in advance. Unlike their Irish counterparts they do not hang on the words of Jean-Claude Trichet as to whether interest rates will go up or down.

When you think about for a while, it is a bit crazy to tie the cost of our debt on our most valuable physical asset, i.e. our home to the vagaries of the financial markets and the deliberations of the European Central Bank. A 1% rise in interest rates has the potential to cause real misery for many homeowners. I suppose its all very well in good times, but the weaknesses in the system are plain to see in the current climate. That's not to say that the French system is perfect, it is much more difficult to get a home loan there, so many people here would not have been able to buy a home if they lived in France.

And of course then there is the cost, would it cost more if people could only purchase a long term fixed rate mortgage compared to the option of a short term variable mortgage? Obviously each case is different, but while in the short term the French mortgage might cost more, in the long term it would appear to cost less and of course give much more security and peace of mind. That brings me to an interesting conclusion in a report on the UK Mortgage market (Miles report) that examined the issue of fixed long term mortgages. It found that consumers really only focused on the immediate short term cost of the mortgage. Can I make the repayments in the initial months? In the UK they rarely looked at the overall cost or the cost if interest rates were to rise when taking out a mortgage, in most cases it is the same here and I can understand why. People assumed that mortgage rates would remain stable and the prices would keep going up. The lenders are supposed to highlight potential pitfalls to borrowers, but I imagine in recent years when money was being thrown at people and most people thought the party would go on forever, this was largely overlooked. However necessity is the mother of invention and therefore it might be an opportune time for Government to examine the pros and cons of encouraging the take-up of long term fixed mortgages here.

PS: The Bank Guarantee Scheme was published on Wednesday, I was on The Breakfast Show on Newstalk on Thursday highlighting how this was a great deal for the banks, but a bad deal for taxpayers and consumers. Clause 44 says "A covered institution shall not pass on the costs of the guarantee to its customers in an unwarranted manner". This is vague, meaningless and unenforceable. Minister Lenihan says that the costs won't be passed on, but once the dust settles in a few months, I wouldn't be so sure.

Thursday, October 2, 2008

Consumers must not be short changed!

All I can say is wow...what an amazing week. Little did I know when I attended a meeting with Minister Brian Lenihan on Monday afternoon at 5pm about the Budget about what was going on behind the scenes and the astonishing announcement made early on Tuesday morning.

Most people agree that this was a bold move that appears to have restored some sense of stability in the Irish Banking system in the short term. However none of us know what the impact will be on the banking sector, the economy and most importantly from my perspective on the consumer. A lot has been written about it and of course we all acknowledge that the global credit crunch played a role. But the Government, regulators and banks have to face up to the reality that much of the problem was home grown as well. The Irish banks shovelled out huge loans to developers and builders in the past 5 years and it was the concerns of other banks about the exposure here that led to the crisis on Monday. Morgan Kelly from UCD had a very good article about this in the Irish Times on Thursday. With Charlie Weston in the Independent leading with a story telling us the banks could be owed €112bn by developers.

Despite the fact that not a cent has been paid by the state because of the guarantee, it is already or very soon going to cost the taxpayer and consumer. As the latest exchequer returns show the Government will have to borrow billions to balance the books, with the guarantee the cost of this credit will shoot up. The other suggestion coming from sections of the financial services sector is that charges and fees will have to increase. This would be totally unacceptable. It was the taxpayers who threw the banks a lifeline in their hour of need, not the shareholders or investors, so is our reward to be higher charges and fees, while those who created this mess, the fat cats at the top get off scot free?

No George Baileys here!!

The Government needs to do 3 things to protect consumers as a result of their decision to guarantee and bail out the banks. Firstly once the dust has settled they must conduct an independent investigation into why this emergency bailout was necessary. Is the current regulatory regime appropriate? Does the Central Bank and Financial Regulator have the necessary powers and did they act appropriately?

Secondly the Government must legislate or regulate to ensure there is no attempt to pass on the cost of this in the form of increased bank charges and fees. It would be all to easy for the banks to pass on the costs of this to the consumer, as we have seen with the airlines when the price of oil went up. Therefore any bank which signs up to the gaurantee scheme would forfeit the right to increase these costs. This can be easily done as all charge and fee increases are already regulated by section 149 of the consumer credit act.

Thirdly the Government must legislate to put the key provisions of the Consumer Protection Code on a statutory footing. The days of "principles based" and light handed regulation are over. We need strong regulatory action to protect consumers, who do not get bail outs or guarantees when they run into financial difficulties.

If the Government fail in this regard, it will be the taxpayers and consumers whi will feel short changed in this whole sorry saga.