Going Dutch?

Here we go again. Despite talk of strong regulation and effective enforcement, last week saw the same old softly softly approach to regulation that got us into the current sorry mess. Davy Stockbrokers were found to have breached rules governing the sale of perpetual bonds to credit unions. The Irish Stock Exchange issued a carefully worded statement, which confirmed that Davys had breached stock market rules, but there was no mention of resignations or fines. This deal has been a disaster for the credit unions, it is estimated that they have lost about 100m euro. Davys have only offered 35m in compensation, so ultimately it will be the credit unions members who will suffer with higher loan repayments charges and reduced or no dividends on their shares to meet the massive losses.

These are the same Davys stockbrokers who in league with two other stockbroking firms called for a cut to social welfare. I would say that senior figures in Government must have been fuming because whatever hope there was of a rate cut before the stockbrokers intervened, there was no hope after this, as the credibility of these people is so low. They have projected deflation of 3% this year, so they say social welfare should be cut by 3%. I wouldn't put too much faith into their projections since they have been wrong so many times. I think Fintan O'Toole summed it up perfectly.


Beware the sweet talking Stockbrokers!!!

There has been a lot of talk about the need for radical reform of financial services regulation. A lot of the focus has been on the model. We have heard of the Canadian model of regulation and now the Dutch model is being mentioned. Yes we can learn from other countries, but focusing on models completely misses the main point. The key problem in Ireland was not the model of regulation, but the culture. The financial regulator was not willing to take strong decisive action against reckless and feckless behaviour by banks and bankers. They issued warnings about 100% mortgages, but did nothing to stop them being issued. They also had powers which it would appear they were reluctant to use. The light touch approach was more like the soft touch approach.

I met an official from the Australian regulator a few years ago. He told me how in Australia the regulator there regularly takes CEOs and senior officials to court for breaking the law and rules. When I spoke with him in 2006, they had jailed 17 people in the Financial Services sector. In doing so they sent a very strong message that they wouldn't tolerate any behaviour which puts consumer, the economy and their overall reputation at risk.

The Government does appear to be serious about a radical reform of financial services legislation. I am just concerned that they rushing into changes for the sake of change that may create more problems that they will solve. For example, I am worried about the proposal to separate the consumer protection function out from the new Central Banking Commission. They plan to create a Financial Services Consumer Agency by merging the existing consumer directorate of the Financial Regulator and the Office of the Financial Services Ombudsman. In my view prudential supervision and consumer protection are intertwined and having two agencies will just confuse the consumer and industry.

Apart from the structure, we need to recruit people of international standing with no connections with the industry here, who will take no prisoners and can withstand the financial lobby and act in the public and consumers interest. And while the focus has rightly been on the banks, I think it is also high time we had a shakeup of how the stockbroking companies are regulated.

Weston on target again!

Last autumn Charlie Weston in the Irish Indo doggedly pursued and exposed the banks for their failure to pass on the ECB rate cuts to hard pressed consumers. Eventually Charlie managed to shame most of the banks into treating their customers in a fair manner, which was the least we could expect given the bank guarantee scheme, otherwise known as the "no banker left behind" scheme.

Well Charlie is at it again, by highlighting the shameful failure of the banks to pass on the savings from the 5 cuts in the ECB rate to consumers on credit cards, personal loans and overdrafts. Financial institutions are also increasing charges and fees and on top of that they are reducing the rate paid to savers.


Irish banks as responsive as Carol to needs of consumers!

Basically the banks are making ordinary consumers pay for the sins of the golden circle and their feckless and reckless lending practices. This needs to be exposed and the Government needs to call in the bankers and tell them this is not acceptable. The impending regulatory reform of the financial services sector should serve as an opportunity to recast the banking system here so that we have banks that serve the needs of consumers, business and long term sustainable growth and not a small elite and short term profiteering.

Fair play to Charlie for exposing this rip-off. We need to keep a focus on this to shame the banks into treating consumers fairly.

The weight of opinion is growing for a ban on junk food advertising

Happy St. Patrick's Day as I write here in Scotland, where it is just another day at the office, where I am over for a 2 day meeting. So while most of the population was gearing up for St.Patrick's day, not too many were aware that last Sunday March 15th was World Consumer Rights Day. No great surprise I suppose, but it does give consumer advocates an opportunity to raise issues of importance nationally and globally.


Campaign video from our Italian counterparts

Consumers International co-ordinated the theme and events for the day. For the second year in a row they decided to focus on the campaign to restrict junk food advertising to children and young people, which is leading to such a huge health and social problem all over the world. This is part of their ongoing excellent "Junk Food Generation" campaign.

We have a major problem in Ireland, it is estimated that over 330,000 children are obese. The Government set up a Taskforce on Obesity which reported in 2005. It set out a course of action, however like many strategies published in recent years it largely lies gathering dust.

We once again took the opportunity again this year to link up with the Children's Rights Alliance Their CEO Jillian Van Turnhout is not only an excellent advocate for children, but also a good friend of many years. Last March we called for action to be taken to protect children from aggressive and pervasive junk food advertising, in the form of a ban of adverts before 9pm.

We were delighted that the Minister for Communications, Energy and Natural Resources, Eamon Ryan included section 42 of the Broadcasting Bill 2008 to restrict the advertising of foods which are high in salt, sugar and fat to children. The Bill is making its way through the Oireachtas and should be passed by the summer, however in our view it is vital that once it is passed that the new proposed Broadcasting Authority moves quickly to regulate junk food advertising.

As expected there has been an outcry from sections of the junk food and advertising industries to date. No doubt they will propose industry developed and managed "voluntary" codes which won't be worth the paper they are written on and even if breached there will be no meaningful penalties. However the reality is that the Goverment has to put the current and future health and well being of thousands of children before commercial interests. I think a long battle lies ahead, but one worth fighting!

Sharing the pain equally? Fat chance!

Blogging had to take a back seat these last few weeks. I represent NYCI at the social partnership talks and the negotiations on a plan to address the perilous state of our public finances were quite intense up until last Tuesday. The rather snappily titled (not) document "Draft Framework for a Pact for Stabilisation, Social Solidarity and Economic Renewal" was concentrating all our minds. The public perception may be that the talks collapsed completely, however while the Government and the Trade Unions failed to agree on the issue of the pensions levy, this document has been agreed and will be important in the coming months and years.

Some of the discussions at the talks were interesting, people expressing anger at how the bankers, builders, stockbrokers etc who got us into this mess were getting away Scot free. There is an expectation at the few dozen people who contributed greatly to the rapid descent in our economy must pay the price. People talked about a criminal assets bureau for the financial sector. One story was recounted about how Sean Fitzpatrick was asked to leave a pub, because the owner didn't want his sort around the place. I am not surprised, people are losing their jobs, their homes, dreams and sanity and these guys get millions in payoffs and can retire to the golf course. Indeed it was galling to read Rossa White over in the very smug Davy's stockbrokers lecturing us on how to deal with the crisis, when he and his kind have talked up the housing market and contributed so much to our current problems. And as for their analysis, they can keep it, they have been so wrong so often, they have the credibility of used car salesmen. As recently as March 2006, the so called "analysts" were telling us the boom would last for another 15 years.


Exclusive recording of the Cabinet meeting!

I see the Times in London came up with a list of the 10 people most responsible for the credit crunch. Would be interesting to do a similar exercise here on the ten people responsible for the near collapse of the banking system. Sean Fitzpatrick and Pat Neary may be obvious choices, but they are not solely to blame, there are many people still holding powerful positions in this state who have a lot to answer for as well.

There was an interesting story in the Sunday Tribune last week that didn't get much coverage. It dealt with contracts for difference (CFD) and how they played such a crucial role in the collapse of Anglo Irish and the reputational damage to our financial service sector here. It is alleged that through CFDs Sean Quinn and his family built up a huge stake, almost 25% in Anglo Irish Bank, unknown to many investors. Slowly though international investors got wind of what was happening and confidence in the bank and shares began to collapse. As the article states here, both the Financial Regulator and Irish Stock Exchange come out badly from this fiasco. But will there be any real change so that the lessons learned cannot be repeated?

There is a really interesting section in the article on how a 1% tax could have prevented the problems at Anglo Irish, but how the powerful Dublin stockbrokers scuppered that;

"It could have been different. In March 2006, the Revenue Commissioners, responding to a query about a tax treatment from a Dublin broker issued guidance that tax-free CFDs should be taxed at the 1% that applied to traditional share purchases. All hell broke lose. "It was like a tsunami had hit," recalls a tax expert with close knowledge of what happened at the time. "The brokers kicked up a storm," he said.The storm confirmed the importance of the CFD trades to the profits of the main Dublin stockbrokers, despite the fact that the Irish stock exchange was being dangerously speculated on. Within days, the then finance minister, Brian Cowen, bowed to pressure and pledged to amend the Finance Bill to maintain the tax-free status of CFD trading. The 1% stamp duty levy would continue to be levied only on traditional purchases of shares"

I am sure the files on the correspondence between the main stockbrokers and the Department of Finance would make for interesting reading. But will we see radical change at the Financial Regulator and will the Irish Stock Exchange investigate what went on here to avoid a repeat, which has done so much damage to our financial services sector and has contributed greatly to our economic and public finance woes? I am also concerned at the lack of apparent urgency or sense we need a radical overhaul of the financial services regulatory system. In the Dáil this week the Minister said this in a response to a question on reform;

Financial Services Regulation.
"Deputy Joan Burton asked the Minister for Finance the measures and actions he will take to examine the reasons behind the regulatory failure in the financial services sector here to determine the changes that are required; if he will give a commitment to engage a broad range of stakeholders, such as academics, consumer representatives and social partners; and if he will make a statement on the matter.

Minister for Finance (Deputy Brian Lenihan): Any change to the regulatory framework in Ireland must have regard to EU and international developments. In relation to the EU, there are a number of proposals being developed for adoption this year, including improvements to the Capital Requirements Directive to further strengthen the existing banking prudential framework. Furthermore, the role and mandates of national regulators has been the subject of in-depth consideration by the Ecofin Council. Common reporting standards for financial institutions will enable greater EU wide consistency in supervision. An initial report on this matter is due to be submitted to the Spring European Council and any reform of our Financial Regulator’s structures will be consistent with EU developments. Arising from recent events, there are a number of reviews underway within the Financial Regulator with a view to identifying any shortcomings in the Financial Regulator’s strategic regulatory approach, its structures and its capacity to respond. I await with interest the outcomes of these reviews and will be working with the Regulatory Authority to bring about improvements in our system of financial regulation. Stakeholders will have an involvement in this process through the independent statutory Consultative Panels which will be making an important input to the review process. I will bring proposals to Government if, arising from these reviews, I consider that a change in legislation is required. As the Deputy will also appreciate, under the Credit Institutions (Financial Support) Scheme, the oversight of the banks concerned has already been greatly intensified.

This response is a bit alarming, as if nothing much has happened and some tweaking may be required! For my sins I have been re-appointed to the Financial Regulator's Consumer Consultative Panel. I am proud of the work the last panel did on the Consumer Protection Code, which was an advance for consumers. My view is that the Financial Regulator failed not because it did not have the powers to act, but because it was too timid and unwilling to act against the big players, something which I stated publicly in December 2007. The financial services sector in Dublin was a small cosy club, where the top bankers, stockbrokers, audit firms, government officials and central bank regulators were and those still standing are still very chummy. No one will rock the boat!

I would hope that the Consumer Panel will have some input and influence on reforms, but what we really need is a broader public debate and discussion about the role of banks and the financial services sector. We need the sector to return to basic banking and to serve the needs of the economy and our society and not be the slave of the equity analysts! On top of trying to protect consumers rights in the areas of mortgage repossession and attempts by banks to pass on their mistakes in higher charges and fees, I will be following up on some of the issues raised here and looking in particular at the how we can make the system work for consumers and citizens.

Layaway, the cure for our plastic pain?

Yesterday, January 19th was officially the most depressing day of the year, when it seems the bad weather, long forgotten new year resolutions and the post Christmas bills all catch up with us. To be honest the bill I hate most is my credit card bill. January seems so far away when you are shopping before Christmas. Yes I try to reduce the cost of it, but sometimes I need it to tide me over or I have to withdraw cash where these sneaky charges kick in....it always galls me even if I have to pay a few euro in charges and fees. Two years ago I was involved in a NYCI campaign to address some of the worst anti-consumer features of credit cards. Last year I got a commitment from the Financial Regulator that some of these issues would be dealt with in the review of the Financial Regulator's Consumer Protection Code in 2009. Given all that has happened in the financial sector in recent days, months and weeks, a revolution in regulation is required, not a review.

Well back to my bill, I got a shock when it arrived as I was charged a €7.50 over limit fee. How could this be, I don't remember having to pay this before. Anyhow I called my bank Permanent TSB and asked where did this come from. I was informed that this new fee was announced in a press release in October (couldn't find that) and of course if I had read the new terms and conditions line by line, would have seen details on page 6, how silly of me!

Bank charges and fees have been a major issue in the UK. Some of the banks there charge unfair and exorbitant fees and the issue has been through the courts where the banks have been taken to task and many consumers are getting redress. The Office for Fair Trading there has investigated these charges known as default charges and called for reductions. The only reason we have been spared such an onslaught is that many of the fees and charges (not credit card fees it would appear) are governed by Section 149 of the Consumer Credit Act which I wrote about previously Anyhow my bank told me that the fee was to cover their costs because it cost them moeny when I went over the limit, which of course is balderdash.

Firstly I told them a limit is a limit, if I exceed my credit card limit, then the payment should be refused. I am certainly not one to be embarrassed if my credit card is refused. Secondly it doesn't cost the bank anything, in fact they are charging me interest on the larger amount, so in fact they are having their cake and eating it. Getting a nice fee of €7.50 plus interest on the bigger balance. A few years ago banks were actively encouraging people to increase their limits, sending them letters and calling them. This was banned by the regulator, now they have found a new way around this. Charge an over limit fee and madden us all into increasing our limit to avoid it.

Against the background of my rage at this fee and credit cards in general, I came across this interesting article in the Economist on layaway. Its referred to as a lay-by in the UK, Australia and New Zealand. Basically a return to old and perhaps more sensible times when if you wanted to buy a suite of furniture, you paid for it in instalments and only when you had fully paid for it you collected it. As this blogger recounts I do remember something like this from childhood, but until recent times seemed quite quaint. So instead of walking in, flashing the plastic and a buy now pay later mentality, you are forced to budget so that you can afford your weekly or monthly payments. Sounds like hire purchase, but its not. HP is usually used for large purchases like a car, you get possession of the goods straight away and payments are spread over 2-5 years. For people on lower or stretched incomes (which includes a lot of people now) layaway could be perfect for purchases such as clothes, furniture, white goods etc.


Layaway explained!

Basically you decide what you want to buy, pay a deposit and then pay a weekly or monthly instalment, perhaps over 3-6 months. In other jurisdictions there is a service fee and you would have to factor that into the overall cost. In these times when retailers suddenly collapse, consumers may be wary of paying instalments over a number of months without possession of the goods. And what if you can't pay or if you change your mind. These are all things that need to be clarified before you decide to go down this route. Of course you first have to find a retailer who offers this facility. I could only find one. But I imagine in this straightened times that some retailers would do anything to make sales, while many consumers want to better control and manage their costs, so it just might take off. My only advice is that if it is offered, check all the fine print! But certainly an idea for the times.

Northern Exposure is good for the Republic's consumers and economy

There has been a lot of bellyaching from business interests and some politicians about consumers heading to Northern Ireland to access cheaper prices and save money. Brian Lenihan pleaded with consumers to shop at home because by shopping in the North the state was losing revenue needed for investment in schools and hospitals. Firstly I will take Brian Lenihan more seriously on taxation when the massive tax loopholes which allow the super rich to pay little or no tax are closed off. In 2006 we learned that "between the 1999 tax year and 2003, a sizeable number of multimillionaires - 184 to be exact - declared incomes of more than €1m a year and paid no income tax at all." That's not to mention the approximately 3,050 tax exiles who live here for less than 182 days and pay no tax at all. Secondly individual and family incomes are under huge pressure from the high inflation, particularly in food costs over the last 2-3 years. On top of that people's incomes are being squeezed and indeed some being decimated as the result of job losses. The Government mantra was "shop around" and therefore any rationale or sane person would avail of the cheaper grocery prices in the North to help makes ends meet.

Of course the retail and business sectors have been trying to suggest that the Northern shopping phenomenon is all a media creation. The reality here is that if consumers went to Newry or Lurgan and didn't get value or found that the prices were not all that different they would just stop going. The fact that there are still travelling in large numbers indicates people are saving money and getting good value. Of course we had all the usual suspects blaming the high labour costs, rental costs, and any other costs they could think of. I heard a guy on Q102 in November justifying the difference in prices based on the back of an envelope exercise where he had compared rent costs in Dublin and Belfast and also labour costs. Somehow he appeared to think that this rip-off could be explained away on the basis of a few phone calls without any detailed or proper analysis of a whole range of underlying costs. Indeed he like none of the these apologists mention the lower corporation tax and the lower social insurance contributions employers pay here. Neither do they mention the strengthening euro which should be translating into cheaper prices.

Well finally some light was shed on this issue when before Christmas when Forfas published a report which clearly demonstrated that the price differential was not justified. They found that at most the price differential should be in the region of 5% not the between 16% to 31% difference found in independent studies of grocery prices. The Forfas report was based on information provided directly from retailers and most importantly showed that the cost of the goods is the key factor affecting resale prices, its states "the cost of buying goods for resale is the single biggest cost incurred by retailers and accounts for three-quarters to four-fifths of their total costs". So at last clear and independent evidence that labour, utility and rental costs cannot be used to explain away the huge price differences, the reality is that retailers were making significant margins and profits. I suppose the market will always charge what it thinks the consumer will pay and perhaps during the boom years enough (not all) people were willing to pay high prices.

However I think a lot of retailers and businesses were slow to respond to the changing economic circumstances that many consumers found themselves in early last year. They were killing off the golden goose they plucked so easily for a decade. And as a result people began to buy less, switch to the discounters and more recently go North.



Falling through the floor-hopefully prices will follow!

Obviously there are short term benefits for consumers in terms of saving money by heading North. However there are medium and long term benefits as well, not only for the consumer, but for our economy and society as a whole. Having such strong competition available cross border will force retailers and businesses here to reduce their prices and offer better value and service. We saw that to a certain extent over Christmas and New Year with the major reductions in some stores. I believe if retailers here are to regain and retain customers and market share they will have to cut prices.

We are always told that one of the greatest benefits of the EU is the single market and indeed the EU Consumer Policy actually promotes cross border competition stating "the potential therefore exists for deeper EU-wide retail markets. Opening up cross-border retail markets is the key to unlocking the potential of the retail internal market. As cross-border shopping develops as a credible alternative to national markets, consumers both have greater choice and national markets are subject to greater competition."

So contrary to what some politicians and retailers say this "Northern exposure" is actually a good thing. Yes we will lose some tax revenue in the short term, but in the long term for our society and economy, it has positive aspects because it will keep and hopefully force prices down and reduce the cost of living for all and make us more competitive.

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.