Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach.

Leinster House

Dublin D02 XR20

Re: Investment Funds in the Irish Property Market

Dear Chairman,

Thank you for the opportunity to present to the Committee on the above matter.  This paper draws on my experience of over 20 years in investment and retail banking and 3 years with Kennedy Wilson.  Since 2015, I have been working with distressed mortgage holders, assisting consumers in filing complaints with the Financial Services and Pension Ombudsman (FSPO).

While the focus of this presentation is on Vulture Funds[1], I also deal with the entire process from origination of the mortgage, and further, describe the general protections available to consumers of financial services in Ireland.

Vultures Funds invest in distressed assets. They form part of the unregulated world of shadow banking.  They all have one thing in common; to seek above average returns on their capital. They are accountable only to their Managing Directors and investors. 

Vulture Funds provide liquidity to the banking system by purchasing illiquid distressed debt at a discount in troubled times.

In this paper, I will address the following:

1. How is the residential mortgage market different to other banking sectors?
2. What protections exist for consumers in this market?
3. Enforcement of Consumer Protections and potential conflicts of interest.
4. Why did the banks delay sales of their distressed Home Loans?
5. What caused the banks to eventually sell?
6. Who are Debt Servicers?
7. How do the Vultures manage distressed family Home Loans?
8. How do Vultures fund their portfolios?

1. How is the residential mortgage market different to other banking sectors?

This market is different because “the laissez-faire rules which might apply in the case of the borrowing and lending on the international capital markets cannot be applied in exactly the same way in the case of the domestic mortgage market, given that these are matters which gravely affect the long term welfare of most members of the general public”, as recognised by the Courts[2].

The Central Bank reinforced this view where they noted[3] in 2005 that “Consumers are far less well informed about financial products than the providers of those products………many potential buyers of retail financial products may not even know what it is that they do not know.”

Both statements clearly indicate that the authorities believe that consumers of financial services need protection, as products such as Home Loans can gravely impact the long term welfare of our society.

• What protections exist for consumers in this market?

The Central Bank issued the first Code in 2001, in the form of a Code of Practice.  This Code sets out the principles of consumer protection and has placed a marker down that the concept of “Buyer Beware” is no longer appropriate for this sector.  A more expanded version of this Code followed with the publication of the Consumer Protection Code 2006.  These Codes placed obligations on banks selling Home Loans to follow mandated rules.  The Codes were supplemented by instructions on best practice issued directly to the lenders by the Central Bank, as noted in its Annual Report and Accounts.

• Enforcement of Consumer Protections and potential conflicts of interest.

While all the protections required for the consumer are in place when purchasing a mortgage, there is an apparent conflict of interest when it comes to enforcement. Namely, the Central Bank is responsible for both Consumer Protection and Prudential Supervision. This structure is out of line with both the UK and the US, who have similar banking models to Ireland. 

That is, there is no one dedicated independent body in Ireland enforcing Consumer Protection with respect to financial services.

Appendix A sets out the State bodies involved in Consumer Protection and deals with conflict of interest in more detail. 

• Why did the banks delay sales of their distressed Home Loans.

The liquidity crisis had passed with the creation of NAMA and other Troika initiatives.  Banks had no desire to sell their non-performing Home Loans, as the necessary disclosures in a sale would expose issues such as the absence of documentation, security of title, and misconduct.  To gain an understanding of the pressure on banks’ administrative functions, the table below sets out the number of Home Loans originated at the height of the Celtic Tiger compared to a more normalised 2018.

Years	No. issued
2005	102,965
2006	105,313
2007	93,414
2018	24,422

• What caused the banks to eventually sell?

The European Central Bank called time on this retention policy by implementing changes to regulatory capital rules.  The ECB was preparing for the next crisis and needed to ensure the loans, even if fully provided for, did not continue to distract their regulated banks.  The regulatory charges were prohibitive and the banks had no choice but to meet the new target levels for distressed loans.

As a result of regulatory changes, and the need of certain foreign banks to withdraw from the Irish market, 113,000 Home Loans, secured on family homes, transferred from the heavily regulated banking environment to the world of shadow banking.

• Who are Debt Servicers?

The Vulture Funds are not in the day-to-day business of administering loans and have delegated this function to licensed Debt Servicers.   These Debt Servicers meet the local legal requirements and their SPVs[4] are often the legal owner of the loans.  The Vulture Fund, who takes all the risk and reward of the purchased portfolio, has the status of beneficial owner.  Local rules will dictate how the responsibilities are allocated.  The Debt Servicer is the equivalent of the operations department within a bank.  

• How do the Vultures manage distressed family Home Loans?

It is important to note that Vultures only purchase Home Loans where a default, or arrears, exist. When a consumer defaults or goes into arrears (including voluntary rearrangements), the contract is broken and they effectively lose most of their contractual rights.

The rights of the borrower do transfer on sale but these rights are now significantly diminished to that of “Principles” contained within the various consumer protection codes.  In a shadow banking world with no principles, “General Principles” defined in the Codes of Consumer Protection, can become highly subjective. 

The Vulture always ensures it purchases a valid and enforceable legal claim. 

In terms of the day-to-day management of distressed Home Loans:

1. Loans are not written down and permanent restructures involve deferring some or all of the capital repayment to a later date.  No write downs are given as that would entail the Vulture giving up value in the form of house price appreciation, access to next of kin, access to equity on death and pension assets. 
2. There are no deals to be done in this market, as there is no refinancing available in Ireland for retail borrowers who have defaulted and aged.
3. Payment terms are continually assessed and redefined/changed, depending upon affordability to the home owner – death by a thousand cuts.
4. Interest rate increases are applied even though the maximum cash is being extracted.  When applied, the increased charges have the effect of reducing the family’s equity in the asset. 
5. There are no options available to consumers to fix their interest rate as the Vulture is not a functioning bank and any use of derivatives to deliver fixed rates would eat into their profitability.
6. The Vulture purchases portfolios of “Financial Claims”. They need the right/the threat to commence legal proceedings to obtain leverage to negotiate maximum cash extraction from the family.
7. The threat of legal proceedings is crucial to the business model and ensures the Vulture  can maximise cashflow from the assets.  Most possession orders granted are never acted upon but continuously used as leverage to extract more cash. 
8. Collective yield from the portfolio drives the purchase price.  Price is also negatively impacted if documentation, title and the conduct of the underwriting bank are weak.  There is no commercial purchase price for individual loans.
9. Licensed Debt Servicers are employed to administer and maximise the cash flow from each individual loan and meet the legal requirements for ownership.  The Debt Servicer records loans on their system at the full amount outstanding, including accrued arrears; they do not necessarily need to know the price paid for the portfolio.  The Vulture Funds have the status of beneficial owners of the loans and are located overseas.
10. Loans are packaged to maximise sale price, for example, a building society’s entire Home Loan book was packaged as four distinct portfolios.
11. Consumers credit records are never really expunged and they are truly “mortgage prisoners”.

Appendix B contains an extract from a Rating Agency’s commentary on how particular debt servicers manage individual Home Loans in a RMBS[5] structure which perfectly describes the strategic approach taken to maximise cash extraction. 

• How do Vultures fund their portfolios?

Similar to banks, Vultures employ various methods to fund distressed mortgage books, however, the RMBS[6] market, in particular, is extremely attractive given its pricing.  The structure provides long term funding and allows Vulture Funds to play the long game on their Irish Home Loan portfolios.

Distressed Family Home Loans are very different to other distressed asset categories.  There are effectively two assets purchased – (1) the home and (2) the cash that can be extracted from the family. There is nothing to negotiate; no asset/property to sell.  For commercial loans and BTLs[7], the negotiation is based upon whether the debtor can pay more for the asset than a market sale can achieve.  If the asset generates cash, refinancing may be available.  That is not the case with a Home Loan; the consumers are in penury for the remainder of their lives.

We have effectively transferred 113,000 families to an unregulated world of banking dedicated to self-interest, where the only objective is to make money.  To quote a Managing Director of a global debt servicer, an Irishman, at an investors’ conference in London “Irish Distressed Residential Mortgages; the gift that just keeps giving.”

What can be done to help your constituents?

First, individuals who are not coping with their mortgage need to establish what the underlying issues are.  There are two primary reasons for Home Loan mortgage distress:

1. The borrower’s circumstances changed after they drew down the funds, typically due to permanent job loss, ill health, divorce, etc., or,
2. The mortgage was unsuitable at the time of drawdown, i.e., mis-sold.

When faced with the circumstances in 1 above, the consumer needs to work with MABS and explore all the options that are available such as Mortgage to Rent, insolvency, etc.  

If the borrower’s circumstances have not changed since drawdown or they have recovered after a temporary blip in their ability to repay as per the original contract, then they need to establish if their mortgage was mis-sold, i.e., they were originally sold an unsuitable financial product.

If the mortgage was mis-sold, they need to file a complaint to the Financial Services and Pensions Ombudsman (FSPO).  There is a set process that complainants need to follow and this is set out on the FSPO website.  Your constituents need to phrase the complaint very carefully, as 49% of all complaints last year were unilaterally rejected/closed by the FSPO before reaching Mediation or Investigation stages.  More details are provided in appendix C.

What can you do systemically to assist the consumer?

1. Create an unconflicted, properly resourced, body to independently enforce the rights of consumers of financial services and bring Ireland in line with international standards and best practice.
2. To review the role, approach and resources of the FSPO to ensure it is fit for purpose and is adequately resourced to match the number of complaints it receives. See appendix C.
3. To ensure that the FSPO takes a “common-sense” approach in its application to Time Limits for complaints, as instructed by the Courts in Baynes V FSPO 2022.  See appendix D.
4. Review the current access to justice available to the consumer. Parties to consumer complaints should have the right to appeal decisions of the FSPO to the Circuit Court or an independent quasi-judicial appeal body.  The Circuit Court is now deals with possession orders. See appendix E.

Regards, Ben Hoey, FCCA, AMCT.

  Appendix A

Conflict of Interest in the Irish system

The Central Bank is responsible for Consumer Protection, issuing and ensuring adherence to Codes.  When it comes to enforcement – if the consumer has been wronged, any redress must be paid by a bank.  A gain to the consumer is a loss to the bank. 

The European Central Bank (ECB) is responsible only for Prudential matters and has no responsibility for Consumer Protection.

It follows that the same body cannot be responsible for supervision of both Consumer Protection and Prudential matters and Ireland is out of line with both the UK and the US who have similar banking models.

The following examples show differences in approach taken in resolving matters:

• Payment Protection Insurance (PPI) – In the UK, no time limit placed on the period of look back while in Ireland the banks limited their look back period to July 2007.

• In June 2020, the UK’s FCA[8] brought a test case in the High Court against eight insurers to clarify whether certain business interruption insurance policies should cover losses related to the COVID-19 pandemic. There was no equivalent action in Ireland by any State body or consumer representative body.

Competition and Consumer Protection Commission (CCPC) is restricted to consumer educational matters and Government advisory role under its legislation.  It has refused to raise awareness of mortgage mis-selling and is still considering the decision in Baynes V the FSPO, issued in December 2^nd 2022.  It refers financial services consumer protection matters to the Central Bank.

The Central Bank of Ireland will not deal with any complaints regarding their actions in any structured manner.  The appeal process is a Judicial Review application to the High Court.

MABS, the money advisory and budgeting service focuses on the future by assisting the consumer with budgeting, helping with restructures, Mortgage-to-Rent scheme and insolvency matters. 

The Financial Services and Pensions Ombudsman (FSPO) is an Alternative Dispute Resolution (ADR) forum which acts as mediator and adjudicator between consumers and lenders. It treats both parties equally except with respect to Time Limits – see appendix D.

      Appendix B

Rating Agency Report on Debt Servicers on RMBS

“Changes to interest-only to restructure loans is typically not as a permanent restructuring

solution and tend to be used temporary. Typically, the servicers would prioritize part-and-part repayment when there is enough affordability to bring down the LTV ratio by the end of the life of the mortgage loan. Borrowers’ affordability is assessed going into retirement age and the ability of the borrower to pay the balance of the loan through a repayment vehicle, including but not limited to a pension lump sum, the sale of assets, or assistance from next of kin.  

For split loans, 12.8% of the preliminary pool have had a split restructuring applied. The interest-only arrangement is reviewed regularly (typically every three years) where step-ups in repayment are sought as a means of achieving full repayment without relying on the sale of the underlying collateral at maturity.

Most of each sub portfolio have already undergone a permanent restructure considering borrowers’ circumstances. Should these restructure agreements fail, the servicing strategy for both servicers aims to realize the real estate value in the most efficient manner available.” 

Appendix C

The Financial Services and Pensions Ombudsman (FSPO) 

The purpose of the establishment of the statutory complaints procedure was to afford complainants an informal, expeditious and independent mechanism for the resolution of complaints.  It is an Alternative Dispute Resolution forum which deals with consumers complaints against Financial Service companies.

The role of the FSPO is restricted to Mediation, Investigation and Adjudication and treats each party equally, with the notable exception of Jurisdictional matters – see appendix D

It can award compensation for both misconduct and breaches of law, however, there is no award of legal fees; the consumer is on their own.  As a result, the legal profession cannot financially justify representation at this forum and the consumer is left to argue against a financial services company, with all the resources that it has available to it. 

The FSPO upheld 96 complaints in 2022 in favour of the consumer.

The FSPO annual report for 2021 records “Legal Fees” at €3.1 million (€1.8 million in 2020) which represents 73% of the amount expended on ‘Salaries and Staff Costs” at €4.3 million.  It would appear that the FSPO expends as much defending itself and its decisions, as it does on investigating and closing consumer complaints.  There is no clear explanation or breakdown of the €3.1 million of legal fees in the annual report and accounts.

The 96 legally binding decisions delivered €616,686 of compensation to consumers in 2022.      

The 2022 mission statement, outlined in the FSPO annual report and accounts, is “to provide an impartial, accessible, and responsive complaint resolution service that delivers fair, transparent and timely outcomes for all our customers…….”

2022 recorded 4,647 complaints closed, down 25% on 2020 numbers of 6,193.

Only 2% of all complaints closed were upheld in favour of the consumer in 2022.

49%, or 2,296 of total complaints dealt with in 2022, were closed within a short period, not reaching Mediation or Investigation stages.

With respect to timeliness, 40% of the complaints closed in Investigation Stage, were ongoing for more than 3 years. No details were provided beyond the 3 years.

Appendix D

Jurisdiction to Investigate and the FSPO Act 2017

The Oireachtas amended the FSPO Act in 2017 to recognise, amongst other things, that problems may only arise at the later stages of long term products such as mortgages. The extension of the period available to the consumer to take complaints brought Ireland in line with international standards.  The discretion to investigate complaints, relating to long term products, was granted by way of Sections 51(2)(b)(ii) and (iii).  Under Section 51(2)(b)(iii) the Ombudsman’s discretionary powers where significantly widened to reflect the need to examine long term products such as mortgages:

“(iii) such longer period as the Ombudsman may allow where it appears to him or her

that there are reasonable grounds for requiring a longer period and that it would

be just and equitable, ……………..”

The following paragraph was included in the amendments to the 2017 Act:

“Where a question arises as to whether the Ombudsman has jurisdiction……………. to investigate a complaint, the question shall be determined by the Ombudsman whose decision shall be final.”

Due Process surrounding Statute of Limitations, normally dictates that it is the responsibility of the respondent or defendant to raise such matters and provide support to their claim.  It is not the role of a “mediation and adjudication” service, to raise such issues unless the complaints are clearly outside the remit of the FSPO.  Those clearly outside the remit of the FSPO are defined in Section 52 of the FSPO Act.  Section 52 permits the FSPO to gather more information on the complaint but does not permit it to investigate periods after the date of the complaint with the purpose of identifying when the consumer became aware of the mis-sale or the unsuitability of the mortgage.  The FSPO carries out these investigations on Jurisdiction on a bilateral with the consumer only. 

By any reasonable standards, it is most improper for a “Mediator or Adjudicator” to action the following steps – (1) raise the issue, in the first instance, (2) make the case for the complaint being statute barred, (3) investigate bilaterally with an inexperienced consumer, without a proper understanding (or an investigation) of the complaint, and (4) subsequently unilaterally make the decision, and (5) declare that decision final. 

In this process, the FSPO issues “Preliminary Opinions”, which can run to 22 pages, referencing legislation.  The consumer cannot possibly engage with this Preliminary Opinion without legal representation.  Expressed as an “Opinion” it misleads the consumer, as well as intimidates, given its style and depth; what consumer would argue with an “Opinion” from the Legal Department and, as a result, most Preliminary Opinions are not challenged and the complaint closes.

A staggering 49% of complaints, dealt with by the FSPO in 2022, were closed before reaching Mediation or Investigation. This would appear contrary to how the Courts view the role of the Ombudsman:

“…. purpose of the establishment of the statutory complaints procedure was to afford complainants an informal, expeditious and independent mechanism for the resolution of complaints against a financial service or product provider………..”. 

If the consumer does challenge the Preliminary Opinion and it becomes a final determination, the only recourse available to the consumer is an application to the High Court for Judicial Review of the FSPO practices.

As part of your deliberations on this matter, the Committee should assess if the conduct of the FSPO regarding Jurisdiction is in line with the intentions of the Oireachtas when drafting the 2017 Act.

The Office of the FSPO has never undergone an independent review of its approach, interpretation of its Act, processes and performance.  The FSPO has never been challenged by a consumer on the issue of Time Limits until Baynes V FSPO, 2022,  where the Court concluded that the FSPO’s lack of proper engagement with Section 51(2)(b)(iii) was unlawful.

Appendix E

Access to Justice for the consumer of financial products

The Competition and Consumer Protection Commission (CCPC) establishing legislation, restricts the body to consumer educational matters and Government advisory.  It has refused to raise awareness of mortgage mis-selling and is still considering the decision in Baynes V the FSPO, issued in December 2^nd 2022.  It refers all financial consumer protection questions to the Central Bank.

MABS, the money advisory and budgeting service is forward looking and limited to budgeting, helping with restructures, general advice, Mortgage-to-Rent scheme and insolvency matters. 

The Central Bank will not entertain, in any structured manner, any complaint that relates to their conduct. They do not follow their own procedures and do not advise of any appeal process.

If a consumer is dissatisfied with any decision of the above public bodies, appeal is limited to the High Court. 

The costs of appealing decisions is prohibitive and may result in costs against the consumer.  There is no funding available for legal fees (for and against the consumer) due to the laws of Maintenance and Champerty.

Direct access to the Courts is prevented due to the Statute of Limitations (six years since conduct occurred) as well as prohibitive legal fees (for and against) for a consumer.

Appeals against a decision of the FSPO is to the High Court only and must be executed within 28 days.  High Court fees are disproportionate to any compensation sought by a consumer of financial products and, as expected, consumer appeals are rare.

The FSPO also advise/warn consumers in writing, that if they appeal to the High Court, the FSPO may seek their costs, if the consumer’s action is not successful.

On the other hand, financial services companies have significant resources available to appeal to the High Court, and it is very much in their interests as a single lost case may create a precedent costing the industry millions.

The FSPO is naturally conscious when making decisions in favour of the consumer of potential High Court appeals by the bank, which might place a spot light on its decision making. This is further complicated, in that many more cases are conceded and settled by the banks in the investigation stage before the decision is upheld and published.

---

[1] defined as the beneficial owners of Irish consumers’ distressed Home Loans, namely the Global Investment Funds. They employ licensed Debt Servicers in Ireland for servicing and legal requirements.

[2] Hogan J. Irish Life and Permanent PLC v. Financial Services Ombudsman and Thomas, 2012.

[3] Extract from the Central Bank Consumer Protection Impact Analysis 2005.

[4] Special Purpose Vehicle.

[5] Residential Mortgage Backed Security.

[6] Residential Mortgage Backed Security.

[7] Buy-to-Lets, house purchased by consumers to let on a long term basis.

[8] Financial Conduct Authority

Used frequently in the pension world to avoid regulation. Companies can potentially utilise this instrument to raise equity and thus potentially avoid the Prospectus Directive.

This blog item is aimed at those individuals who are battling the banks through the Irish Courts in an attempt to obtain justice.  You all use different tacks and you all come across clear breaches of law and clear injustices on specific points of law.  Your frustrations mount as you reference Statute and precedents; you know you are right but ignored by the system. As a result you see the Irish Judiciary as the enemy.  This note is an attempt to explain why the Judiciary behave in what would appear to be an unsympathetic and disproportionate manner towards the consumer.

I genuinely believe that some of you are looking for justice in the wrong place.  Please read to the end as I think I know where it can be found or, at worse, will give you an extra line in your defence.

Recently, I’ve been reading about the plight of the modern referee in professional rugby.  This is a game that professionalised in the mid-nineties yet holds dear, its rules, sense of fair play and the amateur game underpinning it.  World Rugby continually reappraises the laws of the game to ensure that parents will want their children to play, without the fear of head traumas.  Of course, I am aware that they need to take actions now to avoid future legal actions for damages from retired players.

In this modern game attempting to attract an audience, the referees are reporting that they are under more and more pressure to “keep the game going” and reduce the amount of stoppage time.  One top class ref reported that, when a breakdown occurs such as a ruck, he might see three or four possible infringements of the law but he is only interested in those offences that give a clear and significant advantage to a team, in all other cases he needs to keep the show on the road or he won’t get the next gig.

That’s what the judiciary do when it comes to matters of contract law.  The bankers first defence will always be the loan contract.  Treating the contract with the greatest of respect is the equivalent of keep the game going.  The contract is sacrosanct and no matter how many infringements around or emanating from the contract there are, it does not matter.  The bankers consumer loan has already been challenged in the “Unfair Contracts Arena” without much success.  Among my favourite guidance from the Judiciary to Irish lay litigants are:

“So What!” and “You borrowed the money, you need to pay it back!”

Even if the contract cannot be found, it will be implied under certain circumstances.

We need to put your engagements with the LAW in context. If the loan contract is the nuclear option, all other defences are akin to the bow and arrow.  In my opinion, this is why you are not being listened to and your valid arguments fall on deaf ears.  However, I do believe that some members of the Judiciary smell a rat and use proportionality to push things down the road.  

My question to you “what wrong has been done against you?”.  Did you borrow the money, did your circumstances subsequently change, and now you are simply fighting to survive – stay in your home.   I’m sorry but you will struggle to challenge the validity of the loan contract.  The loan contract will win out if Ireland is not to become the legal outlier of OECD countries.  This is so important as Foreign Direct Investments assess the legal structure of a country before investing.

However, you need to ask yourself, did the bank act in an improper way when granting you the loan facilities?  In other words, did the bank follow the rules when lending you the money?  What rules I hear you ask?  The financial services consumer market is heavily regulated and has a set of principles and rules known as codes.  The codes must be followed by the licensed lender as part of the contract to participate in this consumer market. 

The Central Bank issued its first code of conduct with respect to financial services, “The Code of Practice for Credit Institutions”, in 2001.  This Code marked an important modification of the principle of caveat emptor (let the buyer beware) by the express requirement that financial services firms act

“with due skill, care and diligence in its dealings with consumers” and “In particular, it must not recklessly, negligently or deliberately mislead a consumer as to the perceived advantages or disadvantages of any banking service provided;” and “makes adequate disclosure of relevant material information……..”

Furthermore, the Courts have recognised:

“The laissez-faire rules which might apply in the case of the borrowing and lending on the international capital markets cannot be applied in exactly the same way in the case of the domestic mortgage market, given that these are matters which gravely affect the long term welfare of most members of the general public. The very fact that the Office of the Financial Services Ombudsman was established by the Oireachtas is itself living testimony of this.”

In the home loans that I have reviewed, and I have reviewed thousands, the codes, in my opinion were not followed at origination prior to 2009.  This is known as mis-selling, which results in an unsuitable product being sold to a consumer and is against the (soft) law.  If you believe you have a case of mis-selling, then you do have a forum for justice and  it is not the Courts, it is the Financial Services and Pensions Ombudsman (FSPO) Act of 2017.  The Judiciary recognise this forum for what it is – Justice Niamh Hyland on 19 February 2021  [Danske V FSPO]:

“50. But the argument made (by Danske) fails to recognise the import of the jurisdiction being exercised by the Ombudsman under s.60(2)(b) and (g), as discussed earlier in this decision.  In principle, a financial service provider may have acted entirely in accordance with law and still be found to have acted unreasonably or improperly. “

“It may have no black letter duty under statute or “soft” law obligation under a regulatory standard to give unambiguous information as to the loss of the tracker mortgage and the inability to return to a tracker rate under the new mortgage but may be still be found to have acted unreasonably and improperly in not doing so.”

More importantly with emphasis that the contract is still valid:

“A customer may be bound by their contract with the bank but nonetheless may obtain redress which amounts in substance to a setting aside of those contract terms.  As noted in the introduction to this judgment, the mere absence of a breach of law does not immunise a financial services provider from a finding of unreasonable and improper conduct under s. 60(2)(b) and (g) by the regulator. The statutory scheme and the case law referred to above makes this clear.”

If this FSPO case, awarding compensation to a consumer, appealed to the High Court by the lender, had gone through the Court process in the first instance, the consumer would have lost.  There is no tort of reckless lending but there is a case for “improper” conduct or misconduct in the world of consumer banking.

The FSPO is the forum that some readers need to look to but there are problems – I call them Irish problems but they are solvable and they are as follows:

• The Ombudsman is a Irish public servant and behaves as such;
• The Ombudsman has no banking conduct experience;
• Their processes are not automated so they are very slow;
• They do not employ precedent so they are very slow;
• They are understaffed and not trained so they are very slow;
• Did I mention that they were very slow;
• Awards of redress/compensation up to €500,000;
• They can only look back to 2002;
• Prior to Baynes V FSPO [2022], it has been near to impossible to take a case where the wrong occurred more than six years previous to the date of complaint.

You’ve been warned, but can I say that it is worth the effort but please make sure you are a consumer and thankfully, “consumer” is widely defined.

Why does no one use this forum? Simple answer, our trusted solicitors hate it for some of the reasons above, there’s no award of legal fees if they win, so bottom line is it’s not profitable for the Legal Profession to pursue this line for their clients.

Secondly, you need to understand banking, the codes, the internal guidance and what conduct is expected by the regulated institutions.  Outside of banking, you will not find many real bankers, knowledgeable and honest, who will assist the ordinary consumer in proving misconduct.

Thirdly, the banks and their powerful lobby groups spin concepts of “Moral Hazard”, “Strategic Defaulters”, “Can pay, won’t pay”. Insidious attempts to set neighbour against neighbour.  They have convinced Government that a healthy banking industry is key to a successful economy.  They have even gone as far as to set up the “Irish Banking Culture Board”, staffed and funded by the very same “Group Think” that is the banking community. This Board and its purpose is endorsed and supported by the Government to self-regulate their “Ethics”.  This would be funny if it was not so insidious.  Certain banks may even write off debts of famous sports people to propagate a positive message into the community – we back brave! Count on us! Respected individuals who see no harm in making statements that they believe you need to repay your loans. It’s another lobby expense, just a little more insidious! We have no way of knowing if any politically sensitive persons have received favourable treatment from the banks or the vultures.  

All this distraction is to ensure that you, the lay litigant, the struggling debtor, do not look in the right place.  

In conclusion, on this part anyway, if you file your complaint to the FSPO, then please ask the judge/registrar, in the common law process you might find yourself in, to grant a stay on any action until the FSPO has fully investigated. Did I mention that they are very slow.

Now part 2, the one significant exception to my advice on seeking consumer justice through the FSPO, is the injustice that our “licensed consumer facing mortgage lending financial institutions” were permitted to sell loans to a bunch of high return private equity bankers.  Loans secured on family homes. If you raise that with the FSPO, they will rightly say “that matter is more appropriate for the Courts” and they are right, as this sale, in my humble opinion, is Maintenance and Champerty, a common law from c. 1630 still on Irish books.

I feel so strong on this, that I want to take a Court case but no, stop, I can’t, because I need another party to fund the case and, yes, you’ve got it, that’s Maintenance and Champerty.

Ireland did not repeal or amend this ancient statute when our statute books were cleaned up in 2007.  I have my theories as to why is was kept on the books but that’s for another day.  Read Persona V Irish Government, read Osus V HSBC, and you will see that Maintenance and Champerty is alive and well in Ireland.  So it is what it is, as the solicitors say, so my question is:

“If a loan, in default, is sold to a third party, who had no prior interest in the matter, and the right to litigate against the defaulted party also travelled, then surely that is Maintenance?  The sale price as a percentage of the loan is the value passed to “maintain” the case against the consumer.”

“If Maintenance above is proved, then presumably, where the purchaser obtains the right to litigate for the full value of the loan, rather than a fee, then surely that is Champerty?”

“Are the sales of family home loans a matter for public policy?”

Selling loans is a vital part of a healthy banking system and should never be stopped.  I have no issue with the sale or transfer of performing loans but not those in default.  Once in default, they become a “claim to litigate”.  If a purchaser of these claims wants to cure, restructure, etc. and offers write downs, etc. and all the flexibility that a functioning bank can offer, then I have no issue.

I do have an issue when someone buys a claim to litigate, and uses that claim to extract as much cash out of the borrower that they can get their hands on without any cure, restructure, certainty or fair deal.  Below is an extract from a renowned Rating Agency’s comments on a debt servicer’s management of Irish distressed family home loans:

“Changes to interest-only to restructure loans is typically not used as a permanent restructuring solution and tend to be used temporary. Typically, the servicers would prioritize part-and-part repayment when there is enough affordability to bring down the LTV ratio by the end of the life of the mortgage loan. Borrowers’ affordability is assessed going into retirement age and the ability of the borrower to pay the balance of the loan through a repayment vehicle, including but not limited to a pension lump sum, the sale of assets, or assistance from next of kin.” 

Could not have put it better myself. Clearly no intention to cure and give certainty to the borrowers on their home, even in retirement.  Is this even proportional.  They achieve this with the threat of possession orders. Possession orders that they rarely enforce as they have achieved their objective of extracting maximum amount of cash from the debtor.

I like to end on a positive, in that I might obtain my funding for the Court case, as Maintenance and Champerty is happening every day when Irish solicitors offer “No Foal No Fee”.  The solicitors are “Maintaining” the case, it’s just not so obvious, but the solicitors and barristers are not a direct party to the action.  In Atlas (Planning Judicial Review) which involved a property developer claiming that a Residents Association’s Judicial Review had been funded by persons not affected by the development, the Court rejected the claim of Maintenance and Champerty levelled at the Residents on the basis that all participants, i.e. funders/donors of the Judicial Review costs, had some interest in the action, a community interest.  So some hope emerging that a community impacted by the issue might just be able to get the case going on behalf of all those sold out of the banking system.

The Author.

Ben Hoey and Quartech, trading as misselling.ie operate as a commercial concern that assists consumers make compensation claims to the FSPO for mis-selling .  We do not offer legal advice but we know plenty about banking and misconduct.

Road Traffic Accident Versus mortgage Mis-selling

I was in Court recently, helping two pensioners take on the might of a European Bank.  We had a strong case and the Respondent’s barrister was struggling and, as a result, started comparing the situation in hand to a Road Traffic Accident.

The barrister’s instinct to compare were correct, in that both the “Road Traffic Management” and “Consumer Mortgages” are similar in that they both operate in a heavily regulated environment.  There are clear rules and everything is well sign posted or at least most of the time.

Now, for the record, the barrister did stop as he realised he was digging his own case grave with an unrehearsed story line. However, it got me thinking that he was on to something.  Is there a difference between being hit by a car and being mis-sold a mortgage. Both result in injury, both involve real people and both can have life changing implications that are not always obvious at the time of injury.

In a Road Traffic Accident, when people are hurt, the first responder, the ambulance service focus on the injured parties.  The next responder, the police, secure the area, manage traffic flow to avoid further accidents, and try to work out what happened.  Was it an unfortunate accident, did anyone break the rules, speeding, running a red light, weather conditions, visibility, drug taking, etc. etc.

When a consumer defaults on a mortgage, the first responder to the scene is the bank who sold the mortgage.  There is no second responder, no police. 

The bank does not investigate the cause of the accident, why the default arose, they just want their money back, and as soon as possible. Usually a default is caused by a change in the borrower’s circumstances such as job loss or illness, but sometimes a default arises because the loan was unsuitable from the start; a mis-sold mortgage.  Consumer mortgage mis-selling was summed up well by the UK’s financial services regulator:

“if  your circumstances have not changed and you struggle to pay your mortgage, it is likely that the mortgage was not suitable for you”.

Every “Interest Only” home mortgage that I have witnessed, defaults at the end of the term.  The borrowers, usually in their sixties, receive a letter stating the full amount is now due and failure to pay will result in default.

Who in their right mind would sell Unsuitable Products?

Now, why would a bank want to offer you an unsuitable product.  You could ask the same of an infamous second hand car salesperson, withholding some facts.  To fully appreciate how such an issue can arise in a bank, you only have to look at the US property crash of 2007 (reference “The Big Short”), where salesmen offered consumers cheap money without a care in the world, knowing that the mortgage will be sold to another bank or pension fund within a very short period, and that ultimate buyer has no sight of the underwriting.  [Underwriting is the process of assessing the product to ensure it meets both the customers’ and the bank’s risk appetite and that the return is adequate for that risk]

By the way, the salespersons and their overseers have pocketed their commissions and bonuses when they sold the mortgage and certainly within a year of the drawdown.

The underwriting is always carried out by a group separate to the mortgage sales force and that segregation is a fundamental control in banking.

Why was the Irish Consumer Mortgage Market so attractive to European Banks given its size

Ireland in the mid noughties, became an attractive venue for foreign banks, as the Celtic Tiger roared.  The introduction of low interest rates, thanks to EU membership, Foreign Direct Investment leading to increased number of well paid jobs, young educated English speaking population, all looking for homes and mortgages.  All this despite our relative tiny market size, made the numbers stack up back at head office.

Bankers and their Capital

Why is the consumer mortgage market so attractive?  The answer lies in capital, which is the banker’s own money at risk.  Bankers borrow most of what they need to fund their loans by using other people’s money –  deposits, international loans, securitisations, etc. but they do need to put up some of their own capital.  How much capital is required against a loan is dictated by the prevailing regulatory rules and strict international standards apply.  If the bank in question has few historic losses on consumer mortgages, then the approved models, that calculate the capital, will produce lower capital requirements.  

Up to 2009, there was a European tradition of not defaulting on your home loan so the models required banks to put up very little capital compared to their commercial lending activity.

An Example of Why Consumer Mortgages are so Attractive

A bank advances €100m commercial loan, the banker’s capital requirement might be €10m.  If, after borrowing costs,  net interest is 3% or €3m, Return on Capital is 30% (€3m/€10m).

If the same bank advances €100m in consumer mortgages, it’s regulatory capital models might produce a capital requirement of €4m.  The gross margin is the same at €3m, however, the Return on Capital goes to 75%.  I’m ignoring all the fixed costs, etc. but you get the maths, same income levels but return goes from 30% to 75% on capital invested.

The Irish consumer mortgage market became very competitive as more and more foreign banks arrived, driving down the cost to consumers. They chased market share and deals for the Irish consumer became cheaper and easier to obtain. The local banks joined the madness, as their traditional market share was obliterated. The building societies were also flexing their muscles and competing with the banks, now run by individuals with ambition to challenge the old model.

The Outcome

All this competitiveness culminated in a mortgage product not anticipated by regulators or the Consumer Credit Act (CCA) 1995.  For example, the CCA addresses Endowment Mortgages, which are Interest Only loans with an insurance policy and that policy provides sufficient funds at the end of the term to clear the mortgage.  The Endowment Policies have had their own mis-selling issues, however, they did have a repayment of capital vehicle.  It is clear from the rules in place that no one anticipated a home loan that did not actually pay off any capital. The banks, lazily, used the same documentation for their Endowment Loans (without the Endowment) and Buy-to -Let loans to offer this Interest Only product.   If the CCA or regulators had anticipated such a product, then the following associated warnings might read as follows:

WARNING: This in an interest only loan and the entire amount borrowed will be outstanding when you are close to retirement.  We have ignored the regulatory rules in place which require us to establish how you might repay the capital sum in 20 years-time but we don’t care as that’s a very long time away.

WARNING: This in an interest only loan and is effectively a rental arrangement, as we will rely on you to sell your home at the end of the term unless you have come up with some great plan all on your own. By the way, banks are not permitted to own consumer property and this is a great solution for us to avoid those rules while enhancing profits.

As competition for market share increased, other banking best practices were ignored and might have required the following warnings:

WARNING: The repayments on this mortgage go beyond your retirement date and neither the bank nor you have any idea how those payments will be met when your income naturally falls.

WARNING: We have not evidenced your income and relied upon aspirational statements from your accountant or yourself.

Was anyone watching? Was there a policeman?

The Irish regulator at the time had concerns and relayed its actions in its annual reports:

Central Bank Annual Report 2002: “detailed analysis carried out on home mortgage lending policy and practice identified some areas where mortgage lenders could improve their lending assessment and a set of characteristics of prudent home mortgage loan assessment was circulated to the mortgage lenders in February and July 2001.”

Central Bank Annual Report 2002: “the Governor has written to all mortgage-lending institutions to stress the need for the highest lending standards to be applied.”

Central Bank Annual Report 2003: “A directive was issued to credit institutions to improve their internal controls in the area of: (1) client income verification and…”.

The regulator was so concerned that they eventually published the detailed document entitled “Consumer Protection Code 2006”, for financial services companies. In the previous year, the regulator recognised the need to protect consumers and noted in the report Consumer Protection Code Regulatory Impact Analysis of December 2005:

“Consumers are far less well informed about financial products than the providers of those products. In fact, many potential buyers of retail financial products may not even know what it is that they do not know.  In the absence of complete information necessary to make informed choices, competition alone will not produce optimal outcomes for consumers”.

The Consumer Protection Code, published in August 2006, encapsulated what had already been communicated directly to banks with respect to mortgages and it continued with the principles set out in the Code of Practice for Credit Institutions, 2001.  Those principles set out the standards expected from a bank that it:

“acts honestly, fairly and professionally in the best interests of its customers and the integrity of the market; acts with due skill, care and diligence in the best interests of its customers; does not recklessly, negligently or deliberately mislead a customer as to the real or perceived advantages or disadvantages of any product or service;”

The 2006 Code specifically covered items previous communicated directly to the banks such as “Suitability”, “Know your Customer” and “evidencing of income” in detail and requested credit institutions to comply with “the letter and spirit of this Code”

Consumer Mortgages had its own section in Consumer Protection Code 2006

“Where a mortgage is offered to a consumer for the purpose of consolidating other loans…………………must provide the consumer with a written indicative comparison of the total cost of continuing with the existing facilities and the total cost of the consolidated facility on offer.”

“Before a mortgage can be drawn down…………………. and other supporting documentation evidencing the consumer’s identity and ability to repay.

Where the rules ignored?

It’s safe to say that a lot of these rules, controls and guidance were ignored as time progressed as banks fought for market share in the run up to the 2008 crash.  In 2016, US private equity firm Lone Star warned buyers of bonds, containing €564 million of loans issued by Irish Nationwide, that it cannot stand over original commitments tied to the home loans in their statement:

“No assurance can be given that the lending criteria of [the provider] in respect of the mortgage loans were applied at the time of origination of the mortgage loans………..” according to a bond prospectus for a vehicle called European Residential Loan Securitisation 2016-1 DAC, a Lone Star affiliate used to sell the mortgage-backed securities.

In other words, the issuer of the bonds cannot confirm that loans were granted in line with the mortgage provider’s lending criteria, that each loan has the correct documents attached, and that the lender carried out sufficient borrower background checks.

Contact us

Financial products are usually “mis-sold” in order to make an individual complete a purchase that does not properly suit their needs, and the product or service was recklessly misrepresented.

If you feel you are a victim of mortgage mis-selling prior to 2009, please complete the questionnaire on our website at https://misselling.ie at the APPLY tab, for a free review of your mortgage.

Author: Ben Hoey, The Insider, ex Merrill Lynch, ex Bank of Ireland, ex Kennedy Wilson.

Dear John McGuinness, Chairman

I listened with great interest to last week’s Oireachtas Finance Committee where you, as Chairman, asked Ger Deering (the Outgoing Ombudsman for Financial Services) his view on culture in the Public Service and that you believed there was a culture issue within the Civil and Public Services. You went on to list many individuals that you felt had been abandoned by the Public Service.  

I have, since the start of 2021, attempted to appear before your Committee about an issue that affects thousands of individuals in this country. Thousands that I believe have been abandoned by the State and suffer in silence. They are individuals that were mis-sold mortgages prior to 2008 and now live in fear of the future. These individuals can only obtain justice through the services of the Financial and Pensions Ombudsman as mis-conduct by banks cannot be tried in the normal court system and the Ombudsman was set up for this purpose. 

I have made the case that the Financial Services Ombudsman has been preventing a significant number of complaints to proceed to investigation. Many are rejected as the Office of the FSPO deems them as out of time. The banks, the subject of the complaints, have not raised any objection that the complaint is out of time and Mr Deering’s Office has made this determination on his own initiative. It contrasts with the situation and position held by some banks over the tracker mortgages. To understand the scale of the matter, in 2020, Mr Deering rejected c. 2,000 out of 6,000 complaints that his Office “Closed”.

I have submitted many papers to the Committee and also sought help from opposition parties to get in front of the Committee. The clients who I currently assist with their complaints have also submitted pleas to their local TD(s) and the answers that come back are similar and drafted by the appropriate Civil Servants. Thousands of people struggling with their inappropriate mortgages, with a fear for their future or who have already lost their homes, are being denied their only channel to justice and Mr Ger Deering is ignoring them due to the irrational interpretation of banking matters made by legal staff in his organisation. However, he is seen as doing a great job and is wished well in his new role. I believe he is part of the problem by limiting complaints and protecting the banks from their past behaviour.

In effect, I am a whistle blower in that I am an experienced banker who was working overseas when this misconduct was carried out and can see it for what it was. As part of other work with the (advocacy) group “Right(2)Homes,” I came across thousands of these mis-sold mortgages.  

The legislator had the foresight in 2017 to amend the FSPO Act to allow the Ombudsman to investigate past misconduct by the banks if the consumer complained within 3 years of becoming aware of the misconduct. Mr Deering continually holds the position that the consumer should have known of the misconduct when they signed the loan documents – that is an irrational interpretation as consumers have no banking knowledge of what conduct is expected within the banks and conduct driven by regulatory guidelines, consumer protection codes and good credit policies.  

You listed 16 people ignored by the State over the last 10 years. I implore you now to allow me to put the case for the thousands of our citizens who continue to struggle with potential homelessness or the fear of becoming homeless. Many have had their loans sold to overseas investors who now seek the highest possible return and unjust enrichment on their investments. 

Regards

Ben Hoey