As a rule, financial institutions recognize the need to maintain effective compliance with laws that carry criminal sanctions, such as bribery and corruption, fraud, and money laundering. Yet even a well-managed financial institution, otherwise committed to compliance, can expose itself to significant liability if it engages in sales practices that systematically mistreat its customers.
Although the Wells Fargo cross-selling scandal[1] has been the most prominent example of such misconduct, a recent enforcement action by the Central Bank of Ireland indicates that other financial institutions can be similarly capable of systematic customer mistreatment. On March 23, the Central Bank of Ireland reprimanded Ulster Bank Ireland DAC (UBID) and fined it €37,774,520 for “serious failings in the treatment of its tracker customers holding 5,940 mortgage accounts between August 2004 and April 2020.”[2] This post will review the background of the Central Bank’s investigation of UBID and the elements of the fine and reprimand that it imposed, and identify lessons to be learned from the UBID action.
Background to the UBID Action
A discussion of the Central Bank of Ireland action must begin with a brief explanation of tracker mortgages and tracker customers in Ireland. A tracker mortgage, according to the Central Bank, “is a type of home loan where the interest rate charged on the loan tracks that of another publicly available rate, typically the interest rate set by the European Central Bank [(ECB)].”[3]
In the early 2000s, tracker mortgage rates became increasingly popular with the Irish public. As interest rates rose in 2006 to 2008, “many customers on variable interest rates (including tracker interest rates) decided to fix their interest rate for a period in order to have certainty about their monthly mortgage repayments.”[4] After the 2008 financial crisis, as lenders’ funding costs increased and were no longer aligned to ECB rates, all lenders in the Irish market stopped offering tracker interest rates to new customers.
Some of those lenders, however, failed to take account of their obligations to existing customers who were entitled to retain or receive lower tracker interest rates. As a consequence, those lenders often significantly overcharged customers, over a prolonged period of time in some cases, and several hundred customers even lost their homes or “buy-to-let” properties when they were unable to repay at the higher interest rates.[5]
In 2015, the Central Bank established a Tracker Mortgage Examination (TME) as a process for performing an industry-wide review of tracker mortgage accounts. It required all lenders to examine the extent to which they were meeting their contractual obligations to customers, and to review the transparency of their communications with customers on tracker-related issues.[6] The TME is the largest and most complex consumer protection examination that the Central Bank has ever undertaken.[7]
During the period of the TME, which ended in 2019, lenders that offered tracker mortgage products in Ireland identified approximately 40,100 customers affected by tracker mortgage failings and paid out approximately €683 million in redress and compensation. It also led to the Central Bank’s taking supervisory actions against Irish financial institutions that included reprimands and fines for financial misconduct.[8] In addition, according to the Irish Banking Culture Board (IBCB), “[t]he unacceptable behaviour of the Irish banking sector” in relation to tracker mortgages in Ireland became “the key catalyst” for the establishment of the IBCB by five leading Irish financial institutions, to rebuild public trust in the Irish banking sector.[9]
With reference to UBID, the Central Bank stated that as part of its supervisory work, it became aware of complaints by UBID customers that they were being denied their entitlements to tracker mortgage rates after lenders withdrew tracker mortgages from the market. The Central Bank then engaged with UBID in relation to those complaints and requested that it undertake a review of its tracker customers to ensure that it was providing them with their correct tracker mortgage entitlements. Despite the Central Bank’s engagement and a number of findings by the then Financial Service Ombudsman (“FSO”) that its documents were unclear, UBID initially refused to undertake that wider review and only did so following further significant supervisory engagement by the Consumer Protection Directorate of the Central Bank, and under the auspices of the TME.[10]
The Central Bank initiated an enforcement investigation into UBID in 2016, shortly after the start of the TME.[11]
The Central Bank Findings
Through that investigation, the Central Bank determined “that UBID breached its regulatory obligations towards its impacted tracker customers, most notably those under the Consumer Protection Codes 2006 and 2012.” Its investigation established that UBID failed to adequately protect the rights of various customers who had or were entitled to tracker mortgages. As a result of those failings, the Central Bank concluded that UBID customers suffered significant detriment.[12]
In particular, the Central Bank found that UBID:
- Failed to disclose to affected tracker customers all the consequences of fixing their interest rates (e.g., imposing higher rates that customers might be unable to pay);
- Devised and implemented a deliberate strategy not to provide certain customers with their correct tracker mortgage entitlement unless the customers complained;
- Failed to adequately implement the TME’s Stop the Harm principles to protect all potentially impacted tracker customers from further harm (e.g., a number of tracker customers sold their properties without being informed that they may be entitled to redress and compensation under the TME); and
- Failed to ensure that its operational systems and controls were sufficient to ensure that its customers were provided with their correct tracker mortgage entitlements.[13]
According to the Central Bank’s Director of Enforcement and Anti-Money Laundering,
Over an extensive period, UBID denied customers their tracker mortgage entitlements in relation to 5,940 mortgage accounts, resulting in significant and widespread overcharging. At the most serious end of the detriment caused to UBID’s customers, 43 properties were lost, 29 of which were family homes, as a direct consequence of UBID’s actions.[14]
The Central Bank Sanctions
Even before the Central Bank’s fine and reprimand, UBID had been required to pay more than €128,000,000 in redress, compensation, and account balance adjustments to all impacted customers as part of the TME. In the light of UBID’s serious mistreatment of its tracker customers, the Central Bank determined that the appropriate fine was €53,963,600, which the Central Bank reduced by 30 percent to €37,774,520.
The Central Bank stated that this fine
reflects the gravity with which the Central Bank views UBID’s failings. UBID caused unacceptable and avoidable harm to its impacted tracker customers; from extended periods of significant overcharging to the loss of 43 properties, 29 of which were family homes.[15]
In addition to UBID’s failings that caused direct customer detriment, the Central Bank also stated that UBID was sanctioned for two additional failings. First, UBID “devised and sought to implement a customer campaign to encourage certain tracker customers to convert their tracker rates to fixed rates during 2008, without informing them that they would not be entitled to return to their original tracker rate if they moved to a fixed rate.” Second, “UBID failed to comply with a statutory deadline for the provision of information in the context of the Central Bank’s investigation” in breach of Part 3 of the Irish Central Bank (Supervision and Enforcement) Act 2013.[16]
Lessons Learned
While the amount of the UBID fine is substantially lower than U.S. financial regulators have imposed in certain analogous cases, the UBID action provides a number of clear lessons for financial institutions with regard to their treatment of customers.
First, financial institutions must be vigilant about ensuring that they provide their customers with clear information about the terms and conditions of loans and mortgages, particularly when consumer-protection laws and regulations require such information. In UBID’s case, the Central Bank found that UBID, among other things: failed to ensure that contracts were drafted in plain, intelligible language; failed to provide customers with correct tracker rate options; and failed to clearly set out customers’ mortgage entitlements and provide appropriate specific warnings to customers in mortgage documents, correspondence, and other communications.[17]
Second, financial institutions must review their processes to ensure that they do not create unreasonable barriers for customers to receive treatment to which they are entitled. In the tracker mortgage scandal, the FSO (now the Financial Services and Pensions Ombudsman (FSPO)) had authority to investigate and issue legally binding judgments regarding tracker mortgage complaints filed with the FSO.[18] The FSO found that even though UBID’s tracker mortgage documents were unclear and that tracker customers were entitled to return to their earlier tracker rates, UBID “chose the approach that cost it the least” and put the onus on its customers to complain before it would return those customers to the correct rates.[19]
Third, financial institutions must regularly review their operational systems and controls to ensure that customers are provided with the correct rates, terms, and conditions to which they are entitled. In UBID’s case, the Central Bank found that UBID failed to maintain adequate systems and/or operational controls to enable it to meet its contractual and regulatory obligations to customers. “At the heart of this failing,” the Central Bank noted, “was a reliance on numerous disparate and in some cases outdated mortgage systems which were not fit for purpose and necessitated an over-reliance on manual interventions.” Yet even some of those manual interventions contributed to customer mistreatment.[20]
Every financial institution, of course, has occasional missteps in its treatment of customers. But there is no excuse for a financial institution to adopt standards, policies, and practices that make customer mistreatment routine, or to engage in such routine mistreatment to reduce costs or increase profits. Any financial institution that does so betrays its obligations to act with integrity, including acting “honestly, fairly and professionally” in the best interests of its customers and clients.[21]
Footnotes
[1] See Bryan Tayan, The Wells Fargo Cross-Selling Scandal, Harvard Law School Forum on Corporate Governance (Feb. 6, 2019), https://corpgov.law.harvard.edu/2019/02/06/the-wells-fargo-cross-selling-scandal-2/.
[2] Central Bank of Ireland, Enforcement Notice: Enforcement Action Notice: Ulster Bank Ireland DAC reprimanded and fined €37,774,520 by the Central Bank of Ireland for regulatory breaches affecting tracker customers (Mar. 25, 2021), https://www.centralbank.ie/news/article/press-release-enforcement-action-notice-ulster-bank-reprimanded-and-fined-37-774-520-by-central-bank-of-ireland-for-regulatory-breaches-affecting-tracker-customers-25-march-2021.
[3] Central Bank of Ireland, Explainer – What is the Tracker Mortgage Examination?, https://www.centralbank.ie/consumer-hub/explainers/what-is-the-tracker-mortgage-examination.
[4] Central Bank of Ireland, The Tracker Mortgage Examination: Final Report 6-7, 11 (July 2019), https://www.rte.ie/documents/news/2019/07/centralbank1.pdf.
[5] Id.
[6] Id.
[7] Central Bank of Ireland, Tracker Mortgage Examination, https://www.centralbank.ie/consumer-hub/tracker-mortgage-examination.
[8] Central Bank of Ireland, supra note 4, at 4, 7.
[9] Irish Banking Culture Board, IBCB Position on Central Bank of Ireland Tracker Mortgage Investigations (Mar. 26, 2021), https://www.irishbankingcultureboard.ie/ibcb-position-on-central-bank-of-ireland-tracker-mortgage-investigations/#:~:text=The%20unacceptable%20behaviour%20of%20the%20Irish%20banking%20sector,demonstrating%20a%20change%20in%20behaviour%20and%20overall%20culture..
[10] Central Bank of Ireland, supra note 2.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] See Financial Services and Pensions Ombudsman, Tracker mortgage complaints and the FSPO, https://www.fspo.ie/tracker-mortgage-complaints/. Decisions of the FSPO may be appealed directly to the Irish High Court. See Financial Services and Pensions Ombudsman, How we deal with your complaint, https://www.fspo.ie/our-services/.
[19] Central Bank of Ireland, supra note 2.
[20] Id.
[21] See, e.g., Financial Conduct Authority, Conduct of Business Sourcebook COBS 2.1.1 (Jan. 1, 2021), https://www.handbook.fca.org.uk/handbook/COBS/2/1.html.
Jonathan J. Rusch is a Senior Fellow at New York University School of Law’s Program on Corporate Compliance and Enforcement, Adjunct Professor at Georgetown University and American University Washington College of Law, and Principal of DTG Risk & Compliance LLC. He is a former Deputy Chief in the U.S. Department of Justice’s Fraud Section, and former Senior Vice President and Head of Anti-Bribery & Corruption Governance at Wells Fargo.
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