Tracker mortgage examination should be widened to cover SME lending – Mulherin

A Fine Gael Senator has called on the Central Bank to widen its current review of the tracker mortgage scandal to examine practices adopted by the Banks on facilities extended to SMEs.

Senator Michelle Mulherin said that she had been made aware of systemic problems in some banks where SME customers were either duped or coerced into less favourable interest rates following the financial crash.

Senator Mulherin said that she has been made aware of two specific practices which were employed by Banks towards SME customers immediately following the financial crash from 2007.

In some institutions SME customers were encouraged to undergo “interest rate swaps” which were presented as a way of providing the customers with financial certainty on their outgoings, but which in fact operated to prevent customers accessing lower interest rates.

Senator Mulherin said: “In the UK, over £1.8bn has already been paid to 14,000 SME customers who were mis-sold interest rate swaps by banks, many of whom also had significant operations here. In the UK the financial regulator (the FCA) is taking a very active role in overseeing this process.

“However in Ireland the Central Bank does not even seem to be aware that there is a problem. In the Finance Committee last Thursday I questioned senior Central Bank officials, including the Governor Professor Philip Lane about their awareness of the practice. It was clear by their response that this is an issue that they have not even addressed.”

The second instance concerns a practice whereby banks sought to impose an unspecified interest rate on SME customers. Some banks charged an interest rate based on LIBOR or EURIBOR plus a margin – this was a transparent basis for calculating interest rates.

However other banks sought to calculate their interest rate for SMEs by reference to an unspecified “cost of funds” plus a margin. In some instances borrowers were assured that the costs of funds were equivalent to the LIBOR or EURIBOR rates, when in fact they subjectively set and were not related to either index of funds.

“Once the crash came there were instances where banks ratcheted up “the cost of funds” to excessive levels which drove some SME borrowers into default. This process for calculating interest rates was designed to suit the institution, was not transparent and ultimately led to unsustainable interest rates being charged for loans, some of which went into default.”

Senator Mulherin said that the Central Bank needed to launch an initiative to determine the extent to which these practices were employed in Ireland. She had been made aware of an alarming number of instances where SMEs had been put into distress as a consequence of such practices being employed by the Banks. She said that the Central Bank needed to actively address this issue and end its practice of arriving breathless and surprised at the scene of each newly revealed financial scandal.

“I questioned the Governor of the Central Bank last Thursday about their awareness of interest rate overcharging issues concerning SMEs. It was clear this is not an issue that is on the Central Bank’s radar and they are clueless about it to an alarming extent.

“The Central Bank needs to grab this issue and ask the Banks to report to it on the extent to which these practices were employed, or indeed continue to be employed, in their dealings with SMEs.

“I would ask that the Central Bank demonstrate that it is more than just a spectator in matters of financial regulation,” the Mayo Senator said.