The Sunday Times - Money Comment 18/01/09

Posted by Jill Kerby on January 18 2009 @ 22:40

At least one side of the regulator’s office seems to be earning their keep:  the financial Ombudsman has seen a 36% increase in the number of complaints, or nearly 6,000 over the past six months, arrive across his desk, compared to the same period in 2007.


The Ombudsman’s office deals with everything from people unhappy with the way they’ve been treated by their insurance company, to those who’ve been fraud victims, but by far the most serious case over the period - at least in terms of financial value – is the one in which a credit union was refunded €500,000 of the €1 million that was all lost after they hastily invested it in a ‘wrapped around’ insurance bond. 


But this case ended up in a rare oral hearing with both sides found to be equally at fault by the Ombudsman – the stockbroking firm for failing “to advise the credit union of the risk of the possibility of total loss of capital”; for its “inadequate’ presentation; its lack of thoroughness of research into the bond and its failure to point out to the credit union that the bond was outside the ordinary type of investments that were typically made by the credit union”.  He conceded that the broker believed it “acted in good faith” by regarding the bond as low risk but “the true nature of that risk should have been cogently pointed out to the credit union” -  that is, that there was absolutely no capital guarantee provided.  This was especially important given that two of the three investment committee members “were not in the remotest sense experienced in investment matters.”


Nevertheless, the Ombudsman also found that the investment committee “could not absolve itself from the disaster which occurred” as a result of the meeting and presentation that lasted “between 15 and 30 minutes at the most”. After the stockbroker left them, they agreed, “there and then” to invest in the bond and admitted under oath that they “in effect, ‘blindly signed’ the application form and did not even read the brochure, or indeed the conditions under which they were investing €1million of members’ monies. One of the conditions included a warning that the investment could be worthless.”


It is unfortunate, but not always inexplicable when ordinary people, with no training or understanding of complex financial investments, but who are seduced by the idea of higher than average returns, admit to not fully reading or understanding the lengthy contracts and small print that still accompanies most financial contracts. 


It shouldn’t happen to an investment committee entrusted with millions of other people’s savings. 


Has the Ombudsman, Joe Meade, delivered a fair judgment? The credit union doesn’t think so and is exercising their rights by appealing his finding to the High Court. Meanwhile he referred this particular case to the Financial Regulator for their further attention.  


Oh dear.  Perhaps it would have been even more helpful if he’d suggested that all credit union members also satisfy themselves that the people they’ve entrusted with their money actually know what they are doing before they hand over surplus millions to other investment intermediaries in the search for safe and profitable returns. 




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I’ll certainly be watching the swearing in of President-elect Obama on Tuesday – my tenth such viewing. I sincerely hope he can deliver the leadership that America and the rest of the world needs, but I have my doubts about his ability to fulfil his first promise – to do his best to create millions of jobs and reverse the financial devastation of the past year. 


I don’t expect any shoes to be thrown at the handsome, young president at his inauguration ceremony, but I won’t be too surprised if it happens before he leaves office. 


With no government surplus to tap into, this latest trillion dollar bill for the huge stimulus package of public works, alternative energy project and mortgage bail-outs will have to be paid for, not with more taxes, which have been ruled out, but with further borrowings and ‘quantitative easing’  which amounts to the printing of money. 


Perhaps this is where we, the beleaguered Irish, can make a small contribution, by example, to President Obama’s new, ‘New Deal’. 


Here, thankfully, we don’t have the luxury of a printing press anymore or we too would undoubtedly be churning out euros to cover our huge deficit.  Instead of stimulus programmes, however, we’re finally accepting that we need a cutback programme - of civil and public service wages and jobs, of executive positions within the government itself, and in the ‘free’ healthcare, education and other public services we can no longer afford.  


Maybe we can show the new US administration how a country can prioritise it’s money if it must: for example, if it came down to a choice, say, between spending a billion euro a year on our army – and we are a tiny country with no known enemies and a friendly, nuclear neighbour – or continuing to pay out a billion euro worth of child benefit payments to our own children and those we support in the developing world, I expect we’ll make the right choice. 


President-elect Obama hasn’t talked much about cutbacks, except perhaps in the context of their own military spending: these last eight years of war, without a war economy, and the expansion of the US social security, Medicare and Medicaid programmes for the poor and the elderly during the Bush years, is reckoned to have helped expand the real US deficit to well over $60 trillion. 


There is no possible way all that those promised entitlements and existing debt and credit commitments can be met by this or even future generations of US taxpayers.  Obama’s choices were always limited to acknowledging the existing massive financial hole and drawing up plans to tackle it… or by doing as he appears to be starting his presidency – by deepening the hole in the hope somehow that the extra shovels full of debt and credit can stop the walls of the economy from collapsing, at least on his watch. 


Enjoy the inauguration ceremony.  Reality sets in on Wednesday. 


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Here’s a couple of intriguing Irish ‘stimulus’ ideas that a reader sent in, who might very well be a taxi driver in the market for a new house. 


The first one gives the taxi industry a boost while also reducing the huge cost to the state in policing speeders and the carnage they leave behind: “Allow any taxi in the country to be fitted with speed cameras and share 50% of the revenue with them on speeding fines that they generate.  The real loss of life is late at night in rural areas; pretty soon all late night partygoers would know that they’d be caught.”   



Suggestion two is to “reduce the stamp duty payable on any dwelling by the percentage improvement in the energy audit certificate level, post-sale.  If I purchase a house with a D1 energy classification and within a year it’s improved to a C1 level, then a 26% rebate on stamp duty would reply.  This should give a boost to the building sector and clear unsold houses.”



So would eliminating stamp duty altogether, but probably not until the housing bottom is reached and as the auctioneers have finally acknowledged, that won’t be this year. 

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