The Sunday Times - Money Comment 18/10/09

Posted by Jill Kerby on October 18 2009 @ 19:40


The saga of the ISTC bond sale to retail investors just won’t go away.  Last week, the Financial Regulator fined a Kilkenny financial services provider €12,000 for not keeping proper records regarding his sale of these bonds. But over the past two years, the controversial repackaging and marketing of the ISTC bond by Friends First and its subsequent sale by brokers to retail investors – who lost €43 million when ISTC went into examinership back in 2007 – is still featuring in complaints to the Office of the Financial Ombudsman. 



There have been various private settlements between clients and the brokers who sold them the Friends First ‘Creative Bond’ and the ‘Creative Step-Up’ investment product, others have been adjudicated on by the Ombudsman.



And this is where it gets even murkier:  there are now at least two documented cases where the Ombudsman has found in favour of the investor complainant and recommended compensation be paid by the broker who missold the Friends First product, but where the brokers now claim they are unable to pay up, because their own indemnity insurance provider to honour their claim on the grounds that the original produce supplier – ISTC, had gone bust. 



Both the Department of Finance and the Regulator are aware of this problem.  The question now is, what happens when private indemnity insurance fails?  Does the complainant have to pursue the sales intermediary – by law the only party they are able to pursue and not the product manufacturers - all over again at their own expense through the Courts?  


Where’s the justice in that when the Office of the Ombudsman was specifically created to avoid such huge costs to ordinary people who have been financially disadvantaged by the actions of powerful financial institutions, including their mostly-commission paid intermediaries? 



The Regulator began investigating the ISTC retail bonds last year and the recent case in Kilkenny is just one part of the ongoing operation. Far more significant is the dangerous precedent that might be set if the Regulator does not come up with some method of protecting consumers who have received a favourable financial judgment in such a case.  



I’m not suggesting for a moment that the exchequer should pick up the tab where the sales agent or even the product producer who has been instructed to pay compensation pleads inability to pay, for whatever reason. 



At the very least it should be setting up a victim compensation protection scheme, funded by the industry itself, so that whatever happens to the financial circumstances of the industry players, it isn’t the consumer that gets shafted – again. 




Would a UK-style IVA – an individual voluntary agreement for debtors – sort out the growing personal insolvency problem in this country?



The Greens seem to think so and they’ve convinced their Fianna Fail colleagues to sign up to the idea too in the new Programme for Government.  



I’m not so sure.  IVAs are a more formal, but still private settling up process between debtors and creditors than the entirely informal (as in, no involvement of the Courts) way it is currently done in this country. Some accountants and insolvency practitioners (who could benefit financially from the more formal IVA) say the IVA is more accountable and provides a fairer outcome for all creditors than the current Irish system, which incidentally, is often brokered by officials from MABS, the free, state run money advice and budgeting service.  Both systems are certainly better than the expensive and inflexible Irish bankruptcy system that has been also been in need of reform and is rarely invoked. 



If I’m lukewarm about the Green’s proposal for an Irish IVA it’s because aside from introducing formal charges where there have been none, the Greens seem to think it might be the way to address the great wave of mortgage-induced insolvency that is happening. 



Whatever about allowing unsecured debts to be satisfactorily written down or written off, the IVA process in the UK doesn’t usually deal with secured mortgage debt in the same way as it does unsecured debts like car loans, utility and credit card bills or alimony payments. The debtor seldom gets to walk away from their obligations. 



No, given how property debt and negative equity is at the heart of our national indebtness, we’re going to have to come up with something more than an IVA process. And we should do it soon. 




Professor Terrence McDonough of NUI Galway is reported as saying that we need a ‘good’ bank to replace the ‘bad’ bank, Nama.  Lots of economists also attending the TASC economic conference last week agreed with him, so here’s a tip on where to find one: the transition year students who’ve accepted AIB’s 2009 ‘Build a Bank Challenge’. 


Every year for the last eight years bright, honest, enthusiastic, hardworking, trustworthy young people in secondary schools all over the country set up and run their own bank after being trained (albeit by AIB) not only in money management skills, but “teamwork, customer service and marketing and sales.”  


 I’m told that since the programme started, there’s never been a defaulting customer or a case of payment arrears; the young bankers have never issued themselves with director loans, falsified their accounts or even deceived their regulator (again, AIB). They even report…fully accountable profits.


With a record like that, forget Nama.  They should replace the ECB.




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