Financial transaction tax has merit but little support

At a meeting of European finance ministers in Brussels yesterday, attention was finally paid to the Commission’s proposal for an EU-wide financial transactions tax. Despite the backing of Merkel and Sarkozy it was met with a negative response from the majority of EU states, mostly on the grounds of a lack of planning for its practical implementation. Gordon Brown was heavily dismissive of the tax, quoting research on job losses and GDP reductions. Ireland followed suit with Michael Noonan claiming that any such tax, if not also implemented in the UK, would be disastrous for Ireland.

I continue to be surprised by the lack of consistent support for this type of levy, the proceeds of which could go some way towards reducing national deficits as well as providing finance for humanitarian concerns like foreign aid. There was a surge of interest in the tax in 2008 and 2009 at the height of the financial crisis but this has since receded despite the continued validity of the idea. Given that the recent global economic distress was partly attributable to the activities of banks it seems right and proper to tax financial transactions.

The capital that this tax could raise is impressive. The Bank for International Settlements reported in 2008 that the total value of the world’s annual derivatives trading was $1.14 quadrillion (a quadrillion is a thousand trillions). It is likely that in reality the figure is even higher, since over-the-counter trades are mostly unreported so their size is unknown. A mere 1% global tax on $1 quadrillion in trades would generate $10 trillion annually. We are looking here only at derivatives and not at the finance that could be raised by similarly taxing other types of trades.

The most common argument raised against this tax is that any such levy, by increasing the costs associated with trading, would have a dampening effect on transaction activity and thus would ultimately reduce profits and liquidity. Personally I remain unconvinced. There is huge money to be made in the derivatives market and a minor tax is unlikely to deter traders. The only real risk here would perhaps arise if the tax were applied only to a minority of banks or states; those groups would then be at a clear disadvantage in comparison to tax-free traders. The solution is obvious; it is imperative that the tax be applied to a sufficiently large catchment area to keep the playing field relatively level. An EU-wide tax or US tax would cover enough institutions to silence the argument that a select few have been put in an anti-competitive position. Obviously this will be difficult to implement but surely not impossible.

It should also be noted that the jobs losses and profit reductions that Gordon Brown referred to yesterday as a probable result of this tax will occur mostly within investment banks themselves. Implying limitations on a major industry that has an enormous turnover will naturally result in job losses and lowered profits within that sector. It has also been almost universally accepted that the banking industry is somewhat bloated and needs to be tempered in some way.

Critics also refer to the Swedish example. Sweden implemented a similar tax scheme in the 80s which saw its banks pass on the costs garnered by the tax to private individuals and investors. The answer here is strict regulation. The lax regulatory culture that permeated the financial world pre-2008 (particulalry on the issue credit but in many areas of bank activity)was in many ways the single largest contributor to the global recession and is thankfully coming to an end. We know now why vigilant supervision of the banking industry is in the public's interest. Strict regulation and monitoring of how a financial transaction tax is implemented will be necessary to ensure that banks absorb the associated costs themselves rather than passing them directly on to investors.

Taxing long-term investments that raise vital capital and provide sustainable returns is also a point of issue. It is important that a financial transactions tax primarily targets short-term speculative trading, the kind that was a major cog in the banking collapse. The tax structure must penalise short-term, high frequency activity, the type of trading  that provides no identifiable social benefit. Long-term investments should be subject to a very small levy but short-term movements – holdings for minutes or days – should be more heavily levied on an incremental scale.

Many of the finance ministers present yesterday felt that the biggest stumbling block standing in the way of a financial transaction tax is the practical difficulties involved in its implementation. Since it must be applied globally or at least at EU or US level, a requirement exists for cross-jurisdictional legislation and a practical plan that must cover thousands of institutions. However this is in no way an unattainable task; financial institutions communicate thousands of pieces of information every day through international networks, dealing electronically with complex and dynamic products. The creation of an instantaneous electronic method of taxation with an EU reach is not impossible. Similarly the tax will require a clear framework for the distribution of funds. Personally I favour a system that pays into the state coffers of the country where a trade takes place, with emphasis on sovereignty. However there is obvious merit in passing funds on to international schemes like UN healthcare and climate change programs.

Proposals for this tax were essentially sent back to the drawing board yesterday and a more detailed and practical plan must be formulated before EU finance ministers will debate this issue again. Hopefully the powers that be in Europe will not leave this concept to linger until public unrest at the activities of investment banks has receded.

Forced to appeal to the High Court over incorrect bank charges

The number of complaints formally made by consumers against banking institutions has grown year on year since the inception of the Financial Services Ombudsman (FSO) in 1995. The FSO is the statutory office tasked with independently inspecting complaints made by the general public about their dealings with financial service providers that have not been resolved by the providers themselves. Between 2008 and 2009 the office saw an increase in complaints of 28%. There is no doubt that this increasing figure is not only a result of mounting consumer difficulties in making repayments on loans and mortgages, but also a result of the growth in anger at and thus scrutiny of the practices of Irish banks.

The procedure for successfully resolving a complaint through the Financial Service Ombudsman is, unsurprisingly, complicated. The consumer must first lodge a written application. On the basis of this the FSO will decide whether the issue falls within its remit; in 2010 it found that a whole 859 did not. We have no idea as to what happened to these claims as they are not tracked any further by the office. If a complaint is found to fall within its remit the FSO then notifies the financial institution in question and affords the institution twenty five days in which to resolve this complaint internally. If no solution is reached the FSO will offer a mediation service. How this works in practice remains a mystery as the office does not elaborate on what mediation involves. There are no clear guidelines provided as to what type of result will deem mediation a success. A mere token effort by a financial institution to placate an aggrieved consumer might be sufficient to halt the involvement of the FSO.

On to the investigatory stage. Only if the FSO itself declares that mediation has been unsuccessful will it begin an actual investigation into a complaint. There is currently a twenty week waiting time for the commencement of a new investigation following the ruling out of mediation; what happens to the aggrieved parties in the meantime we do not know. Investigations take on average six to eight weeks, involve an evidentiary assessment and potentially an oral hearing. Once a decision is reached it is legally binding on both parties, subject only to an appeal. In 2010, a year that saw a near-record 7230 complaints, only 2443 decisions were ever reached.

At this point we reach the most problematic aspect of the complaints procedure. The only way to appeal a decision of the FSO is to take an appeal to the High Court. The High Court, the second highest court in the state! At this level legal costs are prohibitive for the majority of the populace never mind those parties already in a disadvantaged position with their bank. The cost of taking on a solicitor and barrister to bring an appeal through the High Court would be well into the thousands and we can hardly expect applicants to represent themselves in an upper court where across the room will sit the type of well-paid and experienced counsel that banks can afford. As a direct result very few appeals are ever taken.As of 31st December 2010, there were only 32 High Court appeals pending against the FSO in a year where 2500 decisions were issued. We don’t even know how many of these appeals were brought by the consumer rather than by the financial institution involved.

In theory applicants could apply for legal aid to support their appeal. Unfortunately legal aid is very heavily means tested and the income bracket it accepts is extremely low. Anecdotally I know that even if an applicant meets the financial requirements to qualify for legal aid, the Legal Aid Board will generally turn them down on the merits test. A case must be likely to succeed before it will be taken on for legal aid and since the FSO complaints process is already so long-winded the Board are reluctant to bet on the success of an appeal. It would be interesting to see how many applications for legal aid in order to take such an appeal are dismissed every year but this kind of specific information is not provided by the Legal Aid Board.

I see the point of using non-judicial bodies like the Financial Services Ombudsman to make decisions on certain specific issues, since this reduces the costs to the taxpayer that would be incurred by full blown court cases. The Personal Injuries Assessment Board is a good example of this model working at its best. Yet the integrity of these non-judicial bodies is instantly cast in doubt when applicants are forced to go all the way to the High Court to appeal their decisions. As well as providing more clarity on its complaints procedures the Financial Services Ombudsman must set up a more realistic appeals process as a matter of urgency.

How healthy is your credit file?

I have noticed that several assumptions regarding personal credit checking in Ireland are circulating in the blogosphere. Perhaps it is exposure to US advertising that has resulted in the incorrect conclusion that there is a credit rating scheme in operation in this country and that almost any type of imperfect financial transaction will lower one’s credit score. In reality the only credit referencing procedure currently in existence is administered by a small private organisation, the Irish Credit Bureau (ICB), with much less scope than that of its US counterparts. A real lack of knowledge exists as to the powers of lenders to look into the financial history of citizens and as a result the actions of the ICB do not come under sufficient scrutiny.

The ICB is not affiliated with the Government in any way. It is owned and financed by ICB members, mainly financial institutions. The bureau operates a database that contains information on the performance of credit agreements between financial institutions and borrowers. Lenders register these details with the ICB on a monthly basis. Each time you apply for credit from one of these lenders, they can search the ICB’s records for an account of your performance under previous credit agreements with other lenders. Notably the ICB does not score or rate citizens on the basis of their credit history but instead just provides information relating to each credit transaction that a person has entered into.

So what do our files actually contain? Most credit agreements are covered, including mortgages, all types of loans and leasing and hire purchase agreements. All instances where an individual has missed payments are recorded. Credit card details are also included. In the past, these were supplied only if a credit card was revoked or cancelled. Now lenders have the option of supplying all and any information relating to credit cards, including a cardholder’s opening and closing balances. The only saving grace here is that because of the nature of credit cards the ICB waits thirty days before any negative records relating to card use are stored. In all other cases information is kept on the ICB database for the full term of the agreement regardless of whether it concerns a three year personal loan or a thirty year mortgage. When an agreement is either paid off or formally written off it is still stored for a full five years after the date of termination. This rule applies irrespective of whether the debt has been completely repaid or the borrower has failed to complete payment.

What is not covered by the ICB? Overdraft agreements are thankfully excluded, with the exception of those overdrafts that are the subject of legal proceedings. If borrower and lender have come to an agreement to postpone the payment of a loan, this will not be recorded either. This means, for example, that negotiations for payment moratoriums or interest-only periods under the Code of Conduct for Mortgage Arrears would not be included on an individual’s credit file.

The lender is tasked with recording the borrower’s performance in making repayments and this information is then sent to ICB where it is stored. This is a point of issue; can we really expect our lenders to faithfully represent our credit history? It would be preferable to assign an impartial organisation, even an independent arm of the ICB itself, with the task of reviewing our performance in credit transactions.

A second worrying aspect that I stumbled across while researching this piece is that virtually every person who agrees to a credit transaction with a financial institution signs away their information to the ICB without knowing it. Those lengthy terms and conditions that must be signed to activate a loan or credit agreement, rarely read in full by consumers, almost always contain a declaration of consent that allows the ICB to collect and store data on that financial transaction.

The final issue that I have with this system relates to the number of private investigative firms that offer a credit check service for a fee; google All Ireland Investigation or www.checkback.ie to see for yourself. The ICB database is designed solely for the benefit of partaking financial institutions and should not be accessible by other groups. We do not consent for investigative firms to have access to our financial information even if we sign an ICB declaration of consent as part of a loan agreement.

North to South currency exchanges: money is falling through the cracks in the border

I have recently started a new job in Northern Ireland. It has not been any great move; on our little island only an hour and a half’s drive from Dublin results in a new currency and jurisdiction. Still I’ve been surprised to find how difficult it is to transfer money online from a Northern bank account to a Southern one without incurring a ridiculous fee.

I have expenses that must be paid in both the North and the South, in Sterling and Euros. Thus like many people I have a bank account in both states. I also have a full-time job that makes it difficult for me to physically visit my banks to withdraw and lodge money. Instead I am an enthusiastic user of online banking, a service that consumers now view as standard and expected. Despite the fact that some taxpayer-funded Southern institutions have the gall to begin charging us for this service, a large portion of society now perform most of their banking online. So I was surprised to find that it is not possible to move money online from an account with a bank in Newry to an account in Dundalk, ten minutes drive away from each other, without being charged a ridiculous international transfer fee.

I can transfer money online from an Irish Euro account to Romania for a smaller fee than to transfer money to Northern Ireland. All EU countries except the UK are subject to SEPA, the Single Euro Payments Area initiative. SEPA dictates that a bank must charge the same amount for SEPA Euro credit transfers as they charge for domestic credit transfers.

Although there are vaguely less costly ways to transfer money cross-border, including by bank draft (which generally involves a £5 or £6 charge) or by physically withdrawing and lodging the money (where travel expenses alone will add up), I must stress that I am only concerned with what options are available online. So what options currently exist for the Northern employee with Southern bills who is tech savvy but time poor?

I bank with Bank of Ireland who as it turns out are one of the least helpful institutions on this issue – you simply can not make cross-border transfers online with this bank, even though they have dedicated northern and southern branches. I found it a challenge to gather comprehensive information on any bank’s transfer rules but eventually a BOI advisor was able to explain that the only way to perform such a transaction was through a bank draft at a cost of £10. The receiving bank in the South would then charge a commission as well as its own (usually unfavourable) exchange rate – if you moved money from BOI North to BOI South that commission would be 1% of the overall transfer on top of everything else. Expensive.

AIB do thankfully offer an online cross-border transfer service. Transactions are completed through their Paylink service. Again these are performed according to the bank’s own unfavourable exchange rate. High Street banks rarely offer competitive rates to consumers; they make quite a substantial profit from the general public’s purchase of currencies that are initially bought by banks at a lower market rate on the interbank market. Unfortunately a standard charge of £15 applies to Sterling-to-Euro movements with AIB and a €15 charge is applied vice versa. Ulster Bank operate a similar scheme; you can make cross-border electronic payments but they will cost you £18.75 per transaction. These fees are still too hot for my blood; I want to move money regularly so need a cheaper option.

Our country’s banks should be able to provide us with this basic service for a reasonable price. They do not and so I was forced to explore less familiar options. I had only come across Paypal in the context of eBay payment options but it is championed online by foreign exchange enthusiasts. By establishing two PayPal accounts, one in Euros and one in Sterling, and attaching them to two different bank accounts, users can perform cross-currency transfers online for one of the lowest going rates. Paypal do not charge a transfer fee for this but instead will charge an extra 3% commission on top of market currency rates. This is still a reasonable rate. When looking at any transaction involving currency exchange it is important to take note of both the transaction fee and also the competitiveness of the exchange rate.

The most competitive options that I stumbled across were offered by online currency exchange companies, of which Xe.com appears to be the most popular. Xe’s service requires you to wire your chosen sum to them (which can be done online), for which there is no fee. They convert this to your desired currency at a very competitive rate, as the company specialises in foreign exchange and does not have to cover the same overheads generated by a bank. If you are changing Euros into Sterling you can even wire the exchanged money to your UK bank account for free, through Xe’s EFT service. If this seems too good to be true, regretfully it is. This free EFT process seems like a loss leader designed to attract customers, because there is still a charge to wire Sterling into an Irish account, and for many other types of currency exchange; only certain countries can avail of Xe’s services while avoiding some kind of transfer fee. But this fee is still low in comparison to what you would experience with a High Street bank. Xe also offer a draft option, where your exchanged money can be posted to your bank in draft form for free. This is a much slower method but since the majority of Irish banks do not charge a fee to cash Euro drafts, we are in the money; here, at last, is a low cost option for moving Sterling into Southern Euro accounts.

Bless the UK Post Office because they also offer a somewhat free service. No fees are applied when sending or receiving money from a post office account, transfers can be made online or by phone and they charge no commission on transfers. Their exchange rate, while not as competitive as currency specialists Xe, is at the time of writing reasonably good. My only issue with the Post Office’s service is that they require a £250 minimum transfer amount for every transaction; given that the median UK salary is only £26,000, this is quite a sizeable amount for the average Joe.

There are still other routes available, including smaller online companies and global banks with internationally-themed packages. However the majority of these feature tricky criteria, as with HSBC who offer free international transfers at a low rate only to Premier customers, those with a running balance of £60,000 or more. The other options that I have discussed are the most realistic and viable solutions for the Northern Irish taxpayer with Southern bills. It is frankly ridiculous that our own banks don’t offer this service for free – the customer should be entitled to expect this as a matter of course.