The Central Bank of Ireland (Central Bank) recently published details of a settlement reached with KBC Bank Ireland Plc (KBC) which resulted in a reprimand and significant fine being imposed on KBC. That reprimand and sanction concerns KBC’s full admission to 12 regulatory breaches in what the Central Bank described as “serious failings” in KBC’s obligations to certain tracker mortgage customers between June 2008 and October 2019.

The fine imposed was €18,314,000.  The original fine of €26,162,857 was reduced in accordance with the settlement discount scheme provided by the Central Bank’s Administrative Sanctions Procedure. In its public statement on the settlement, the Central Bank confirmed that it imposed a fine at the “highest end of its sanctioning powers, reflecting the gravity with which the Central Bank views KBC’s failures”.

The fundamental point, as repeatedly stressed by the Central Bank, is the correlation between the level of the fine and the extent and manner a regulated entity engages with the Central Bank at all levels and in all circumstances. The Central Bank, in its consideration of the appropriate fine in this case, described five “aggravating factors” in addition to the facts of the contraventions themselves. It appears that various failures by KBC to either engage or co-operate, as well as KBC’s previous record, contributed to the level of the fine.

Tracker Mortgage Examination

KBC’s regulatory breaches specifically concern 3,741 tracker mortgage accounts, all of which the Central Bank found were mismanaged. In determining the level of the fine, the Central Bank placed considerable weight on KBC’s handling of particular accounts which resulted in the loss of 66 properties (11 of which were family homes).

The Tracker Mortgage Examination (TME) was established by the Central Bank in December 2015. Its purpose was to engage with various lenders and require those lenders to examine and confirm the following:

• The extent to which lenders had met their contractual obligations to customers
• Lenders’ compliance with obligations under relevant consumer protection regulations in dealings with customers, including the Consumer Protection Codes of 2006 and 2012 (2006 Code and 2012 Code)
• Communications with customers in respect of these matters

The Central Bank found that KBC had failed to co-operate with the Central Bank’s TME in a satisfactory manner.  As a result, KBC caused “avoidable and sustained harm to impacted customers”.  It referred to the “unwillingness” on the part of KBC to acknowledge its failings until December 2017 and its failure to take action to apply the protections provided for in the TME to affected customers.

In the course of the TME, the Central Bank provided guidelines to KBC (and other financial institutions) however it found that KBC failed to adhere to these guidelines in a timely manner. That failure required “significant and sustained Central Bank intervention”, led to greater harm to its tracker mortgage customers and ultimately in some cases, incidents of property loss.  The Central Bank’s view is that a timely implementation of the TME guidelines would have resulted in less harm to KBC’s customers.

Sanctions – Factors Considered

The Central Bank took into account the tracker mortgage handling issue, as well as the manner in which KBC engaged with the Central Bank in the TME process and the subsequent investigation into the regulatory breaches. Overall, engagement by KBC with the Central Bank was viewed as poor and inadequate and had a direct knock-on effect, in terms of aggravating factors considered, when it came to the fine imposed by the Central Bank.

KBC admitted 12 regulatory breaches of the EC (Unfair Terms in Consumer Contracts) Regulations 1995, the 2006 Code and the 2012 Code, identified during the Central Bank’s investigation.  In its public statement, the Central Bank particularised the respective breaches including KBC’s “strategy to permanently convert customers off their tracker rate resulting in KBC’s financial interests being prioritised over the best interests of customers” and culminating in the loss of 66 properties. It also pointed to a general lack of engagement or co-operation on the part of KBC to address the issues during the TME and an initiative by the Central Bank to halt the harm being inflicted on relevant tracker mortgage account holders.

In addition to the specific features of the breaches, the Central Bank also took into account a number of aggravating factors which derived primarily from KBC’s handling of the matter, its attitude to the investigation and the TME and a general perceived lack of co-operation.

Aggravating Factors

• Failures to take adequate remedial steps after breaches were identified.
• The provision of incorrect information to the Central Bank.
• Failure on the part of KBC to meet the Central Bank’s expectations in terms of co-operation in the investigation.
• KBC was subject to a prior enforcement action.
• The need for a credible deterrent when it comes to serious regulatory failings.

The message

The clear message is that pro-active, early, decisive engagement with the Central Bank is key to the attitude that will be taken by the Central Bank to the case overall and any sanction to be imposed. The handling of the matter and the extent to which a regulated entity is seen to either engage with or frustrate the Central Bank is crucial. This is, and will continue to be, an important factor in the assessment of the seriousness of the breach by the Central Bank.

We have extensive experience advising on regulatory and enforcement matters. For a discussion or advice on this please call Lisa Carty, Hilary Rogers, Shane Kelleher or your usual William Fry contact.