AIB repays €26 million for overcharging

Allied Irish Banks (AIB) is repaying €26 million ($32 million) it overcharged clients on 3 million foreign exchange deals, after a regulator slammed the bank in a report last week, reports RiskNews’ sister publication, FX Week .

Liam O'Reilly, chief executive of the Irish Financial Services Regulatory Authority (IFSRA) in Dublin, said the bank had "failed in a number of respects", following the regulator's investigation into overcharging at AIB since 1995. "In some instances, it charged customers more than it was entitled to. It also failed to notify the regulator, as required by law, in relation to certain regulated charges which it levied on its customers."

AIB – which lost $700 million from fraudulent forex trading at US subsidiary Allfirst Financial two years ago – had mistakenly reported to the Office of the Director of Consumer Affairs in 1996 that the margin charged on certain forex trades was 0.5%. In fact, it was charging 1% – the market rate.

The bank pointed out last week that the price actually paid by customers for forex prices was competitive with other providers. "Our customers were not overcharged in their foreign exchange dealings with the bank," said chief executive Michael Buckley. "On receipt of the refunds from AIB, the affected foreign exchange customers will have carried out their transactions at a price well below the market rate," the bank said.

Because clients had paid the rates advertised or agreed, instead of the lower rate notified to the regulator, there is no legal obligation to pay restitution, but AIB said it would do so in the best interests of its customers, shareholders and staff. "A priority for the board and management of AIB is to ensure that the brand and the reputation of the bank is safeguarded," the bank said.

"Our bond of trust with our customers means we are making full payment because they are entitled to the assurance that what they pay is not only market competitive, but complies with regulatory requirements," said Buckley.

The bank said errors had arisen from an "overreliance on manual systems". As a result, it is undertaking "a major investment in technology" to automate a wide range of processes that are still manual.

The bank has taken a number of other steps in response to the IFSRA's findings. These include the appointment of Eugene Ludwig, managing partner of the Promontory Group, as an adviser on controls, risk, compliance and governance. The US banking specialist conducted the independent investigation into the forex fraud carried out by John Rusnak at Allfirst in 2002, and is "ideally qualified to assist AIB in this task" the bank said.

AIB's board has also put in place a confidential helpline for staff who wish to raise ethical issues outside their line management. The IFSRA's investigation into overcharging was prompted by an anonymous call last April.

AIB also commissioned an independent report into its culture, which was carried out by the Concours Group. It concluded that AIB's culture is "strong, not fundamentally flawed. There are, however, some legacy issues which require action in order to better align the culture of the bank to its current business strategy."

Ludwig has already issued a preliminary assessment of AIB to the board. He said: "AIB is fundamentally a sound banking organisation." The bank is now a "much stronger institution" than the one he encountered in the aftermath of the Rusnak affair, he said. That incident had acted as a catalyst for change at the bank and was "wisely used by AIB's board and management to undergo a comprehensive effort to improve its risk management, control, compliance and audit functions. Much progress has been made in that effort," said Ludwig.

The total cost of rectifying its errors will be about €50 million, including repayments to clients and other associated costs, said a spokesperson at AIB.

David Odlum, financials analyst at NCB Stockbrokers in Dublin, said: "The worst is now behind Allied Irish Banks. Given the uncertainty that has surrounded the bank in recent months, a refocus on fundamentals should be good news. Allied Irish Banks will report interim results on July 27, which we expect to be positive. We maintain our buy recommendation."