Mr. Bernard Byrne:

I thank the Chairman and members of the committee for inviting AIB here today. We are here to provide the committee with an update on the tracker mortgage issue, the progress to date and the work being done to bring this to a conclusion for our impacted customers. I am joined today by members of my executive team, Mr. Jim O’Keeffe, Mr. Robert Mulhall and Mr. Tom Kinsella

Since 26 September 26 when we last discussed the tracker mortgage issue with this committee, there has been ongoing and understandable public and political criticism of the banking industry’s handling of the matter. In the course of that debate, many questions have been raised about how we got to this point. Fundamentally there are three areas where key questions arise. The first is how the problem arose, the second is how the bank has responded and the third is the current status.

In terms of how the problem arose, it is helpful at the outset to articulate the circumstances, as we understand them, that existed at the time the original decision was made. The tracker mortgage product was introduced in 2002 at a time when wholesale market funding for banks was readily available and referenced off European Central Bank, ECB, rates. The tracker product had its interest rate based on ECB rates, plus an appropriate margin. As the 2008 financial crisis devastated economies globally, banks across many countries, including Ireland, were experiencing severe liquidity difficulties and the wholesale markets effectively closed or radically repriced credit causing the dislocation of funding from the ECB rate. Faced with this reality, AIB, initially in the second quarter of 2008, began to increase the tracker product margin. Things moved very rapidly and a month after the collapse of Lehman Brothers and the introduction of the Government guarantee scheme, the tracker product had very quickly become unsustainable. The tracker as a new product offering became redundant due to the scale of the margin increase required to reflect the rising cost of funding. The decision which was taken in late 2008 was to no longer make the product available for new customers. In other words, tracker mortgages were no longer offered to new customers but remained in place for those already holding one. Contrary to a widely held view, approximately 104,000 AIB and Educational Building Society, EBS, customer accounts, which at the time of the decision were on tracker mortgages were not affected by this decision and retained their rate. The unforeseen and unintended consequence of this decision was that certain customers who held a tracker product at some point previously but had already moved off the tracker product prior to this decision were not able to revert to the tracker product. It is clear that the potential fallout of the decision to stop offering the tracker product to new customers was not considered in terms of how existing customers might be impacted in the future, as some of these customers had a right to revert to a tracker product. This clearly should not have happened.

In terms of how the bank responded, the differential that would later develop between the bank’s standard variable rate, SVR, and historical tracker mortgage rates and the unprecedented duration of the historically low ECB rates clearly amplified the initial error. In addition, the difficulty was compounded by limited legacy IT systems and operational failures in AIB and EBS when it merged with AIB in 2011. The systems did not record the bank's proper commitments and obligations to its customers.

While the failure to consider the impact on customers was not deliberate, it is a failure that should not have happened and we apologise for this. Where complaints occurred, they were initially infrequent and were dealt with by the bank on an individual basis as each arose. Legal advice and the initial outcome of cases taken to the ombudsman supported the bank’s position. With the benefit of hindsight, this was a too bank-centred approach.

In August 2015, following the identification of a particular issue involving certain EBS customers, and in the context of wider industry developments at the time, an analysis of the tracker issue was conducted within AIB. We commenced a significant programme of work which ultimately scaled up to 500 bank personnel dedicated to the programme. The bank over time conducted an analysis of circa 650,000 accounts to establish what we were dealing with. From the outset, we conducted our review by looking at contractual obligations but also examined whether proper levels of transparency and information were made available to customers that would enable them to make appropriate decisions in their own best interests. We sought to establish how the product was designed, administered and ultimately discontinued.

Issues identified included contractual breaches and-or unclear marketing, as well as process weaknesses. Eventually, more than 30 different customer groupings were recognised as impacted across AIB and EBS. Thus it became apparent that while we wanted to build early momentum in the programme, we would not be able to arrive at a one-size-fits-all solution. Essentially, impacted customers fell into three broad categories: those not on a tracker rate but who were entitled to revert to a tracker; those who remained on a tracker rate but were incorrectly charged a higher margin for a period of time; and those who were never on a tracker rate but who had a contractual option to be offered a prevailing tracker rate at the end of their fixed rate period.

On the basis of what we believed to be the scale of the problem, the bank set aside a provision of €190 million to cover the anticipated costs involved. We worked to ensure full compliance with the Central Bank framework that issued in December 2015, which included a fully independent third party review and an appeals process. We submitted to the Central Bank in 2016 our approach to rate rectification and compensation. Since then, we have continued to implement that programme, completing all the required steps under the Central Bank of Ireland framework.

Members will have seen from information provided directly to the committee and from other recent bank statements that by the end of quarter 1 2018, all 3,509 customers who were identified as not on the tracker rate as they should have been will be redressed and compensated. Approximately 96% of these been completed. By the end of quarter 1 2018, all 939 customers incorrectly charged a higher margin for a period of time – most impacted by less than €500 – will be redressed and compensated. A total of 81% have been completed. For these categories, customer accounts have been returned to their own historic tracker mortgage rate. In addition, as noted in our December 2017 review, the following are now included and will be redressed: by the end of quarter 1 2018, the customers who were never on a tracker mortgage - our initial estimate of 4,000 was published in December - but who could not avail of one because it was withdrawn, will each receive compensation of €1,000 plus €615 towards independent advice. This group was included in the review in December 2017. By the end of quarter 2, a further 900 customers will be reverted to their own tracker rate and will be redressed and compensated.

I fully accept the need for real urgency in bringing this issue to a close, most especially in the interests of the impacted customers. AIB continues to focus very significant energy and resources to ensure we reach a conclusion as quickly as possible. The bank has many challenges and opportunities as we face into 2018. Resolution of this tracker issue is clearly a priority. I am not in a position to make any new financial disclosures today as we are in a close period, but in our trading update issued in December, the bank reported that it is on track to deliver a full year financial performance materially in line with market expectations.

As I have said to the committee previously, AIB is deeply conscious of the adverse effect this issue has had on impacted customers. Many people are angry as a result of the treatment they encountered and I apologise again for this on behalf of the bank. AIB's culture and reputation can only stand on the foundation of fair treatment for the customer. Where we fall short of this standard, it undermines our values and the credibility of the bank. We cannot allow that as we seek to put the interests of our customers first and to rebuild the bank and its reputation. We will continue to work hard until the programme is finished and we intend to reach that point by mid-2018. Customers are assured that payments they receive under the redress scheme will not compromise their right to appeal and, therefore, we can reasonably expect that cases might flow on from this for some time after the date we have indicated. However, AIB, for its part, will have concluded the overwhelming majority of its redress and compensation programme within months.

I thank the committee again for inviting us and we look forward to questions.