Ireland threatens to penalise banks over mortgage overcharging

By Padraic Halpin

DUBLIN (Reuters) - Ireland will raise taxes on banks if they don't move faster to provide compensation for the "scandalous" overcharging of thousands of mortgage customers, Prime Minister Leo Varadkar said on Wednesday.

Ireland's central bank has identified at least 13,000 customers who should have been given the option of a cheaper "tracker" mortgage or kept on a better rate years ago. It has ordered lenders to repay the difference and offer compensation.

"The government believes the behaviour of the banks is scandalous and we also believe the banks have been dragging their feet in solving this problem with a real human cost," Varadkar told parliament.

Tracker mortgages, which follow the European Central Bank rate, were sold in Ireland prior to the financial crisis and have proven significantly cheaper than variable or fixed rate mortgages as ECB rates have long been at record lows.

The regulator said on Tuesday that while banks had rectified the rate for 98 percent of accounts, only a quarter had been compensated. Varadkar said Finance Minister Paschal Donohoe would meet the heads of the banks to "admonish" them next week.

"I want to state that the government will take further actions if we don't see further progress and much more quickly, whether that's through enhanced powers for the central bank or increased taxation imposed on the banks."

According to the central bank, 23 mortgage holders lost their homes as a result of the banks' failings and another 79 investment properties were incorrectly repossessed.

Varadkar said the overcharging - which left some customers paying hundreds of euros extra a month at the height of Ireland's financial crisis almost a decade ago - had also affected many people's mental health and well being.

The central bank expects all lenders to start providing redress and compensation by the end of the year, but it does not have the statutory power to compel lenders to do so for failures that occurred prior to the introduction of new powers in 2013.

So far, permanent tsb <IL0A.I>, the first lender to start a compensation programme for customers, has been fined 4.5 million euros (£4 million) and the central bank is further probing it and RBS' <RBS.L> Irish unit Ulster Bank.

It has said two further enforcement investigations into other lenders are in train, with more anticipated.

Irish bank shares were little changed on Varadkar's warning, with most lenders up on the day at 1230 GMT.

(Reporting by Padraic Halpin; Editing by Adrian Croft and Mark Potter)