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How Setanta Insurance saga put a dent in drivers’ wallets

It is the curse of unintended consequence. The latest round in the scrap between the lawyers and the insurers over the collapse of Setanta Insurance unfolded last week in the Supreme Court. Setanta, a Malta-regulated white-van insurer, collapsed in the spring of 2014, leaving thousands of tradesmen here uninsured.

Shortly afterwards, the chief accountant of the Criminal Courts of Justice sought the view of the High Court as to who should pick up the tab: the Motor Insurers Bureau of Ireland (MIBI), which is funded by the insurance industry, or the Insurance Compensation Fund, which is funded through a levy inflicted by the state on insurance policyholders.

The insurers insist that the bureau steps into breach only when an insured driver or pedestrian is involved in an accident with a caddish uninsured driver, or a driver that can’t be traced. The compensation fund was set up to cover bust insurers.

The Law Society, which took up the cudgel on behalf of the legal system, contends that once Setanta went belly-up, its customers were uninsured, so the bureau is on the hook.

The insurers say that it simply does not make business sense for a company to be responsible for the solvency of its rivals. It further argues that, under MIBI rules, Setanta ceased to be a member once it became insolvent.

The rules governing uninsured drivers are enshrined in an agreement between the bureau and Department of Transport. Both concur that the agreement does not cover insurers in liquidation. It does not help the insurers’ cause that the bureau previously met the claims of bust insurer Equitable Insurance Company, albeit more than 50 years ago, or that its own accounts in 2012 raise a potential liability in respect of a member going bust. So the High Court backed the Law Society argument, and so too did the Court of Appeal. The Supreme Court is last-chance saloon for the insurers.

During the hearing, the seven judges were reminded of some home truths regarding the operation of the bureau. Under the terms of the contract between the department and the MIBI, the bureau can legally pursue the uninsured for the full cost of any claim.

In the case of reprobates who drive without cover, that is justified. But it is hardly fair on innocent Setanta policyholders. These drivers complied fully with their statutory obligations, and lost cover purely as a result of the insolvency of the insurer. Yet they could be pursued.

Despite the marathon nature of these proceedings, there is no great legal precedent at stake here. If the Supreme Court confirms the previous rulings, the agreement between the Department of Transport and the bureau will merely be amended, to remove any doubt that the bill falls with the compensation fund.

In the meantime, about 1,750 claimants have been left in a legal limbo for two-and-a-half years, all because of the interpretation of a clause in an agreement by an institution, the Law Society, that was never party to the same agreement.

If the MIBI is to be stuck with the bill, some of the claimants will ultimately be better off. The bureau pays the full cost of any claim, while the compensation fund will pay only 65% of a claim, up to a limit of €825,000.

For everyone else, this has been a painful exercise. If the bureau is liable for uninsured drivers, then why are motor insurance policyholders paying a 2% levy into the state compensation fund?

Insurers state, in no uncertain terms, that as a result of the various court rulings, drivers are paying for the MIBI liability in higher premiums. So policyholders are paying on the double while the courts decide.

Thin edge of the wedge
Let the battle of wits begin. Minister for finance Michael Noonan has clamped down on the tax status of vulture funds that bought billions of distressed loans from banks and Nama, and investment funds that bought billions of property assets from Nama and bank-appointed receivers.

Tax-neutral vehicles such as Irish collective asset-management vehicles (ICAVs), qualifying investor alternative investment funds (QIAIFs) and section 110 companies, when used to buy property assets in Ireland, will now be subject to withholding tax of 20% or 25%. The funds, naturally, are miffed. They bought assets using these vehicles in a perfectly legitimate fashion. Noonan changed the rules at half-time.

The minister is perfectly entitled to do so. Other jurisdictions regularly do the same thing. Aryzta, a global baker, begat of the former food group IAWS, recently revealed an extraordinary fact regarding Picard, a frozen-food retailer. Aryzta has a 49% stake in Picard, which is majority-owned by private equity company Lion Capital. Picard has an effective tax rate of a whopping 60%.

The reason is that, in the wake of the financial crisis, French authorities introduced what are known in the tax trade as thin capitalisation rules. Basically the French got browned off with private equity buying up companies, loading them with debt and then offsetting massive interest bills against their tax. They put limits on how much interest a thinly capitalised company could offset against tax.

Ireland has no thin cap rules, and deliberately so. It is part of a package of perks designed to attract multinational holding companies here and help them avoid tax. Miffed buyers of bombed-out loans and property should now look to re-register here as normal limited companies, or one of the new designated activity companies, and take advantage of the 12.5% tax rate. If the generous thin cap rules fits, wear them. They will go from no tax to low tax.

Little wonder the Department of Finance has pencilled in just €50m in revenue from the crackdown.

AIB’s future up in the air
David Duffy is kicking over the traces at Clydesdale and Yorkshire Bank (CYBG), lodging a bid for RBS-owned Williams & Glyn. The flotation of CYBG in February, into the teeth of a market headwind, hardly looked smart at the time. Parent National Australia Bank sold the shares at 180p, valuing the bank at 40% of its book value. They now trade at 270p.

It was a lesson surely for Duffy’s former paymasters, the Irish state, in how not to time a flotation. Yet now, while Duffy and CYBG are back in the game, Allied Irish Banks is still beholden to the state. This time next year things should be different. If AIB produces a dividend for the state in 2017, then there is no reason why the state should hold back on an IPO. It could go by June 2017.

There can be a bad time to sell shares in a bank, particularly a state one. Yet it would be folly to wait for a perfect one.