Mr. Bernard Sheridan:

I thank the committee for inviting me here today to discuss the licensed moneylending sector in Ireland. I intend to present a brief overview of the licensed moneylending sector and how the Central Bank regulates it. I would also like to share what I see as some of the issues in the sector and our views on them.

Moneylending, as defined in legislation, is the practice of providing credit to customers on foot of a moneylending agreement which is, in essence, where the total cost of credit is in excess of an annual percentage rate, APR, of 23% or the agreement is concluded away from the business premises of the moneylender. The credit usually takes the form of a cash loan, but may also involve the provision of goods on credit from a retailer, the purchase of goods from a catalogue company or the purchase of vouchers.

There are 40 licensed moneylending firms in Ireland, a decrease from 52 in 2003 when we took over regulation of the sector. The business models operated by these firms fall broadly into three categories, with some firms operating in more than one category. There are 31 firms providing a home collection service to approximately 130,000 customers. Most firms in the home collection category have between 100 and 1,000 customers, which is a relatively small number. There are three catalogue firms, whereby consumers can select goods from an online or paper-based catalogue, with customer numbers representing approximately 50% of the moneylending market. The category of other firms covers retail firms which sell goods on credit such as electrical appliances and remote firms to which payment must be made other than by means of home collection, such as direct debit.

Customer numbers in the sector have increased from 300,000 in 2005 to approximately 360,000 today and outstanding loan amounts are approximately €200 million. Moneylender loans are generally short-term in nature and their cost can be very high when compared to other forms of credit. In addition to the actual cost of credit, the APR is heavily influenced by the term of the loan as well as any collection charge included. The maximum APR charged in respect of specific loans ranges from 23% to 188.45%, excluding collection charges, and up to 287.72% when collection charges are included. The cost of credit for this loan is €30 for every €100 borrowed over a 20 week term. These rates have remained largely unchanged since 2003.

Anyone wishing to engage in the business of moneylending requires a licence from the Central Bank in accordance with the Consumer Credit Act 1995 and this licence must be renewed every year. These firms are subject to the requirements of the Consumer Credit Act and also subsequent European legislation in the form of consumer credit regulations. The Central Bank supervises firms in this sector through annual reviews of their activities as part of the annual licensing process, firm-specific and sectoral inspections, the application of a fitness and probity regime, the carrying out of consumer research, and monitoring trends, including complaints made to the Financial Services Ombudsman. The sector is closely monitored and follow-up regulatory action is taken when necessary.

Our statutory role in respect of the annual licensing of a firm is to assess each individual application, which includes an assessment of whether, in the context of the application, the cost of credit to be charged is excessive or any of the terms or conditions are unfair. In terms of cost of credit, we examine the specifics of the firm’s proposals, and requests for increases to the maximum permitted APR of specific loans in the sector have, in the main, been rejected.

One of the challenges we face in considering rates charged by moneylenders on specific loans is finding a balance between the availability of credit for people who do not have access to legitimate credit elsewhere or who do not use other regulated credit providers and the provision of short-term unsecured loans at what can be a high cost. There has been some public discussion in this regard about introducing an industry-wide cap on the rates moneylenders can charge. Lower interest rate ceilings could be ineffective and counterproductive in this regard and may result in excluding low income households that have repayment capacity, even at the high rates charged by licensed moneylenders. We would have some concerns therefore about the imposition of an industry-wide interest rate cap without there having been a full assessment of its impact on consumers.

There has been some media attention about so-called payday lenders. These lenders typically offer very short-term loans to tide borrowers over until their next pay day. The advertised representative APR associated with these loans can be as high as 4,000% to 5,000%. Although a number of firms have expressed an interest in offering payday loans in the Irish market, I can confirm that no such business model has been licensed by the Central Bank of Ireland.

The number of firms in the sector continues to decline, with some smaller firms either closing or transferring their business to other licensed firms. The number of people who use moneylenders has risen since we published our previous research in 2007, with larger firms, including catalogue companies and other specialist firms, seeing an increase in the number of customers and smaller traditional door-to-door lenders seeing a decline. This changing profile of the sector, which now has fewer but larger firms, will inform our future regulatory approach.

There is no doubt that when compared with other credit providers such as banks or credit unions the cost of loans from some moneylenders is high irrespective of loan size or length. This is particularly so when this form of lending is used on an ongoing basis. Through our assessment of individual applications, maximum permitted APRs have not increased overall in recent years. We have sought, through engaging with potential new entrants, to keep the practice of moneylenders offering very short-term loans at excessive APRs out of the market and we will continue to pursue this policy. Our focus has also been on improving the transparency of these costs and increasing consumer awareness by way of requirements such as the need to warn consumers about the high-cost nature of the loans and to disclose all the fees, costs and interest in a clear manner prior to entering into an agreement. We also set up a register of moneylenders on our website which sets out product details, such as the maximum APR, the maximum cost of credit and the collection charge, if any. Recent research found that 65% of customers surveyed reported knowing the rate of interest they were charged on their most recent loan, in contrast to findings in 2007 that 71% of customers did not know this rate.

According to the research findings, 31% of customers surveyed had borrowings other than mortgages from other institutions, including banks and credit unions. However, only one in five considered alternative credit providers before taking out a loan with a moneylender, with over half of these considering a credit union. Approximately one quarter of customers also reported being refused credit by a bank, building society or credit union. This figure was originally reported to us incorrectly by the research company and we are revising this and a small number of other items in the published research findings following further detailed analysis of the data the research company reported to us. Clearly, what the figures show is that a significant number of customers who use moneylenders do not consider alternative sources of credit, including credit unions.