Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I am delighted the finance committee is now examining this legislation on pre-legislative scrutiny stage. Pre-legislative scrutiny of this Bill was not a requirement but I agreed to it because it may be helpful and result in the Bill being improved over the coming weeks. The other relevant point is that the Bill is currently with the European Central Bank as part of the consultation we are required to do, as the Chairman has indicated. I understand it is not due to revert to us for another few weeks, or until mid-November. The pre-legislative scrutiny will not delay the taking of the formal Committee Stage of the Bill.

I acknowledge the dedication and expertise brought to the issue by individuals and campaign groups, such as the Fair Mortgage Rates Campaign, whose representatives, led by Mr. Brendan Burgess, are present today and from whom I look forward to hearing later. Many commentators in the media, such as Mr. Charlie Weston of the Irish Independent, have highlighted the issue in recent years. We welcome the support of other Opposition parties and Independent Deputies who have used their parliamentary time, including in term of the previous Dáil, to advocate for variable rate mortgage holders.

This legislation is necessary to deal with the issue of excessive standard variable mortgage rates. This issue has been the subject of a public debate for the past couple of years or so. There has been ample time for the banks to move to bring their rates into line with market conditions. Market forces, competition and new entrants have been cited by those opposed to the Bill on many occasions as the best ways of achieving progress on standard variable rates but it has not materialised. Therefore, legislation is necessary. As I stated in the Dáil, I wish legislation such as this were not necessary but I have reached the conclusion, to which I stick, that it is.

There is a widely held view, both in the Government and Opposition, that many of the variable interest rates being charged by banks in the State are unacceptably high. Where we differ is on how to tackle this problem. I emphasise that I am very much open to this Bill being amended over the weeks ahead. I do not claim it is perfect; it is an honest attempt to help variable rate mortgage holders who, in my view, continue to pay well over the odds on their mortgages.

There are a few key issues I would like to highlight. The first is the different treatment by the banks of existing mortgage holders as opposed to new mortgage holders. Over the past year or so, in particular, banks have reduced their standard variable rates for new customers, but some have not extended those reductions to their existing mortgage customers. This is fundamentally unfair and should not be allowed to happen.

Variable rates should change in line with market conditions.

When market conditions are favourable, people expect rightly that variable rates will fall. When they are adverse, variable rates should move in the other direction but that simply has not been happening to the extent that is justified by the prevailing market conditions. It is well documented that variable relates in Ireland are out of step with those charged elsewhere in the euro area. With regard to new business, as will be demonstrated by the presentation we will examine later from the Fair Mortgage Rates Campaign, the difference is at least 1.5%, but it is much greater in many cases for existing customers who are trapped and who do not have the option of switching their mortgage.

I reiterate that the Central Bank is not properly fulfilling its role in the area of consumer protection. It seems to prioritise its role as a prudential regulator above and beyond its role of protecting consumers. If it was giving that role the attention and priority it deserves, then we may not have to introduce legislation of this kind. Switching is not possible for every mortgage customer. Those who can should do so and some have, but for many mortgage customers, because of a change in circumstance, negative equity, reduced income, for example, switching is not an option and they are trapped and have to pay rates that are unjustifiable and, ultimately, unsustainable.

The banks that have steadfastly refused to reduce their SVR cannot be allowed to hide behind improved fixed rate offers. A number have improved such offers. I have highlighted the case of Bank of Ireland in the past, which has stuck rigidly to an unjustifiable variable rate of 4.5% for many existing customers. In a presentation accompanying its year end results for 2015, the bank's cost of funds was quoted at 0.8%. It is, therefore, charging its SVR customers more than 5.5 times its own cost of funds. This is an indefensible position. If the Central Bank will not vindicate the rights of those mortgage holders, the House should move to do so. Fixed rate mortgages are an entirely different product from an SVR. If customers lock into a fixed rate, they will lose out if the variable rate falls below the fixed rate and they will also lose a great deal of flexibility because while a fixed rate is suitable for many mortgage holders, it may not be for others. In addition, if a new competitor enters the market offering a much lower variable rate, these customers face substantial penalties if they seek to switch their mortgage.

The position of Dankse Bank customers is even more precarious as they are paying a SVR of 4.95% but because the bank has departed the personal banking market, there is no incentive for it to reduce the rate. It is not concerned about its reputation in the personal banking market.

The situation facing approximately 46,000 customers whose mortgages are now owned by non-bank lenders should also be highlighted in the context of this Bill. Many of the mortgages are owned by vulture funds which bought them from IBRC special liquidators and foreign banks departing the market. If the funds decided tomorrow morning that the SVR should be increased to 6%, 8% or higher, these mortgage holders could do nothing about it, particularly if they were not in a position to switch. More worrying, the Central Bank could do nothing about it based on its existing statutory powers. That is not a tenable position. This exposes these mortgage holders, in particular, to an unacceptable risk. I would like to address the question of whether the Central Bank wants the powers to intervene in the market and this will come up again during the debate. The fundamental point about this is the Oireachtas decides the powers given to the Central Bank. We decide the regulatory framework and the Central Bank regulates within that framework. There is a division of responsibilities and, therefore, we should not shirk our responsibilities.

Under the legislation, the Central Bank would be required to carry out an assessment of the state of the mortgage market, taking into account factors such as the banks' cost of funds, reasonable profit expectations, concentration within the market, and the ease with which customers can switch mortgages between lenders and the extent to which they are switching. Should the Central Bank conclude that there is a market failure, it would be empowered with a range of tools under the legislation to influence the SVRs charged in the market. The Bill's provisions are modest and many people who believe the Central Bank should intervene suggest that we go much further. It is a modest Bill, which has become essential. I am open to amendments to improve it during its passage, hopefully, through Committee Stage in a few weeks.

The inescapable reality underpinning the Bill is that the cost of funds for banks has fallen dramatically in recent years. Their net interest margin is increasing all the time and the main banks are strongly profitable again, which I welcome. Some of the rates that continue to be charged are unjustifiable by any yardstick and need to be addressed. They are charging those rates because they can get away with it and they are treating many of their existing customers in an extremely unfair manner, which must be addressed. Fair treatment of customers should be a cornerstone of consumer protection. Unfortunately, it is not in the current framework within which the Central Bank is operating. A strong legislative framework is needed to ensure this happens. The banks cannot be allowed to continue to rip off customers safe in the knowledge that they will not be subject to any sanction or intervention by the House or the Central Bank. The position is clear. If the banks wished to avoid legislation of this kind, they had ample opportunity do what was necessary and treat customers with a degree of fairness to ensure the variable rate charged was in line with the market conditions they faced. They have fundamentally failed in that objective and, for that reason, this legislation is necessary to strengthen consumer protection provisions and to ensure further downward pressure on variable rates, especially when they are unjustifiable and unacceptably high. I will be happy to take questions on the Bill following the Minister's contribution.