Professor Philip Lane:

I welcome the opportunity to appear before the joint committee to give an update on the progress of the Central Bank of Ireland’s tracker mortgage examination. I am joined by Ms Derville Rowland, director general, financial conduct; Mr. Ed Sibley, deputy governor, prudential regulation; and Ms Helena Mitchell, head of consumer protection supervision division.

For most people a mortgage is their most significant financial commitment and they have a right to expect their lender to treat them fairly and honour contractual commitments. The Central Bank’s role is to ensure the best interests of consumers are protected in their dealings with financial firms. That is why, after pursuing tracker mortgage issues with a number of individual lenders through extensive supervisory and enforcement work prior to 2015, the Central Bank launched the industry-wide tracker mortgage examination. We did so because the more we learned in our pursuit of individual issues and the more concerns were voiced by customers, consumer advocates and public representatives such as the members of the committee, the more certain we became that an investigation across every lender was required. As the largest, most complex and most significant consumer protection review undertaken by the Central Bank to date, the examination has exposed unacceptable failings by lenders on an industry-wide basis and the lack of a consumer-centred culture in lenders. These failings have had a detrimental and, in some cases, devastating impact on many tracker mortgage customers, up to and including the loss of homes and investment properties. It is clear that lenders did not sufficiently recognise or address the scale of these failings until intervention by the Central Bank. We are using all appropriate powers to force banks to undo the harm caused by their unacceptable failings.

I will give an update on progress to date. Unusually for live supervisory work, we have published regular updates on the examination since its launch in 2015. When we appeared before the committee last October, we reported that at that point the examination had ensured that approximately 13,000 customers would receive redress and compensation as a result of lender failings. This was in addition to the 7,100 cases which had already been resolved through our prior work in advance of the examination. We also made it clear in our report at the time that more cases would follow as we challenged lenders to include all customers who had been harmed by the mishandling of tracker mortgages. Last month we published a progress report which had been provided for the Minister for Finance. Today we will provide a further update for the committee based on the end-of-December information.

The most recent data show that lenders have been forced to pay €316 million in redress and compensation. More will follow, as the remainder of the 33,700 customers who were denied tracker mortgage products or charged the wrong rates receive redress and compensation and also as claims submitted to the independent appeals processes are adjudicated on.

When we last appeared before the committee, we outlined the phased structure of the examination and that lenders had submitted their phase two reports. We made it clear at that point that we regarded certain reports to be deficient. In particular, we said certain lenders had left out groups of customers who, in our view, had been harmed by their failures and were, therefore, entitled to redress and compensation. We emphasised that we would robustly challenge any such deficiency as we moved through our assurance work. In that work we have scrutinised reports by lenders, undertaken on-site inspections, hauled in lenders’ senior management and impressed on them the need to take a consumer-focused approach in complying with the examination. The outcome of this intensive engagement is that the issues surrounding the inclusion of disputed groups of customers have been resolved to the satisfaction of the Central Bank. As a result of our challenge, there has been a large increase in the number of customers who will receive redress and compensation, a further 13,600 customers compared to the number for October. In short, the examination is delivering for consumers.

I acknowledge the work of the committee and the Minister for Finance and Public Expenditure and Reform in shining the public spotlight on the lenders involved in the examination which has added to the sustained pressure we have exerted on the lenders since the outset. Like any regulator, the Central Bank is limited by law in the amount of information it can publicly disclose on any regulated financial institution. Much of the pressure we exert on lenders to protect consumers must necessarily be exerted in private until outcomes are final and announced. Of the initial group of 13,000 customers accepted by lenders up to the end of last September, 74% have received redress and compensation. The majority of the remainder of that group will receive theirs between now and the end of March, with the final balance receiving theirs by the end of June. A total of €181 million has been paid to date to these customers, with more to follow. Of the additional 13,600 customers which the banks have accepted since October, 29% have received redress and compensation of €87.9 million. For these customers, it is an ongoing process which we believe is going to conclude between now and end of June.

Lenders are counting the cost of this scandal. In addition to the redress and compensation we require them to pay, they must also bear the administrative costs of running the examination in line with our requirements. We can see this in their provisioning statements and staffing levels. If we look at their combined provisions, they add up to €900 million. That sum can be broken down into figures of €600 million for redress and compensation - what they have already paid out and what they are projecting they will need to pay out in the coming weeks - and €300 million in costs. The €300 million is the bottom line cost for the lenders. In terms of scale, one lender has disclosed that up to 500 people are working on the scheme. In addition to the monetary consequences of the failure, the institutions must also repair damaged reputations, not only as a result of the original mishandling of tracker mortgages but also the partial and delayed engagement by some lenders with the requirements of the examination.

While the Central Bank’s view is that the vast majority of customers have now been identified and accepted by the lenders for redress and compensation, our work continues. We will continue to review, challenge and verify the work undertaken by the lenders and complete our intrusive on-site inspection programme. The Central Bank is probing lender compliance with all aspects of the examination framework and also gathering evidence to support its enforcement activity. I acknowledge that this work has taken time to complete. I am also conscious of the devastating impact the failures by lenders has had on customers, up to and including the loss of their homes and investment properties. It is essential to acknowledge that no amount of money will ever fully compensate a person or a family for the trauma involved in losing their home or other adverse consequences arising from having to overpay for a mortgage.

The Central Bank has heard many distressing personal testimonies from customers who have contacted it. Our awareness of the harm caused to so many families has underpinned our drive to ensure all affected customers will receive the appropriate financial redress and compensation and that we will leave no stone unturned in seeking evidence to support enforcement actions. The scale, range and complexity of the examination, in addition to the material deficiencies in the responses given by certain lenders, have required robust and sustained Central Bank intervention which has resulted in many more customers being included and lenders significantly improving both their redress and compensation proposals and their independent appeals processes to the benefit of those affected.

While this has meant that the examination has taken longer than expected, the results are evident in terms of the numbers identified as having been affected and the scale of redress and compensation being paid.

In tandem with our supervisory work, enforcement work is ongoing. Four enforcement investigations are under way and we expect all of the main lenders to face enforcement investigations. Such investigations are detailed and forensic and routinely involve the scrutiny of thousands of documents and the conduct of interviews as part of the investigative process to establish the exact circumstances surrounding matters under investigation. In the investigations the Central Bank will consider all possible angles, including potential individual culpability.

While we are investigating, it is important to remember that board members and the senior personnel of lenders have significant legal obligations to report potential regulatory breaches to the Central Bank and certain potential criminal offences to An Garda Síochána under the Criminal Justice Act 2011. In that context, we are writing to board members and the senior personnel of the banks and require signed confirmation from each individual that he or she is aware of his or her legal obligations.

I will turn to the culture within lenders. Our consumer protection code requires lenders to act in the best interests of their customers. While many lenders publicly subscribe to this principle, evidence from the examination firmly suggests otherwise. The examination has exposed the manner in which certain lenders have treated their customers and the degree of regulatory force required to make them rectify such behaviour. It is clear that there are still significant behavioural and cultural issues and challenges in some of the lenders and that customer interests have not been sufficiently protected or prioritised. The Minister for Finance has mandated the Central Bank to report later this year on the issue of behaviour and culture within lenders. We are completing our scoping work and the next step is to commence on-site assessments which will include engagement in each of the lenders at senior management, middle management and staff level to probe behaviour and cultural issues.

It is important to note that culture is about more than behaviour. A partial list includes prioritising the best interests of customers, offering responsible products, reviewing board effectiveness, committing to diversity and inclusion and having robust internal audit and risk management procedures. A defining cultural test is how a firm deals with adverse situations. Does it make sure the best interests of customers are protected, even if this damages short-term profitability?

The culture review will be underpinned by our enhanced consumer protection risk assessment model which facilitates us in determining how financial firms identify and manage consumer risks, including the risk that a firm's culture does not promote and support the protection of consumers. The behaviour we witnessed in the examination has very much informed the development of the new model. We are working with the Dutch Central Bank, DNB, a recognised leader in the supervision of behaviour and culture which will participate with us in on-site inspections at the lenders.

The culture of a firm is its responsibility. In particular, the members of its board should constantly be asking questions of themselves and their firm such as what counts for promotions and whether it is high sales figures or high quality interactions with customers; whether the right products are being sold to the right people; how staff incentives and rewards influence product sales and consumer outcomes; whether the interests of customers are taken into account when decisions are being made in the boardroom; and whether the tone from the top signals the right values to staff. These are critical issues which lenders must prioritise and get right if they are to truly reflect a consumer-focused culture.

The Central Bank is using effectively the full range of its powers to deliver for affected customers in the tracker mortgage examination. We keep under constant review the question of whether additional powers would enable us to deliver more effectively on our mission to safeguard stability and protect consumers. In that context, our report on behaviour and culture in lenders will help to identify regulatory enhancements required and whether additional legislative changes are needed. Another example of how we keep our powers under constant review is our response this month to the Law Reform Commission's issues paper on regulatory enforcement and corporate offences.

I will turn to the issue of redress and compensation payments. I stress an important message for customers affected. The key to the examination framework is that it has been designed to ensure affected customers will have extra options if they believe the redress and compensation offered by their lender are insufficient. They can accept the redress and compensation offered and still make an appeal. They can cash the cheque safe in the knowledge that what they have, they will hold. Redress and compensation offers cannot be reduced in the event that a customer makes an appeal.

Lenders have been required to establish independent appeals panels, specifically to deal with customers who are not satisfied with any aspect of the redress and compensation offers they have received from lenders. Together with redress and compensation, affected customers will receive a separate payment which they can use to pay for independent advice on the adequacy of their lender's offer. In line with the State's overall consumer protection framework, all other recourse options remain open to customers such as the Financial Services Ombudsman who will deal independently with their concerns or the courts.

The tracker mortgage scandal is unprecedented in its scale and, naturally, has required an unprecedented regulatory response. Our pursuit of lenders continues to ensure they will include all affected customers and discharge their responsibilities under the framework. This will continue to involve intrusive supervisory scrutiny, which means that we will continue to review, challenge and verify the work undertaken by lenders and complete our own multi-faceted inspection programme. In parallel, our enforcement investigations will continue.