Oireachtas Joint and Select Committees
Wednesday, 29 January 2014
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Report on Licensed Moneylending Industry: Central Bank of Ireland
3:30 pm
Ciarán Lynch (Cork South Central, Labour)
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I welcome Mr. Bernard Sheridan, director of consumer affairs at the Central Bank of Ireland. Mr. Sheridan is accompanied by Mr. Colm Kincaid, head of consumer protection, banking, insurance, investments and policy; and Mr. Terry Murphy, consumer protection, banking, insurance, investments and policy. Mr. Sheridan is here to discuss with the committee the Central Bank’s report on the licensed moneylending industry. Mr. Sheridan will make some opening remarks, following which members may put questions to Mr. Sheridan. I remind members, witnesses and those in the gallery that all mobile phones must be switched off.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the committee to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise or make charges against any persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of a long-standing ruling of the Chair to the effect that Members should not comment on, criticise or make charges against a person outside the House, or any official by name in such a way as to make him or her identifiable.
I invite Mr. Sheridan to make his opening comments.
3:35 pm
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.
Ciarán Lynch (Cork South Central, Labour)
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Are these licensed or unlicensed moneylenders?
Mr. Bernard Sheridan:
All of my references are to licensed moneylenders.
Other factors relevant to this issue are the robustness of the creditworthiness assessments carried out by moneylenders, a topic on which we have given firms feedback previously, and the continued availability of credit for existing customers. It is especially important in such a high-cost sector, where over a quarter of borrowers surveyed cite ease of availability of moneylender credit as a key factor in their choice of a moneylender over another type of credit provider, that lenders have effective systems in place to assess the ability of the borrower to repay. This is all the more important in a context in which a quarter of those surveyed had found it difficult to make moneylender repayments in the previous 18 months, and this overall figure will be higher in some moneylender sectors.
The research found that more customers hold longer-standing loan arrangements of five years or more with a moneylender. While there may be circumstances in which a customer needs an additional loan, we would be concerned a new loan is simply a way of extending an existing loan whereby the credit becomes longer-term in nature but is charged on the basis that it is short-term. It may also become more difficult for the borrower to consider alternative sources of credit. Concerns have also arisen through our supervisory work as well as from the research that some moneylenders may make credit available but reduce the amount of a new loan made available to the customer in order to repay an existing loan. This is an issue we will examine further.
I thank the committee for its invitation to discuss this important topic. In regulating licensed moneylenders the Central Bank’s focus is on the protection of borrowers’ interests. While we believe we achieve this through the regulatory framework we have put in place and our ongoing monitoring of the sector, we continue to be vigilant about the sector’s trends and will develop our supervisory approach accordingly. I am happy to take any questions.
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Sheridan. We will rotate in rounds of 12 minutes for questions and answers. I thank Mr. Sheridan and his officials for coming before the committee. The report makes for very interesting reading. I wish to discuss the Irish market as it is and will be for licensed moneylenders. Are the 360,000 people borrowing at present from licensed moneylenders borrowing from them only and not from credit unions or banks?
3:45 pm
Ciarán Lynch (Cork South Central, Labour)
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Regardless of whether they had borrowed from banking institutions?
Ciarán Lynch (Cork South Central, Labour)
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So the majority of the 360,000 people who borrowed are with licensed moneylenders, not banks or credit unions.
Ciarán Lynch (Cork South Central, Labour)
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Is that separate from banks and credit unions?
Ciarán Lynch (Cork South Central, Labour)
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Some €200 million in loans are outstanding in that category.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Sheridan mentioned that APR rates were at or could cap out at 200%. It is an astronomical figure. Ireland entered the troika bailout programme because we could not get money cheaply, namely, below 8.5%. The affordability level of these interest rates indicates a worrying return. Of the 360,000 loans, what percentage have been completed in full? Have almost all of them been repaid?
Ciarán Lynch (Cork South Central, Labour)
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What is the default rate in the market? Is it 10% or 20%?
Ciarán Lynch (Cork South Central, Labour)
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We can safely say that approximately 80% of people are servicing their loans. If one operates on the basis that risk in lending is determined by the interest rate and that 80% of loans are performing, why is the Central Bank allowing such a high interest rate to operate in the market?
Mr. Bernard Sheridan:
I will clarify a point about how this market operates. When people fall behind in their repayments, the lender is prohibited under the legislation from imposing additional charges or costs upon the borrower other than legal costs owing to legal actions. Generally, the term of repayment is extended and no other action is taken.
Ciarán Lynch (Cork South Central, Labour)
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With an interest rate of 287%, surely one could not add more penalties.
Mr. Bernard Sheridan:
I tried to give a sense of the market in my opening statement. The types of loan that we are discussing range across the variety of providers. For example, there are traditional door-to-door lenders, which charge APRs in the higher bracket. This is partly related to the high cost of credit as well as to the terms of the loans, which drive up the quoted APRs.
We have undertaken this research and followed up on the 2007 research to determine the impact, how borrowers are coping and why they are engaging with the sector in question. In general, people are satisfied because they can get small loans relatively easily. It seems to suit many people despite the fact that we have tried to emphasise the high-cost nature of these loans. People use moneylenders at these rates because of ease of access. An issue for us is whether moneylenders are making it too easy.
Ciarán Lynch (Cork South Central, Labour)
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That leads me to my next question. According to the report, people are satisfied with the service, but I would like to know what question was asked. It is certainly easier to get a loan from a licensed moneylender than from a bank or credit union. With some moneylenders, one can almost get loans online. However, quality of service and access to money are separate matters. There is a significant financial penalty or additional cost in taking this route. Is it within the Central Bank's power to reduce the interest rates? Does it set the limits?
Mr. Bernard Sheridan:
Under the Act, our role applies to individual applications for licences, which are mainly renewed every year. Our role relates to each firm, its business model, the types of loan it proposes to provide, the terms of those loans and the rates it charges. We intervene on a firm-by-firm basis. We took over this role in the market in 2003, since which time the rates, types and terms of loans have not changed.
Ciarán Lynch (Cork South Central, Labour)
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Did the Central Bank make any intervention in 2013?
Ciarán Lynch (Cork South Central, Labour)
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Did the Central Bank make an intervention in 2013?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Sheridan must realise that I am extraordinarily tight with my own time and will be just as tight with members' time. If a question is put to Mr. Sheridan, will he please answer it first and then elaborate? Was an intervention made against a company's licence in 2013, 2012 or 2011? When was the last time?
Ciarán Lynch (Cork South Central, Labour)
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Was there an intervention regarding a company's existing interest rate that resulted in the rate's reduction?
Ciarán Lynch (Cork South Central, Labour)
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The Central Bank has not made an intervention that led to a reduction in interest rates.
Ciarán Lynch (Cork South Central, Labour)
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Firms can have the interest rates that they have been granted for a number of years until their licences come up for renewal, but at no time has the Central Bank made an intervention to reduce an interest rate that it had already granted. Am I correct in saying that?
Ciarán Lynch (Cork South Central, Labour)
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I want to be clear, as members will need to be certain about this matter when they are asking questions. Mr. Sheridan's section in the Central Bank sets the ceiling for the interest rates allowable for these companies. It is not set by legislation, but at Mr. Sheridan's desk.
Ciarán Lynch (Cork South Central, Labour)
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How does Mr. Sheridan justify a company charging an interest rate of 287%?
Ciarán Lynch (Cork South Central, Labour)
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I know, but the Central Bank can intervene to reduce them. Why is it tolerating an interest rate of 287%?
Mr. Bernard Sheridan:
To understand how the market operates, we have not only supervised lenders but have also been anxious to know what is happening with borrowers - for example, what types of borrower are using moneylenders and for what purposes. These types of loan are high-cost but are used for short-term purposes. Our concern is about these loans becoming longer-term and the rates charged for them.
Ciarán Lynch (Cork South Central, Labour)
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I will revert to my question. Am I correct in believing that the Central Bank has set the maximum interest rate that can be charged for a loan regardless of the schedule? The maximum APR that can be applied in Ireland is 287%.
Ciarán Lynch (Cork South Central, Labour)
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More than 80% of the market is performing. Perhaps I am wrong, but the interest rate applied to a loan is based on risk - that is, whether the borrower will repay the money. As Ireland discovered in the international monetary markets before we entered the bailout programme, we could not get affordable money because the interest rate increased. That was 8.5%, but we are discussing 287%. How is that an affordable interest rate, particularly given the fact that 80% plus of the market is performing? It does not equate.
Mr. Bernard Sheridan:
In case I confused the Chairman, that 25% of people are experiencing difficulty making repayments does not mean they have defaulted. We are discussing specific types of loan. We have undertaken research to determine the impact on the market. One of our concerns relates to interventions in the market. Where will people go if this type of credit is not available? We tread carefully when considering reductions in the market rate, but we certainly would not like to see further increases.
Ciarán Lynch (Cork South Central, Labour)
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The Central Bank has never made a reduction on an existing licensed rate. That is what Mr. Sheridan stated.
3:55 pm
Ciarán Lynch (Cork South Central, Labour)
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The profit margin in this area is so good that everybody will be seeking higher rates. It is the nature of business to want always to make more money. How much money would one of these companies make on a €1,000 loan at 287% over a four month period?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Sheridan in his opening statement said that there is much commentary and concern in regard to what is happening in the high street in Britain. Is the Irish market as currently structured attractive to such lenders? Can the Central Bank, under current regulations, facilitate interest rates of 5,000% plus, as is currently the case in Britain?
Ciarán Lynch (Cork South Central, Labour)
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Some of the companies operating in this area in Britain are very big and must certainly be looking at the Irish market. It is obviously a profitable business area given there are 360,000 operators engaged in it. Would the Central Bank be concerned about interest rates which are in excess of 3,000%, 4,000% and 5,000%?
Mr. Bernard Sheridan:
Any firm wishing to operate here as a moneylender has to apply to the Central Bank for authorisation to do so. As part of that process, there is a meeting between the firm and the Central Bank. During recent years a handful of firms from different jurisdictions have communicated with us in regard to setting up that business model here. Applying the policy that we have set, we have been able to refuse them entry to the market. While initially these firms only provide loans which are critical to people in terms of getting them out of a hole, they subsequently turn into firms providing easy access to credit.
Thomas Byrne (Fianna Fail)
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I share the Chairman's concern that the issue of interest rates has not been dealt with. Personally speaking I have no problem with credit provided by catalogue firms or electrical or furniture companies, which are well known companies that are doing a good job. While people may pay a lot for what they purchase, they might not be able to get their products otherwise. While there may well be issues around the interest rates in respect of that type of credit, many people benefit from these companies.
How many unlicensed moneylenders has the Central Bank dealt with recently?
Thomas Byrne (Fianna Fail)
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Who is the prosecuting authority in that regard? Is it a criminal matter?
Thomas Byrne (Fianna Fail)
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Another issue of concern for me is that of debt collectors calling to people's homes, which ties into the unlicensed moneylender issue. There is a great deal of secrecy in this area, including by licensed companies. Moneylenders generally do not display the name of the company over the door. In many cases, the names do not suggest that the business is that of moneylending. A couple come to mind but I will not mention them now. However, in my view this adds to the secrecy of the whole operation. Three different premises come to mind that display no information which would suggest that the businesses therein are moneylenders. Perhaps there is a need for amendment of the regulation in this area. A person who opens an accountancy or solicitor's practice is required to display their name on the business premises. If this provision were to apply across the board, it could help to open up the market in terms of the supply of information to consumers. What is the difference to the consumer between a licensed company which does not display its name above the door of its premises and an unlicensed company which does likewise? I am not sure there is much, if any, difference. This issue needs to be addressed.
The Consumer Credit Act provides for the taking of a case to the Circuit Court in respect of the excessive interest rate charges, with the Circuit Court having the authority to vary interest rates in credit agreements, including moneylending agreements. Are any such cases ever taken? Would such cases be taken by the borrower or the Central Bank on behalf of the borrower?
Thomas Byrne (Fianna Fail)
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Is Mr. Sheridan aware of any case ever being taken?
Thomas Byrne (Fianna Fail)
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That means the provision concerned is a irrelevant. I advocated a couple of years ago that people avail of that provision in relation to interest rates on mortgages. However, it does not apply to mortgages. Is there any role for the Central Bank in terms of use of that provision for issues that arise outside of annual renewal time in respect of moneylending agreements or other credit agreements?
Mr. Bernard Sheridan:
It is too much to expect borrowers to take these type of actions. It is the responsibility of the Central Bank in the context of annual licensing to address the issue of excessive interest rate charges. The issue is addressed case by case. Whether this should be provided for in law is a separate issue. In my view, it is too much to expect borrowers to take on a provider of credit to them.
In regard to the Senator's comment around secrecy in regard to whether one is dealing with a moneylender, the Central Bank requires companies to display their licences. Also, under law it must be clear from a credit agreement that such is a moneylending agreement. We have tried to improve transparency through making the registers available and being more upfront about the types of products on offer. We do not necessarily want to promote one sector over another, particularly the moneylending sector. We try to strike a balance. However, there may be something to what is suggested by the Senator in terms of people being entitled to know when entering a premises that they are dealing with a moneylender.
Thomas Byrne (Fianna Fail)
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The fact that a moneylending firm can operate from a premises with no name over the door is an issue. I am not suggesting there is anything wrong with any of the companies of which I am aware. As far as I am aware, they are licensed companies, some of which are operating from plush offices. The fact that no name is displayed over the door undergrounds the business, whether licensed or unlicensed. The names of such companies also needs to be looked into. In some cases, the names suggest they are property companies and so on. I am not sure of the extent of this particular problem. A practising solicitor must state the purpose of his or her business on headed paper and on a plaque displayed outside the business premises. If moneylending businesses were required by law to do likewise, it would be helpful. It would also be of advantage to the licensed operations and would remove the perception that a particular business is dodgy and so on.
Why are moneylending businesses closing? I note some of them merging. Is that because moneylending has now become big business?
Mr. Bernard Sheridan:
Yes. A number of the smaller companies are struggling to make profits and they are reacting to this in different ways. One reaction is to increase rates. These companies need to be of a minimum size in order to make the business worth their while. Many of them are relatively small and as such are not viable. Another issue for them is the regulatory burden, including the annual licensing process with the Central Bank. When we come across issues, we put them through the hoop. For some companies, it is not worth their while.
Kieran O'Donnell (Limerick City, Fine Gael)
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I thank Mr. Sheridan for his presentation. I will cut to the chase. The figures provided are disturbing.
Mr. Sheridan stated:
From what I can see, this is the poor man's bank with exorbitant interest rates. To cut to the chase, people may have little choice other than to use it. The annual percentage rate mentioned was between 23% and 188%, which is an incredible difference of 165%. It goes up to 287%, which would leave 264% of a differential, which is even more incredible.
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.
Has consideration been given to the cost of funding to these moneylenders and how they formulate their APR? Typically, what would be the relevant APR for money borrowed from a credit union or other typical lenders? I note in the survey with regard to the licensing process that moneylenders are effectively nationwide. Of the 40 operators, 27 operate in all 25 districts. Are they operating a cartel?
4:05 pm
Ciarán Lynch (Cork South Central, Labour)
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The Deputy is halfway through his time and there has not yet been a response.
Kieran O'Donnell (Limerick City, Fine Gael)
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They are similar questions. Are they operating a cartel and is there a relationship between them? What bad debt provisions exist for moneylenders versus ordinary banks? It is disturbing and shocking that any body charges nearly 300% APR. That is being charged when people cannot afford it. Did the bank consider how they come up with cost of funding?
Kieran O'Donnell (Limerick City, Fine Gael)
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They are using cash.
Kieran O'Donnell (Limerick City, Fine Gael)
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Does that mean they use cash?
Kieran O'Donnell (Limerick City, Fine Gael)
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There is no cost of funding in that case.
Kieran O'Donnell (Limerick City, Fine Gael)
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What alternative costs?
Kieran O'Donnell (Limerick City, Fine Gael)
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If using them for alternative purposes, what could be got on deposit in a bank now?
Kieran O'Donnell (Limerick City, Fine Gael)
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What is the typical rate of interest paid by a financial institution for money on deposit?
Kieran O'Donnell (Limerick City, Fine Gael)
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Perhaps 2% or 3%. These people are charging 287% APR. I do not need a calculator to tell me there is something wrong in that respect. To get to the nuts and bolts, did the bank consider the cost of funding for the moneylenders?
Kieran O'Donnell (Limerick City, Fine Gael)
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What is the level of bad debts relative to ordinary banks?
Kieran O'Donnell (Limerick City, Fine Gael)
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I am a bit perplexed. How could a moneylender charge nearly 300% in interest on a loan? Mr. Sheridan has indicated that, in effect, all loans are repaid and many moneylenders are giving out cash reserves rather than money which they have borrowed. How can some of these not make a profit? If a model is to be built to lend money to people who cannot access it elsewhere by looking to make a profit, would it not be better to close the moneylenders and change the market in order that people can access money from institutions like credit unions or others where consumers would not pay crazy money? It is a valid question.
Kieran O'Donnell (Limerick City, Fine Gael)
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In the limited time I have, I am asking a very direct question. Is this model flawed? How can it be justified that these moneylenders - which for all intents and purposes are now the poor man's bank - charge up to 300% APR, when typical APR for a loan is between 7% and 10%? Even credit cards charge approximately 19%. The Central Bank is the custodian of this area so how is this allowed to happen?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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The problem with the model that is-----
Ciarán Lynch (Cork South Central, Labour)
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The Deputy's point has been made.
Kieran O'Donnell (Limerick City, Fine Gael)
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This is an important point. The Central Bank has admitted there are effectively no bad debts in the industry. People are being put in a cycle of debt upon debt from which they cannot escape. Is the Central Bank standing over the process?
Ciarán Lynch (Cork South Central, Labour)
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The Deputy must finish so I can bring in the next member.
Kieran O'Donnell (Limerick City, Fine Gael)
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Will Mr. Sheridan reply?
Ciarán Lynch (Cork South Central, Labour)
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They Deputy must allow time for responses as well.
Kieran O'Donnell (Limerick City, Fine Gael)
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Why is it not being changed?
Ciarán Lynch (Cork South Central, Labour)
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Deputy, I will move to the next question if you interject once more. Mr. Sheridan should proceed without interruption.
Mr. Bernard Sheridan:
In the opening statement I indicated that this is an area of concern for us as people are using moneylenders for longer periods, which may be down to how moneylenders are operating. They are offering new loans to people and, in a minority of cases, to people with existing loans. Our concern is whether the loan is offered to keep the relationship going and the debt in place. We are considering how to intervene more strongly in that area.
Michael Creed (Cork North West, Fine Gael)
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I am staggered by the report and presentation today. There is a perception that this is almost an underground activity, although it is licensed. The fact that there are 360,000 clients means that this is a real phenomenon, and the numbers for market share would make a high street bank proud. Mr. Sheridan is in the dock on this issue and my colleague has correctly prosecuted a number of issues. The people who should really be in the dock today are in the credit union sector, as they have strayed far from the original purpose of their establishment. Ms Nora Herlihy, a founder of the credit union from my constituency, would turn in her grave at what she would see today as the legitimate purpose of credit unions and how far they have moved from being the poor man's bank. Moneylenders are the poor man's bank by default. Regrettably, one credit union was bankrolling developers, and this happened the length and breadth of the country-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy-----
Michael Creed (Cork North West, Fine Gael)
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This is relevant. If the Central Bank must account for its role in respect of licensing, it would be fair game to have the credit union movement representatives in here. People need, in the sense of financial services, to get back to knitting, and this is what the credit union's core business was about. It was about knowing their communities and providing credit where people could not get it elsewhere. It was the poor man's bank. Now the poor man's bank is being licensed by the Central Bank, charging 188% APR. It is bordering on criminal, and the Central Bank is rightly in the dock in that regard because it is facilitating the process. The people who are equally culpable are in the credit union movement.
Ciarán Lynch (Cork South Central, Labour)
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I will allow the Deputy his time but he should be measured in his language. Accusations like "criminal" are moving the Deputy outside his own privilege. He should be careful.
Michael Creed (Cork North West, Fine Gael)
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I am not aware that I levelled accusations of criminality against individuals. The industry is a fair target for those comments. It is bleeding people dry with debt recycled upon debt. In order to question their core purpose, we should bring in people from the credit union movement.
I would like Mr. Sheridan to comment on the matter. How can his organisation facilitate the credit union movement getting into the area of borrowing which I understood was its original purpose?
4:15 pm
Mr. Bernard Sheridan:
I do not agree with some of the things that the Deputy has said. I agree with his point about the credit unions being a real alternative. To be fair to the credit unions, the most growth has taken place in the catalogue companies. It is more difficult for credit unions to compete with that type of lending but I am not saying they could not do so. Potential exists in the sector and research has shown, for example, that if a moneylender ceased to do business then 43% of people have said that they would approach a credit union. Many people who use moneylenders already have relationships with credit unions and banks so there is a potential for credit unions to build on that situation. The credit unions must examine their products and assess whether they can compete with the products offered by moneylenders.
Michael Creed (Cork North West, Fine Gael)
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I have a final question on the matter. The current legislation allows moneylenders to give top-up loans on existing debt where there are default payments but credit unions are exclusively precluded from doing so. Is there a legislative difficulty in terms of regulations? Can we make it easier for the credit union movement to compete in a realistic fashion in this business?
Mr. Bernard Sheridan:
I am not sure what point the Deputy is trying to make. Moneylenders are prohibited from offering a new loan to a person and must give the full amount of the loan to the person. They cannot reduce the amount by offsetting it against a loan already held by the person. Moneylenders are not allowed to do so under law. Whether they actually do it or not is an area of concern for us.
Michael Creed (Cork North West, Fine Gael)
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Does the Central Bank regulate the situation? Has the Central Bank evidence that it happens? Has it prosecuted in such instances?
Ciarán Lynch (Cork South Central, Labour)
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Let us say I borrow €1,000 from a licensed moneylender this afternoon. Will my loan be registered anywhere?
Ciarán Lynch (Cork South Central, Labour)
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I call Deputy Pearse Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat. Cuirim fáilte roimh ár gcairde ó Banc Ceannais na hÉireann.
I wish to distance myself from the comments made by Deputy Creed who made an outrageous attack on the credit union movement.
Michael Creed (Cork North West, Fine Gael)
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Bankrolling developers.
Pearse Doherty (Donegal South West, Sinn Fein)
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I did not interrupt Deputy Creed when he attacked what I believe to be the credit union movement. I wish to point out to members that if they believed that these extortionate rates bordered on criminality then they had the option to do something about it when I drafted legislation on behalf of Sinn Féin, when it was debated in the House and called for a cap to be put on interest rates. A member of the committee has now blamed the credit union movement union but he and other Members decided not to impose a cap on moneylenders and have allowed for the practice of 287.72% APR to continue. If one wants to point fingers then they should start by looking in the mirror and examine the role they play and the power they have, as Members of the Parliament, to do something about the matter.
I shall now turn to the issue of a cap on moneylenders' rates. As I have stated, my party is very clear on the issue.
Ciarán Lynch (Cork South Central, Labour)
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I shall try to get order for the Deputy. I ask members to desist from talking when others are asking questions. Deputy Doherty to continue, without interruption.
Pearse Doherty (Donegal South West, Sinn Fein)
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I thank the Chairman. Some 13 out of 27 EU member states have placed caps on moneylenders. The only legal cap that exists at present has been placed on the credit union movement which has a cap of 12.68% APR. Clearly, the credit union movement cannot compete with the other type of loans because it cannot offer APRs in excess of that rate. If one wants riskier loans to be taken up by the credit union movement then the Central Bank must deal with the APR cap.
Can Mr. Sheridan confirm there is no cap at this point in time and that it can only be done at the discretion of the Central Bank? This time next year the Central Bank could approach us to inform us that it has a licensed moneylender operating at 400% APR. Is that correct?
Pearse Doherty (Donegal South West, Sinn Fein)
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Challenge by whom?
Pearse Doherty (Donegal South West, Sinn Fein)
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There has been a debate - and I hope that I have been part of the debate - on whether caps should be imposed on moneylenders. I argued that it should be set at 40%. I know that is a lot higher than what the credit union movement suggested to the Minister for Finance three years ago. Has the Minister for Finance or the Central Bank decided to carry out a proper analysis on the introduction of a statutory cap on moneylenders? This is not fairytale stuff because it has happened in nearly half of all EU member states. Is such an analysis being considered? The arguments put forward by the Central Bank have been very light, to say the least.
Mr. Bernard Sheridan:
We have raised the issue with the Department of Finance. I am not aware that progress has been made but we are open to assisting it by giving our expertise.
In my opening statement I expressed concern about adopting a simple one cap fits all approach. We believe that the approach that we are taking, in terms of assessing whether rates are excessive and applying that to different types of loans, terms, APRs and costs of credit, may be a better approach. We are concerned about the impact a simple market-wide cap could have because it would be irreversible in terms of where people could go which brings us back to the point made about alternatives.
Pearse Doherty (Donegal South West, Sinn Fein)
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Does Mr. Sheridan believe that the type of cap that we have discussed should go hand in hand with the credit union cap? We should examine the legal cap on credit unions. They could involve themselves more with the 360,000 customer base that moneylenders have at their disposal. Does Mr. Sheridan view it as a dual approach strategy?
Pearse Doherty (Donegal South West, Sinn Fein)
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I wish to ask a very simple question. Mr. Sheridan gave us a figure for the number of customers. Therefore, I assume that there have been over 500,000 moneylender loans in the State over the past 12 months. I have made that assumption based on the fact that Mr. Sheridan has said that there are 360,000 customers, 26% of whom are currently paying off at least two loans, and 6% have more than two loans. That takes the figure up to about 500,000 loans by moneylenders in the past 12 months. Is that correct?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, I excluded them.
Pearse Doherty (Donegal South West, Sinn Fein)
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My figure is only an estimate. I am not talking about 360,000 loans but 360,000 customers and I shall return to the matter later.
One of the largest moneylenders in the State is Provident. The moneylenders are all listed and rates shown. Mr. Sheridan mentioned that the highest APR rate licensed by the Central Bank has been granted to Provident. He said that the maximum APR charged, including collection charges, is 287.72%. A person can secure a loan of €500 on the Internet within a couple of minutes. If the loan is for the duration of a year he or she will pay as much as €466.60 in costs for such credit. If it is for half a year - which is a more likely term with Provident - the loan will cost €228.75. How can the Central Bank justify this situation? We know from the survey the type of social class from which the majority of people who use these companies come. The Central Bank has licensed one of the largest moneylenders in the State and left it with an ability to charge a person who borrows €500 for a term of 12 months, the total sum of €966.60. How can the Central Bank justify such action?
Mr. Bernard Sheridan:
I am not confirming those figures because I have not done the calculations. There is no doubt that when one uses these loans, for a longer term, they are very costly. We have tried to get a handle on the type of people who borrow from the likes of the firms mentioned by the Deputy. We have tried to find out what the borrowers use the money for and its impact. We have published the findings. Some of the findings have surprised but that is what the consumers have told us.
Pearse Doherty (Donegal South West, Sinn Fein)
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We can define what is meant by "longer term".
The longer term means over one year but Provident Personal Credit Ireland is licensed by the Central Bank to charge this rate for a six-month period and it amounts to €228.75 on €500, for which there is no justification.
With regard to long-term loans, the survey shows that one in five people took out new loans before another loan had been paid off and that 70% use loans to reduce the existing loan while extending the period in which they owe money to the moneylender. We have graphs showing that 47% of people have loans for one to five years from the moneylender and that 38% are in hock to the moneylender for over five years. These are not new revelations and it is clear that moneylenders licensed by the Central Bank to provide short-term money have these customers in their grip for a long period. The Central Bank survey is not new; the one completed in 2007 showed similar patterns. Nevertheless, the rate that allows the moneylender to have a profit of €228.75 on a €500 loan is unacceptable.
4:25 pm
Mr. Bernard Sheridan:
We applied a new consumer protection code to this sector in response to the 2007 research. One of the focuses was on the issue of loans being so expensive. To some extent, that is bearing fruit in that people who responded to the survey were generally aware that these were high-cost loans and they were aware of the cost they were paying. It is not as if we have done nothing in dealing with these issues. The process moneylenders are following in rolling over loans is one we are examining.
Pearse Doherty (Donegal South West, Sinn Fein)
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With respect, all the Central Bank has done is make people aware that they are being screwed by moneylenders. It has not reduced the rate through which moneylenders are screwing customers and it knows, through the most recent data, that moneylenders continue to have a grip on these individuals, with 38% having loans for over five years.
Section 99 of the Consumer Credit Act is supposed to ban top-up loans. It is very clear from the Central Bank survey that top-up loans continue to be given and that multiple loans to the same individual continue to be given. Some 22% of people have more than one loan, some with the same financial provider. How many investigations are ongoing into moneylenders and how many prosecutions have been taken against moneylenders in the past three years?
Mr. Bernard Sheridan:
There is currently one investigation into the practice to which the Deputy refers. With regard to prosecutions, we have applied our role through either refusals of a renewal of a licence or taking action against individuals. We have had a number of cases in which we managed to do this.
Pearse Doherty (Donegal South West, Sinn Fein)
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We all make mistakes, but it is quite a big one in the report that 77% of respondents, of 500 people surveyed, suggested they had been refused credit. Today, the Central Bank confirmed the figure was 25%. It is quite a big difference and I am surprised at the information. I am glad that it has been corrected, but the written report should also be corrected.
During the debate on Committee Stage of the Credit Reporting Bill I was pushing to have moneylenders come under the terms of the Credit Reporting Bill, but it has not happened. In the Central Bank documents some 95% of moneylenders do not have access to the external credit history database to check the credit history of applicants. The report states, "Regulation 11 of the European Communities (Consumer Credit Agreements) Regulations 2010 requires a creditor to assess a customers’ creditworthiness on the basis of sufficient information, where appropriate obtained from the customer and, where necessary, on the basis of consultation of the relevant database". Moneylenders are completely in breach of the spirit of the regulation and it is clear from the evidence in the report that only 5% are accessing the credit history database, with the rest having conversations with people on the doorstep. Half of the people concerned are not asked for documentary proof that they are in employment or proof of their financial position. With the deepest of respect to Mr. Sheridan, with whom I have engaged on moneylending practices and whistleblowers, the Central Bank has approached this sector with kid gloves. This part of the report is evidence of that.
Mr. Bernard Sheridan:
With regard to creditworthiness assessments, I agree that the research shows that it seems very light in a lot of cases. We have responded to the industry in that regard and reminded its members of their obligations.
I ask Mr. Kincaid to deal with the other issue concerning the credit register.
Mr. Colm Kincaid:
The scope of the Act covers moneylenders and, as it is operationalised, the initial focus will be on the banks. There is a limit of €500 to which the Deputy referred. Moneylenders are within the scope of the Act, but, as Mr. Sheridan said, there is a period of time before the register is set up and operationalised. There is a lot moneylenders can do in the meantime in terms of improving the creditworthiness assessments. We want to see them do this.
Ciarán Lynch (Cork South Central, Labour)
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Deputies Aodhán Ó Ríordáin and Arthur Spring are sharing 12 minutes.
Aodhán Ó Ríordáin (Dublin North Central, Labour)
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I welcome the delegates. The report is interesting, as is much of the information given in response to questions. We had all assumed the Central Bank was in the business of ensuring people were not exploited. When the Central Bank engages with people on the receiving end of these loans, whom it states it is trying to protect, how do the delegates describe an APR of 287%?
Aodhán Ó Ríordáin (Dublin North Central, Labour)
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Is there an adjective Mr. Sheridan would use? Would he describe it as excessive?
Mr. Bernard Sheridan:
Clearly not, because we have allowed it. Our role under the Act is in respect of each application. Since 2003, we have tried not to allow what was in place to be increased and we have largely succeeded. We have undertaken the research to see the implications of this and repeated it recently.
Aodhán Ó Ríordáin (Dublin North Central, Labour)
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I would describe an interest rate of 287% as pornographic, but that is just me. Mr. Sheridan talks about people who want short-term loans, but if they want short-term loans at that range, between 23% and 287%, it means that they have something in their lives they want to finance at short notice. It could be the cost of a funeral or Christmas expenses and concerns something they cannot afford but that they must get over. There could be an element of trauma attached to it. Is this the experience of Mr. Sheridan?
Aodhán Ó Ríordáin (Dublin North Central, Labour)
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They will take money at any cost in order to get through this period.
Mr. Bernard Sheridan:
I do not know about that. I am not here to defend the industry, but in determining whether something is excessive, we look at the cost of credit. For these loans which are relatively small, borrowers look at how much they will have to pay in total, how much they will have to pay per €100 borrowed. They believe they can afford to repay it. In those terms, we can understand why people use moneylenders.
Aodhán Ó Ríordáin (Dublin North Central, Labour)
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I must look at it in those terms because Mr. Sheridan has said he has engaged with lenders and that is the basis of his report. I assume he talked to the MABS which has done a lot of work with the Traveller community on the reasons moneylending becomes a problem in that community. Surely he has some appreciation of the reasons people need short-term loans and, at difficult times in their lives, they are wide open to being exploited by some of these guys.
Mr. Bernard Sheridan:
We have spoken to different consumer groups. One of the concerns is that we will take action that could unsettle the market and lead more people into the illegal sector. That concern has been expressed to us, which is why we are cautious about taking further action with the licensed sector.
Aodhán Ó Ríordáin (Dublin North Central, Labour)
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That is always the argument made against doing anything. With any legal vice in society, people say that if we touch or regulate it too much, it will move underground. Is that a good enough excuse?
4:35 pm
Ciarán Lynch (Cork South Central, Labour)
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Just over two minutes.
Aodhán Ó Ríordáin (Dublin North Central, Labour)
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It is not an encouraging balance that we are trying to strike here. To go back to the issue of those who need short-term loans, the suggestion from the witnesses is that they would resist an interest rate cap. Surely anybody listening to this conversation or studying these figures would say that any interest rate that creeps up to 287% has to be challenged, controlled and driven down. People are only going to engage with a regulated industry that they can trust and that they fundamentally believe will not exploit them. I do not think the argument about the potential for driving people into the underground market holds much water. Do the witnesses believe there is room for manoeuvre on this? The legislative body of which we are all Members has a responsibility to help the witnesses out and we must take that responsibility seriously. However, we are not in the business of allowing people to be exploited. What we are doing here essentially is saying that it is very sad that Mrs. Murphy is being charged over 200% for a loan to get her through a devastating period in her life but, hey, that is just the way it is. That seems to be the general consensus from the body politic and the Central Bank.
Aodhán Ó Ríordáin (Dublin North Central, Labour)
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Does that mean that 88% said "No"? What did the others say?
Mr. Bernard Sheridan:
As I mentioned earlier, the credit unions were a potential option for some. However, the point I am making is that there is potential for people to go to the illegal sector and that is why we are careful about how we regulate the sector. Access must be a concern too. I agree with the Deputy about the rates. Would we like the rates to be lower? Measured by APR purely, there is no doubt that they are high. However, in terms of the role we play under the Act, the issue is whether they are excessive, and we do not believe they are. We are not hanging too much on the findings from the research in terms of our approach to the sector. What we are focusing on are issues such as why people are using moneylenders in a more long-term manner. Using moneylenders for short-term loans or for emergency purposes is acceptable, but if people continue to use them at such high rates of interest, we need to find out what is going on there. That is an area of concern for us.
Arthur Spring (Kerry North-West Limerick, Labour)
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I welcome the witnesses to this meeting. The report is very comprehensive and I note that the researchers interviewed 508 people in order to get an understanding of the customer's point of view. It would appear from the report that the typical person who borrows from a moneylender is likely to be a female with children who has her own house. The amount of money that is typically borrowed is €350 at a rate of 125%, which ends up costing €580 after nine months. That is written in black and white. I have found that many of the people I deal with do not comprehend how money works when it comes to loans. All they know is that they have a need for basic goods in their house, for which they borrow in a hand-to-mouth fashion.
The report suggests that the overriding catalyst for borrowing money from moneylenders is convenience. It is repugnant that as a society we permit people to go knocking on doors offering money. It is licensed because it is something that is potentially damaging. I believe in governance, institutions and the capacity to regulate people's lives at some level. If the notion was floated that off-licence owners could call to people's houses offering them drink, there would be uproar.
The use of moneylenders by those in local authority houses has decreased since 2007. Since the economic collapse, however, moneylenders have increased their business among those living in private housing.
Ciarán Lynch (Cork South Central, Labour)
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Does Deputy Spring have a question?
Arthur Spring (Kerry North-West Limerick, Labour)
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I am not going to come down heavy on the Central Bank on this issue. The Government must clean up its act in this regard. It is not fair that 360,000 people have borrowed from moneylenders, 78% of whom have missed payments and are subjected to people calling to their doors looking for money from them. The critical point in the report is that 31% of people reported that they did not receive any rebate or refund for early repayment. However, the report goes on to point out that "the right of withdrawal from a moneylending contract, the right to repay a loan early, the right to a reduction in the total cost of credit in the event of early repayment and the moneylender's obligation to assess creditworthiness" are enforced under the Consumer Credit Act of 1995 and also the European Communities (Consumer Credit Agreement) Regulations of 2010. If borrowers are entitled to a break, how come 31% of them did not get a break?
Banking institutions typically have access to credit ratings data. A moneylender can call to a person's door and even if that person is under enormous financial pressure already, to the extent that he or she should not get any more loans, the moneylender can provide a loan. Why is it that moneylenders can give out loans without checking an individual's creditworthiness? If a person is already in hock to a moneylender and that same person goes to the local credit union looking for a car loan, how come the credit rating of that person does not reflect his or her true credit status?
Mr. Colm Kincaid:
A few issues need to be addressed, but if I miss anything please let me know. As the Deputy has said, moneylenders are using relatively informal means to assess creditworthiness, but even within the scope of that they could be doing better in terms of assessing people's ability to repay and so forth. The issue of people saying that they do not recall receiving a rebate is a real concern. As the Deputy has said, there is a statutory right for a person who repays early to receive a rebate, and that is something that we want to look into further.
Arthur Spring (Kerry North-West Limerick, Labour)
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It should be enforced, I would suggest.
Mr. Colm Kincaid:
Yes, absolutely. It is a statutory provision and is among the areas of concern that we have arising from this report and other sources. It is something that is part of our supervisory engagement. We will be looking into it. In the past, where we have identified breaches of the rules we have not shirked from taking action, and we will do so again, in this context, whether that be by way of administrative sanction or, in appropriate cases, by revoking the authorisation of the firm.
Arthur Spring (Kerry North-West Limerick, Labour)
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The catalyst is convenience.
Ciarán Lynch (Cork South Central, Labour)
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I urge the Deputy to be brief because we are running out of time.
Arthur Spring (Kerry North-West Limerick, Labour)
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I would agree with many of those who have contributed already on the issue of the interest rates. I believe there should be a cap on those rates. The Government must tackle this issue. Is there anything the Central Bank can do on that at the moment? If there are 360,000 customers of legal moneylenders, how many customers do the illegal moneylenders have?
Arthur Spring (Kerry North-West Limerick, Labour)
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Yes; how many customers do the illegal moneylenders have?
Ciarán Lynch (Cork South Central, Labour)
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Does the Central Bank have an estimate of how many people do business with unlicensed moneylenders?
Arthur Spring (Kerry North-West Limerick, Labour)
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Sorry, but that does not make sense -13% of what?
Mr. Bernard Sheridan:
Thirteen percent of the customers who responded to the research that we conducted indicated that they were aware of illegal moneylending going on, but only 4% had actually engaged with an illegal moneylender. On the issue of the cap, I agree with the Deputy that it might be better if there were a statutory-based determination because, as a matter of policy, we determine whether something is excessive, and we are disagreeing on that at the moment.
We caution against a simple solution such as the use of a percentage. We would like people to use the basis we have adopted. As I said, we have looked at different loans and terms. One need not necessarily stick to the rates, but at least they form a basis for determining the issue as to what should be the appropriate rate.
4:45 pm
Ciarán Lynch (Cork South Central, Labour)
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May I clarify Mr. Sheridan's response to Deputy Arthur Spring? Did he say the unlicensed money market was shrinking?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Sheridan cannot quantify the extent of the market.
Stephen Donnelly (Wicklow, Independent)
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I welcome Mr. Sheridan and his colleagues. I am delighted that a light has been shone on this issue. There is a long way to go, but this is a very useful first step. It is a welcome step by the team at the Central Bank.
What is the total amount of loans outstanding in the market? I cannot find that information in the report.
Stephen Donnelly (Wicklow, Independent)
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Will Mr. Sheridan give me a ballpark figure?
Stephen Donnelly (Wicklow, Independent)
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Does that mean that the capital lent is approximately €200 million?
Stephen Donnelly (Wicklow, Independent)
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Am I correct in stating the Central Bank has negotiated different rates with different companies?
Stephen Donnelly (Wicklow, Independent)
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Is it the case that each licensed moneylender has its own contract with its own rate?
Stephen Donnelly (Wicklow, Independent)
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What is the maximum rate in the market today?
Stephen Donnelly (Wicklow, Independent)
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Is that the maximum?
Stephen Donnelly (Wicklow, Independent)
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Does the Central Bank have an open book relationship with these firms? From the nod, it does, which is great.
Stephen Donnelly (Wicklow, Independent)
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Does the Central Bank know the return for these firms on invested capital?
Stephen Donnelly (Wicklow, Independent)
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Normally in a regulated market the regulator would sit down with a company and work out a reasonable return on the invested capital based on the characteristics of the market and would then work out the regulated price of the service. This is exactly the same. I would expect to see an official from the Central Bank sitting down with a company and saying as it is lending €50 million, the cost to the company is 5%; that the Central Bank deems a reasonable return on invested capital in this market, based on risk, to be 20% and therefore the price of the product; and that the maximum interest rate it will be allowed to charge is Y. Is that how it is worked out?
Mr. Terry Murphy:
No. Under the legislation, these companies must apply for renewal of their licence every year. They will supply information on changes to the firm, how they are meeting the fitness and probity requirements, their product range, the APR and the cost of credit, all of which we will check. We will also receive information on the number of loans outstanding at the start of the period, the number of loans advanced, the number of loans repaid and the number of outstanding loans. If there are requests for an increase in rates, we will look into them and require a detailed commercial justification to be given.
Stephen Donnelly (Wicklow, Independent)
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The Central Bank requires a commercial justification. There is only one justification, the return on invested capital, which is the only game in town. The margin on the amount of money lent is the return on invested capital. If the team at the Central Bank is not looking at the return on invested capital, how is it determining there is a reasonable commercial case to be made for the moneylenders?
Stephen Donnelly (Wicklow, Independent)
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Is it possible that the Central Bank has regulated prices to companies that are making returns on invested capital in excess of 50%?
Stephen Donnelly (Wicklow, Independent)
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Profitability based on turnover is not relevant. What is relevant is profitability based on invested capital. That is the only metric that is relevant. If the team in the Central Bank does not know what returns they are getting on invested capital, how can it assess the commercial case for a regulated price, which is the interest rate they can charge?
Mr. Bernard Sheridan:
As I mentioned, where we see the rate going above the current rate relative to their peers, we reject the requests for increases. Essentially, as Mr. Murphy mentioned, if they are not proposing changes to the rates, we are looking at their accounts to see if they are making super normal profits on their business and whether it has changed year on year. If nothing significant has happened and they subsequently come looking for an increase, we generally reject the request for an increase.
Stephen Donnelly (Wicklow, Independent)
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The key words are "super normal profits." What data is Mr. Sheridan using to determine, if it is not the return on invested capital, whether something is a "super normal profit"?
Stephen Donnelly (Wicklow, Independent)
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What metrics are being used?
Stephen Donnelly (Wicklow, Independent)
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At what point does the Central Bank arrive at a decision that a company is earning a "super normal profit"? What is the maximum profit considered reasonable by the Central Bank?
Stephen Donnelly (Wicklow, Independent)
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Why?
Stephen Donnelly (Wicklow, Independent)
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That is not satisfactory. This is a policy question. Mr. Sheridan states the Cental Bank team makes a decision based on "super normal profits." It is not a firm by firm issue; it is either a "super normal profits" issue or it is not. Will Mr. Sheridan give me an example of what he believes to be a "super normal profit"?
Stephen Donnelly (Wicklow, Independent)
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Of what?
Stephen Donnelly (Wicklow, Independent)
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Let us say they are lending €50 million. Are they making a profit of €5 million? Would that be correct?
Stephen Donnelly (Wicklow, Independent)
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How many increases in rates have there been in recent years? If the team does not have the exact number, a ballpark figure is acceptable. Is it zero, about five or 50?
Stephen Donnelly (Wicklow, Independent)
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None of the maximum figures has been increased in recent years?
4:55 pm
Stephen Donnelly (Wicklow, Independent)
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I understand the Central Bank has the authority to react to requests for increases in interest rates. Does it have legislative power to decide, out of the blue, that a company must reduce the interest rate it charges?
Stephen Donnelly (Wicklow, Independent)
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There is no information on how the sample of 500 or thereabouts was selected, whether it was randomly selected and so forth. Is Mr. Sheridan satisfied that the sample is representative?
Stephen Donnelly (Wicklow, Independent)
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Recommendations would have been useful. While the report is a great first step and includes a large number of conclusions on the sector, it does not make recommendations. I am slightly confused by some aspects of the report. For example, I do not understand how anyone who has any choice would ever borrow from a licensed moneylender. It is barking mad to borrow money at an interest rate of 280% instead of 10%. The report appears to make conflicting statements. On page 9 we learn that 5% of the interviewees cited being refused credit elsewhere as a reason for contacting a moneylender. On page 21, however, we read that the majority of the sample stated they had been refused credit. Similarly, 84% of interviewees indicated they understood the costs. Perhaps the Central Bank will follow up on this finding because while I believe that was the finding, I do not for one moment believe 84% of borrowers understood the costs, particularly relative to alternative sources of loans. Moreover, as Deputy Pearse Doherty noted, the majority of the loans are not for short periods as 85% of respondents indicated they had been borrowing for more than one year. What is the Central Bank's top two or three recommendations, especially for Members of the Oireachtas? Based on the evidence available to it, why are people using licensed moneylenders when they have other options? Is the reason they do not understand the costs?
Mr. Bernard Sheridan:
How do people become aware of moneylenders? What the research has found and what we have seen elsewhere is that they do so through family and tradition. Why would somebody ever use a moneylender? If one's family has a tradition of doing so or one's neighbours have been borrowing from moneylenders, that partially explains the reason. One of the findings was also that people found moneylenders convenient when looking for money to purchase goods. As to whether I agree with that or why they do not borrow from credit unions, these are issues for us to consider.
We should not get carried away and conclude that everybody understands the costs associated with licensed moneylenders. While people report that they understand the costs, that is different from really understanding them. This issue is connected to the length of time people have been using moneylenders. It is not only the case that the loans are longer term but that the relationship is longer term and could involve a series of shorter-term loans, rather than everyone taking out longer term loans. We are following up on this issue.
To address the Deputy's question on recommendations, the question as to whether the cost of these loans is excessive is the biggest issue for the Central Bank. We have been up-front and taken a position on the matter, although people will take a different view. If the issue is being looked at, we will need to consider its implications, particularly in terms of the need to avoid upsetting financial inclusion and ensuring alternatives are available. While the word "recommendation" may be too strong in this regard, the Central Bank is looking at issues such as the continued use of loans and the issue of whether creditworthiness assessments are sufficiently robust to avoid circumstances in which a person cannot afford the repayments.
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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This issue of moneylenders affects many people and it is important that we examine it. Moneylenders cause considerable concern in communities. My experience of them differs somewhat from the experience suggested by the report. I have met many people who took out loans from moneylenders and the only information they received was the figure for the weekly repayment. They did not understand the interest rate or the consequences of non-payment or building up arrears on their loans. For this reason, they repeatedly top up their loans. I am concerned by the figures showing that 62% of borrowers are females and most are from the lowest socioeconomic group as these suggest borrowers are trying to provide for their families. Sometimes desperate people do desperate things and sign up to things they do not understand.
The report states 50% of customers did not recall the moneylender assessing their ability to repay, 6% could not remember and of those who were assessed, 41% indicated the assessment took the form of a discussion. This shows that no real effort is being made to obtain evidence to show the borrowers can afford the loans. This is a serious problem. What steps is the Central Bank taking to address the issue? Moneylenders should have a duty of care to their customers and should satisfy themselves that the loans are affordable. I am familiar with many cases of loans being provided for people who could not afford them.
From listening to the delegates, some people may conclude that the Central Bank is taking a softly-softly approach to moneylenders. Is there anything in current legislation that is preventing the Central Bank from doing its job properly?
Having worked in a credit union, I can attest that credit unions have been engaging in an information campaign for many years under the slogan "Keep the Wolves from the Door". The campaign was specifically targeted at moneylenders. The problem credit unions have is that Central Bank regulatory restrictions prevent them from lending to those who are being driven into the hands of moneylenders. They cannot provide top-up loans or loans for people who are in arrears. This results in people deciding to borrow from moneylenders. Credit unions must turn away people they want to help and serve.
Of the 360,000 customers of moneylending services, how many are members of a credit union? It would be interesting to discover how many of them were refused loans by their credit unions on account of the restrictions imposed by the Central Bank on credit unions. This issue needs to be addressed by the Registrar of Credit Unions and the Central Bank. If they were to act, it may not be necessary to change the legislation. The inability of many credit union customers to obtain top-up loans is a major issue which needs to be addressed. If credit unions were allowed to do what they want to do, the world would be a different place.
Mr. Bernard Sheridan:
On creditworthiness assessments, as I stated, we agree that more needs to be done in this area and are examining this issue. The legislation requires an annual licensing process. While this is definitely a burden in terms of cost, it also imposes discipline on the sector. In terms of the powers of the Central Bank to intervene, we have used our powers to refuse licences. Firms are free to challenge such decisions through an appeals tribunal and some are doing so. The powers the Central Bank requires to impose discipline in the sector are, therefore, available.
In terms of restrictions on credit unions, it is a concern for us, in the context of the moneylender sector, that credit union loans are not available, if one likes, to borrowers. However, the Registrar of Credit Unions spoke as recently as last weekend on the issue of restrictions on credit unions. She is conscious of the issue. The restrictions are largely applied in the area of commercial lending, although I am aware of other restrictions on individual credit unions.
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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I am referring to restrictions on top-up loans, not individual credit unions. A borrower who is in arrears will not be given a top-up loan and if a loan is restructured, the borrower will not be given another loan for perhaps one year. People cannot borrow to pay for everyday emergencies, for example, a funeral or vehicle repairs. The credit unions are being prevented from lending money in many of these circumstances and that must change.
5:05 pm
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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It is.
Heather Humphreys (Cavan-Monaghan, Fine Gael)
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How many of the 360,000 credit union customers are customers of moneylenders?
Kieran O'Donnell (Limerick City, Fine Gael)
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What was the wording put on the question?
Ciarán Lynch (Cork South Central, Labour)
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Perhaps I can summarise where we are at. I am looking at the 360,000 people. That is almost the population of County Cork and a significant number of the population. Leading on from what Deputy Donnelly said, the report has provided some data in this area. I do not believe the 360,000 people can all be put into one silo, as it were, because they fall into different categories and have different needs and presentations. Some may be informed of the interest rates and some may not but the fact is that 360,000 citizens are availing of a credit route which is the most expensive and penalising and presents the greatest risk of perpetual debt. The Central Bank has carried out a report which provides a certain level of insight and some of the questions here give us a certain level of insight as well. What action will be taken by Mr. Sheridan and his department on foot of this report and what he has found out? I am not talking about recommendations or findings but the action that will be taken. We have established this afternoon that the interest rate parameters are set by the Central Bank. The licensed institutions may be like football teams but the Central Bank is like FIFA or UEFA. It sets the rules and decides when they are offside and onside. What specific actions will the Central Bank take on foot of its own report?
Mr. Bernard Sheridan:
We have adopted and are continuing with the policy of precluding or keeping out of the market the higher cost shorter-term loan providers. We are interpreting the legislation in a way that allows us to do that and we intend to continue to do that. We will also be alert to whether any of these providers are trying to come into the market without obtaining a licence in the first place.
The creditworthiness assessment issue has been raised a few times today. That is an issue on which we have followed up with the industry, but it strays into the area of the credit register and such areas. We would be conscious of that.
In terms of other issues, we will investigate the practice of offering loans to people who have an existing loan in order to offset some of their existing loan. That brings in a few issues such as keeping the person tied up with the moneylender and making them less likely to go somewhere else if these loans become longer-term. That is one issue we will investigate. We have started that process and it is probably a priority for us.
Kieran O'Donnell (Limerick City, Fine Gael)
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What is the licensing fee? What is the cost?
Kieran O'Donnell (Limerick City, Fine Gael)
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What is a typical levy?
Kieran O'Donnell (Limerick City, Fine Gael)
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What legislation governs the licensing of moneylenders?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is the Central Bank prohibited under the legislation from imposing interest caps? Is there anything within the legislation that prevents the Central Bank from imposing an interest cap at the moment?
Kieran O'Donnell (Limerick City, Fine Gael)
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Mr. Sheridan referred to the issue of alternatives. I agree with him that one has to find an alternative. The credit union model is structured, community-based and has the skill set. The problem with the structure of that model is the restrictions on it. It would be very informative if the Central Bank, working with the registrar, would commit to carrying out a review, taking into account the moneylending area, because it could be restructured in a way that would end the way the credit unions function. Clearly, people are being driven into a situation where they have to go to moneylenders. If a person has no alternative but to go to a moneylender and he or she is being charged nearly 300% interest, that is exploitation in any man's language. Will Mr. Sheridan commit to looking at that issue?
Ciarán Lynch (Cork South Central, Labour)
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From my own involvement with the credit unions, there is a great deal of regulation coming from the regulator's office that is being enacted. There are some very simple things. When a person makes repayments on borrowings, a certain amount goes into savings every week. I do it myself as a credit union member. Those two sums have to be separate in two different accounts. There are many positive suggestions coming from the regulator's office. Is there a possibility that some of what is coming from that office is creating the difficulties we are discussing and, if so, should some dialogue take place between the credit unions? Maybe that regulation has to be put in place.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can Mr. Sheridan give a commitment that this area will be looked at positively by the Central Bank and the registrar? Will the Central Bank look at that issue and speak to the registrar?
Mr. Bernard Sheridan:
Yes. I will definitely speak to the registrar. Obviously, I cannot commit on her behalf as to what we might do. To reiterate, I have discussed with her the restrictions being imposed. I am aware the committee has raised a more specific point about people in arrears who are with a credit union and cannot get additional loans. The restrictions have been targeted at the higher value loans so that they are not hitting the smaller value loans. At least in theory the registrar is trying to ensure that is not causing problems in terms of moving for people who are with moneylenders. That is one of the objectives. The specific issue raised today is another angle to that, and I will discuss it with her in terms of what we can do.
Ciarán Lynch (Cork South Central, Labour)
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It is propping up another area. For example, the insolvency service is keen that people have access to what Deputy Heather Humphreys referred to as emergency credit for a funeral, a car or whatever. That is fine if one is in the big game and one is in the insolvency service, but if one is broke and living on subsistence or from pay cheque to pay cheque, one is in difficulty all the time. When an emergency pops up, there has to be some route. Credit union managers are saying to me they need a degree of flexibility where they can give Mr. and Mrs. O'Sullivan €1,000 to change the buggy or whatever, that they can step out of the regulation, as it were, in some structured environment that recognises such people still have debts to pay. This is an emergency facility and should not just be available to the insolvency service.
Arthur Spring (Kerry North-West Limerick, Labour)
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I am working on the Betting (Amendment) Bill 2013 which is before the House. Does Mr. Sheridan know if many of the people who are participating in moneylending have gambling debts? There was an observation that there was indebtedness and that moneylending was propping up other debts. Would any of that be moneylending without being gambling related debts?
Arthur Spring (Kerry North-West Limerick, Labour)
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The figures that were provided on Monday were for the GAA. Frightening figures of indebtedness are being created by people through gambling.
I wish to impress a point upon the delegation and I think they should look at it. The convenience factor is the overarching element that I do not agree with. That is why people often decide to use moneylenders rather than go to the credit unions. As everyone at the table would agree, we should always beware of people pressing their wares and coming to doors, because they do not always live up to their undertakings. Can the Central Bank stop or prohibit lenders from calling to people's houses and providing access to money under the Consumer Credit Act? If we could go down that route, it would be a starting point. The deputation can be assured of a commitment from myself and some of my colleagues in the committee who are of the same opinion that we need to examine this and get the convenience element sorted as well as the cap on interest rates.
5:15 pm
Mr. Bernard Sheridan:
A question was asked about what actions have been taken since 2007. One additional measure relates to unsolicited contacts and people calling to doors. Lenders are precluded. A moneylender is not allowed to call to someone's door out of the blue. The question arose earlier about how people are going to moneylenders. The issue is that it is through referrals, for example, a family member suggesting to a person that he should give so-and-so a shout. Then, they must identify that they have been referred from someone else.
Arthur Spring (Kerry North-West Limerick, Labour)
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Nevertheless, they are still calling to the house. That is the gig.
Mr. Bernard Sheridan:
Yes, but I am saying that cold calling should not be happening. I do not suggest it is not happening but that is not to say they can call on referral. They must then ask whether the person is happy for the conversation to continue. I agree with Deputy Spring that when a moneylender is at a person's door it is a different scenario. They are not sitting at the committee meeting today talking about the rules per se.
Arthur Spring (Kerry North-West Limerick, Labour)
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My final question is for Mr. Murphy. In the case of the licensing, what does the €2,000 escalate to?
Arthur Spring (Kerry North-West Limerick, Labour)
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Mr. Murphy said many of the companies were not profitable. I cannot get my head around that. Will Mr. Murphy provide the figures on bad debts?
Arthur Spring (Kerry North-West Limerick, Labour)
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I am not being smart, but if I owned a moneylending company I would be siphoning money out of it through salaries or whatever. There are many mechanisms. A company can pay royalties or whatever it wishes. The members of the deputation know what I am talking about. That is done to keep the profitability low and to provide the Central Bank with profit and loss accounts and balance sheets which would show little money in the company. Has the Central Bank carried out a forensic audit of the books for that purpose? Is information available in this regard? Can we examine a company's accounts at the Companies Registration Office, for example?
Arthur Spring (Kerry North-West Limerick, Labour)
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Of the 40 moneylending firms, how many are sole traders?
Arthur Spring (Kerry North-West Limerick, Labour)
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We could do with that because if a sole trader is operating, he or she could be stripping money out of it.
Stephen Donnelly (Wicklow, Independent)
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The group of people I am most interested in ensuring protection for is the group Deputy Heather Humphreys talked about. If a person wishes to borrow €300 for three months and it costs €150, I would prefer it if he or she did not go with that, but it will probably not destroy him or her. The people Deputy Humphreys is talking about are being destroyed. We see from the data that the amounts add up to a great deal, it could be 85% of a loan over a year. This is potentially a major area.
I offer one thought that is halfway between where we are now and introducing a maximum cap on a given annual percentage rate of charge, APR. My suggestion is to introduce a cap on the total amount that can be paid back. Let us consider an example where a person borrows €500 and there is an APR of 100%. Perhaps that is fine or perhaps it is not. The people who get caught are the people who end up paying €500 every year and who never pay the capital down.
I call on the deputation to take away for consideration the idea of introducing a cap on that scenario to the effect that a moneylender may be able to charge 150% APR on a loan up to €400, whatever that is. Then, once the borrowers have paid back the moneylender 300%, regardless of whether the moneylender has got any of its capital back, that is it and the moneylender has got its sizeable return. If we could introduce such a cap, it would satisfy some of the people who would argue - I do not agree with them - around liberal markets, that people should be able to borrow money if they wish and for social inclusion and so on. It would end the problem Deputy Humphreys talked about because they would lose interest. If a person was in arrears and only paying half the interest, once a person has paid back 300% of the capital, for example, then the moneylender could be gone and would not get any more. By tomorrow morning that would stop people being trapped and clearly many people are trapped. I call on the deputation to take that away for consideration.
Mr. Colm Kincaid:
The Deputy used a key phrase relating to arrears. With a moneylending loan, the moneylender can only ever recover the total cost of credit from the outset, no matter how long it takes a borrower to repay. If a borrower falls into arrears, he or she does not keep paying interest on an overall sum. The borrower will only ever have to repay the amount of money that he or she contracted to pay at the start of the contract.
Arthur Spring (Kerry North-West Limerick, Labour)
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Therefore, there is no interest on interest.
Stephen Donnelly (Wicklow, Independent)
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Even if it takes five years to pay it. Is that the case?
Kieran O'Donnell (Limerick City, Fine Gael)
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The problem is the rate of interest.
Kieran O'Donnell (Limerick City, Fine Gael)
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The problem is that the amount is too high initially.
Stephen Donnelly (Wicklow, Independent)
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Let us suppose I borrowed €500 and I must pay back €500 in interest and capital on that amount in one year. In other words, there is 100% interest and a one-year loan. If, at the end of year 1, all I have paid back is €500, is Mr. Murphy suggesting I need not pay any more interest on that loan? There is no chance of that.
Kieran O'Donnell (Limerick City, Fine Gael)
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Let us suppose the person would only pay for three years. We are discussing a cap. The problem is that it still will not work. The initial rate is exorbitant and therein lies the weakness. The problem is that ordinary people are chasing down money and taking money that they simply cannot afford, but they have no alternative. The main point that arose was made by Mr. Sheridan, namely, it is well and good and we must adjudicate what is before us, but the issue is the alternatives. That is the challenge.
Ciarán Lynch (Cork South Central, Labour)
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The fact is that there is a cap in place. It is 287%. That is the existing cap. People are suggesting there should be a cap put in place but at present the cap is 287%. The question is whether that is acceptable.
I thank Mr. Sheridan, Mr. Murphy and Mr. Kincaid for appearing before the committee and for the briefing and the discussion. Certainly, it was very informative and, I imagine, a topic we will be returning to again.