Oireachtas Joint and Select Committees
Wednesday, 30 April 2014
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Mortgage Arrears Resolution Process (Resumed): Insolvency Service of Ireland
10:00 am
Ciarán Lynch (Cork South Central, Labour)
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Before we commence, I remind members, delegates and those in the Visitors Gallery that all mobile phones must be switched off completely to avoid interference with the broadcasting of proceedings. The meeting is being webcast and also broadcast on the UPC Oireachtas channel; therefore, members should be mindful of any electrical interference they might be causing.
I welcome representatives of the Insolvency Service of Ireland, ISI. We are joined by Mr. Lorcan O'Connor, director; Ms Cathy Clarke, head of the regulation division; Mr. Randall Plunkett, head of the case management division; and Mr. Christopher Lehane, head of the bankruptcy division and official assignee in bankruptcy. They are here to assist the joint committee in its examination of the issue of mortgage arrears and the progress made in putting in place solutions aimed at resolving difficulties in the sector. In the year since the Insolvency Service of Ireland was established Mr. O'Connor and his officials have been developing a new legal infrastructure and service dedicated to providing sustainable solutions for insolvent debtors.
This is the last of a series which began in early April with a meeting with voluntary organisations providing assistance for those struggling to manage their mortgages. The committee continued with a number of meetings during which we questioned the chief executive officers of Ulster Bank, permanent tsb, AIB and Bank of Ireland on progress made by them in meeting mortgage arrears resolution targets and will conclude the current round of meetings with a discussion with the Governor of the Central Bank this afternoon. We will begin this morning's discussion with opening remarks by Mr. O'Connor and Mr. Lehane, following which members may put questions to the delegates, as appropriate. It is important that we manage our time well to derive the maximum benefit from the meeting. Each member will have a strictly limited time slot within which questions may be put and replies given. Questions from members and replies by delegates should be clear and concise.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity by name or in such a way as to make him, her or it identifiable.
I again welcome Mr. O'Connor, Mr. Lehane, Ms Clarke and Mr. Plunkett and ask Mr. O'Connor and Mr. Lehane to make their opening remarks.
Mr. Lorcan O'Connor:
As the Chairman has already made the introductions, I will begin with opening remarks to highlight progress since we last met in July last. As the Chairman mentioned, the official assignee in bankruptcy, Mr. Christopher Lehane, will address some specific points about bankruptcy and the family home which were specifically requested by the joint committee.
It is important to remember that the Insolvency Service of Ireland, ISI was established only one year ago. When I speak to my counterparts in the Insolvency Service of England and Wales, the Insolvency Service of Northern Ireland or, for that matter, other equivalent organisations, they speak in years, rather than months, when referring to their experiences in their initial establishment or even the roll-out of a completely new business service. Those involved in the regulation of those practising in the financial services sector provide a similar commentary, yet in that relatively short time of one year, from a standing start, we have achieved an enormous amount, both directly and indirectly.
We have developed a whole new legal infrastructure and service dedicated to providing sustainable solutions for insolvent debtors and these solutions are being put in place. While the initial uptake of debt relief schemes by debtors is slow, I am confident that the number of cases in the system will grow significantly in the coming months. The statistics published by the ISI earlier this month point to a trend that is moving in the right direction. The slow start in terms of volumes is mirrored in the experience of other jurisdictions when new debt relief measures were introduced. It takes a little time for people to become comfortable with them. I expect thousands to have availed of our services within the next year.
In terms of the ISI's indirect impact, it is worth remembering that this time last year insolvent debtors were not obtaining debt agreements with their creditors. The position is now very different and the ISI has been a significant catalyst for this change. Until it published its guidelines on a reasonable standard of living and reasonable living expenses, negotiations on allowable expenditure between debtors and creditors never passed "Go". What was once the most difficult aspect of addressing personal over-indebtedness is now not even on the agenda and since the autumn we have seen evidence of a growing number of agreements between insolvent debtors and creditors being successfully concluded. This would not have happened but for the introduction of the new debt solutions and the reform of bankruptcy laws.
Since we met in July last year a number of milestones have been reached by the ISI. In August it began authorising approved intermediaries and personal insolvency practitioners. We now have over 200 practitioners. There are 135 personal insolvency practitioners known as PIPs - they deal with the debt settlement arrangement, DSA, or the personal insolvency arrangement, PIA - and over 80 staff known as responsible persons within MABS offices who have been authorised as approved intermediaries and are trained to help those who wish to apply for a debt relief note. I expect the number of practitioners to continue to rise.
In September we published our strategic plan through to 2016, but, more importantly, we also began to accept applications for the new debt solutions. October saw the first protective certificate issued, while November saw the first debt settlement arrangement approved by creditors. December saw the reduction in the period of bankruptcy from 12 years to three and the formal transfer of the office of the official assignee to the ISI. January saw the first debt relief note issued, while February saw the first personal insolvency arrangement approved by the courts. March saw us take on our 500th case and earlier this month we published our first quarterly statistics report. The ISI will shortly launch an information campaign, in consultation with the Citizens Information bureaux, MABS, PIPs and other stakeholders, a campaign which will include information sessions around the country offering opportunities to avail of one-to-one advice.
I turn to a particular initiative under way that will further assist in increasing the numbers availing of the new alternatives to bankruptcy.
In February this year the ISI hosted a conference for creditors and practitioners in Dublin Castle. A major aim of the conference was to initiate the development of protocols for the DSA and the PIA. Agreed protocols will make the insolvency application process simpler and faster for creditors, practitioners and debtors. The development of these protocols does not require any amendment to existing legislation and is in line with best practice in other jurisdictions. Let me use an analogy: conveyancing solicitors do not write individual contracts for the sale or purchase of houses. If they did, each individual transaction would take far longer than it does and clearly cost a lot more than at present. Instead, for a regular transaction, use is made of the standard terms and conditions produced by the Law Society of Ireland. Similarly, a protocol for insolvency applications will soon have standard terms and conditions that will assist in achieving transparency and greater acceptance rates for all concerned.
At the conference the ISI announced an ambitious target to have the DSA protocol agreed this spring. Thanks to the high level of commitment shown by all of the participating stakeholders, we are on track to achieve this. Members of the steering group and the working group, set up only at the end of February, have already spent over 2,000 working hours on developing the protocol. We have a further session scheduled for this afternoon. Our aim is that the steering group at this afternoon's session will sign off, in principle, on the draft protocol. There are some stages prior to it being issued, but they should take only a few weeks. In the United Kingdom the equivalent process took over two years to develop. We are noting a clear desire among participating stakeholders to have the protocol up and running in as short a timescale as possible. An equivalent protocol in the United Kingdom has resulted in acceptance rates for protocol compliant IVAs - the equivalent of DSAs - exceeding 95%. That is what I want to see happen here. Once the DSA protocol is complete, it will be followed by a PIA protocol which will deal with the additional aspects of secured debt.
While I am proud of what the ISI has achieved in its short existence and while I am firmly of the view that the Personal Insolvency Act and the ISI will assist many thousands of insolvent debtors badly in need of help, it would be remiss of me to ignore recent comments made before the committee by certain creditors. Before doing so, I must stress that the ISI is an independent statutory body with clear functions set out in section 9 of the Act. It is not its role to question a creditor's approach to any given case. We are not pro-debtor, but we are not pro-creditor either. Our primary purpose is to deliver the infrastructure required to facilitate the debt relief notes, the debt settlement arrangements and the personal insolvency arrangements. The concepts behind the debt relief note, DRN, and the DSA are tried and tested in other countries. The PIA dealing with security debt is a new concept. However, the Act carefully balances the interests of both debtors and creditors when dealing with secured debt.
While I was disappointed with the comments made by one creditor, in particular, to the committee, I cannot say I was altogether surprised. The creditor was blunt about how it intended to approach PIAs, in particular. However, making a global policy statement on how it intends to deal with applications does not take full account of the new reality that the new debt solutions, including the PIA, are designed to deliver better outcomes for both debtors and creditors. If a creditor stands in the way of a solution, there are mechanisms available to debtors to deal with this.
Despite the statements made here, on a case by case basis we will achieve solutions for debtors. If, however, I am proved wrong, we hit a brick wall and do not make progress in individual cases, we will report this to the committee and recommend change. At this time, however, only a few months into the process, the sample size of cases is insufficient to make this assessment. Both the Minister for Justice and Equality and the ISI have indicated that the effectiveness of the legislation will be kept under review. If issues arise that need to be addressed, they will be addressed. Monitoring creditor engagement will obviously be a key focus.
In the short term the ISI remains focused on developing the DSA and PIA protocols. While some have been critical publicly of the ISI on the issue of the number of individuals seeking an insolvency solution, I observe that the ISI opened in record time and was taking applications within six months of establishment. Our presence is contributing to breaking a stalemate between stakeholders which, in some cases, has lasted for six years or more.
In addition to providing mechanisms to address individual cases of unsustainable debt, the enactment and operation of the new insolvency legislation have an even broader impact. The legislation redefines the overall framework within which lenders and debtors assess their options for dealing with insolvent debtors. It can already be seen that as a result of the enactment and coming into operation of the Personal Insolvency Act, some financial institutions are taking more active and constructive steps. They are moving towards a long-term sustainable debt solution rather than short-term debt amelioration. This would not have happened without the personal insolvency legislation and the establishment of the ISI. These new debt solutions are not just good for debtors but are also in the interests of creditors. They offer an efficient and fair means of tackling what is a very large problem for everybody. Ultimately, it is in the interests of us all to return an insolvent debtor to solvency to ensure his or her well-being and give him or her the second chance he or she deserves.
I invite Mr. Lehane, the official assignee in bankruptcy and head of our bankruptcy division, to speak to the committee on the recent changes to bankruptcy legislation and what they might mean for a debtor and his or her family home.
10:10 am
Mr. Christopher Lehane:
I will talk about four areas. First, I will highlight the significant changes made to the Bankruptcy Act and deal with my own role. I will then deal with two areas which I believe are of particular interest to the committee, namely, income payment orders and the treatment of the family home in bankruptcy.
As members are aware, there were significant changes made to the Bankruptcy Act which came into effect on 3 December. The most significant by far was the reduction in the automatic discharge period from 12 years to three. Another significant change is a requirement that one needs debt of €20,000 if either a creditor or a debtor is to petition for bankruptcy. Formerly, the figure was only €1,900. There is a requirement for a court to consider, with regard to both creditor and debtor petitions, whether it is appropriate to adjourn proceedings to allow a debtor to attempt to enter into a debt settlement arrangement or a personal insolvency arrangement. There is an increase in the amount of the estate that does not form part of the bankruptcy estate. This is called the accepted assets and the specified value has increased from €1,900 to €6,000. Pensions, where a person is adjudicated upon after 3 December, no longer form part of the bankruptcy estate, subject to the five year claim period, whereby, if a pension crystallises in the time, the official assignee can exercise his or her right in that respect. There is an increase pertaining to the avoidance provision for three years where there are fraudulent preferences, as in circumstances where one creditor would be preferred over another, where one would sell an asset under value or where one would make fraudulent transfers, commonly known as transfers to the spouse in advance of going bankrupt in an effort to keep an asset out the bankruptcy estate. There is a limit of five years on income payment orders. There was, under section 65, no limit on the period within which an income payment order could be brought in. The Act has significantly capped this figure at five years.
Regarding an application, the official assignee or a trustee in bankruptcy, if I am replaced by a private trustee, can apply to the court to have the period of bankruptcy extended. This can be extended for a further five year period beyond the three year automatic discharge period.
Another change which affected me was the change in the administrative structure pertaining to bankruptcy, whereby the office of the official assignee, formerly an office within the Courts Service, moved to the ISI. This is for very understandable reasons, given the synergies between the two insolvency processes.
I will now talk about my role. When a person is declared bankrupt, all of the property of that individual passes to me, or invests in me as official assignee. I have the same powers and rights of the person made bankrupt in respect of the property. My primary role is to investigate assets, gather them in and distribute them to the creditors.
It is, effectively, the equivalent of the liquidator.
The two issues that I believe are of particular interest to the committee are those of income payment orders and family homes and bankruptcy. An income payment order, as understood under the Act, can last for up to five years. The process within the office is that when a person is made bankrupt, on his or her adjudication, I assess his or her capacity to contribute towards the bankruptcy debts to see if there is a surplus - applying the reasonable living expenses criteria of the ISI - that he or she can contribute. Up until now, the practice has been that we have put in place agreements whereby we move into a process of applying for orders in respect of them. That is because under the law, the entitlement of the official assignee to apply for a order is that he or she must apply prior to discharge. In the absence of any provision that will enforce income payment agreements beyond the discharge period, it is a necessary requirement that I apply for income payment orders. If a bankrupt person has surplus income, an income payment order will be sought. It is in the interests of a debtor to co-operate in these matters in order that the income payment order is put in place at the earliest stage of a bankruptcy. In the normal course, he or she will be moving out of bankruptcy in three years; therefore, if he or she engages early, the five year period will start early and there will only be a two year period afterwards. If a debtor does not have surplus income initially but will at some stage in the bankruptcy, as official assignee, I will seek an income payment order but will generally limit the amount of the remainder of the five year period since adjudication. That effectively means that in the third year I will not seek an income payment order for five years in the normal course. I will discount the period within which in the course of the bankruptcy I have assessed the individual. If he or she does not have capacity or a surplus above reasonable living expenses, it is not the Armageddon certain individuals believe, whereby I would use it effectively to have a period of eight years of bankruptcy. It will depend on what the process is. One will find from the media that, unfortunately, there are individuals who evade the office and effectively go missing and I cannot locate them. Where people fail to co-operate, fail to disclose their income or simply fail to pay, it could be that by the time I eventually trace them and obtain their income it is in the third year. They will find that the five year period will extend for the full duration of the three year period.
The final topic I will deal with is the family home and bankruptcy. For obvious reasons, when people move into bankruptcy, they are concerned about what will happen to the family home. The Insolvency Service of Ireland has published a useful guide to bankruptcy that explains in a simple, step by step way, everything that happens when people move into bankruptcy, including their property, debts and income. We have also published a scenario pack giving practical examples of various family home cases. It deals in detail with the assessment of one's income, one's ability to pay if there is a surplus and how the role of the ISI official impacts on a person. It is always subject to whether one has the capacity to pay a mortgage to the extent that a financial institution will accept. I will be dealing with that issue in more detail.
For the benefit of the committee, I will set out the three key sections of the Bankruptcy Act concerning the family home. First, section 136 states an unsecured debt can only be claimed through a bankruptcy. Therefore, if one has an unsecured debt that is not recovered within the bankruptcy process, one has no opportunity outside the process to recover it. If one does not receive a dividend, that is it and the unsecured debt is written off. The section goes on to state, "This shall not affect the power of a secured creditor to realise or otherwise deal with a security in the same manner as they would have been entitled to realise or deal with it if the section had not been enacted". In my appendix, I will deal with how this operates in practice.
Section 44 of the Bankruptcy Act states that when a person is made bankrupt, all of the property of the bankrupt vests in me as the official assignee. Section 615 states, "The court shall have the power to order postponement of the sale of the family home, or shared home within the Civil Partnership Act, having regard to the interests of the creditors, of the spouse or civil partner, and dependants of the bankrupt", as well as the circumstances of the case. I will deal with this in more detail in Appendix 1. What happens, however, is that I cannot sell a family home; I must apply to the bankruptcy judge who can effectively delay it. The judge cannot absolutely say one cannot sell the home because if there is equity, the role of the official assignee is to effectively liquidate that equity. In that case, a bankruptcy judge will simply delay the process, having regard to all of these factors, including the family and dependants.
I have set out my five main policy views on how I will approach dealing with the family home. Where there is positive equity in the family home, all other assets will be realised before I have regard to the family home. The official assignee's interest in the family home will be sold to the spouse, where possible. When a person is made bankrupt, it splits the family home interest - half goes to the official assignee, while half remains with the spouse. The family home will not be sold earlier than six months after the adjudication order, unless to the spouse. The bankrupt will be offered the opportunity of doing a composition, effectively a deal, with his or her creditors with the proceeds of the other assets sold before the family home will be sold. It is not usual that there are two buy-to-lets and there is a pool of assets that become available within the bankruptcy estate, with me leaving the family home as the last asset. It is possible that the creditors might agree to the sale of the buy-to-lets, accept a pool of assets and effectively leave the person concerned in the family home.
A minimum sum of €5,000 will be sought by me for negative equity interest of the official assignee. When a person is made bankrupt, the interest vests in me. When a person is discharged from bankruptcy, that interest continues to vest in me. I will not approach the spouse of the person in negative equity. It may be that the full three year period has passed. At a minimum I will seek a sum of €5,000 for the spouse to buy me out of the half interest that continues to vest in me.
In Appendix 1 I deal with the three options of the secured lender when a person is declared bankrupt, the actions to be taken by me and the consequences for the debtor. In appendix 2, I set out the findings of a recent survey we carried out of bankruptcies in the past four years to establish the consequences of bankruptcy for family ownership.
I will briefly go through Appendix 1 to explain what happens when a person is made bankrupt. While it is true that the same levels of protection around the family home within a personal insolvency agreement, PIA, do not apply in bankruptcy, it is not automatically true that when a person is made bankrupt, he or sh e loses the family home. The First Schedule to the Bankruptcy Act sets out three options for a secured creditor. If a mortgagor - a person who is borrowing - goes bankrupt and the lender is considering his or her position, the First Schedule to the Bankruptcy Act sets out three options for what he or she can do. First, the bank can rely on its security and not claim in the bankruptcy. Second, it can abandon the security and claim for the full debt in the bankruptcy. Third, it can realise, sell the house and claim for the shortfall.
Where there is positive equity, the financial institution sells the property. This will only arise if the mortgage is not being paid. In the normal course, if the mortgage is being paid, banks do not bankrupt people.
Banks do not seek to sell a family home if someone is paying the mortgage. It would be absolutely ludicrous and crystalise the negative equity. Where there is positive equity and no capacity to pay and the mortgage has not been paid, the banks have the right to sell the family home under the mortgage deed. If the mortgage is not being paid on terms acceptable to the financial institution, it can sell the family home and claim interest on the mortgage up to the date of the sale. If there is any balance, it is given to me as official assignee. However, there may be judgment mortgages on the property constituting prior charges to the right of the official assignee, who effectively gets the unsecured assets. If there is no judgment mortgage on the family home, the proceeds will be paid to me. If we look to the right, we will see what the consequences are in the case. The house is sold and the person has lost the family home. However, the surplus from the sale proceeds might generate a pool of assets and that might mean that the person within the bankruptcy can go to his or her creditors and say: "I have €60,000 and owe €300,000. Will you accept a dividend of this and release me from bankruptcy?" In those circumstances a person could get out of bankruptcy much more quickly than in the three year automatic discharge period. If the family home is gone in the classic situation where a man has been made bankrupt, I would allow, as official assignee, an allowance for accommodation for renting for that individual and his family within the reasonable living expenses with which members are familiar.
Where there is positive equity of, say, €20,000, and the mortgage is being paid on a family home, my role is to realise that equity for the benefit of creditors. It will be half of that figure, or €10,000. I will go to the wife and say to her: "Do you have the capacity to pay?" I have already said the process can last six months or longer. I do not pressurise them immediately to sell the family home for €10,000, but section 61(4) of the Bankruptcy Act applies. Even if I am selling to the spouse, I must obtain a court order. It is a formality before the court when I am selling to the spouse. If the house is sold to someone other than to the spouse, the position is as I have set it out.
Where there is negative equity, the issue is whether the mortgage is affordable. Does the borrower have the capacity to pay? The fact that the property is in negative equity is irrelevant. If the financial institution sees that the mortgage is being paid, it will not sell the family home. That would be to crystalise the negative equity, which would never be done. However, if there is negative equity, the position of the official assignee is that there is nothing for him to sell on the open market. The issue for him is not whether he will sell the house, but whether the mortgage payment the bank seeks is reasonable having regard to the family requirements, including dependants. Do they need a five bedroom house in an expensive part of Dublin which carries a massive mortgage and a requirement to pay a mortgage of €4,000 to €5,000? That sum is way beyond what would be enough to provide in the normal course for that family. In that case, I will not allow the mortgage payment and the family would have to move. What is allowed within reasonable living expenses is that which is sufficient for the family and not a balloon mortgage payment. They should cut their cloth and move. Otherwise it is to expect creditors to maintain a lifestyle which is gone as the tiger economy has collapsed.
The second option for a secured creditor is to abandon the security. This is very rare. When a bank has security over a house, it will not walk away from its security which is the priority it has over unsecured creditors. It practically never happens. It would only happen if there was a prior mortgage and, in effect, the security has no value. The third option, which is being taken now, is to sell the family home. The financial institution realises its security and claims the shortfall in the bankruptcy as an unsecured creditor. As a financial institution is claiming in the bankruptcy, it is subject to 75(2) of the Bankruptcy Act which provides that it can only claim mortgage interest up to the date of adjudication. The consequences are that the home is lost and the shortfall after the dividend, if any, is written off. The spouse is still jointly and severally liable for the full mortgage unless she goes bankrupt. In the circumstances, the official assignee's decision is whether to allow rental payments for the family. Of course I will, but in accordance with reasonable living expenses under the ISI guidelines.
The next paragraph of my submission deals with the rare situation where, instead of realising the security, the institution values the security and claims for the shortfall in bankruptcy as an unsecured creditor. That is very rare. It is much preferred to opt to allow the mortgage to continue to be paid on acceptable terms. That avoids crystalising the security, which continues to appreciate providing value should the person cease being able to pay.
In April 2014, having seen questions raised at previous sittings of the committee, I sought to provide detail to members and an accurate picture of what happens when people go into bankruptcy. We went back and interviewed all bankrupts going back to 2011 and the findings are set out. We split them into two periods. In 2014, we have had 82 bankruptcies. Many people are simply attending for interview now and we are obtaining their profiles. The consequences for them of going into bankruptcy are only hitting now. It is more beneficial for the committee to see the historical picture split in two. The real numbers have come in since the change in the Bankruptcy Act on 3 December 2013. Of the 73 bankruptcies the statistics showed on Monday - it is 82 now - 40 are still in the family home and 33 are renting, of whom 14 voluntarily surrendered the properties. In the period 2011 to 2013, of the 121 bankruptcies, 66 are still in their homes and there are issues in relation to potential proceedings to be brought by me and family law proceedings. The balance can be read from the table itself. I pass back to Mr. Lorcan O'Connor.
10:30 am
Ciarán Lynch (Cork South Central, Labour)
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I thank the witnesses for their opening statements. I propose to take questions in rounds of 15 minutes and to wrap up thereafter.
To kick off proceedings, I was interested in Mr. O'Connor's opening remarks. He expressed his disappointment with comments made by some creditors who had appeared before the committee. The purpose of the committee's work since the targets were put in place has been to see how they are being met. We are seeking to see how the resolution processes are working and to establish what new resolution processes might come out of the ether. Hopefully, a greater level of flexibility and learning will evolve with solutions to reflect that. Can Mr. O'Connor elaborate on why he expressed his disappointment publicly this morning?
Mr. Lorcan O'Connor:
Clearly, the legislation and the ISI are new, but the legislation was developed with reference to best practice in many other jurisdictions. The Personal Insolvency Act sought to go one step further in trying to deal with secured debt.
I think that was necessary because the difficulties the country has faced in the past five or six years have been primarily property-related; therefore, if we did not try to introduce some solution to deal with secured debt, we would not be tackling the problem.
The legislation lists a number of options that are envisaged within a personal insolvency arrangement as a potential solution. One of these options is that secured debt be written off in certain circumstances.
10:40 am
Ciarán Lynch (Cork South Central, Labour)
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By "secured debt" does Mr. O'Connor mean where the property is still in the ownership of the home owner?
Mr. Lorcan O'Connor:
That is correct. The legislation includes this as an option in a non-exhaustive list; therefore, it is disappointing that certain creditors are saying that under no circumstances will they entertain that kind of solution. I would distinguish some comments from others made before the committee in April. Certainly I acknowledge that there is a very big difference between secured and unsecured debt. Were we to blur the lines, we could end up with a scenario where we would all be paying our mortgages at credit card level interest rates. Clearly, that is not something we want.
Secured debt brings with it certain rights and options. It is also important to say the write-off of debt is not the be all and end all. When an insolvent debtor comes through the door of a personal insolvency practitioner, he or she is tasked with finding a solution that will return the debtor to solvency. In many cases, that may not require a secured debt to be written off. There is what is called by many a waterfall set of solutions. Extending the term of a loan, reducing the interest rate on a loan or carrying out other tweaks could return the person to solvency. If that is the case, there is no need to look at or even consider the potential to write off debt. However, there will be situations where, having exhausted all of these points, there is still a difficulty or an issue to be addressed to return the person to solvency.
The final point I will make in distinguishing between some of the comments made is that a number of creditors said they would regard it as extremely unusual or have difficulty in foreseeing circumstances where they would be required to write off debt because their other forbearance measures are so generous. I see this as very different from a creditor saying that, irrespective of forbearance measures, it does not contemplate ever agreeing to a secured debt being written off.
Ciarán Lynch (Cork South Central, Labour)
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To come back to the waterfall set of solutions and simplify matters, the most benign solution is used at the start and the solutions become more drastic and severe as the difficulties are examined. Some of the banks that appeared before us are stating that when the property is disposed of in a case of voluntary surrender, there is a legacy debt that they still perceive as secured, even though it is not. They are publicly stating they will not write down that debt. Going back to the waterfall analogy, it seems that under this approach, if a person does not have the more modest or benign option such as an interest rate reduction or an elongation of the debt, the best option, based on some of the banks' comments to us, is to go straight to bankruptcy. The implication is that they do not see scope for the ISI in their resolution processes. It is a case of either apply the waterfall set of solutions the banks will provide or go straight to bankruptcy. They were not too enamoured by the idea that a personal insolvency arrangement would be put in place.
Mr. Lorcan O'Connor:
In the scenario depicted by the Chairman where, in effect, the keys are handed back and there is no agreement on the legacy debt, it is considered to be unsecured under insolvency law. Therefore, if the keys have been handed back, the bank is not in a position to offer an acceptable solution to the debtor and if the debtor is insolvent, it is open to him or her to use a debt settlement arrangement to deal with the legacy debt. Alternatively, bankruptcy is an option.
Ciarán Lynch (Cork South Central, Labour)
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Bank of Ireland and permanent tsb stated they were going to go after legacy debt. Mr. O'Connor has said there are mechanisms available to debtors to deal with it. Will he talk us through the process? According to recent comments made to us by the banks' chief executive officers, if somebody is a Bank of Ireland or permanent tsb customer, he or she disposes of his or her property and there is a legacy debt of €100,000, Bank of Ireland and permanent tsb will come after him or her for it. What is the mechanism in place to deal with this?
Mr. Lorcan O'Connor:
Assuming the debtors remain insolvent, the mechanism open to them is to avail of a DSA or bankruptcy. That is not to say they can through either of these options turn their back completely on their obligations regarding the legacy debt, but through a DSA, they will be asked to contribute what they can over a period of time, after which whatever is left over will be written off. In bankruptcy, an income payment order will be put in place; other assets will be realised and used to pay off as much of the legacy debt as possible and the balance will be written off.
Ciarán Lynch (Cork South Central, Labour)
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Moving to Mr. Lehane, the guide put together by the Insolvency Service of Ireland is quite good, as are the case studies set out inside it. Perhaps we might need to see more modelling related to the types of policy about which Mr. O'Connor is talking. I will drill down into some of the things about which Mr. Lehane spoke. I understand that in the United Kingdom the official receiver is obliged by law to make a decision on the family home within 12 months. Is that the case in the United Kingdom?
Mr. Christopher Lehane:
The position is that the official receiver effectively has a three year period within which to make a decision. Effectively the courts frown on people being thrown out of a house within one year, but the receiver must make the decision by the third year. If he or she has not instituted proceedings, his or her right to claim the half-interest disappears.
Ciarán Lynch (Cork South Central, Labour)
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Is Mr. Lehane referring to the position in Ireland or the United Kingdom?
Ciarán Lynch (Cork South Central, Labour)
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Therefore, Mr. Lehane is saying there is a three year window.
Ciarán Lynch (Cork South Central, Labour)
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What is the period during which Mr. Lehane must make a decision?
Ciarán Lynch (Cork South Central, Labour)
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On the basis that there is no window, there is a suggestion that Mr. Lehane is sitting on many properties for a long period of time. Which property has been held the longest by him pending the making of a decision?
Mr. Christopher Lehane:
The position maintained in the changes in the Act is that when a person is made bankrupt, the property is vested such that the half-interest in the family home vests in me from the date of adjudication. Post-discharge, it vests in me until such time as it is sold. In the first instance, I try to sell it to the spouse.
Ciarán Lynch (Cork South Central, Labour)
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What is the average time for which Mr. Lehane would hold a property before making a determination or a decision on it?
Ciarán Lynch (Cork South Central, Labour)
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I will come back to the €5,000 fee. Mr. Lehane is holding properties pending the making of a determination.
Mr. Christopher Lehane:
My role as official assignee is to act for the benefit of both creditors and debtors. Interest has been vested in me. If it has no value for the moment, there is nothing that can be sold on the open market. The Chairman may want to revisit the €5,000 fee, but the interest continues to vest in me until such time as an acceptable offer is made and I sell it back.
Ciarán Lynch (Cork South Central, Labour)
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For how long is Mr. Lehane holding on to properties on average?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Lehane has held on to his share of a family home and disposed of the other share.
Ciarán Lynch (Cork South Central, Labour)
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The general feeling is that a sustainable solution is something that may require a certain level of hardship and, in some cases, a prolonged period of hardship, but, ultimately, there is redemption at the end with certainty about the future for all clients involved - debtors and creditors. In respect of the Insolvency Service of Ireland, people would be in purgatory, but there would be redemption on the other side.
If the witnesses do not have in their minds any guideline or modelling as to what is an appropriate time for them to hold an ownership in a property, that allows for the uncertainty to continue forever.
10:50 am
Mr. Christopher Lehane:
What it does do is that it gives clarity. When a person comes into us, that is one of the first questions put to us and we explain the position to him or her. We advise how quickly they can choose to get family and friends to buy out the interest of the official assignee and they have absolute comfort from that day that the spouse then owns the full family home.
Mr. Lorcan O'Connor:
The clarity a debtor has, regardless of whether he or she is going into a DSA, PIA or bankruptcy, is that at the end of the process he or she will be solvent again. That is probably the biggest win or the most impressive point for a debtor. The bottom line in a bankruptcy is that, with certain exceptions, one loses all one's assets. Whether they are sold on day one, year one, or year ten is almost an administrative point. The bottom line is that assets are lost but one will have a clean slate to start again. In terms of a DSA or a PIA, one signs up to the proposal that one is putting to creditors, so one can dictate what it is that one wishes to happen with regard to certain assets. Obviously, one must have buy-in from the other side of the table but there is clarity within those proposals.
Ciarán Lynch (Cork South Central, Labour)
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The reason I am pinning down the witnesses on this point is that the impression we got from some of the banks that have come before us is that the bankruptcy route seems to be the least painful one which is a little ironic with regard to the approach they are taking. I imagine the question people considering bankruptcy would ask themselves is where their property or home would lie at the other side of that process. If they have a yacht in Kinsale, that would go or if they have a business and other additional assets and securities they may go as well. The primary objective of this committee's work with regard to the banks is to ensure that where people meet their obligations to the best of their ability that they will get to remain in their home - there is the certainty that is required out of this process. If somebody comes into Mr. Lehane's office tomorrow morning and says "I am going bankrupt and my wife or partner holds a proportion of my home", for what period will Mr. Lehane's organisation retain ownership of that property?
Mr. Christopher Lehane:
There are two points to be made. The first is that when a person becomes bankrupt all of their other unsecured liabilities are written off. The pressure to pay off their credit card bill or their credit union loan is gone. Their capacity to pay their mortgage, ironically, improves. They may have been making interest-only payments, trying to satisfy three or four buy-to-let mortgages. That madness of the tiger economy we have gone through and the collapse is that many people across every profession bought a second or a third home. When a person becomes bankrupt, in terms of buy-to-let properties, if they are all in negative equity, I would surrender them to the financial institution. If there is equity in them, I would recover that amount and pay in that respect. The truth is that those commitments that have been causing huge distress for people in terms of sleepless nights improves in bankruptcy because they no longer have all those commitments. They do not pay off their credit cards. Whatever funds I get, they get a dividend. The capacity of an individual to pay the mortgage, therefore, improves. The answer to the Chairman's question is that on the basis that the interest continues to vest in me, if the property is in negative equity as soon as the person comes up with €5,000, he or she will get-----
Ciarán Lynch (Cork South Central, Labour)
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That brings me to my final question. Why is somebody being charged a minimum of €5,000-----
Ciarán Lynch (Cork South Central, Labour)
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-----for a house that is in negative equity, given that they are paying €5,000 to buy something that is a liability because it is in negative equity?
Mr. Christopher Lehane:
It is an interest that vests in the official assignee. If I consider that half the people in this room were creditors and half were debtors, they would be asking me to consider that their debts have been written off completely. The committee focus has been on the banks but when one is the official assignee one is dealing with many creditors who, if they do not get paid, will be in to me as clients the next day wanting me to be fair to both creditors and debtors. Asking for €5,000 of an interest that vests in me is not a significant amount of money, given that I will not be pressurising any individual to come with the €5,000 and it could be that their property would still be in negative equity ten years from now. Many of the cases with which we are dealing involve people who are distressed because they have lost their job or have separated and they get back on their feet and get into a new situation where they will have the capacity to have the ability to pay. I do not believe that €5,000 is a penal sum of money. As the Chairman said, it is a minimum because in other situations where house prices are rising it may be more.
Michael McGrath (Cork South Central, Fianna Fail)
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I welcome Mr. O'Connor, Mr. Lehane and their colleagues to the meeting and thank them for forwarding their opening remarks in advance in order that we could have the opportunity to go through them. I will start with the issue of Mr. O'Connor's disappointment with the comments made by some of the creditors at the recent finance committee hearings here. We can name names, we all know who they are. Bank of Ireland makes it very clear that it would veto any PIA which involved writing off some mortgage debt. Deputy Doherty in his questioning of Ulster Bank elicited from it that it has no intention either of signing up to a PIA where there is an element of mortgage debt being written off. Mr. O'Connor said in his opening remarks that if we hit a brick wall we will review this and we will make recommendations. I would submit to him that his organisation has hit a brick wall. Two of the major lenders in the country have made it perfectly clear that they fundamentally object and will oppose, at every opportunity, a fundamental pillar of the organisation's armoury, which is a PIA. What can be done about that?
Michael McGrath (Cork South Central, Fianna Fail)
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That was Ulster Bank's position.
Mr. Lorcan O'Connor:
-----as opposed to those who say "under no circumstances ever". Prior to the committee hearings earlier this month, I would have made the point that it is in the commercial interest of creditors to engage in a PIA and all other arrangements. I will continue to be of that view. When the IVA process was introduced in the UK, initially probably all the banks were sceptical but some banks engaged to a greater or lesser extent than others. Over time they all became comfortable with the process and, generally speaking, they are now all supportive of the IVA protocol that is in place and the IVA solutions and, in many cases, they encourage debtors to avail of that solution. The reason I think that process will hopefully evolve over time in respect of all creditors, including those who were quite clear as to what their current position is, is the simple maths of it. I would give the Deputy one example of what a PIA can offer to a creditor. We often focus on the protections it can deliver for a debtor but I would focus briefly on those it can deliver for a creditor. Let us say a creditor has a mortgage of €300,000 and the PIP having examined the individual's circumstances. and applied forbearance measures around term extensions, interest rate adjustments and so on, can identify a sustainable mortgage of €200,000, the PIP would go to the individual's bank and say that he needs a €100,000 of that mortgage to be written off, to be warehoused or something done in respect of it to solve the problem. If the bank says "No" to that, that person would go to Mr. Christopher Lehane and seek to be declared bankrupt, but what would be the position if the market value of that house is €100,000? What that means is that by voting "No" to a PIA, instead of writing off €100,000 of the mortgage, the bank would have to write-off €200,000. When it comes down to the hard cold facts hopefully people realise that in certain circumstances a PIA should be supported.
We produced statistics at the beginning of the April and the numbers were very low in terms of those that had gone through the system but the trend, I suggest, was a positive, showing that the number of new cases each week and each month were increasing. We have already seen a significant move since even the beginning of April, notwithstanding the Easter period in the intervening time. We have now significantly more cases, more than 100 protective certificates, more than double the PIAs, more than double the DSAs, and a significant increase in DRNs. I think that over the next few months momentum will build and hopefully that will build confidence with all stakeholders in the process.
Michael McGrath (Cork South Central, Fianna Fail)
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I thank Mr. O'Connor for that reply. He is saying that the banks will realise that it is in their commercial interests to sign up to a PIA in certain circumstances because the debtor holds the ace card of the bankruptcy option in reserve.
However, that is contrary to the spirit of what was intended in the legislation. We do not want debtors threatening to go down the road of bankruptcy or to have thousands of bankrupts in Ireland because banks have been unwilling to co-operate with the spirit of the legislation. Given the fact that the two main lenders have made it clear that they have no truck with personal insolvency arrangements, PIAs, we have a serious problem.
It is early days in the service's life. While the numbers are low, the witnesses have stated their expectation that thousands of people will avail of it within the next year or so, which is welcome. However, it is not good enough to assert that, if people threaten bankruptcy, the banks will realise it is in their interests to sign up to PIAs. That is not what was envisaged. In some cases, the banks have given two fingers to the State and the new Insolvency Service of Ireland, ISI, by refusing to sign up to one of the main options provided for in the legislation.
11:00 am
Mr. Lorcan O'Connor:
I understand that view. It is important to remember that these are voluntary arrangements and require a personal insolvency practitioner, PIP, as mediator to bring the two sides to the table. In any negotiation, there are always reference points. Bankruptcy now has a reduced term of three years. While I take the Deputy's point about the spirit of the legislation and so on, bankruptcy is nonetheless a relevant point. Deals were not being done this time last year because the debtor did not want to wake the sleeping dog in the corner. If the bluff was called, a 12-year bankruptcy was not an attractive option to pursue. As the period has been reduced to three years, bankruptcy is no longer something that people would not necessarily favour. This has moved the negotiations to a different position from that they inhabited this time last year.
Michael McGrath (Cork South Central, Fianna Fail)
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I will move on to a few other issues. The ISI has set out reasonable living expense guidelines, which play an important role in deciding whether a debtor is able to avail of an arrangement. Where a debtor has an income that is below the level of reasonable living expenses, is it the case that he or she cannot avail of one of the arrangements? PIPs seem to be claiming that, ironically, those who have the lowest levels of income and high levels of debt are being excluded from the service because they have no capacity to make financial contributions over certain periods.
Mr. Lorcan O'Connor:
It is not an automatic fact that people will not be able to avail of arrangements. If one's income is less than reasonable living expenses, one may be able to offer something in one's proposal. For example, there may be a second car or an asset that can be disposed of to offer into the pool of money for creditors. In the absence of such options and if all of one's income is being used to meet reasonable living expenses, there is nothing to offer to creditors. In that situation, it is unlikely that a debt settlement arrangement, DSA, or PIA would work. However, this does not mean that there is no solution open to such a person. For example, a DRN, is available for those with debts of less than €20,000 or bankruptcy is an option if their debts are greater than €20,000.
The conversation could move on to question whether someone's living expenses were set at the appropriate level. We did a great deal of work in preparing our guidelines. When they were published last spring, they were based upon more than a decade of work by the Vincentian Partnership for Social Justice. The figures were not picked out of the blue. Rather, they were based on extensive building blocks that led to an overall number. As such, I am reluctant to make a quick change to the guidelines beyond reviewing them each year to meet inflation. It is only reasonable that people have sufficient income to retain reasonable standards of living even while insolvent.
Michael McGrath (Cork South Central, Fianna Fail)
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I agree entirely and am not in any way suggesting that the guidelines' figures be changed. However, I am hearing from some PIPs that a sizable proportion of the people approaching them will not be able to avail of DSAs or PIAs because they have no financial capacity to make additional contributions to their debts. This is a problem. Mr. O'Connor has mentioned other options. For example, DRNs can be availed of in certain cases. Otherwise, though, it is bankruptcy. Must the system be changed in any way to cater for those people? It seems ironic that the very people on the lowest incomes and who have unsustainable debts are locked out of the process because they have no capacity to make additional repayments.
Mr. Lorcan O'Connor:
One of the challenges facing the ISI and the wider audience is the need to ensure that any remaining stigma around bankruptcy is removed. Bankruptcy is as legitimate a solution as any other and has equal standing with the DRN, DSA and PIA. As the Deputy mentioned, there will be situations in which people will not be able to avail of DSAs or PIAs because of the guidelines on reasonable living expenses, but they will be able to avail of other solutions to their problems. This is the most important point. They will return to solvency and have the second chance they deserve.
Michael McGrath (Cork South Central, Fianna Fail)
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Is Mr. O'Connor satisfied with how the system of fees charged by PIPs is working? In certain cases, upfront fees are being charged. For some people, does this place a barrier to accessing a system that they need?
Michael McGrath (Cork South Central, Fianna Fail)
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I know.
Mr. Lorcan O'Connor:
Ultimately, it is for the market to decide. A significant number of practitioners have stated that they will not charge upfront fees. In the UK, private practitioners do not charge upfront fees for individual voluntary arrangements, IVAs. Instead, their fees are taken out of the dividend payments made during an arrangement's lifetime.
Michael McGrath (Cork South Central, Fianna Fail)
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I will move on to the issue of a family home in a bankruptcy scenario. A list of scenarios was helpfully provided in Appendix 1. It is difficult for people to get their heads around this issue when facing the stressful decision of whether to apply for bankruptcy. I put a point to Mr. Ross Maguire when he appeared before the committee a number of weeks ago. He advocated bankruptcy as a viable option for many debtors, but people are reluctant to go down that road. They believe that if they lose their family homes, they will never again have the opportunity to get credit to purchase another. What is Mr. Lehane's response? He has asserted that, in many cases, someone will retain at least a share of his or her home and the official assignee's share in it might remain for a long time, but many people remain concerned.
Mr. Christopher Lehane:
It relates to a couple of points, the first of which is destigmatising bankruptcy. There is a reality to be faced by people who have got into that level of indebtedness, namely, whether bankruptcy is a bigger problem or a solution to the problem. It wipes out unsecured debts and makes one's capacity to pay one's mortgage possible. Ironically, one may go from an interest-only capacity to interest and capital. When one is reassessed after bankruptcy, one has the power to pay the full mortgage whereas one previously did not. If a spouse is involved, he or she is jointly and severally reliable for the full mortgage. In the classic situation, if one spouse enters into bankruptcy, the other is still on the hook for the full amount.
I set out my policy clearly to address the reality of the situation. The issue becomes one of whether €5,000 is a reasonable amount. If a spouse owns one half and I have applied a value of €5,000, at what stage could they approach me - it is a time of their choosing, not mine - with €5,000 and get their family home back, given their capacity to repay the mortgage?
Michael McGrath (Cork South Central, Fianna Fail)
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I thank Mr. Lehane.
Kieran O'Donnell (Limerick City, Fine Gael)
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I welcome Mr. O'Connor and his colleagues and thank them for their presentation. I will address a couple of points. Regardless of whether the witnesses like it, the average person does not want to declare bankruptcy.
Regardless also of the process entered into, once they declare bankruptcy the family home becomes part of the equation. The purpose of the process is to protect the family home. That is one of its key ingredients. I would be nervous about the bankruptcy route as an option.
I have had only a quick look at the figures provided. The devil is in the detail. I accept the insolvency service is still a relatively new entity. Appendix 2 of the documentation provided includes data for the first quarter of 2014 and the period from 2011 to 2013. Based on these figures - Mr. O'Connor can correct me if I am inaccurate - 54% of people who entered bankruptcy during the first quarter of 2014 lost their homes, which equates to 37 out of 69 people. A person who enters bankruptcy has at least a one in two chance of losing his or her family home. Equally between 2011 and 2013, some 58%, or 70 people, in bankruptcy lost their family home.
On the PIAs, according to the first quarterly report only four PIAs were entered into and the secured debt write-off in this regard was 19%, which strikes me as low. As things stand the person who goes the bankruptcy route has, at least, a one in two chance of losing his or her home. Even where the banks provide restructures and write-downs under the PIAs, only 19% of the value is being written off. Mr. O'Connor stated that the banks should be buying into the PIAs because they are to their benefit. An issue which arose at a recent meeting of this committee is that of positive equity. The perception is that people who are in positive equity but in mortgage arrears are more vulnerable than people who are in negative equity. In other words, because a property is in positive equity and a person is in arrears with his or her mortgage payments a bank as opposed to providing a write-off will opt to sell the property. Why would a bank opt to provide a write-off when a property is in positive equity? In these cases, family homes are being sold and risky assets are being removed from the banks' balance sheets. I would welcome some commentary from Mr. O'Connor around the issue of positive equity.
In regard to the 523 applications received by the service in the first quarter, the result was 70 protective notices, 44 debt relief notices, seven debt services arrangements and four PIAs. Reference is made on page 5 of the presentation to recent comments made by the banks. Two institutions have stated that over their dead bodies would they allow write-offs in terms of mortgage debt in PIAs. Mr. O'Connor said earlier that if a creditor stands in the way of a solution there are mechanisms available to debtors to deal with this. Perhaps he would outline those mechanisms. As in other countries in the world, in terms of home ownership, in Ireland, the family home is of emotional significance. Bankruptcy should be a measure of last resort. We want the mechanisms to work. Perhaps Mr. O'Connor would respond.
11:10 am
Mr. Lorcan O'Connor:
It is true to say that the protections around the family home that are inherent within the personal insolvency legislation and the PIA do not exist in bankruptcy. However, the survey carried out over the limited period of the last four years indicates that in many cases people retain their family home. I would not dispute the Deputy's statistics, with one exception. The largest category of people made bankrupt over the past number of years are those who do not own a family home but are renting. When this is taken into account the percentage of people who retain their home, as per the survey, is slightly higher.
Kieran O'Donnell (Limerick City, Fine Gael)
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I was speaking about the statistics regarding the number of people bankrupted and family homes repossessed by order. I accept I may have misinterpreted that.
Kieran O'Donnell (Limerick City, Fine Gael)
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Which is low.
Mr. Lorcan O'Connor:
I do not have a view as to whether it is high or low because the primary responsibility of a PIP is to deliver a sustainable solution to allow the person return to solvency. There are many cases in respect of which a write-off is not necessary. I can give the Deputy what might sound like an impressive percentage. We have 150% more PIAs than we did at the beginning of April.
Kieran O'Donnell (Limerick City, Fine Gael)
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How many?
Kieran O'Donnell (Limerick City, Fine Gael)
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Up to the end of March four PIAs had been entered into.
Kieran O'Donnell (Limerick City, Fine Gael)
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That means an additional seven PIAs were entered into in the month of April.
Kieran O'Donnell (Limerick City, Fine Gael)
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Of the seven new PIAs in April what was the average write-off of secured debt?
Kieran O'Donnell (Limerick City, Fine Gael)
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Which is an increase on the 19% during the first quarter.
Kieran O'Donnell (Limerick City, Fine Gael)
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On secured debt?
Kieran O'Donnell (Limerick City, Fine Gael)
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I assume that excludes the two financial institutions who when before the committee said they were not willing to write-off secured debt.
Mr. Lorcan O'Connor:
It includes those financial institutions within a PIA solution. I would like to take the focus slightly off write-offs. In regard to whether the person with the problem, having engaged with the PIP, obtained a solution that assists in returning him or her to solvency, the answer is, "Yes". In some cases, this involved the writing off of secured debt and in others it has not but in all cases the person has been returned to solvency.
Kieran O'Donnell (Limerick City, Fine Gael)
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Where a customer of two institutions at great cost employs a PIP to engage on his or her behalf with both institutions, one of which holds a secured debt on behalf of the customer and is not amenable to the process, the PIP can opt to go the bankruptcy route, which route most Irish people prefer not to go. As a nation, we are averse to doing so. What mechanisms are available to people to force the institutions to engage in the process?
Kieran O'Donnell (Limerick City, Fine Gael)
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I am happy enough with that.
Kieran O'Donnell (Limerick City, Fine Gael)
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Two institutions have told this committee they will not write-off mortgage.
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Mr. O'Connor at liberty to identify that institution?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Mr. O'Connor speaking about a particular case with which the service has been dealing?
Mr. Lorcan O'Connor:
No. I am speaking about comments made at a previous meeting of this committee.
Equally, however, in those situations that is not to say that the vast majority of people could not get a solution that gets them solvent again with that creditor within the PIP mechanism. Time will tell as to how situations that require debt write-off are dealt with. To refer back to the point I made to the Deputy earlier, there will quite straightforward cases where it is clearly in the commercial interest of the creditor to support a PIA that includes secured debt being written off, because the alternative is worse.
11:20 am
Kieran O'Donnell (Limerick City, Fine Gael)
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If there is a PIP and Bank of Ireland is refusing to do a write-off, and that is the only sustainable mechanism, what can the individual do?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is there a requirement to re-examine this? Are there areas that must be re-examined and tweaked to ensure that institutions such as Bank of Ireland will work with the process? Clearly, it should be to its long-term benefit to keep the individual in their home and able to pay the mortgage.
Mr. Lorcan O'Connor:
Ultimately, that is a policy matter for the Oireachtas. From the ISI's perspective and, indeed, the Minister's perspective, commitments have been given that we will identify any changes we believe to be necessary. I would be loath to say to the committee today that this or that should be changed, because I would be doing so without meaningful numbers to support my analysis. The danger is that a change could be made that would not solve the problem or could make matters worse.
Kieran O'Donnell (Limerick City, Fine Gael)
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What would the witness regard as a reasonable timeframe before he could make recommendations?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is the issue of positive equity arising on the ISI radar?
Mr. Lorcan O'Connor:
It has not arisen on our radar. However, in light of the type of scenario that was depicted, it is important that the ISI does not create false expectations. The reality is that a secured creditor, or any other creditor for that matter, cannot be unfairly prejudiced with regard to their situation. If there is a secured creditor with the asset in positive equity, they will not agree to debt being written off. There is no point in suggesting that they will. That is not to say that a PIP cannot deliver a sustainable solution that gets them to stay in their home, but that bank or that lender will continue to hold that equity to a future point in time.
Kieran O'Donnell (Limerick City, Fine Gael)
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The issue that is arising is people who are in positive equity but cannot meet their mortgage repayments. It is their family home and ultimately the objective here is to get the process to work, pre-bankruptcy, to keep people in their family homes.
Kieran O'Donnell (Limerick City, Fine Gael)
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My final question is with regard to the ISI's general interaction with the financial institutions. What has the general interaction been? What is the position with buying into the process and where are the weaknesses? Has the ISI dealt with sub-prime lenders, the main lenders, the credit unions and car companies? Perhaps the witness would describe the general interaction. We are anxious to come up with a process and for me it is all about keeping people in their family home.
Mr. Lorcan O'Connor:
From the ISI's perspective, the view is that it is important to try to keep close to all of the stakeholders. We are, in effect, all learning by introducing a new system and it is important to stay close to each other. At the outset we would have met with all of the categories of creditors the Deputy mentioned. In more recent times it has probably been at a more formal level, be it through the IBF, the credit union representative bodies, the utility companies and credit associations. Also, when we had our seminar last February, we invited creditors from all walks of life.
Our engagement has certainly been positive. The protocol is probably the best example of that. All creditors, without exception, have been fully committed to the development of a protocol, including those that have been somewhat circumspect with regard to the engagement more generally. That augurs well. It shows that creditors realise that this is going to happen whether they like it or not and are saying, "Let us work towards trying to get a protocol in place that at least ticks as many boxes as possible around our concerns or around where we think efficiencies can be brought into the system". The fact that we have achieved or are close to achieving a protocol in less than 10% of the time it took our UK colleagues to get one in place is testament to that positive engagement.
Pearse Doherty (Donegal South West, Sinn Fein)
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I welcome the witnesses. I will start with a quote. It relates to what Mr. O'Connor said in his presentation about the intention of the agency and the Government to keep this legislation under review. Indeed, it is a commitment that was given last year when some of us believed that the banks would use the veto with the personal insolvency service. We hear that two of the largest banks in the State are going to do that, but Mr. O'Connor is still saying that he will continue to keep it under scrutiny and review. I am sure he has read the committee's transcript but I put a question to Mr. Richie Boucher of Bank of Ireland. There were questions leading up to it. It was in reference to the fact that, on average, 19% of secured debt had been written off in a PIA. Mr. O'Connor has now informed the committee that the figure has increased to 41%. I put it to Mr. Boucher, and I quote, "The personal insolvency service told us an average of 19% of secured debt is written down on average based on PIPs' proposals. The bank is saying it will torpedo every single one of these through the veto the Government gave it if it has the opportunity". Mr. Boucher said in response, "That is correct". He has told this committee that he will torpedo every proposal by a PIP who recommends a secured debt write-down. Does Mr. O'Connor not believe it is time for the ISI to wake up and understand that there is now a need for the legislation to be amended or does he believe Mr. Boucher is bluffing?
Mr. Lorcan O'Connor:
I do not have a particular view as to Mr. Boucher's rationale for making that statement. It will be important, when dealing with cases on an individual basis, to consider that when one looks at, for example, the average of 19% being proposed as written off, if creditors vote "No" to that, they are likely to be writing off more in bankruptcy. Therefore, notwithstanding global policy statements, general media releases and so forth, when they are dealing with cases on an individual basis, the numbers should talk. As I said, the UK experience-----
Pearse Doherty (Donegal South West, Sinn Fein)
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That may be the fact but the reality is that the Oireachtas passed legislation which allowed for PIAs. If a bank is saying it is going to torpedo every proposal that recommends a secured debt write-down, there is a serious issue. Debtors may have the option of bankruptcy, and we will discuss that shortly, but we have heard the chief executive officer of a bank that has been saved by the Irish people - a person who is CEO only because the Irish people saved it - say that it has decided to torpedo the legislation that this Oireachtas has passed. My problem is that the ISI either believes Mr. Boucher is bluffing to this committee and is not serious in what he said or the ISI is going to sit back and allow that to happen.
Mr. Lorcan O'Connor:
With regard to a creditor having a PIA proposal put before them, it is the PIP's responsibility to ensure that it is not unfairly prejudicing the creditor. Therefore, by extension, if the creditor votes "No", it will be to their economic disadvantage as to what happens as a consequence in respect of that case.
Pearse Doherty (Donegal South West, Sinn Fein)
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If Bank of Ireland was one of the main creditors and was able to enact its veto, why would a PIP put forward a proposal that included a debt write-down, given that the PIP knows that the policy of Bank of Ireland at the most senior level is to veto that application?
Mr. Lorcan O'Connor:
In doing so they will be able to present what the outcome is in the alternative, which is bankruptcy and which is far worse. I worked on many examinerships in my previous career. When one was advising a company in advance of going to the High Court and getting examinership protection, banks might have been very reluctant to engage or certainly very reluctant to implement a restructure that involved debt being written off.
As soon as one got that protection that examinership delivers, the negotiations changed completely and the power within those negotiations moved significantly. It was simply because the bank said: "Okay, I can't look back anymore, I need to look forward and if I vote 'No' to this examinership the company is going to go into liquidation." In my view that same rationale, whether it happens on day one of case one or after a learning curve that is slower for some banks than others, will ultimately mean they get to the point at which they say: "Actually, this is better than the alternative and it is in my interests, in my shareholders' interests and in my bottom-line interests to vote 'Yes'."
11:30 am
Pearse Doherty (Donegal South West, Sinn Fein)
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Earlier Mr. O'Connor gave an example of a house valued at €300,000 or one with a mortgage of €300,000 but valued at €100,000. A PIP proposal would see the bank recoup €200,000, so it is in the bank's interest to support the proposal. I will outline a missing element. The banks know that if a debtor or person in his or her family home takes the bankruptcy route, he or she has a good chance of losing the home. If it were Bank of Ireland then it would put forward a split mortgage for the full €300,000 and charge interest all the way through. A bank knows that its proposal is likely to squeeze more money out of the individual. Also, if there is a windfall at the end of 20 years, a bank will grab it with both hands because people are reluctant to go bankrupt and lose their family home.
Has the delegation lifted the phone to contact Mr. Boucher and ask him whether he is serious about torpedoing every single proposal that comes before his bank that involves a secured debt write-down? I am very concerned that the ISI has sat back and not taken the issue seriously enough. It is not just Mr. Boucher; two of the four main banks have said they will make the process unworkable where they can and where the veto applies.
Mr. O'Connor has said he will keep the matter under review, and I believe he is genuine, but red flags have gone up everywhere. Mr. Boucher openly made his comment at this committee. Either he is bluffing and we let things go the way they are going, or we change the legislation.
Mr. Lorcan O'Connor:
We have been in touch with all the creditors, as I told the Deputy earlier. Equally, I have been in touch with the chief executive of Bank of Ireland in the past, although not since his last appearance. Let us look at the engagement that is taking place to develop the protocol and the general engagement on the new insolvency service, or Mr. Lehane's area of bankruptcy. I think there is positive engagement but, as the Deputy has said, red flags have been raised. The language used and the position articulated at the beginning of this month has highlighted areas for us that we need to pay close attention to, but we need a statistically relevant sample size in order to give people meaningful analysis.
Pearse Doherty (Donegal South West, Sinn Fein)
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Has Mr. O'Connor called Richie Boucher? Has anybody from the office engaged with his bank to see if he is genuine about torpedoing every proposal? Has the service adopted a wait-and-see approach?
Mr. Lorcan O'Connor:
As would be the normal course in any event in meeting the various banks, I would be happy to give a commitment to the committee that we request a meeting and talk through the kinds of issue that we talked through earlier and the kinds of scenario I have set out in order to tease out what the bank's particular issue is. We ensure they are aware of - let us say - the lessons from the UK and what we can do to try and speed that up, the commercial realities, and the fact that in certain situations debt write-off in a PIA is far better than the alternative and, therefore, should be supported.
Pearse Doherty (Donegal South West, Sinn Fein)
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The Government, in launching the service, suggested that 18,000 people would access it in the first 12 months. I am sure the Government did not pluck the figure out of the air, but it must be deeply disappointed about the uptake. Is one of the reasons for the slow uptake the convoluted route to acquire a protected certificate and the onerous mechanism involved? Does the system need to be reformed? For example, a PIP could go to the Circuit Court for a certificate instead of using the service, which seems to take a long time.
Mr. Lorcan O'Connor:
From the ISI's perspective, we are trying to ensure that the process is as smooth as possible, and in our quarterly statistics report we set out the typical timeline for a given case. Equally, the protocol, which is very close to being published, will achieve significant efficiency in the overall process. At the moment every practitioner produces a different set of terms and conditions, so every case must go to a creditors' legal division in order for it to look through the small print to see if there is a problem. Once the protocol is in place, all of that part of the process will be taken off the table and, I would like to think, it will be a lot more smooth.
In terms of the initial engagement between debtor and practitioner, basically the practitioner summarises the financial situation of the debtor and submits it to us. When we are satisfied that the application is in order, it is then passed to the court and the court's process takes only a matter of days.
Pearse Doherty (Donegal South West, Sinn Fein)
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I may come back to the matter later.
With regard to inheritance or windfalls for someone who is in an arrangement, what is the agency's position regarding drawing down or taking a portion of the money? Is it 100% above a certain value? What rule does the agency operate for same?
Pearse Doherty (Donegal South West, Sinn Fein)
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Can the Chairman inform me how much time I have left?
Ciarán Lynch (Cork South Central, Labour)
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The Deputy has four and half minutes remaining.
Pearse Doherty (Donegal South West, Sinn Fein)
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I asked about inheritance and windfalls.
Mr. Lorcan O'Connor:
The ISI does not have a view per seon the matter. The legislation provides for a variation to an arrangement for unforeseen circumstances. That could be where a debtor's situation deteriorates or where he or she comes into an inheritance or has an unexpected windfall. In that situation a variation would be expected whereby the dividend paid to creditors would increase.
On a positive note, the DRN envisages people with very low income and assets being offered a write-off of all of their debt, with a payment required only in certain circumstances in which an individual's circumstances improve. I had not envisaged that happening often, but we have already had a situation, about a month ago, in which somebody who had had close to €20,000 written off through a DRN contacted our office and said: "Great news - I have now got a job and I want to start contributing to paying the creditors that I already, in effect, have relief from." That shows that debtors want to meet their obligations if they can, which is a positive note. People are getting a second chance and in doing so looking back to see what they can do.
Pearse Doherty (Donegal South West, Sinn Fein)
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Later I will return to the inheritance issue, because Mr. O'Connor has not really answered my question on whether the sum is 100% over a certain value. I hope we will get it the second time around.
With regard to bankruptcy figures, let me take out the people who did not have a family home in the first place. That means that out of 54 cases in 2014, only 16 of them who are still in the family home are not in default, and there are 16 people who are in their family home and in default. What happens to people who are in default but still live in their family home?
Mr. Christopher Lehane:
These are cases in which people have been made bankrupt only in the past few months. They are in default because there was such a build-up before they were interested in bankruptcy. As regards those commitments, it can be a range of situations - for example, their capacity may have improved and they can come out of default.
Within bankruptcy - and this is where it comes down to the decision of the official signee - he or she considers, having regard to the circumstances of the individuals, the scale of the mortgage they are in. Bankruptcy sounds horrific to people and the reason is that it had an horrific stigma in the past. For some people, bankruptcy is due to their having got in way above their heads, so asking them to sustain completely unsustainable mortgage payments in order to stay in their family home-----
Pearse Doherty (Donegal South West, Sinn Fein)
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I appreciate Mr. Lehane's comment, and I am sorry to interrupt him, but I must ask a specific question because I have just gone beyond my time. If they are not able to come out of default, what happens the family home?
Pearse Doherty (Donegal South West, Sinn Fein)
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Only 16 people of the 54 bankruptcy cases this year are secure in their family home. Let us look at last year's figures.
Pearse Doherty (Donegal South West, Sinn Fein)
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I refer to the 16 people who are not in default and who have family homes out of the original 54 bankruptcy cases this year. The 16 people are secure in their family homes at this point in time. Let us look at 2011 figures.
Pearse Doherty (Donegal South West, Sinn Fein)
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Let us compare the figures for 2011 with 2013, which is more historical.
Out of the 86 with family homes who went into bankruptcy, only 25 are secure in their family homes. The other ten are in default. Either way, two thirds of them have lost their family homes through voluntary surrender or otherwise.
11:40 am
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Lehane mentioned the transfer of half of the asset that lies in the office of the ISI to the spouse and the fee of €5,000. I do not understand it so I will present an example as I think it is and the witnesses can tell me where I am wrong.
If I am a husband and my wife has gone bankrupt and our mortgage is €300,000, the ISI holds half of the family home, but I am still liable to the bank for the full €300,000 granted to me through a mortgage. The bank will squeeze me for every single penny and the ISI offers me the opportunity to buy the other half of the family home, for which I am fully liable, for a minimum of €5,000. Is that right? Can I pay in instalments?
Mr. Christopher Lehane:
That is correct. I will explain the position. The classic situation is where the woman is on the hook for €300,000 and the man, within his reasonable living expenses, is being allowed to contribute to the mortgage. If the woman is not working, he will be able to pay the full mortgage within his reasonable living expenses. From the point of view of his creditors, reasonable living expenses allows him to pay the full mortgage. However, it is the reality that in many cases where the wife may not be working and reasonable living expenses are not coming from the wife, they are coming out of funds that could be taken and paid to creditors. A minimum of €5,000 is asked for, but it will not be asked for immediately. It will be asked for whenever the spouse is in a position to contribute. The official assignee's role is to be fair to both creditors and debtors. In a couple of years, it may be that half of the interest in a house in Dublin is such that it is very much in the interest of the spouse to pay €5,000 when the house is worth up to €60,000 more. It is a commercial decision to try to see how people can get back the half interest in the house. My role is to be fair to creditors and debtors, and I believe €5,000 is reasonable.
Ciarán Lynch (Cork South Central, Labour)
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I must be excused from the committee for ten minutes. Deputy Kieran O'Donnell will chair the meeting in my absence.
Aideen Hayden (Labour)
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The ISI acknowledges that uptake of the process has been slow since it opened its doors to applications in September. I am pleased to see the ISI acknowledges in the report that it will take more steps to publicise the options available to distressed debtors. It is important to recognise that there is particular disappointment about the PIA. This is particularly true given that we have over 100,000 households in significant mortgage debt. This is being watched closely. I accept the witnesses' point that these are early days. What types of legal change may be necessary in order to make the service as successful as it could be? The ISI places emphasis on the liberalisation of bankruptcy laws in bringing financial institutions to the table. It mentions that the more liberal bankruptcy laws are breaking the stalemate between stakeholders, which has lasted six years in some cases.
I note the comments by the Chairman that Irish people are reluctant to go towards bankruptcy. Have we gone far enough in liberalising bankruptcy laws? How do the witnesses feel about reducing the term of bankruptcy from three years to one year? Do we need to take more steps to make bankruptcy more attractive? One year is the term in another jurisdiction very close to here.
Mr. Lorcan O'Connor:
The ISI does not have a formal view on this. It is a policy matter for the Oireachtas. The three-year period aligns itself with the majority of options across Europe and elsewhere, although the term in the UK is one year. With regard to the slow take-up of PIAs, I can show some evidence of traction. Since the end of March, the largest number of new successfully completed cases are PIAs. The largest number of draft cases-----
Aideen Hayden (Labour)
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What is the number of PIAs?
Aideen Hayden (Labour)
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That could be from four cases to 12.
Mr. Lorcan O'Connor:
I agree, but we must start somewhere. Doubling every three weeks means it will not take long before we reach a reasonable number. It is important to show that the new cases are, in the majority, PIAs. There are 12 cases before the court for new protective certificates and the majority are PIAs. There is traction and it is pointing to the fact that by the autumn there will be a significant number of successful PIAs in place. Every successful arrangement returns the person to solvency, so each of the arrangements is of huge value.
Aideen Hayden (Labour)
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I will return to bankruptcy. I am concerned that people who have the money and the capacity can go across the Border or over the sea and have themselves discharged within a 12-month period. It is not fair to people who do not have the capacity. Given that more liberal bankruptcy laws are pushing creditors towards making arrangements, why not take that step and level the playing field in this country?
Mr. Lorcan O'Connor:
Ultimately, it is a policy matter. While it is true to say that the formal period is one year in the UK and three years here, moving to the UK involves establishing a centre of main interest. That takes a number of months and, from speaking to our counterparts in the UK insolvency service, the UK judiciary are taking a much harder line in questioning whether a centre of main interest has moved from Ireland to the UK. Given that establishing a centre of main interest can take anything from six months to one year, it is potentially a two-year period compared to a three-year period here. The person loses any protection of the family home because, by definition, moving to another jurisdiction means that a home in this jurisdiction cannot be the family home. People lose jobs they may have in this jurisdiction and there is also disruption to family. There is a difference. In certain circumstances, it remains attractive for a person to go to the UK, and there is no law preventing it. For many people, it may have been a no-brainer a number of years ago where there was a 12-year term compared to a one-year term. Now, the difference is marginal in many cases. Given the other solutions available here, there is a feasible and practical solution available for everyone to become solvent.
Aideen Hayden (Labour)
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Mr. O'Connor says that the Personal Insolvency Act balances the interests of debtors and creditors where creditors are dealing with secured debt. I do not agree, because it is not a level playing field. Many of the criticisms of the legislation, such as criticism by FLAC about the bank veto, have proven to be correct. Mr. O'Connor said that some of these players would come to the table in due course. He said that the DRN and the DSA had been tried and tested in other countries and that the PIA is somewhat different. Should we consider moving away from the assisted mediation model and towards an adjudication model that gives the ISI teeth to determine whether an arrangement should be put in place? This is an interim position between what we have now and bankruptcy. We need another layer that moves us away from mediation and mediated settlement.
We need an interim plateau level which I would term "adjudication", for want of a better word.
11:50 am
Aideen Hayden (Labour)
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It is a policy matter for the Oireachtas but it is the job of the Insolvency Service of Ireland to advise the Oireachtas on the basis of its experience.
Mr. Lorcan O'Connor:
I accept that, but I am also aware of certain constitutional restrictions about what can and cannot be achieved through the personal insolvency legislation. I would also point to the UK experience. It is clear from the UK IVAs, individual voluntary arrangements, over a decade ago, that they require 75% creditor support in every case. The pass rates for cases were low, the reason being that banks were still trying to learn and still trying to get comfortable with the process and they did not have a protocol in place. We have done our best to try to learn from that because we do not want a decade of banks not necessarily engaging fully with these processes. We are within weeks of issuing a protocol. In the UK, once that protocol was issued, the pass rates increased to 95% and over. I hope we will have something similar here. I am not saying that everything is rosy. The comments made before the joint committee at the beginning of April clearly demonstrate that. The committee has a commitment from me and my colleagues that we will come to the committee, the Minister and the Oireachtas to identify any changes we believe are necessary, but we need that statistical relevant sample size before we can do that in a meaningful way.
Aideen Hayden (Labour)
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I agree with Mr. O'Connor on that issue. Another issue that arose was the assignee's role in respect of joint tenancies. Effectively what he said is that a joint tenancy in a bankruptcy situation is severed and the bankrupt's portion rests with the assignee and bankruptcy. I am wondering what can be done in terms of legal change. An area about which I am very concerned is the position of separated couples and couples where the relationship has broken down. In my personal practical experience, it is proving to be incredibly difficult in relation to the code of conduct on mortgage arrears and in trying to deal with any debt. Is there any logic as to why we could not change the law to sever the mortgage as well? It seems illogical that the joint tenancy can be severed while leaving the mortgage on that property extant, in other words, with the remaining mortgage holder liable for the entire debt. That is one aspect of the question. The other aspect is what we need to do to cover adequately the position of partners and couples where the relationship has broken down, because I think we are falling into a major black hole in this area?
Aideen Hayden (Labour)
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One can legislate to amend the terms of any contract.
Aideen Hayden (Labour)
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My point is that one can be absolved of one's ownership but not of one's debt. That is the bottom line. It is illogical to sever a joint tenancy of a property to give a half portion and still not sever the mortgage as well to separate the liability in respect of the mortgage. I take that as an answer. I am just putting my comments on the record. I think it is entirely unfair to the other party.
Mr. Christopher Lehane:
This is a real practical difficulty and it is one I am dealing with in bankruptcy. Equally, it is a difficulty, even if there is mortgage indebtedness, when people separate and there are two homes to be financed. In the normal course, that is a huge burden on both parties. The difficulty at present is that the property is in negative equity in the middle of all this, but it is not necessarily an insolvency issue.
Aideen Hayden (Labour)
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Can Mr. Lehane address the issue? Do we need to look at our insolvency legislation to consider the position of marital and or relationship breakdown? Does the current legislation adequately cover that issue?
Aideen Hayden (Labour)
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And what about the personal insolvency arrangement situation? Is that adequately covered?
Aideen Hayden (Labour)
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What is the position where there is a non-co-operating party and a joint family home?
Aideen Hayden (Labour)
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My experience is that the non-co-operating partner is, in fact, preventing the co-operating partner from reaching agreement. On that point, who can avail of the services of the ISI? My understanding is that if one is determined to be a non-co-operating borrower, and I am speaking in terms of PIAs, one cannot access the services of the ISI. Is that correct?
Aideen Hayden (Labour)
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It seems very strange that a statutory body, such as the Insolvency Service of Ireland, providing a solution set down in law by the Oireachtas can deem a person ineligible for its services. I have seen situations where a person has been deemed a non-co-operative borrower for not replying to a letter or where an estranged spouse has not given a financial statement and the other party has been deemed to be a non-co-operative borrower. Is it right that a body that has no statutory powers is able to deem somebody ineligible for its services?
Mr. Lorcan O'Connor:
It is part and parcel of the legislation. It is a condition around eligibility albeit with the caveat to say that a PIP can bypass that requirement if they are of the view that it meant very little. It is equally important that we have not become aware of that in any practical way or in terms of actual live cases being a problem for eligibility.
Aideen Hayden (Labour)
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I take it that Mr. O'Connor will keep this matter under review.
Stephen Donnelly (Wicklow, Independent)
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I thank the witnesses for taking the time to appear before the committee. I think we have not got the total number of deals done in terms of protective certificates issued, PIAs and DSAs. Mr. O'Connor said that more than 100 protective certificates have been issued. I think I heard that 11 PIAs have been signed off. Is that correct?
Stephen Donnelly (Wicklow, Independent)
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How many DSAs?
Mr. Lorcan O'Connor:
Ten, and 56 debt relief notices and more than 100 protective notices. I would point out that today there are 12 cases before the Circuit Court that are likely to produce new cases. In terms of what visibility we have, I would be comfortable that the numbers are increasing significantly week by week.
Stephen Donnelly (Wicklow, Independent)
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Therefore, the two numbers that are relevant to the mortgage crisis are PIAs and DSAs. Does the witness have an estimate as to how many will be completed by the end of this year?
Stephen Donnelly (Wicklow, Independent)
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A four-figure number, so 1,000 or 9,000.
Stephen Donnelly (Wicklow, Independent)
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So the witness-----
Mr. Lorcan O'Connor:
We have been speaking with PIPs throughout the country. They are saying that there has been an initial engagement with people who say they have a problem and are asking for help. The PIP says that in principle they believes they can. However people still want to see others successfully go through before formally signing on the dotted line. As we produce more statistics or as people become aware of their neighbour successfully going through the process, the engagement will increase.
12:00 pm
Stephen Donnelly (Wicklow, Independent)
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Mr. O'Connor referred to a four-figure number. Does 2,000 or 3,000 seem reasonable?
Stephen Donnelly (Wicklow, Independent)
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Is Mr. O'Connor's estimate in the low thousands or high thousands? It is important.
Mr. Lorcan O'Connor:
It is remarkably difficult to give the committee an accurate figure. I would have thought the numbers would be higher today than they are, notwithstanding the fact that they are probably along the lines of the experience of other jurisdictions. Anyway, I would have been of the view, given the backlog or the perceived backlog of cases, that we would not have had that slow run-in. Therefore, it is very difficult to say. I simply do not have an actual number to offer.
Kieran O'Donnell (Limerick City, Fine Gael)
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Between the various categories there are approximately 200 cases to date, or 194 in total, and we are four months into the year. Is that correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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No; I am referring to all cases, including protective notices and the various other categories. There are 112 protective notices, 56 DRNs and ten debt service notices, giving a total of approximately 200.
Kieran O'Donnell (Limerick City, Fine Gael)
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In that context, there have been only 200 to date.
Kieran O'Donnell (Limerick City, Fine Gael)
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We are four months into the year.
Stephen Donnelly (Wicklow, Independent)
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Let us suppose the figure is 4,000 by the end of the year for cases either in train or completed, whether personal insolvency arrangements, PIAs, or debt settlement arrangements, DSAs. These are the two arrangements relevant to the mortgage crisis, which is what the committee is addressing. Does that seem like a reasonable estimate to Mr. O'Connor, notwithstanding everything he has said?
Stephen Donnelly (Wicklow, Independent)
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Here is my problem. I know Mr. O'Connor and his team are doing the best they can with the legislation they have been given. I would prefer that number to be greater because, for all the flaws that the insolvency legislation has, it is none the less a superior mechanism to what we are seeing in the voluntary arrangements. The spirit of the insolvency legislation, which some banks have explicitly said they are trying to avoid, is made up of two things: one, families get to stay in their homes where possible; and, two, it provides for a genuine restart or recovery from unsustainable debt. Does Mr. O'Connor agree?
Stephen Donnelly (Wicklow, Independent)
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My problem with the voluntary arrangements is that, in the case of many of the banks, over 90% of the so-called sustainable restructures actually end up in higher payments being made over the lifetime of the debt. We have the figures from the banks. For example, I have seen the figure from Bank of Ireland and it amounts to well over 90%. Term extensions increase total payments, interest-only arrangements increase total payments, recapitalisation of arrears increases total payments, and so on. Furthermore, we have Bank of Ireland's pretend split mortgage, which actually charges the full amount on the shelved portion. To me, that is not a sustainable solution to a debt crisis; rather, it is an extend-and-pretend solution to a debt crisis.
Here is my major concern. I have no doubt that Mr. O'Connor and his team are doing their best, but let us consider all mortgages in arrears, of which there are 176,000 in total. This includes buy-to-let and owner-occupier arrears. Now, let us consider Mr. O'Connor's figure of 4,000. This means a little over 2%, or approximately one in 50, of the mortgages that are in arrears will come through what I believe is a good process. The Government target is essentially for the arrears figure to go to zero by the end of this year. The banks are ahead of these targets because they will be financially penalised by the Central Bank otherwise.
The legislation is probably not bad legislation, notwithstanding some things I would change, for a business-as-usual economy. However, I believe it is utterly flawed. Therefore, the important task Mr. O'Connor has in terms of dealing with the crisis - not in a business-as-usual situation - for the next ten or 20 years is impossible because by the end of the year the banks will have forced through many voluntary arrangements which are not remotely sustainable. The banks are allowed to define what "sustainable" is and the Central Bank is utterly complicit in allowing the banks to do so. Therefore, they will get away with it, and approximately one in 50 of the restructures will come through the Insolvency Service of Ireland. From a national debt recovery perspective, this is useless, although it is great for the 2% because they will have superior solutions to those the banks are voluntarily offering, not in all cases but in many cases. In that context, does Mr. O'Connor believe anything can be done now or this year to increase the 2% to a far greater level?
Mr. Lorcan O'Connor:
I agree that we should be trying to achieve as high a number as we can. Those availing of ISI solutions can be assured of greater transparency - this applies to all stakeholders involved - and a holistic solution. On occasion, the voluntary solutions the banks are offering may only solve the mortgage problem, but there could be other credit union loans, credit card loans and so on that must be dealt with. There are advantages in availing of the ISI services in this regard. That is not to say people should not try to solve their problems short of the ISI, but I agree with the broad thrust of Deputy Donnelly's statement.
Deputy Donnelly asked what we can do to try to get the number as high as possible by the end of the year. The first thing we can do is to roll out an information campaign again. We had one this time last year when we were launching the organisation and we tried to produce as many cases studies and guides as possible. We were keen to have several cases successfully through the system before we engaged in a further round of information. It is important for us to be able to demonstrate that, for example, Joe went through successfully and to outline his situation at the moment, and we are able to do that now. We are planning, in consultation with the several stakeholders, including the Citizens' Information Board and others, to have several information sessions which will be light in terms of presentation, perhaps only half an hour or an hour explaining the options, but to have scattered throughout the room a dozen local personal insolvency practitioners, several people from the Money Advice and Budgeting Service offices and several people from Mr. Lehane's bankruptcy division as well as representatives of the ISI. The idea is for people to be able to sit down and have a face-to-face ten or 15 minute conversation that evening with the people concerned to tease out their initial queries. That might lead to people formally meeting with a personal insolvency practitioner or whoever. That is one thing in terms of information.
The second thing is the protocol. I cannot overstate the importance of the protocol because it is moving what is a blockage in the system. It will smooth out the entire process and make it more efficient. We are very close to publishing it. I am hopeful that we will publish it during the month of May. I believe it will encourage personal insolvency practitioners, because they will then have far greater confidence that the cases they are taking on will successfully go through the system. It should help creditors because they will see that the goalposts are not moving from one case to another as they come before them. Furthermore, they will know, broadly speaking, what will come forward and they can focus on the commercial proposal. It also helps debtors because they will know where the goalposts are, since they will have been fixed, and they will know what they are signing up to. Far more clarity has been brought to the situation.
Stephen Donnelly (Wicklow, Independent)
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Mr. O'Connor has referred to information campaign and the protocol. Is there anything else? Are there any other big-ticket items?
Stephen Donnelly (Wicklow, Independent)
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Let us return to the figure of 4,000. We accept it may be 2,000, 1,000 or 8,000, but we are using 4,000. Does this estimate include the information campaign and the protocols?
Stephen Donnelly (Wicklow, Independent)
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I understand that.
Stephen Donnelly (Wicklow, Independent)
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Let me rephrase the question. We are discussing this figure of 4,000. Accepting that it is a range, does Mr. O'Connor believe the protocol and information campaign may bring it up to 10,000, 20,000, 30,000 or 40,000?
Stephen Donnelly (Wicklow, Independent)
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Neither do I. I believe the protocol and information campaign, rightly, have been figured in because they are things the service is already planning on doing. Therefore, when we are discussing the estimate of the ISI for the end of the year, it is right and proper that the service should include them.
Here is my question. A figure of 4,000 is not enough. It is great for the 4,000 involved, but I want it to be 40,000, 50,000, 60,000 or 70,000, and the clock is ticking. There is no point in our having a great process in place in February 2015, because the banks will have forced through a vast amount of dross dressed up as sustainable solutions.
12:10 pm
Stephen Donnelly (Wicklow, Independent)
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I accept that. However, Mr. O'Connor has been asked by several members about the nature of the mechanisms to which he referred. He indicated in his opening statement that if the banks do not play ball, there will be mechanisms in play to address that. The reality, of course, is that the banks have explicitly stated that they will not play ball and some of them have never played ball. The only mechanism I am hearing about is insolvency. My question in this regard is to both Mr. O'Connor and Mr. Lehane. If we were to decide to be far more ambitious by, for example, seeking to have 40,000 rather than 4,000 cases put through by the end of the year, how might we go about achieving that? Dealing with 4,000 is more or less business as usual, but we are facing a crisis here.
Mr. Lorcan O'Connor:
In terms of the current numbers, several PIPs are telling us they have hundreds of cases on their books, which will be translating into cases for the Insolvency Service of Ireland in the near future. The Irish Mortgage Holders Organisation, IMHO, by way of its initiative with Grant Thornton, is suggesting it will have a four-figure number of cases for us in the coming months. It is a slow start, but it is building. It will be very important in respect of the information campaign that people are able to say they have done this successfully-----
Stephen Donnelly (Wicklow, Independent)
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I am sorry to cut across Mr. O'Connor, but the time remaining to me is limited. Mr. O'Connor is staying within his own parameters, but I am asking him to think outside those parameters. If the Minister for Finance came to Mr. O'Connor and asked for 40,000 cases to be resolved by the end of the year instead of 4,000, what would it take to achieve that? I am envisaging a situation where the Minister undertook to push through whatever Mr. O'Connor said he needed in terms of legislation, funding, tackling the banks, giving the Central Bank new powers or whatever else. What would he ask for?
Mr. Lorcan O'Connor:
The important thing to remember is that this is a demand-led service. We are up and running and there are more than 100 PIPs throughout the country who have the capacity to deal with cases. It is simply down to ensuring there is engagement and confidence among debtors such that they know what their options are and they feel comfortable to apply. The success of the initiative will very much happen at the debtor level.
Stephen Donnelly (Wicklow, Independent)
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I am going to push Mr. O'Connor on this because I do not know whether he really cannot think of any changes that might be made or whether he is reluctant to do so. Certainly, every member of this committee could name two or three things straight off that they would like to see done. Can Mr. O'Connor genuinely not think of anything that would double, treble or quadruple the numbers, or does he feel he would be straying into policy areas by putting forward suggestions in this regard?
Mr. Lorcan O'Connor:
It is not the role of the ISI to move into policy areas. On the question of whether there is a policy initiative or any other initiative that would see a threefold or fourfold increase in the numbers by the end of the year, I have difficulty in seeing what it might be. I am, however, open to any suggestions the committee might have.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Donnelly is out of time
Stephen Donnelly (Wicklow, Independent)
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The Acting Chairman took up some time, so I would appreciate if the Chairman would allow me some leeway.
Ciarán Lynch (Cork South Central, Labour)
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I will allow the Deputy a little more time.
Stephen Donnelly (Wicklow, Independent)
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Thank you, Chairman. Will Mr. Lehane respond to the question I put to him and Mr. O'Connor?
Mr. Christopher Lehane:
To answer from the bankruptcy perspective, what the Deputy describes as "dross" deals being offered by the banks should, in fact, be bankruptcy cases. The problem is that there still is so much stigma associated with bankruptcy, even within this committee. The reality is that bankruptcy sometimes is a perfect solution. I see people who have taken out equity releases, for instance, and whose mortgages are completely unsustainable. We have spoken about people's distress and pain. These people are trying to achieve the impossible because they have a view that going bankrupt will make them a failure. In the United States, on the other hand, it is a badge of honour for a person to come through bankruptcy and go on to achieve success. We have all heard about the people who visited Ireland recently and bought castles - people who went on to be spectacularly successful after going into bankruptcy.
We must work to remove the stigma associated with bankruptcy, starting with this committee. In Northern Ireland, there have been 50,000 bankruptcies in recent years. Individual voluntary arrangements and so on have been in place in that jurisdiction for years and are working perfectly, but there have still been 50,000 bankruptcies. There was reference today to how terrible a thing it is for anybody to lose their family home. It is not always a terrible thing. There are people who have got out from under an incredible burden that was impossible to deal with. I made the point in a talk I gave recently - my comments were reported in the newspapers - that the day the bankruptcy button is pushed, the problems of the individual in question become my problem. I deal with all of their issues and that is stressful. I am dealing with every commercial decision on the person's behalf; he or she is out of the picture very quickly once the process begins. I have to run and jump to deal with all the issues and impress the reality of the situation on creditors. For the debtor, release has come and he or she can begin to move on. Moreover, in some cases, it is all the other commitments that are gone and the family home may now actually be affordable. The family home is not always last.
We have to stop thinking of bankruptcy as always something that should not be done. It is the fourth option, it is a valid option and people should avail of it more. All the figures the Deputy mentioned were on Mr. O'Connor's side of the house. We have 82 bankruptcies at the moment. If we were anything on a par with the figures for Northern Ireland, we would be greatly adding to the solution. We are not doing so because there is still the stigma to which I referred.
Stephen Donnelly (Wicklow, Independent)
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Mr. Lehane is the expert on this issue in this country. There are things that could be done to increase the credibility of the threat, including, for example, reducing the discharge period from three years to two or adjusting the maximum duration of the income payment order. What one, two or three policy changes would Mr. Lehane make - these changes could potentially be time bound to two or three years - to address two issues, namely, making the process less punitive to go through and-or making it a more credible threat so that people will engage with Mr. O'Connor's organisation or approach their creditors voluntarily?
Mr. Christopher Lehane:
Mr. O'Connor and I are both members of the International Association of Insolvency Regulators. The three-year discharge period compares very well with practice internationally. The question is whether reducing the period to one year, for example, would necessarily encourage people to avail more quickly of the bankruptcy regime. The answer is that it is a possibility that people might regard a reduced period as more favourable. Personally, however, I would stick with three years. I deal fairly with people when it comes to income payment orders. While Deputy Donnelly might be of the view that it should be eight years, I am saying that it could be two or three, depending on people's repayment capacity.
As I said, it is important that people have the right information. The road show we will be doing with Mr. O'Connor will afford us an opportunity to get out there and explain to people what exactly bankruptcy is. A major difficulty is that it has in the past been treated almost like a criminal offence. The more people avail of it, the more people will see how it can function as a release from an unsustainable debt burden. In so far as Deputy Donnelly is asking me for solutions, I am saying that there is a major information campaign to be staged. Bankruptcy should be a valid solution in every jurisdiction.
Stephen Donnelly (Wicklow, Independent)
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My specific question was what Mr. Lehane might change in the current regime. There are levers that can be pulled all over the legislation. If we want to make the process more accessible and more of a credible threat, which of those levers would Mr. Lehane pull first?
Mr. Christopher Lehane:
If we want an instant solution that will lead to more bankruptcies, we could take the discharge period down to one year. However, looking at international practice, I would not personally recommend that. I do not have any other legal solution because I know that we are operating the process in a fair way and applying the reasonable living expenses guidelines in a very fair manner. We are trying to make it as easy as possible for people. I do not have a legal solution, but there is a lot that could be done by way of tampering with the bankruptcy legislation, including taking out the official assignee and bringing in more private trustees, as is the practice in England. There is a concern, however, that this could possibly make it more expensive for individuals. My personal view is that operating the bankruptcy process in an absolutely fair and transparent manner and destigmatising bankruptcy itself are the best things we can possibly do.
Ciarán Lynch (Cork South Central, Labour)
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Before calling the next speaker, I have a couple of questions for Mr. O'Connor. Of the personal insolvency arrangements that have been put in place, can he indicate the number of vetoes that have been instigated against them? Second, to what extent are the unsecured partners in those arrangements, such as credit unions, credit card companies and so on, co-operating? Are they resistant to the process or more compliant than the banks?
Mr. Lorcan O'Connor:
As I said in my opening statement, it is not for the ISI to question the rationale behind a particular vote in a particular case. It is fair to say that all the main creditor groupings have engaged in the process. Indeed, the vast majority of cases that have gone to a creditors' vote have been approved.
However, some have not been approved and others have been appealed. The latter are very much in the minority. We do not have the full analysis at this point. As already stated and based on the analysis that would feed in to our assessment as to whether the legislation is working later this year, that is the kind of scenario at which we would be looking. At this point, the vast majority of votes have been in the "Yes" category and the engagement from creditors on all sides has been positive.
12:20 pm
Ciarán Lynch (Cork South Central, Labour)
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Have vetoes been exercised in respect of any PIA arrangements?
Ciarán Lynch (Cork South Central, Labour)
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How many?
Ciarán Lynch (Cork South Central, Labour)
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Would Mr. O'Connor be in a position to provide that number?
Ciarán Lynch (Cork South Central, Labour)
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When the chief executive officers of the banks came before us, there was a suggestion that unsecured loans such as those offered by credit union loans and others are continuing to be repaid while people are not servicing their mortgage debts at any level whatsoever. Have our guests encountered this when drawing up PIAs?
Mr. Lorcan O'Connor:
Whatever about what might have been the historical practice, once a PIP comes into play all, in effect all situations are regularised. It would not, therefore, necessarily be something that would come to our direct attention. However, in terms of the unsecured creditors' assessment of an arrangement, the reality is that in bankruptcy the dividend to unsecured debt is close to 0% in the vast majority of cases. Again, there is an incentive to engage because there is a dividend of some kind to be obtained through a DSA or a PIA.
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. O'Connor and I call Deputy Kevin Humphreys, who has ten minutes.
Kevin Humphreys (Dublin South East, Labour)
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I do not intend to use the full amount of time allotted to me because our guests have explained a great deal. I look forward to the roadshow being rolled out because I agree with Mr. Lehane that bankruptcy is a viable option. It is also a powerful tool in the context of dealing with creditors. I apologise that I was not present for some of the presentation.
I wish to comment on some of what Mr. O'Connor said during his initial contribution. I questioned the CEO of Bank of Ireland, Mr. Richie Boucher, at length in respect of a particular matter and he articulated a policy of no debt write-down. Mr. O'Connor went to great lengths to explain that he wants to be fair to creditors, debtors and all others involved in the process. I put it to him that the policy articulated by the CEO of Bank of Ireland is not fair to either the bank, which is the creditor, or to the debtor. The policy in question actually forces the latter down into a position of bankruptcy. I am of the view that Bank of Ireland must change its policy statement. Is this also a fair reflection of the position of ISI?
Kevin Humphreys (Dublin South East, Labour)
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I was referring to a policy.
Mr. Lorcan O'Connor:
At a higher level, I do not think that a creditor should rule out any solution within the framework of a PIA. The legislation contains a non-exhaustive list of solutions, including debt being written off on a secured debt. I accept that it is the last stage in a waterfall of solutions that should be applied. However, I would not rule it out because in doing so it goes against the intention of the Oireachtas. More importantly, from a creditor's selfish perspective, it actually is not in his or her financial interests. In many cases relating to bankruptcy, the return is less.
Kevin Humphreys (Dublin South East, Labour)
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Will Mr. O'Connor outline what he thinks is driving the bank's policy in this regard? I have no wish to be unfair to Bank of Ireland and I must state that a similar position was outlined by several of the financial institutions which came before us. Are policy statements of the kind to which I refer designed to get across a message to the effect that the banks are very tough on people who have run up debts and that they deal with them extremely harshly?
Mr. Lorcan O'Connor:
It is not my role to anticipate or identify what might be the underlying reasons for those statements. It is important to note that while, it is fair to say, every creditor would be reluctant to write off secured debt, in many cases others are saying, "I cannot get blood from a stone and there will be situations where some element of debt-write off is required". Equally, there are others who are of the opinion that it is unlikely they will need to write off secured debt because their forbearance measures - short of write off - are sufficiently generous to tackle the problem. There are a number of nuances at play there. I return to my opening response to the Deputy. I do not think it is welcome or best that people would completely rule out options that are already identified within the Act.
Kevin Humphreys (Dublin South East, Labour)
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In the context of dealing with the overall matter, have our guests come across mortgage-to-rent solutions in their dealings? There have been a number of submissions to the effect that there are roadblocks in place in respect of mortgage-to-rent arrangements. Is Mr. O'Connor in a position to indicate whether the ISI has had experience in this regard? Does he have any recommendations to make in the context of how we might improve this service?
Mr. Lorcan O'Connor:
The ISI would not really have a direct role in dealing with the mortgage-to-rent solution, other than obviously being aware that it offers potential to those who find themselves in a given set of circumstances. It would not play a large role with regard to our side of the equation.
Kevin Humphreys (Dublin South East, Labour)
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I accept that the roadshow is going to swing into gear but in what other ways might we communicate information to people? The changes brought about by the new bankruptcy legislation have empowered people in debt with regard to their dealings with their banks. The changes to which I refer constitute a mechanism that is designed to force the parties involved to negotiate realistically. From my point of view, the CEOs of the banks who appeared before this committee have still not recognised reality in this regard. Would it be worthwhile for the ISI to meet the CEOs of the banks again and state that it is carrying out a publicity roadshow and is going to inform the public - in a much stronger way - that this is a real option and that it is perhaps time they returned to the table with a sense of reality? Has the ISI already engaged at this level with the banks? I accept it is probably not the ISI's role but-----
Mr. Christopher Lehane:
We have, yes. We have met all the CEOs and we discussed bankruptcy, and the implications of it, in detail. There is a reality and that is what I have said. When unsecured debt is written off and when the banks say that they are not scared of bankruptcy, to an extent they should not be because while they may be equally unsecured creditors, their big worry is the secured debt. The Armageddon in a lot of bankruptcy is not for the secured lender, it is for the credit union - the trade creditor - and other types of unsecured debt. When people sit down with the banks and have a total conversation, I am not saying that I am adding to the stick that is beating them over the head to be worried. In bankruptcy situations, they actually get their mortgages paid.
Kevin Humphreys (Dublin South East, Labour)
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Mr. O'Connor referred earlier to instances where this does not happen.
Mr. Lorcan O'Connor:
To be clear on that and in the context of secured debt in bankruptcy, in the event that bankrupt persons wish to stay in the home, in the majority of cases they will have greater capacity to service their mortgages than would have been the case before going into bankruptcy. This is because they no longer have to pay credit cards, credit unions or anything else for that matter. However, it may or may not be sufficient for the secured lender to be happy that they remain in the home in that situation. What certain creditors stated before this committee is that they will not allow somebody to retain an asset in the context where a debt write-down is required. In the event that somebody were to go bankrupt and hand back the keys, that is where bankruptcy means bad news for a secured creditor vis-à-visa PIA.
Kevin Humphreys (Dublin South East, Labour)
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Where people want to remain in their homes and where there are viable solutions on offer, in some cases the attitude and the policies of the banks - which is not to write down anything on the secured debt - is to force people out of their homes. This is despite the fact that there would be a greater return if they facilitated a certain level of write-down.
Mr. Lorcan O'Connor:
In that situation, we are doing our best to ensure that the learning curve is steep in order that banks will realise this and will, therefore, engage. Hopefully, over time they will realise that. As the Deputy indicated, it is not in their interests for such a scenario to evolve.
Kevin Humphreys (Dublin South East, Labour)
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I had a problem with the representatives of Bank of Ireland when they came before us because it appears that their institution has closed down to some degree in respect of this matter, even though it is in its interests to engage and in certain - but not all - circumstances to write down some of the secured borrowings involved.
However, it is refusing point blank to do this and there continues to be a resistance in the policy statement to doing it. Mr. O'Connor has also said in his statement that his organisation gives the process time to settle down to see if that is the reality. What length of time does he believe we must give it because I would not like it to be very lengthy? Has he considered the recommendations made on legislative changes that would need to be made to bring the banks to that sense of reality?
12:30 pm
Mr. Lorcan O'Connor:
We have not come to a view at this point. It goes back to the point that the volume of cases is not sufficiently material at this time to make that meaningful analysis and come to a view, but I am of the view that before the end of the year we will have reached the point where we will be able to carry out that analysis and come to committee members and the Minister with recommendations on changes identified as being necessary.
Ciarán Lynch (Cork South Central, Labour)
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I will take a few brief supplementary questions.
Michael McGrath (Cork South Central, Fianna Fail)
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My question is for Mr. O'Connor. From the point of view of a debtor, the personal insolvency practitioners, PIPs, are licensed by the Insolvency Service of Ireland. Debt management firms are licensed and regulated by the Central Bank; therefore, if borrowers in distress go to a PIP for advice, it is inevitable that he or she will try to direct them towards an insolvency arrangement. If they go to a debt management firm, they cannot bring them down the road towards an insolvency arrangement; therefore, they will almost certainly try to encourage them to enter an informal arrangement with the bank. Is there an issue in that regard from a consumer point of view? To whom do they go for advice in terms of PIPs and debt management firms as they are regulated differently?
Mr. Lorcan O'Connor:
Two things happened last year on the regulatory side. First, the Insolvency Service of Ireland began authorising personal insolvency practitioners and, second, the Central Bank introduced debt management regulations. I welcome these two developments. Debt advice is extremely important and it is important that the quality of that advice be appropriate because there can be very significant consequences for those acting on it. We want to ensure there is no unnecessary overlap or duplication. A PIP is statutorily obliged to set out all of the options for his or her client, including alternatives to the Personal Insolvency Act. In that sense, they will lay out all of the options. The difficulty that has arisen which I suggest is an unintended consequence is the exemptions PIPs have from the debt management licensing regulatory framework to the extent that they are performing their duties under the Act. However, situations may arise where an informal deal is appropriate and in that instance we are of the view that if it is possible, the service should be covered also within the remit of the ISI or that at least there should not necessarily be duplication that could result in difficulties for the practitioner as well as the debtor. We would not like to see a debtor going to a practitioner and spending a number of hours setting out his or her financial position - it is probably an emotional process - at the end of which the practitioner will state he or she does know how to help him or her but it involves X and that the debtor needs to go next door to talk to somebody who can supply the service when he or she will have to go through the emotional process again. We are working closely with the Department of Finance, the Department of Justice and Equality and the Central Bank to try to square the circle to ensure there will not be an undue overlap.
Michael McGrath (Cork South Central, Fianna Fail)
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It may involve the debt management firms coming within the ISI's remit instead of that of the Central Bank.
Mr. Lorcan O'Connor:
No. We would not suggest that that was appropriate. The Central Bank regulations are very welcome and needed. We will be suggesting this because we have a regulatory regime and the definition of "exemption" should ensure that, in effect, a PIP can deal with a debtor from beginning to end.
Pearse Doherty (Donegal South West, Sinn Fein)
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I will ask Mr. Lehane a number of questions. If someone is bankrupt and his or her mortgage lender instigates repossession proceedings against him or her, what does Mr. Lehane's office do? Does it halt the proceedings for a repossession order? If a bankrupt's mortgage repayments were in excess of what it would cost to rent a similar sized house in the locality, would Mr. Lehane approve the mortgage repayment figure or would he ask him or her to vacate the house and seek rented accommodation? Does he have a standard list of values for items such as laptops, computers and other personal items above the value of €6,000?
Mr. O'Connor spoke a good deal about the protocol. Some who work on the front line with those in mortgage distress do not believe the protocol is all that it is made up to be. I am not sure about the engagement he has had with some of the organisations which have come before the committee. He has mentioned that he engages with PIPs and the banks. I want to ask him some questions in that regard. If a debtor misses a payment, is he or she deemed to have fallen into arrears and what happens at that point? How does Mr. O'Connor's organisation's service deal with that issue?
I return to the issue of inheritance. I asked earlier if there was clarity on what would happen when somebody involved in one of these processes inherited money or was given a gift. Is it the case that 100% above a certain value is taken and, if so, how does this combine with the legislation which refers to a figure of 50%?
I understand the protocols are not compulsory, although Mr. O'Connor mentioned the protocol to which the banks have signed up, but if proposals are made outside of them, can the banks veto them on that basis?
Mr. Christopher Lehane:
The first question the Deputy asked was related to proceedings. If he looks at page 18 of the document circulated, he will see that it refers to section 136 of the Bankruptcy Act which effectively states the rights of secured creditors are not affected in bankruptcy, while the first Schedule sets out the various options. To answer the question directly, when a person becomes a bankrupt, a set of mortgage possession proceedings which are wrongly called repossession proceedings - the banks have never been in possession of the house - are taken. My position is that on the basis that the banks are taking repossession proceedings, people must be in a situation where they have been unable to repay their mortgage. In moving into bankruptcy they are fully entitled to go back to the bank in that regard. Sometimes I come across possession proceedings that are historical. In terms of people who have gone bankrupt, in repossession proceedings there is a period in which the wife can go back to the bank and say her capacity has improved and the possession proceedings are withdrawn.
Would I prevent repossession proceedings going ahead? The answer is no. Under section 136 of the Bankruptcy Act, I am the official signee. I move and have the same rights as the debtor. I do not have any power to stop them proceeding to take the house. All I can do is facilitate the man - the classic situation - to make the payments and if they are not grossly above what would be a reasonable amount for the house - this answers the Deputy's second question - I will not stand in the bank's way. The repossession proceedings go ahead because I am only an assignee of the individual's rights.
On the second issue regarding the mortgage and the rent, we consider the household requirements of, say, a man with four children. He needs a four-bedroom house. If it is in any way reasonable and within close proximity - we do not have a rigid figure - we will not force a family out of a house. We will allow this as a mortgage payment and allow them stay in the house. We do not get down to pettiness of valuing the video recorder but, unfortunately, it is an issue. The bankruptcy inspector views the house and considers items above the value of €6,000.
That €6,000 is the man's share of the house contents. Equally, the wife will have €6,000. That amounts to €12,000 as the value of contents. There is a lot of flexibility. It is not reinstatement value; it is second-hand value. We do not find ourselves taking out, as, unfortunately, did happen years ago, the video player, and sometimes even bikes and other such items. Nothing is that petty.
12:40 pm
Pearse Doherty (Donegal South West, Sinn Fein)
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I am glad for that clarification. I assumed that was the answer - that a bank seeking repossession or, as Mr. Lehane would call it, possession, cannot be halted by his office.
Pearse Doherty (Donegal South West, Sinn Fein)
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That is clear. It is important that the public know that as well, because other impressions have been given.
On the rent comparative to the mortgage repayments that would be made, we all will be aware of borrowers who have high mortgage repayments and need to pay them before they retire because the way the bank looks at it is that it has to be paid on or before retirement or it will repossess. Mr. Lehane stated that if the time is marginally beyond, he will not ask those living in the house to leave and rent property. Can he give any clear indication? Are we looking at maybe 10% or 15%? What is marginal? We are not holding Mr. Lehane to this, but I ask that he give us an indication of what is acceptable and what is not.
Mr. Christopher Lehane:
To be honest, when I go into the practical realities of how it arises in a house, the Deputy would be surprised. On the issue of reasonable living expenses, we looked at daft.ie. We look at rental properties, such as four-bedroom houses, in that area and we consider what is a reasonable amount. We assess an amount. If the amount is grossly above - I would say 40% or 30% more - we can say that we fix an amount and we find that the amounts are otherwise paid, because the spouse comes in. However, it is wholly within the reasonable living expenses guidelines and there is no imposition we make on the family that means they cannot have the full reasonable living expenses.
Pearse Doherty (Donegal South West, Sinn Fein)
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It is above and beyond. I thank Mr. Lehane.
Mr. Lorcan O'Connor:
Deputy Pearse Doherty raised three main questions with me. The first was the situation that applies when somebody misses a payment within an arrangement and the arrears. The legislation provides that where there are arrears of three months the creditor has the right to go to court and seek for that arrangement to be terminated, and if the arrears extend to six months, the court automatically terminates the arrangement. Having said all of that, as we develop a protocol we are trying to put in place flexibility around that legislative consequence. For example, the protocol is looking at whether we can put in place payment breaks so that if somebody's car or washing machine breaks down, he or she is given a payment holiday to solve that rather than have this arrears consequence kick in.
The Deputy's second point related to inheritance and windfall. As I stated, there is the variation mechanism, which can go up or down. If somebody is better or worse off than they started out, there is a mechanism whereby the arrangement is altered to reflect the new reality. If, in bankruptcy in the UK, one comes into an inheritance, it goes to the creditors. Here, if one comes into a material inheritance or windfall, the variation will kick in and it will be down to the commercial terms of that arrangement as to what happens to those moneys.
In terms of the compulsory nature of the protocol, in the same way that the arrangements are voluntary-----
Pearse Doherty (Donegal South West, Sinn Fein)
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No guidelines are given to personal insolvency practitioners as to what happens with inheritance above a certain level.
Pearse Doherty (Donegal South West, Sinn Fein)
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Is it the case that the legislation does not allow for a 100% sum to be taken? I think the legislation mentions 50%.
Mr. Lorcan O'Connor:
The only reference to inheritance or windfall in the legislation is the fact that a variation may kick in. It states that it would not be unreasonable for a debtor to refuse a variation that sees greater than 50% of the inheritance or windfall going to the creditors. However, that is ultimately for the commercial terms of an arrangement to set out.
On the last point in relation to the compulsory nature of the protocol, ultimately, the protocol is a voluntary arrangement but what we are trying to deliver is something akin to what one has in the United Kingdom. In effect, in the United Kingdom, where the IVA protocol is working well, there is a letter from the British Bankers' Association - we will be looking for the same from the Irish Bankers' Federation - that basically states that for protocol-compliant arrangements it will vote in their favour, subject to the commercial terms. In other words, if one does everything else per the protocol, they will not say "No" and will merely focus on the commercial reality. That is what we are looking for here as well. In other words, it boils down to what the commercial numbers set out.
Pearse Doherty (Donegal South West, Sinn Fein)
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For the purposes of clarification, Mr. O'Connor mentioned that where somebody fell into arrears there could be payment breaks. I understand the ISI will not allow consecutive payment breaks. If somebody falls into arrears, Mr. O'Connor mentioned that a creditor under the legislation could appeal to the court to have the notice terminated. If the breach has not been remedied by the debtor, is it the case that the PIP will have to terminate the notice as well?
Mr. Lorcan O'Connor:
The PIP has a number of other options available as well. For example, the PIP can put in place a variation. They can change the arrangement to reflect the fact that the person has encountered difficulties in meeting his or her obligations or they can put in place the payment break that is envisaged through the protocol, etc. There are a number of safety nets to try to ensure that an otherwise healthy arrangement that has seen a bump in the road continues to the final point of a solution rather than falling down because of some small unforeseen matter.
Pearse Doherty (Donegal South West, Sinn Fein)
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Lastly, I note the protocols are ready to go. It seems that everything is agreed on them.
Pearse Doherty (Donegal South West, Sinn Fein)
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What engagement has Mr. O'Connor had with those agencies or organisations that have worked on the front line? We have had a number of them before this committee. The Chairman invited in the likes of FLAC and New Beginning. The IMHO has been here.
Mr. Lorcan O'Connor:
We set out the membership of the steering group on our website. It is primarily creditors and practitioners, because they are the ones affected by the protocol, but we have also had on that committee a representative of MABS and another debtor representative group - in this case, a solicitor from New Beginnings. There are all constituents represented in that steering group, but one should bear in mind that it is ultimately a creditor and practitioner protocol that is agreed.
Pearse Doherty (Donegal South West, Sinn Fein)
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I understand that. I am sorry to push this, but Mr. O'Connor made a lot of the fact that ISI has been able to introduce these protocols in a shorter time than has been done in other countries. In fairness, there have been a lot of successes, and some disappointments, with his agency. However, while this is about PIPs, the banks and the credit unions, there is a view that some PIPs are there to make money. It is a business for them. Some of them are quite large institutions. Some of them have their fingerprints on the economic collapse of this country. However, those affected by these protocols are debtors, those whom we represent. The question I have, which is not only about the steering committee, is this: what consultation has the ISI had with those who represent debtors on the front line? I refer to the not-for-profit organisations such as New Beginning and the IMHO which have emerged because they want to provide advice, support and legal assistance.
Pearse Doherty (Donegal South West, Sinn Fein)
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Around these protocols?
Mr. Lorcan O'Connor:
Not necessarily around the protocols but generally, including the IMHO, FLAC, New Beginning, MABS, the Citizens' Information Bureau and Phoenix Project Ireland. In relation to the protocol, we have the membership of the steering group, which represents all of the main interest groups, but I would go back to the point that, ultimately, it is a PIP and creditor protocol.
Returning to the Deputy's former point that there are large and small PIPs involved, the protocol really is there to help the smaller PIP rather than the larger one.
Pearse Doherty (Donegal South West, Sinn Fein)
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That is fine. Lastly, I ask that Mr. O'Connor, before he signs off on these protocols, engage with those organisations to ask for their views and support.
Ciarán Lynch (Cork South Central, Labour)
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I will allow Deputy Humphreys make a brief contribution.
Kevin Humphreys (Dublin South East, Labour)
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I will not delay the meeting. I wish Deputy Ciarán Lynch the best in the difficult and - if the social media are correct - probably challenging position as chairman of the banking inquiry. It is long overdue. The right man has been picked to chair that.
12:50 pm
Kieran O'Donnell (Limerick City, Fine Gael)
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I concur.
Mr. Lehane referred to bankruptcy becoming a solution. I regard it as a measure of last resort. It has many implications. Just because it represents the pattern in other countries does not necessarily mean it should be the pattern here. My logic is that there is clearly a problem with the way the personal insolvency arrangement is working at present, certainly in respect of two of the institutions whose mortgage books hold a substantial proportion of all mortgages. I accept Mr. O'Connor's point but when it comes to bankruptcy, the family home is involved. Admittedly, there are cases of voluntary surrender; we have come across them. The surrender represents a huge burden lifted from the debtor's shoulders. I would like to see the new pre-bankruptcy process we have established examined by the Insolvency Service of Ireland to determine whether there are legislative measures that could be implemented, sooner rather than later, to make it work more effectively. The bankruptcy legislation has reduced the number of years.
Ciarán Lynch (Cork South Central, Labour)
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I propose to suspend for a few moments to attend to private business
Kieran O'Donnell (Limerick City, Fine Gael)
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I believed we would be doing that this evening.
Ciarán Lynch (Cork South Central, Labour)
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No, we are doing it now.
I thank the witnesses for appearing today. There were a number of matters on which they said they would revert to us and offer further clarification. We would certainly be very interested in hearing their views as the process rolls on. As I said in my opening address, we had in the past deferred interest or interest-only payments, representing the prolonging of a problem. We moved into the Keane report area and then into the insolvency realm, bearing in mind the change to the bankruptcy laws. As the process develops, other solutions and models may be developed. Between the occasions on which the Insolvency Service of Ireland and this committee meet, I ask Mr. O'Connor to keep us informed about what is actually happening with the service.