Oireachtas Joint and Select Committees
Wednesday, 3 December 2014
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Business of Joint Committee
General Scheme of Sale of Loan Books to Unregulated Third Parties Bill 2014: Discussion
I remind members, witnesses and those present in the Gallery that all mobile telephones must be switched off. I welcome, from the Department of Finance, Mr. John Hogan, assistant secretary in the banking division, Mr. Declan Reid, specialist in the shareholding management unit, Mr. Antoine Mac Donncha, legal adviser, and Mr. Brian Fee, assistant principal in the banking division. The format of the meeting is that Mr. Hogan will make an opening statement and a question and answer session will follow. I hope, following the input of the witnesses today, we will have covered all the key topics.
I draw witnesses' attention to the fact that, 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 the committee to cease giving evidence on a particular matter and they continue to so do, 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 nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I invite Mr. Hogan to make his opening statement.
Mr. John Hogan:
We welcome the opportunity to brief the joint committee on the sale of loan books to unregulated third parties Bill, which is priority legislation for the Government. The Bill will address concerns surrounding the continued applicability of the Central Bank's codes and access for borrowers to the Financial Services Ombudsman after loan books are sold to unregulated entities. The proposed legislation provides that borrowers will have the same protections under the Central Bank codes, such as the code of conduct on mortgage arrears, CCMA, as they had before their loan was sold.
Where the purchaser of a loan book is not a regulated entity in Ireland, the purchaser may voluntarily apply the Central Bank codes when managing loan books. Voluntary compliance is not enforceable and the Government committed in March 2014 to ensuring the same protections would be made available for all consumers whose loans have been sold. The mission of the Government in bringing forward this legislation is straightforward, namely, to ensure that borrowers whose loans are sold by a regulated entity to a currently unregulated entity maintain the same regulatory protections as they had prior to the sale, including under various Central Bank codes. To achieve this objective it is apparent that certain changes to the existing legislative and regulatory regime are required.
Unregulated financial institutions are not bound by any of the Central Bank codes. While customers of unregulated financial institutions have access to the courts, they do not have access to the Financial Services Ombudsman. It is generally accepted that consumers need protection when they are taking out credit, during the course of holding credit and when they are repaying credit. It is not equitable that some of these protections can be avoided due to the regulatory position of the entity which owns the credit. For this reason, consumers should maintain the protections they had before their loan was sold. This is what the proposed legislation seeks to achieve.
In July and August last, the Department of Finance ran a public consultation seeking views on this proposed legislation. Nineteen submissions were received from a range of respondents, including the financial services industry, consumer groups, public representatives, individuals and other stakeholders. We subsequently met some stakeholders to clarify submissions and the technicalities of how the credit servicing industry operates. We also discussed the issue with the authorities in the United Kingdom as they had faced similar policy challenges in recent times. Officials in the Department of Finance have carefully considered the submissions and have been working intensively with the Central Bank and Office of the Attorney General to progress this legislation. The Minster has stated in replies to parliamentary questions that the Bill is expected to be published by the end of this year.
Before explaining the heads of the Bill, I will briefly explain that our approach has altered somewhat from that which was proposed in the public consultation in July 2014. At that time, we proposed to regulate the ownership of credit to continue the protections enjoyed by consumers prior to the loan book sale. As a result, owners of loan books would have been required to become authorised as a retail credit firm where they engaged in loan book servicing activities. The public consultation process highlighted an issue with a passive special purpose vehicle, SPV, which we had not intended to intend regulate, outsourcing servicing to a firm that would not be regulated. It became clear from the consultation process that credit servicing, as the customer-facing activity, was the appropriate activity to regulate and this legislation achieves this.
Once we had taken the step to regulate credit servicing rather than ownership, we examined whether it was still appropriate to regulate ownership. While the owner may make decisions on a credit agreement, it is the credit servicer who will communicate these decisions to the borrower. After considerable and detailed examination, it is now accepted that the best way of ensuring the borrower is protected and retains access to the Financial Services Ombudsman is to regulate credit servicing and ensure borrowers can complain to the Financial Services Ombudsman about any actions affecting the borrower. Our intention is to allow access to the Financial Services Ombudsman for borrowers who are unhappy about any actions which affect them. Our intention, subject to the advice of the Office of the Attorney General, is that, if the regulated credit servicer claims it is not responsible and passes responsibility to the owner, the legislation will allow the Financial Services Ombudsman to make the owner a party to the complaint, even if the owner is not regulated.
On the provisions of the legislation, the Bill is being renamed the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2014. This change follows consultation with the Office of Parliamentary Counsel and reflects the approach now being adopted to protect consumers.
The proposed legislation will amend the Central Bank Act 1942, Central Bank Act 1997 and Consumer Credit Act 1995 and provide for related matters. It is proposed to amend section 28 of the Central Bank Act 1997 by inserting definitions of the terms "credit agreement", "credit servicing", "credit servicing firm" and "relevant borrowers". The term "credit servicing" is being tightly defined in order that any firm which communicates with borrowers will require authorisation. We will also require owners which do not outsource credit servicing to anyone to be regulated, in other words, some regulated entity will be responsible for all credit agreements.
The effect of the amendments to section 28 of the Central Bank Act 1997 is to regulate the activity of credit servicing and the credit servicing firms engaged in such activity in order that the borrowers retain the protections they have before the loan book was sold. All consumer and small and medium enterprise, SME, loans are covered by these amendments and retain the protections they currently have in the following ways. First, on the code of conduct on mortgage arrears, customers of regulated financial institutions must be dealt with in accordance with the mortgage arrears resolution process, which sets out the steps to be followed on communication, gathering financial information, assessing the circumstances of the borrowers and proposing a resolution. Complaints and appeals procedures are also provided.
Second, on the consumer protection code, customers of regulated financial institutions also have the protection of the Central Bank's consumer protection code regarding limits on communications, personal visits and other contacts, complaint resolution processes, error handling, compliance of outsourced activity with the code and post-sale information provisions, including warnings on switching from a tracker mortgage to a variable interest rate mortgage.
Third, on the code of conduct for business lending to small and medium enterprises, SME customers of regulated financial institutions have the protection of the business lending code regarding arrears handling, complaint resolution, etc.
Breaches of the Central Bank codes can lead to sanctions on the regulated entity. No sanctions can be imposed on an unregulated entity. As credit servicing firms will become regulated financial services providers under the new legislative regime, all appropriate supervisory powers of the Central Bank will be applicable to them as regulated financial service providers including the administrative sanctions procedures regime. Technically, all Central Bank codes will apply to credit servicing firms when they become regulated entities but certain aspects will not be applicable. For example, there is no need for the requirements in relation to issuing credit where credit servicing firms act only as credit servicing firms and do not issue credit.
Customers of regulated financial institutions have access to the Financial Services Ombudsman, FSO, whose role is to investigate, mediate and adjudicate complaints about the conduct of regulated financial service providers. Therefore, we also propose to amend Part VIIB of the Central Bank Act 1942 in relation to the powers of the Financial Services Ombudsman. The aim of this amendment is to enable borrowers to make a complaint against an unregulated owner of a loan book where that owner makes a decision about the borrower’s loan that the borrower disagrees with and where the regulated credit servicer is not involved in the decision of the owner.
Finally, with regard to credit union credit, we must ensure that where credit union loan books are sold, those borrowers are also afforded the same protections as other borrowers. This was raised by the Financial Services Ombudsman, FSO, in the consultation process. Credit union credit which is sold outside the credit union movement should be regulated so an amendment to the Consumer Credit Act 1995 is needed. Therefore, the relevant codes will apply to credit which is initially advanced by a credit union but is subsequently sold to an unregulated entity. I should say that we are not aware of circumstances where this has arisen but feel that it is prudent from a consumer protection perspective to provide for this.
The Consumer Protection (Regulation of Credit Servicing Firms) Bill 2014 ensures that borrowers retain all the protections of the Central Bank codes including the code of conduct on mortgage arrears, CCMA, and their right of access to the Financial Services Ombudsman.
My team and I are happy to take questions.
Thank you, Mr. Hogan. Before we begin, I propose that we adhere to the same rules that applied at our recent meeting. This is to ensure that everybody has the opportunity to ask questions. I propose that the lead speaker from each group will have ten minutes and that a committee member from each group will have five minutes. Anybody else who wishes to ask questions will have five minutes. I will advise members when there is one minute remaining of their allocated time to give them an opportunity to wrap up their contribution within the time limit. I will be happy, time permitting, to allow some speakers back in. I ask members to co-operate to ensure the smooth running of the meeting. Is that agreed? Agreed.
I thank Mr. Hogan for his comprehensive overview of the legislation. We are all aware of the concerns expressed by borrowers at the time that some of the institutions decided to divest themselves of their loan books. Clearly their concern was that the code of conduct would not be enforceable. Is Mr. Hogan satisfied that the proposed legislation will ensure that any loan transferred hereafter is covered?
Mr. Hogan is satisfied that will be the case. Has he any concerns about the retrospective nature of the legislation? A number of Oireachtas Members were anxious that the Government would have addressed the issue prior to the transfer of the assets and were always concerned about the hazard of attempting to do something retrospectively and the extent to which legislation might be relevant. Will Mr. Hogan discuss how that will be dealt with?
Mr. Antoine Mac Donncha:
We would have had significant concerns if what we were attempting to so was retrospectively to regulate activity that these firms had done in the past. If we were to attempt in the legislation to regulate and impose the regulatory requirements on actions that had been taken prior to now, that would have been a difficulty from a constitutional perspective. That is not what we are doing. We are saying that from this moment forward, any person who has acquired or who does acquire loan books will be bound by these rules and regulations and they must behave in a manner that is restricted by those regulations. The regulations will apply from this point onwards, but they will apply in respect of people who purchase loan books in the future or who have already purchased loan books and who own loan books.
What about the people caught in the middle, those who would not fall within the remit of this legislation, in other words, people who have fallen foul of the rules as set out by the organisations that had purchased these loans and have found that their terms and conditions were changed?
Mr. Antoine Mac Donncha:
The reality is that the courts have effectively policed that already up to now. From a commercial point of view, it would not have made a great deal of sense for a purchaser of the loan books to start acting in an egregious way towards customers. Had they done so and tried to enforce the loans against those customers, the courts have made it very clear that they would not look kindly on that sort of behaviour and they would not be disposed towards granting enforcement reliefs to people who had behaved in that way. Our understanding is that in general there has not been a very widespread pattern of people misbehaving in that way. In any case, however, once the regulations are in place, people will be entitled to all of the protections. Even if somebody had been attempting to do that in the past, the regulations will kick in at this stage and customers will be entitled to the benefit of them.
That leads on to my next two questions. Has the Department carried out an audit of the loans that have been transferred to establish what has happened? Are there any categories of loans that have experienced difficulties?
Mr. Antoine Mac Donncha:
I do not believe, although I am subject to correction, that we have conducted a formal audit, but we have been monitoring the situation actively. We have been liaising with the Central Bank in terms of what is going on in the market. We have been engaging with stakeholders to monitor what has been happening. Although there has been no formal audit of the industry, it is certainly something that we have been monitoring carefully.
In regard to loans where complications have arisen and the institution concerned has made a formal decision to change the terms and conditions and the process has begun, how will this legislation apply to those situations?
The purchaser of the loan has taken a decision either to change the terms and-or to do so in a way that is not in the best interests of the consumer and is acting outside what the guidelines permit. When the new legislation comes in to play, can it bring those loans back within the boundaries of the guidelines or will the institution concerned be able to argue that it had already begun the process and therefore the legislation would be attempting to address retrospectively a process that has already begun?
Mr. Antoine Mac Donncha:
If there was a process in train, I think the legislation would intervene in it at this stage. It is worth bearing in mind that in any case the provisions of the unfair terms and conditions in consumer contract legislation already would apply to contracts between consumers and these purchasers even before this legislation intervenes. The difference after the enactment of this legislation is that the Central Bank will now be in a position to intervene. Although the Central Bank has had some access to intervention already, the reality is that it is now in the position that it is monitoring this on the part of regulated firms rather than unregulated firms to a large extent. However, even before that, if an owner were to have unilaterally changed the terms and conditions of the contract in a manner that was unreasonable or without valid cause, legislation already in place would effectively make that term and condition unenforceable against the consumer.
Mr. Declan Reid:
It is worth noting the CCMA, code of conduct on mortgage arrears, covers a process to the extent that certain steps have been taken prior to this legislation being enacted. If a lender tries to take an action once the Bill has been enacted, often times that action will require precedent actions to have been taken. Accordingly, they will have to still comply with whatever precedent actions were required to take the action they are proposing under the CCMA.
I am curious as to why there were so few submissions to the public consultation process. A large number of people had their mortgages transferred through the sale of IBRC, Irish Bank Resolution Corporation, to two companies which were given colourful names at the time. There were serious and genuine concerns arising from the fact they would not be protected, yet there were only 19 submissions. This legislation is designed to protect these mortgage holders. Not trying to be smart but was this consultation process advertised well? Did the Department get any submissions from any of the mortgage holders who expressed their concerns about the sale of the IBRC loan book at the time? Did they make a collective submission?
What are the differences between what the legislation purports to do and what the actual existing regulations do to protect those whose loans are sold to regulated parties?
Mr. John Hogan:
There is a standard consultation process whereby we advertise through our website that we are entering a public consultation phase. On this particular issue, there was at the time quite a bit of media interest around it and it was covered by the main news stations. It was in the public domain and we were active about it.
Looking at the submissions, there is a fairly extensive cross-section of people who have been affected by the sale of their particular loan to another party. These included some stakeholder organisations which represent consumer interests, some companies involved in this particular area and the banking industry.
Mr. Brian Fee:
We did put out a press release at the time. Six weeks were given for the consultation process, so it was not too long a time that people would forget about the deadline and yet it was short enough that people had time to make a submission. We would have referred to it quite a bit in replies to parliamentary questions and so forth to get it out there. We had it on the Department’s website with a dedicated e-mail address. We made it as easy as we could for people to get submissions into us.
There were a fairly limited number of responses from individual consumers. That might have been down a little bit to embarrassment. People might not want to attend a public consultation process, talking about their personal circumstances. We did have responses from consumer representative organisations. We captured the flavour of peoples’ concerns.
Mr. Hogan stated in his opening statement, "Our intention is to allow access to the Financial Services Ombudsman for borrowers who are unhappy about any actions which affect them". In the case of loans that have already been transferred or will be transferred before the legislation is enacted, will they be covered too?
I am talking about a loan with an institution which might be covered but is transferred to an entity that is not covered soon. There could be a gap between the time it is transferred to when this legislation will be enacted. If there is a query concerning the loan in the interim, will it be covered by the legislation?
Earlier this year, Rabobank did not sell its loan book to a third party but left the market and demanded all moneys back from loans to SMEs. Anyone with a mixed loan book who had property, etc, was almost unbankable. It would have been easier to sell it to a third party. Would that situation be covered by this legislation?
I raised it because there were a lot worried people over that.
If an institution is in the process of transferring to a third party which is unregulated, is there any provision to ensure it informs its customers well in advance so they could take other actions. These deals do not happen overnight.
Mr. Brian Fee:
There are requirements about notifying people when loans are sold on. If a regulated entity is thinking about it, it would probably keep the Central Bank informed. I do not believe there would be an obligation to inform each individual customer of ongoing negotiations which may or may not result in a sale of a loan book.
Having said that, if an individual consumer is in a position to re-finance a loan, it might be easier to do so when the book is sold rather than before.
We have been waiting a long time for this Bill. Will the Department outline the reasons for the delay and the difficulties encountered?
I also ask them to outline the discussions they had with the Attorney General's office and the questions that arose in that context. When can we expect publication of the Bill?
Mr. John Hogan:
In my opening statement I referred to the fact that in March the Minister indicated that he would bring forward this legislation and at that time he indicated, and has done so consistently throughout the year, that his intention was to publish it by the end of the year. That is still our intention. What we needed to do from the outset was to assess the playing field and understand the implications of particular decisions we might take in terms of the legislative provisions we bring forward. It was important for us, given the public interest in the sale of these loan books, that we would have a period of consultation. We took the decision to do that through the course of July and August of this year. Following the feedback we got on the consultation, it was also incumbent on us to understand if the initial framing we had done in terms of how we thought the legislation might be prepared, drafted and enacted was consistent with ensuring that protections were there for the borrowers. The consultation period gave us some pause for thought and led us to the conclusion that we needed to alter the approach we wanted to take. As I said in my opening statement, we engaged with a number of stakeholders on that. We also engaged with some authorities in the UK.
We often look at other jurisdictions, although sometimes the background and circumstances are not necessarily equally aligned. We took soundings from UK authorities as to the approach adopted there. We have been engaged, it is fair to say, very intensively over the last number of months with the Central Bank and the Attorney General's office on the drafting and articulation of the policy approach that we want to achieve through the legislation which we expect to publish by the end of the year. On this particular Bill, we are very anxious to get it right. We see it as important and the Minister has identified it as such. He also indicated, in order to manage expectations as much as possible, that it would be published by the end of the year in order to give us sufficient time to engage in various consultations and work with the Attorney General's office and to prepare the legislation to achieve our objective which is, effectively, to put those people who were in a certain position vis-à-vistheir lenders in the same position after the loan books were sold
People out there have genuine concerns about this because the Government missed this issue and we are now trying to deal with it retrospectively. To simplify the issue, if I had a loan that was with a regulated financial institution that was sold on to a third party, after this legislation is passed, regardless of what that third party is doing at this point in time, that loan will be just the same as one with an institution like Bank of Ireland or AIB in terms of the protections I have. Is that correct?
Mr. John Hogan:
What we have done here is to put in place legislation which enables the Central Bank codes that are applicable, namely, the Code of Conduct on Mortgage Arrears, CCMA, the consumer protection code and the SME lending code, to apply, through the supervision and authorisation by the Central Bank of those credit servicing firms who are engaged with the front line activity with the individual borrowers.
Would there be any case in the context of the scenario I have outlined, where a loan was sold by a regulated entity to an unregulated one, that post the enactment of this Bill, the borrower would be at a disadvantage?
Has the Department identified, in its attempts at drafting the legislation to meet the intended outcome, any cases where people would be disadvantaged because the legislation did not apply at the time of the sale of the loan book?
Mr. Antoine Mac Donncha:
We are endeavouring to apply exactly the same level of regulatory protection in respect of the loans going forward. Whether someone is disadvantaged or not is a more subjective question in terms of the attitude someone takes. We are going to apply the same rule book to the credit servicing firms as would apply if a bank were servicing the loans.
We could tease that out further but will probably deal with it again on Committee Stage.
Issues have been raised relating to the Securitisation Special Purpose Vehicles, SSPVs, in this Bill. When I saw them in the heads of the Bill, I submitted a parliamentary question to the Department. In his response, the Minister drew my attention to a link to the ECBH website because I asked him for a list of all of the SSPVs as I wanted to know who would be exempt. The link to the website listed financial vehicle corporations which I presume are different; perhaps the witnesses will clarify if they are the same. There were 20,000 of them based in Dublin, many of them at the same address. There are thousands at 5 Harbourmaster Place in Dublin. Some of the names appearing on the list to which the Minister drew my attention include Mars Capital and Atlas and are well known. I ask the witnesses to speak in more detail on that portion of the Bill. I also ask them to deal with the issue raised by the Oireachtas Library and Information Service regarding SSPVs that would not be engaged in loan servicing activities through contracting that work out to other third parties. Would they be exempt as a result? I ask the witnesses to clarify that too.
Mr. Declan Reid:
In his opening remarks Mr. Horgan referred to the fact that have altered our approach from the original proposal. Rather than targeting this legislation at the SPVs or the SSPVs, we are targeting it at the servicer. That may well be the owner of the loan but in most cases it will be another company that interacts with the borrower. The list of exemptions which Deputy Doherty raised in his question is less relevant now because the exemptions do not really apply. It is the servicing entity which interacts with the customer which will now be regulated under this current proposal.
So, there will be no exemptions in the legislation because every loan will have a servicer or an owner and, therefore, every loan will be regulated and there is no way out of that. Is that correct?
Yes, okay. I understand that. Does the servicer face the same legal obligation as the owner? I refer to circumstances in which the servicer is contracting out in terms of engagement with the customer, but the owner still has legal ownership of the loan. Under the existing rules, are penalties imposed by the Financial Services Ombudsman and similar bodies on the servicer or on the owner? Who takes legal action in such cases? Does that stack up in terms of the contract between the owner and the servicer?
Mr. Antoine Mac Donncha:
That is something we are actively exploring right now. I can tell the Deputy where we are aiming at getting and where I think we are going to arrive. Our intention is that a complaint will be made against either the servicer or, in circumstances I will clarify, the owner. If a servicer seeks to dissociate himself or herself from a complaint - if he or she says that the owner, rather than him or her, was involved - the owner will be drawn into the complaint. In such circumstances, it will be possible for an award to be made against the owner rather than the servicer. We anticipate that for practical reasons, this is not likely to happen. In many cases, the owners will be special purpose vehicles that will not have any employees and will not really be in a position to engage in that sort of process. The meat of the interaction will always be with the servicer. If somebody tries to avoid responsibility by saying "it was not me, it was the owner", our intention is that the owner will be brought into a complaint before the Financial Services Ombudsman and an award can be made against him or her in such circumstances.
I have a final question on this matter. We are thinking about this Bill in the context of the sale of loans from regulated entities to unregulated entities. The actual shape of the Bill has changed quite significantly. I want to tease that last point out by using the example of a case in which AIB serviced its loan book out to Certus. I am speaking hypothetically. As things stand, if I have an issue with AIB - I do not even have a bank account with AIB - I can go to the Financial Services Ombudsman and take a case against AIB. Under this legislation, would I now be taking a case against Certus?
Yes. If AIB has outsourced my loan book to Certus - banks have entered into such contracts and are continuing to do so - Certus will be writing to me to tell me I have fallen into arrears, etc. If I believed it was not behaving appropriately and decided to go to the Financial Services Ombudsman on that basis, against which institution would the case be taken? At this time, it would be taken against AIB-----
Mr. Antoine Mac Donncha:
In that scenario, the consumer would not have to look under the hood to see which institution was involved in dealing with the matter. There would be no need to get into whether Certus or AIB was at fault. The consumer would make a complaint against AIB and it would be adjudicated against AIB. If Certus had done something that caused it to have some sort of liability against the consumer, AIB could sort it out with Certus afterwards. Similarly, after this legislation is enacted somebody who is being dealt with by a servicer will not have to look behind that to see which institution owns the book, whether a special purpose vehicle is behind it or whether that vehicle had some hand or part in the matter about which he or she is seeking to complain. That person will make the complaint against the servicer. If the servicer seeks to try to abdicate responsibility for something by saying "no, that was the owner" - we do not think this is likely to happen - then the owner will be drawn into the complaint and any award will be made against the owner. We are trying to ensure there will be some kind of continuity there, so that the consumer will not really have to get into the ins and outs of who is at fault. It should not be the consumer's problem.
Does this change anything that has been done previously by the banks in securitising mortgage loans? It is the same fundamental principle. If a person has entered into a contract with an organisation that is regulated by the Irish State, does it matter where the money or the block book is sold on to? Is the relationship still with the initial organisation, even if a servicer is put in place?
I am asking a fundamental question. If a person has entered into a contract with a bank or institution in this country that is regulated by the Central Bank of Ireland, is it the case that this initial contract takes precedence over everything else that happens underneath it or in front of it?
Yes. I just wanted to establish that as a basis. It is not ground-breaking in any huge shape or form. My question relates more to interest rates than anything else. If a bank has sold on a book, and if that book is part of a larger portfolio which has a cost of funds that is blended from different currencies, etc., and if it needs to increase in order to break even, what level of control would a new purchaser of a loan book have over the implementation of interest rates on borrowers here?
I will use an example. If every mortgage that was sold by AIB in 2004 was put into a book, securitised and sold to an American institution, and if that institution subsequently decided to increase the interest rate which applies to that section of the loans, would AIB have to follow through on that decision?
Is that not worrying, given that the purchaser of a portfolio like this might not have a front-end office here? It might be using other facilities, such as those of AIB. Is it not in a position to do more profiteering than anybody else?
Mr. Declan Reid:
As Mr. Mac Donncha mentioned, the exact same protections from which someone who has borrowed from AIB would benefit today, with respect to their interest rates, will apply if that person's loan is sold to a third party that is unregulated or is not a bank. A new owner and servicer would be obliged to provide the exact same level of protection to the consumer that the bank currently provides.
I am trying to get clarification about something that worries me.
If someone ends up in a predicament where a loan book is sold on and the agency does not want to involve itself in new loans, in terms of the variable rate it can apply to that chunk of properties, and if they buy something that has a good loan to value, LTV, ratio and a proven record, in other words, the good stuff in the books, it can start yanking up the variable rates and conceivably go beyond what would be the mean in the market and the person who will be hit is the consumer. Is there anything in this to prevent that from happening?
Mr. Declan Reid:
There is nothing in here that changes the current level of protection a consumer enjoys if their loan is owned by a bank. The contractual provisions of, say, the mortgage still apply with respect to the interest rate. The customers still have the benefit of the unfair terms in consumer contracts legislation in respect of that loan and the intention of this legislation is to make sure they still have access to the Financial Services Ombudsman for any complaints around unfair movements in interest rates.
I can understand that part but the vulture capitalists who could purchase this are not exposed to the day to day realities of needing to do new business here. I suggest that Mr. Reid should reconsider how the Department will safeguard people from extortionate variable rates, whether that be trying to get the financial institutions to underpin that the variable rate cannot go above and beyond what it is in the institution that originated the loan or a mechanism whereby it is set in stone that it should be X or Y above the mean variable rate for mortgages in the country. Mr. Reid would be doing a good day's work if he were to put in such a safety measure to protect the mortgage holders.
Mr. John Hogan:
There are protections built into the legislation by virtue of the codes that are there, and they will apply through the regulation and oversight by the Central Bank and the credit servicing firms. Also, if a situation arises, and we alluded to it earlier, whereby a particular decision which was detrimental to the borrower was taken by the owner, there is an opportunity to make that application of appeal to the Financial Services Ombudsman, and that is being drafted currently in terms of the legislation.
This question is to Mr. Hogan. Why would they appeal? If someone enters into a variable rate contract and the owner of the loan decides they want to increase the variable rate, what is the appeal one can make?
Mr. John Hogan:
Ultimately, it comes back to two things. There is the unfair contracts legislation which Mr. Reid can refer to if he has the particular provision, but also the rapid movement of the interest rates as alluded to by the Deputy would be seen as being detrimental to the borrower and it would be on that basis that an appeal would be made.
Mr. Declan Reid:
Yes, and the unfair terms in consumer contracts legislation states that any lender would not be allowed to change an interest, even if it is allowed in the contract, without valid reason. It is a level of protection afforded across the European Union at this stage but if a dispute was brought to the Financial Services Ombudsman, FSO, there is no valid reason for the movement in this variable rate or the standard variable rate, SVR, on this mortgage. If the FSO deemed that to be the case, that move would be essentially expunged.
That gives me some level of comfort but it does not corner off the idea that if somebody is overexposed with regard to currency exposures, etc. - the blended portfolio - and if they need to increase it to keep their ship afloat, they can justify it perhaps on those grounds. I am giving Mr. Reid the worst case scenario.
Mr. Declan Reid:
That is a valid concern. The Deputy's argument is about moving into the territory of justifying a certain financial return for the buyer of that loan, which I do not know if the SFO would favour, as opposed to protecting the consumer in that case. On balance, a justification that I need to earn profit on my purchase of this book would not outweigh a concern around an unfair movement in interest rates.
Chairman, could I ask a question following on from that? I have an e-mail here from a lady whose mortgage was sold to Lone Star, and her layperson's question is whether she is more vulnerable now than with the original mortgager.
Mr. John Hogan:
Those were some of the questions and concerns that were coming across from individuals who made representation to the Department as part of the public consultation campaign. In responses to parliamentary questions, the Minister has been keen to emphasise that it is the intention of the legislation and that he will reset the situation to what it was before the loan was transferred.
I want to explore the issue of servicing ownership and the reason for the move from one to the other. The original intention was to go for a model of ownership with some exclusions of securitisation special purchase vehicles, SSPVs. The Department changed that on the basis of consultation with stakeholders. I understand the reason is to regulate servicers. That makes sense, but why not do both? Why not get servicers and owners, as happens currently? In terms of Deputy Doherty's hypothetical loan from the AIB, they are covered. Why do not do the same in terms of both ownership and servicing?
Mr. John Hogan:
As I alluded to at the outset, it was highlighted to us in the public consultation process that a passive SPV, for example, who was holding ownership could outsource the servicing to a firm which would not be regulated. The danger was that we would find a situation where nobody was regulated in terms of what was taking place so we have moved to concentrate our emphasis in the legislation on the regulation of the credit servicers. That will be consistent with situations such as those we would see in other jurisdictions like the United Kingdom and in other cases across Europe. Does Mr. Fee or Mr. Mac Donncha want to add anything to that?
Mr. Brian Fee:
We were keen that there would be one regulated entity facing the consumer in each case so as Deputy Doherty pointed out, with AIB outsourcing, as things currently stand AIB takes responsibility for the actions its credit servicer may take. It appeared to us that there was a possible gap if a passive SPV acting as an owner, which we did not intend to regulate, outsourced to a credit servicer that we were not going to regulate because the consumer would have lost out on certain protections. However, because the credit servicer is the entity that the consumer is dealing with, it seemed to make the most sense that they are the entity that will be regulated but we are setting it up in such a way that if the owner does not outsource to a regulated credit servicer, the owner will be deemed to need to be regulated. Generally speaking, there will be one entity as the regulated entity for each consumer.
Yes, and it is fair to say that this is effectively what the SPVs lobbied for. I am not implying anything untoward but their basic representation is that it would make more sense to have a model along the lines of that in Britain of servicing administrators, etc., and the witnesses were convinced by that argument.
Mr. John Hogan:
A number of representations were made to us and we would have taken all of them on board in terms of what we are trying to achieve on the regulation. As I said, we looked to other jurisdictions to see how it was managed in those to ensure that we were not moving too far away from what might be seen as international practice. Does Mr. Reid want to add to that?
Mr. Declan Reid:
An equally strong representation made during the process was that the servicers asked to be regulated as well. Not only did the owners say they may not be the appropriate jurisdiction for legislation and regulation, but the servicers said they were because they had the infrastructure, the systems and the controls.
They said that they were the ones working the books of loans and interfacing with customers and, therefore, were the appropriate venue for those controls to be put in place.
I definitely see the argument for regulating the servicers, but why not do both? Who would lose if SPVs were regulated? To the extent that they engage in any of these activities, they would be subject to the regulations. If they do not engage in these activities, the regulations would not arise.
Mr. Declan Reid:
That is the case with this proposal. To the extent that they participate in what we have defined as servicing activities, that is, interacting with the customer directly, they will be covered. Where they do not and instead delegate that role to the servicers, it will be the servicers that are covered. Our definition of a servicer is anyone who interacts, be it the owner or a third party.
The Department could have done it the other way around and regulated certain activities of owners and servicers. A passive SPV will not break the code of conduct. It will not harass people itself.
Mr. Antoine Mac Donncha:
That is the approach we have tried to take. We are regulating the activity rather than the legal ownership because the former is where protection is required. One of the most convincing arguments that was raised in the consultation made us reconsider our approach. It was pointed out to us that, if we just focused on the ownership, there was a possibility of having an owner who did nothing and was entirely passive. No regulation would apply, as the owner would be able to slip under the radar by not doing anything that was regulated. Therefore, the regulatory requirements would not be breached. The activity could be outsourced to a servicer that would have a freer hand because it would not be regulated. By moving from the ownership to the activity, we intend to avoid that lacuna. Every loan will be captured now because either the owner or the servicer will be captured. Even if a loan is not outsourced and there is a passive owner, that situation will be captured in the legislation.
Is it not an anomaly that a person with a loan with a banking institution that outsources credit servicing can, if the owning institution is pre-existing, for example, Bank of Ireland, take a case against it but in another situation might have to pursue the servicer? It is potentially confusing for people.
Mr. Antoine Mac Donncha:
The concern is that, if we went in the wrong direction and targeted the legal owner, which could easily be a shell company, often one with no employees, the consumer would not benefit. Consumers have no interaction with the owner. I do not know to what extent they will have an awareness of the shell company. Members heard about the number of such companies. It is not practical to try to identify and target which vehicle has acquired a consumer's loan. We have focused on the person who interacts with the consumer and actively services the loan.
There could be the further development of this approach, including by traditional financial institutions. For example, someone with a loan with AIB might have little interaction with the bank and instead deal with the servicer. Is it the case that the consumer should still go after AIB?
Mr. John Hogan:
The principle of what we are trying to achieve with this legislation is to ensure that the individual borrower has the protections available to him or her under the Central Bank's codes. One can argue about the different approaches to undertake this principle. We considered one but were convinced that we needed to change our approach to ensure that a lacuna was addressed.
My final question is on a somewhat separate matter. Many of us believe that the code of conduct is inadequate and not rigorously enforced. This legislation brings others under the Central Bank's code of conduct, which is for the Central Bank to enforce. In theory, the Dáil could give a legislative basis to something equivalent to the code of conduct. Nothing in how the Central Bank works necessarily means that there cannot be such legislation.
Mr. Antoine Mac Donncha:
Obviously, the Oireachtas could pass that law. Constitutionally, we could not set up such a system, even if it were desirous to do so, which it would not be, in which the Central Bank could trump the Oireachtas. If the Oireachtas wants to pass legislation, it is free to do so.
Mr. John Hogan:
The other advantage in having the Central Bank's codes is that, if it identifies a change that needs to be made, it can do so relatively quickly through them. Under the other approach, we would have to run legislation through the Dáil, certain committees and so on, as the Deputy is well aware.
Mr. Antoine Mac Donncha:
The other point worth mentioning is that the Central Bank is the organisation that regulates at the coalface and interacts with these financial servicer providers on a daily basis. It probably has a great deal of insight into exactly what is needed to protect the consumer and regulate the industry effectively.
As there are no other contributions, on behalf of the joint committee I thank the witnesses from the Department of Finance for participating in this meeting and for the material that they supplied beforehand.
We will suspend now and then resume our discussion with representatives of the Free Legal Advice Centres, FLAC, and Banking & Payments Federation Ireland.
We will resume the discussion on pre-legislative scrutiny on the general scheme of the sale of loan books to unregulated third parties Bill 2014 with FLAC and the Banking and Payments Federation Ireland. I welcome Ms Noeline Blackwell, director, and Mr. Paul Joyce, senior policy researcher, FLAC. I also welcome Ms Niamh Murphy, head of consumer banking and Mr. Maurice Crowley, retail director, of the Banking and Payments Federation Ireland which, in case anybody is confused, used to be the Irish Banking Federation.
The format of the meeting is that Mr. Joyce and Mr. Crowley will make opening remarks. I remind members, witnesses and those present in the Visitors Gallery that all mobile telephones must be switched off because they interfere with the broadcasting equipment.
I draw witnesses' attention to the fact that, 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 the committee to cease giving evidence on a particular matter and they continue to so do, 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 they asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I invite Mr. Joyce to commence his opening statement.
Mr. Paul Joyce:
I thank the committee for the opportunity to address it. We made our original submission in August in response to the Department's consultation paper. Today we have an updated submission which has been circulated to members and I will summarise its points.
As we understand it, the purpose of the draft Bill is to do two things. First, it is to bring the buyers of debt or credit agreements into the realm of retail vetted firms so that the code of conduct on mortgage arrears and-or the consumer protection and Central Bank codes will apply to such entities. Second, it is to ensure that customers of these providers or entitles will have access to the complaints mechanism of the Financial Services Ombudsman.
There are two issues to consider. First, is the means chosen to achieve this in the Bill adequate? Second, the issue of much more concern to us, is this particular approach adequate in terms of consumer protection, in the first place, both for existing providers and any buyers of debt?
Let me deal with the first issue of whether the means chosen are adequate. We looked at the submission of Mars Capital and noted some concerns about the mechanisms chosen. There is an exemption in the Bill for so-called securitisation specified purpose vehicles. Mars Capital made the point that the acquirers of loan portfolios in this country are, by and large, almost all SSPVs as they are called. It suggests that if this approach were continued with, it would exclude most acquirers of debt portfolios from the ambit of the scheme.
Mars Capital also made a second observation, which it thinks is important, that the entity of a retail credit firm, as we were called, was first introduced back in 2008 to cover the sub-prime lenders that were involved in mortgage lending, by and large. Mars Capital made the point that retail credit firm, as a category, would not be relevant to the acquirers of credit agreements because they do not, by and large, tend to engage in further lending activities. Those are two important points that the Department needs to look at and they might be of interest to the committee in terms of the mechanics of the Bill, as announced in the consultation paper.
Assuming the Bill attains the objectives of applying the CCMA or consumer protection code and the FSO scheme to the acquirers of loan portfolios, we wondered whether this will be adequate protection for the customers of these institutions. As the committee will probably know, FLAC addressed that point in a report this year called Redressing the Imbalance. The report examined the inadequacy, as we would see it, of the code of conduct on mortgage arrears to protect borrowers in arrears under their mortgages, whether the mortgage is with the original creditor or the debt has been sold to an acquirer of loans.
We looked recently at 12 months of statistics on mortgage arrears on restructures and repossessions. We would be of the view that it was a worrying time in terms of the number of repossession applications that were made and the slow progress tackling proper reschedules.
Recently the Governor of the Central Bank addressed a MABS conference, as mentioned on page 2 of the submission. He suggested:
The process of tackling the unresolved arrears cases has been that lenders have not been allowed to neglect or long-finger the numerous cases of non-cooperating borrowers. This has had the undesirable side-effect of crystallising into legal proceedings cases of non-cooperation for which a negotiated cure could have been arrived at.His comment could be interpreted as suggesting that non-co-operation is the principal reason for legal proceedings and if only borrowers had co-operated, a solution would have been found to their arrears difficulty. That is not our experience right now. There are some non-co-operating borrowers. We have seen a number of instances where borrowers have co-operated with the mortgage arrears resolution process for some years but have found since the revision of the code in 2013 that a demand for greater payment has been made. Equally, there are lenders who are not complying with the MARP. There are also lenders who adjudicate borrowers in arrears as non-co-operating on the flimsiest of grounds, in our view, and in some cases to short-circuit the MARP.
We understand from the Governor that the Central Bank is planning to undertake inspections of lenders in order to monitor compliance with the CCMA in the second half of the year.
However, this process does not appear to have started.
The Governor of the Central Bank, in his recent speech, stated the Central Bank could not to attempt to oversee each case, although the bank would, he said, shortly embark on a further probe and continue to hold regulated lenders to account for any deficiencies. However, in a reply to a parliamentary question from Deputy Michael McGrath in July last, the Minister for Finance confirmed that no sanctions had been imposed on any lender for failure to comply with the code of conduct on mortgage arrears, CCMA.
We are also seriously concerned that provision has not been made for any recognisable appeal to an external third party in the case of adverse decisions by lenders under the code of conduct on mortgage arrears. Such decisions could relate to declining to offer a borrower an alternative repayment arrangement, offering the borrower an unsuitable repayment arrangement or declaring that the borrower is not co-operating. There is a right of reference to the Financial Services Ombudsman but that office has made abundantly clear that, while it will consider complaints related to issues of process, it does not believe it is in a position to overturn the substantive decisions of lenders. It is clear that a number of lenders have come to understand this to mean that provided they comply with the processes and abide by the rules, they have little to fear. Many borrowers have been left facing repossession proceedings in the Circuit Court as a result. Some 10,000 new repossession cases have been taken in the past 12 months. We are awaiting Central Bank figures on the third quarter. The point we are making in this regard is that even if the Bill is introduced and the acquirers of loan portfolios become retail credit firms or equivalent and the CCMA and other codes apply to them, borrowers will still not be properly protected in the circumstances I have outlined.
On access to the Financial Services Ombudsman, FSO, which is the second object of the Bill, people will have a right to make a complaint to the FSO if they are unhappy with the conduct of a regulated financial service provider. This will clearly include the acquirers of loan portfolios. A significant number of the customers of the credit acquisition companies are fearful that, in time, the terms and conditions of their loan agreements may be varied to their detriment. Our submission refers to a recent decision of the Financial Services Ombudsman in the case of Millar and the Financial Services Ombudsman. Time does not permit me to discuss the case in detail, other than to note that it involved a couple with a number of mortgages, all of which were on a variable rate. The lender, Danske Bank, which had taken over the business of National Irish Bank, increased the variable rate of the mortgage loan. The couple argued that this increase was not tied to any change in European Central Bank interest rates and, therefore, was not justifiable. The FSO rejected the couple's complaint on the ground that a clause in the mortgage agreement allowed for alterations in the rate of interest in response to market conditions, rather than in line with general market interest rates. Interestingly, the High Court recently overturned this decision. We understand, however, that the FSO may appeal the High Court's decision.
Holders of variable rate mortgages are particularly vulnerable to future changes in their terms and conditions and the rates of interest applied to their loans. There is an obvious concern that loans which have been sold on to the acquirers of loan portfolios will be sold on again to other companies in a complex web of transactions that may in some way mirror what happened when sub-prime mortgages were packaged up as investments. This practice led in many instances to the deep personal debt arrears crisis we are experiencing. The further a loan travels down the road as a packaged entity, the greater the danger that the borrower or consumer will find the terms of the loan being varied to their detriment. What is required, therefore, is not only legally binding legislation about the status of credit acquisition companies, but also a regulatory regime and Financial Services Ombudsman service that will vigilantly monitor the companies in question and deal with complaints in a decisive fashion.
A further issue that is not mentioned in the Bill or consultation paper is that certain sections of the Consumer Credit Act are relevant to the rights of borrowers as against creditors who have sold on the debt to an acquiring company. Without discussing this issue in great detail, we have asked whether section 40 of the Consumer Credit Act and a parallel regulation - regulation 20 in the European (Consumer Credit Agreements) Regulations of 2010 - will apply to the acquirers of loan portfolios. Essentially, this section provides that where a credit owner's rights are assigned to a third person, the consumer is entitled to plead against that person any defence available against the original creditor. We suggest that this provision be pointed out to the acquirers of loan portfolios to ensure they are aware that there are existing consumer protection measures in place to which they should be obliged to adhere and that they simply cannot step into the original creditor's shoes and attempt to vary or manipulate the terms and conditions of an existing contract.
We are concerned as to what is the status of an alternative repayment arrangement put in place under the CCMA by a mortgage lender which subsequently sells the mortgage debt on to an acquirer of loan portfolios. Will the new entity be bound by the alternative repayment arrangement which the original lender has put in place? Again, this question is not addressed in the consultation paper.
The submission provides some detail on an issue that is particularly dear to our hearts, namely, the regulation of hire purchase. We have seen that the Central Bank can reasonably quickly draft a Bill that will correctly put regulatory status on the acquirers of credit agreements, both secured and unsecured. However, it remains the case that hire purchase companies are not regulated by the Central Bank. The agreements provided by these companies are regulated by the Consumer Credit Act, under which the borrower is entitled to a written agreement. The entities are not regulated, however, and an explanation is provided in the submission as to why we believe this is the case. This Bill, which accords retail credit status or equivalent to acquirers of loan portfolios, is a perfect opportunity to regulate hire purchase companies. After all, these companies provide credit to vulnerable borrowers, in many instances at high levels of credit and using hire purchase agreements that are technical, detailed and have certain features that would require particular levels of consumer protection.
Mr. Maurice Crowley:
I thank the Chairman and members for affording the Banking & Payments Federation Ireland the opportunity to appear before the joint committee as part of the pre-legislative scrutiny of the general scheme of the sale of loan books to unregulated third parties Bill 2014. The federation and its member banks support in every guise the objective of seeking to ensure consumers are protected. In this regard, our members have implemented or are signatory to a range of consumer protection protocols, including the consumer protection code, code of conduct on mortgage arrears, the Money Advice & Budgeting Service operational protocol and the protocol on multi-banked small and medium enterprise debt, which we issued earlier this year.
In the context of the proposed Bill, which is being prepared and drafted by the Department of Finance, certain issues require careful consideration. For the purposes of this meeting, we will briefly draw attention to one or two of these issues. A ongoing process of de-leveraging in the banking sector involves bolstering banks' capital and strengthening their balance sheets to make them more fit for purpose and allow them to continue to lending into the economy. We are cautious to ensure that new legislation does not adversely impact on these efforts, while achieving the appropriate balance of protection for consumers. We are concerned that the legislation, as drafted, may deter potential purchasers of or investors in the loan portfolios that are being made for sale and present a risk that such investors may turn their attention to other European markets.
We feel very keenly that a balance is needed in the legislation between not deterring the deleveraging and sale process and ensuring that appropriate consumer protections are maintained irrespective of the owner of the portfolios. We have concerns about potential unintentional consequences from the legislation, which we outlined briefly in our submission.
We share Mr. Joyce's concerns that the way in which SPVs and SSPVs are pulled together may undermine the protections this Bill proposes to offer. We are of the view that where a purchaser of a loan portfolio outsources the servicing of that portfolio to a third party which is itself a regulated entity, the purchaser should be exempted from the legislation. A number of well-run loan services now operate in this country and they provide considerable employment. We believe they are a more appropriate focus for this legislation. The Bill refers to purchasers having a physical presence in Ireland. At present under Central Bank regulations there is no requirement on physical presence. They focus on the ability to supervise and regulate these entities. The reality, as Mr. Joyce noted, is that many SPVs and SSPVs will not have a physical presence in this country and, therefore, the focus should be on those who service the loan books. We are aware, based on earlier discussions with this committee, that the Department of Finance is planning to introduce amendments to alter the focus from purchasing entities to those entities who take responsibility for servicing and managing loan portfolios. Given our previous submission in August, we would welcome that approach because it would deal with the issues we outlined. It would recognise the primacy of protecting consumers and borrowers under the CCMA and the consumer protection code but it would also address the other commercial issues to which I alluded in the context of banks seeking to deleverage and strengthen their balance sheets.
I thank the witnesses for their presentations. I am not sure if they followed the earlier presentation from departmental officials who indicated there would be significant changes to the draft heads which have given rise to concern. The Bill is relatively short and FLAC has raised certain issues that probably should be addressed. The officials have indicated that the exemption for SPVs will not exist in the Bill and that provision will be made for providers of services. Mr. Joyce expressed concern in this regard. Given that SPVs will no longer be provided for in the same way, does he think that the Bill is sufficient in terms of the protections that existed heretofore for consumers? We have been assured that the Bill will wind back the clock to the point when the loans were sold and that the protections existing at that point will be available in the future.
If the servicer is to be legally accountable under the regulations, what happens if the contract between the owner and servicer of the loan denies responsibility, and would there be recourse to the Financial Services Ombudsman? They are saying they will deal with the issue but it is difficult to discuss it when it is not included in the heads of the Bill. They indicated that they would seek to find a way of revising the process so that where the servicer of a loan claims it is only servicing the loan and is not responsible for it, the owner of the loan is pulled into it. This would only apply to non-regulated entities. I asked this question in the context of AIB outsourcing the servicing of its loan book to Certus. What recourse would I have if I wanted to make a complaint about the way in which AIB managed my loan? The point is that it would apply only to unregulated entities. Do the witnesses think the Bill is robust enough to deal with Government's intention, which is to go no further than the provisions that already exist?
Mr. Paul Joyce:
It is worth noting that in the UK, the entities who take over the administration of mortgages are regulated separately under a code for mortgage administrators. Over recent years in Ireland we have seen a number of unregulated entities operating in the collection and management of debt, and it has taken us a long time to impose a regulatory status on them. Much depends on the meat of the legislation and its provisions, but we would be wary for consumers where third parties are involved. We have come across a number of cases in which borrowers in arrears are not even sure who they are supposed to be paying because a debt collection company is involved, on the one hand, and the borrower continues to liaise with the lender, on the other. Telephone calls may be transferred to an office in Leeds, London or Dublin. In some cases, multiple debt collectors have been involved on the same account. There does not even appear to be an express provision that obliges a lender to declare immediately to a borrower when a loan has been sold or handed over to a debt management company. I would think more detail is needed in the Bill simply to declare that, if there is a legal relationship between the debt owner and servicing agency, the agency would in some way take responsibility for servicing the loan. It appears to us that regulatory rules for the agency managing or collecting the debt would be a good idea.
Ms Niamh Murphy:
We have proposed to include firms that are already licensed. Names we have mentioned already, such as Pepper, Certus and Capita, are already regulated by the Central Bank. That is the type of entity we propose should be included in the category of loan servicer. They are administering the loans on behalf of the owner and in accordance with consumer protection legislation. This is not just a question of mortgage debt because a variety of sales can happen. Under European regulations, for example, Bank of Ireland was obliged to sell part of its debate. There is an ongoing need to ensure that any agency that deals with the consumer is licensed and regulated by the Central Bank.
Ms Murphy has proposed that where a loan book is sold to a regulated entity, the owner of the book shall be exempt. It appears that the Department plans to introduce such a provision, which will apply not only to entities which are currently regulated but also future entities because they will all be regulated as service providers under this legislation.
I am interested in Ms Murphy's views on the officials' comment about regulating the service provider rather than the owner.
Mr. Hogan stated:
I raise this issue because members have been waiting for this legislation for a year and it is quite frustrating. There has been public consultation and the legislation as printed does not appear to be what will be published. It appears to me as though this could be a quite convoluted and long drawn-out process. Were I the person with a complaint for the Financial Services Ombudsman, I would be obliged to go through a system in which it is not really clear as to who was responsible for my complaint. In addition, it is also clear that at this point it is subject to the advice of the Attorney General and, therefore, the Department has not got this across the line yet.
Our intention is to allow access to the Financial Services Ombudsman for borrowers who are unhappy about any actions which affect them. Our intention, subject to the advice of the Office of the Attorney General, is that, if the regulated credit servicer claims it is not responsible and passes responsibility to the owner, the legislation will allow the Financial Services Ombudsman to make the owner a party to the complaint, even if the owner is not regulated.
Ms Niamh Murphy:
To revert to some of the firms we have mentioned, they are fully au faitwith the process and procedures around the ombudsman and participate in that process. We are talking about what could potentially be dealt with from a legal challenge perspective. Certainly, however, our members, be they full firms that currently are the owners of this debt and which are not planning to change that or those who are servicing the debt, they are already dealing with the ombudsman. I believe they would be happy to continue to so do because that is how they operate. They set up all their processes and procedures to do that and are comfortable with that process. As an example, we bring representatives of the ombudsman's office to talk to our members to make sure they are focused on issues that are emerging. The likes of the firms the Deputy mentioned, namely, the debt management firms, will also be part of that process. In addition, one could consider the type of entities that might buy in whereas today we are focused on the likes of private equity firms or whatever that are buying. In the longer term, we envisage - again in the interests of the economy - that there will be a substantial turnaround in who or what potentially could be a third party, that is, an owner of a debt in the Irish market. One could be looking at a pension fund and that was the basis of our original submission. It could be difficult for the Central Bank to have oversight over those types of entities, which is why we proposed that the servicers should be the ones who manage the responsibility for the whole process on a day-to-day basis and should be the ones being monitored and managed by the Central Bank.
May I ask the witnesses a question? I will understand if they cannot give an opinion on it because it is taking them down a line that is not clear in respect of the legislation or its intention. In the context of how the application of this proposal would mean it would be the responsibility of the servicers, the Central Bank has just adjudicated on the Provident moneylending scandal and in my view its adjudication was not appropriate. I was involved with the whistleblowers who provided the dossier to the Central Bank more than 18 months ago. One point of interest relevant to this legislation is that each of those people who service the debt and who make credit available to individuals are self-employed. They are not employed by Provident and are not employed by moneylenders. Therefore, a question arises in respect of credit servicers with this legislation. They are unregulated. While the statement by the Central Bank states the Central Bank found against Provident in respect of 105 loans, the self-employed people would tell one there were thousands of them. The Central Bank found against Provident not because it happened but because it did not have the rules and practices in place to identify it. The individuals who carried it out were self-employed, not employed by Provident and consequently were third parties. This relates to the question FLAC raised with regard to those who service credit in respect of hire purchase. Do the witnesses perceive an issue whereby this Bill should be expanded to deal with those areas? Alternatively, should it simply try to do what it says on the tin, that is, to deal with the loans that have been sold on and then to deal with consumer protection on a wider scale at a later stage?
Mr. Maurice Crowley:
I will answer the first part of the question. I must be honest and state I am not that familiar with the Provident case. However, on listening to the Deputy, I would draw a clear distinction between what Provident and its employees appear to have been doing and what the loan servicers about whom we are talking do. These are highly professional firms, which are mostly foreign, such as Capita, Pepper, Certus, etc. but they are focused on servicing the loan. They are not lending money. These firms are not lending money to borrowers. They are taking existing portfolios of loans and are servicing and administering them on behalf of existing regulated entities, as the Deputy described earlier, or in terms of the new purchasers. Consequently, we would draw a clear distinction between them in circumstances in which these firms have the policies and procedures in place to make sure the consumer protection code, the code of conduct on mortgage arrears, and all the other codes are dealt with.
Is this not precisely the case in respect of a moneylender? I assume all moneylenders operate the same case. It is the moneylender, in this case Provident, which lends money and which takes in the money. It is the agents who service it, who go to the house and collect the fee. It is the agents who collect payment. Is this not dealing with the exact same thing albeit on a more micro level whereby it is proposed to regulate third-party entities for servicing loans but to forget about the moneylenders and those they are servicing? The reason I believe this structure exists is for moneylenders to do some of the things they have done in the past.
Mr. Maurice Crowley:
It is hard for me to comment because we are not here to represent moneylenders of the type the Deputy describes. We are very comfortable with the quality, appropriateness and professionalism of the loan services firms we suggest here should be the regulated entities. I draw a clear distinction between the activities of moneylenders and what is happening here, which is the transferring of existing borrowings and existing borrowers as part of a portfolio to what I agree is another purchaser. To respond to Mr. Joyce's point, a purchaser might lack a great deal of physical substance in Ireland, which is why we would focus on the servicing entities, which have a physical presence and which have in place the processes and procedures to service appropriately these loans in accordance with all the codes and legislation. That is our focus and we hold no candle for the moneylending side.
Ms Noeline Blackwell:
Deputy Pearse Doherty has hit on a really important point. The reality is that while these servicers have a job to do, they act as agents of a body which owns the money and which owns the debt. They can make any contract they wish. It is not just a question of the Financial Services Ombudsman either because there are issues that may need to go before the courts and if only the agent is liable and is caught for proper behaviour or regulated behaviour, there is a real worry that a contract could be structured in such a way as to let the entity behind, that is, the owner of the debt, off the hook. With the change of emphasis to the servicer away from the owner of the debt, there is a risk that the terms of the agreement will be structured in such a way to ensure maximum flexibility or least culpability for the owner of the debt in behind. Moreover, the servicers often are behaving to a routine in a way that is not acceptable or satisfactory as far as FLAC is concerned. It is good to know they are regulated, as they need to be, but so too should anybody who is buying that debt. Issues such as existing arrangements with regard to the debt and so on will be very important.
Mr. Paul Joyce:
There appear to be three distinct situations here. The Bill as currently constituted is attempting to deal with an entity that buys a debt and therefore, the original creditor moves out of the picture and one has a new creditor. In such a situation, the legislation should ensure that all existing consumer protection measures that are in place for the borrower whose debt has been factored on are maintained, including the codes, the consumer credit legislation and so on. Then there is a situation where an existing creditor might instruct a debt collection company to collect a debt that is in arrears but the debt still belongs to the original creditor. Then there is a third situation where the bank may be foreign-based and gets another entity to service the debt in its entirety on the bank's behalf. For example, this may be a mortgage that is not in arrears at all. It would appear sensible that the legislation would cover all those eventualities and unless I am mistaken, it is fair to state that debt collection and debt management firms and services have only become regulated recently under the Central Bank supervision and enforcement legislation. It took quite some time for that to be put in place and I am unsure whether the extent of that regulation is as robust as perhaps it should be.
I refer to the moneylending issue and the Provident case.
It is true that licensed moneylenders operate through local agents who act on their behalf. Although I am not saying it happened in this case, sometimes the agent goes on a solo run. This case involved top-up loans, which were being extended to people who had not paid off the original loan they had taken out. This is a clear and flagrant breach of section 99 of the Consumer Credit Act. Why is a fine imposed when the Central Bank's notice specifically drew attention to a legislative breach? If this is the type of regulation we have, whereby original creditors or companies to whom debt is factored on have breached legislative requirements but the penalty is a settlement, it calls into question how vigorous consumer protection is.
The whistleblowers who supplied the dossier to the Central Bank are a number of agents who felt under immense pressure from the company to engage in the type of activities against which the Central Bank has found. I hope the case is not over because other areas need to be delved into. Where a servicer which has a contract with a financial institution to service loans, whether in arrears or not, is penalised or found to be in breach of regulations, one can imagine the servicer might say it has nothing to do with it, that it does not own the loan but has a specific contract, which none of us will see. What kind of system should be put in place to protect consumers? BPFI has made a particular submission saying it should be the service provider, which is what the legislation anticipates. However, in a case where a service provider will not take responsibility for issues, how does BPFI believe the owner should be made a party to the complaint? I look at it from the consumer's point of view and I anticipate a long, drawn-out legal process between the servicer and the owner. If an entity is regulated, I go to the Financial Services Ombudsman. In this case, the service provider will be regulated, but not the owner. The Department is trying not to regulate the owner but to go half way there. Where the regulated service provider fails to stand up to an issue, we will have to draw the unregulated entity in, and it could be a minefield.
Mr. Maurice Crowley:
While it begins with the servicer, I accept the point that at some stage, where borrowers are unhappy with what is emerging from the servicing process, based on today's hearings, the Department plans to draw the owners into the Financial Service Ombudsman's process with a view to making them responsible in those circumstances. This is what makes the most sense to me. While I am not sure how it would work legally, it would have a lot of merit. We have tended to shift the focus of servicing regulations around substance on the ground. Because the special purpose vehicle, SPV, which is what most of the companies use, has a legal substance but no physical or personal substance on the ground, it always seemed to make more sense to start with the servicer. However, we would have no difficulty with the owner being brought to account through the ombudsman's process. Some of it already happens for banks in this country in that if customers or borrowers are unhappy with a bank or appeals process, they always have the option of the Financial Services Ombudsman. If the Department is planning to mirror the process with the unregulated owners of the books, it would have a lot of merit.
If a financial institution outsourced the servicing of its loan book to an entity, is it common practice to employ a company in this regard for the duration? Using the example of AIB, although it is regulated, say AIB sold its loan book to Certus for a five-year period and Certus was dealing with me, as an AIB customer. After the contract ran out, say AIB engaged a different servicing company. In this example, the legislation allows AIB to be unregulated. Two servicing companies could be dealing with the same customer and loan while the owner remains unregulated. Would that not cause a major problem with the recourse to consumer protection?
Mr. Maurice Crowley:
I do not believe so. Any regulated entity would have a very clear set of service level agreements and expectations with the initial servicer. If that contract ends, either at the end of the specified period or during it if the servicer were not meeting the key performance indicators for service levels, there would be a relatively simple shift of responsibility from the first to the second servicer, although it would probably not be as simple as it sounds. I am assuming the second servicer is also a regulated entity, so the same approach and provisions would apply. As regulated entities, banks will outsource only in circumstances in which they are absolutely happy with the service provided and that the processes and procedures comply with the codes. If the bank has a problem with a servicer, it will shift to another servicer only if it is absolutely comfortable that the same compliance applies. Our members are very keen that the services be regulated because it gives them an extra lever over the servicer to which they have outsourced.
I welcome our guests and apologise for being late. I will pick up on the issue Deputy Pearse Doherty was teasing out. My instinct is that drawing a distinction between the service provider and the owner of a loan creates many issues and has the potential to dilute the thrust of the legislation. The Department of Finance's statement makes it clear that it has concluded that it would be better to insist that the credit servicer be regulated rather than the owner of the loan. I take the simple view that the original relationship is between the borrower and the lender, and that the lender, whether the original lender or somebody who steps into the shoes of the original lender, should be regulated and accountable to the State authorities for the application of the various statutory protections. Creating another layer through the service provider raises many issues, which could be cumbersome and bureaucratic in their application.
Inevitably, the relationship between the new owner of a loan - inevitably a private equity firm - and the service provider is a commercial relationship with a contract in place. If the Central Bank identifies a compliance issue with the CCMA which it wants to pursue, it can do so only under the legislation as proposed with the service provider. The service provider's relationship with the new mortgage owner could come to an end contractually. Although Mr. Crowley said there would be a seamless transition to a new service provider, why introduce the complexity? He asked why the owners of the loans should be regulated. If they want to own Irish mortgages, they should be regulated in Ireland. It would introduce a lot of complexity and it would appear that the industry has won the argument privately with the Department of Finance.
Mr. Maurice Crowley:
Not that we would ever admit to banks' winning an argument such as that. I take the Deputy's point on the borrower-lender relationship because that is where it all starts. On one level, we are not here to protect the purchasers of those loan books. We do have a concern, as we said at the start, that if a level of regulation is imposed on the purchasers of these books they may be deterred from purchasing these books going forward and that would have practical and commercial implications for regulated banks which are trying to deleverage and strengthen their capital bases. In the context of purchasers of loan books, our concern is from the point of view of not deterring them, it is not necessarily from protecting them from regulation. The concern is twofold, if there is regulation on the new purchasers it may deter them from making a purchase in the first instance. Our other concern is more practical. I revert to something I said earlier. In drafting the original legislation the Department sought to draw a distinction between securitisation special purpose vehicles, SSPVs, because many of them are used by banks in this country to sell covered bonds and securitise their mortgage in order to bring more liquidity to their balance sheets, and SPV, which we would welcome. The danger and the practical concern we would have for the borrower is that if the focus of the regulation is on the SPV, it is a legal entity here but it is no substance, what is one actually regulating? What recourse does one have against that SPV which is just the holder of a loan book? I do not know but I am not sure there is much else on the balance sheet of that SPV.
I would worry about the substance of that SPV in terms of regulation and the ability to pursue and to sanction. For us, the focus on the loan servicer was intended to be a more effective way of focusing in on a group of entities that could clearly be regulated and have significant substance in this country. All of these loan servicers - I draw a distinction between the provident services - have a substantial presence in this country in terms of employment. They also have substantial reputation concerns. These are significant companies. Certus is Irish based but Pepper, Capital and HML are worldwide companies and will not put their reputation at risk. For those reasons, they are quite comfortable with the notion of being regulated because they have a reputation to protect both in this market and elsewhere.
Ms Niamh Murphy:
Since submitting our consultation we asked twice whether we could meet to discuss the issue but it said the process had moved into the Oireachtas so that it was not in a position to share. Only this afternoon, I think on Twitter, we heard that there might have been some changes to the Bill.
Can I tease out how this will work in practice if, as Mr. Joyce said, the Central Bank has not taken any enforcement action for possible non-compliance with the code of conduct on mortgage arrears against any financial institutions? If an issue did arise in this circumstance the Central Bank would take enforcement action against the service provider.
So if sanctions, fines, penalties and so forth were imposed the service provider would be liable. What would govern the relationship between the service provider and the owner of the loan in respect of those issues? Would the owner of the loan require the service provider to sign an indemnity that if such regulatory and compliance issues arose, the owner would not be responsible? From a commercial point of view, presumably that is what will happen.
Ms Niamh Murphy:
In terms of the first part of the Deputy's question on the CCMA, some of the firms we have mentioned are part of the oversight process the Central Bank is undertaking at present. Mr. Joyce mentioned that he was not aware of any inspections which were planned. They have actually commenced. Our members have received letters from the Central Bank. They have completed a type of factfinding process last month and on-site visits have taken place. Those visits take place in the large banks but also in the service providers who are acting, in some cases, on behalf of UK based companies that have exited this market, so they are certainly in scope.
As Mr. Crowley mentioned they are concerned about their reputation and making sure they comply with all aspects of the regulation and actively pursue that. It is in their interest to ensure that if this is a growing market in the Irish economy in terms of new contracts coming on stream that they are best placed to bid for those if they can show through their previous practices that they comply with the regulations in place. A new round of additional consumer protection regulations was put in place in the past couple of weeks by the Central Bank. It consulted twice on those. In recent months we certainly contributed to both consultations and other stakeholders and interest parties were eligible to do so also. On that basis the Central Bank has reinforced consumer protection in the debt management firms category. There has been much activity in that area and the firms we are talking about have been through the oversight process. In terms of individual contracts between the firms and the purchasers, we would not be privy to those. The documents are not publicly available so that would be something in terms of competition that we would-----
I accept that but one can be fairly certain on what will happen. The new owners of the loans will not take any risk of possible non-compliance by the service provider. They will make sure contractually that they are covered and indemnified on that issue. Is that the road we want to go down where the actual owner of the mortgage is effectively exempt from compliance because he or she has no skin in the game as such whereas the service provider does in terms of reputation and commercially? If it comes to the possible new restructuring of a loan are all decisions made by the service provider?
Ms Niamh Murphy:
They would normally be given parameters. All of the mortgage arrears resolution targets and the process and procedures around those have to be set out with the Central Bank. The administrators of the loan would operate within parameters as to how they deal with the cases in front of them. They would have to follow policy and procedures and guidelines to go ahead. In terms of how they deal with the Central Bank-----
I am asking if individual cases would be elevated up the line at any point to the private equity firm for final sign-off or decision or do all matters relating to the administration of the loan have to be dealt with by the service provider, including decisions on new restructurings of the loan?
Mr. Maurice Crowley:
We would not know for sure as we are not privy to the contracts but our expectation is that, by and large, the decisions would be taken by the service provider, based on a clear set of parameters and a clear set of mortgage solutions which meet an arrears capitalisation or split mortgage.
Perhaps I can put a question to FLAC, as devil's advocate. We understand that more than 10,000 mortgages have been sold to unregulated entities. Is there a pattern of trouble? Has a pattern of alleged non-compliance with the codes emerged? The new owners, generally private equity firms, have signed up to voluntary compliance. Is that happening? I appreciate it is difficult to gauge because the mortgage holders do not have anywhere to go. There is no policeman to ensure compliance. Has FLAC any evidence that the equity firms have abused the privilege of not being regulated?
Ms Noeline Blackwell:
I will pass over to Mr. Joyce in a moment except to say that one of our major worries about the entire system, regulated-unregulated, whichever the owner happens to be, is that there is nobody who can tell us what is really happening in each restructure because there is such a limited financial and legal advice service available to people. For the most part, people are doing these on their own.
It is very difficult to know. Many of the restructures that were done in the past year are already being restructured. We have a real concern - including in respect to the inspection being carried out by the Central Bank - to the effect that unless consumers are asked about this matter, we will never discover how right or wrong are these restructures. All one hears are people's perceptions at the end of the process.
Mr. Paul Joyce:
As the Deputy is aware, the CCMA was fundamentally reviewed and this process concluded in July 2013. It is now December 2014 and the first proper inspections of lenders in the context of their compliance with what was quite a lender-friendly revision are only beginning to take place. The Central Bank does not appear to publish any statistics on compliance with the CCMA and there is very little consumer research in the context of talking to borrowers who are in arrears regarding their experience under the code. There is a limited amount of information available. We do have some information to the effect that certain of the debt-servicing companies are extremely difficult to communicate with and that they are very hardline in their negotiations and in the context of the kind of arrangements they are offering on behalf of the entities they represent.
To return to the issue of who should be responsible for the debt, we have just heard that the Department of Finance is suggesting that the owner of the agreement should exit stage left - from a legal and regulatory point of view - where a credit servicer has been engaged to service the loan. That seems extraordinary. Section 40 of the Consumer Credit Act, details of which are set out in the submission we made to the committee, and the parallel provision in regulation 30 of the consumer credit regulations specifically state where a borrower's debt is sold on or where the rights relating to that debt are assigned to a third party, then that third party steps into the original creditor's shoes from a legal perspective. The borrower is also entitled to plead against the purchaser of the debt any defence he or she had against the original creditor. The suggestion - if indeed such a suggestion is being made - that a lender who engages a debt-servicing company can abdicate responsibility for honouring the terms and conditions of a loan seems quite absurd. If that is the case then section 40 will have to be removed from the Statute Book.
In the context of what Deputy Pearse Doherty stated earlier, it seems that in terms of access to the Financial Services Ombudsman's scheme, both the creditor - who is still legally responsible for the loan and in whose name the loan remains - and the credit-servicing company should both potentially be the subject of a complaint. Equally, the CCMA should apply to both entities. There have been difficulties in this area in the past. Returning to the issue of hire purchase, garages have tried to claim that loans are with finance companies and that they are not responsible for them. In turn, finance companies have stated that credit intermediaries are responsible for lining up hire purchase agreements and that they are not responsible for what those intermediaries do. One should be able to make a complaint to the Financial Services Ombudsman against both the original creditor, who still has ownership of the loan, and anybody that creditor brings in to service the loan, regardless of whether it is an existing lending company or a lending company with a seat outside the State.
Ms Noeline Blackwell:
Looking at the matter from the point of the consumer, if one's main link is to the agent - but allowing for the owner to be drawn in, if necessary - then I presume it will be for the consumer to in some way prove that the owner should be brought in at his or her expense and risk. If it is only to be allowed to be drawn in to the Financial Services Ombudsman and not to any other avenue of redress which might be open to the consumer, then, as matters stand, that is about as complicated a legal structure as I have ever had the privilege to see.
We addressed many of the relevant issues with the representatives from the Department earlier. However, Ms Blackwell highlighted the fact that here appears to be some uncertainty regarding how this is going to work in the context of financial institutions and the original borrowers and lenders. Will Ms Murphy or Mr. Crowley comment on the level of satisfaction among the financial institutions at present in terms of how this is going to work?
Mr. Maurice Crowley:
Our members - the existing financial institutions - would support the approach we have proposed. On the sale of a loan book, they feel that the most merit is to be had in regulating the loan-servicing entity. That is where it is happening and, as stated earlier, that is where the substance is to be found. The substance is not there in the SPV that would have been set up. As part of that - and in reference to comments which have just been made - it is not just the loan that is being sold, the contract is also being sold. The lender is not abdicating responsibility, as has been suggested, in respect of the loan's terms and conditions. The latter transfer across with the loan and the borrower to the servicing company and remain intact. I would, therefore, refute the suggestion that the financial institution selling the loan has responsibility.
I understand that but I have a couple of questions. Before I was elected to the House, I was involved in putting together loan portfolios for the purposes of securitising them. My experience is that one would choose loans attracting the very lowest risk and with the cleanest of files attaching because otherwise one could not sell them on the market. The very best loans have to be selected. We are talking here about loans which might not be in the very best state. We also find ourselves in a situation where the providers of the services were the originators of the loans and where a back-office deal was done to sell a securitised block of loans. This provided liquidity for the relevant banks and allowed them to kick on. In my estimation, what is involved here is completely different. As Mr. Crowley intimated, the reputation of the financial institution which originated the loan is not at stake. An SPV or an SSPV might have been set up and the lender in question might have its origins in Malta but it might be regulated here. As we have seen with the insurance corporations, this can prove problematic when it emerges that the parent company has no assets other than its portfolio. In the event that this portfolio has exposure to loans which are not performing fantastically well, can the lender decide - as a result of the fact that it has taken a hit in respect of some loans and that other loans are in arrears and there is non-compliance in respect of them - that the best way to deal with its losses is to increase its variable rates? This would mean that the segment of the portfolio to which I refer would be carrying the remainder of it.
Are lenders of the type to which I refer in a position to make a claim to the Central Bank to the effect that they can justify increasing variable rates on foot of the fact that certain loans are not performing as well as they might? If representatives from one of the main financial institutions were present, they would refer to their mortgage and commercial loan books, the blended rate relating to their cost of funds, interest rates and other specific matters. Where an SPV is involved, it can legitimise the increase in variable rates solely on foot of the fact that some of the loans are not performing. If Mr. Crowley is in a position to allay my concerns in this regard, I would be somewhat more satisfied with what is proposed.
Mr. Maurice Crowley:
The Deputy raised a number of points. I would certainly draw a distinction between securitisation special purpose vehicles, SSPVs, and the SPVs that are now being used by those who are purchasing loan books from banks. The SSPVs are set up to take sets of quality mortgage assets - as the Deputy suggested - SME loans, credit card loans or whatever and sell them to a very wide base of investors throughout Europe and across the globe. The emphasis in this regard is very much on quality. I do not know all the ins and outs but I think there are provisions within those securitisation vehicles to ensure that the quality is maintained. If a lot of the loans involved go sour, they are backed out and better loans are put in. I cannot be sure of this but I have some sense of what is involved. As a result, these entities are very different animals from the SPVs we have been discussing. There is a general lack of substance around those SPVs.
The question posed by the Deputy is a difficult one.
The loan contract with the borrower transfers across. In the end, whatever rights that loan contract confers in variation of rates and so forth, also transfer. How the new purchaser plans to apply those to terms and conditions within that contract is up to them. I refute the suggestion that existing banks would look for an increase in variable rates to cover losses on other mortgage loans.
I am not suggesting that is the case now. However, potentially, a proposal legitimatising an increase in a portfolio bought through a SPV, special purpose vehicle, which has difficulties with some of its loans, could be put to the Central Bank. The SPV is isolated in its entity. A great many conditions exist between the originator of the loan and the equity from whoever bought it. The equity firm cannot make onerous demands of the provider and the originator of the loans as it could damage their reputation. Will a provision be introduced where the originator of a loan cannot hike up interest rates and they are kept at an average? I am concerned that an argument could be made to the Central Bank that a SPV is not making money and interest rates on the loans within it need to be hiked up.
Ms Niamh Murphy:
We can only go by what we have seen so far in the market with some of the banks that have exited or moved on their loan books. According to public documentation available, they have sold these portfolios at a very deep discount. Accordingly, they have already bought a mix of performing and non-performing loans, be they mortgages or SME loans. Based on international practice, we would expect some of these firms or funds to then sell on those loans. What they are looking to do is to maintain the loans for a period and then, once conditions improve, sell them on. The Central Bank has used the term “stickiness” to describe the resolutions that have been put in place. The committee has heard from some of our member banks about the level of stickiness of the resolutions that have been put in place. There may be anecdotal evidence, to which FLAC, the Free Legal Advice Centres, alluded that not every resolution will remain in place and there will be changes.
Mr. Maurice Crowley:
When a bank goes to sell the loan, to get the deleveraging benefits, etc, it needs to strengthen its balance sheets, there needs to be a clear cutting of the ties. If the bank still has skin in the game or has some risk exposure to those loans, then it does not get that deleveraging effect or capital benefit.
On one level we cannot be confident there will not be an increase in the rates of the loans in question. The individual bank selling the loan portfolio is in a position to regulate the interest rate that will be charged by the purchaser, although evidence to date would suggest none of the purchasers have sought to increase interest rates. Their focus has been on curing or improving the status of the debt they have. They bought it at a deep discount and have gone about improving its status and performance through restructuring, etc. My sense of it is that their interests are in curing the debt so they can sell the portfolio on at a profit. It would not be to their benefit to raise the loans’ interest rates to cover losses in the portfolio.
Mr. Paul Joyce:
The recent High Court judgment in Millar v.the Financial Services Ombudsman involved a foreign bank, Danske Bank, which took over the business of National Irish Bank. It unilaterally raised the rates on seven variable interest rate mortgages belonging to a couple, one mortgage on their principal residence and six on their buy-to-let properties. The couple complained to the Financial Services Ombudsman that this increase did not refer to any increase in the European Central Bank rate which is at an all-time low. The ombudsman upheld the bank’s right to change the interest rate according to market conditions. That was extremely vague to say the least.
Most consumers with mortgages or other loan agreements do not read the small print. Anyone who has read the terms and conditions of a mortgage agreement will know it is extraordinary the amount of latitude credit institutions give themselves. It is scary in the extreme. If some of these purported rights that the creditor reserves for itself were exercised, the borrower could find a loan called in for the most spurious of circumstances.
Mr. Paul Joyce:
On the point of debt factoring or selling on of the debt, its contractual rights are sold lock, stock and barrel, terms and conditions notwithstanding. What is to stop the purchaser of the debt, for whatever reason, invoking terms in the contract that the original creditor never had any intention of following through on?
The documents from the Department state the proposed legislation will achieve borrowers maintaining the same regulatory protections that they had prior to the sale of their loans. That is very strong language for public servants to use.
I believe we should enforce the contracts lock, stock and barrel, as Mr. Paul Joyce said. So what if a bank sold a tracker mortgage to, say, someone who bought a petrol station which was bypassed by a motorway. Caveat emptorshould apply to the purchasers of these loans. They should not be allowed entertain any hope that they can change the contracts. When we discussed this with the then Minister for Justice and Equality, Deputy Shatter, in the Seanad, he was keen those borrowers with such loans should be protected in these situations. Firms must exercise due diligence and have a better idea of risk than those who drew up the original agreements.
That is what they bought. The contract is the contract. The property rights of the other parties remain absolute. The property rights of the other parties remain absolute. The terms of the agreement stand. In the end, there is a change on the name of the cheque or the name of the direct debit. I do not want to form any relationship with whoever now runs the mortgage. I am fulfilling my part of the deal. It is about time some aspects of financial services in Ireland grew up and accepted that, rather than attempting to renegotiate deals with individuals after they have bought packages from one of the failed banks. I think that is what the Department is trying to do. I hope the negotiations in that regard go well.
I believe the property rights of people must be protected in the legislation. I refer not only to the people we are discussing, but also to others, including the tenants if a buy-to-let landlord is bankrupt. The former Minister, Deputy Shatter, was particularly interested in the protection of tenants in such circumstances. Similarly, if the bank has gone bankrupt - not the person who holds the mortgage - it should be made quite clear to the purchasers that this is what counts. Reference has been made to the institutions we own. I think that is irrelevant. If it were relevant, the Minister, Deputy Noonan, would come under all sorts of pressure because we own shares in banks. The public interest has been expressed. I remember the example was used of pressure being put on the post office to reduce interest rates on savings and thereby help the institutions we own. They have done all the damage. I do not think we have any further obligations after the €64 billion to do anything else for them. That should be made clear to anybody who wants to buy loan books from Irish banks.
Ms Noeline Blackwell:
I would like to comment on what the Senator said about the need to preserve the property intact as it goes through. I am beginning to struggle to understand what is the problem with keeping these vehicles or shelf companies. Given that they all seem to be so nebulous and small, etc., what harm is done by keeping them? Of course the person servicing the loan and doing the negotiation must be held to account. What is the problem with also recognising the need to keep the owner in the frame when it comes to redress for the consumer? Our colleagues in Banking and Payments Federation Ireland have made the point that we should hold the servicers to account because they have extensive reputations and assets. In that context, it is even more worrying if we are selling on these loan books to entities that have neither reputations nor assets and are out of the frame entirely. I am no longer seeing the logic of what this change is about We will be taking it back to the Department of Finance if this is the continued proposal.
I would like to ask a couple of questions. A number of them were asked by Deputy Spring earlier. I first came across securitisation some time around the early to mid-1990s. My understanding of securitisation at the time was that if a person had a loan with Bank of Ireland and it securitised part of his or her loan, he or she continued to deal with that bank and that was grand. As far as that person was concerned, there was no difference in what was happening. As Mr. Joyce has set out, we are now dealing with three very different situations.
I am aware that there are people watching this programme on Oireachtas TV whose loans have been sold as part of a package to an unregulated entity, or who fear that their loans will be sold on in that way. They are wondering how such sales change their positions. We have covered some of that ground. As we have said, there is uncertainty about loans that are sold before any legislation is enacted. Is that correct? I think that is correct. Officials from the Department of Finance have told this committee that most of the loan books that have been sold to date have been sold to entities that have voluntarily said they will comply with the code of conduct on mortgage arrears. As a solicitor, I question how robust that would be as a security to me if I was tossing and turning in bed at night and worrying about my debts.
We have covered the question of whether the terms of the original contract with the lender will continue to hold water as we go forward. Deputy Spring mentioned the issue of interest rates in this context. When that came up last week, the Governor of the Central Bank made it clear that the Central Bank has no role in setting interest rates. Is it not the case, therefore, that there appears to be no protection in terms of interest rates? An entity that buys a loan book might decide, for whatever reason, to vary the terms of interest on some of the better-performing loans to beef up the return on the books. There does not seem to be any prohibition on doing that, in spite of Miller, which is under appeal. That is my first question.
My second question is one that many people ask. Why would a bank want to sell a performing loan book? I think the answer is that many of these loans are not performing. Therefore, there has to be another agenda. That is what people are afraid of. In the current improving property market, there is a fear that those who buy loan books, particularly those who might want to maximise on them, are not effectively prohibited from acting in an aggressive fashion, refusing to engage in forbearance and going to sale as quickly as possible. My reading of this is that there is no effective prohibition. My engagement with the code of conduct on mortgage arrears leads me to believe it is so easy for a borrower to be in breach of the code that a lender, or indeed somebody managing the loan book on behalf of its owner, can simply decide to step in at any number of points during the process.
Mr. Joyce made the point that approximately 10,000 cases have gone into the courts in the last short period of time. Questions have to be asked about aggressive behaviour. How can we protect consumers? Obviously, we can beef up the code of conduct on mortgage arrears. Problems arise when those who buy loan books that are not necessarily in the most robust condition decide they want to cash in on rising property values. Mr. Crowley made a point about reputation in this context. That is fine when it comes to existing institutions, as there is still a great deal of trust in the market between some of the traditional lenders and customers. Many of those who have sold on loan books no longer have skin in the game, as somebody said. They do not really give much thought to their reputations. Reputation will not save anybody. As we know from other types of credit and the activities of some credit collectors, for want of a better word - some of them would be closer to the sheriff's office, or wherever it happens to be - the behaviour of the people who are administering loans can vary substantially. The behaviour of one person who is acting to enforce a loan can be very different from the behaviour of another person who is seeking to do so.
I will put my overall question. Will what is being proposed here protect people whose loan books have already been sold? I think the answer we have been given to that question is "No". I believe the code of conduct on mortgage arrears is still way too weak and too easy.
In the case of joint borrowers, for the sake of argument, where there is one non-co-operating borrower, it is easy to abandon the code of conduct on mortgage arrears at any point in time. In spite of the legislation and the Government's stated desire to protect people, is there any real, effective protection in the legislation for vulnerable borrowers in the face of someone who buys a loan book and is only interested in maximising its value?
Mr. Paul Joyce:
We make the point in the course of our submission that even if the legislation achieves its stated aim to ensure that the CCMA applies to all mortgage providers, whether the original lender or an entity that buys the loan, the code itself is now an inadequate infrastructure for the protection of borrowers in arrears anyway. I agree completely with the Vice Chairman's point that declarations of non-co-operation are made by lenders in relation to borrowers whose standard financial statements seem to never have arrived at the lenders' offices. We have seen it. Declarations are made where bits and pieces of information have gone missing and where there is a couple who have separated and one of the borrowers fills out the standard financial statement but the other borrower does not wish to do so. There is a multifaceted definition of non-co-operation in the code of conduct on mortgage arrears and we do not even have figures from the Central Bank as to how many cases of non-co-operation lenders have declared since the code was amended in July 2013.
Furthermore, there is an expanded suite of so-called "alternative repayment arrangements" set out in the legislation. However, the lender is only obliged to pursue those repayment arrangements which it chooses itself to offer and has no obligation to offer any alternative repayment arrangement. It seems to me that if I was the acquirer of a loan portfolio, I would not be too worried about the code of conduct on mortgage arrears and would be putting in place the processes required to tick the boxes under it knowing that there was no right of appeal. If one looks at the website of the Financial Services Ombudsman, that office has made it abundantly clear that it will only deal with complaints related to abuse of process under the code and will not review the three crucial decisions that can adversely affect borrowers under it. Those are a declaration of non-co-operation, a refusal to offer an alternative repayment arrangement and, therefore, to declare the mortgage unsustainable, or to offer such a restrictive alternative repayment arrangement that the borrower refuses it and is then adjudicated to be outside the process. When one finds oneself in that position, the MARP no longer applies and legal proceedings can be brought against one within three months of the lender informing one that one is outside the code. To put the tin hat on it, there is no legal aid available for defendant borrowers who find themselves on the receiving end of proceedings.
We have set out in the submission the recent comment of the Governor of the Central Bank that he believed - or seemed to suggest - that many defendants in legal proceedings for repossession were non-co-operators. While some are not co-operating, many borrowers who have co-operated right through the process are now in the Circuit Court facing repossession proceedings. It is one thing to put in place the same protections for borrowers of all creditors, but are the protections themselves adequate in the first place? We are at a very critical juncture where we await the Central Bank's quarter 3 figures, but we know that in the first six months of the year there have been over 6,000 repossession applications. The numbers have mushroomed.
Simultaneously, the restructuring arrangements under the mortgage arrears resolution target set out by the Central Bank are quite slow. If one looks at the statistics, progress is quite slow. The number of arrears cases have declined, but we are not even sure whether there is double counting going on. There is a lot of capitalising of arrears going on, which is bizarre as it would appear to involve a higher instalment being paid by a borrower who was already in financial difficulty. While some people's situations have improved, it is not the 25,000 odd who have been offered arrears capitalisation. Whether it is the original lender or the purchaser of debt, consumers are very vulnerable and nothing seems to have changed.
Ms Niamh Murphy:
I want to come in on one or two things there. At an overall level, data is provided in detail to the Central Bank by our members, in particular every quarter, as they are obliged to do. The Central Bank has also requested that each of our members provide it with details of the solutions they have in place. There is a long list of alternative repayment arrangements that are available to borrowers. It depends on each individual circumstance which is why the Central Bank introduced the standard financial statement which requires the borrower to go into each aspect of his or her financial situation in a great deal of detail. It is a very difficult experience for many people and we agree absolutely that it is very challenging for them. It is why in many of the longer term solutions proposed the banks will pay for independent advice, which the borrowers can achieve themselves. In many cases of long-term arrangements, the banks will pay towards legal advice. That is the case.
The Vice Chairman referred earlier to banks selling their books. The majority of the sales which have taken place to date are from banks that are either winding down their operations in Ireland or have been forced into making the sales. We do not see a lot of existing lenders who want to stay operating in Ireland selling on their books. If one looks at some of the banks based in the UK who had a substantial mortgage business in Ireland and have parcelled off the loans, there is a mix of good and bad in there. Based on the information we have and the experiences we have seen, in the majority of cases where there is a mix, they are trying, as Mr. Crowley said earlier, to get the flow and to get the loan cured if at all possible. That is where they will make their money back when they decide to move the asset on. That is the nature of those types of company and the way they invest. They buy the asset at a reduced price and look at the improvement in the economy. They would not be here buying these books unless they saw that there was a benefit to them in the way the economic circumstances are changing. That leads then to an increased level of cure.
Does that not come to my point? They buy the asset, as Ms Murphy puts it, with a view to moving it on when the economic circumstances improve. Like I say, the market is improving so house prices are rising. The difficulty here is that the asset is my home. Their profit lies in turning over my home which boils down to getting it out of my possession and onto the market.
Mr. Maurice Crowley:
I will be allowed to refute part of what was said hopefully. Their interest, as Ms Murphy has explained, is in curing the loan. It is not about forcing people out and repossessing their homes. It is absolutely not that. It is very much that if they can cure the loan and make it more cash-flow positive, they can then sell that portfolio of assets to another investor. It is the world we live in and I am not saying it is a particularly nice process, but these people are not buying these loans to go through a repossession process to force people out of their homes. There is no question about that. There is also no question of them coming in here with a view to using the contracts that are in place to force up variable rates. There is no evidence of that.
The other thing I would say at the risk of repeating myself as it keeps coming around is that the existing contract between the borrower and the lender and the rights it confers on both parties are transferred, in the phrase someone used, lock, stock and barrel to the purchaser. It does not put the purchaser in a position to vary the underlying terms of that contract. It gives them a right to exercise the existing terms and conditions of those contracts. It does not give them the right to renegotiate or vary the terms. I am not a lawyer but I am comfortable on that one.
I am a lawyer and realistically speaking the vast majority of mortgage deeds allow a lending institution to foreclose.
I think the point has already been made by Mr. Joyce. Realistically speaking, if one was to read the vast majority of mortgage deeds, one would see that they would enable any lending institution to literally foreclose on a mortgage with 30-days notice.
I do. To set the scene for my contribution, I am always last. Even though one might see me first, I must be the last to contribute even though we have a very good Vice Chairman. That is because I am not a member of this committee because I was removed from it on 3 July 2013 and I am not allowed to be a member of any committee because of a conscience vote.
This is an area in which I have a lot of experience. I am interested to hear that the law does not improve the scene when the ownership of a loan moves from the original owner or lender to a new owner. However, as the Vice Chairman and Mr. Joyce said, the actual small print terms and conditions, which become magnified when things go wrong, show that it was a very unclear position at the start and that everything is massively weighted in favour of the lender.
Let us think about the lender. The lender was part of a class called the banking or financial services sector, which is becoming the financial self-services sector. This sector allowed its balance sheets and the financial engineering of the domestic banking economy to become absolutely dangerous over a period of about seven years through a credit pyramid system, effectively a Ponzi scheme. The sector is now trying to repair that financial engineering on balance sheets which involves the sale of loan books by those institutions that remain, some of whom want to get out, as Mr. Joyce mentioned, and some of whom see that there may be some point in staying as interest rates change and they manage the interest rates differentials of what assets they have created and whether they are on fixed or variable and so on.
I remember back in the 1990s when there was some sort of good behaviour in banking that many of the banks with the exception of ICC Bank where I worked did not even define what the interest rate base was. They talked about the prevailing average cost of funds but that could be anything. If banks had stupid boards of directors, that could work out at 20% or 30% if they were paying too much for their funds. Their cost of funds is whatever they pay. It was not even related to what one could call objectively defined rates. Sometimes it did. It was the Dublin interbank offered rate, Dibor, or the Euro interbank offered rate, Euribor. As we have learned, they were then manipulated and fraudulently changed by the biggest banks in the world which cumulatively are paying fines of €140 billion for their reckless breaking of the law. I am afraid that I think the little people are again put in very vulnerable situations. It is up to us to correct this.
I will tell the witnesses a short story in 50 words. Ernest Hemingway wrote a short story in six words. It read "For sale: Baby shoes, never worn." Mine is 50 words. W. Ross Jnr. made a profit of €500 million on an investment of €290 million in Bank of Ireland shares. He was the largest single shareholder in the bank apart from the State. He was the most influential director on the board for the two years and ten months he held that investment. Having sold it for a €500 million profit and having been the most influential director on the board forming the policy of the bank which we know is not to have any principal write-down on any loan even in loan restructurings, which is absurd to me as a financial person but that is what it is stating is its policy, this man took his €500 million profit and went back to the US. He has no investment or interest in or directorship of the bank. That is a short story. That is the reality - €500 million. It is stark as the death of poor Jonathan Corrie on the steps outside the Dáil 48 hours ago. This is the modern Ireland in which we live and it is not right.
The letters that summarise the situation of the two so-called pillar banks are OOOC. What do those letters stand for? They stand for "out of operational control". That is my experience. Mr. Joyce has given very good case evidence and I congratulate Ms Blackwell on her contribution to "The Pat Kenny Show" this morning which discussed how after five years as a tenant and having been fully up-to-date on her rent, a lady called Svetlana found herself, her son and her husband locked out because a bank acted without giving any information to her or her family as to why it was locking them out. That is another true story that is about 30 words. We really need to wake up in Ireland. The Governor of the Central Bank of Ireland appeared before the committee last week and I would say he was doing his best but the best is in a fog - a labyrinthine fog that has been left behind that nobody has had the guts to clear up honestly.
The banking losses were not the figure of €64 billion in the domestic banks that we all talk about and that one can see and tot up on balance sheets. If one includes the banks that operated here that were not owned in Ireland like KBC, Danske Bank, Rabobank and Bank of Scotland (Ireland), one can see that the domestic banking sector's losses in Ireland were €135 billion, not €64 billion. That is nearly 70% of our GDP. That is mind-blowing compared to anywhere else on earth in the past 20 or 30 years.
But we should all think about this. We really must wake up and be honest and banks have to stop faffing around and get real. I know that they are not actually responding meaningfully, to use their own terms, to people. I know this because I am dealing with about five cases at the moment. I know that their boards of directors are refusing to meet professional representatives in cases where those representatives based on the evidence and the facts of the case have a far more sustainable resolution for the cases in hand. They refuse to meet them. How dare they? They mandate to people who are given orders that there shall be no principal loan write-downs in the restructurings. How dare they do that when it is measurably calculable how culpable they were in creating the credit Ponzi scheme? Both AIB and Bank of Ireland measurably on their balance sheets are culpable in the creation of the credit pyramid at a level of 70% of the credit bubble. Why? It is because their loans to deposit ratios, which are the proper funding for the assets they create, were out of control at 160% of deposits, which is the mainstay funding for their balance sheet asset creation. This is very wrong. They are trying to correct those balance sheets by selling these loan books and letting people take the consequences, which is wrong.
I am going to call a halt now. I am asking one question that relates to agreements that have been reached relating to distressed loans where the loan book has been sold on.
Given that the situation has been evolving in recent years and that the actual agreements per semay vary in terms of their robustness, is there enough protection for agreements that have been reached between lenders that are selling on loan books and customers? If there is not, could anything be done in the context of the Bill to improve the situation?
Mr. Paul Joyce:
The alternative repayment arrangements lenders offer under the code of conduct on mortgage arrears can be short term, long term, permanent, temporary and take many different forms such as payment of interest on a portion of capital, split mortgages, arrears capitalisation and so on. They are all subject though, by and large, to periodic reviews. Even where an arrangement is put in place by one lender who subsequently sells on its loan book, I do not see anything in the code of conduct on mortgage arrears that would stop the incoming purchaser from changing the goal posts at a financial review.
We do also have to remember the code of conduct on mortgage arrears is precisely that; it is a regulatory code. Its admissibility in legal proceedings is certainly open to question. It does not form any part of the corpus of secondary or primary legislation in the State. I would tend to say “No”. Once there are in-built reviews, even if the incoming purchaser were to honour the arrangement until the review, I do not see how they could be prevented from altering it after that.
Mr. Maurice Crowley:
I suppose in short we would not have any difficulty with what is being suggested. If an agreement is in place with a borrower when the portfolio is sold to another purchaser, whoever that might be, our belief is that it should remain intact. Presumably that applies when a bank holds a portfolio, and excepting if the circumstances of a borrower change the contract or agreement between a borrower and existing lender or new lender should remain in place as far as we are concerned.
Ms Niamh Murphy:
The reviews are in place at the request of the Central Bank to make sure an oversight provision is in place. If something is working and the arrangement is sustainable, there is no reason to review it as long as payments continue to be made. I do not think anyone is looking to try to take a review process and to use it as a way of undermining what has already been agreed.
Mr. Paul Joyce:
That may well be, but if one is looking at a long-term restructuring arrangement such as a split mortgage where a comparatively small portion of what is the original contractual instalment is being paid, I would have my doubts about whether the goal posts would not be changed even though an arrangement is in place.
This is of interest as it is a parallel issue. The same thing applies to life assurance companies. I have personal experience of the situation. They now advise customers who hold a convertible life policy that they are obliged by the Central Bank to advise in the interests of customers that the policy could be sold or transferred to a third party in a secondary market. I looked at the original policy I took out in 1980, which I converted in 1989. The policy was written by Norwich Union but is now controlled by Aviva. Nowhere in the original policy was there even a hint that it might be sold or transferred to another company. I would not take out an insurance policy with a new owner if the original policy was sold. That is fundamental. The same applies with lenders and borrowers. It is a relationship, it is not just an asset.
Ms Murphy spoke about the details submitted to the Central Bank by the banks. I would hold that in the past ten years the information and details from any of the banks in this country submitted to the Central Bank are hugely unreliable, starting with the loans that were listed for the purpose of transferring to NAMA. It was a joke. The provisions were a joke.
On behalf of the committee I thank the witnesses for attending today. I thank Noeline Blackwell and Paul Joyce from FLAC and Maurice Crowley and Niamh Murphy from the Banking & Payments Federation Ireland. It will take me some time to get over the name change. We would be delighted to receive any additional contributions witnesses might wish to make. Unless there is any other business, the meeting is adjourned.