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.