John McGuinness (Carlow-Kilkenny, Fianna Fail)
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We are now dealing with the scrutiny of the Central Bank (Variable Rate Mortgages) Bill 2016, which is Private Members' business. I welcome the Minister for Finance, Deputy Michael Noonan, Mr. John Fitzpatrick, Ms Emma Cunningham and Mr. Leonard Wall. In accordance with Standing Order 141(2), the select committee is scrutinising the provisions of this Private Members' Bill, in the name of Deputy Michael McGrath. As members are aware, the European Central Bank has been consulted on it, and we are awaiting the outcome of that consultation. In our first session today, we will hear the views of the Minister for Finance on the proposed legislation. In the second, we will hear from the members of the Fair Mortgage Rates Campaign, which has been campaigning on the issue. It is also planned for the coming weeks to engage with the Central Bank of Ireland on this Bill.

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 House or an official either by name or in such a way as to make him or her identifiable.

As Deputy Michael McGrath is the sponsor of the Bill, I invite him to make an opening statement to the committee, following which the Minister will be invited to respond. Members will then be invited to participate in the debate.

Michael McGrath (Cork South Central, Fianna Fail)
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I am delighted the finance committee is now examining this legislation on pre-legislative scrutiny stage. Pre-legislative scrutiny of this Bill was not a requirement but I agreed to it because it may be helpful and result in the Bill being improved over the coming weeks. The other relevant point is that the Bill is currently with the European Central Bank as part of the consultation we are required to do, as the Chairman has indicated. I understand it is not due to revert to us for another few weeks, or until mid-November. The pre-legislative scrutiny will not delay the taking of the formal Committee Stage of the Bill.

I acknowledge the dedication and expertise brought to the issue by individuals and campaign groups, such as the Fair Mortgage Rates Campaign, whose representatives, led by Mr. Brendan Burgess, are present today and from whom I look forward to hearing later. Many commentators in the media, such as Mr. Charlie Weston of the Irish Independent, have highlighted the issue in recent years. We welcome the support of other Opposition parties and Independent Deputies who have used their parliamentary time, including in term of the previous Dáil, to advocate for variable rate mortgage holders.

This legislation is necessary to deal with the issue of excessive standard variable mortgage rates. This issue has been the subject of a public debate for the past couple of years or so. There has been ample time for the banks to move to bring their rates into line with market conditions. Market forces, competition and new entrants have been cited by those opposed to the Bill on many occasions as the best ways of achieving progress on standard variable rates but it has not materialised. Therefore, legislation is necessary. As I stated in the Dáil, I wish legislation such as this were not necessary but I have reached the conclusion, to which I stick, that it is.

There is a widely held view, both in the Government and Opposition, that many of the variable interest rates being charged by banks in the State are unacceptably high. Where we differ is on how to tackle this problem. I emphasise that I am very much open to this Bill being amended over the weeks ahead. I do not claim it is perfect; it is an honest attempt to help variable rate mortgage holders who, in my view, continue to pay well over the odds on their mortgages.

There are a few key issues I would like to highlight. The first is the different treatment by the banks of existing mortgage holders as opposed to new mortgage holders. Over the past year or so, in particular, banks have reduced their standard variable rates for new customers, but some have not extended those reductions to their existing mortgage customers. This is fundamentally unfair and should not be allowed to happen.

Variable rates should change in line with market conditions.

When market conditions are favourable, people expect rightly that variable rates will fall. When they are adverse, variable rates should move in the other direction but that simply has not been happening to the extent that is justified by the prevailing market conditions. It is well documented that variable relates in Ireland are out of step with those charged elsewhere in the euro area. With regard to new business, as will be demonstrated by the presentation we will examine later from the Fair Mortgage Rates Campaign, the difference is at least 1.5%, but it is much greater in many cases for existing customers who are trapped and who do not have the option of switching their mortgage.

I reiterate that the Central Bank is not properly fulfilling its role in the area of consumer protection. It seems to prioritise its role as a prudential regulator above and beyond its role of protecting consumers. If it was giving that role the attention and priority it deserves, then we may not have to introduce legislation of this kind. Switching is not possible for every mortgage customer. Those who can should do so and some have, but for many mortgage customers, because of a change in circumstance, negative equity, reduced income, for example, switching is not an option and they are trapped and have to pay rates that are unjustifiable and, ultimately, unsustainable.

The banks that have steadfastly refused to reduce their SVR cannot be allowed to hide behind improved fixed rate offers. A number have improved such offers. I have highlighted the case of Bank of Ireland in the past, which has stuck rigidly to an unjustifiable variable rate of 4.5% for many existing customers. In a presentation accompanying its year end results for 2015, the bank's cost of funds was quoted at 0.8%. It is, therefore, charging its SVR customers more than 5.5 times its own cost of funds. This is an indefensible position. If the Central Bank will not vindicate the rights of those mortgage holders, the House should move to do so. Fixed rate mortgages are an entirely different product from an SVR. If customers lock into a fixed rate, they will lose out if the variable rate falls below the fixed rate and they will also lose a great deal of flexibility because while a fixed rate is suitable for many mortgage holders, it may not be for others. In addition, if a new competitor enters the market offering a much lower variable rate, these customers face substantial penalties if they seek to switch their mortgage.

The position of Dankse Bank customers is even more precarious as they are paying a SVR of 4.95% but because the bank has departed the personal banking market, there is no incentive for it to reduce the rate. It is not concerned about its reputation in the personal banking market.

The situation facing approximately 46,000 customers whose mortgages are now owned by non-bank lenders should also be highlighted in the context of this Bill. Many of the mortgages are owned by vulture funds which bought them from IBRC special liquidators and foreign banks departing the market. If the funds decided tomorrow morning that the SVR should be increased to 6%, 8% or higher, these mortgage holders could do nothing about it, particularly if they were not in a position to switch. More worrying, the Central Bank could do nothing about it based on its existing statutory powers. That is not a tenable position. This exposes these mortgage holders, in particular, to an unacceptable risk. I would like to address the question of whether the Central Bank wants the powers to intervene in the market and this will come up again during the debate. The fundamental point about this is the Oireachtas decides the powers given to the Central Bank. We decide the regulatory framework and the Central Bank regulates within that framework. There is a division of responsibilities and, therefore, we should not shirk our responsibilities.

Under the legislation, the Central Bank would be required to carry out an assessment of the state of the mortgage market, taking into account factors such as the banks' cost of funds, reasonable profit expectations, concentration within the market, and the ease with which customers can switch mortgages between lenders and the extent to which they are switching. Should the Central Bank conclude that there is a market failure, it would be empowered with a range of tools under the legislation to influence the SVRs charged in the market. The Bill's provisions are modest and many people who believe the Central Bank should intervene suggest that we go much further. It is a modest Bill, which has become essential. I am open to amendments to improve it during its passage, hopefully, through Committee Stage in a few weeks.

The inescapable reality underpinning the Bill is that the cost of funds for banks has fallen dramatically in recent years. Their net interest margin is increasing all the time and the main banks are strongly profitable again, which I welcome. Some of the rates that continue to be charged are unjustifiable by any yardstick and need to be addressed. They are charging those rates because they can get away with it and they are treating many of their existing customers in an extremely unfair manner, which must be addressed. Fair treatment of customers should be a cornerstone of consumer protection. Unfortunately, it is not in the current framework within which the Central Bank is operating. A strong legislative framework is needed to ensure this happens. The banks cannot be allowed to continue to rip off customers safe in the knowledge that they will not be subject to any sanction or intervention by the House or the Central Bank. The position is clear. If the banks wished to avoid legislation of this kind, they had ample opportunity do what was necessary and treat customers with a degree of fairness to ensure the variable rate charged was in line with the market conditions they faced. They have fundamentally failed in that objective and, for that reason, this legislation is necessary to strengthen consumer protection provisions and to ensure further downward pressure on variable rates, especially when they are unjustifiable and unacceptably high. I will be happy to take questions on the Bill following the Minister's contribution.

Michael Noonan (Limerick City, Fine Gael)
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I am grateful for the invitation to participate in the committee's pre-legislative scrutiny of the Bill, which has been proposed by Deputy McGrath. I look forward to working with the committee and contributing to its important work. There is a responsibility on all of us to critically, but also fairly, evaluate all proposed legislation coming before the Oireachtas, irrespective of whatever side of the House it emerges from. There was a constructive Second Stage debate last May to which many Members from all sides of the House contributed, and the Dáil then decided that the Bill should move to Committee Stage for further and more detailed deliberation. I can assure members that the Government will constructively engage with the issues raised by the legislation as it is further considered by the committee and the Oireachtas. However, it is also important to acknowledge and recognise that this is not a Government Bill. It will, therefore, not be the responsibility of Government to progress the Bill through the parliamentary process, or to answer questions on the overall objective or detailed provisions of the Bill. That responsibility rests with the Bill’s proposer. While the Government will actively contribute to the work of this committee, it cannot assume a responsibility for the progression of Private Members' Bills once they have passed Second Stage.

As I indicated on Second Stage, I fully understand that the intention behind the Bill is to help people with their mortgage repayments. As the economy improves and as the banks stabilise and come back into profitability, borrowers will rightly feel that their mortgage and other loan rates should come down. Depositors and other stakeholders in the banks will also want improvements in their positions. These are the natural tensions which play out in a competitive banking market. However, on Second Stage, the Government outlined a number of significant concerns it had with the Bill as proposed. These concerns remain and it is considered that it would be of benefit to the legislative process if the committee would consider these and also concerns that were raised by others in the House and outside in the pre-legislative scrutiny which is now commencing.

One of the points I raised was the requirement under the EU framework to consult the European Central Bank, ECB, on the content of the Bill. Dáil Standing Orders have since been amended to provide that in the case of a relevant Private Members' Bill such as this, the relevant Oireachtas committee will conduct this important consultation function. I welcome the fact that this consultation process has been initiated. However, it is unfortunate that neither this committee nor the House has yet had the benefit of that ECB opinion before it further considers this Bill.

Such an opinion, when it is to hand, will obviously be a very important contribution to the pre-legislative scrutiny work that members of this committee are now undertaking. Also, depending on the content of the European Central Bank opinion, the Bill's proposer may wish to consider if amendments are required to the Bill as it currently stands. The Bill will need to be carefully considered to ensure it complies with all the requirements of European Union law. Section 5, for example, in permitting the Central Bank to impose a cap on the standard variable mortgage rate that applies to one lender but not to the market generally could potentially be considered to enable competitive distortions in the market or to enable the prevention of the free movement of services or be subject to criticism under state aid rules.

Significant constitutional issues are already raised by this Bill. I sought to flag these concerns during the Second Stage debate not to seek to make a political point, avoid a fair consideration of the merits of the Bill, or more importantly, to somehow prevent an improvement in the position of variable rate mortgage holders, but to raise a genuine concern. Real constitutional issues will need to be considered as this Bill is further progressed by the Oireachtas. As it is drafted, the Bill will clearly have an impact on the existing property rights of some creditors. Likewise, there are concerns about the process and decision-making procedures set out in the Bill and whether they provide for "fair procedures" and a "fair appeals" process to any affected parties. Overall, it will be important to ensure that any proposed legislation that interferes with private property rights would be a proportionate measure in the interests of the common good.

I am not saying the Bill as drafted is unconstitutional but rather the issue is that it is not possible to come to a considered view on the matter at this point. When the Government initiates a Bill, the constitutional and legal aspects of the Bill will be considered by the Attorney General as legal adviser to the Government. Where a concern about the constitutionality of a Bill arises, the Attorney General may seek a very detailed analysis in terms of the rationale for the policy measure and possible impacts from the initiator of the proposal in order to assist it in forming an assessment on whether the proposed restriction on property rights or some other rights are proportionate to the social good which the proposed Bill seeks to achieve. Such a detailed assessment is also likely to contain an assessment of whether an alternative measure or measures could be deployed to achieve the same or similar desired objectives but without impacting existing property or other rights. This will be an important issue for the committee to consider further in its pre-legislative deliberations.

Likewise, it will be important to consider the detailed drafting of Private Member’s Bills, and I note that the report of the Dáil reform committee called for a greater role for the Office of the Parliamentary Legal Advisor in the drafting of Bills. I do not know what involvement that office had in the drafting of this Bill. Nevertheless, while this is not the time for a detailed line by line consideration of the Bill, there are some detailed drafting, technical and other issues. These include the precise "interest rate" that will be assessed in the determination or otherwise of "market failure"; the feasibility of restricting the regulatory measure to mortgages for the "primary purpose of purchasing a principal dwelling home" as opposed to a loan provided for another consumer purpose but which is nevertheless also secured on the primary home; what precisely is meant by a "fixed" and "not fixed" interest rate; how the Bill will link with existing national and European provisions governing housing loans such as the Consumer Credit Act, the mortgage credit directive and the Central Bank consumer codes; whether the Bill will apply to local authority mortgages; and whether the requirement to conduct an assessment of the mortgage market each quarter is unduly proscriptive and excessive. These and other issues will need to be considered in some depth by this committee in due course. Consideration also needs to be given to whether there are unintended consequences to this Bill, such as acting as a deterrent to new entrants to the Irish market and thus ensuring that there is less choice available to consumers.

Another area of concern relates to the respective responsibilities of the Central Bank and the Competition and Consumer Protection Commission. The Bill requires the Central Bank to assess whether "market failure" exists in the principal dwelling house mortgage market. This is not a power sought by the Central Bank and it does not have a competition mandate. That mandate rests with the competition commission. The Competition and Consumer Protection Commission is the independent authority charged with tackling anti-competitive business practices and with the assessment of business competition issues. Nevertheless, the Central Bank will have an important interest and role in the operation of the residential mortgage market. Committee members will therefore be aware that the Programme for a Partnership Government indicates that the Central Bank and the competition commission, having due regard to their respective remits, will work together to set out options in terms of market structure, legislation and regulation to lower the cost of secured mortgage lending and to improve the level of competition and consumer protection.

The Government remains of the view that competition represents the most favourable method of driving down interest rates in a sustainable way without giving rise to possible unintended consequences. The latest monthly data from the Central Bank indicates that the interest rate on new mortgage agreements continues to decline. Banks are expanding the range of mortgage products for customers, including a wide range of fixed interest rate products. The Government is of the view that there is further scope to generate more competition and switching behaviour in the mortgage market and which has the potential to deliver more savings to customers. Therefore, in addition to the work requested from the competition commission and the Central Bank that I have just referred to, the programme for Government also wishes to promote a greater level of switching in the market for existing mortgages. A Central Bank economic letter published last year suggested that a significant number of existing variable rate mortgage customers could achieve financial savings by switching their mortgage provider.

I believe competition is a better solution to this issue because it benefits all banking customers and will help to avoid potentially unintended consequences that could arise from the imposition of administrative controls on some mortgages rates. We also continue to have concerns about the constitutional implications of the Bill as currently set out. Consequently, I welcome the pre-legislative scrutiny this committee will now conduct on this Bill. I also welcome the fact the committee will obtain the views of the European Central Bank and other interested parties on this Bill before it proceeds to further consideration by the Oireachtas. If the committee decides to proceed, I will pledge our co-operation to improve the Bill if it is the desire of the Oireachtas.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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We will have the opinion of the European Central Bank before we meet representatives of the Central Bank. We will be seeking our own legal opinion on the constitutionality of the Bill. We will deal with both those items. Do members have any questions?

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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Who will be answering the questions?

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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The Deputy has put his finger on it so off he goes.

Michael McGrath (Cork South Central, Fianna Fail)
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I will be responding to questions about the Bill but the Deputy is equally free to put questions to the Minister about policy, etc.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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It is not that I do not want to hear Deputy McGrath's answers.

Michael Noonan (Limerick City, Fine Gael)
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I have full confidence in the Deputy.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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New politics. We have heard it here.

Seán Sherlock (Cork East, Labour)
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On Second Stage we assented to bring the Bill to this stage. One of the questions I have had on my mind for some time has been where the Central Bank is in respect of its position on mortgage pricing in Ireland. There was a report from 2015 but is there an updated report in that respect? I do not necessarily need the answer now. It seems there is a very clear position within the Central Bank on bank profitability. The report states that equity investors, whether the State or others, cannot be expected to inject capital if a return in the form of profits is not in prospect.

The report stated:

That is why it is unrealistic to imagine a regime even in the long-run in which mortgage lending rates do not build in not only a sufficient spread (over the cost of funds) to cover the credit risk being undertaken, but also make an adequate contribution to profits. It is likely, however, that the rates in effect for most banks at the end of April 2015 [which is when the report was published] were higher than would be necessary in the long-run for a bank unburdened by a poorly performing mortgage back book.

Could we get a perspective from the Central Bank as to whether this view point has been updated? It would be pertinent regarding dealing with the issues of competition as elucidated by the Minister.

There is an issue regarding how the property rights of some creditors would be affected. Can we have a deeper dive into the dynamic of the property rights as they affect those people who paid 6% or 7% on variable rates? In one case I am familiar with, it will add approximately €100,000 to the cost of the mortgage over its lifetime. I wonder how somebody like me could explain to the person that it is a constitutional issue in which the property rights of the bank or financial institution take precedence. It is a little unclear.

Michael Noonan (Limerick City, Fine Gael)
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The Central Bank has not updated the opinion. There is nothing more recent. As the Deputy said, he is taking legal advice on the other question.

Seán Sherlock (Cork East, Labour)
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Perhaps we could have an updated report from the Central Bank on the standing of the mortgage book in that respect. If there were an update of the May 2015 report Influences on Standard Variable Mortgage Pricing in Ireland, it would be very useful.

Michael McGrath (Cork South Central, Fianna Fail)
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I have read the report, which goes through all the key elements of pricing in terms of interest rates, the cost of funds, the cost of credit risk associated with the lending, the operational costs of running the bank, the cost of capital and the competitive environment faced by the banks. The Central Bank position is well known. There are some interesting points in the report. For example, it says, "Their boards and management need to recognise that charging spreads that excessively exploit the current weak competitive environment risks being counterproductive if they bring down upon themselves Government policy reactions". The banks have not heard this message and responded accordingly, and this is the problem. The Bill passed Second Stage unanimously in the Dáil in May without a vote. The Government did not oppose the Bill. Perhaps the Government was anxious to avoid a parliamentary defeat so early in its lifetime.

On the question of constitutionality, I am not a senior counsel, and I welcome Deputy Pearse Doherty's suggestion that we refer to the Parliamentary Counsel. The Government introduced amendments to the personal insolvency legislation whereby an insolvency court could impose a solution on a lender, including a write-down of the mortgage amount owed. Although the Government said for a long time that it would not be constitutional, the Attorney General must have passed it. If it is constitutional, I cannot see how the measure in this Bill could be unconstitutional. We will await the judgment and opinion of the Parliamentary Counsel.

The key measure in the Bill is defining a market failure. It follows the Central Bank's assessment which can result in it issuing a direction to a lender or group of lenders whereby, as stated in section 4, the rate being charged is "higher than the Central Bank considers can be reasonably and objectively justified by reference to the factors set out in section 3". Those factors deal with all the issues contained in the Central Bank's report on variable rate pricing. The benchmark is whether the rate a bank is charging to the customer can be "reasonably and objectively justified" by reference to those factors. Undoubtedly, there are rates being charged in the Irish market that are exploitative and cannot be justified by reference to those factors. The Bill is particularly designed to deal with those outliers, those egregious situations in which people are paying rates that cannot be justified.

Michael Noonan (Limerick City, Fine Gael)
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The Second Stage debate in the Dáil was very useful and the inputs were coming form Deputies who were very well informed about the personal problems individual mortgage holders had and the general issue. The Deputy is right that there was a desire not to have a Government defeat so early in the life of the Government. There was also an agreement on the principle of the Bill. Everybody thought certain lenders were applying mortgage interest rates that were too high and there was a common purpose in seeing if we could get the rates reduced. That was the purpose of the Bill, and on Second Stage one is voting on the principle, not on the detail. The principle was close enough, as described by Deputy Michael McGrath, to the Government's view.

I would have thought the application of competition would have achieved the same end without legislation. To a large extent, in terms of new mortgages, it has, particularly in AIB where the State is a 99% shareholder. The AIB rate is quite good. The Deputy is right that the outlier is Bank of Ireland, especially regarding mortgages that are already written and the differential between the treatment of new mortgage applicants and historic mortgages. There is a gap there.

I have no advice that the Bill is unconstitutional. The test is whether the response in the Bill is proportionate to the public interest advantage that is gained by enacting it. This is the criteria on which a senior counsel would examine it and it is in this space that one would get legal advice. All I am saying is that there is an issue and that legal advice is needed. We will work our way through it and see if we can come up with a solution. I do not disagree with the analysis. Some lenders are charging too much. There are other issues. We do not want to distort the market. If our legislation results in a reduction in the profitability of mortgage books, we would like to avoid a situation in which a bank would move to recover profits elsewhere in the market by charging more for SME lending where we need economic activity to create jobs.

There are a number of issues. The Deputy has done the House service, especially under the new rules. We will work our way through it, not with the intention of obstructing the Deputy in any way but of assisting in the discussion.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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The Second Stage debate was not as unanimous as the Minister suggested. In the Minister saying the Second Stage position was not so far from the Government's position, there is a bit of rewriting of history going on regarding the Bill, which we supported. On the first night of the debate, the Minister said if we took the total value of the Irish taxpayer's holding in the banks, the publication of Deputy Michael McGrath's Bill decreased it by 10%. Does the Minister stand over the statement or does he withdraw from it? If he is saying the Government's position is not so far from the position of the Bill, how can it be explained?

Michael Noonan (Limerick City, Fine Gael)
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If we had a majority, we probably would have opposed the Bill.

Everybody knows that. Traditionally, everything was opposed by Irish Governments regardless of the merits of what came from the Opposition.

On the principle of the Bill, we share the aspiration to reduce variable mortgage rates. As they pinch hardest for historic mortgages because the new offerings have reduced interest rates, we share that objective. We expressed our views very strongly as did the supporters of the Bill. Statistically, that is what happened. We can give Deputy Paul Murphy the piece of paper. The advice I received was that there was a cause-and-effect relationship in the context of the drop in bank shares.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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The Minister is saying that, statistically, bank shares dropped by 10% over a period of days but that is not what was said at the time. What the Minister said was that the publication of the Bill led to it dropping by 10%. Does the Minister still believe the publication of a Bill proposing that there should be some measure of relief for mortgage holders caused bank shares to drop by 10%?

Michael Noonan (Limerick City, Fine Gael)
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It was not that there should be some term of relief for mortgage holders - we all share that aspiration - it was because the Central Bank, which is independent, would be empowered by the Legislature to direct mortgage rate levels. That created concern in the market. Anyone connected to the lenders would have been made aware of that concern. I am saying there was a cause-and-effect relationship. It is very difficult to explain market movements but there was a cause-and-effect relationship and the advice I received was that there was a 10% reduction, on average, across bank shares at the time and it was attributable to the Dáil being willing to enact such a Bill.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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The facts do not back that up in terms of the scale of the drop in the value of shares. The value did not drop by 10% and also-----

Michael Noonan (Limerick City, Fine Gael)
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That is an assertion.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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It is an assertion people can go and check.

Michael Noonan (Limerick City, Fine Gael)
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I have produced the piece of paper; Deputy Paul Murphy is only making assertions.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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I have the facts about what happened at the time in front of me. A related question is one of causation and whether the publication of a Bill of this character in the Dáil, which is nowhere near radical enough from our point of view, is responsible for the drop of 10% in the value of bank shares. In any event, it is a slightly different approach and is being-----

Michael Noonan (Limerick City, Fine Gael)
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If one thinks about the matter, it stands to reason that shareholders would look at it and believe their shares were less valuable because if the Bill were successful, the interest rates relating to mortgages would be reduced. As a consequence of interest rates going down, there would be less profit from mortgage books. If there is less profit from mortgage books, it impacts on share prices. This was not a political charge; it is just the way the world works.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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It was precisely a political charge. It was precisely scaremongering about a Bill. The Minister has effectively agreed that there is a rip-off or exploitation of standard variable rate mortgage holders. They pay over the odds compared to the European average. What will change to make the Minister think that, all of a sudden, competition will resolve this? If competition has not resolved this in the past couple of years, what will change that it will resolve it now?

Michael Noonan (Limerick City, Fine Gael)
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I am not the proposer of the Bill.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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The Minister is arguing against the Bill on the basis that competition will resolve it. That is what the Minister argued.

Michael Noonan (Limerick City, Fine Gael)
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I understand that the proposer of the Bill is to answer the questions in this process.

Seán Sherlock (Cork East, Labour)
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Is this a precedent in the history of the House?

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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It is a precedent. Deputy Paul Murphy is raising questions that he is putting to the Minister. Some of those questions are for the Minister to answer. On the Bill and the approach, Deputy Michael McGrath is more than willing to answer some of the questions. As we have not gone through this process before, it is new politics and the Minister and Deputy Michael McGrath will have to share the burden as we proceed

Michael McGrath (Cork South Central, Fianna Fail)
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Before we move on, I want to respond to the suggestion that the publication of the Bill directly led to a 10% fall in bank share prices. There is no evidence whatsoever to back that up. I looked at that claim in some detail at the time and it was not borne out by the facts. On 11 May there was a trading statement by Permanent TSB and immediately following that there was an 11% drop in the bank's share price. That trading statement set out a number of major challenges the bank is facing. It did not refer to variable rate mortgage pricing. It was a bogus claim and the Minister should not try to defend it. Back in May 2015, when the Minister met with the banks, he issued a statement following those meetings and threatened to impose legislation on interest rates on the banks. He said if they did not play ball, the result would be a levy or legislation. To hang it all on the Fianna Fáil Bill of May this year is not borne out by the evidence. The Minister should not try to stand over it.

Michael Noonan (Limerick City, Fine Gael)
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I am holding my position. However, time has moved on so I will not repeat the facts.

Michael McGrath (Cork South Central, Fianna Fail)
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The facts have moved on - that is the Minister's problem.

Michael Noonan (Limerick City, Fine Gael)
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We should deal with the fact that, from a shareholder's perspective, if measures are taken in the Oireachtas, the intent of which quite clearly is to reduce interest rates, which have a consequence of reducing the profitability of a loan book, it stands to reason that the share price will go down. Is that not the way the market works? Why is the Deputy arguing about it?

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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I am arguing it because it is nonsense and I do not think the Minister believes it.

Michael Noonan (Limerick City, Fine Gael)
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Why is it nonsense?

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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It is nonsense because there is no evidence of a causative link between the publication of the Bill and the drop of 10% in share prices.

Michael Noonan (Limerick City, Fine Gael)
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Why do people buy shares?

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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I understand why people buy shares.

Michael Noonan (Limerick City, Fine Gael)
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To make a profit.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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That is right.

Michael Noonan (Limerick City, Fine Gael)
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If a shareholder wakes up one morning and sees something happening which will reduce the profitability his or her shares, he or she knows the price will go down and will sell as quick as lightning.

Michael McGrath (Cork South Central, Fianna Fail)
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Is the Minister denying that the Permanent TSB share price fell by 11% immediately following the publication of its trading statement on 11 May, which made no reference to mortgage pricing? Is the Minister denying that?

Michael Noonan (Limerick City, Fine Gael)
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Effectively, what Deputy Michael McGrath is saying is that there were other factors at play in the market. There are always other factors at play in the market. My view is that the Deputy's Bill was the trigger.

Michael McGrath (Cork South Central, Fianna Fail)
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It was not. That is nonsense.

Paul Murphy (Dublin South West, Anti-Austerity Alliance)
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I will make a broader point to Deputy Michael McGrath. We support the Bill. We supported the Sinn Féin Bill previously. We think it would potentially give some element of relief to mortgage holders. It does not deal with the fundamentals. The approach in the Bill is to say the issue was market failure whereas the market is the failure in this circumstance. The fundamental problem is that there are banks - including State-owned banks - that are set up to maximise profits. That is what the banks are doing. They are taking losses or are not making as much as they would like in other areas. Therefore, in an area where they think they can get away with it, such as that relating to standard variable rates, they are keeping rates high at a significant rate higher than the European average. Fundamentally, they are acting as profit-maximising companies do and shareholders act as profit-maximising individuals or companies. Is the alternative approach to say that particularly where a large segment of the banking sector is already State-owned, we should have banking that is publicly owned, democratically controlled and used in the interest of society as opposed to society being used and run in the interest of the banks, which is what happens? With a democratically-controlled Central Bank and democratically-controlled banks, we can direct credit to where it is needed in the economy and can ensure that mortgage holders and others are not being ripped off.

What is proposed tinkers around the edge of the problem. It would potentially make some difference and we welcome that. In presenting the thing as a market failure, it ignores the point that the banks are doing what they are set up to do which is to maximise their profits and that is the nature of the problem.

Michael McGrath (Cork South Central, Fianna Fail)
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Banks are commercial organisations and they have to be profitable. What Deputy Paul Murphy is suggesting is that the State would set up a mortgage lender. Credit unions in Ireland can lend but are constrained by regulatory limits on the proportion of their loan books that can be lent out over a long period. Some of them want to invest much more in that side of their business. Some people disagree with that approach but I think it would have some potential. What we are trying to do is deal with the reality that the banks are commercial and that they have to be profitable, which I accept. The question that arises is whether they are abusing their position and whether the rates charged to customers reflect market conditions. I accept that inherent in any variable rate is the fact that the rate falls when conditions are good and when they are less favourable, it increases.

The rates being paid to savers are at rock bottom. The banks have not been slow to cut the returns they are paying to savers but they have been slow to cut the rates they are charging borowers, including not only mortgage holders but SMEs, farmers and so on. The budget announcement of a €150 million fund for farmers to access credit at a rate of 2.95% is a recognition on the part of Government that the rates being charged in Ireland are out of step with reality. I know the banking system is repairing itself, that the banks have a high level of impaired loans, that they did not fair too well in the European Central Bank, ECB, stress tests and that they also have a high percentage of tracker mortgages, which is a reality that cannot be ignored, but there is no fairness in their targeting one cohort of customers, many of whom are trapped. The Minister is correct in saying that for new business there have been improvements. Those improvements must be recognised. The Allied Irish Bank rates are now between 3.1% and 3.5%, depending on LTV, which is an improvement that must be welcomed. AIB has reduced its rates for existing and new customers but other banks have drawn a distinction between what they are doing for their new customers and what they are doing for existing customers and they are being allowed to get away with this. The Central Banking in allowing this, in my view, is not properly fulfilling its consumer protection role.

The reality is that the banks are accessing money at next to 0% and yet they are continuing to charge, in the case of Danske Bank, rates of just under 5%. We are not in this regard speaking about the sub-prime area in respect of which rates of 6% and 7% are common place. We are speaking about mainstream lenders in Ireland charging 4.5% because they can get away with doing so. We are allowing them to get away it and we should not be doing so. I come from a different perspective to Deputy Paul Murphy on this issue in that I would rather that the market resolved this situation but it has had ample time to resolve it and it does not appear it will do so. The banks have known for a couple of years what they need to do. We are only asking them to be fair and reasonable. We will hold them to task. They will be appearing before this committee in the next few weeks and we will be putting all of these questions to them. That is the premise of the Bill from my perspective.

Michael Noonan (Limerick City, Fine Gael)
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I want to comment on Deputy Paul Murphy's intervention to the effect that mortgage holders are a soft target in that the banks are recovering their losses elsewhere by excessive charges on mortgage holders. That is effectively the argument the Deputy makes. The letter to which Deputy Paul Murphy and a number of other Deputies, including Deputy Michael McGrath, referred is the Central Bank letter of May 2015 under the heading "Influences on Standard Variable Mortgage Pricing in Ireland". In regard to the Central Bank's view in May 2015, with the permission of the Chairman, I would like to quote a paragraph from that letter as follows:

Nevertheless, the mortgage business as a whole is not profitable for the Irish banks. This is not just because of the emerging loan-losses on the back-book, but also because their profitability is further hampered by low-yielding tracker mortgages originated during the bubble. The ability of the banks to partially compensate for the burden of the trackers by retaining higher spreads on variable rate lending is likely to be transitory; as such spreads will in time encourage entry.

In that regard what the Central Bank is saying is that the banks are moving in a compensatory way but they are doing so within the mortgage books. They are compensating for fixed rate trackers, which are probably showing a loss or very close to a loss, by an extra charge on the variable rate. That is the issue. This is not about lending to SMEs or lending elsewhere. The argument then is the competition argument. In this regard, the Central Bank letter states: "New entrants could charge lower rates without incurring a loss of interest on the back book." New entrants would not have the tracker legacies so they would be in a position to compete. Again, care needs to be applied to ensure that we do not do anything that would discourage new entrants from coming into the market.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does Deputy Sherlock wish to comment?

Seán Sherlock (Cork East, Labour)
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The Minister has quoted from the document I referred to earlier. Specifically for the reasons outlined therein I asked for an update on the position. Given the Minister's intervention, it is clear that the modus operandi of the Central Bank is, to all intents and purposes in relation to mortgage lending, to take alaissez-faireapproach. The question for us then is whether we can legislate for the cost of funds and a percentage over and above that. For the purposes of this engagement we are fairly clear at this juncture that there are two courses of action open to us in terms of our seeking legal advice and further engagement with the European Central Bank, ECB, on this matter. From my perspective, at this juncture we should move on.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I want to return the focus to Deputy Michael McGrath's Bill. In his opening remarks the Minister said that the intention behind the Bill is to help people with mortgage repayments. Essentially, that is what we are talking about. Having listened to the Minister and the general debate on the Bill it would appear to me that the banks are continuing to screw particular mortgage holders, that the Central Bank is turning a blind eye to this practice and that while we continue to talk about the matter and try to encourage change there is little change coming about. As that happens, people's lives are affected. Alongside this is the Land and Conveyancing Law Reform Act and the manner in which that is playing out in the courts, in terms of the aggressive approach being taken by the banks, which is almost an abuse of their position, which is shocking. It is unforgivable that we, as legislators, would allow this to happen. The banks are being allowed to rebuild their balance sheets at an enormous pace, using aggressive and abusive means to do so, and we are not prepared to step in and put some sort of block in the way to reduce the speed at which they are doing so in order to bring some sort of balance into the situation such that the life of a mortgage holder in distress can at least be given consideration.

The Minister referred more than once in his opening remarks to new entrants to the market and switching, an issue which has also been raised more than once thus far in this discussion. The people paying these higher interest rates are not able to switch. I would like to see any of them go into a bank and ask for a switch. Nobody is interested in them. They appear to be being dumped on a pile and nobody is paying a blind bit of notice to what is going on in their lives. The Central Bank, accompanied by representatives of its consumer protection section, appeared before us in the context of our discussion on the insurance industry. They were less than impressive. They have no interest in the consumer protection end of this matter and they had little or no interest in terms of the consumer and the insurance premiums bar that the companies had to rebuild. We are offering up the consumer in this case in order to ensure that the banks rebuild their balance sheets. I think that is appalling. This Bill should be supported. It was supported in principle on Second Stage and I would urge greater consideration of it, with a greater input from the apparatus of Government, to ensure it is enacted.

Pearse Doherty (Donegal, Sinn Fein)
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I get the feeling that we are again fighting the battles we had on Second Stage of this Bill. As has been said, this Bill passed Second Stage unanimously despite the reservations that the Government had. I think the Minister has been fair, frank and honest with us today in terms of his own views on the Bill. In terms of the pre-legislative scrutiny process, what is key is that we get this right. There are areas of the Bill about which the Minister has raised concerns. We also have to wait to hear the European Central Bank's opinion on the Bill, although we are required to only note its concerns. Obviously if issues are identified that would lead to a challenge in the future we will need to ensure they are addressed. The committee has already agreed to seek legal opinion on the Bill.

I acknowledge the statement the Minister made at the end of the written part of his contribution. He repeated that he will engage with this in a very honest way to strengthen the Bill if that is the joint committee's desire. The Minister is well aware that in 2015 I published my own Bill which was debated in the House and supported by Fianna Fáil, Independents and a number of other parties at the time. It was voted down by the Government. It sought to do the same thing. Deputy Michael McGrath's Bill has the support of a number of parties without reservation. We need to move on because there is a clear support for the principle. I argue that the principle is not the same as the principle the Minister spoke about on Second Stage. There is clear support in terms of numbers for the principle that enough time has passed and enough effort has been made by the Government to reduce variable interest rates. Acknowledging that some lenders have reduced their rates, now is the time for decisive action and legislation that will empower the Central Bank with an extra set of tools that will allow it to intervene in the market.

The Minister pointed out in his opening statement a number of concerns. This is new. We discussed earlier that this is not the first Opposition Bill that will have passed if this Bill passes, but it is the first time we will have had pre-legislative scrutiny in terms of an Opposition Bill. What role is the Department, through the Minister, going to play in relation to the expertise on the Government side and its resources which are beyond the collective resources of the Opposition to ensure that we do not just point out issues in terms of section 5 or 7 but actually come forward with concrete suggestions based on the fact that the principle of intervening in the market and deeming a market failure is the dominant view at this time? That is why we are in committee.

Michael Noonan (Limerick City, Fine Gael)
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We are on the first day of a new departure in the Irish parliamentary system. Since 1922, there has never been a minority Government to the degree we have now. If one looks at what happens in the US Congress, one will see that Bills carry the names of the proposers quite frequently. That gives one an insight into the process. Very often it is across the aisle. A Democrat and a Republican get together, see that there is an issue of concern and seek to address it by way of amending legislation. They then try to build a majority behind the Bill. They have their own independent office as we will have here shortly, I presume, for financial matters and they have their own legal office. They have the resources without going back to Government Departments to enact legislation. What will we do? This morning, we are co-operating fully with the committee. We analysed the Bill on Second Stage. This morning, I am recording the primary concerns my officials have about the Bill. I am also, however, saying that if there continues to be a majority in favour of this approach after the committee has heard various witnesses and taken the advice of the ECB and Central Bank, we will work with it if the members require amendments. I reserve the right to put down amendments myself. I do not know whether I have the right within Standing Orders to do so or whether we will put the amendments down through members of Fine Gael.

I am not too sure how this is going to proceed or where it is going to land. The general intention, however, is to use the resources of the Department of Finance to remove any faults we perceive in the legislation. Of course, we will have to do that with the consent of the majority of the members of the committee. I acknowledge that there is a new process. It is a new world and a new departure, but my primary concern is to legislate to make things better rather than to make things worse by accident or mistake. I will fulfil that role. I will not be taking a primary role in it. It is Deputy McGrath's Bill and he is entitled to take the primary role.

Pearse Doherty (Donegal, Sinn Fein)
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Of course, that is the way it should be as he is the author of the legislation. However, we all acknowledge the role and expertise of the Department of Finance and the resources it has at its disposal. I welcome the Minister's commitment there again. Notwithstanding the reservations the Minister mentioned on Second Stage and the position the Government would take if it had a majority, is the Bill workable in terms of the principle of market intervention? The Minister referred to strengthening the Bill and improving it if it is the decision of the committee to move to the next stage, which is formal committee consideration. Is it the Department's view that the Bill can be strengthened to address the areas of concern it has and in such a way as to allow for the key principle, which is that the Central Bank would have the power to intervene in the market in relation to interest rates?

Michael Noonan (Limerick City, Fine Gael)
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That is the kind of thing we need to tease out here. I have said there are concerns about the Bill and we need to tease them out. I do not want to make any pre-emptive statement here, however, which might be taken as an indication that I would not co-operate. I will co-operate if we can. If this is enacted, it will not give any executive function to the Department of Finance. The executive function is being given to the Central Bank which is independent in its statutory basis and in the way it operates. I cannot direct the Central Bank, but the Oireachtas can regulate. The Deputy is right that very early on the committee has to get the Central Bank people in and ask them about it. The Central Bank made it clear publicly at the time Second Stage was being taken that it had not requested this power. It also seemed to hint, if it did not say so bluntly, that it if it got the power, it might not use it. There is no point in giving the Central Bank a power that it is not going to use. It is not my place to advise the committee, but in my view that is a key question. Will the Central Bank use the power if it gets it? Next, consideration must be given to whether the Central Bank perceives an adverse effect of the legislation despite its advantages. Could it assess the effect it might have on new entrants entering the mortgage market? There is a range of genuine issues.

I agree with the committee that variable mortgage rates for existing mortgage holders of historic mortgages are too high for certain banks. Other banks have moved and are providing very competitive rates. The market for new entrants is pretty competitive now. One can argue about small percentages, but there is no huge discrepancy there. However, there is the discrepancy Deputy Michael McGrath pointed out, in particular in relation to banks like Danske, which has quit the market and is trying to collect as much as it can from its historic loan book, and Bank of Ireland which, no matter what way we talk to it, will not move on the very high rate it has for older mortgages. It has moved significantly, however, on new mortgages. It is not for me to call it but I will use the resources of the Department to help the committee and will comply with any request. If finance spokespersons need briefing in the Department outside the ambit of the committee, we can arrange that.

Pearse Doherty (Donegal, Sinn Fein)
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I will turn to certain points in the Bill in a moment. The Minister has said today that certain banks are charging standard variable interest rates beyond what is acceptable. We all agree on that. We also acknowledge some of the movers in recent times. The Minister mentioned Bank of Ireland, but it is not just that bank. Permanent TSB is a State-owned bank yet it seems all of the threats have not worked. I use the word "threats" because the Minister has stated publicly that he will bring in a penal levy if the banks do not reduce their interest rates. He said he would bring in legislation like the legislation we are discussing this morning. Nevertheless, Permanent TSB, a State-owned institution, is absolutely fleecing its customers.

In terms of what the Central Bank has stated publicly and what it has hinted at, as the Minister stated, one of the major concerns in terms of whether it wants the powers or not, and it is the Oireachtas that decides the powers the Central Bank should have and it is then up to the Central Bank to decide how it uses them, is that it will not use those powers. If it does, we, as legislators, will have to consider what we do next, and my party will not be found wanting in that regard. A commitment we gave to the campaign group prior to the election, which other parties have given also, is that we would go to the next step. However, in terms of banks owned by the State charging 4% for loan to values of 80%, that is not much lower than that charged by Bank of Ireland. In the absence of this type of legislation, what action can we take to ensure that the banks the State owns stop fleecing its existing and new customers?

Michael Noonan (Limerick City, Fine Gael)
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When the banks got into trouble it was part of the bailout programme that the Government entered into contractual arrangements with all the banks. They were framework contracts, and interference in commercial decisions by the shareholder is excluded from the powers of the Minister. The Deputy will see the reason for that when he thinks about it. We have to allow the banks make commercial decisions, not political decisions. If we went down that road someone would have to go to their local Deputy before they would get a loan, which is the ultimate abuse of it. Under the terms of the framework document we cannot intervene. The Deputy is being hard on Permanent TSB, PTSB, because it introduced a new product range based on loan to value rates. Its loan to value rates for certain customers are quite attractive, but the purpose of today's meeting is not to examine the practices of any individual bank. We are examining legislation, and I do not believe we should examine the practices of individual banks except in passing.

Pearse Doherty (Donegal, Sinn Fein)
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That is what we are doing. The Minister opened the discussion in terms of Bank of Ireland's rates being excessive, and Bank of Ireland has also introduced fixed term products similar to what other banks have done. I am making the point that the arguments presented heretofore by the Government, which is that we should leave this to it and it will put pressure on the banks, have not worked in some circumstances, and the Minister's response today, in terms of the framework document in place, tells us that it cannot work. He is not going to direct the banks because of that document. Nobody is suggesting he should. The banks do not have to listen to the Minster, even if he goes in with the bata mór and tells them they should reduce their variable interest rates. He is on record for a number of years with regard to that, yet we have stubbornly high interest rates not only in non-State owned banks but banks in which we have significant shares such as Bank of Ireland and those in which we have majority ownership such as Permanent TSB.

If the Minister wants to respond to that he can, but I want to return to the legislation and deal with the Minister's concerns in terms of section 5. He said that permitting the Central Bank to impose a cap on standard variable rates which applies to one lender and not the market could potentially be considered as competitive distortions in the market and would enable the prevention of free movement of services and state aids. Where does that sit in terms of the Central Bank currently having the power to set interest rates for individual providers when it comes to the issue of moneylenders? With regard to moneylenders, the Central Bank has the power and utilises the power, and we can see from its website that different rates are applied to individual companies. The Minister mentioned its potential but it does not lead to the concerns about competitive distortions. It is not a case of one-size-fits all. In a way, we have already done this for financial institutions, if we want to call moneylenders financial institutions, in that the Central Bank has the power to set the maximum interest rate applicable. The interest rates are crazy, and I brought forward legislation on that a number of years ago to stop the Central Bank allowing moneylenders to charge up to 187% APR, but, nonetheless, some of them have APRs less than that and it is deemed to be on an individual case basis. Given the power that already exists under statute and the power the Central Bank has, why is that not considered to be a competitive distortion yet the Minister believes that section 5, which similarly allows him to impose a standard variable rate on one lender but not on the wider market, would potentially result in competitive distortions?

Michael Noonan (Limerick City, Fine Gael)
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My position is that in the opening address this morning I am pointing out the kind of issues that would arise if I was sponsoring this legislation myself. I am not stating categorically that the difficulties I am pointing out cannot be overcome but what I am saying is that they have to be addressed by the committee. I am not saying either that the difficulties are insurmountable. It might be able to be done with a different draft. Clearly, when I say that under natural law there should be an appeals system, what could be done is to bolt an appeals system onto the Bill. All I am saying is that if this was Department of Finance legislation, at this point the assessment would be identifying issues and asking if we have to drop a section or can we amend it, can we change it, can we get the same effect by approaching it in a different way? That is all I am doing. I am signalling to the committee that there are areas that need to be examined, and then I am saying I am prepared to work with it to find solutions. If my advice is that the issue does not present an insurmountable difficulty, there is a way around it by changing the legal approach by way of amendment on Committee Stage, we will work on it. However, the underpinning issue all the time is the attitude of the Central Bank and the opinion of the Central Bank on the effect this might have on the wider market. I cannot call that for the Deputy, but I can signal to him that there are concerns.

Pearse Doherty (Donegal, Sinn Fein)
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The Minister mentioned the concerns of the Central Bank. Is that about the competition element? The point I was trying to make earlier was that these are very much concerns one would make in a Second Stage speech. The Bill passed Second Stage in May. We are now into October. Pre-legislative scrutiny is something the Minister requested on Second Stage. We are now at this point, yet what we are getting are Second Stage issues of concern instead of asking the experts, through the Minister, to come before the committee and give us something more concrete, such as the question I asked earlier. The Central Bank already does that. It intervenes with individual lenders and sets interest rates. How is that different in terms of doing it for moneylenders?

There does not seem to be any meat on the concerns the Minister has raised. I expected something more from the Department in terms of pre-legislative scrutiny. I welcome the Minister's commitment to engage with the committee, and he is a member of the select committee in terms of Committee Stage, but his contribution has not enlightened us much more beyond what has been said on Second Stage in terms of his concerns, the detail of those concerns and how they could be addressed in his view.

Michael Noonan (Limerick City, Fine Gael)
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It is a new experience for me also.

Pearse Doherty (Donegal, Sinn Fein)
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I appreciate that.

Michael Noonan (Limerick City, Fine Gael)
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It is my first pre-legislative scrutiny meeting under the guidance of the Chairman of the committee, and with the Deputy's assistance. It is not a Committee Stage debate. If it was I would be coming forward with detailed suggestions of amendments, but my view of it was that we were not at that point yet, so I have gone beyond the Second Stage speech in the Dáil by focusing on particular areas of concern. The committee has other witnesses to hear from but it is not fair comment to say that I should come in with a lot of detail today. It is not my Bill.

Pearse Doherty (Donegal, Sinn Fein)
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My last point-----

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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We have to move on.

Pearse Doherty (Donegal, Sinn Fein)
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It would be helpful, in terms of the committee's engagement with other individuals, if further detail were presented to us during the pre-legislative scrutiny process.

Michael Noonan (Limerick City, Fine Gael)
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That is a fair request. If the committee puts specific questions to me, I will have the Department provide specific replies if members wish to have the answers in writing. If they want me to return in person, I will come back and we will talk our way through the issues.

Kieran O'Donnell (Fine Gael)
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I will make a couple of points on the Bill for Deputy Michael McGrath. Section 1, which deals with definitions, defines the term "lender". Does this definition cover all lenders?

Michael McGrath (Cork South Central, Fianna Fail)
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It will cover regulated lenders.

Kieran O'Donnell (Fine Gael)
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Are there lenders active in the mortgage market which will not be covered?

Michael McGrath (Cork South Central, Fianna Fail)
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A lender must be regulated if it wishes to lend. Regulated entities that are in the mortgage market will be contemplated by the Bill.

Kieran O'Donnell (Fine Gael)
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Deputy Michael McGrath referred to market failure. The law of unintended consequences may arise here. The Deputy stated the Central Bank of Ireland would intervene if an entity charges an interest rate that is one third higher than the average variable mortgage interest rate. Could this have the unintended consequence of preventing other mortgage providers from entering the market? Perhaps the Minister or his officials will indicate how many new mortgage providers have entered the market in the past year. Given the small number of providers, I am concerned that there will be a lack of competition in the market. The provision with respect to charging an interest rate one third above the average interest rate would result in people paying a higher rate than they would pay if there were an appropriate number of new entrants in the market. Will Deputy Michael McGrath respond to my point that this measure could have the unintended consequence of creating a barrier to entry for mortgage providers seeking to enter the market and would not have the desired effect of driving down interest rates?

Michael McGrath (Cork South Central, Fianna Fail)
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Section 5 sets out a number of intervention options that are open to the Central Bank. It sets out four different options in terms of what the bank could do if it arrived at the conclusion that there has been a market failure in the case of one lender or a group of lenders or in the market generally. In such circumstances, it could intervene and set a cap on a particular rate. It could specify a rate or a cap in terms of the margin above the lender's cost of funds that it would be allowed to charge.

Kieran O'Donnell (Fine Gael)
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I ask the Deputy to respond specifically on section 5(d).

Michael McGrath (Cork South Central, Fianna Fail)
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The Senator's argument is the one put forward by the Minister - and to which the Central Bank referred - that this provision could be a deterrent to new entrants to the market. In recent years, Pepper has started lending some mortgages in the market. I understand Frank mortgages has also applied for permission to lend, although I do not believe the application has been fully processed in the system. As I stated, some credit unions wish to lend in the mortgage market but are precluded from doing so by lending restrictions that apply over longer terms. I do not accept the premise that the option available to the Central Bank under section 5(d) would result in rates increasing. The Central Bank may never need to use these powers. It is my view that having these powers on the Statute Book would deter the type of practice that currently prevails in the market. That is the important point. The Central Bank is a policy taker, rather than policymaker. It should also be listened to and we will listen to it when it has an opportunity to appear before the committee. However, I do not accept the assertion that the option in section 5(d) would result in rates going up.

Kieran O'Donnell (Fine Gael)
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I did not say they would go up. What I said was that if one has new entrants in the market, one would expect interest rates to come down. If one has a barrier to new entrants, the worry would be in respect of a Central Bank review that finds that providers are charging a rate that is more than one third higher than the average variable interest rate charged by all mortgage providers. If there are only five or six mortgage providers on the market and the average rate is 5%, the rate can be one third higher than that. Let us assume, however, that there are 20 mortgage providers in the market and the average rate suddenly fell to 3%. The only issue of consequence would be that if the legislation acts as a barrier to entry, someone could end up paying a higher rate because the average rate would be higher. In such circumstances, the one third rule would not work because if more entrants had entered the market, the average rate would be much lower.

Michael McGrath (Cork South Central, Fianna Fail)
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No, I do not accept that. The legislation places a cap on mortgage interest rates. The Senator is arguing that because of the relationship with the average rate, it may end up pushing rates up.

Kieran O'Donnell (Fine Gael)
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No, I did not say that. The point I am making is that this legislation could prevent average mortgage rates from coming down, not cause them to go up.

Michael McGrath (Cork South Central, Fianna Fail)
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The question one must ask is where are the new entrants. This has been spoken about often in recent years.

Kieran O'Donnell (Fine Gael)
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I am posing a question. Could the unintended consequence of this legislation be that it might act as a barrier to prevent new mortgage providers entering the market? This could have the consequence of preventing the average mortgage rate from going down. The Deputy is talking about it going up, whereas I am talking about it going down.

Michael McGrath (Cork South Central, Fianna Fail)
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No

Kieran O'Donnell (Fine Gael)
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A first-time buyer and mortgage holder could end up paying a much lower rate if this legislation is not introduced.

Michael McGrath (Cork South Central, Fianna Fail)
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That is a very convoluted argument and it is a certain-----

Kieran O'Donnell (Fine Gael)
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It is based on competition in the market.

Michael McGrath (Cork South Central, Fianna Fail)
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New entrants to the market will always be welcome and will be able to charge a rate from which they can achieve a fair return. They will be able to charge a rate that is above their cost of funds, taking into account all of the other factors that feed into variable rates. I do not accept the Senator's argument.

Kieran O'Donnell (Fine Gael)
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A company seeking to enter the mortgage market will be aware that the Central Bank could, at some stage, interfere with the mortgage rate it is charging. We will agree to differ on that point. I am trying to do due diligence on the legislation.

When insolvency legislation was before the House, Deputy Michael McGrath was a vociferous advocate for the inclusion of an appeal mechanism in the Bill. Section 11 of this legislation, however, specifically prohibits any form of appeal mechanism. Not only does it not provide for an appeal mechanism, but the Bill specifically prohibits the establishment of such a mechanism. There appears to be an inconsistency between what the Deputy sought to have included in the insolvency legislation and the provisions of the Bill he is proposing.

Michael McGrath (Cork South Central, Fianna Fail)
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The issue here is that the appeal will be made to the Central Bank and, as such, it will be internal to the Central Bank.

Kieran O'Donnell (Fine Gael)
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The Bill will not establish a mechanism similar to that provided for under the insolvency legislation.

Michael McGrath (Cork South Central, Fianna Fail)
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Yes, appeal mechanisms are not always provided in legislation. For example, the proposal for planning applications involving more than 100 units will now go directly An Bord Pleanála. What appeal mechanism applies in those circumstances? There is none. The Senator raises a point of detail. We will consider amendments if members believe an appeal mechanism would render the legislation constitutionally stronger. While I would not be against that in principle, any such mechanism would have to be meaningful. In the Bill, where the Central Bank arrives at a decision, an appeal can be made to the Central Bank. Would an appeal mechanism be used as a delaying tactic? It would have to be a time-bound process.

Kieran O'Donnell (Fine Gael)
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Can I ask the Minister and his officials a quick question?

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Yes, but please remember that the Minister has to leave soon.

Kieran O'Donnell (Fine Gael)
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How many new mortgage lenders came to the market last year?

Michael Noonan (Limerick City, Fine Gael)
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We will send the Senator a written reply to his question.

Kieran O'Donnell (Fine Gael)
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The Minister said, "As the economy improves and as the banks stabilise and come back into profitability, borrowers will rightly feel that their mortgage and other loan rates should come down." In a normal situation I would agree with him. However, in a situation where Irish taxpayers and citizens have put billions of euro into the banks over the years and some taxpayer funds are still in those banks, is there not room to question the rationale of having banks being entitled to make a return based on a reasonable rate? Will the Minister stand over the specific circumstances in which we find ourselves?

Michael Noonan (Limerick City, Fine Gael)
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Does the Senator mean shareholders?

Kieran O'Donnell (Fine Gael)
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Yes, I suppose shareholders, but more particularly in terms of the money that was invested. In many cases it would be the same people who have sought mortgages from the banks and are being fleeced in certain cases.

Michael Noonan (Limerick City, Fine Gael)
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First, in terms of the piece quoted by the Senator, he would have realised, from the subsequent sentences-----

Kieran O'Donnell (Fine Gael)
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Yes, but I did not want to lose time.

Michael Noonan (Limerick City, Fine Gael)
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-----that the point I made was that the borrowers from the bank are only one part of the customer base at the bank. Many people put money on deposit in banks and at present the interest rates are negligible or very low. There is a conflict or tension between different types of bank customers from a market point of view . As the economy improves, depositors would like to have a higher interest rate or return on their savings and people who pay their mortgages would like to have a lower interest rate. The two conflict.

Kieran O'Donnell (Fine Gael)
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No, and I will finish on this point.

Michael Noonan (Limerick City, Fine Gael)
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On the second point made by the Senator-----

Kieran O'Donnell (Fine Gael)
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Specifically my question on mortgages.

Michael Noonan (Limerick City, Fine Gael)
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Yes. There is no policy in the Department or at Government level to boost bank profits artificially in order that the shareholding base owned by the State will be more valuable. That is not in the mix at all. The primary interest is that the banks would operate to provide the kind of banking service a modern economy needs and would have the normal interplay of competitive banking offers in a market to support economic activity and jobs. Once that happens the shareholding will have its value anyway. There is no policy to conduct a fire sale of the shares or get money out of them because we do not need to anymore. If it were three years ago, that might be a tempting option, but not now. Was that the point the Senator raised?

Kieran O'Donnell (Fine Gael)
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No, it was not. The point I made was straightforward. We are here today because the banks in certain cases are fleecing mortgage holders, many of whom are first-time buyers. My question squares the circle. How do we get a mechanism where banks do not charge a disproportionately high variable mortgage rate to boost their lack of profits in other areas yet maintain a balance in the market to attract new entrants? The common thread among us all is that we believe the banks overcharge certain mortgage holders. How can we stand over such a situation?

Michael Noonan (Limerick City, Fine Gael)
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First, the banks themselves would say that they have bad loan books, which is a drag on the market and that has to be compensated by charging interest rates on mortgages which would be higher than the European average. Second, they would say that they wrote a substantial number of tracker mortgages which are either are unprofitable or certainly were two years ago. Maybe as we moves towards negative interest rates, the tracker mortgages may be showing slight profitability. The banks will show figures that, taking the totality of their mortgage books, they are not profitable because the drag of the bad loans and the drag of the trackers. It is one of the reasons they give for having variable mortgage interest rates higher than what would be the norm across Europe. We all know they went bust, that they had to be rescued by the State and that they are working their way through the bad books. That is the argument. The Central Bank would agree with that analysis but it is not for me to speak for the Central Bank, and the committee will have it in here.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Yes, Minister.

Rose Conway Walsh (Sinn Fein)
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I thank the Chairman, the Minister and Deputy McGrath. I very much welcome this Bill, particularly the openness to amend and enhance the legislation to benefit people. Many of my questions have already been answered so far. I have a question for Deputy McGrath.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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The Minister is under time pressure. Has the Senator a question for him?

Rose Conway Walsh (Sinn Fein)
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Yes.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I suggest the Senator asks the Minister her question first.

Rose Conway Walsh (Sinn Fein)
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I will ask my question, if that is okay.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I want to facilitate the Minister.

Rose Conway Walsh (Sinn Fein)
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In the absence of this Bill, what would the Minister do differently to rescue or protect mortgage holders? When Deputy Pearse Doherty of Sinn Féin tabled the original Bill in June 2015, the intention was expressed that penal levies would be imposed on the banks to change their behaviour. Has the Minister done anything about that? When was the last time he raised the issue with the banks? It is obvious that the initiative has not worked. I know because I have attended courts in Castlebar and seen the behaviour by banks. I have seen banks put families out of their homes and show a complete disregard for customers.

There has been huge quantitative easing by the ECB, especially since March of this year. Has it had an impact on Irish banks?

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Senator Horkan has one question for the Minister. I suggest the Senator asks his question and then Senator Conway-Walsh can resume her contribution.

Gerry Horkan (Fianna Fail)
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Yes, I know the Minister is under time pressure. Many of my questions have already been answered. Has the banking sector or have individual banks lobbied or contacted the Minister or his officials about this legislation?

Paddy Burke (Fine Gael)
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I have a question for the Minister.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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The Senator is delaying his Minister who may give out to the Senator afterwards.

Paddy Burke (Fine Gael)
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The Central Bank has advocated that switching loans is a better option. Switching banks costs money and it is unlike switching one's electricity bill. Who pays the piper? Is it the bank that pays? The Central Bank advocates switching. Is it the customer who pays? Will the bank pay the bill on a substantial mortgage as switching can cost a substantial amount?

Michael Noonan (Limerick City, Fine Gael)
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First, I will respond to Senator Burke's question. Yes, the Central Bank has calculated that 21% of mortgage holders would have savings if they switched, which is quite a high figure. To encourage switchers, there was a campaign late last autumn and there another from about March up to April of 2015 to encourage people to switch. A person with 20 years gone on 25 year mortgage who is dealing with the same crowd at very small money will not switch. There is a kind of an inertia in the system. Unless the savings are significant, people will not break with their traditional bank and that needs to be taken into account as well.

Since we started talking to the banks about these issues, many of them are now prepared to pay the switching costs. The new lender, the bank being switched to, is prepared to pay the switching costs. There are different offers across the banks. In talking to constituents, there are serious offers in the system which can save serious money and the receiving bank will pay the switching fee.

Will Senator Horkan remind me again of his question?

Gerry Horkan (Fianna Fail)
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Did the banking sector lobby the Minister or his officials about this legislation?

Michael Noonan (Limerick City, Fine Gael)
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No, I have had no personal lobbying from the banks. I know from contacts with the Department that the banks are concerned about this legislation. That is to be expected. To my knowledge, they have not gone into the specifics of their concerns. Some of those concerns came through in my Second Stage speech.

I put it to Senator Conway-Walsh that it is not true to say that the actions taken by me and my Department have not had results. They have had very strong results in some banks, such as AIB. Deputy McGrath quoted the rates, which are not much more than 3%. I think one can now get a mortgage from AIB for something like 3.25% or 3.3%. The rates here are getting into a space where they can compare with what is happening in some European countries. They are certainly at the bottom.

AIB is not the only bank that is doing this. Other banks have various offers. PTSB is moving to a loan-to-value system whereby a customer pays a higher rate on a 90% mortgage than on a 50% mortgage. If I have headroom because of the equity in my house beyond the level of my mortgage, I am a lower risk. The banks are pricing for risk. This suits some people but not others.

It is not true to say there has been no movement. There are outliers that have moved on new lending to new mortgage holders but have not moved on their historic or legacy mortgages. That is the difficulty. This is now a new issue. The programme for Government provides that the Central Bank and the Competition and Consumer Protection Commission, having due regard to their respective remits, will work "to set out the options for the Government in terms of market structure, legislation and regulation to lower the cost of secured mortgage lending".

Perhaps the committee should add the Competition and Consumer Protection Commission to its list of invitees. As the authority with responsibility for competition, it might have a particular perspective on many of these issues, which relate to competition. In general terms, I am simply giving my position on the matter. I do not disagree with the fundamental principle of what the Senator is saying, which is that variable interest rates seem to be too high in the cases of certain mortgages and we should continue to bring those rates down.

Rose Conway Walsh (Sinn Fein)
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Is the Minister happy with the behaviour of the banks in this regard?

Michael Noonan (Limerick City, Fine Gael)
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Of course I am not.

Rose Conway Walsh (Sinn Fein)
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That is what I am trying to get at. I acknowledge that there have been some shifts which have had a positive impact. We would not be here today to discuss this Bill if the banks were doing what they are meant to do and if the Central Bank was doing what it is meant to do in line with its consumer protection role. I find it quite amazing that the Central Bank is refusing extra powers, or does not want extra powers. I will ask representatives of the Central Bank questions about that matter when they come in.

Michael Noonan (Limerick City, Fine Gael)
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The difference between Deputy McGrath and me lies in how we want to achieve what is, in effect, a common purpose. I believe that if we can get new entrants into the market and if we can have more competition between the existing people who are offering mortgages and new entrants, that will push interest rates down. Deputy McGrath is frustrated about how long it is taking some lenders to bring their rates down. He is advocating that we legislate to force rates down. The objective is the same.

Rose Conway Walsh (Sinn Fein)
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I understand that. I think that by concentrating on switching, the Minister is under-estimating the ability of people to switch to other banks. I refer in particular to people who are in arrears. Could the Minister give me an opinion on the impact of quantitative easing on the Irish banks?

Michael Noonan (Limerick City, Fine Gael)
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It is improving liquidity in the system as a whole. I would like to give the Senator a considered written response on this complex matter, rather than giving an ad libresponse here from memory.

Rose Conway Walsh (Sinn Fein)
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Okay. I thank the Minister.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I thank the Minister and his officials for attending this meeting. I want to underline my own views in so far as supporting this Bill is concerned. Individuals and families out there are suffering greatly because of the attitude of the banks to providing assistance to solve problems between banks and borrowers. Some of them are unhelpful to a degree. It is almost impossible for some people, depending on their status, etc., with the banks, to deal with them. This problem is still the same.

The banks refer people very quickly to the courts. As I said earlier, as legislators we should go down to see some of those eviction courts. They are outrageous. People are not given an opportunity to defend themselves or explain their cases. The various initiatives that have been taken, such as house purchases by voluntary housing agencies and the mortgage-to-rent scheme, are just not working. The banks are not playing ball. They are favouring new borrowers who are coming in because such cases involve dealing with new sets of figures on a new page. They are not willing to assist borrowers on their books who are in really deep trouble. Until they are driven to the point where they are forced to deal with such borrowers, we will continue to have this problem with the banks. We can imagine what it is like to deal with sub-prime lenders as they are just outrageous in their behaviour and their treatment of people.

In my opinion, the State was more than good to the banks when it bailed them out and gave them an opportunity to continue in the marketplace. This was done because it was decided the banks were essential in terms of the availability of money. The behaviour of the banks does not show any sign of change. As the banks are getting back on their feet, they are even more aggressive and have no consideration for people. That is certainly what I am finding when I speak to people who are dealing generally with the banks.

The manner in which evictions are coming about is an outright disgrace. The way people are treated when they end up in one of those courts is an outright disgrace. The banks are taking people's houses even though those people have done their utmost to work with the banks to try to keep their houses. It appears that the legislative system and all of us in this House have failed. The banks have got up off their uppers and are back at the same game again. They are treating people in an abominable fashion. I cannot stand over their activities.

We will take it up with the banks and the Central Bank when they come in here. No one is assisting consumers in this area. The Central Bank's consumer protection efforts are not working for people. Like other members, I am dubious about what we are told about switching accounts. People cannot switch their accounts unless they have the muscle to do so. Otherwise, they are locked into their banks and no other bank is interested in them. New entrants into the market will show no interest whatsoever in someone who is in difficulty. Therefore, customers are at the mercy of the banks they are with. The banks show no mercy. That is the awful disgrace of this. As they rebuild their balance sheets, the people who are most marginalised and affected by this are being shown no mercy whatsoever. I have to put that on the record.

Michael Noonan (Limerick City, Fine Gael)
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Can I comment on what the Chair has said?

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Of course.

Michael Noonan (Limerick City, Fine Gael)
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It is quite clear that the Chairman has very strong views on these issues. Nothing in this legislation deals with repossessions, evictions, arrears, the treatment of people in courts, insolvency or anything like that. The Bill is about giving the Central Bank the power to put a cap on variable mortgage interest rates. The issues raised by the Chairman are of great concern to many people, but they are not relevant to the legislation.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I know they are not. I have read the legislation. They are relevant to the Minister because he is the Minister for Finance.

Michael Noonan (Limerick City, Fine Gael)
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The committee will have to bring me in-----

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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No, I have a point of view-----

Michael Noonan (Limerick City, Fine Gael)
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-----on another day to hold me accountable for those issues.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I will bring the Minister in on another day. I will give him plenty of time to discuss what is happening because it is outrageous. As the Minister is in here this morning, I did not want to miss the opportunity to say this to him on behalf of people who are greatly affected by these issues and need the support of legislators to save their own homes and their own lives. It is amazing how many suicides are attached to the performances of banks against families and individuals. Again, that is for another morning.

Michael Noonan (Limerick City, Fine Gael)
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If am invited in for one purpose, I would like to fulfil that purpose. If the committee is inviting me in for another purpose, it should make that clear in the invitation.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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The Minister is so well experienced that I think he would fit any purpose.

Michael Noonan (Limerick City, Fine Gael)
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No, no.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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He is the one who writes the legislation.

Michael Noonan (Limerick City, Fine Gael)
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We are starting on a new departure.

There is a pre-legislative scrutiny system now and this is the first day of it. I am prepared to discuss the Bill up, down, over and back and to come back again to do it. However, the issues you have raised, Chairman, are nothing to do with the Bill.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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They have to do with banks, the lives of people and the attitude of the legislators to them. That is why I am asking you to take note of the views.

Michael Noonan (Limerick City, Fine Gael)
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I know.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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We can conclude this part of the meeting. Senator Conway-Walsh, you can continue then with Deputy McGrath. You are free to leave, Minister. Thank you very much.

Michael Noonan (Limerick City, Fine Gael)
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Thank you very much.

Gerry Horkan (Fianna Fail)
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Senator Conway-Walsh, you have some questions you would like to put to Deputy McGrath.

Rose Conway Walsh (Sinn Fein)
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I have one question. I have welcomed the Bill previously. In particular, I welcome the intention to take any amendments or alterations that would enhance the Bill in any way. My question relates to vulture funds. I am rather concerned about mortgages, including variable rate mortgages, that are being bought up by vulture funds. Will this Bill give those affected any assurance in terms of rate caps? Will the Bill cover them? Earlier, Deputy McGrath referred to regulated and unregulated categories. What category do such mortgages come under? Are they captured in this Bill?

Michael McGrath (Cork South Central, Fianna Fail)
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This is an important issue. There is a gap in the existing legislation around credit servicing. Many of the vulture funds that bought loan books are not directly regulated in Ireland. However, they must appoint an intermediary, which is regulated, that is to say, a credit servicing firm. Pepper is probably the best-known example. The legislation could only apply to regulated entities and, therefore, it would apply to the intermediary. All contact from a customer in respect of a mortgage is with the intermediary. I have argued that the actual owners of the loans should be regulated and I gather Sinn Féin holds a similar view. Currently, they are not and I believe that is a deficiency. This Bill will apply to regulated entities and, therefore, it will apply to the credit servicing firm with which the customer has all contact.

Another body of work remains to be done to bring all the funds within the ambit of Central Bank regulation. Currently, they are not. I have argued that the owners of the loans make all the ultimate decisions on those loans. If there is a decision on interest rate policy, accepting or restructuring of a mortgage or a decision about going down the enforcement and legal routes, then the decision is made not by the intermediary but by the owner of the loan. However, currently, the owners are not required to be regulated under the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015. That gap has to be bridged first before we can bring the funds into this legislation. The legislation does cover the credit servicing firm, which is an intermediary.

Rose Conway Walsh (Sinn Fein)
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My question relates to mortgage rates. It is of no use having that relationship with the intermediary under this Bill. Am I correct? Would it have any impact, even some limited impact, when we refer to the intermediary as opposed to the owner?

Michael McGrath (Cork South Central, Fianna Fail)
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It does, because the intermediary is a regulated entity. Therefore, it would come under the legislation. The customer's direct relationship is with the intermediary, even though the intermediary does not own the overall loan. It is only a matter of a short time, I hope, before the Oireachtas will deal with the issue of bringing the owners of loans directly within the ambit of regulation. They are not currently and, therefore, we cannot do it in this Bill. That would require a separate Bill.

Rose Conway Walsh (Sinn Fein)
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I understand that. Can the owner decide on the rate without any reference to how the intermediary might be bound by this legislation? Is that the position regardless of whether the rate is 5%, 7%, 10% or whatever? Can the owner of the loan decide on the rate to charge for the mortgage that has been purchased?

Michael McGrath (Cork South Central, Fianna Fail)
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The powers that we are proposing to give to the Central Bank can be applied to the intermediary. The Central Bank does not have a direct relationship with many of those funds, because they are not regulated in Ireland.

The Central Bank powers will apply to the intermediary, and that can be of benefit to the consumer. There is a gap, however. It is a gap that can be traced back to last year's legislation. The Central Bank was of the view that the funds themselves should be regulated. The Department and Minister took a different view and just brought the intermediaries within the scope of regulation. To my mind, what I refer to is an anomaly that should be addressed. This Bill will apply to the regulated entity, which will be the intermediary.

Rose Conway Walsh (Sinn Fein)
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So it will not stop the setting of whatever rates the vulture funds deem necessary. This particular Bill will not but-----

Michael McGrath (Cork South Central, Fianna Fail)
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The Central Bank can apply the powers in respect of the intermediary that I hope will be given to it through this Bill. That could have an impact on the rate charged to the customer.

Rose Conway Walsh (Sinn Fein)
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It could but we are not sure yet. That is as far as we can get.

Paddy Burke (Fine Gael)
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I welcome the Bill and congratulate Deputy Michael McGrath on bringing it forward. I do not subscribe to the view that there is more competition if there are more entrants to the market. I remember speaking on this very subject quite a number of years ago when there were new entrants in my home town, Castlebar, a small town. There were 14 places where one could borrow money and everything went belly-up after that.

The Minister has expressed reservations about the view of the Central Bank and the constitutionality of the Bill. We are at the pre-legislative stage now. Second Stage has been completed in the Dáil. What are Deputy Michael McGrath's views now after his having heard the Minister's views on the Central Bank and his views on constitutionality, which he expressed on Second Stage? There is a considerable amount of work to do on the Bill if we are to bring in the Central Bank representatives and get the legal opinions required to allay the fears over a constitutional problem with the Bill. All the other Stages must then be completed and the Bill must then proceed to the Seanad.

Michael McGrath (Cork South Central, Fianna Fail)
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I would have thought the Minister would have sought the advice of the Attorney General after Second Stage of the Bill was completed in May but it appears this has not happened. As we are not in the business of advancing legislation that is unconstitutional, that issue will need to be clarified. The Bill is with the Parliamentary Counsel so we will get an opinion from that source. The Government also needs to get an opinion from the Attorney General. I do not believe the Bill is unconstitutional but I am not a senior counsel and am not qualified to hold an informed opinion on that. This issue has to be addressed and it will be done through the Parliamentary Counsel. I encourage the Department of Finance to refer the Bill to the Office of the Attorney General for advice also.

My overall view on the need for the Bill has not changed. Ultimately, it is about helping mortgage holders who are paying over the odds. Many of them are trapped and are being taken advantage of. The proposed powers are necessary. The Bill will provide the Central Bank with extra tools. We cannot compel it to use them because it is ultimately independent but we will see what shape the final draft of the legislation takes. I am very much open to ideas to improve and strengthen the Bill. As I stated, it is an honest effort to address a problem. No one in opposition has access to anything like the resources on the Government side, including civil servants, the Attorney General, parliamentary draughtsmen and so on. We have done a good job in bringing the Bill to this point but now the Oireachtas has to take ownership of it and make it the best Bill it can possibly be. It is designed to help mortgage holders, and that really is a litmus test as far as I am concerned.

Gerry Horkan (Fianna Fail)
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We have just heard the views of the Minister for Finance on the Bill. We will now hear from members of the Fair Mortgage Rates Campaign, who have been campaigning on this issue. I welcome to our meeting Mr. Brendan Burgess, Mr. Stefan Goor and Mr. Conor McNally from the Fair Mortgage Rates Campaign. I thank them for attending and I apologise as we got a little delayed earlier with the Minister.

I advise witnesses of the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, they 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 are 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.

Deputy Michael McGrath must leave by 12.45 p.m. because of votes in the Dáil. I ask all members to be aware that neither he nor any other Deputy can be here after 12.45 p.m. I hope we will be able to conclude before then.

Mr. Brendan Burgess:

I circulated a briefing note earlier but I will not go through it because we are under a little time pressure.

We began this campaign two years ago. At that stage, Irish mortgage rates were 1.9 percentage points higher than average eurozone interest rates. There was no justification for that at all. Today, two years later, Irish mortgage rates are 1.6 percentage points higher than those in other eurozone countries. While mortgage rates have come down, they have come down throughout the eurozone and not just as a result of our campaign, although I would like to believe the campaign we have been running for two years has resulted in the 1% reduction in the nominal rates in Ireland. A good part of the reduction is attributable to quantitative easing, as mentioned earlier. Rates have decreased across Europe but the gap has hardly moved at all. That is completely unjustified.

Over the two years, a person on a mortgage of €200,000 has already paid approximately €6,000 more than he or she should have. He or she will continue to pay at a rate of €3,000 per year for the next number of years while he or she has the mortgage. The payments will reduce as the capital is paid off. There is a huge charge being imposed on ordinary Irish families as a result of these interest rates.

There are two separate aspects to this Bill. They are separate but equally important. The first part concerns section 7, which prohibits discrimination against existing borrowers. If the Houses decide the rest of the Bill is unconstitutional or undesirable, it does not stop them passing section 7. I hope the whole Bill can be passed. Section 7, on its own, would be a huge step forward, however. It is the section that makes sure lenders offer the same rates and incentives to existing customers as to new customers.

What has happened in the market is that Allied Irish Banks and Ulster Bank offer existing customers the same rate as new customers. When they compete, they bring the rates down for everybody but the other banks, including KBC, Bank of Ireland, Permanent TSB and, more recently, EBS, have introduced completely new lower rates for new customers and just tell existing customers they cannot avail of them, or they keep all their rates high and compete by giving incentives, such as 2% cash back. We are talking about the new business rate having fallen to 3.5% or whatever it is, but many customers of Bank of Ireland and Permanent TSB are currently paying at a rate of 4.5%. As mentioned on numerous occasions, there are customers of Danske Bank paying at a rate of 4.95%. If section 7 were passed, it would be helping very many people.

The other aspect is equally important. We have been working on this for two years and have got almost nowhere. As Deputy Michael McGrath has said, I would much prefer if the banks had responded and if this legislation were not needed. I would be a free market capitalist. I want to see markets working but I am not an ideologue. If the markets are not working, I want to see the State intervening to make them work.

This market has not worked. People are being put in a very difficult position and the Central Bank says it is nothing to do with it, let competition resolve it. Competition will not resolve it. I have heard the Minister say that competition benefits all bank customers. It does not benefit the 46,000 people who are customers of vulture funds or the customers of Bank of Ireland who are on 4.5% who cannot switch. We are hoping Frank Mortgages will start lending. If it does, it will lend 80% loan to value mortgages to people on 3.5 times income. It will be a very small niche market lender and people who have a bad credit record, who have 90% loan to value will not get any benefit at all from that sort of competition. They are just the highlights. I will ask Stefan Goor to say a bit about his situation.

Mr. Stefan Goor:

I thank the committee for the opportunity to contribute to the discussion. My experience relates to the unfair treatment of new and existing customers for mortgages. While I will be talking about my experience there are many customers in the same situation as me who face the same problems. In 2014 my wife and I decided to buy a house after saving for a deposit for approximately three years.

Gerry Horkan (Fianna Fail)
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Let me remind Mr. Goor in respect of privilege not to mention anyone or any particular incident that makes a person identifiable. He cannot talk about an individual branch or entity.

Mr. Stefan Goor:

We did diligent research on mortgages. We looked into the various options on how the different types of mortgage worked and we went to a broker for some extra reassurance and in case we had questions. At the time we got a 60%-80% loan to value mortgage at a particular rate. Shortly after we took out the mortgage that rate was cut but we did not receive a reduction in our payments. This seemed contrary to the general understanding of variable rate mortgages. We queried it with the broker who also seemed surprised and was not familiar with that scenario but the bank in question suggested that this was available only to new customers. Since we took out the mortgage there have been four cuts, totalling 0.6% and we are currently paying a €100 per month more than a customer who would take out the identical mortgage today. Over the term of the mortgage we will be paying approximately €30,000 more than somebody who got an identical mortgage today. This is only a comparison between our mortgage and someone with the same lender who took an equivalent mortgage. If we compare it with the eurozone average that Mr. Burgess spoke about we are paying almost €100,000 more over the term of our mortgage than someone on the average eurozone rate.

Unfortunately, we cannot switch. Recently I became self-employed, as I was in the fortunate position of starting a company with some colleagues, but that prevents me from switching mortgage. We would also like to go to a fixed rate but the fixed rates available are not appealing, especially when one considers that elsewhere in Europe we could get a ten year fixed rate at approximately 2%. We feel that what is going on is unfair. New customers get better rates than existing customers. Even existing customers are on different rates and are treated differently. The banks want to attract new business but show no concern for existing business. Competition will not fix this for us. If another bank comes in we cannot switch. If a new bank comes in it may act in the same way. Not all banks act in this way but without some intervention they could. We believe this is a breach of the consumer protection code. We have made a complaint, which was dismissed and we are currently in the Financial Services Ombudsman, FSO, dispute process but that is a very long and time-consuming process and many people would not have the time or be able to spare the effort to do it.

Section 7 is very important and would save many people from this unfair scenario. I thank the committee for the opportunity to raise this and the Fair Mortgage Rates Campaign and Mr. Burgess in particular for representing so many mortgage customers.

Mr. Conor McNally:

Mine is not the worst scenario. I represent an average story that thousands of mortgage customers and families have gone through and are still going through in this country. I have heard the word relevant a lot today. I hope my family and my money are relevant. My mortgage rose quickly for no other reason than that the lender ran its business badly, to put it mildly. Now I am going to help fix it. The lender's attitude is that it is my tough luck if I do not like the arrangement because it has the deeds to the house where I and my family live. The interest rate went from 3.8% in January 2010 to a colossal 6.25% in August 2011. At that stage, from memory, AIB and Bank of Ireland were charging 3% and 3.25%. That rate increase on my mortgage made a 20% increase in my monthly payment. As if things were not tight enough, my lender certainly saw to it that it would make things worse. A steady rise to 6.25% saw things getting very tight. To add insult to injury, repossession proceedings were issued because of the arrears despite the arrears being small and decreasing. The final smack in the face was the court charge of €1,200 imposed on my mortgage account despite the registrar's throwing out the case against the bank and not awarding costs to either party. I did not receive a letter stating that the account was being charged. The €1,200 is on the loan principal, which amounts to €1,800 over the term of the loan.

Having the ability to increase the cost of a product with little justification other than we can and we will is a truly unique business to be in. If any other business did that the customers would shop around and leave swiftly. Why not move? Many mortgage customers in this country do not have the clean slate that new business or better offers demand. This leaves a very large portion of the mortgage market at the mercy of the existing lender to extort when it sees fit. If I walk up to someone in the street and demand €50 from that person criminal charges could follow. When a bank writes to a customer and extorts an increase in the lending rate nothing happens. The word extort is accurate, it means the practice of obtaining something, especially money, through force or threats. Apart from physical harm, there are few threats greater than losing one's home or one's home being at risk.

The basic nature of a consumer is to shop around. Few people buy from the person who is too expensive. These rules do not apply to a mortgage. Moving a mortgage costs the customer money if he or she can move at all. Depending who one asks, the figures are fluid but one thing is for sure: tens of thousands of mortgage customers are stuck where they are. Being stuck with a mortgage lender who squeezes one is like wearing concrete shoes. Recently I have moved three of my five utility bills because it was free, easy, saved me money and I could. The emphasis is on "I could". Other banks offer better deals than the one I have but I am firmly stuck.

The proposition of competition to deter overcharging lenders might work if everyone had good credit records, better wages and met the now stringent criteria set down by the banks, all of which suit the demands of the lender, a far cry from their historical standards. Despite having 60% loan to value, LTV, I do not have a fitting credit record. I have called other lenders and when they hear I was in arrears they tell me there is no point in applying. The painful irony is that the main reason I was in arrears was the high mortgage rate. Even if the drop in my income caused me to go into arrears I would have cleared these arrears much earlier had Permanent TSB been charging me a fair rate. A recent phone call to a lender with better rates than my own proved that a lender can have the pick of people to lend to. That rules out a huge part of the mortgage customer base because of reduced income, credit history, increased living expenses and a list of other factors that tips the scales to the lender. If a customer like me with 60% LTV cannot move there are new levels of bias at work.

The Central Bank estimates that 21% of borrowers, that is approximately 144,000 mortgages, could save money by switching to a new lender. What it does not say is how many borrowers actually can switch. An article states that only 38 people switch every month, a tiny fraction of the mortgage market.

I am one of them. I could switch to five different lenders that are cheaper than my existing lender, saving me between €45 and €100 per month, but none will touch me. A letter from Permanent TSB in 2012 stated "I want to make it clear that I don't believe that permanent tsb has performed to an acceptable standard in recent years." It went on to state:

many of the bank's customers suffered financially because of the impact of decisions which should not have been taken. I apologise for the mistakes which were made and I am determined to do all in my power to rectify them.

This came from a company which gouged about 75,000 variable rate customers over the course of a year and a half. I rang the bank shortly after receiving this letter and asked whether I would get a refund on the over-charging since it was sorry. There was a graveyard silence on the phone.

I will now deal with help from the Government at the time. The mortgage interest supplement was a quick political injection to help struggling mortgages and was, of course, means tested. Not much came from banks. In fact, the only thing that came from banks was restructuring; some forbearance, by which I mean that it will bide its time; threatening letters; interest rate hikes; and a waiting game until increased house prices gave the banks back equity to threaten people with repossession.

The Minister claimed this Bill was unconstitutional and that there was no need for it. Is it in accordance with the Constitution to allow a small group of companies which have a huge impact on thousands of families and which repeatedly squeeze their customers to continue doing so? Why is the can constantly kicked to the customer to bear the brunt of the bill to fix things that were mostly not their doing? A headline in the Irish Independentasks "why banks have been so reluctant to reduce variable mortgage rates" and the simple answer is that banks charge high rates because they can and are allowed to. It is not complicated to understand that they will not reduce their rates because the banks make millions more with high rates. The Government does nothing about it and that is why there is a need for this Bill. Gas, electricity, bus fares, taxis, airport charges, pensions and insurance are regulated. In fact there are few financial products that are not regulated or have not been regulated in the past. Bank interest rates are not regulated. Banking operations were rumoured to be regulated in the day but this is a rumour. That is why legislation is needed.

Paddy Burke (Fine Gael)
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I welcome Mr. Burgess, Mr. McNally and Mr. Goor. I think they have all confirmed what we have all been expressing over the past number of years and why legislation like this is needed. Mr. Burgess said that European banks' interest rates are far lower and that customers can get long-term loans in other European countries at much lower interest rates. How can those banks do that and Irish banks and European banks operating here cannot?

Mr. Brendan Burgess:

The Irish banks could do that. The Irish banks would be very profitable lending money at 2% to Irish borrowers. They choose not to because, as Mr. McNally pointed out, they do not have to. There is no real competition there. The lowest rate is 3.1%. That is for people with a clean credit record with less than 50% loan to value. Irish banks could lend at 2% and would make plenty of profits at that, so they just choose not to. There is more competition in other countries. There are plenty of banks competing actively for it.

The link between the cost of funds and the mortgage rate has been broken in this country. About four or five years ago when Permanent TSB was charging Mr. McNally 6.25%, AIB and Bank of Ireland were charging 3%. At the time, they were paying about 3% for deposits and they also had to pay the eligible liabilities guarantee, ELG, on deposits. I argued at the time that those mortgage rates were unsustainably low so I am not here saying that I want everything to be as low as possible and I want tracker mortgages for everybody. I was criticised for calling on banks to raise rates to an acceptable level. They did start bringing them up and then they just way beyond what they should. There is nothing to stop Irish banks charging a fair mortgage rate.

One of the reasons given in the Central Bank report mentioned by Deputy Sherlock and the Minister was that the Irish banks are still recovering from the bad losses they made. The Irish banks have fully provided for home loans in their accounts. They have set reserves aside in full so for last year and the previous year, their profits were boosted by writing back profits. The bad loans in the past have actually been a source of profits for the Irish banks and they should serve to bring down mortgage rates and not be used as an excuse for raising them.

Paddy Burke (Fine Gael)
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Do the witnesses think the new entrants to the market will help reduce the Irish rates?

Mr. Brendan Burgess:

If a new entrant comes into the market, which I hope will happen in the near future, it will reduce the rates for people who can switch. They will target 80% loan to value and three and a half times income. It would be extremely unlikely for anyone to do a 90% mortgage in the Irish market. That would not be a great idea. They would see that as being too risky.

Paddy Burke (Fine Gael)
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The Minister said that the Bill would be carefully considered to ensure it complies with all EU laws and requirements but that section 5, which permits the Central Bank to impose a cap on the standard variable mortgage rate which applies to one lender but not to the market generally, could potentially be considered to enable competitive distortions in the market. Do the witnesses think the Central Bank can do what the Bill is proposing to do in respect of driving down interest rates?

Mr. Brendan Burgess:

My argument is that somebody has to do it. The Central Bank does not have clean hands in this area. I would prefer if we had a properly functioning Central Bank that was interested in protecting the consumer or balancing the interests of consumers and banks. I do not want to see bad banks because we want low rates just for mortgages. You cannot hand control of mortgage rates over to the Department of Finance so the only institution that could do it is the Central Bank. I agree there may be stage two in respect of this matter. If the Central Bank ignores the wishes of the Oireachtas and does not do what it is supposed to do and make sure fair mortgage interest rates are charged, it may be necessary to revisit the legislation and put in place some form of hard cap. As I said, I would prefer if this legislation was not necessary and I certainly would not like to see a hard rate like the ECB or cost of funds plus 3% in the legislation but if it is required, it must be done.

Rose Conway Walsh (Sinn Fein)
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I thank the witnesses for their excellent presentation. What would be natural and fair rates? The presentation referred to the Netherlands but given what we have been through, is there an argument that Irish rates should be higher than other wealthy western European countries for the foreseeable future as a result of the legacy? Is there a legacy cost or do the witnesses think we should just draw a line under that and that there should be no impact going forward? Is it fair to expect a legacy cost to be factored in to Irish mortgage rates?

Mr. Brendan Burgess:

I do not see why today's borrowers should be paying for the legacy cost. I do accept that if you lend 90% loan to value, it is a riskier loan than if you lend 60% loan to value. When lending that money, the bank does not know which of those will default so they must charge the 90% person more. I accept that but I do not see why a bank should charge Mr. Goor more money because it gave me a tracker ten years ago. If I went into Doheny & Nesbitt to ask for a pint of Guinness and was told it was €10, I would reply that it should not be €10. It would be as though I then was told they had served a lot of people that morning and as a mistake in the till meant they had charged everyone €1, they had to make up the profits. Then, the Central Bank would come along to say it had looked at Doheny & Nesbitt's accounts and as they were the same average profits as other banks on that stretch of the road, it would ask what I was complaining about.

John McGuinness (Carlow-Kilkenny, Fianna Fail)
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We may have a drink for free the next time, now the witness has mentioned it here in public session.

Mr. Brendan Burgess:

I apologise, I hope I have not broken the rules in mentioning them.

Rose Conway Walsh (Sinn Fein)
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I agree with Mr. Burgess, by the way, but I believe it is important in this forum for us to get his opinion, as other people will be involved in the discussions around this. The legacy issues should really not be determining what is happening now.

Mr. Brendan Burgess:

Not current rates, no.

Rose Conway Walsh (Sinn Fein)
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Not current rates. Does Mr. Burgess believe, in his view, that there are natural or fair rates? I know he says he would not stick to an exact rate but does he think, having examined all the European rates, there is a rate that would be fair and reasonable?

Mr. Brendan Burgess:

The average rate being charged across the EU is a reasonable indication of what is a fair rate, what I would call a fair base rate for mortgages. There is however, no doubt about it that it is very difficult for a bank in Ireland to actually repossess a home. There is not a huge sanction for people who do not pay their mortgage. A 90% loan-to-value is far more risky to a bank. In the UK a 90% mortgage is about 1% more expensive than a 50% mortgage. It looks to me as if there should be a risk factor of about 1%, or somewhere around that, going from a 50% loan-to-value up to a 90% loan-to-value. I would work on the current rate, which is about 2%, and I would raise it for higher, riskier loans.

Rose Conway Walsh (Sinn Fein)
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The Central Bank has made new regulations and guidelines that are supposed to make the switching easier. Has Mr. Burgess seen any positive effect of those moves at all?

Mr. Brendan Burgess:

No. On switching, the Central Bank brought in great regulations some years ago about switching current accounts because if one switched for example, from Bank of Ireland to AIB there were problems if the old bank did not co-operate, such as direct debits or standing orders not going through. There were all sorts of issues. The switching code put a requirement onto the old bank to co-operate. In switching mortgages, however, there is no requirement for the old bank to co-operate. A person could go in to the old bank with the cheque from the new bank for the outstanding mortgage amount of €326,000 and then that person is finished with the old bank. The only real problem and difficulty for the switching of mortgages lies with the credit procedures of the new bank and there is also the legal paperwork etc. There is also the general inertia - there are a lot of borrowers who could save money by switching, and they do not do it. I have not decided if I should have sympathy for those people. While it is okay for me and I would be quite happy and comfortable with switching, somebody else might not be comfortable going through that process and they just stay. I have spoken to some people who have no idea and they do not understand they are being overcharged. I tell them they are paying 1% more than they should be. One person paying a mortgage of €200,000 asked me how much was 1% of that. I was very shocked at that. I assumed that everybody knew that 1% of €200,000 was €2,000 and that would be the amount to pay but he did not understand that.

Rose Conway Walsh (Sinn Fein)
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With regard to new entrants to the market, is Mr. Burgess aware of any that are offering mortgages to people who are in negative equity, or in arrears or who have had their mortgage restructured?

Mr. Brendan Burgess:

Sorry Senator.

Rose Conway Walsh (Sinn Fein)
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In terms of the new entrants that are offering mortgages-----

Mr. Brendan Burgess:

They are never offered-----

Rose Conway Walsh (Sinn Fein)
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-----or the new mortgages that are being offered, I am trying to get to the bottom of this. This switching idea is put out there as an option-----

Mr. Brendan Burgess:

No, it would never-----

Rose Conway Walsh (Sinn Fein)
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-----but we find that it is not an option for those people who are in negative equity, those whose loans have been restructured or those whose loans are in arrears. Is that Mr. Burgess' experience of this?

Mr. Brendan Burgess:

Absolutely. As far as I know, no bank will take on a new customer from another bank if the customer owes more than 80% of the value of the house.

Rose Conway Walsh (Sinn Fein)
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Yes.

Mr. Brendan Burgess:

There are people who are in negative equity who seek to switch but they have no chance of it at all.

Rose Conway Walsh (Sinn Fein)
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And is it likewise in terms of arrears?

Mr. Brendan Burgess:

Arrears are a complete no-no for five years after the arrears. Mr. McNally made the point that part of the reason he was in arrears was because of the high rates and now because of the arrears he cannot switch. It is really a double whammy. He is a prisoner of Permanent TSB. He is on a low loan-to-value and he has cleared the arrears but no bank will touch his loan. They just look at the Irish Credit Bureau record and if there is a mark that says a person was in arrears within the last five years then that is it and there is no further discussion. The banks do not need to know what a person's income is or why they were in arrears - that is just it.

Mr. Stefan Goor:

There has been much talk about negative equity and arrears, which are all negative terms, but there are a lot of things that happen that are not negative but which mean a person cannot switch. For example, if somebody has children then child care costs must be factored in or - like me - a person might become self-employed. Even changing jobs can preclude a person from being able to switch.

Rose Conway Walsh (Sinn Fein)
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So one is stuck. With regard to quantitative easing, I have grave concerns about what happens when the European quantitative easing stops. I do not think that people fully understand the extent of the quantitative easing and how that has been played. It has almost been put under the radar. It is propping up the whole system which is extremely vulnerable. What does Mr. Burgess believe will happen when quantitative easing ends? It has to at some point, when the ECB rates go back to normal levels. Has Mr. Burgess carried out any assessment on what that would mean for mortgage rates?

Mr. Brendan Burgess:

No, that would probably be beyond my pay grade but over the last two years the ECB rate itself has fallen by only 0.15%. Two years ago it was 0.15% and now it is zero. While it has fallen by 0.15% rates have fallen by far more than that because with quantitative easing the banks are full of money. They have nobody to lend it to, or they will lend it at whatever rates they can get. I would be concerned that when quantitative easing stops and when mortgage rates rise - and if we do not fix this problem before the ECB rate starts to rise again - one can be quite sure that the banks are going to pass on every interest rate rise. Mr. Goor thought he was taking out a variable rate mortgage but KBC seemed to think that variable was only upwards. Mr. Goor could have fixed at the time and could have had the benefit of fixing, but he now has the worst of both worlds.

Mr. Stefan Goor:

The significant point is that I do not think that customers taking out a mortgage now, in this sort of scenario, realise that they are not getting the variable rate that is advertised. A person takes out a variable rate mortgage loan assuming its movement will be linked to the cost of funds, the competition etc., but it is not. The variable rate is at the bank's discretion.

Rose Conway Walsh (Sinn Fein)
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What effect might the first-time buyer scheme have on mortgage rates? We hear that the qualifying criterion of loan-to-value might drop to 70%. What is Mr. Burgess' opinion on that?

Mr. Brendan Burgess:

It had not occurred to me that the scheme might have an influence on mortgage rates. I was concerned about the 80% cut-off because at 80% people, generally speaking, pay an interest rate of about 0.2% to 0.5% lower. The 80% cut-off would have forced people to borrow 80% when a 79% mortgage would be cheaper. I am glad it is being brought down to 70%, which I read in The Irish Timestoday. That is good. It will stop people taking out excessive mortgages.

Pearse Doherty (Donegal, Sinn Fein)
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I would like to expand that point about the drop in the loan-to-value ratio down to 70%. Consider somebody who is buying a house at €400,000. Under current Central Bank rules and without any exemptions being in place they would need a deposit of €58,000 but somebody who had a loan-to-value ratio of 70%, would already have savings of €120,000 and €20,000 of that could come from the help-to-buy scheme. Would the witness acknowledge that this drop in the loan-to-value ratio is providing a grant of €20,000 into the back pockets of people who can nearly double the amount of savings that are required under the Central Bank's rules?

Mr. Brendan Burgess:

There are two ways of looking at it. On the one hand I believe that people should be encouraged to save and put a deposit together. By and large I support the Central Bank's rules. The overall 80% is a good idea as is the exemption for first-time buyers, that is, the 90% for first-time buyers up to €220,000 and the various exemptions.

I am not a fan of the Central Bank but I believe it has got this right. I have mixed views on the first-time buyers grant. I would prefer if the Government was not interfering with the market, but 12% of the sale price of new houses goes on VAT so I view the 5% as almost a partial refund of the 12%. I do not have the same big problem with that as do other people. The €600,000 ceiling appears to be mad and way too high. I would probably reduce it to €300,000, which is a different way of answering the Deputy's question.

Pearse Doherty (Donegal, Sinn Fein)
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In fairness, it is for another day and another topic. We will see what is in the Finance Bill on that measure in the next couple of hours. To return to the issue at hand, I commend the Fair Mortgage Rates Campaign. It has done sterling work in raising this issue in a focused, concentrated way. I was glad to be invited to some of the campaign's events and I appreciate the advice it has given us in the past. As Deputy Michael McGrath acknowledged, there are a number of key people. Obviously, many people have been on the receiving end of being fleeced by interest rates, but a number of prominent individuals, particularly in the media, such as Charlie Weston and others have continued to raise this issue. Hopefully, all of this, including Deputy Michael McGrath's Bill and my Bill in 2015, has created some pressure on some of the lenders, which we have acknowledged, but some remain stubbornly on a higher rate.

The presentation is excellent and succinct, and gives us the data in the condensed pack that are required. The fact that the banks are charging too much and that certain people cannot switch is well established. Now, we must figure out what to do about it. What is before us is the direct intervention - the determination of a market failure and the subsequent intervention by the Central Bank. With that in mind, and with regard to the legislation presented by Deputy Michael McGrath and following what the Government has said or not said today, does the campaign have any suggestions to the committee as to how the Bill could be strengthened and on whether it needs to be strengthened or otherwise? For example, the appeals process has been raised. It has been stated, and rightly so, that there is not an appeals process for every mechanism or body. Does Mr. Burgess have views on where we should seek to strengthen the Bill, if it requires it?

Mr. Brendan Burgess:

I would like the entire Bill to be passed. There might be some minor issues. It states: "In setting a variable interest rate for a group, class or category...". I would delete the word "variable". In setting a rate, whether it is fixed or variable, I do not wish to see just good variable rates, but long-term fixed rates as well. I would certainly feed in some things such as that. On section 7 on the prohibition of discrimination against existing customers, I do not know if anybody is arguing with that or if it must be checked with the ECB. I do not know if there could be a constitutional challenge to it. Is there any way to get that through as an emergency measure and then let us see the arguments in the Supreme Court about the constitutionality of the other provisions and whether the Central Bank wishes to approve it? That alone, and there are only approximately 20 words in the section, would be a huge help to many people and it would answer many of the points the Central Bank and the Minister make with regard to competition affecting all customers. That would mean the competition would be helped. That is one point.

I had not thought of the appeals process until Senator O'Donnell raised it. There is probably a natural justice issue but I do not know enough about the area to know whether it is standard in legislation. I certainly would not object to it in any way. If Senator O'Donnell thinks it is a good idea, it probably is.

Pearse Doherty (Donegal, Sinn Fein)
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That will teach Senator O'Donnell to leave the room. He can look back on the record.

What if the Central Bank sends out a signal to say in effect, "Let them do whatever they want and give us the power, we will not do anything about it. Relax, folks", and Permanent TSB, Bank of Ireland and AIB continue as before? What is the next course?

Mr. Brendan Burgess:

The Dáil will have to return to it and say that, regrettably, it must now put a hard limit in the legislation, such as the cost of funds plus 3% or 2%. As a result of tabling such a Bill and starting that process, the Central Bank will call in the chief executives of the banks and say, "Lads, we have got away with it for long enough. You have restored your balance sheets at the expense of these guys so let us start playing ball at this stage. We do not want that legislation".

Michael McGrath (Cork South Central, Fianna Fail)
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I thank Mr. Burgess, Mr. Goor and Mr. McNally for appearing before the committee today. I thank the campaign group for all the work it has done over the last few years. It started with the Permanent TSB issue and the rates of over 6%, which affected Mr. McNally. I thank Mr. McNally and Mr. Goor for sharing their personal stories. They are representative of many thousands of others who are affected by high variable rates. There is an onus on us to act and I believe we have made a good start. There has been some progress. Some of it is attributable to the campaign's work and the pressure in the Oireachtas, which in turn forced the Minister to meet the banks and raise the issue. It had not even been on the agenda until all of us worked collectively to get it there.

I have some brief questions for Mr. Burgess. The issue he highlights, the discrimination between existing customers and new customers, is a key one. Is that particular to Ireland? In Europe fixed rates are far more common, with many customers on long-term fixed rates. However, that discrimination undoubtedly exists. Perhaps the Central Bank already has the power to deal with that under the consumer protection provisions, but I am not sure.

If all of the rates in the market were around 3% to 3.5%, where AIB is positioned currently, would legislation such as this be warranted? Will he give us an idea of the cost of funds the banks are currently enjoying in the market? They do not get all of their money from the ECB; it is a combination of wholesale funding, deposits and some ECB money. Mr. Burgess is something of an expert on this issue. What is the cost of funds the banks typically face now?

Mr. Brendan Burgess:

I do not believe it is the practice across Europe to force banks to treat existing customers the same as new customers. The UK is the market I probably know most about, as I keep an eye on what is happening there. It has standard variable rates and high standard variable rates but it has a very active switcher market. Where people are on variable rates in most eurozone countries and in the UK they can switch. The existing mortgage rates might be higher but there probably is no need to introduce legislation in those countries. The problem is quite specific to Ireland. Negative equity, mortgage arrears and restructured mortgages mean people cannot switch so existing customers must be treated fairly.

If mortgage rates decreased to 2.5% or 3% and people could switch, there would be less of a need for the legislation. Tomorrow, one of the vulture funds could decide it wanted to charge 10%. Mr. McNally knows what it is like for a bank to increase its rate to 6.5% over a few months while other banks are charging 3%. There is nothing a mortgage holder can do. Mr. McNally attended the permanent tsb AGM and complained about it.

Mr. Conor McNally:

Twice.

Mr. Brendan Burgess:

Twice. An ordinary consumer should not have to do this to highlight an issue. Although there would be less of a need for the legislation, the Central Bank almost needs the weapon in its quiver. I would prefer the Central Bank to have it and not use it than not to have it.

According to the interim reports of the three banks, as of the first half of 2016, permanent tsb's cost of funds was 0.75%, Bank of Ireland's was 0.73%, and AIB's was 1.28%. Bank of Ireland said it was making 0.37%, 37 basis points, on tracker mortgages. All the banks are making profits on tracker mortgages, notwithstanding the argument about the drag of the legacy issues. While the profits are not as big as the profits on non-tracker mortgages, they are very profitable.

Michael McGrath (Cork South Central, Fianna Fail)
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I apologise, but we have to go and vote in the Dáil.

Mr. Brendan Burgess:

Deputy Pearse Doherty asked me about the appeal and I said I was not aware of the issue until he raised it. If he thinks it is a good idea, it probably is. I do not know much about it.

Kieran O'Donnell (Fine Gael)
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Mr. Burgess will get the point in Doheny & Nesbitt. Does Mr. Burgess agree with the thrust of Deputy Michael McGrath's Bill?

Mr. Brendan Burgess:

Absolutely. It is needed now, before ECB rates change. If quantitative easing is stopped or reversed and if ECB rates start to rise, we will have-----

Kieran O'Donnell (Fine Gael)
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What does Mr. Burgess think about the likes of the Pepper Group? Pepper entered the market by buying up loans from distressed institutions. What are the prospects of mortgage holders coming into the Irish market in terms of providing proper competition?

Mr. Brendan Burgess:

Pepper is now offering loans in its own right, but it is very niche.

Kieran O'Donnell (Fine Gael)
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Correct. Pepper came here for a specific purpose at a specific time and I welcome the fact that it is providing mortgages. However, to have a proper, functioning, competitive mortgage market, what does Mr. Burgess see over the next two or three years?

Mr. Brendan Burgess:

One of the problems is that there are 600,000 mortgage holders in Ireland, 300,000 of whom have tracker mortgages. A new lender that enters the market will never be interested in those. There are 300,000 non-tracker mortgage holders, of whom at least 150,000 are either in negative equity, an LTV of more than 80%, arrears, a restructured loan, or their job has changed, or something else. The target mortgage book for a new lender is very small. It is no more than 150,000, and if a new lender got 10% of it, which would be an extraordinary achievement, it would be 15,000 borrowers which is not enough to sustain a large UK lender such as Nationwide. Nationwide could not come into the Irish market.

Kieran O'Donnell (Fine Gael)
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I was being the devil's advocate in this morning's argument, and said that while the Bill could control rates increasing, it could have an unintended consequence of stopping rates decreasing due to lack of entrants to the market.

Mr. Brendan Burgess:

Although I listened to the debate, I did not follow the Deputy's argument at all.

Kieran O'Donnell (Fine Gael)
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The legislation states that if the rate being charged by an individual financial institution is one third above the average rate, the Central Bank can move in and tell the lender it is charging a prohibitive rate. Say the average rate is 6% and a financial institution is charging-----

Mr. Brendan Burgess:

8%.

Kieran O'Donnell (Fine Gael)
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Well done. The Central Bank can then move in. If the average is kept high due to a lack of competition in the market, there could be an unintended consequence. If there were competition in the market, it would drive down the average rate and, even at a rate that is one third higher than average, the individual would be getting a better rate than if there were no competition in the market.

Mr. Brendan Burgess:

Say the average rate were 6% and there were no cap, lenders could charge 10% to some customers, and if they could not switch, they would be stuck on 10%. If a new lender entered the market, it would not matter to the person paying 10%, which is what this is aimed at.

Kieran O'Donnell (Fine Gael)
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What if the variable rate were reduced?

Mr. Brendan Burgess:

Without the cap it would not matter. Let us deal with today's figures. The average rate is approximately 3.5%. If the legislation has the unintended consequence of stopping a lender which wants to come in and charge 4.5%, so what? We do not want lenders to come in to take money at 4.5%. The legislation will not stop the likes of The Frank Mortgage. The only lender I am aware of that is trying to get authorisation from the Central Bank to provide mortgages is Frank. It is not put off by the legislation.

Kieran O'Donnell (Fine Gael)
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Mr. Burgess's point is that if it is a trade off between allowing new competitors to come in or dealing with banks ripping off mortgage holders, the market is so small that we will not get a flood of competitors coming in. When it is a fine balance, Mr. Burgess feels it is a better decision to ensure the existing banks are charging appropriate rates.

Mr. Brendan Burgess:

That is very well put. As I said earlier, I believe in free markets. I would prefer not to see this legislation. We have been campaigning about this for two years.

Gerry Horkan (Fianna Fail)
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Would it be fair to say Mr. Burgess would prefer if the legislation were not needed as opposed to saying he would prefer not to see it?

Mr. Brendan Burgess:

Correct. We want the legislation. The Minister said something very extraordinary. He said he had spoken to Bank of Ireland and that Bank of Ireland would do nothing, no matter how he talked to them.

Gerry Horkan (Fianna Fail)
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On 17 November, Bank of Ireland's representatives will come before the committee and we might put it to them.

Mr. Brendan Burgess:

They will probably have the same attitude to the committee.

Kieran O'Donnell (Fine Gael)
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Mr. Burgess is saying the Irish market is unattractive to competitors coming in.

Mr. Brendan Burgess:

It is not big enough. It is profitable for a small, niche lender such as Frank.

Paddy Burke (Fine Gael)
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I will be very brief as I have already asked some questions. Does Mr. Burgess think the bonus culture has been completely removed from the banking sector? I presume people would have brought it to his attention.

Mr. Brendan Burgess:

I do not know anything about it.

Gerry Horkan (Fianna Fail)
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To be fair, the purpose of the meeting is to engage in pre-legislative scrutiny of the particular Bill.

Paddy Burke (Fine Gael)
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It would be factored in in the pricing of mortgages.

Gerry Horkan (Fianna Fail)
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We will bring in representatives of all of the banks in the next few weeks. Perhaps the question-----

Paddy Burke (Fine Gael)
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Yes, but I just want to ask Mr. Burgess about his experience in dealing with mortgages. People with mortgages got into difficulty and the reason they were given them was the bonus culture in the banks.

Mr. Brendan Burgess:

I certainly would not make that leap.

Paddy Burke (Fine Gael)
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Were tracker mortgages always a loss leader?

Mr. Brendan Burgess:

It is extraordinary, looking back, that the banks lent money in that way, but they all did. If one did and lost money, one would not have been surprised - banks make mistakes - but they all did it. They were profitable at one stage because-----

Paddy Burke (Fine Gael)
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They were not very profitable, were they? Did the Central Bank turn a blind eye to their giving of tracker mortgages at the rates at which they were being given?

Mr. Brendan Burgess:

To be fair to it, the Central Bank had the same attitude then as it has now - pricing is a matter for the bank concerned. The Central Bank would probably intervene now if banks were to start offering loans at unsustainable rates leading to great losses. I think it would intervene because of the increased regulation and new solvency rules whereby when the capital requirement is worked out, it is also based on the level of profitability of the bank concerned. If it were to lose money, the Central Bank would intervene.

Paddy Burke (Fine Gael)
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In the past it was always the culture that one asked where one might get a mortgage; now there is real competition. When I was younger and took out my first mortgage, it was a matter of where I would get it. I presume that is no longer the case.

Mr. Brendan Burgess:

I remember when I first applied for a mortgage in the early 1980s, ICS Building Society told me that there was a six-month waiting list before it would even consider my application. The market has changed completely. It is weird.

Gerry Horkan (Fianna Fail)
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Unless any other Senator is interested in contributing, I thank Mr. Burgess, Mr. Goor and Mr. McNally for attending and assisting the committee.