Oireachtas Joint and Select Committees
Tuesday, 21 May 2019
Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
Matters Relating to the Banking Sector (Resumed): KBC Bank
We are dealing with matters in the banking sector and with KBC. From KBC, I welcome Mr. Paul Roebben, on his first appearance at the committee, Ms Dara Deering, Mr. Barry D'Arcy and Mr. Brendan Mahon.
I advise witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a 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. 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.
I invite Mr. Roebben to make his opening statement.
Mr. Peter Roebben:
I thank the Chairman and members of the finance committee for the invitation to appear before it today. May I introduce our team, Ms Dara Deering, head of retail banking, Mr. Barry D'Arcy, our chief risk officer, Mr. Brendan Mahon, the head of our arrears solution team and myself, Peter Roebben, the chief executive officer, CEO, of KBC Bank Ireland.
We understand the importance of these hearings and of the role of members of the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach. As elected politicians, the members represent our customers and the people of Ireland and we appreciate this opportunity to engage with the committee. We will answer any questions following completion of my opening statement. If we do not have the answers immediately to hand, we will endeavour to secure a response in a timely manner.
I am delighted to have been appointed as CEO of KBC Bank Ireland. This country is vibrant, outward looking and ambitious for its people and places a premium on innovation, which is an exciting prospect for a bank like ours.
While I am new to Ireland and arrived at a good time, into a thriving economy and society, that does not mean I am unaware of events in Ireland’s recent banking past. I see it as essential to my mandate to show our customers that we have absorbed the lessons necessary for embedding positive change, ensuring that their needs stand at the centre of KBC’s way of doing business.
The process of change has already begun in KBC, with a comprehensive transformation plan being put into place step by step. This plan will be underpinned by the values we hold throughout KBC Group, for which we use the acronym "PEARL", which stands for performance, empowerment, accountability, responsiveness and local embeddedness. This means that in KBC, we embrace the diversity of our teams and customers in all our local markets. I recently had the pleasure of meeting the chairman of the Irish Banking Culture Board, the retired judge Mr. Justice John Hedigan, with whom I was extremely impressed. I am pleased to share with members that my colleague, Ms Dara Deering, will be representing KBC on that recently established board.
My experience has taught me that for cultural change to be credible and sustainable, it takes time, hard work and one must have a clear horizon to move towards. It starts at the top but must ultimately engage every last member of our staff. It also requires that all financial institutions work together towards that horizon with the common goal of rebuilding trust in the sector. It is my intention that KBC Bank Ireland fully embraces Irish society’s call for change.
KBC represents choice in Irish banking. We are committed to making banking as easy as possible for Irish people. Customer needs are changing rapidly. We understand this, which is why we are combining customer service with unrivalled digital capabilities to deliver an unique, innovative and transparent banking experience. We provide the kind of ease and convenience for which people are looking, so they can get on with living their lives.
We are building a model of banking of the future with customer ease at the heart of it. The recent launch of KBC multi-banking, means that customers of KBC can now check the balance of current accounts held with other Irish banks through their mobile app. We are the only bank to have opened our banking app to third parties through the digital walls of external providers. We were the first to the market with the recently launched two socially responsible investment funds, SRI. These funds are designed to balance environmental and social good and offer more investment opportunities to socially conscious consumers in Ireland. For customers seeking person-to-person interaction, our KBC hubs have longer, more customer friendly opening hours, and our contact centre is available 24-7, 365 days in the year. We are stepping up to extend this innovative approach with a KBC business banking service specifically designed for micro-SMEs in Ireland.
Our recently-published first quarter results tell a positive story about the choice we offer in the market. More than 18,000 new customer accounts were added in the first three months of the year, bringing total customer numbers to just under 300,000. We disbursed some €216 million in new mortgage lending, which represented an increase of 9% year on year. The digital mobile activity on our apps increased by 50% year on year. The model works. Overall KBC Bank Ireland reported a net profit of €15 million after tax and impairments for the first quarter of this year.
These results show that customers are seeking that alternative choice in the market. The remaining non-performing loans at KBC Bank Ireland now concern primary dwelling homes. Our approach here remains as it has been for some time to reduce these non-performing loans in an organic way. In this, communication is key and every effort is made to establish and keep open communication channels with every individual customer who is experiencing difficulties meeting his or her repayments.
In my first few weeks of arriving here, I visited our arrears solutions unit - which is headed by Mr. Mahon - to gain a clear understanding of what is happening on the front line. We have a special team that looks after the most sensitive cases and I sat down with them to look through some of the cases currently at hand. When it comes to the issue of non-performing loans and arrears, I believe that we should continue to tread carefully. In every case there is a person and a person's home. We must remain conscious of the vulnerability of those who find themselves in difficulty, and behave accordingly.
All arrears cases that are related to a borrower’s principal dwelling house are afforded the benefit of the mortgage arrears resolution process as set out under the Central Bank of Ireland’s code of conduct on mortgage arrears. The success of these mortgage arrears solutions at KBC is evident in the number of arrears cases where resolution options have been implemented. In some 90% of its arrears cases, borrowers have agreed a resolution option with KBC over the years.
Resolution options remain available at any time to the constructively engaging borrower, regardless of a borrower’s history, and at all stages of the legal process. The loss of a home is a significant trauma in someone’s life. That is why we insist on repossession being an action of last resort, coming at the end of an extensive process designed to identify a solution that keeps the occupant in their home.
The tracker mortgage examination has been a top priority for KBC and we are determined to right the wrongs experienced by our customers. We do not anticipate material changes to the number of cases for redress beyond the figures that we published at the end of the first quarter.
We would like to again acknowledge our errors in relation to the administration of tracker mortgages and as newly-appointed chief executive officer, CEO, I add my sincerest apologies to those of my predecessors to those affected. I also publicly commit us to taking on board the lessons learned on behalf of our customers.
The Irish economy has begun 2019 in good stead, with domestic economic activity underpinned by strong increases in employment and an improvement in household spending power. While an emerging weakening of global economic growth will restrain Irish activity, the UK and US economies have performed better than expected of late and this has supported Irish export growth. A young, well-educated and growing population, allied to encouraging trends in the public finances, an ambitious infrastructure programme and significant foreign direct investment suggest scope for the Irish economy to remain on a healthy path in coming years.
With regard to Brexit, we can only take note of the ambiguity around the whole process. To this point, we have seen no material effect on KBC activity or our customers' relationship with us. The nature and scale of the long-term impact of Brexit on Ireland will depend on a range of factors. We remain watchful but whatever happens, I believe KBC Ireland is as ready at it can be.
In summary, KBC Bank Ireland represents choice in banking in Ireland. It is my mandate to stay in tune with changing customer needs and to innovate for more convenience and transparency, thereby continuing to grow our customer base. At the same time we are very aware of the need to stay in tune with demand for change in Irish society. That is also part of my mission. I thank the Chairman.
I welcome Mr. Roebben to his first meeting at this committee. I am sure it will not be the last meeting that he will have here. Mr. Roebben's colleagues, Ms Dara Deering, Mr. Barry D'Arcy and Mr. Brendan Mahon are very welcome. Some the witnesses may be familiar with this meeting format from previously and perhaps they have looked at transcripts and recordings of earlier meetings. The opening statement was relatively upbeat and the witness is fairly positive about the economy. I am struck by the positivity in Mr. Roebben's statement compared with that of his predecessor who, if I am right, indicated that we are closer to the next recession than we are to the last one. That line has stuck with me ever since he made that point. While Ireland is relatively fortunate with corporation tax receipts, low interest rates on our national debt and so on, there are many uncertainties including Brexit, as outlined by the witness.
Since our last meeting with KBC I have heard anecdotally from people around the country that lending has almost stopped and people are very wary of taking on debt, which is possibly not a bad thing in some ways, but there is much less take-up. Many people are worried about Brexit, the US-China trade wars, stock market decline and various other matters. What are Mr. Roebben's thoughts on where the economy is going? Could he outline to us the nature of the lending KBC is engaging in and whether it is less than anticipated?
Mr. Peter Roebben:
I would agree that we are closer to the next downturn than the last one. I was analysing that in my previous job as head of credit risk globally for the KBC group. Our chief economist, who keeps a close eye on things here, is still quite upbeat about the immediate expectations in the Irish economy. We still expect 3.5% GDP growth, which is slightly more conservative than the IMF forecast of 4.7%. The outlook is still positive. We consider it from the retail client perspective. Our mortgage distribution is up 9% year on year. The year started a bit more slowly than we expected. At the end of last year and in the first month of this year activity was less but we saw it pick up in February and March, which for the time being is continuing. On the retail side, what probably happened was the scare around Brexit at that time, which kept some consumers back from taking the step but that seems to have recovered. It is true that house prices are a concern. Affordability is a real issue for many potential borrowers. That has to do of course with the imbalance between offer and demand in terms of new housing coming to the market although our expectations are that 22,000 new dwellings will come onto the market this year at the present rhythm, compared with 18,000 units last year. Our estimates, however, are that approximately 35,000 units per year would correspond to normal demand and would offer balance in this market, so we are still somewhere behind where we should be. In that sense, we remain relatively optimistic.
There are many uncertainties there. I am hardly an expert on Ireland after seven weeks so I will be humble about that but Brexit is a big sword of Damocles over expectations for growth but it can go in any direction. The recent announcement of the European Central Bank, ECB, to keep lower interest rates going for a much longer term is the fuel for continuous growth. I have summed up several elements that I think plead in favour of the short-term economic outlook for Ireland. I am ill placed to answer how that potentially affects lending or investment demand in companies because it is not a market in which we are very active. I can give macroeconomic figures but not a real personal feeling from our bank's point of view.
KBC as a brand here in Ireland is relatively new but I think most of us are cognisant that IIB was a predecessor bank, which had a very long presence in Ireland albeit not at the retail level that KBC is engaging with now. I know KBC has been investing heavily in digital communication, in apps and in trying to get people to do business without having to go to branches. Can Mr. Roebben outline where KBC's future technology is going?
Mr. Peter Roebben:
We think the future is multi-channel. It is not that we will move to a future where there is no personal engagement but we see the branch, as the Senator calls it, or the hub, as we like to call it, as a place where a person can have a personal interaction with another person on the bank's side as a support channel. Today that is very mixed. There is still a group of customers that would prefer to go to the hub and speak with someone there first and then move to make transactions on a digital channel. More and more, and we see this in other markets, the group of customers that wants to engage digitally, even to onboard digitally and will only ask for personal support be that physical support, through a contact centre or an electronic interface application - I will not mention brand names - is growing, such that last year in our traditional home market of Belgium, 56% of clients did not go to a branch.
A full year passed without them having to go to branches. When we were making projections two years ago about this strength, we totally underestimated it. I am too recent in the Irish market to put that into context here. Ms Deering may be able to provide more background because she is more versed in that regard. It is a trend that is happening across our markets. In terms of our experience in other places, the take-up of digital starts slow, grows gradually and then takes off very fast. Once the model has reached a particular phase and people start taking it up, with word of mouth it grows faster. There will always be need for a place where the customer can interact personally with an adviser, more and more the interactions will generally be done digitally.
Ms Dara Deering:
To put those numbers in an Irish context, nine out of ten of our customers do not go to physical hubs. Rather, they either deal with us through the contact centre or in a digital way. This shows the change in consumer behaviour. As Mr. Roebben stated, it is important to remember that the customer must have choice. Different customer segments may want face-to-face contact, particularly where investment or a major decision is involved. The reality, as evidenced in other markets, is that face-to-face contact may not be the traditional physical face-to-face any more, it may be video or some other mechanisms as well. Irish consumers are responding very well to the choice we are giving in this marketplace.
Ms Dara Deering:
Yes. For example, in terms of card payments, 40% of all our debit card transactions now are contactless. People are also using digital wallets. Reference was made at a previous meeting of this committee to contactless payments being only possible up to €30. For digital wallet, via Apple Pay or Fitbit Pay, there is no limit because it is a more secure system. Currently, approximately 6% of all our transactions are through the mobile wallet. Consumers of all ages are dealing more in an electronic way and cash, in terms of ATM transactions, has reduced considerably.
Unfortunately, in this country hubs have taken on a different connotation in terms of the provision of family hubs housing through the Department of Housing, Planning and Local Government. Hopefully, that will change over time. How many hubs does KBC have?
In regard to mortgages and LTV rates, KBC operates a high rate for greater than 90% and a much lower rate for a lower LTV. It has been estimated that there are approximately 32,000 customers who could save quite a bit if they sought valuations. What is KBC doing in that regard? To be fair, the offering is available and people can exercise it. It is probably not in the bank's financial interest, but the bank has a duty of care to those customers. How well has KBC publicised that there are up to 32,000 customers who could save €1,400 per annum?
We are all looking at various ways to cut our costs, including changing mobile phone and ESB tariffs. There are few ways by which one can save €1,400 that easily.
Mr. Peter Roebben:
I think the Senator is referring to the 32,000 clients still on a standard variable rate. What I was interested to discover - I think it is quite unique - was that we had written as a legal obligation under the code of conduct. We have already written to all of these customers twice to inform them, given the situation they are in and the loan-to-value they are at, that they might qualify for a lower rate. The rates are then published. They receive an individualised communication. It was done at the end of last year and again in March this year. Of that group, we saw approximately 5,000 customers who made a switch. Others have not, but the number is increasing. Writing to customers has had an effect compared to last year when the group was 4,000 or 5,000 larger. It varies, depending on individual cases. The Senator quoted an average figure. Among the group of clients on standard variable rates, the average mortgage is much lower than our total average mortgage. It is approximately €79,000; therefore, it is much lower. It depends on whether it is sufficiently interesting for the client, but there is always a saving. However, it is for the client to judge whether he or she wants to go through the process. The only condition is that a client obtain an official valuation of the property; therefore, the value of the property is officially documented. Otherwise, the process is very smooth. When clients receive such a communication which we intend to send once a year, the group that will make the switch will increase in size. It is slowly becoming habitual.
Ms Dara Deering:
They could be on a one-year fixed rate of 2.5%. The average loan-to-value for that population is 44% because they tend to have the older type of mortgage. As Mr. Roebben said, as a result, the financial motivations for them are fewer than for a new mortgage customer because, obviously, the new customer has a loan for a much longer period.
Ms Dara Deering:
Despite writing to them, while, thankfully, 14% have taken it up, as Mr. Roebben said, there still tends to still be in that customer base. They could definitely avail of more rates. As Mr. Roebben said, we personalise what they can avail of based on the information we have on them on file. Thankfully, more have done so this year than last year. We will continue to do this. We have information on our website and dedicated phone lines that people can ring to find out what is available to them.
We are all bombarded by emails and letters. Stuff comes in. One looks at it and 3% or 4% does not sound like a substantial difference. Going from 4% to 3% is a 25% difference for people who are reasonably numerate, but not everybody with a mortgage is obsessing. They have families, perhaps older parents or young children, are in busy workplaces and so on. When I was going to college, there was significant pressure from whichever bank happened to be located on campus. It wanted to recruit everyone. As a certain bank manager said to me a long time ago, a person was more likely to change her husband or his wife than her or or his bank account. That level of inertia stemmed from it being too much trouble to change a bank account, similar to a mortgage. On average, the figure is about €1,400, but it could be €4,500 or €5,000 for some of the people concerned because the loan is almost but not at 90% and the value might be much more than €80,000.
When we have brought all the various banks before the committee - and KBC is the last of the banks in this cycle - two of the main points have been Brexit, which I think we have touched on a bit, and the banking culture board. I accept that Mr. Roebben is not an expert on Brexit from an Irish perspective and I do not expect him to be. I know that Ms Deering has been nominated to the banking culture board. It is a very new process. Its acting chief executive and Mr. Justice Hedigan and so on have been before the committee. Regarding where KBC's culture has come from and where it has gone to, how far down the road does Mr. Roebben think it is as opposed to where he wants it to be? I am not saying KBC is the worst offender in respect of the culture we had ten or 12 years ago. What has KBC done to change its culture and what does it still need to do?
Mr. Peter Roebben:
I am sorry - I did not mean to interrupt the Senator. Yes, I am aware of the Irish division. I do not think this is unique to Ireland. What happened in Ireland of course went much further and much deeper than what happened in other countries in Europe and where KBC is active. What happened here was therefore very much on the group's radar and we discussed it. To give the Senator some context, we held last year a two-day session with the entire top 300 of management in KBC Group to discuss the issue of culture and the topic of responsible behaviour and how to bring it into the group's work. The special experience of what happened here in Ireland was on the agenda very explicitly as an example of things that should not be allowed to happen and can never happen again.
Let us talk about KBC Bank Ireland and KBC Group. Regarding risk management, oversight and governance internally, there has been a sea change between what happens now in our institution and what would have happened ten or 12 years ago. Structurally, a whole lot of measures have been taken to ensure better and more independent control. There is a totally independent CRO, three lines of defence and so forth. This is obvious now but that was not the case looking back ten or 15 years ago, when I could go through a whole technical list of governance issues. There is also a totally different regulatory environment now with a lot of interventions that provide some needed checks and balances on the banking market. The third component is the more difficult but also the more fundamental one: how one gets well-balanced behaviour in organisations. This is about making sure that the output-versus-outcome trade-off is constantly being made. On the one hand we must carry out cost-benefit analyses in generating return on economic capital but, on the other, we must be aware that every decision has an impact on clients. Basically, the question is whether a decision enhances the well-being of the client. Is there a fair balance in how costs and benefits are shared between the bank and the customer? Ultimately, are the decisions we make scalable? Something that might be a good idea in the short term could turn out to be a very bad one in the long term. Something that might work very well for a particular type of customer could backfire badly if one were to start expanding it across the market. The trick is to find a way to have that dialogue going on constantly at every level in the organisation. This is a journey that has only just begun. If one could fit this into a big rule book and go to page 25 and find the answer to a given question, it might be easy. The reality is that life is very complex and opinions can differ as to what the right balance is. At the core, this is about getting a dialogue going in an organisation and keeping it going at all levels, not only top down and bottom up, but also horizontally, peer to peer, and creating internally a culture of transparency whereby these doubts can be put on the table such that people can ask, "Should we do this? Should we make this decision on this product?" I could give examples from elsewhere in the group where one must carry out this management of dilemmas, because that is what it is. It is part of the normal way of doing business. Some things are very simple; we know we do not have to do them. We of course do not do things that are forbidden by law. Day to day, however, all of us are involved in decisions that incrementally can lead us on a wrong path. The Senator asked me where we are. We are at the beginning of the journey, and it will never stop. It is a continuous journey.
I appreciate the level of honesty and the depth of Mr. Roebben's response. It was not what we get from everyone. Clearly, banks by their nature have corporate governance responsibilities to make money on behalf of their shareholders and so on, but not at the expense of vulnerable customers.
That is where it often happens where people are sold products that are less than appropriate to them or their stage in life, for example, giving older people loans when their capacity to repay is going to diminish rather than increase or, equally, selling people very risky products at a time in their life when they should be reducing risk. To be fair, the KBC representatives have acknowledged this. There is always a dilemma between trying to make money while acknowledging that the company is in a relationship with the customer which is very important. The customer must be at the centre of everything each day. Sometimes that might mean making less money. The bank is writing to customers about their loans but that balance is there and it is important KBC acknowledged it.
I draw the representatives' attention to question No. 5 in the questionnaire, which relates to voluntary and legal surrender. They have taken us through the different voluntary and legal surrender cases, such a customer selling a property, voluntary sale proposals, voluntary surrender proposals and so on, right down to receiver proceedings. How is the appointment of receivers to private dwelling homes, PDH, working?
To be fair, KBC's opening statement says that it will not transfer PDHs to vulture funds and it is managing it out in a way that some other banks have not been doing. That is to be commended. The question was why was that the case.
On question No. 8, there are 58 legal proceeding proposals and 39 receiver proposals. Why is that the case there?
Mr. Peter Roebben:
At the end of the first quarter, we had 3,737 mortgage cases, that represents 2,976 customers who were identified for redress and compensation. Some 96% of these have received redress and compensation and we are still trying to find the customers in 4% of cases. Everyone has been written to but in some cases the mail has been returned or we cannot find the customer. However, we will continue our efforts. Mr. D'Arcy knows the details of that 4%.
KBC has about 17,000 trackers out of about 71,000 home loans. That is about 24%. Most banks were at 40%. Is the reason for the lower figure that there were fewer tracker mortgages offered in the first place or had the bank managed to get people off the trackers? Why is KBC's figure below the industry average?
I have to leave the meeting because I must attend another meeting that is on at the same time but I will be back. The two main spokespersons, Deputies Pearse Doherty and Michael McGrath, are in the Chamber for Leaders' Questions so there is a bit of a change around in personnel.
It is important to examine it so I ask Mr. Mahon to let the committee have the exact number of mortgages impacted by it. Sometimes buy-to-let mortgages can be just dismissed as superfluous but they have a real impact on people's lives, particularly where people bought one or two properties instead of a pension that they were guaranteed at the time. It has affected their entire family loan circumstances. Throughout the opening statement, reference was made to vulnerability. Many of the people whom I come across whose mortgages have been sold are extremely vulnerable. Does Mr. Mahon have a figure on the write-down when KBC sold the €0.9 billion? What write-down was given to Goldman Sachs?
What is happening is these mortgages are being sold off. I will take one particular example of a vulture fund buying a mortgage for less than €70,000 and then selling it for €170,000, so it made €100,000 straight off. The fees for the receiver and the legal fees take €35,000 from it. Then the vulture fund goes back to the mortgage holder and demands, as happened in one particular case, an extra €20,000 on top. What is difficult for me to understand is why this could not be negotiated with the mortgage holder in the first instance. KBC is facilitating vulture funds by the sell-off of these non-performing loans, or what it calls non-performing loans as in some cases they are split mortgages. I dispute the definition of non-performing loans. The fund is already making €100,000 out of it and it wants a further €20,000. There is unfairness built into this. Banks such as KBC are leaving mortgage holders to the mercy of vulture funds that not only charge them the receiver fees and legal fees and make a huge profit, but then go back for more. The definition of a vulture is to go back and pick the carcasses. What is happening is the carcasses of these vulnerable people about whom the witnesses spoke in their opening statement are being picked by vulture funds and it is having an enormous impact on the lives of the families with whom I am dealing.
That is why I am interested to know how many loans have been affected and the write-down that has been given to the vulture funds, most of which come under section 110 so they do not even have to pay tax on this.
Mr. Peter Roebben:
The Senator is referring to the sale of non-performing loans that we closed last year. I do not know the specific case to which she referred so I cannot comment. I referred to the customer group in my opening statement. KBC's position is not to sell primary dwelling loans. It is an important decision as members will have seen the percentage of non-performing loans. We apply the European Banking Association and European Central Bank definition so it is a standard definition and not one that we have invented. We take responsibility to run a high percentage of non-performing loans. It is the logical consequence of treading very carefully with primary dwelling homes and having an extensive engagement process. I can only repeat what I said on this in my opening statement. We will give the Senator the details on the number of mortgages and the number of buy-to-let mortgages separately.
That is almost 5,000 families which are affected. Our guests refer to dwelling homes but for someone who has one property, it is the same as having a dwelling house because there is an impact on his or her everyday life. I know people who are absolutely distraught at the way they are being dealt with by vulture funds. Once KBC sells off to Goldman Sachs, for example, is that its responsibility disposed of and a line drawn under the matter? Does KBC ever check to see what is happening to the people whose mortgages have been sold? Does the bank feel any responsibility?
Mr. Brendan Mahon:
As part of the sale to Goldman Sachs, when we issued letters to borrowers, where we received any response that the buy-to-let had become their private dwelling home and they could evidence that, they were excluded from the transaction. There was an opportunity for customers to engage with us at that point.
Ms Dara Deering:
Under regulation, we have an obligation to ensure that before we sell a loan we must write to customers and give them 60 days notice. If customers came back to us that they were living in the property, recognising that these were families, we removed them from the Goldman Sachs transaction. In the case of non-performing buy-to-let loans, we only sold where the period of the loan being non-performing was quite extensive.
These people are in real difficulty now with how they are being treated by the vulture funds. All of the banks, including KBC, have a responsibility for that. In repossession cases, KBC charges legal and receivers' fees to mortgage holders.
Mr. Brendan Mahon:
If we are going through a legal process, we accrue fees in line with the loan agreement onto the associated account. Ultimately, that will be decided by the courts. If a court states that KBC is not entitled to those legal costs, they will be reversed off the account along with any associated interest.
Mr. Peter Roebben:
We are not selling off any primary dwelling home mortgages.
We have in process a transaction, which is about to close, relating to the remaining performing corporate loans. It is our strategy to recentre entirely on retail and micro-SME business. These performing corporate loans constitute the sell-off we are finishing now.
Our guests use all the right language in referring to the bank's responsibility to citizens and so on and being concerned about people's vulnerability, but there are people who are absolutely distraught by the way in which they are being treated by financial institutions such as KBC.
Mr. Peter Roebben:
We have 55,500 live mortgages. I am going with rounded figures. Of these, 85% relate to people who continuously pay off their mortgages quite normally. We tend to forget about them, but they work very hard every month. It is not that easy for them to make their repayments but they do it. Another 5,500 mortgages, or 10%, are performing perfectly under some kind of restructuring solution - in other words, these customers are engaging with us and meeting those terms. This leaves 3,300, or 6%, of the book, which is really the group of customers in the gravest difficulty. This is, I think, what the Senator is pointing to, and I fully understand her doing so because these are very distraught and difficult circumstances. Half of this group engages with the bank, so we have communication with them and try to work through issues. The issue is that there is, of course, a limited group, 1,500 customers, in respect of which there is absolutely no communication or engagement. Yes, we realise these are very difficult circumstances. If, however, there is engagement and communication, solutions are found. We have put in place a whole range of resolution options, or temporary solutions, to get borrowers over such difficult periods. It is possible but it requires that both parties have that communication and seek that solution.
I deal with people all the time who are communicating or trying to communicate with banks and I can tell Mr. Roebben that this is not the case. Of course, KBC will say the same as every other bank that has come before us.
What is the difference between buy-to-let and corporate loans?
Another eight years. It is good if you can get it, is it not?
Following on from the issue of repossessions, let us say KBC goes to court to get a repossession and the court order is granted.
When it is executed, a State representative takes possession of the property and engages a private security firm. Will our guests explain this? In order for the bank to get the property back, the State executes the court order and engages the private security firm. Where is the bank in all of this? Does it pay the State? With whom does the loss or expense lie?
Mr. Peter Roebben:
The court makes a decision and the registrar is in charge of executing it. We work with an Irish asset management firm to manage all properties that are repossessed. That asset management firm can, if it sees a requirement, engage a security firm for the dwelling. If the firm is appointed by the sheriff, I guess the cost would still be carried by KBC Bank, I do not know.
Mr. Brendan Mahon:
To answer on the cost of security, when we take a property into possession, the sheriff or county registrar executes the repossession order, as the Senator said, and that is separate from the bank. That happens before the bank gets the property back in its possession. At the point at which there is vacant possession, the sheriff or county registrar will hand over the property to KBC and we will sign for it. At that stage, we may put in security to secure the property and facilitate customers in retrieving their private possessions in the subsequent period.
I would like to tease out the same point. Are there no court costs whereby the bank has to put up fees? From Senator Conway-Walsh's questions and the answers given, I assume that when the bank goes to court it looks for somebody to be evicted, which is the only term for it, because he or she has not been compliant with the agreement the bank has had. I presume the bank must put up fees and that the State does not pay all of these costs. I presume the security employed by the sheriff or county registrar ultimately gets billed back to the bank.
I think I will get a job in banking.
I want to return to the issue of the prevailing rate. Were the terms "variable" and "tracker" interchangeable? In the context of contracts in 2005, at the end, the bank had a fixed rate that would roll on into a prevailing rate. What was the difference between the variable rate and the prevailing rate? For someone who was on a one-year fixed rate from 2005 that ended in June 2006, the prevailing rate - the 3% plus a further 1.4% - kicked in for July and August and then that changed again but was linked to the ECB rate. If something is linked to the ECB rate, surely it is a tracker rate and not a variable rate. Will our guests tease that matter out for me?
Mr. Barry D'Arcy:
I am not sure of the details of the specific case to which the Senator refers, but customers who were on a tracker rate prior to being on a fixed rate would typically have rolled to the standard variable rate which would have been considered to be the prevailing rate, unless they had within their contracts a right to be on a rate that included a margin, plus the ECB rate. It, therefore, depends on the individual contract of the customer.
There are people who are deemed not to have been impacted on by the tracker mortgage debacle who have had to take their cases to the Financial Services and Pensions Ombudsman because there is confusion on what the standard variable rate was and what the tracker rate was.
Mr. Barry D'Arcy:
As part of the tracker mortgage investigation, we recognised a large grouping of customers who were on a fixed rate and have now been placed back on a tracker rate. Through the examination we identified all customers who had been impacted on. We do not have any disagreement with the Central Bank or any other body on rates or challenges to them.
I want to talk to the delegates about lending. The mortgages of many people I come across have been sold. They might have good loan-to-value ratios, but they are not being allowed any other finance. What is KBC's policy when dealing with customers who have had their loans sold and have healthy portfolios? What is its treatment of such customers?
Ms Dara Deering:
If they are new customers, say, customers who no longer have a relationship with KBC and whose loans on buy-to-lets were sold, obviously, we will assess their individual circumstances at that point in time and their ability to take out a mortgage. If they were customers of other financial institutions, their mortgages had been sold and they came to KBC to fund additional debt, we will look at their cases on an individual basis. People would not be disadvantaged because their loans had been either sold to someone else or were with another provider. It is all down to the individual circumstances of the customer and, if he or she is buying a property, the value of the property he or she is purchasing.
While there have been some reductions in the fixed rates on offer, KBC's standard variable rates remain stubbornly high. We have seen this with other banks too, whereby customers are encouraged to move to a fixed rate. Obviously, they should do so where they can, but there is a danger that banks are effectively removing the choice of a variable rate from customers in the long term. Is KBC's goal to get everyone onto a fixed rate from the variable rate?
Mr. Peter Roebben:
We have a commercial choice in that we have a preference for customers buying some security and going to a fixed rate. Again, though, they have the option of going from a one-year fixed rate, which is not very long, to the longest offer we have, which is ten years today and which we may extend further. There is therefore a wide range of options, including a one-year, a three-year, a five-year and a ten-year fixed rate. This is very customer-friendly. The nature of a variable rate is that it is variable. We have a variable offer in the market and clients can always avail of it. We see a clear preference on the part of customers today. In the new mortgage production year to date about 94% of customers-----
Mr. Peter Roebben:
-----have opted for fixed rates. In our case, the most popular product is the three-year to five-year rate. Given the low level of interest rates, however, it is not unwise for customers to seek some stability. Again, though, this really depends on individual customer preferences and every person's individual situation.
No. I ask Mr. Roebben in his new role - and I wish him well with it - to look at the prevailing rates again and what was happening in 2000 and 2006 and people's contracts at that time. I believe there is an issue there with the prevailing rates and what was described as a tracker rate and what was described as a standard variable rate. I ask Mr. Roebben to look at this issue.
If I repeat a question that has already been asked, I ask the Vice Chairman to let me know and I will not continue. I apologise - I was covering for my party leader in the Chamber so I missed the earlier part of the meeting. I welcome all the witnesses and wish Mr. Roebben well on his tenure as CEO of KBC Ireland. He is very welcome to this country, and I hope the bank's commitment to the Irish market will continue and deepen. I will start with that question because in recent years, as we emerged out of the banking crisis and the wider economic crisis, all international banks re-examined their presence in countries such as Ireland and we saw the departure of a number of international banks from this market. This was unfortunate because it reduced competition. I therefore ask Mr. Roebben about KBC's commitment to the Irish market. I wish to give him an opportunity to reaffirm it.
Mr. Peter Roebben:
I can only confirm it. That is why I am here. My mandate is to keep growing the bank and its customer base. Our strategy remains the same: to invest in innovation, to develop an ever more convenient and transparent banking model, to convince more and more Irish people to give us a shot, to try us, and to be the competition. We are not an incumbent. I would say we are the smallest player in today's market. However, we have the support of one of the strongest and best-capitalised financial groups in Europe, and KBC very much believes in Ireland. We think the overall outlook for Irish economic growth and where society is going are favourable for this business model but to keep developing this is of course a daily job. Competition is good.
Mr. Peter Roebben:
Retail banking is where we focus. Of course, the strongest contributor today to our model very much is mortgages, but we have 300,000 clients, a very large number of whom also do daily banking with us. We are gradually expanding our product offer and in the years to come we will expand it further.
As we go forward, we will be stepping up this service approach into the micro SME sector. Small companies in Ireland are also part of our target group.
In his opening statement, Mr. Roebben outlined that the net profit for the first quarter of this year was €15 million after tax and impairments. Is the first quarter representative of the trend he anticipates through 2019?Pro ratait would mean €60 million profit after tax and impairments in 2019. Is this the area the bank is in?
Mr. Peter Roebben:
We are part of a publicly quoted group so we do not do it. We are quite satisfied with the results of the first quarter. They were strong. The net profit was less than last year, when it was €54 million. What this represents is the picture reflecting our position as a pure play retail bank and soon to be micro-SME bank. We are almost finished the process of disengaging from corporate lending.
With regard to the mortgages in arrears, the bank has provided us with a lot of data and details of the restructuring arrangements it enters into. Earlier in private session, the committee agreed to write to all the lenders to clarify their policies in respect of the application of legal fees to mortgage accounts in arrears. Prior to a repossession order being secured, where a threatening legal letter has been issued or where court proceedings are about to commence, what is the bank's policy on applying legal fees to those mortgage accounts in arrears? Some lenders seem to be doing it. It is an issue I raised by way of parliamentary question with the Minister, which was passed on to the Central Bank, and the position seems to be unclear as to what the banks are entitled to do under the mortgage arrears resolution programme. I do not know whether the witnesses have this level of detail as to what the bank does in respect of legal fees.
Mr. Brendan Mahon:
In cases that are going through the legal process the bank accrues legal fees in line with the loan agreement with the associated account. Ultimately, it is decided in the courts. When a court decides KBC is not entitled to those legal costs they will be removed from the account along with any associated interest.
Is the basis for doing this set out in the loan documentation? Is it provided for in the code of conduct or the mortgage arrears resolution process? Where is the basis that allows the bank to do this?
Is that aspect of the relationship regulated? To Mr. Mahon's knowledge, does the Central Bank have a view on it? Has it issued guidance on what is allowable? Is there a limit on the amount of legal fees that can be applied? Where I am going with this is if a borrower is co-operating and paying what he or she can and is trying to negotiate a restructuring arrangement but continues to receive letters from the bank's solicitor, it compounds the problem in that the amount owed grows as a result of legal fees. It may not rise significantly, but it does increase . I am trying to understand what is the bank's policy on this. At what point does the bank invoke the clause in the loan contract that enables it to start applying legal fees?
Mr. Brendan Mahon:
We encourage all borrowers to engage with us in this process. Legal fees are applied where we go through a legal process seeking an order for repossession and we have no engagement with the borrower. It is more at a late stage for non-engaged borrowers. If somebody engages with us, we do not go through a legal process; we try to get them onto a resolution option.
As such, the bank has two tests. These are that there is non-engagement, which, presumably, translates into no payment being made on the mortgage, and that it must be part of the legal process, which, presumably, has gone to court.
Mr. Brendan Mahon:
This is not to state that we would not have a case where the borrower re-engages very late in the legal process. We are open to re-engagement at any point in the process. Borrowers have re-engaged with us when we have secured orders for repossession. We may have gone through a legal process until that point. We could have been incurring legal costs as we were going through the legal process but a borrower can re-engage very late. When borrowers engage with us upfront, we do not go down a legal route. When people engage with us and we are trying to get them onto resolution options, we do not go down a legal route.
Mr. Mahon's understanding is that the application of such legal fees provided for in the loan contract does not in any way contravene a Central Bank code or rule or any provision of the mortgage arrears resolution process.
As stated , I tabled questions in the Dáil and the response from the Central Bank was to the effect that it was examining whether the application of legal fees was in compliance with the mortgage arrears resolution process. We will see where that leads.
Given that the mortgage and housing markets are central to the bank's business model, do our guests have any observations on the housing market? There are limited opportunities for first-time buyers to purchase properties. Supply is increasing but when we strip out the houses that are, quite rightly, being built as social homes by local authorities and approved housing bodies, the entire developments being bought by REITs or investment funds, and one-off houses in rural areas being built by qualifying planning applicants, the number of properties actually available is quite small. I am sure the bank would like it to be more given that it is a key part of its business. There is also an affordability crisis. Supply is very tight but the cost of building in Ireland has risen significantly in recent times. It is not as simple as diagnosing it as a supply problem. There is also an affordability problem. Not all new developments are selling very quickly because the homes are expensive and we have the macro-prudential rules. What are the observations of our guests on the market and where do they see it going?
Mr. Peter Roebben:
After only several weeks in Ireland, it would be presumptuous of me to claim to be an expert and answer comprehensively this very complex question. What we do observe is that it is very clear that, at the core, there is an imbalance between offer and demand. This is undeniable. Our economists estimate that where the market is today it should absorb 35,000 newly built units per year and we are on the path to add 22,000 this year. Last year, the figure was approximately 18,000. We have an imbalance and this has been going on for some time. It is building up and the economy is doing very well. Unemployment is at an extremely low rate. We have this tension that leads, particularly in certain areas, including Dublin, which is very important for our business model, to prices that pose an affordability problem. This is a clear fact.
On the prudential rules, quite honestly, I believe it is good that the Central Bank of Ireland puts limitations into the market. One of the big lessons that came out of the previous crisis - in the Irish market and in all the other countries where we have a presence - is that we see the central banks intervening in the definitions of the rules, the level of which depend on the local circumstances. This is a good evolution because mortgage markets left on their own, particularly if the underlying real estate markets are unbalanced, will become unhinged. The Central Bank prudential rules are good.
The Vice Chairman has covered the issue of the number of borrowers on the standard variable rate, which is quite high. That is just my observation. In the context of question No. 9, the total number of mortgage sub-accounts is 32,680 out of 79,301, which is 41% of the book in account number terms. Did KBC split out the number of those loans that have the discount?
That has been provided. Did our guests clarify which of those loans have a loan-to-value, LTV, ratio of above 90%? Is there any opportunity for those customers to reduce their rate? Was this dealt with earlier?
Ms Dara Deering:
Yes, only 2%. Some 14% of standard variable rate customers have opted for the new business variable rate. We have spoken about this at the committee previously. We write to those customers regularly and give them options to reduce their rates. Almost 5,000 of those customers have opted for the lower rate. The standard variable rate numbers would be higher if the customers had not chosen to reduce their rates. The existing customer base for the current account rate is still only approximately 2% of those standard variable rate customers - who have taken out the current account rate - despite constant engagement with customers. In context, nine out of ten new mortgage customers who take out mortgages with us take a current account discount. There is just different responsiveness in different customers.
We have products for those customers whose loans are in negative equity-----
Ms Dara Deering:
A better way to answer the question would be to refer to those loans with more than 90% LTV. Those customers can fix for three years on a rate as low as 3.70%. If they are on the standard variable rate of 4.25%, they can reduce it to 3.70% by taking the two-year fixed rate with the current account discount. There are many options for customers, irrespective of their LTVs, to take different products with KBC.
Deputy Michael McGrath was making the point that, relatively speaking, these are the older customers who have broken the back of their mortgage. While they should change as the saving is available to them and while all they have to do is get a valuation-----
-----for most of these people it is no longer the biggest thing in their lives. It would be a much bigger saving if it were a new mortgage, which on average would be €1,400. It could also be €4,000 or €5,000 if the amount outstanding is in excess of €80,000.
I, too, am sorry that I was late. I had to attend in the Chamber. I welcome the representatives from KBC Bank Ireland. I have dealt with a member of KBC staff in respect of an eviction. That person was very helpful and went out of his way to deal with issues.
I do not know much about KBC Bank. How many people does it employ in Ireland?
Mr. Peter Roebben:
We published a net profit after tax and impairments of €15 million in the first quarter of this year compared with €54 million last year. The main difference is that last year we had sold off €1.9 billion in loans, the bulk of which were corporate loans and the non-performing buy-to-let portfolio. Last year we were benefiting from the provision write-backs on that portfolio since it was improving. Those provision write-backs are no longer there. This year we are now a pure play little bank, with the exception of some €260 million of performing corporate loans that are in the process of being sold off in the current quarter. The business model has changed in that regard.
I thank the witnesses for that.
I can assure the Vice Chairman that I will not mention individual situations but I shall now turn to the issue of evictions. The committee is aware that I went through a very difficult situation in my own area-----
I will keep it limited because I understand that legal proceedings are ongoing. On evictions, are the KBC representatives satisfied that the bank gets it right - perhaps this is not the correct phrase - or that the bank does everything possible to avoid that situation happening?
Mr. Peter Roebben:
Yes. Before I arrived in Ireland I personally looked at how we approach non-performing loans because I am aware of how sensitive and important the issue is in Ireland and for KBC Bank Ireland. Our policy has been, and remains, to really look for every possible option to individually engage with every customer. This affects people and their houses so it is always a difficult situation. If one looks back over the period since 2009 - we went back that far - some 90% of the people going into payment difficulties arrears have ended up with a restructuring solution. I gave the statistics earlier. There are 55,500 live private dwelling mortgage cases, of which 85% are paying normally and working very hard to pay every month. Of the live cases, 10% - or 5,500 people - are performing under some form of restructuring solution with the mortgage arrears restructuring process, MARP. We also have some 3,300 customers, which is really the most difficult part, that go 90 days arrears or more. We are still able to engage with half of this group to find solutions. There is, however, no contact or engagement with the remaining group. We cannot reach those clients and so cannot talk with them. This is the difficult part. As long as communication is going on and there is dialogue then we will find some sort of arrears solution. It is in everybody's interest and certainly in the bank's interest. It is very thorough. The legal process is the very last place we will go. If nothing else happens the independent courts and the legal system are the only way to find some kind of closure, but only after a very long process over many years. Even if one goes through the legal process it too is a lengthy process and at any time in the process if the customer is willing to engage we are open to go out of that process again and find a common solution. With this very thorough process we have learned a lot over the years. The options available have expanded. When one considers the people who are on the arrears solutions, gradually one sees an increasing number moving out and improving. They have come through the difficult situation. There is, however, a cohort of people who are in a very difficult situation. If no dialogue is going on then it is very difficult to advance. I believe the KBC process is extremely thorough and the attention we pay to it in Ireland has impressed me.
I would not expect Mr. Roebben to know all about the eviction that took place in Strokestown in Roscommon, which happened down the road from me but would he accept that KBC nationally has lost face over the way that was handled?
As the Deputy noted, I cannot comment on specific cases, particularly when legal proceedings are ongoing. In this case I believe criminal legal proceedings are also involved. We have a very rigorous process when we go into legal cases. It is the last step in a very long process if nothing else works and no dialogue is ongoing. We adhere scrupulously to all legal rules, policies and legislation in such a case. That is our approach in every single case.
To a degree, how it was handled is water under the bridge. I will not mention him by name, but the staff member in Galway was very helpful when I rang him to intervene in the case. For whatever reason, the family decided that they would not accept the offer of negotiation. Will Mr. Roebben comment on the security people the bank employed to carry out the unfortunate work of evictions? Does he have a comment to make on the matter?
Mr. Peter Roebben:
We work with an Irish asset management firm. If a building, a house in this case, is repossessed, it must be managed. We outsource the work to a professional asset management firm which, if it sees the need, can hire other agents such as a security firm. That is how the process works. We would not do it directly. We engage in due diligence to ensure all of the companies with which we work have legal permits and are fully licensed under Irish law. This is the due diligence we undertake and the duty of care we have.
We spoke about this matter before in the context of the role of the registrar. This might be a question that is more relevant to Mr. Mahon as director of recovery. I am not speaking about the case mentioned particularly but generally. I want to tease out how the process works when KBC gets to the end of a journey and believes it must issue court proceedings and the sheriff obtains a repossession order from the court.
Obviously, the bank has instigated the process. It involves the sheriff and the personnel whom he has hired, rather than people the bank has hired. Mr. Mahon has noted that once the sheriff hands the property back to the ban, it has to hire security to mind it, but in the process of eviction, they are not people the bank has hired, rather they have been hired by the sheriff.
Mr. Brendan Mahon:
The lender does not execute the repossession; it is done by the sheriff or the county registrar. The county registrar and the sheriff will arrange to provide whatever support is needed on the day such as that of locksmiths. When the property is vacant, it is handed to the bank and we will sign for it. At that point we will provide our own security team to secure the property but also to arrange for the previous occupants to take their belongings, if they wish, or to have them taken away. That is why we have a security team in place.
The bank does not have any role in it. I do not want to hear the words, "We do not advise." Does the bank have any role in recommending or say in deciding who should carry out the eviction? I am not talking about giving advice; I understand fully from where Mr. Mahon is coming. Does KBC, or any bank for that matter, have a role in deciding who is employed to carry out this work? I would like a direct answer to that question.
Mr. Mahon is using the word "advise". Does he have any role? This is an important clarification I need to obtain, if possible. Does the bank, or any bank, have any role in deciding who is employed to carry out that work?
To add to what Deputy Eugene Murphy stated, is it fair to say that, in all cases, the county registrar, as the sheriff, is ordered by the court to carry out the eviction and he finds his security team without any recourse to KBC Bank - we cannot say what other banks do - and the bank has no say in deciding which security company is good to use?
I am not going to get a clear answer so I will not proceed further. I appreciate that this is also difficult for our guests. I understand fully that when they lend money, their right to want it back is important. With regard to specific evictions and in cases where there is a home and a farm involved, does the bank make an attempt to allow the family to remain in the home and, perhaps, secure additional land in the procedure, rather than tossing them out?
Mr. Brendan Mahon:
We afford people every opportunity to engage. We paused the legal activity in four out of ten cases last year because the borrowers had re-engaged, even at that late stage. In two out of ten cases, we stopped the legal process. The borrowers engaged very late but they still engaged. We are open to engagement at all stages. We will engage with anyone. We have engaged with people where the repossession order was about to be executed. There were approximately five cases last year where a repossession order was about to be executed and we now have people back on resolution options. We are absolutely open to engagement at all stages.
I am not trying to badger Mr. Mahon. It is my responsibility to ask such questions. There has been much turmoil in my area. Many genuine people are upset. That is why I have to ask those questions today. The individual from KBC Bank who I dealt with was very helpful and fair. I thank Mr. Mahon for attempting to answer those questions.
I have one question on the same issue. Typically, a security team goes in with the registrar to take over a property. Would it be normal for that same security team to continue with a different paymaster or is it more likely that there will be a completely different set of individuals involved?
Who pays the security firm involved in the eviction and who pays the separate firm, if there is one, when the property is handed over? Does the Courts Service pay one while the bank pays the other?
We heard earlier that when an eviction takes place, all of the costs relating to it accrue to the Courts Service. The bank does not make a contribution in respect of the costs accruing to the Courts Service and only pays its own legal costs. The Courts Service - and, ultimately, the State - pays for the cost of the eviction. Is that correct? The bank does not pay for it.
Is it fair to state that the registrar, not in consultation with the bank, hires the people but that the bank may end up hiring the same individuals for purposes of convenience, if nothing else? They are already on site and it could be a location that is not readily accessible to many security companies. Since they are already there and have secured the property, the bank might pick up the bill so that the property is protected. Does that regularly happen?
I thank Mr. Roebben for attending. This was his first appearance before the committee. It may also have been the first time for others. I thank all of our guests. We wish Ms Deering well in her new role on the Irish Banking Culture Board.