John Curran (Dublin Mid West, Fianna Fail)

Securitisation involves an institution, such as a bank, selling non-liquid pools of assets such as mortgages or loans so as to create space on its balance sheet for new loans.

In a traditional securitisation transaction, an institution sells the assets to another company called a special purpose vehicle, SPV, which has been set up specifically to facilitate the transaction and which is legally independent from the originator. The money received from the sale enables the originator to make fresh loans, buy new assets or whatever. The funds to purchase the assets are raised by selling bonds or securities to investors such as pension funds, insurance companies etc. The income stream from the mortgages and loans is used to pay interest on the bonds and eventually to redeem them.

Securitisation allows financial institutions to raise finance at a rate generally cheaper than traditional borrowing. It allows them to convert assets that generate long-term income into cash that could be used for further activity, such as the making of new loans. It also can remove assets from the balance sheet, thus improving returns on debt or equity and reducing their capital requirements from a financial regulation perspective.

I understand that the use of charitable trusts in securitisation is based on commercial law considerations. For the securitisation process to work, the SPV must be independent. The directors of the SPV have a contract to perform a certain task, such as issue the bonds and pay money to the originator company, but the SPV cannot be a subsidiary or in any way affiliated to the originator company. One way used by many financial institutions to achieve this is to make the SPV wholly-owned by a charitable trust, the stated aims of which are to do nothing other than to own the SPV and to distribute any profits that might arise to the charity. The choice of charities to benefit from the trust is made by the SPV trustees.

Members will understand this is a complex financial mechanism that uses a charity base. It was not the intention of the charities legislation to address this financial institution and while the issue arose inadvertently from the drafting of the legislation, the consequences to the financial services industry are quite significant. I understand that approximately 1,000 direct jobs are affected by this.

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