Fergus O'Dowd (Louth, Fine Gael) | Oireachtas source

I wish to share time with Deputies Maloney and Lawlor.

I welcome the opportunity afforded by this Bill to explore the issues raised by the sale of loans books by regulated entities to entities that are not regulated. I consider this an opportune and timely intervention given the context of the upcoming sale of the IBRC loan book.

I am fully aware of the concern among mortgage account holders that they could lose the protection of the Central Bank's code of conduct on mortgage arrears. The sale of loan books to unregulated third parties Bill, which is listed in section C of the Government legislative programme, will address concerns surrounding the continued applicability of the Central Bank's code of conduct after loan books are sold to unregulated entities. In preparation for this legislation, Department of Finance officials are already examining the complexities of this issue with their colleagues in the Central Bank and in the Attorney General's office. The Minister for Finance fully intends to bring forward this legislation from 2015 to protect mortgage account holders.

The Government accepts the principle of the Bill, as put forward by Deputy, but unfortunately, the Bill, as proposed, is flawed and, therefore, will require significant additional work to achieve the objectives sought. Considerable protections apply to people who are in mortgage difficulties. The Government is firmly of the view that the last resort should be people losing their family home. In that regard, the Government has put in place measures to ensure this does not happen. The Central Bank's code of conduct on mortgage arrears provides an integrated and cohesive package of consumer protection measures for borrowers either facing or in mortgage arrears. The code provides that mortgage lenders should allow for a flexible approach in the handling of arrears and pre-arrears cases and that they should aim at assisting the borrower who is in genuine difficulty as far as possible, having regard to the specific circumstances.

The code reflects the current mortgage arrears situation and seeks to deliver on the following principles: to ensure appropriate resolution of each borrower's arrears situation; to ensure lenders deal with borrowers in a fair and transparent manner; to support and facilitate meaningful engagement between lenders and borrowers; and to ensure borrower awareness of the benefits of co-operating with their lender, and the consequences of not co-operating. The code places particular requirements on lenders when communicating with customers to ensure the level of communication is proportionate and not excessive; communications are not aggressive, intimidating or harassing; borrowers are given sufficient time to complete an action they have committed to before follow-up communication is attempted; and steps are taken to agree future communication with borrowers. A lender must also produce and implement a board approved policy regarding communications with borrowers to ensure these requirements are met. If a borrower is not satisfied with a lender's compliance with the requirements of the code or with the lender's treatment of the borrower's case, then any complaint by the customer must be dealt with in accordance with the complaints provisioning set out in the Central Bank's consumer protection code.

I refer to the protections afforded by the provisions of the Land and Conveyancing Act 2013 which, inter alia, provides that a court has the discretion in any proceedings brought by a mortgagee for possession of a principal private residence to adjourn such proceedings to enable the mortgagor or another relevant person to consult a personal insolvency practitioner and where appropriate to instruct a personal insolvency practitioner to make a proposal for a personal insolvency arrangement, PIA. These provisions will apply in respect of all primary home mortgage repossession cases, irrespective of whether the mortgage is also subject to the code of conduct on mortgage arrears. The Minister for Finance has previously said that the matter of extending the protections in the code of conduct to unregulated financial institutions is complex and requires careful examination.

The proposed Bill illustrates some aspects of that complexity. Section 4(1) purports to impose an obligation on purchasers of loan books from regulated entities to agree to be bound by existing Central Bank codes. This issue was discussed by the Joint Committee on Finance, Public Expenditure and Reform last week. The special liquidator confirmed that the remaining bidders for the IBRC loan books had made such an agreement with the liquidators. However, it also emerged that there are likely to be difficulties enforcing that agreement. The Minister for Finance has been advised that a contract is not generally enforceable by a person who is not party to it and, therefore, the proposed Bill would create an unenforceable obligation on the purchaser. This could potentially lead to further stress for the borrower.

The question also arises as to what would happen if an entity not regulated by the Central Bank were to breach the Central Bank's code of conduct. With regard to a regulated entity, the Central Bank has a range of sanctions available to it, ranging from cautions or reprimands to the imposition of significant financial penalties. However, the Central Bank does not have the power to impose such penalties on entities which are not regulated by it. Therefore the proposed Bill would lack the power to impose sanctions on institutions which breached the terms of the code.

A similar issue arises in the case of the Financial Services Ombudsman. The Financial Services Ombudsman is a statutory officer who deals independently with unresolved complaints from consumers about their individual dealings with regulated financial service providers. The limitation of the role of the Ombudsman to regulated financial service providers is contained in primary legislation establishing the Office of the Financial Services Ombudsman. Any extension to the work of the Ombudsman would require primary legislation. This is not included in the proposed Bill.

It is worthwhile returning to the origin of this issue. The Central Bank Act 1997 was amended by the Markets in Financial Instruments and Miscellaneous Provisions Act 2007. The main purpose of this amendment was to bring non-deposit taking lenders under the remit of the Central Bank. "Retail credit firm" was defined as meaning "a person prescribed for the purpose of paragraph (g) of the definition of 'credit institution' in section 3 of the Consumer Credit Act 1995, or any other person who holds itself out as carrying on a business of, and whose business consists wholly or partly of, providing credit directly to relevant persons." A number of exclusions were contained in the section and the significant one in this context was "in relation to credit that was originally provided by another person, a person to whom all or any part of that other person's interest in the credit is directly or indirectly assigned or otherwise disposed of."

I fully appreciate that what I have just said is not easy to take in at first hearing but it illustrates how complex the issue is. This provision had the effect of excluding special purpose vehicles, SPVs, to which interest in credit was sold or otherwise assigned. As we have now discovered, it also covers funds which may purchase mortgage loan books from regulated entities. Such transactions would not have been expected in 2007 but, like a lot of other things, they have come to pass. A simple solution to ensure that mortgage holders whose mortgages are currently with regulated entities continue to have the protections of the codes would be to remove that exemption. However, this would mean that SPVs would also be subject to regulation, which was not the intention in 2007 and does not seem to be a good idea. The original thinking was to ensure that consumer protection would apply to retail consumers but that it was not needed when a large corporate was selling a securitised bond to another large and financially astute corporate.

Securitisation by use of SPVs is not uncommon in the Irish financial sector and banks use it as a means of raising funds. A bond would be secured against a book of mortgages and the bank would usually get the funds at a lower price than it would pay for unsecured funds. Both the bank and the buyer of the bond know what they are doing and the individual mortgage holder whose mortgage is part of the deal is never aware of or affected by the transaction. I am quite clear of the outcome that the Government and I want. We want to ensure that existing mortgage holders who have the protections of the code of conduct on mortgage arrears now will continue to have these protections if their loans are sold to an unregulated entity. If this can be achieved by the voluntary application of the codes by the purchasing entity, well and good, but we will work to explore how this can be achieved without unintentional effects on other entities.

The current regulatory regime in Ireland is based on whether or not an entity is regulated by the Central Bank. The Central Bank has informed me that firms that are already authorised or registered with the Central Bank for other regulated activities do not require a separate authorisation to provide retail credit. The consumer protection codes, including the code of conduct on mortgage arrears, apply to the regulated activities undertaken by regulated entities and the Central Bank supervises lenders' compliance with those provisions and financial services legislation generally. Similarly the remit of the Financial Services Ombudsman is confined to regulated entities.

As the House will recall, the introduction of a regulatory regime for debt management firms was achieved by making debt management firms regulated businesses which require Central Bank authorisation. One of the options that needs further consideration is whether we should make holding mortgage books - to put it in non-legal language - a regulated activity. If we take this option, we also have to consider how this could be implemented if the holder is based overseas and how sanctions could be applied in these circumstances. Another option is whether we could regulate how the holders of mortgage books service them. The holder may not have a presence in Ireland but someone has to make contact with the borrower and collect the repayments. Such activity may be outsourced to a firm based in Ireland and regulation of the activity rather than the entity which holds the loans may be a viable option.

Depending on the approach taken, we may have to consider whether the purchasers of loan books would be required to pay fees or levies to either the Central Bank or the Financial Services Ombudsman or both. The Ombudsman collects levies from institutions it covers to fund its activity and additional institutions could also be required to make a contribution towards its operating costs if their customers have a right of appeal. All of the focus at the moment is on the application or otherwise of the code of conduct on mortgage arrears in the event of the sale of a mortgage loan book to an unregulated entity. The protections provided by the code of conduct on business lending to SMEs and the consumer protection code also apply to certain existing loan books with regulated entities which could be disposed of by their current owners. There may also be other options which would provide the solution required which have yet to come to the notice of the officials examining the issue so I do not present this as an exhaustive list. I think it is clear that there will not be a quick solution to this issue but I do not want this fact to cause undue concern to existing mortgage holders whose mortgages may be sold shortly.

As the Minister for Finance has already said, it is in the interests of the purchasers of existing mortgage books that they treat their new customers in accordance with the code because their failure to do so may be held against them. This commercial reality is illustrated by the behaviour of Apollo Global Management which purchased the Bank of Scotland Ireland loan book. Apollo met the Central Bank and the Department of Finance and indicated clearly that it intended voluntarily to adopt the code of conduct on mortgage arrears to manage the acquired loans. Apollo Global Management believes that following the code is in the best interests of both and forms part of its core strategy. As the House will be aware following the meeting of the Oireachtas Joint Committee on Finance and Public Expenditure and Reform last week, the remaining bidders for the IBRC loan books have committed to abiding by the Central Bank code of conduct on mortgage arrears on a voluntary basis. I look forward to further debate on this issue of importance.

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