Damien English (Meath West, Fine Gael) | Oireachtas source

Regarding Deputy Ó Cuív's concerns, he may not be aware that the Minister for Finance is in Brussels at a meeting and cannot be here. He would like to be here but cannot be. As Deputy Michael McGrath knows, the Minister would be here if he could be as he does attend these debates. However, he cannot be in two places at once despite all he is able to do.

The Government appreciates the concerns which Deputy Michael McGrath has attempted to address in the Bill. We know Deputy Michael McGrath's efforts and those of Fianna Fáil are genuine as it is an issue affecting a great many people. We all want to see the burden eased if at all possible. A monthly mortgage payment is the largest expense faced by most families and, as the Deputy Michael McGrath will be aware, the Minister for Finance has requested the Central Bank to examine and produce a report on the issue. Subsequently, the Minister met the six main mortgage lenders in May to outline his concerns and those of most people here. The meetings focused on the mortgage market and specifically the comparatively high standard variable rates currently being charged by the banks in Ireland. The Minister was clear that all customers should have easy options available to them to reduce their monthly mortgage payments. The banks agreed to review their rates and products and, by the beginning of July, to have simple options to reduce monthly mortgage payments for standard variable rate customers. This is to the benefit of both existing and new customers of the banks. A key concern expressed by the Minister was that all customers, including those with high loan to value ratios, would be in a position to lower their mortgage payments. The main lenders have launched a range of measures ranging from lower standard variable rates, new loan-to-value products and fixed-rate products.

In addition to meeting the banks, the Minister met with representatives from the fair mortgage rates campaign. The Minister briefed the representatives on his meeting with the banks and his expectations in the months ahead. The Minister outlined to the group his view that many of the new products offered by the banks could result in monthly savings for mortgage customers and should be considered fully by customers and their advisers. We are currently in the middle of this process and the bank's responses are being considered by the Minister and the Department of Finance. The Minister wants to see customers offered lower monthly mortgage payments. I am sure this is an objective that is shared by all Deputies in the House. The Minister has made it clear that a follow up set of meetings will take place with the banks in advance of the budget. The Minister has made it clear to the banks that the issue of a penal banking levy in the budget or powers for the Central Banks to regulate interest rates will be considered in future if sufficient progress on this issue is not made. It is therefore not the time to legislate on this issue as the effects of moves by the banks have not yet become clear and a review of the situation is ongoing.

The Government is opposing this Bill and I will outline the reasons. I stress that Department of Finance officials have consulted with the Central Bank specifically on the contents of the Bill and that the Central Bank remains opposed to the regulation of interest rates. I turn to the Bill in detail. The Bill requires the Central Bank to assess whether market failure exists in the principal dwelling house, or PDH, mortgage market and permits the Central Bank to issue a direction to a lender or lenders setting a maximum interest rate defined in a number of possible ways; either a specified rate, a margin above the ECB rate or cost of funds, or a proportion above market average. The Bill also requires the Central Bank to make an assessment of competition in the mortgage market. However, there is already a separate public authority with jurisdiction in this area, which is the Competition and Consumer Protection Commission. I question therefore whether the Bill could create a conflict of authorities in this regard. In addition, while the Central Bank does not support the regulation of interest rates, it has advised on a brief inspection of the Bill that there are numerous other factors which would need to be taken into account in any analysis, including such an analysis as suggested by the Bill. That said, the Bill does permit other matters which are certified by the Governor as relevant to be taken into account.

The Bill permits the regulation of all banks and lenders. Therefore, it would apply to newcomers to the Irish market and might hinder competition, which is crucial to exerting downward pressure on interest rates. In fact, a three-year exemption from restrictions on other fees and charges for new entrants to the Irish market is currently in place to encourage new entrants and to foster competition. In addition, the Bill does not include variable rates which are set by reference to European Central Bank interest rates. This could mean that a tracker mortgage with an unreasonably high margin above the ECB rate would not be included. On an initial consideration, it would seem that the requirement for quarterly reports appears excessive. It is not accepted that significant changes are likely to occur in the mortgage market on a quarterly basis. There may be also legal issues regarding definitions and the factors to be taken into account in the assessments. The Bill prohibits discrimination between existing and new borrowers without defining any of these terms.

Another difficulty with the Bill is that it provides that the assessments should be published "as appropriate" but makes no such provision in relation to directions to lenders. It is not clear whether these should be public although there is a possibility of High Court enforcement action in the Bill, which would, presumably, be public. The Bill limits the discretion of the High Court to impose fines on lenders for failure to follow a direction. Furthermore, the Bill limits the operational freedom of lenders because it seems to only allow two ways to attract new borrowers; defraying legal costs or paying stamp duty. Other practices such as lower introductory rates or cash back directly to customers which are used in Ireland do not seem to be permitted. Of course, there are consumer protection issues associated with such practices which warrant further detailed consideration. Significantly, the Bill does not have a sunset or review clause, which means the Central Bank would be required to undertake these assessments in perpetuity unless the legislation were repealed, even if it is accepted that the market is functioning well.

Notwithstanding the foregoing, it is clear that the objective of the Bill is to reduce monthly mortgage payments faced by standard variable rate customers. This is an objective the Minister shares. As I have stated, the purpose of meeting the banks was to get fair monthly payments for existing as well as new mortgage customers, including those on standard variable and fixed rates. As Deputies will be aware and as I have already stated, the Minister for Finance, Deputy Michael Noonan, met with the senior management of Ireland's six main mortgage providers in May and strongly delivered the message that change was expected. The meetings focused on the mortgage market and specifically the comparatively high standard variable rates currently being charged by the banks. The banks agreed to review their rates and products and, by the beginning of July, to have simple options to reduce monthly mortgage payments for mortgage customers. The Minister does not want to see one solution or mortgage offering from all of the banks but rather a competitive range of products for existing and new customers. The banks have responded to the Minister's initiative and made announcements and these are currently being reviewed. We encourage all customers and their advisors to examine the options now available and to make the best decision for their circumstances. Customers with the highest standard variable rates now have the option to lower their monthly mortgage repayments and we encourage all Deputies to ensure that their constituents are aware of the lower cost products available to them.

A number of the banks have embarked on significant advertising campaigns in order to attract new customers and encourage switching. This is very important because if banks believe they may lose customers, they will be encouraged to offer more competitive rates to existing customers. Switching would also increase the overall competitive nature of the market. Customers should not be put off by the process but should approach a new bank if they wish to switch and allow it to do the work or guide them through the process. I understand that the Competition and Consumer Protection Commission, or CCPC, is planning a significant public awareness campaign on switching in the early autumn which will provide additional information to consumers to encourage switching. The CCPC website, www.consumerhelp.ie, continues to be a valuable source of information on the rates charged by various financial institutions. In relation to other initiatives undertaken by the banks, some have reduced fixed-rate options for new and existing customers while others have introduced new variable rates based on loan-to-value ratios. Therefore, there are options available to those on standard variable rates. They can stay with their lender and, where possible and where it suits their circumstances, switch to an alternative rate or, alternatively, they can look into switching lenders.

I would not want to give specific advice to borrowers because it is up to each person to make up his or her own mind on whether to choose a standard variable rate or fix or not and for how long. However, I would point out that many customers have the option to make immediate monthly savings by fixing. In some cases, it would take significant and speedy additional reductions in rates in the months ahead to outweigh the immediate savings from switching now. Borrowers need to consider whether the security and peace of mind of having a fixed rate, which will not rise if interest rates rise, could outweigh the lack of flexibility which comes with fixing, particularly when some of the fixed rates on offer are lower that existing variable rates.

As we have stated, the responses by the lenders are currently being reviewed by the Minister and the Department of Finance. In addition, a follow-up set of meetings with each of the six banks will take place in September in advance of the budget. We are, therefore, only in the middle of this process and to legislate now would not be appropriate. The effects of the initiatives taken by banks have not yet had time to effect change or to be evaluated by the Department of Finance.

In advance of the meetings the Minister held with the main mortgage providers, the Central Bank, on the Minister's request, prepared a report on the influences on standard variable rate pricing in Ireland. This report was submitted to the Department of Finance last month and has been published on both the Department of Finance and the Central Bank websites, to which reference was made. The report provides a valuable insight into the mortgage market and I would urge all Deputies to read it carefully. It showed that 52% or €60 billion of credit advanced to Irish resident households for home purchases is on a tracker rate, a further 7% or €8 billion is fixed and the remaining 41% or €47 billion is on standard variable rates.

The report finds that the spread between official European Central Bank, ECB, rates and the standard variable rate is relatively high and lending rates are above average compared to our European peers, which is a point Deputy McGrath referenced. However, it made clear that the high pricing of loans reflects three factors - credit risk, competition and bank profitability. The report went on to say that credit risk is influenced by the high level of non-performing loans and lengthy and uncertain process of collateral recovery. Competition is weak and this is not unrelated to the credit risk as new entrants may be deterred from entering the Irish market.Finally, bank profitability is constrained by legacy issues, but profitability is needed to build capital buffers and to meet increasing regulatory requirements. However, the report did note that the reduction in ECB policy rates has not been passed through fully to the funding costs of Irish banks. Also, non-tracker mortgage lending rates have been slower to respond to a lowering of the policy rate than to increases. Furthermore, the Central Bank thought that it is likely that the rates in effect for most banks at the end of April 2015 were higher than would be necessary in the long run for a bank unburdened by a poorly performing mortgage back book.

The Central Bank highlighted that the mortgage business as a whole is not profitable for Irish banks. This reflects the high levels of non-performing loans and tracker mortgages on their books. The Central Bank suggested that the ability of the banks to partially compensate for the burden of the trackers by retaining higher spreads on variable rates is likely to be transitory, as such spreads will in time encourage entry into the market.

This report by the Central Bank sharply cautioned that any policy steps to interfere with the rates charged risks creating damaging side-effects. In the last few days, the Central Bank has reiterated to the Department of Finance its stated policy opposition to set and enforce mortgage interest rates. Acceptance of the Bill would give powers to the Central Bank that it does not want and does not want to use. Therefore, the Government, in opposing this Bill, is also taking into account the views of the Central Bank, which is opposed to having the power to regulate interest rates.

In regard to the regulation of standard variable rates, on 28 May 2015, in his introductory statement to the Joint Committee on Finance, Public Expenditure and Reform, the Governor of the Central Bank, Professor Patrick Honohan, re-emphasised his opposition to the administrative control of interest rates. While he acknowledged that he would welcome a reduction in bank standard variable rates in current circumstances as a benefit to the economy at large, it remains his firm belief that the introduction of administrative control on interest rates in Ireland would be bad for the country as a whole in the medium term - notably, as he said, because of its stultifying effect on bank efficiency and its chilling effect on the entry of other banks. While the Governor signalled that he would welcome a reduction in bank standard variable rates in current circumstances as a benefit to the economy at large, he was opposed to this being brought about by administrative controls and instead thought that competition would be the crucial determinant. The Minister has also highlighted the importance of competition in terms of exerting downward pressure on interest rates, although it is acknowledged that this competition must be tempered by prudence.

The Governor pointed out that in current conditions, the standard variable rate borrower's main protection is competition: the fact that, by setting its standard variable rate too high, any bank stands to lose business - whether new business or switchers - to competitors. However, he acknowledged that the effectiveness of this strategy was currently hampered by the low level of competition in the Irish banking sector, but that this fact further strengthens arguments against administrative control of interest rates. Ensuring that official policy does not inadvertently deter competition and entry of banks to the market is thus vital for the long-term health of the economy. Professor Honohan warned that if Ireland were to be the country that controls interest rates, this would have a signalling value far in excess of what one might think in terms of causing a retreat of service providers.

The Governor very firmly cautioned against the enacting of legislation that would provide for officially-administered lending rates and the Minister has yet to see convincing evidence to justify going against this advice. He explicitly stated that:

Nothing could be more likely to curtail and discourage entry of new competitors into Irish banking, and without the possibility of such entry, I cannot see that banking can recover the operational efficiency and competitive pricing that is essential for Ireland in the long run. For the sake of modestly lower standard variable rates for a few quarters, a much larger and quasi-permanent albeit somewhat invisible loss would be incurred by the customers of the banking system in Ireland. Well-capitalised banks operating more competitively will, in the end, offer lower rates and better service.

In addition, the Governor highlighted that close administrative control of interest rates would not be easily compatible with the principle of an open market economy with free competition which has underpinned the considerable increase in national prosperity over the past half century in Ireland and which is enshrined in the European Union treaty. As such, the issue of administrative control is not a matter to be taken lightly or quickly for what would be at best be a transitory advantage.

As the Deputies are aware, banks must operate on a profitable basis if they are to provide the services necessary to the economy, to comply with international regulations surrounding capital requirements, to be fully financially autonomous and not dependent on the State, to have the resilience to deal with future shocks and to serve customers adequately.

As I said, Department of Finance officials have consulted with the Central Bank specifically on the contents of this Bill and the Central Bank remains opposed to regulation of interest rates.

It should be noted that the Government is committed to helping address the particular problems faced by those individuals who bought homes at the height of the property boom mainly between 2004 and 2008. In this regard, in budget 2012, the Minister fulfilled the commitment in the programme for Government to increase the rate of mortgage interest relief to 30% for first-time buyers who took out their first mortgage in that period. This was the period during which house prices were at their peak.

As the Minister has made clear to the banks, the issue of a penal banking levy in the budget or powers for the Central Bank to regulate interest rates will be considered in future if sufficient progress on this issue is not made. However, it is too soon to assess the scale or nature of this progress as the banks have only recently set out their responses on the issue to the Minister and these are currently being reviewed by the Minister and the Department of Finance. Moves have been made by the banks in relation to providing options for customers with regard to the availability of different lower rate products and through advertising the possibility of switching lender. The Minister has also committed to a follow-up set of meetings with lenders in advance of the budget, and this will take place in September.

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