Dáil debates

Wednesday, 8 July 2009

Other Questions

Financial Services Regulation.

Photo of Catherine ByrneCatherine Byrne (Dublin South Central, Fine Gael)
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Question 30: To ask the Minister for Finance if he has received a report from the Irish Financial Services Regulatory Authority on whether banks have matched fixed rate mortgages with their own borrowings at high fixed rates which would justify the application of high breakage charges. [27883/09]

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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The Deputy's question refers to the commitment I gave in this House on 26 March 2009 to request the consumer director in the Financial Regulator - which has a statutory mandate to safeguard customers' interests - to examine the level of redemption fees charged by banks to customers wishing to exit from fixed rate mortgages. My Department received a copy of the Financial Regulator's report on this matter on 29 June 2009. The report sets out that the Financial Regulator requested specific information from 26 lenders on how early redemption fees quoted to customers are calculated. Of the 26 lenders, 25 confirmed to the Financial Regulator that they did not impose any fees in respect of the early redemption of a fixed rate home loan other than those which would arise in the context of a normal redemption of any mortgage. In one case, a €95 fee approved under the Consumer Credit Act 1995 is charged by the lender for breaking a fixed rate mortgage. The regulator's report states that independent actuarial confirmation was also sought from all the lenders to substantiate the case that the formulae applied by them to calculate redemption fees were restricted to the recovery cost of the funding of particular fixed rate mortgage arrangements in place.

On the basis of the information supplied by the lenders, including worked examples and the actuarial confirmations submitted, the regulator concluded and has confirmed to my Department that its analysis indicates the early redemption fee calculation in all cases appears to seek to recover costs and lenders do not generally apply additional fees in the case of early redemption. The Financial Regulator has advised my Department in its report that since its findings are based on a review of material provided by lending institutions rather than verification by means of on-site inspections, it intends to carry out at least six on-site inspections on this issue.

Lenders do not, therefore, seem to be applying financial penalties to dissuade borrowers from early redemption of fixed rate mortgages. However, if the additional work to be undertaken by the regulator brings to light any information that does not support the findings and the conclusions contained in its report, the regulator has confirmed that this information will be made available immediately in the public domain.

Photo of Richard BrutonRichard Bruton (Dublin North Central, Fine Gael)
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Although he did not address the matter in his reply, the Minister has committed to examine whether the exposure to fixed-rate mortgages by these lenders is matched by commitments to fixed-rate funding on their part. He has not adverted to the matter but it is a central issue. If the banks do not commit to long-term money they should not charge breakage fees for those committed.

I refer to the finding in the report which showed some lenders limit the breakage fee to six months' interest. In light of the very hands-on involvement the State now employs in the practices of financial institutions, does the Minister agree the approach used by some lenders ought to adhere to a best practice, given a background in which families are being crucified with commitments? If it is possible for some then it should be possible for all and a code of best practice should be employed.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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Certainly I will take up the Deputy's suggestion on the matter of six months' interest and whether it is the practice. However, the answer deals with the question, correctly raised, of whether it is matched to long-term funding. It refers to actuarial calculations which relate precisely to the cost of funding the borrowing.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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That is a different matter.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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That is the basis of the regulator's examination.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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The Minister is probably more aware than I that part of the reason for the mess in which the Irish banks find themselves is that they borrowed short to lend long. However, people who borrowed on mortgages have borrowed long. An individual family who bought a mortgage borrowed long but many of the banks borrowed short. The actuarial valuations seek to value the cost of long borrowing, not necessarily the actual borrowing the banks undertook. It may have been what they should have done but the mess they are in suggests that in many cases they did not.

Will the Minister arrange to extend the study to include international best practice on this issue? In one or two years' time, if the European Central Bank began to lift interest rates, fixed term mortgages may become attractive again. As the Minister will be aware, people are advised to shop around in a narrow sense for the best possible deal. We should consider what is available or what takes place in the Untied States and in places where penalties exist. Some of these penalties have been as high as €20,000 or €30,000 for hard pressed families. Will the Minister extend the review deeper and further to include an examination of the approach of other countries to ensure borrowers get a fair deal as far as possible?

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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The suggestion on international best practice is constructive. The Deputy will appreciate that the regulator sought first to establish whether the basics were being adhered to.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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I am simply suggesting it.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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However, building on the review, that is a very constructive suggestion and I will follow up the matter.

One of the great difficulties is the banking sector must have fixed rate mortgages as an option and if one were to interfere with that one might close down the option for the future. I am unsure if I am as pessimistic - if that is the correct word - as Deputy Burton about the future trajectory of European Central Bank interest rates.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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They are likely to rise a little in the coming two years.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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In time it may be possible that will take place. However, I will raise the issue.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick East, Fine Gael)
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The review is all very well but let us consider the historical position with Anglo Irish Bank. The Financial Regulator relied on evidence provided by Anglo Irish Bank whereas it should have carried out independent verification work on day one. Instead it relied on an independent review carried out by the banks and it is now considering whether to carry out a review verification at a later date. A thorough, in depth review should be carried out by the Financial Regulator now. People are being caught with between €10,000 and €40,000 in terms of breakage fees on fixed rate mortgages, many of whom are young families and it is not good enough. Will the Minister call on the Financial Regulator to extend the review to a thorough verification of fixed rate mortgages?

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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The regulator has made it clear that on-the-spot examinations will now take place in several institutions.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick East, Fine Gael)
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When?

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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I do not believe it would be advisable to give a specific date for that as it would amount to giving notice to institutions concerned and it would not be normal practice for on-the-spot checks. Clearly, they will be carried out imminently.

Photo of Arthur MorganArthur Morgan (Louth, Sinn Fein)
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Is the Minister aware of the real crisis facing families struggling to repay mortgages? In some cases it is very serious and at the point of being a battle for food. Is the Minister really aware of the extent of the problem? Does he understand why people, including many Members, simply would not trust any information provided by the banks? I refer to Deputy O'Donnell's question regarding when and how soon these six on-site visits will take place?

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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They will take place very quickly. I assume the regulator will build on the work already done. I will certainly raise with the regulator the issues of the suggestions raised about international best practice and the question of whether six months' interest is now a restriction or has become an industry norm.