Dáil debates

Wednesday, 9 November 2011

Topical Issue Debate

Uncovered Credit Institutions

4:00 pm

Photo of Catherine MurphyCatherine Murphy (Kildare North, Independent)
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I thank the Ceann Comhairle for selecting this topic for discussion. I have come across a number of business people who are trying to sustain the jobs of those they employ in the face of heavy-handed activity by some banks. I wish to focus in particular on banks that are not covered by the guarantee. What can the Minister do about such practices? I will cite examples from my constituency, although this is happening throughout the sector. I spoke to an individual who employs 40 staff in a business that is in its third generation. On a monthly basis, that business is being hauled in and asked to provide figures. The bank's overriding concern is not how sustainable the business is, but how quickly it can get repayments. Some of these banks have an exit strategy which is dominating how they interact with their customers.

The second example is a business that employs in excess of 120 people. Once again, the bank meets them on a monthly basis. In this case it is a collection of businesses run by several family members, but it is one company. They had been doing very well except that they invested in upgrading their properties. As I said, the bank is not covered by the guarantee. They were hauled in and eventually asked to undertake expensive research on what would improve their margins. They were also asked whether, if they invested in something, it would improve the company's sustainability. The outcome was that an investment of €30,000 in some technology would improve things significantly. When they asked the bank for a loan to make the improvement that the bank itself had sought, the bank refused the loan request. They questioned why they were being asked to make that investment in a report when the bank clearly had no intention of providing the funds.

The problem is that the exit strategy of some banks that are not covered by the guarantee has the potential to put many people out of work. I saw ISME's press statement today and, while I would not agreed with all of ISME's views, one can see from its language the frustration the organisation feels on behalf of its membership. ISME is focusing on the bailed-out institutions, but people who have debts with banks that are not covered by the guarantee are in a much more exposed position.

What kind of powers does the Minister for Finance have to deal with these institutions? How can we get a more sensible arrangement that would give viable businesses more time to repay? Some businesses may lose viability because of the pressure being put on them to pay back what is owed more quickly than is possible. The pressure being put on such people is making the situation unsustainable because they are clearly unable to focus on running and developing their businesses due to the pressure from these banks.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I thank Deputy Catherine Murphy for raising this important issue.

I am concerned that customers are not being treated in an even-handed and fair manner by financial institutions. To that end, the Central Bank has introduced three codes of conduct designed to protect customers, both personal and business, in their dealings with such institutions. These are the consumer protection code, the code of conduct on mortgage arrears, and the code of conduct for businesses lending to small and medium-sized businesses.

The consumer protection code is binding on financial institutions authorised, registered or licensed by the Central Bank. It also applies to the provision by financial institutions of services in the State, which are authorised by an equivalent financial regulator in another EU or EEA member state.

The code contains a number of general principles that financial institutions must adhere to in their dealings with all their customers. The requirements imposed on financial institutions under these general principles include: acting honestly fairly and professionally in the best interests of customers; acting with due skill, care and diligence in the best interests of customers; employing effectively the resources and procedures, systems and control checks that are necessary for compliance with the code; seeking information from the customer relevant to the product or services requested; and making full disclosure of all relevant material information, including all charges in a way that seeks to inform the customer.

The code places more detailed requirements on financial institutions when they are dealing with private consumers. These include limiting the number of times a lending institution may contact a consumer, by phone or otherwise, who is in arrears with his or her payments. For the purposes of the code a "consumer" is defined as: a natural person acting outside his or her business, trade or profession; unincorporated bodies such as partnerships, clubs and trusts; incorporated bodies with an annual turnover of €3 million or less in the previous financial year; or a member of a credit union.

The code was recently revised by the Central Bank following detailed consultation with interested parties. The revised code will come into effect next January. The Central Bank considers that the provisions in the code strike the right balance between requiring lenders to engage with customers to encourage them to deal with arrears and with protecting customers who are already stressed from dealing with financial difficulties.

The next code is the code of conduct on mortgage arrears. This code applies to mortgage lending activities with borrowers in respect of their principal private residence in the State. Compliance with the code is mandatory on all mortgage lenders registered with the Central Bank. Lenders must have in place the required systems and trained staff necessary to support the implementation of the code. The code sets out the framework that lenders must adhere to when dealing with borrowers who are in arrears or are in pre-arrears. For the purposes of the code a "pre-arrears" case arises when the borrower contacts the lender stating that he or she is in danger of getting into financial difficulties and/or is concerned about getting into mortgage arrears.

The third code I have mentioned is the code of conduct for business lending to small and medium enterprises. On 4 November last, the Central Bank published a revised version of the code setting out new requirements for lenders when dealing with SMEs in or facing financial difficulties. The SME code revisions build on the Central Bank's ongoing programme of work for protecting the interests of borrowers in or facing arrears. The introduction of the new provisions in the SME code follows a review of the financial difficulties requirements in the existing SME code as part of the Central Bank's commitments under the EU-IMF work programme.

The revised SME code will come into effect from 1 January 2012. A full review of the SME code will be undertaken in 2012. It will provide key stakeholders, including SMEs and their representatives, with an opportunity to engage further in the operation and effectiveness of the code, including the new requirements relating to the treatment of financial difficulties cases.

The House will be aware of the large number of initiatives taken to ensure SMEs are able to get the credit they need. There is a need to ensure credit is only extended to viable businesses that can meet repayment schedules, and it is normal that some businesses are not able to obtain credit, even in good times.

Photo of Catherine MurphyCatherine Murphy (Kildare North, Independent)
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The phrase that struck me is: "in the best interests of customers". I fully accept a bank is entitled to seek the repayment of the loan taken out but, in the case I outlined, in respect of which there was a requirement to pay for a report in spite of the business concerned having been hard pressed, there was no obligation on the lender to act in the best interest of the company by facilitating investment in technology. One would wonder why the company was put to the expense. This sort of practice puts more pressure on a small business that is really struggling at the margins.

Are complaints about the code monitored? It is only from complaints that we will determine how the code functions for those who feel they are being dealt with inappropriately by a lending institution. The monitoring arrangements will be really important from this perspective. While we may all have anecdotal experience, general feedback would be very useful.

The Minister said there will be an upgraded code in operation from next January. Will there be an examination in the interim of the experience with the existing code? If experience shows there is a deficiency in the new code, I presume it can be modified.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The reason the Central Bank is revising the existing codes is that, having consulted interested parties, it realised they are inadequate. One is operative since 4 November and the other will be operative from January next. The Central Bank normally puts the relevant documentation on its website. I do not know whether these codes are posted but I assume they are and that the Deputy will be able to gain access to them in detail on the website.

The other issue, which is related to the example the Deputy raised, concerns the reason lending institutions are refusing loans to companies that appear to be viable. A case could be referred to the director of credit control. If there is a refusal, the director will examine all the documentation, without any particular cost to the applicant. If he feels the case is one in which credit should have been extended, he contacts the lending institution involved and advises it of his decision. His decision is not binding but there is an agreement with the credit institutions that they honour his recommendation. To date, they have done so. Approximately one third of the cases the director has examined have been reversed. There is, therefore, potential for reversal. The Deputy may be aware of the website of the office of credit control. This office, rather than the codes of practice, seems to be fitting in the case mentioned by her.