Thursday, 23 June 2016
Ceisteanna - Questions - Priority Questions
Financial Services Regulation
3. To ask the Minister for Finance if he is concerned at the manner in which commercial loans are being offered for sale and are being actually sold by non-bank entities and the fact that commercial loans can now be bought by private citizens and by persons in business who may be competing with the borrower concerned; if he will make changes in this area to ensure that loans can only be sold to regulated entities with a banking licence; and if he will make a statement on the matter. [17750/16]
This question relates to business loans, as opposed to mortgages. I have previously raised with the Minister the issue of the owners of loans, in some cases vulture funds, not needing to be regulated. The legislation of last year, to which the Minister referred, requires a credit servicing firm as an intermediary to be a regulated entity. My concern is that the large portfolios of loans bought by these funds from NAMA, IBRC and departing banks are now going to wash themselves out. They will be sold on, sold on again and sold on again and we will have no idea of who will end up owning the loans. That is the specific issue, on which I will elaborate in a moment.
The previous Government advanced the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 to ensure that purchasers of relevant loan books must either be regulated by the Central Bank or loans purchased by non-regulated entities must be serviced by a credit servicing firm who is regulated by the Central Bank and therefore subject to the Central Bank's code of conduct.
The Act was introduced to fill the consumer protection gap where loans were sold by the original regulated lender to an unregulated firm. It introduced a regulatory regime for a new type of entity called a credit servicing firm. Credit servicing firms are now subject to the provisions of Irish financial services law that apply to regulated financial service providers. This ensures that relevant borrowers, whose loans are sold to third parties, maintain the same regulatory protections they had prior to the sale, including under the various statutory codes such as the consumer protection code, the code of conduct on mortgage arrears, the code of conduct for business lending to small and medium enterprises and the minimum competency code, issued by the Central Bank of Ireland.
It should be highlighted that the transfer of a loan from one entity to another does not change the terms of the contract or the borrower's rights and obligations under the original contract. Also, following a review in 2015, the Central Bank code of conduct for business lending to small and medium enterprises has been strengthened in certain areas resulting in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 which come into operation on 1 July 2016.
It should also be noted that the Deputy's proposal that commercial loans could only be sold to regulated entities with a banking licence would likely reduce the attraction of competition into the SME credit market by deterring the entry of non-bank financing sources to credit markets at a time when there is agreement across the EU on the need for greater non-bank financing.
These funds bought large portfolios of loans from NAMA, IBRC and banks departing Ireland. They are now slicing up those portfolios into much smaller parcels of loans and, under existing law, anyone can buy a loan. If one person owns a hotel in Dublin and I own a hotel down the road, I may be in a position to buy that person's loan. To comply with the law, I would have to appoint a credit service firm as an intermediary but I could do it and take out that person.
The nature of commercial loan agreements means they can be called in at will by the lender. For example, if a single payment is missed, this can trigger a default and the loan can be called in within a matter of days. The issue raised in this question will become a major one as this becomes washed out. There is no control whatsoever on who can ultimately own a loan. The idea that any individual can buy a loan relating to someone else's business and appoint an intermediary firm, hence complying with the law, raises serious questions. As I understand it, this will be coming down the track. I know for a fact that parcels of loans as well as individual loans are being offered for sale to individuals and business people. This will happen and the issue will need to be addressed.
The contractual obligation that is attached to the loan continues with a change of ownership. I therefore cannot see how the person to whom the loan was given originally can be exploited on the transfer because the protections under law are still in place. The solution suggested by the Deputy that only regulated entities with a banking licence should be able to acquire loans would cut across a lot of SME lending. For example, the Strategic Banking Corporation of Ireland has established a way of lending, which is appreciated very much by the SME sector, with three non-bank finance providers, namely, Finance Ireland, Merrion Fleet Management and First Citizen Finance, using the high street banks as vehicles. If the Deputy says there is an issue, I will take his word for it. Further, if he could give me an aide-mémoireon the issue, I will get it checked out and if there is agreement that this is a real issue we will move to amend it.
I believe there is an issue and that it will become a much bigger one. It is true to say the new owner of the loan steps into the shoes of the original lender and all the same terms and conditions apply. However, the nature of a commercial loan agreement is such that it is heavily stacked in favour of the lender. Basically, the loan can be called in at will and in the matter of a number of working days by way of notice. This opens up the real possibility that someone with negative intentions in respect of a loan relating to a business can take ownership of it and, essentially, trigger the calling in of the loan and move on the original borrower. We are entering into a period now when the funds will seek to get a return on their investment. They will want to turn over the loan portfolios they bought. They are slicing them up into much smaller parcels. I take the Minister's point on the issue of non-bank finance, which I support, but a way has to be found to tackle this issue. A person's loan could in theory end up in unsavoury hands. That is the reality. All they need to do is appoint a credit servicing firm to comply with the law. This exposes the original borrower to major risk.
As I stated, the Central Bank code of conduct for business lending to small and medium enterprises has been strengthened in certain areas resulting in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-sized Enterprises) Regulations 2015. These regulations only come into effect on 1 July next. I have not familiarised myself with the details of the regulations, but there may be something in there which helps to solve the problem raised by the Deputy. However, if it is not resolved and it is as he says, I will arrange for him to talk to my officials to see if we can come up with a statutory vehicle to resolve the matter.