Dara Murphy (Cork North Central, Fine Gael) | Oireachtas source

I welcome the opportunity to address the House on this important legislation which is a priority for the Government. The purpose of the legislation is to protect consumers whose loans are sold by regulated financial service providers to unregulated firms. It will address concerns surrounding the continued applicability of the Central Bank's codes and access for borrowers to the Financial Services Ombudsman after loan books are sold. It provides that borrowers, whose loans have been sold, retain the protections they had when their loan was with a regulated lender. For example, they will retain the protections provided by the Central Bank's codes such as the code of conduct on mortgage arrears, known as the CCMA, the consumer protection code and the code of conduct for business lending to small and medium enterprises. Consumers need protection when taking out credit, during the course of holding credit and when they are repaying credit. It is not equitable that some of these protections can be avoided owing to the regulatory position of the entity which owns the credit. For this reason, consumers should maintain the protections they had before their loan was sold. This is what the proposed legislation seeks to achieve.

As Senators know, unregulated financial institutions are not bound by the Central Bank's codes. In addition, while customers of unregulated financial institutions have access to the courts, they do not have access to the Financial Services Ombudsman. Although, as the House will be aware, many purchasers of loan books have already agreed voluntarily to apply the Central Bank's codes when managing loan books, voluntary compliance is not enforceable. As a result, the Government committed to ensuring these protections would be made available for all consumers whose loans had been sold.

Senators might ask why loan books are sold. It is generally accepted that there is a need for financial institutions to be able to deleverage and restructure their loan books so as to return to their main business of supporting the economy through the provision of financial services, including credit for SMEs and consumers. We do not intend that this legislation will inhibit that process, but, more importantly, we do not want borrowers to lose protections because of a change in ownership.

This has been complex legislation to prepare. Department of Finance officials have carefully considered how best to protect consumers and, as is often the case when preparing legislation, their thinking has evolved during the course of the preparatory phase. Last July and August the Department of Finance ran a public consultation process to seek views on the proposed legislation. Some 19 submissions were received from a range of respondents, including the financial services industry, consumer groups, public representatives, individuals and other stakeholders. These submissions are available on the Department's website. Department of Finance officials subsequently met some stakeholders to clarify submissions and the technicalities of how the credit servicing industry operated. The officials also discussed the issue with the authorities in the United Kingdom, as they had faced similar policy challenges in recent times.

Officials in the Department of Finance have carefully considered the submissions and have been working intensively with the Central Bank and the Office of the Attorney General to progress the legislation.This experience has underlined the value of the public consultations process. It means legislation is prepared in an open and transparent manner and also plays an important role in contributing to understanding the issues and avoiding unintended consequences. When work began on this Bill, the initial thinking was that the ownership of credit should be regulated to ensure borrowers continue to receive the same protections they enjoyed prior to the loan book sale. However, the public consultation process highlighted an issue with this approach, namely, that it was possible to envisage cases where owners would effectively function as passive special purpose vehicles, SPVs, and, where they outsourced servicing of loans to a firm, that would not be regulated. It became clear from the consultation process that if we were to protect consumers effectively, it was better to regulate the process of credit servicing as that is the customer-facing activity. However, if owners do not outsource credit servicing and instead undertake the activity themselves, they will be required to be regulated. Furthermore, if a regulated financial service provider outsources its credit servicing, it will be obliged to ensure the firm credit servicing on its behalf is compliant with Central Bank regulations. In other words, a regulated entity will be responsible for all credit agreements.

I will now turn to the details of the Bill, the Title of which was agreed following consultation with the Office of the Parliamentary Counsel and reflects the approach being adopted to protect consumers. The legislation will amend the Central Bank Act 1942, Central Bank Act 1997, Central Bank (Supervision and Enforcement) Act 2013 and Consumer Credit Act 1995 and provide for related matters. It is proposed to amend section 28 of the Central Bank Act 1997 by inserting definitions of the terms "credit agreement", "credit servicing", "credit servicing firm", "creditor" and "relevant borrower". The term "credit servicing" is being tightly defined in order that a firm which communicates with relevant borrowers in regard to their credit agreement will require authorisation. As mentioned earlier, the legislation will also require owners who do not outsource credit servicing to another party to be regulated. The Bill ensures there is only a limited number of actions an owner can take without needing to be authorised as a credit servicing firm by the Central Bank.

The effect of all this is to regulate the activity of credit servicing, and the credit servicing firms engaged in such activity, in order that borrowers retain the protections they have before the loan book was sold. All consumer and relevant small and medium enterprise, SME, loans that are sold will be covered by these amendments and will retain the protections they currently have. First, the code of conduct on mortgage arrears, CCMA, sets out the framework lenders must use when dealing with borrowers in mortgage arrears or pre-arrears. It requires lenders to engage positively with the objective of helping borrowers to meet their obligations. Under the CCMA, borrowers must be dealt with in accordance with the mortgage arrears resolution process, MARP, which sets out the steps to be followed on communication, gathering financial information, assessing the circumstances of borrowers and proposing a resolution. Procedures for complaints and appeals are also provided.

Second, the consumer protection code provides protections such as limits on communications, personal visits and other contacts, complaint resolution processes, error handling, compliance of outsourced activity with the code, and post-sale information provisions, including warnings on switching from a tracker mortgage to a variable rate mortgage. Third, under the code of conduct for business lending to small and medium enterprises, SME customers of regulated financial institutions enjoy protections in respect of arrears handling, complaint resolution and so on.

Breaches of the Central Bank codes can lead to sanctions for the regulated entity. As credit servicing firms will become regulated financial services providers under the new legislative regime, all appropriate supervisory powers of the Central Bank will be applicable to them as regulated financial service providers, including the administrative sanctions procedures regime. Customers of regulated financial institutions also have access to the Financial Services Ombudsman whose role is to investigate, mediate and adjudicate complaints about the conduct of regulated financial service providers. All personal customers, unincorporated bodies, charities, clubs, partnerships, trusts and limited companies with a turnover of €3 million or less can complain to the ombudsman. This is a very important protection for borrowers.

With regard to credit union credit, we must ensure that where credit union loan books are sold outside the credit union movement, the borrowers in question are afforded the same protections as other borrowers. This requires an amendment to the Consumer Credit Act 1995. Therefore, the relevant codes will apply to credit which is initially advanced by a credit union but is subsequently sold. We are not aware of circumstances where this has arisen, but it is considered prudent from a consumer protection perspective to provide for it.

Section 1 amends section 28 of the Central Bank Act 1997 by inserting definitions of "credit agreement", "credit servicing", "credit servicing firm", "creditor" and "relevant borrower", as I have mentioned. The activities of credit servicing have been defined to ensure the entity managing the relevant borrowers' credit agreements is regulated. Owners who do not outsource credit servicing will be required to be regulated in order that a regulated entity will be responsible for all credit agreements. The effect of the amendments to section 28 of the Central Bank Act 1997 is to regulate the activity of credit servicing and the credit servicing firms engaged in such activity in order that borrowers retain the protections they have before a loan book is sold.

The definition of SMEs, which comes within the definition of "relevant borrower", ensures SMEs that borrowed from regulated firms maintain the protections they had, while SMEs that borrowed from legitimately unregulated firms are not captured. Such unregulated firms are an important source of funding for SMEs and we do not wish to restrict the flow of funds to such businesses in any way. The Bill will ensure the status quois maintained. As a result, where credit has been granted to an SME by a number of providers, both regulated and unregulated, it is only the credit that was originally provided by an authorised or regulated financial services provider that is covered by this Bill. Essentially, SMEs will be restored to the protections they currently have, including under the code of conduct for business lending to small and medium enterprises, when they borrow from regulated lenders, but we are not extending the remit.

Section 2 amends the Central Bank Act 1997 in respect of the Central Bank's powers to grant and refuse applications for authorisation. Section 3 amends Section 33A of the Central Bank Act 1997 to enable the Central Bank to impose conditions or requirements on authorised credit servicing firms.

Section 4 amends the Central Bank Act 1997 by inserting two new sections, 34E and 34F, with transitional provisions for retail credit firms and credit servicing firms, respectively. Existing retail credit firms or credit servicing firms are taken to be authorised under this Act provided the person applies to the bank for authorisation no later than three months after the legislation is enacted. However, these firms will "stand authorised" on an interim basis during that period and will be obliged to comply with relevant financial services legislation. They will fall under the supervision of the Central Bank which can immediately step in if there is a problem with a firm's actions. The Central Bank does not have to wait three months to have this power. It will have it as soon as the Bill becomes law. In addition, a regulated financial service provider authorised before or after the enactment of the legislation to provide credit in the State is taken to be authorised to carry on the business of a credit servicing firm by virtue of the amendment this Bill makes, in section 1, to section 28 of the Central Bank Act 1997. Section 5 was introduced on Committee Stage in the Dáil to strengthen protections for borrowers further. It inserts a new section in the Central Bank Act 1997 that is a statutory obligation on both owners and credit servicing firms. The statutory obligation will ensure that a credit servicing firm cannot do something, or fail to do something, that would be a prescribed contravention if performed, or not performed, by a retail credit firm. It also prevents the owner of credit from instructing a regulated credit firm to perform such an action. This obligation is considered necessary to return borrowers to the circumstances they were in prior to the sale of the loan book. It strengthens the protections for borrowers and also effectively closes off possible behaviour by owners instructing firms to carry out inappropriate activities. It also strengthens the position of an upstanding credit servicing firm as it legally obliges it not to carry out such instructions. Furthermore, the obligation makes the issuance of such instructions by an owner an offence.

By this obligation, we are specifying an offence for the unregulated owner, but also ensuring that the breach cannot be implemented by the regulated servicer, over whom the Central Bank has oversight as a regulated entity. This will mean a quicker response to possible breaches. Furthermore, this oversight will allow the Central Bank to investigate in a case where an unregulated owner instructs a credit servicing firm to do something that would be a prescribed contravention if done by a retail credit firm. Such a breach is actionable by the Central Bank against the credit servicing firm. In addition, the owner could also be liable for credit servicing without authorisation. The obligation on the regulated credit servicing firm not to perform the action also means that the borrower has access to the Financial Services Ombudsman.

Section 6 amends section 3 of the Central Bank (Supervision and Enforcement) Act 2013 to amend the definition of "customer". We are adding paragraph (c) to include people whose loans are being serviced by a credit servicing firm.

Section 7 amends section 57BA the Central Bank Act 1942 to ensure that relevant borrowers whose credit agreements are being serviced by an authorised credit servicing firm are considered eligible consumers for the purposes of the Financial Services Ombudsman. Customers of regulated financial institutions have access to the Financial Services Ombudsman, whose role is to investigate, mediate in, and adjudicate on complaints about the conduct of regulated financial service providers.

Section 8 amends section 3 of the Consumer Credit Act 1995, which concerns the application, to ensure that the relevant Central Bank codes will apply to credit union credit that is sold to an unregulated entity. With regard to credit union credit, it is necessary to ensure that where credit union loan books are sold, those borrowers are also afforded the same protections as other borrowers. This issue was raised by the Financial Services Ombudsman in the consultation process. Credit union credit sold outside the credit union movement should be regulated so an amendment to the Consumer Credit Act 1995 is needed. Therefore, the relevant codes will apply to credit that is initially advanced by a credit union but subsequently sold to an unregulated entity.

Section 9 contains the Short Title and collective citation. The Bill will commence on its signature by the President.

This Bill is important because it addresses the concerns of borrowers whose loans are sold to unregulated entities. It will give consumers a legally enforceable right to complain to the Financial Services Ombudsman and it will ensure that consumers whose loans have been sold will have the benefits of the Central Bank codes, and those dealing with those consumers will have to be authorised by the Central Bank.

The Minister, Deputy Michael Noonan, looks forward to a constructive debate on the Bill. There is broad agreement in the House on the need to ensure borrowers will have the same protections as they had before their loan was sold. We can all agree that this important legislation needs to be enacted as soon as possible so that borrowers are protected without delay. While the Minister and his officials have been extremely careful and diligent in the drafting of this legislation to ensure it restores protections for borrowers, they believe that if issues emerge regarding the legislation, they may, if considered necessary, be dealt with at a later stage through amendments to the Act. The priority must be to enact the legislation to ensure that protections for borrowers will be in place as quickly as possible. I commend the Bill to the House and ask that Senators give it their full support and consideration.