Michael D'Arcy (Wexford, Fine Gael) | Oireachtas source

These two amendments are being taken together and they remove the definition of securitisation for special purpose entities and the provision that securitisation for special purpose entities was not included in the definition of credit servicing firms subject to certain conditions.

The second amendment also removes the provision that a person authorised to carry on the business of a credit servicing firm before the coming into operation of this Bill is taken to be authorised to carry on the business of a credit servicing firm after the enactment. The effect of this provision is that an existing authorised credit servicing firm does not have to go through a new authorisation process when the new activities become regulated. This mirrors a previous provision in the 2015 Act. It is hard to see why it is necessary that an existing authorised firm would have to go through a further authorisation process. The additional authorisation requirement would create an administrative burden for the existing credit servicing firms and for other firms authorised to perform credit servicing activities. It would also create additional work for the Central Bank in the processing of these applications.

From an operational viewpoint it could delay implementation because it would mean that existing authorised credit servicing firms would not be authorised to hold legal title. There is no transition provision, however, to allow them to do so pending the additional authorisation which will be required.

Furthermore, the traditional provision in section 2 of the Bill refers to section 28(4), which is proposed to be deleted by this amendment, but there is no amendment to this Part of the Bill.

In addition the proposed amendments do not do anything to the definition of "retain on an ongoing basis a material net economic interest in the securitisation of not less than 5 per cent", even though the Part which uses this definition is proposed to be removed. These are technical issues but are nonetheless important.

I turn now to the policy issue of securitisation. This is an important and ongoing aspect of the international financial system and passive securitisation vehicles do not have any implications for consumer protection. As the legislation is structured, there is a specific exclusion for passive securitisation vehicles where:

(a) the securitisation special purpose entity was established by or on behalf of the owner of credit as part of the securitisation arranged by or on behalf of that owner of credit,

(b) the owner of credit retains the legal title to the credit so assigned or otherwise disposed of, and

(c) the originator, sponsor or original lender of the securitisation is required to retain on an ongoing basis a material net economic interest in the securitisation of not less than 5 per cent;

Furthermore, the definition of securitisation special purpose entity means a corporation, trust or other entity:

(a) established for the purpose of carrying out one or more securitisations,

(b) the activities of which are limited to those appropriate to accomplishing that objective, and

(c) the structure of which is intended to isolate the obligations of the securitisation special purpose entity from those of the originator.

We have drawn these definitions from the European Securitisation Directive and are satisfied that this Bill will allow passive vehicles which do not interact directly or indirectly with the consumer to avoid the need for regulation, but once they get involved in any active way, they will need to be regulated.

The Central Bank publishes some numbers which show the size of this market. The total outstanding stock of securitised loans for house purchase at the end of September 2018 was €23.9 billion. Total loans for house purchase, which includes both on-balance sheet and securitised mortgages, stood at €100.5 billion at the end of September 2018, so this is a significant proportion of overall lending.Irish and European banks use securitisation as a matter of course to raise funds for on-lending to the real economy, the mortgage borrowers and small and medium enterprises, SMEs, which need access to credit. If securitisation vehicles need to be authorised and regulated, a number of unintended consequences could arise. In the most dramatic scenario, such vehicles could find it impossible to comply with the regulatory requirements of the Central Bank and therefore could be forced out of the market. Alternatively, they would have to take on staff and premises and adopt structures to meet these requirements and the costs of this would be factored into the price that buyers would be willing to pay for securitisation, increasing costs which are likely to be passed to consumers. Either way, there is likely to be disruption to a well-established business model which does not impact customers at the moment.

We have given very careful consideration to the Bill’s current provisions for securitisation and consulted with the Central Bank to avoid unintended consequences. At the very least, the amendments would inhibit securitisations with real consequences for the real economy. It is not in any way clear how the removal of the provision that existing credit servicing firms do not need to seek additional authorisation would work or what benefits would arise from it. The amendment also contains a drafting inaccuracy in that it does not address the impact of the removal of the proposed section 28(4) in section 2 of the Bill. For these reasons, we will not be supporting the amendments.