Tuesday, 18 December 2018
Consumer Protection (Regulation of Credit Servicing Firms) Bill 2018: Committee Stage
I move amendment No. 1:
In page 5, to delete lines 8 to 19.
I welcome the Bill, which will contribute to the solution to address the scourge of vulture funds. However, it is only part of the picture. Even this part of the picture may be incomplete if we fail to undo the provision inserted by Fianna Fáil in the Dáil. Fianna Fáil has chosen to exclude securitisation vehicles from the scope of the Bill. Either we are regulating all owners of credit or we are not. We all know why this is an issue and we have seen it in the case of Permanent TSB and Glenbeigh. The State-owned bank is selling the mortgages of over 6,000 people who are meeting their restructuring arrangements. However, we do not know to whom. We could not get to the bottom of this at the finance committee. We do not know who is behind Glenbeigh, who benefits from it or anything else. It is a structure established in recent weeks but the Bill, as amended by the Dáil, will not regulate its owner at all. The Bill will not regulate the likes of Glenbeigh. While Pepper will be regulated, as is already the case, the owners, whoever they are, will remain unregulated. We should close this regulation gap, not open another. The Minister and Fianna Fáil state that passive securitisation may still take place but I wonder how passive it feels for the 6,000 families doing their best to pay what has been agreed. I continue to receive correspondence from people who have been paying their mortgages but who were suddenly given written notice that their mortgages had been handed over to Pepper. The key question is whether the Minister believes Glenbeigh will be regulated if we accept the Bill as it stands. If it will not be regulated, why is that the case?
In 2015, Sinn Féin proposed amendments which would have regulated the owners of the credit. Fine Gael and the Labour Party opposed the amendments in question. We are now back here over three years later and I want to ensure we do not have to return again. The Glenbeigh deal represents a new low for Irish banks but it is also a new phenomenon to which we must respond. Amendments Nos. 1 and 2 address the same issue which is to ensure all owners of credit, whoever they are and wherever they are, are regulated. One should not be allowed to own mortgages in Ireland if one is not regulated regardless of what tax efficient structure is used. That is what the amendments set out to achieve albeit it may well be that even if they are made, Glenbeigh will still be excluded. It is not clear when the prospectus was signed off but it was dated 29 November 2018.Deputy Michael McGrath removed securitisation vehicles from the scope in July, so one would imagine it was taken into account. I do not discount the possibility that even further deeper amendments are required to capture the owners of all mortgages. The real test should be perhaps the economic interest, that is, who benefits from it. If one is making money out of Irish mortgages, they should be regulated. That is the bottom line. I want to see this Bill doing that.
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.
This is a Fianna Fáil Bill. I welcome that we discussed it last week. I can see why somebody might table these amendments and it is quite emotive with Permanent TSB and so on. These amendments are trying to remove the sections relating to passive securitisation where the ultimate investor plays no role in the administration of the loan used in that model. The bank uses the model for good loans and the investor is simply looking for the cashflow from those loans. The bank will continue to hold the legal title in most cases and will continue to administer the loans. For the purposes of this legislation, the lender will be regulated and not the passive investor.
Amendment No. 1 removes the definition of a securitisation special purpose entity. That definition is there to legislate for passive securitisation. It is important, if the passive investor starts to become active, that he or she is covered by the Bill. It is important that we realise that if banks do not reduce their non-performing loans, NPLs, to the ratios being looked for by the European Central Bank, ECB, the Single Supervisory Mechanism, SSM, and so on, then they will not be in a position to lend to the economy. That is an unintended consequence as far as I am concerned in that they have too many NPLs on their books. I might not agree with the definition of NPL but it is there and is what they have to stick to. People are sticking to a restructured agreement but do not qualify as having a performing loan because of the definition of NPLs. A high level of NPLs restricts the ability of banks to lend to the wider economy, to small businesses, to people buying homes and to people trying to improve their lives through borrowing in a sensible and measured way. If the passive investor decides to make key decisions, then he or she is no longer passive and is covered by the Bill. This is used extensively by many banks in Ireland. Approximately a quarter of the European securitisation market is in Ireland, with over 1,000 staff working in this industry. I am concerned that these amendments would have that effect. The Minister outlined that there are some drafting errors in how the amendments are worded. There is an idea that everybody who has already been regulated and certified would have to reapply and re-administer what they are already doing. They are regulated and will be regulated by this Bill. It is important that this Bill passes as quickly as possible.I take on board the concerns of the party that has proposed the amendments. As a member of the party that brought the Bill forward, it is a step in the right direction, as Senator Conway-Walsh has acknowledged. The sooner we get this done, the better. If and when this happens, how soon can we get it to take effect? When will it come into operation? Passive securitisation is not covered but anything involving active participation is covered. All of the credit servicing firms will be covered. The people who owe money to the institutions will be covered. All the people they are dealing with will be covered by the Bill.
I ask Sinn Féin not to press the amendments because I would like the Bill to be enacted as soon as possible for the benefit of everybody dealing with credit servicing firms in Ireland.
My concerns remain. They are genuine concerns. Can the Minister of State answer the question now about whether Glenbeigh will be regulated as part of this Bill? Will it be regulated? My understanding is it will not as part of the Bill. We are leaving a loophole that will come back to bite us. The fact it will be administratively over-burdensome should not be reason to fail to address that loophole. We are trying to put the responsibility on the people who benefit from all of this. We need to be careful in what we do. I support the Bill but we would be failing in our duty as the main Opposition party if we were not to point out the loophole. I cannot see the difference between the securitisation and the selling off to vulture funds. There is a six-month period but the end result is the same. The end result will not be any different. I refer to the machinations in terms of the different levels of companies and organisations that are involved in all of this. At the end of the day, we have responsible homeowners, particularly the 6,000 we talked about in connection with PTSB whose mortgages are being sold off, and they are losing out. We are doing it so we can make the banks look better in all of this yet we have a company that is one step removed. We do not know who the owner is. We do not know where the owner is based. We know nothing about the owner yet we are leaving the loophole there which means he or she will not be held to account and that is concerning. I do not know if there is another route we can go down. We do not want to stop the Bill going through. I ask the Minister of State's advice on how this loophole can be addressed. I put on record the concern of the Sinn Féin Party about leaving things the way they are for Glenbeigh and its likes.
Senator Conway-Walsh did not address my concern that if we do not allow the banks to do some of this work and reduce their NPLs, we are restricting the amount available in the economy which can be lent to businesses and homeowners or people looking to buy houses. It is important that we acknowledge that whoever is calling the shots is regulated under the Bill. If passive investors decide they want to start calling the shots or become active in any way in calling the shots, they are regulated. The regulation will apply to those calling the shots and those looking at the loans, examining how the loans need to be satisfied and paid off and so on. This is what the Bill is trying to do. We are trying to get regulation of the credit servicing firms that are dealing with borrowers who in some cases are in distress.We are trying to ensure that happens as soon as possible. If anybody who is a passive investor gets involved and starts calling the shots, they are regulated. Some 24% of the European securitisation market is in Ireland with 1,100 people in processing jobs. Securitisation is much more than just Permanent TSB. It incorporates a broad set of financial measures and products. We are all concerned that the people are being regulated and that those, who are dealing with mortgage owners and people who have borrowed money, are regulated; that is the purpose of the Bill.
I know Sinn Féin supports it as does the Government, for which I thank them. It is important that we get the Bill passed. It is somewhat of a red herring to suggest that the passive investors can make decisions. They cannot and that is why they are passive investors. As soon as they stop becoming passive investors, they will be regulated by the Bill.
The high level of NPLs should not be used as an excuse. The Senator is bringing the NPLs into it. It should not be to reduce customers' rights. The Bill was sold to us as covering the owners of the credit and it is not doing that, which is what really concerns me. Credit servicing firms are already covered and this is what is confusing about the Bill. As what the Senator is describing is already the case, what is the Bill supposed to be regulating if it is not regulating the owners? The owners are the people behind the scenes. When the Senator says that as soon as they become active they are not passive any more and then they are regulated, how do we know how active they really are?
I am coming to this from a very genuine position. I feel there are loopholes in it. While people somehow believe this Bill will be the salvation of the selling off of mortgages to vulture funds and all that, I do not think it will do that. It will leave gaping holes that will expose consumers and mortgage holders in the same way as they have been heretofore.
Nobody questions anybody's bona fides on this issue. The question is fair. The Bill was not designed to regulate private equity funds. Currently regulated by law are the agents, the credit-servicing firms. Deputy Michael McGrath presented this Bill and the Department of Finance and others participated in a very collegiate way to try to do the best we can for these structures.
We have concluded that anybody who is participating is regulated. A private equity fund that wants its money out in four years is regulated. It is as simple as that. It is one direction; they are now regulated. Investors, who have others investing their money for them in a securitisation structure and have no further input apart from investing, are not regulated and will not be regulated. They were not meant to be regulated.
It is not a question of a gaping hole. It is a question of it doing what we wanted it to do, which was to regulate private equity funds that stand above the credit-servicing firm, which is the agent for the private equity fund and takes instruction from the fund and they are not passive. Everything else that is passive - any other investor - is not regulated.
I am advising Seanad Éireann that proceeding with this amendment would be a mistake. There are other unintended consequences. I will give another example. If we require a person who is an investor in a securitisation structure to be regulated, he or she may not be able to invest not just here but in other areas of securitisation because he or she may not have an entity here but may simply provide capital to make an investment.If this is passed and if they are regulated, they will need staff and structures here, and they will need their entity based here, which many of them do not do and have no intention of doing. That is the unintended consequence. I accept the Senator's bona fides in questioning the matter.
I regret there is no Report Stage to tease this out properly because it warrants further discussion. Securitisation is a loan sale through the back door. It has the same impact on the consumer as a loan sale. I have a feeling we will be discussing this in another forum but, as there is no Report Stage, I will withdraw the amendment.
I thank the Sinn Féin Party and Senator Conway-Walsh for their co-operation. I also thank all other parties, the Department of Finance, the officials and the Ministers. Deputy Michael McGrath has been looking for this for a very long time and has done all the work on it. I am just making sure, as the party spokesperson on finance here, that it gets through the House as quickly as possible. I thank the Minister of State for his responses and I thank all who participated. I am looking forward to it being enacted as early as possible, hopefully in January, as the Minister of State outlined.