Address to Irish Banking Federation by Bernard Sheridan, Assistant Director General, Consumer Protection

Responsible Lending and Borrowing

Thank you for inviting me along this morning.

This is my first opportunity to speak in my new role in the Central Bank with overall responsibility for consumer protection. I have spent the last year and a half working in the banking supervision area dealing with the guaranteed institutions. Previous to that, I have many years experience in both the Consumer Protection and Consumer Information areas of the Financial Regulator.

Everyone here is aware of the challenges the financial system has faced over the last couple of years. We have focussed on a number of key areas in this time in banking including capital/solvency, funding/liquidity, credit exposures and internal governance. We also recently published a consultation paper on corporate governance rules which will strengthen from the top down how financial institutions are run. It is clear to me that one of the main priorities in addressing these challenges is the protection of the interests of customers and consumers. The introduction of the guarantee scheme, the increase in the deposit protection scheme cover, the recapitalisation of a number of the banks have all contributed to stabilizing the banking system to the ultimate benefit of consumers. The backdrop to these prudential measures is the consumer protection framework.

The Head of Financial Regulation Matthew Elderfield has already set out our strategic approach for the coming years and our more detailed plan will be published in the coming months. Let me highlight a few elements that set the background in the area of consumer protection and conduct of business. There has been much focus on the debate on rules versus principles-based regulation. Clearly, an appropriate mix of both is required. The approach we will take will be set in the framework of assertive risk-based regulation underpinned by the credible threat of enforcement. A risk-based regulatory model will allow us to calibrate the intensity of our regulatory standards and the day-to-day supervisory approach depending on the risk profile of the firms and sectors we supervise. Conduct of business issues will be considered as part of that model.

A risk-based model means that we will not have a one size fits all approach. While conduct of business rules apply across all firms, we need to be balanced and proportionate in our approach depending on the risk of the sector or firm in question. While we do need to strengthen our level of engagement across the board, a systemically important bank should expect a much more intrusive approach than a small firm with a lower risk profile.

Our approach in relation to enforcement will also develop over the coming year as we establish a dedicated enforcement directorate, review our approach to enforcement once the new team is in place and enhance our powers through a second Central Bank bill which will be published later this year.

Our strategic approach to consumer protection will be to build on the existing strong framework developed over the last few years. Key objectives here will be reviews of the Consumer Protection Code and Minimum Competency Requirements which I will discuss in more detail shortly. The core of our day-to-day supervisory work will remain themed inspections where we examine an issue or practice across a range of firms. Clearly, given the current focus on the difficult economic situation and growing concerns about levels of indebtedness, this is a topic that our inspections will focus on. During our recent themed inspection on mortgage arrears, we found a number of issues in relation to compliance with both the Consumer Protection Code and the Consumer Credit Act including a high level of contact with consumers in arrears and the frequency of application of charges to consumers in arrears. Following this inspection we indicated our intention to review the application of mortgage arrears charges in conjunction with the work of the Mortgage Arrears and Personal Debt Review Group.

Charging issues are the final area of the strategy which I wanted to mention. Earlier this year we indicated that we would conduct a review of our approach to handling overcharging issues. It is of concern that charging issues continue to persist. Our focus in dealing with charging issues is to set out deadlines for communicating with customers and providing compensation, making it clear that enforcement action will follow if our timelines are not met. Enforcement action may also be taken where a firm fails to implement adequate systems and controls to ensure compliance with the Code. We will be writing to firms in the coming weeks regarding the outcome of our review, however, it is important to emphasise that the Code already requires firms to ‘speedily, efficiently and fairly, correct an error in any charge or price levied on or quoted to a consumer’.

Consumer Protection Framework for Lending

The regulation of consumer credit in Ireland goes back a long number of years. The Consumer Credit Act, 1995 implemented the 1987 Directive and covers a broad range of issues including consumer credit, bank charges and moneylenders although its provisions will be affected by the upcoming transposition of the revised Consumer Credit Directive which Mary has outlined. The introduction of the Code and the Minimum Competency Requirements in 2007 represented a major development in the regulation of the provision of consumer credit. The Code essentially introduced the concept of responsible lending in Ireland. Three of the most significant measures that were included in the Code to embed responsible lending in the day-to-day activities of lenders are:

• the ban on the offering of unsolicited pre-approved credit facilities,
• the ban on increasing a consumer’s credit card limit unless requested by the consumer, and
• the requirement to carry out the Know Your Customer and Suitability assessment before giving a consumer a loan.

The Code also put a major emphasis on the importance of dealing with consumer complaints in an effective and timely manner by including the requirement to have in place a complaints handling process.

The Minimum Competency Requirements established minimum standards across all financial services providers, with particular emphasis on areas dealing with consumers. The Requirements were introduced to ensure that consumers can expect a minimum acceptable level of competence from individuals acting for or on behalf of regulated firms. Individuals providing advice on or selling retail financial products, or undertaking certain specified activities, must be either appropriately grandfathered or hold a relevant recognised qualification.

In the area of lending, the provision of housing loans and consumer credit by regulated firms fall within the scope of the Requirements. The relevant recognised qualifications include the Qualified Financial Adviser, the Professional Certificate in Mortgage Practice and the Professional Certificate in Consumer Credit. Individuals must also undertake a programme of Continuing Professional Development (CPD) on an ongoing basis to ensure that their knowledge and skills remain up-to-date.

I would like to remind you that the four year transitional period under the Minimum Competency Requirements will finish at the end of this year. This means that those who were already in the industry at 1 January 2007, but did not have the necessary experience to avail of the grandfathering arrangements, must have obtained a relevant recognised qualification by the end of this year.

I was speaking to someone yesterday in the context of a car loan. He was keen to show me his qualification but also raised the concern that it is important that we ensure everyone meets the Minimum Competency Requirements , as he had put in the effort to be compliant.

Since 2007, the Consumer Protection Code and the Minimum Competency Requirements have been in place to help ensure consumers are protected in all their dealings with firms. Everyone has now had three full years to make sure that all of the necessary resources, systems, processes and training are in place to ensure full compliance.

There is a danger however that with the challenges facing so many financial institutions, the best interests of the consumer may be relegated into second place. If costs need to be cut, customer service may be an obvious target. If margins need to be increased customers will end up paying. We have no problem with firms making sure they are as efficient as possible. But this must not be at the expense of consumers receiving the service which is required. We will continue to expect that areas like the handling of complaints, dealing with charging issues, knowing your customer and suitability processes and training of all staff who deal with consumers receives the priority it deserves.

The nature of credit transactions is probably unique in the sense that the firm is giving its money to the consumer in the expectation the consumer will repay the principal and interest. There should be perfect alignment between the interests of the firm and the consumer i.e. both sides should be satisfied that the provision of the loan is in the customers best interests, that they can afford to repay it, that they understand the nature of the loan, the costs associated with it and what happens if the terms of the loan are not complied with. When you think of the principal and interest associated with a loan you should also think of the General Principles and Best Interests of the Customer.

I mention ‘both sides’ as, to reflect what Brendan was saying, it is important that the lender explains the product to the consumer so that the consumer understands the product that the lender is offering to him/her, thus allowing the consumer to make an informed decision. It is also important that the consumer gives correct information to the lender and asks questions where he/she does not understand certain features or terms of the product. We recognise that this interaction is important and in our previous education and information role we endeavoured to increase the financial education levels of consumers and provide information to them to assist in the understanding of financial products. The EU Commission also recognises the importance of both responsible lending and responsible borrowing and the potential for financial education to lead to a reduction in the number of default and foreclosure rates, as set out in its 2009 consultation paper on Responsible Lending & Borrowing in the EU.

In the current economic climate, many of us have some experience of friends or family who are now struggling to meet their repayments. The relationship between the lender and the borrower at times like this is very important and therefore all firms need to examine how the ongoing relationships with borrowers can be developed even before a customer gets into difficulty. For example how many lenders contact customers in advance of an interest rate increase to advise them of the increase and that they should contact the lender if they believe they will have difficulties meeting the higher repayments? Data which we have published today show that as at end March 2010, over 32,000 mortgage accounts, or over 4%, were in arrears for more than 90 days. Mortgage accounts in arrears for more than 90 days have increased by 13% since the end of December 2009. This means that there are over 32,000 families really struggling to meet their repayments. It is at those difficult times in particular that consumers should get the full benefit of the Code and the Code of Conduct for Mortgage Arrears and that all lenders ensure they are complying with the spirit as well as the letter of both Codes.

Since 2007, we have been working hard to increase the standard of consumer protection in relation to credit. In June 2008 the Code and the Minimum Competency Requirements were extended to cover retail credit firms and home reversion firms. The Moneylenders Code was introduced on a phased basis during 2009. The Code of Conduct on Mortgage Arrears came into effect in February 2009 followed by the Code for SME lending in March 2009. Earlier this year, we revised the statutory Code on Mortgage Arrears in order to extend the time period during which lenders may not start legal proceedings to repossess a principle private residence from 6 months to 12 months. The introduction of such a large number of requirements in a relatively short timeframe demonstrates that nothing stands still in this area and now the introduction of the Consumer Credit Directive will also mean changes having to be made to internal controls and processes.

Our focus is also on monitoring how firms are complying with the Codes. Some issues which we are looking at include: Are firms forcing/encouraging consumers to switch off tracker rates to variable rate mortgages when restructuring mortgages which are in arrears? Are firms striking the right balance in their contact with customers – we want a positive engagement on how to deal with the problem, but we do not want harassment which causes further stress to the customer? Are firms racking up charges unnecessarily by the way they are engaging with the customer?

Our recent inspection in relation to arrears practices and procedures highlight both good practices and issues of concern. Some of the good practices included ensuring that adequate resources, in terms of staff numbers with the appropriate level of experience, were available to advise and assist borrowers experiencing difficulties. Advice and information was as broad and relevant as possible so that, for example, borrowers were made aware of any available entitlements such as tax relief at source or mortgage interest supplements. As part of the interaction between lender and borrower, procedures were in place to ensure that all contacts and information was documented and was available to the central collections area. Best practice also involved the non-application of various charges and penalties to the accounts of borrowers in difficulty and the exploration of all available options to ensure that the commencement of legal proceedings was only undertaken as a last resort.

By contrast a number of poor practices were also found. The high level of contact with customers in arrears was an area of concern as was the application of certain charges by some providers such as fees for putting in place alternative repayment arrangements, arrears charges on accounts where an arrangement was in place and charges for letters which, in some cases, were issued on a weekly basis despite the borrower’s difficulties in making repayments. There were instances of insufficient and/or incorrect information being communicated to borrowers and in some cases no arrears letters were issued at all. The lack of a comprehensive communication structure to ensure that all discussions were recorded in detail and that written requests from borrowers were responded to in writing were also areas of concern. Alternative repayment options were not always available although this has since been addressed in the Code of Conduct on Mortgage Arrears.

In recognition of the scale of the concerns surrounding mortgage arrears and other debt a number of bodies have been established to formulate proposals to assist consumers in dealing with their debt issues. In this regard, we are participating on bodies such as the Government’s Mortgage Arrears and Personal Debt Review Group, and the Law Reform Commission’s Working Group on Personal Debt and Enforcement. These Groups also have representatives from the industry and consumer bodies such as MABS and the Free Legal Aid Centres (FLAC) to ensure that a holistic approach is taken in addressing the issues surrounding consumer debt.

The working group is bound by confidentiality ahead of making its recommendations. However, it is expected that the Group will report on its findings during the summer and will make recommendations about what it sees are appropriate measures which could be implemented.

The Law Reform Commission has also done some important work in examining the issue of consumer debt. Following the publication of its Consultation Paper on Personal Debt Management and Debt Enforcement last year, it quickly moved to establish a Working Group of relevant parties to try and identify some measures which could be introduced relatively quickly, in order to aid consumers experiencing arrears and debt. This Group has recently published its Interim Report, in which it sets out an action plan containing 14 initiatives to address current personal debt issues.

What next?

We have a busy schedule ahead over the coming 12 – 18 months.

Because of the urgency of the arrears problem and the scale of the impact of mortgage arrears on consumers, we have decided to take the opportunity to review the Code of Conduct on Mortgage Arrears. In revising our Code, we will be mindful of any relevant recommendations which may be issued by the Government Arrears Group and the LRC Working Group.

As you know, we have also committed to reviewing the Consumer Protection Code and the Minimum Competency Requirements.

The review of the Requirements has now commenced. We are currently reviewing issues that have arisen since the Requirements were implemented and are preparing to consult on revised Requirements. The main area where you will see changes will be in relation to the CPD requirements. We are considering more detailed rules in this area, for example, specifying when a pro rata adjustment can be made and setting out the consequences of failure to comply with the CPD requirement. There are also proposals dealing with the requirement to make the Register of Accredited Individuals publicly available and the documentation to be provided to a grandfathered individual when moving from one firm to another.

We anticipate issuing a public consultation paper on the revised Requirements in June, with a view to implementing the revised Requirements early in 2011 and we look forward to receiving your comments on the proposed changes.

Our plans for the Code Review are to examine the issues that have been raised with us and review our experiences that have emerged from our monitoring of compliance with the Code. We have engaged in a pre-consultation process with industry representative bodies and the Consultative Panels. As part of the Review, we will look at areas where the Code needs to be strengthened or reworded to provide clarification. We will also consider whether any new measures need to be introduced into the Code to provide additional consumer protection. We anticipate publishing a consultation paper in September, with a view to implementing the revised Code in mid-2011.

In revising our requirements, consideration will be given to EU developments, but, in many ways the framework here in Ireland is ahead of developments in Europe and you may argue that this has created difficulties in terms of interpretation and implementation of new European legislation. For example, the revised Consumer Credit Directive, with its maximum harmonisation principle, will have an effect on some of the existing provisions of the Consumer Credit Act 1995 and the Consumer Protection Code. I know Derval is going to explain how the various pieces of legislation and the Code interact so I will not go into that here. However, I believe it is a major advantage for the consumer that we already have a strong framework in place already. Consumers have had the benefit over the last number of years of the current framework and it is up to us to ensure that firms have and continue to deliver these benefits. I would like to stress that it is important that we do not forget about the fundamental principles of consumer protection which are already in place when trying to integrate any new regulations into the existing framework.

As an organisation we are developing our strategy for the next three years. We are committed to a more intrusive form of supervision which has a credible threat of enforcement. What does this mean? We will continue to carry out themed reviews of the Codes. However we intend to become more challenging when we see practices which are not up to best practice. We will expect firms to respond more quickly to issues which arise e.g. in the area of overcharging incidents we will expect firms to commit resources to ensure these issues are dealt with expeditiously. We are also building up our enforcement resources in the organisation. When these are in place it is likely that more cases will be considered under the formal sanctions regime. Firms which have put the best interests of the consumer at the heart of what they do and who can demonstrate that to us will benefit from our new approach as they will know that firms which do not achieve this will have to deal with the consequences of non-compliance.

Thank you for your time this morning.