Protecting consumers through COVID-19

The Central Bank’s mission is to serve the public interest by safeguarding monetary and financial stability and ensuring that the financial system operates in the best interests of consumers and the wider economy. Our focus over recent months has been to ensure that the financial system supports households and firms through the crisis and is also ready to support the recovery when it comes.

In the words of our founding legislation, the Central Bank’s “constant and predominant aim shall be the welfare of the people as a whole”. And that aim is at the core of what working at the Central Bank is about. It’s what motivates our people to bring their expertise, their professionalism and their commitment to work every day. It’s also why it is important for us to be well-connected to the community across the length and breadth of Ireland, listening and learning about the issues households and firms are facing, and explaining what we do and why we do it.

Last week we met with a range of civil society representatives to listen to their insights and reflections¹. This helps us ensure that policy-making is as informed as possible and, I hope, it helps key stakeholders better understand our perspective on issues of mutual interest. A central topic of discussion was how the Central Bank has been protecting consumers throughout COVID-19, so I thought I would share some of my own reflections in this week’s blog.

A wide mandate, but that is our strength

First, some context. Over the last number of years our responsibilities have grown, reflecting both the response to the 2008 global financial crisis and the changing world around us. In addition to being Ireland’s central bank, we’re also the national competent authority for banks, credit unions, the funds and insurance sectors, the national macroprudential authority, the national resolution authority, and we are a core part of the national framework for consumer protection. I have personal responsibility under Irish law for the Bank’s functions and powers as a member of the European System of Central Banks (ESCB), the primary objective of which is maintaining price stability in the euro area. This – at its heart – is essential to intergenerational wellbeing, enabling governments, businesses and citizens to plan, invest and make provision for the future.

Our responsibilities are heavily intertwined. For example a stable financial system is a precondition for depositors to trust that they will get their money back when they lodge it in a bank. And better trust in turn reinforces financial system stability. The breadth of our mandate gives us both strength and insight, enabling us to harness our collective, wide-ranging and deep expertise to tackle complex issues. Most of the areas we are responsible for – whether consumer protection, the regulation of banks, the country’s payments system or providing economic analysis and statistics – interact with each other.

Some have suggested we have competing mandates but I don’t see it that way at all. In my view the Central Bank has a single mandate, with many elements, and I see everything that we do as protecting consumers.

Let me explain why.

Protecting consumers is everything that we do

Stable prices protect consumers.

I have written a lot in previous blogs about the monetary policy response to COVID-19. One of the most important tasks my colleagues around the ECB’s Governing Council and I have is keeping prices stable. What do I mean? Well this means that prices shouldn’t go up too much and prices shouldn’t fall too much. Why? Well, very simply, if prices increase too quickly, it’s harder to plan and you’ll be able to buy less with your income. That’s inflation. The reverse is deflation. And while falling prices might seem attractive initially, deflation can have very serious effects for the economy. Consumers postpone their purchases (in the hope that prices will fall further) and businesses postpone their investments, with serious implications for the economy and wider community. Deflation can also make it more difficult for consumers to pay back their debts (because if prices fall, and wages then fall but debt levels stay the same, then in relative terms consumers will be worse off).

So stable prices matter. Setting interest rates and so-called non-standard monetary policy helps us achieve this for the euro area as a whole. (The ECB has a nice explainer on this which discusses these issues in more detail.)

But in very simple terms effective monetary policy and stable prices protect consumers.

A stable financial system protects consumers.

Last week we published our first Financial Stability Review of 2020. It highlights some of the many risks to financial stability facing Ireland today. I don’t think I need to explain too much what financial instability can do to consumers; the 2008 financial crisis devastated communities throughout Ireland.

Since then our work programme has been dominated by a focus on protecting consumers from any financial instability.

Take the mortgage measures for example. Although they are a macroprudential tool, they’re also an important part of our consumer protection framework. They build the resilience of both consumers and banks to protect against another unsustainable credit-fuelled housing boom. Last year’s review of the measures showed that if they hadn’t been introduced (in 2015), both house prices and the proportion of highly-indebted mortgage borrowers would have been significantly higher in 2019 than otherwise.

The benefits of financial stability policies like the mortgage measures for consumers are clearly evident in a period of stress like we see today. Over one quarter of the stock of lending has been issued since the measures came into effect. Very simply, this means these consumers are more resilient to shocks such as the current pandemic. Limiting how much banks can lend or how much consumers can borrow means both are less likely to get into difficulty if there is a significant rise in unemployment or a similar fall in property prices. It makes the financial system – and the households and firms that rely on it – more resilient.

And the mortgage measures are just one of our financial stability tools that protect consumers and safeguard financial stability. There is a veritable alphabet soup of policy instruments (the CCyB – countercyclical capital buffer – is an example) to mitigate the risk of a disruption to the provision of financial services.

I have written in other blogs about what we have done to ensure that the financial system is better placed to support households and businesses through the crisis and to support the recovery out of the crisis.

In brief, a stable financial system protects consumers.

Resilient financial institutions protects consumers

Lots of people have heard the phrase “regulated by the Central Bank”. Our animated explainer series makes it clear that means our job is to design, monitor and enforce rules which seek to ensure regulated firms are financially sound and safely managed, an essential first level of protection for consumers. We do this by making firms hold capital, or reserves, so that if they get into difficulty they still have the capacity to continue to provide products and services (such as mortgages, insurance cover and personal loans) to consumers.

A resilient financial sector ensures consumers are protected. We are not involved in the commercial decisions, such as pricing of products, or the running of the firms that we regulate. Our role is to ensure that regulated firms are managed by people that are fit and proper and to supervise them to ensure they are run in a prudent manner and act in the best interests of consumers. When firms are managed and run in a safe and sound way, they are more resilient to downturns and shocks as they are better-placed to manage and mitigate risks. The ability to withstand shocks protects household savings and access to credit, and allows firms to continue to serve consumers, households and businesses when it is needed most.

There will be times when additional protections are required to counter extreme events. Some examples of these additional protections include compensation schemes for consumers and recovery and resolution mechanisms for firms. We play an important role in a number of these schemes to protect consumers as well as being the National Resolution Authority for firms that get into difficulty, which by extension protects customers of those firms.

Conduct of business rules protect consumers

As I mentioned earlier, if people can trust financial institutions, the system will be more stable, and vice versa. It is important that those in charge of running financial institutions embed a consumer-focused culture.

Consumer and investor protection begins with the firms themselves (although of course it also involves the regulator and the consumer). As my colleague Derville Rowland highlighted at the start of the year “there is therefore an onus on them to have effective cultures and set the right standards … these standards must be reflected in every business area, from corporate governance structures to individual accountability; from strategy-setting to product development; from risk management to people management; and from internal challenge to how whistle-blowers are treated.”

We expect financial services providers to comply with their obligations and to treat their customers in a fair and transparent way. We set statutory codes of conduct for firms, covering how products should be sold, the information that should be provided to consumers and how any complaints should be dealt with. Our work is multi-disciplinary, involving regulation, engagement, gatekeeping, supervision and enforcement. (A good example is the Tracker Mortgage Examination, where a team from across the Bank designed a redress and compensation scheme that returned almost €700 million to consumers who had been denied a tracker mortgage or put on the wrong rate.)

Conclusion

I hope this blog helps to explain why I see no hierarchy, competition or conflict in our mandate. There are only different – and complementary – ways in which we protect consumers.

Price stability protects consumers, a stable financial system protects consumers, resilient financial institutions protects consumers, and our conduct of business rules protect consumers.

Our statutory codes of conduct, redress powers and enforcement actions are all essential to consumer protection, but so too is our work to ensure firms are well managed and financially sound, and to guard against instability in the system as a whole.

So not only is protecting consumers at the heart of everything we do at the Central Bank, it is everything we do.

Families, businesses, investors, and governments are all consumers. Consumers are the economy. Consumers are the financial system. Consumers are the community.

That is why engagement is so important. Listening to the insights and reflections of key stakeholders – like the civil society representatives I met last week – helps to improve our understanding of the issues faced by the community and ensure we are focused on “the welfare of the people as a whole.”

Gabriel Makhlouf

¹ Civil Society Roundtable

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