Opening Statement by Acting Chief Executive at Joint Oireachtas Committee

Introduction

Good morning. Thank you Chairman and members of the Committee for inviting me here today to discuss the important topic of personal debt in Irish society. I am joined by my colleague, George Treacy, Head of our Legal and Consumer Departments. I would like to briefly outline for you the consumer role of the Financial Regulator, in particular our consumer protection and information responsibilities and our initiatives to date regarding debt issues.

The Financial Regulator has put a number of measures in place to protect and inform consumers in relation to debt. I would now like to bring you up to date on what we have done and on our ongoing work in this area:

Consumer Protection Code

We introduced a statutory Consumer Protection Code that became fully effective in July 2007. In relation to lending, the Code requires that a firm must ensure that, at the time a loan is approved, the borrower is in a position to make the required repayments.

It also demands that:

• Institutions must act fairly and in the best interests of their customer.
• All loans offered to customers must be suitable for the individual customer – this would include an assessment of affordability. Furthermore, the firm must be able to demonstrate after the event that the loan it offered was, in fact, suitable at that time on the basis of the borrower’s circumstances.
  Offers to consolidate several loans into one must contain information on the extra cost involved.
• Offering pre-approved unsolicited credit is banned.
• Unsolicited increases in credit card limits are also banned - prior to the introduction of these measures an examination by the Financial Regulator found that the average monthly number of limit increases processed automatically by credit card providers was 42,000 a month.

Conscious that not all lenders were subject to our regulation, we called for a change in legislation to bring non-deposit taking mortgage lenders under our remit. As a result of this change in the law in 2008, non-deposit taking lenders, now called Retail Credit Firms which include so-called sub-prime lenders, must now comply with the Consumer Protection Code.

Clearly, while a decision to make a loan must be based on an assessment at a point in time as to whether the customer can afford the loan, no-one can predict future events affecting a customer’s income or change in circumstances that may have the effect of leaving them over-indebted such as job loss or income reduction. Where this happens, the code requires lenders to alert customers as soon as possible if their mortgage falls into arrears and have procedures in place for handling arrears.

If anyone is dissatisfied with the way they are treated by a regulated financial services firm, they can take their unresolved complaint to the Financial Services Ombudsman. In adjudicating on complaints and considering appropriate restitution, the Ombudsman takes the provisions of the Code into account.

Code of Conduct on Mortgage Arrears

A themed inspection carried out by the Financial Regulator in 2008 examined residential mortgage arrears and repossessions across all regulated mortgage lenders including the newly regulated retail credit firms. Following from this inspection, we recognized the need for stronger provisions in the area of arrears and repossessions and worked together with the Department of Finance to introduce a statutory Code of Conduct on Mortgage Arrears which came into effect in February. It is designed to ensure that mortgage lenders take action to assist householders who are in arrears.

Under the Code, mortgage lenders may only apply to the courts to commence enforcement of legal action for repossession of a customer’s primary residence six months from the time arrears first arise. A lender may not seek repossession until every reasonable effort has been made to agree an alternative repayment schedule with the borrower.

We believe this Code is critical in our current environment. However, we must be careful that by setting our rules we don’t automatically push people towards ‘loopholes’. We have separately written to all lenders stating our expectations that not only should they deal with someone fairly when they are actually in arrears but also when they seek to move to prevent an arrears problem.

Debt Collection

There has been much recent discussion on the role played by debt agencies and whether legislation should be enacted so that they are regulated. Debt recovery services apply across a range of activities significantly wider than the recovery of money for financial products, for example for utilities and other consumer debt. At present the law does not allow for debt collection firms to be regulated by any agency.

Preliminary enquiries made by the Financial Regulator suggest that most regulated lending firms do not assign or sell on consumer debt. However, regulated lenders often outsource debt collection. In such cases the person contracted to collect the debt must comply with requirements of our Code.

Regardless of the reasons for a person becoming over-indebted - I have already publicly stated that we support the development of a more effective debt settlement system based on the models that have been tried and tested elsewhere and have been found to work well for creditors and consumers and we welcome the Law Reform Commission’s review of this issue. 

Debt and Access

The issue of credit and debt for low income consumers is, of course, linked to the issue of access to financial services. We are committed to fostering access to financial services. We included specific provisions supporting financial inclusion in the Consumer Protection Code.

Access to credit is a more complex area. We require lenders to act in the interests of their customers and to sell suitable products. In the new environment of less credit and tightened credit requirements, this means that in some cases a consumer’s application for credit will be refused. Equally, borrowing will not always be the answer to a consumer’s money problems.

Information and advocacy

In addition to the policy measures we have taken, debt has been, and continues to be, the focus of many of our consumer campaigns. Taking into account this changing environment, we will continue to highlight the cost of credit for consumers and the risks associated with borrowing money. We will also continue to inform consumers about more expensive forms of debt, like credit cards and overdrafts and the issues associated with these forms of borrowing. We consistently highlight issues like affordability, comparing alternative options and considering the total cost of credit. We have also encouraged consumers to exercise their power and move if they are paying more than they have to, or are not getting a deal that suits their changing circumstances. Our cost comparisons show significant variance in costs for the same products, for example the interest on credit cards currently ranges from 8.5% to 17.9%. People who may be on a higher rate should be looking at alternatives to get better value.

Our information campaigns aim to inform consumers about appropriate forms of credit. Personal loans are the cheapest form of credit, people that use their credit card sometimes believe that the debt will be short term whereas in reality they carry the debt over a longer term. Forms of revolving credit, such as overdrafts can also pose problems - especially where consumers incur charges for unauthorized overdrafts. These charges can be significant. This interest surcharge is charged on top of the standard rate for overdrafts, which already vary from 5% up to 14.79% We would always advise consumers against using credit in this way. There are alternatives, and planning ahead to avoid potential debt problems will help consumers to get a better deal.

Our recent financial capability study found that while 60% of people have no non-mortgage debt, those with the highest levels1 of non-mortgage debt account for approx. 11% of the population and are more likely to be between the ages of 20 and 40. We are targeting these consumers with our information campaigns and are currently dealing with about 4,000 people a month who have various queries on personal finance issues. Our personal finance website www.itsyourmoney.ie received over a quarter of a million visits in the first three months of 2009. We have also produced a dedicated Managing your Money pack to help consumers manage their finances in the current market.

Consumers have been hit badly by the downturn; no one is immune whether it be through reduced income, job losses or financial worries. An unfortunate outcome of the downturn is that consumers may find it harder and more expensive to purchase financial products. But even within this new environment, customers can still inform themselves about the various types of loans and the costs and risks involved and our information helps them do this. Indeed, for those applying for credit today the suitability requirements in the Code are more important now than ever.

Finally, before I conclude, members will be aware that the Taoiseach recently announced a reform of regulatory structures and the establishment of a new consumer agency that will bring together the consumer functions of the Financial Regulator with those of the Financial Services Ombudsman. We believe it is critically important that the level of consumer regulation is maintained in the new structure. The focus of our current attention is quite rightly on prudential supervision. We cannot, however, neglect the important functions of consumer protection including the prevention of mis-selling, therefore, the restructuring of financial regulation must impose comprehensive consumer protection coupled with strong enforcement powers.

Conclusion

The solution to the difficulties we are discussing is likely to be made up of many parts. We would fully support an overarching public policy initiative in this area that draws together the relevant agencies to find workable solutions for people. I am grateful to the Committee for the opportunity to be part of today's discussion and would be happy to answer any questions you might have.