Remarks by Director of Consumer Protection Colm Kincaid at Compliance Institute Annual Conference

Good morning. 

I wish to begin by congratulating the Compliance Institute on its 20th Anniversary and the contribution that the Institute and its members have made in that time to financial services in Ireland. I am honoured and grateful to have the opportunity to speak to you this morning. 

I also want to commend the Compliance Institute for its choice of emphasis for today’s event – ‘setting the standard’. This topic is all the more important when we look at the changing environment in which consumers find themselves, and the special responsibility that places on financial service providers to support consumers to navigate that environment. We have moved from the swift and sudden impact of COVID-19, to energy cost driven inflation, rising prices and interest rates and market volatility, and all set of course against the backdrop of an already rapid (and increasing) pace of change through digitalisation and financial innovation. 

It is against this backdrop that our annual assessment of the main risks facing financial service consumers is underway. Earlier this year, in our Consumer Protection Outlook Report, we set out our view of the key risks facing consumers and the actions we expect firms to take to identify, mitigate and manage these risks in their firms. Distilling down from over 145 risks identified in a sectoral risk assessment exercise, we identified five key cross-sectoral drivers of risk to consumers at this time:

• Poor business practices and weak business processes
• Ineffective disclosures to consumers
• The changing operational landscape
• Technology-driven risks to consumer protection
• The impact of shifting business models.

However, we were also conscious that in this changing environment, it was important to engage with a range of stakeholders to hear their perspectives and insights – and to be open to their views. We have therefore undertaken an extensive engagement programme since we published the report, talking to a variety of organisations in both industry and civic society, including a session with the Compliance Institute. This has been a hugely valuable process, with significant new insights and views gathered in this fast-moving environment. We are now using the feedback provided to inform the risk assessment on which we will base our supervisory plan for the years ahead. It also informed our recently published Discussion Paper on the Review of the Consumer Protection Code, on which I will say more later.

What has come through loud and clear from every engagement is that having a strong, clear and appropriately calibrated framework of financial regulation is essential to ensuring the protection of the best interests of consumers and the stability of the financial system. Time and again we have had to resort to that framework to drive out the results that consumers (and the system) deserve, from the Tracker Mortgage Examination to removing harmful practices of differential pricing in the insurance market, to raising standards on structured retail investment products and ensuring the proper treatment of consumers facing the challenges presented by matters beyond their control, from Brexit to COVID-19 to the ongoing departure of two retail banks. We have also seen the contribution of the Central Bank’s macroprudential mortgage measures to ensuring sustainable lending standards in the mortgage market as well as the importance of recalibrating those measures where necessary and appropriate to do so, as we did recently. 

It is also clear to us in our daily supervisory work the extent to which the regulatory framework, while not perfect by any means, supports people in financial services to get things right for consumers; and here not least in the Trojan work that is done day-in-day-out by compliance staff and other individuals working in the industry. The framework we have introduced in Ireland has set high standards for people providing financial services, right through to the minimum competency requirements of individuals dealing with customers on a day-to-day basis, and the benefits of those standards are there to be seen. 

But for this framework of rules, and the interventions under that framework by the Central Bank such as those I have referred to, I do not believe financial services would have delivered as it has for consumers and the welfare of the people as a whole. 

Arrears and Debt 

To illustrate the importance of strong consumer protection frameworks, I want to say a few words on mortgage arrears – as it is an aspect of our work that is pertinent looking both backwards to lessons learned and forwards to the relevance of those lessons for the future.

Today we are publishing new information and data analysis looking specifically at long-term mortgage arrears¹, as we work to bring consumers out of the long shadow cast by the global financial crisis in 2008. For well over a decade now, this work has involved:

• designing a specific Code of Conduct on Mortgage Arrears over and above the minimum requirements of EU law, as well as recalibrating and enhancing that Code over time as the arrears situation evolved; 
• interventions in our supervisory work to ensure that lenders² put the correct resources and processes in place to deal with the scale of mortgage arrears we faced in line with that Code; and 
• working with government and other stakeholders to bring into existence a new insolvency regime overseen by the Insolvency Service of Ireland. 

Through this work, from a peak of almost 143,000 arrears cases in June 2013³ we have seen this reduce over the years to approximately 46,000 in June 2022. This reduction was achieved during a period of economic recovery that facilitated borrowers in exiting arrears, supported by a range of sustainable solutions including agreed alternative repayment arrangements, mortgage to rent and personal insolvency arrangements. 

Our data shows that the number of accounts in long term mortgage arrears (LTMA) continues to decline⁴. In the twelve months to June 2022 we saw a further decrease of 12 per cent. For the first time since the Central Bank started its data collection on mortgage arrears, long term mortgage arrears have fallen below 25,000 accounts. This is the result of hard work by borrowers and firms to reduce this number, particularly over the last twelve months. It shows that by working together within a defined regulatory framework there can be solutions that work for both borrowers and firms, even in cases of borrowers with low affordability and arrears that have lasted for a number of years.  The data also shows that there are borrowers who are making considerable efforts to engage with their firm, and make payments towards their mortgage. For these borrowers, we have seen a significant number move out of LTMA, either through implementation of an Alternative Repayment Arrangement (ARA), a settlement with their firm, or a repayment of some or all outstanding arrears which is reflected in the 12 per cent decrease I have mentioned.

But this progress is also the result of concerted and dogged supervisory engagement with lenders across the system. We should not believe that this progress would have been made without the regulatory framework we put in place or the level of supervisory focus we applied. 

In a speech in 2021⁵, Deputy Governor Ed Sibley noted the progress that needed to (and could) be made by lenders to resolve long term mortgage arrears. He also remarked that full resolution of long term mortgage arrears cannot be delivered solely within the financial system, with lenders taking decisions on a commercial basis. Here too there has been improving engagement and increasing evidence of innovation in the type of insolvency solutions that are being agreed with creditors according to the Insolvency Service of Ireland (ISI)⁶. But it is also clear that more is needed to deal with those cases where a solution cannot be found through the engagement of lender and borrower (be that under the CCMA or the auspices of the ISI). The data we are publishing today shows that over half of all LTMA accounts (53 per cent) made no repayment towards their mortgage over 2021 and 57 per cent of remaining LTMA accounts are classified by their lender as not cooperating⁷. Others have commented extensively on the necessity for improvements to the system of realising security in appropriate cases and the impact the current position is having on the cost and availability of credit in Ireland⁸. I will not repeat their commentary here. However, it would be foolhardy to think that mortgage arrears is simply an issue from the crisis of the past and fail to anticipate that we will need these frameworks in place also for the challenges of the future.  

And there is still more that firms themselves can do to continue to enhance how they engage with borrowers and to go deeper into the suite of options available to reach an agreed resolution with a borrower⁹. We will continue to scrutinise lenders’ progress against their plans and targets in the months and years to come. 

Finally, to borrowers in or facing arrears on their mortgage (or indeed any loan), the message remains to engage with your lender (who has a regulatory obligation to support you in finding a solution, where possible) – and to seek out the support and advice of organisations such as MABS where you want help or independent advice to support you. This remains the case even if you are in deep arrears or have been in arrears for a prolonged period – lenders’ regulatory obligations to engage constructively with you are not subject to any time constraints. Firms have sought to adapt their processes and approaches to seek to encourage borrower engagement. This has included offering video calls to discuss borrower circumstances, targeted engagement campaigns at particular groups of borrowers with similar characteristics, improvements to websites to assist borrowers find the information they may need, letters advising borrowers of potential solutions based on the repayments being made, and including testimonials and case studies in key letters to encourage borrower engagement. 

This past decade or more, we have learned a lot about the impact arrears can have on borrowers and our society. This has included lessons about the importance of lenders having both responsible lending practices and effective arrangements in place to anticipate arrears cases and support borrowers seeking to resolve their arrears. I would say we have also learned about the role of regulation and the importance of having the right framework of rules in place to ensure the right outcomes. Properly learned, these lessons should stand us in good stead as we now head into a more challenging economic environment. 

Review of the Consumer Protection Code 

It is in recognition of the importance regulation plays in a time of change and the need for high standards in financial services that we decided to launch a review of the Consumer Protection Code. In choosing to do so by way of an open public Discussion Paper, we also recognise the complexity of this subject and the fact that the Central Bank does not have all the answers. Nor is the Central Bank the authority on all aspects of protecting consumers of financial services.

We believe it is important to start the review with just such an open discussion, which will cover what can be described as three key strands of engagement. The first is Consumers’ Best Interests and the role that regulation plays in finding the right balance between reducing risks to consumers and ensuring regulatory requirements do not restrict their freedom to choose the most appropriate provider or product for them or impose unnecessary costs. The second strand is Change and Innovation, and in particular how we balance the real benefits and risks it brings for consumers. As regulator, we want to enable the benefits of change and innovation for consumers and the economy as a whole, while ensuring the risks are managed and mitigated. The third strand is Availability and Choice, where we want to discuss the role of high quality regulation within an effectively functioning market – one where innovation benefits consumers, there is a transparency on the part of the firms and competition between product providers. This combined, we believe, best supports consumers to access and choose the financial products that best suit their needs. 

The Discussion Paper is open for views until March 2023 and I would encourage you to share what views you have either through our online facility or our engagement programme. I hope many of you will make a submission to us, whether through your associations, your firms or on your own behalf. As the example of mortgage arrears illustrates, the rules we put in place for financial services are critical to achieving the society and economy that we want to have – to achieving the welfare of the people as a whole.

Concluding Remarks 

My thanks once again to the Compliance Institute for the opportunity to speak to you today, and congratulations once again on 20 years of serving your members and our society. When we consider the extent to which our regulatory framework had to step in to deal with the fallout from the global financial crisis (the impact of which is still being felt by consumers to this day) alongside the challenges that lie ahead, I think the need to protect high standards in financial services has perhaps never been greater. And the role that you play as compliance officers has perhaps never been more important. The Central Bank will continue to support you in this work. 

Thank you for your attention and all of the work you are doing as compliance officers in the financial services industry.

1. Over one year in arrears

2. Includes banks, retail credit firms and credit servicing firms

3. Based on number of principal dwelling house (PDH) in mortgage arrears

4. For this to happen, arrears must be cleared or reduced to less than one year, which generally happens following the implementation of an ARA. In addition to ARAs, during 2021, arrears were cleared also through repayment by borrowers to bring them out of long term arrears, and through an agreed full and final settlement of the mortgage. Borrowers and firms also agreed wider system solutions, such as Mortgage-to-rent (MTR) and Personal Insolvency Arrangements (PIAs). These solutions are realistic alternatives available for those borrowers that are in negative equity or have significantly reduced income levels.

5. https://www.centralbank.ie/news/article/speech-the-need-for-continued-focus-on-resolving-long-term-mortgage-arrears-ed-sibley-13-july-2021

6. https://www.isi.gov.ie/en/ISI/ISI%20Strategic%20Plan%202022-2024_Final.pdf/Files/ISI%20Strategic%20Plan%202022-2024_Final.pdf

7. While the numbers of accounts that have been classified as not cooperating remains high, we know that there are accounts within this classification at various stages of engagement with their firm. There is a significant number in, or facing the legal process for potential repossession, but many in that process have commenced meaningful engagement with firms, or third parties to enable an assessment of their circumstances and a potential resolution to their arrears to be offered. 

8. The IMF has stated that, “The issue of long-term mortgage arrears is complex and will require further development of an overall strategy, with multiple government bodies playing a role. While mortgage arrears are largely a legacy issue from the 2008 crisis, the failure to fully resolve these arrears has the potential to undermine credit growth and affordability, given the impact on credit risk of higher uncertainty of realizing collateral. A key hindrance to creditors’ rights remains the inability of financial institutions to predictably and efficiently enforce mortgage security on primary dwelling homes (PDH). While repossession is not the optimal solution for many borrowers, and resolution of the long-term mortgage arrears issues necessitates further engagement from both borrowers and lenders, a more efficient enforcement regime is also crucial to an effective creditors’ rights system. In that regard, enforcement should be streamlined and simplified. Recommendations to improve the process include clear rules and guidelines for judges with respect to proceedings and ensuring hearings take place in a timely manner (e.g., through more frequent court sessions). The courts should strengthen data collection and publication on repossession cases to allow policy makers to better understand and address bottlenecks, where they exist. More broadly, the Government should adopt a coordinated, multi-agency strategy for resolving mortgage arrears, informed by the granular data available on the financial situation and debt servicing capacity of borrowers. Published guidance on expected solutions based on financial indicators, and broader social support would be critical to this approach and possible strategy.”  “While LTMA are largely a legacy issue from the crisis, failure to create a predictable, efficient system for mortgage resolution creates negative externalities for the financial system. The cost of mortgage credit in Ireland is significantly higher than that of its peers.” IMF Technical Note on Insolvency and Creditor Rights