I hope to conclude after 20 minutes and I will then share my time with Deputies Seán Kyne and Joe Costello.
Deputy Collins and the Technical Group have provided us with a further opportunity to discuss the plight of persons in mortgage arrears. This is evidenced by the Private Members' Bill being discussed which proposes the creation of a further new debt resolution mechanism. The Government accepts the motivation of the Technical Group to seek to make further progress on achieving realistic and workable debt resolutions between debtors and creditors. This is a proposition that this Government has made a priority since coming into office in early 2011. Deputy Collins's Bill proposes the introduction of a new personal insolvency arrangement - to be known as a mortgage restructuring arrangement - which would be in addition to the three new debt resolution arrangements introduced in the Personal Insolvency Act 2012.
The central element in the Bill is for the forced restructuring of secured credit or mortgage debt, by writing off part of that particular debt. The process involved is for a personal insolvency practitioner - which is a creation of the Personal Insolvency Act - to prepare a proposal for a mortgage restructuring arrangement on behalf of the debtor for submission to creditors. The Bill would make it mandatory that creditors accept repayment on the terms set out by the PIP. It is proposed that repayments would be based on the reduction of the amount of the secured debt to a maximum of 110% of the current market value of the property. Any residual debt would be classified as unsecured, to be resolved potentially by another debt resolution arrangement. The proposal contained in this Bill is not accompanied by a cost-benefit analysis nor has there been any detailed consideration to that issue given by any of the speakers to that issue and that aspect of matters, other than the reference by Deputy Donnelly.
The content and details of a mortgage restructuring arrangement would effectively be determined by the PIP alone and would be binding on the secured creditor. In addition, the creditor would not then be permitted to take any enforcement or other action against the debtor. The creditor would be allowed, provided they have fully co-operated with the PIP, to appeal to the court. The proposal by Deputy Collins would turn what is a negotiated debt resolution approach to mortgage arrears into an adjudicative process, with the adjudication being done solely by the PIP. Such a development would dramatically change the basic philosophy and working of the legislation and completely undermine the rights of creditors. We cannot turn the PIP into a court nor can we have a system where debtors would decide that they are either agreeable to arrangements or could veto them, but where creditors would have no say at all. If we put such a system in place, I have absolutely no doubt that it would be unconstitutional.
Deputy Collins and her colleagues may believe that the financial institutions are the source of all evil, but it is important, however, that we have a functioning banking system in this country. We cannot deprive the banks of funds they are entitled to recover from borrowers while also encouraging them to make a constructive contribution to the economy by lending money to small businesses and individuals who are financially viable and who wish to purchase homes. We also need to keep in mind that with regard to secured creditors where financial institutions are involved, there is a public interest in ensuring that more taxpayers' money does not have to be put into our banking system. However, no person in genuine financial difficulty and, in particular, no person who bought a reasonably sized appropriate home during the so-called property boom should now be simply sacrificed to pay for the mistakes made by our financial institutions without regard to his or her financial capacity to deal with their indebtedness over a reasonable period of time.
The proposed approach in the Bill - the imposition of a settlement on the creditor without proper regard to all the circumstances - is significantly out of kilter with the negotiated approach taken in the Personal Insolvency Act 2012. Whereas I do not wish to be unduly critical, it would be remiss of me not to point out a number of significant flaws.
First, Deputy Collins's approach to dealing with mortgage arrears is predicated on having the debtor's representative decide what should be repaid to the creditor without any particular regard to other circumstances, such as real ability to pay or the equity level available in the property. Second, there is a significant possibility that permitting such an interference with the legitimate property rights of secured creditors, as proposed in the Bill, would infringe Article 43 of the Constitution. The courts have been very cautious about devaluing or depriving individuals of property rights in any way and any intervention in this regard must be proportionate and take account of the property rights of all concerned. The State cannot impose retrospectively a settlement on parties to a private contract involving the provision of goods, services or capital.
As I mentioned, one of the main priorities of this Government has been to put in place the best solutions possible for people living under the burden of unsustainable debt. When I took office as Minister for Justice and Equality, it was immediately clear that little work had been undertaken to reform or modernise legislation in the areas of bankruptcy and insolvency, despite the enormous financial difficulties being experienced by so many people. The introduction of a modern, practical and humane insolvency procedure and a reformed bankruptcy process through the Personal Insolvency Act and the establishment of the Insolvency Service of Ireland, ISI, were necessary priorities in our path to recovery and growth. The three new insolvency arrangements, offered through the ISI will be of substantial assistance to thousands of individuals crippled by unsustainable debt. They provide fair and equitable solutions for those who have no prospect of repaying their debt, and the solutions are not confined to the rich or those who were rich, as has been suggested by some speakers. According to most recent statistics on the ISI website, to date 50 personal insolvency practitioners and 28 approved intermediaries have been authorised; 4,788 telephone calls have been taken by the service; 1,630 e-mails have been received; and there have been over 85,400 visits to the website.
The guidelines on reasonable expenses provide an essential defensive shield to ensure that neither financial institutions nor other creditors can deprive debtors of funds they need for reasonable household and family expenditure or deprive those in employment from benefiting from continuing in employment where a debt settlement or personal insolvency arrangement is completed. The new personal insolvency arrangement, or PIA, has been the most significant development in addressing the area of mortgage arrears. The PIA will enable the agreed settlement of secured debt up to €3 million, a cap which may be increased with the consent of all secured creditors. It introduces a concept, which I understand is unique in international insolvency law, in providing for the negotiated resolution of secured debt in a court-sanctioned process that provides certainty for creditors and hope and relief for debtors. It offers a second chance mechanism for talented and capable individuals and entrepreneurs to return not only to solvency, but to contributing to the economic development of our society.
To protect the constitutional rights of all concerned and to prevent potential actions for judicial review, the Act provides for enhanced oversight by the courts of the three new debt resolution procedures. This enhancement of court involvement has the significant benefit to the debtor of providing protection from enforcement actions by creditors, either during the negotiation period or during the life of the arrangement. In order to deal with this anticipated volume of work and to facilitate the speedy consideration of insolvency applications, a new cadre of specialist judges of the Circuit Court has been appointed. The Act deals with the law and procedures necessary to operate a modern personal insolvency process and its focus is, by definition, confined to insolvency. It is not, however, solely concerned with those who are currently in financial difficulties but rather it is about dealing in future with those who find themselves in difficulty for a wide variety of reasons and providing a new legal architecture to facilitate addressing those difficulties in a proportionate and fair manner as between debtors and creditors.
It is important that all households can contribute to our economic recovery and that all those affected by unsustainable debt have real hope for the future. The central objective in regard to the personal insolvency arrangement is that it facilitates persons to reside in and retain ownership of family homes when the arrangement has been successfully complied with over the agreed period, which is expected to be six years.
The new approach led by this Government avoids contentious court hearings, long delays and substantial legal costs inherent in earlier approaches. This is a significant objective designed into the personal insolvency arrangement and offers light at the end of the tunnel to the borrower. Deputy Collins would agree that this is a desirable objective. There is a necessity to allow time in order to see this legislation working rather than labelling it as a failure at the time it is starting and people are making applications to have debt issues resolved. We must remain conscious that many people are in genuine distress and cannot pay their debts. Such debts extend beyond mortgage debt and for understandable family reasons in recent years, such people have been juggling finances. However, the Deputy's Bill might risk providing a means of evading obligations for debtors who may be able to pay those obligations. Some may be refusing to pay in the hope of picking up free debt forgiveness.
This Government is determined to ensure that assistance is targeted at those who cannot pay, as opposed to those who will not pay. People cannot expect to maintain a lifestyle which is beyond their means and at the same time expect financial institutions to reschedule or write off outstanding debt, with taxpayers carrying the burden of their doing so. It is also important to recognise that not all creditors are banks and financial institutions. Many creditors are small and medium-sized businesses and individuals who frequently find themselves in financial difficulties due to the non-payment of moneys owed to them.
The debt resolution initiatives already in place include those under the Personal Insolvency Act 2012, those under the code of conduct for mortgage arrears, the targets set by the Central Bank for financial institutions for resolving mortgages in arrears, and court protection permitting an adjournment of a repossession action for consideration of a possible personal insolvency arrangement. Taken together, these represent a significant and credible set of policy responses by the Government in regard to mortgage arrears. These initiatives, and particularly the personal insolvency arrangement, which is at an early implementation stage, must be allowed time to progress.
I assure the House that the matter is being very closely monitored by the Government on an ongoing basis. If necessary, as I have previously indicated, further adjustments or appropriate measures may be brought forward in due course. In that context, we will continue to have regard to legislation that has in the past operated in other countries and any legislation that may currently be in place in other countries to address similar difficulties. As the Minister responsible for the introduction of the new personal insolvency legislation, it is my expectation that the banks will co-operate in the implementation of the Act and not obstruct its objectives, in particular with regard to agreeing personal insolvency arrangements. I share the concerns expressed in this House and outside that, to date, not all of the banks have adequately engaged with debtors in a manner that is in the interest of debtors, banks and the wider community.
It was necessary, given the nature of the crisis which hit this State and specifically its economy and the banking sector, that the initial focus of the Government initiatives to be complied with by the banks has in recent years been on creating a breathing space for debtors in arrears. This has meant various options such as payment breaks, discharging only a portion of capital and interest, interest-only payments and a moratorium on repossessions. That has involved some 70,000 mortgage debtors. These measures have provided temporary relief and occurred when financial institutions had no other alternative. Many persons in financial difficulty benefited from these measures as they relieved immediate pressures, although the measures were, by their nature, temporary. We must now move on to permanent sustainable solutions that offer certainty to both debtors and creditors.
The Central Bank requires the financial institutions to achieve certain targets in regard to proposing and agreeing sustainable long-term solutions. Unfortunately, a disproportionate amount of the proposed sustainable solutions, as reported by the financial institutions for the second quarter of 2013, relate to legal proceedings or the threat to issue legal proceedings. There was, to say the least, an insufficient response from the banks to entering into viable arrangements with mortgage debtors whose financial situation would enable them to conclude such arrangements. This approach could be likened to a doctor deciding to shoot most of his patients rather than treating their condition as the preferred solution.
During his appearance before the Oireachtas Joint Committee on Finance, Public Expenditure and Reform on 26 September, the Governor of the Central Bank, Professor Patrick Honohan, was rightly critical of the slow and legal approach of the banks.
He noted that 74,000 of the 98,000 mortgage holders in arrears of more than 90 days at the end of June were not yet in an arrangement with their lender. He was of the view that the banks are engaged in "wishful thinking" on the issue of resolving the mortgage arrears crisis and may have a belief that many cases will cure themselves.
The Central Bank set targets earlier this year for lenders to provide sustainable solutions to customers with mortgage arrears of 90 days or more. The bank is auditing a sample of the cases to see whether the solutions proposed can be regarded as sustainable and the Government very much welcomes that approach. The Governor was of the view, which I share, that a sustainable solution for mortgage holders is one that is affordable for the borrower in both the short and the long term. Disturbingly, of the 35,000 proposed resolutions offered by banks to the end of June, as required by the Central Bank, 62% referred to surrender or repossession of the property concerned. It should be noted that the approach of the banks occurred at a time the personal insolvency legislation had not come into operation.
It is not acceptable, based on the existing information, that only one regulated Irish financial institution has made more mortgage modification offers that are classified as "sustainable solutions" than threats of legal proceedings to seek orders for possession before the courts. I agree with the view of the Governor that travelling the legal route should only qualify as a sustainable solution when some form of financial arrangement or a more formal personal insolvency arrangement, PIA, cannot be reached or is inappropriate given the circumstances of the case. That would most likely arise where the borrower is not co-operating or where the borrower's financial position is such that their mortgage is not sustainable and where it is not possible to propose an alternative sustainable arrangement and, in such circumstances, the borrower does not agree to a voluntary sale.
I fully recognise that in appropriate cases, the reconstruction of debt in mortgage arrangements will lead where appropriate to the writing off of a portion of outstanding capital. This is an approach and a reality that to date has been avoided by our financial institutions. I am conscious, however, that some of those in mortgage debt have failed, for whatever reason, to engage with their banks or to communicate with them. It is my hope that such individuals will rapidly engage with their financial institution before, rather than as a consequence of, repossessions proceedings. If our financial institutions refuse to constructively and realistically engage, then I have made it clear on a number of occasions in this House and in the Seanad that the Government will in the future take necessary measures to refine our approach to ensure the debt resolution processes work. I realise that banks must have regard to commercial considerations but they must also behave with greater flexibility and insight and apply a broader range of common-sense options based on financial reality. It is my hope and it is the intention of the insolvency legislation that the engagement by personal insolvency practitioners, PIPs, with financial institutions on behalf of debtors proposing realistic and sensible solutions where individuals are caught in unsustainable debt will produce a more constructive and insightful approach from banks that has necessarily been the case to date.
Irish banks have been recapitalised and stress tested on the understanding that there will be losses resulting from excessive financial lending during the property bubble and there is little excuse for their delay in coming to terms with this. They have had adequate time to equip and train their staff to adequately engage with those in arrears. I understand that the banks may have a fear of debt forgiveness. This would be especially so for individuals who could pay but who might contrive to create circumstances for debt write-off where such is not warranted. Despite exaggerated claims by banks, no information on the extent of such action by debtors has been produced. As the Governor of the Central Bank noted during his recent committee appearance, "[T]here are a huge variety of reasons why people are paying other things first". There is no doubt that some of those in debt difficulties have decided rightly or wrongly that they are going to pay short-term debt first as opposed to secured long-term debt.
Taxpayers have been financing the banks. No matter how one might deplore the previous behaviour of financial institutions, everyone in the State has an interest in ensuring the banks' capitalisation is sound and in the banks playing a normal role in the economy. The Insolvency Service of Ireland is fully operational and ready to do business. Given the scale and complexity of the work involved, it is a remarkable achievement that the service is fully operational little more than a year after the publication of the Personal Insolvency Bill on 29 June 2012. PIPs will play a vital role in negotiating on behalf of debtors realistic and workable solutions which are agreed by creditors. A total of 50 persons are registered as PIPs, with more expected shortly.
The economic and financial effects of the proposals in the Deputy's Bill would be damaging should it be accepted. The costs to the financial institutions could run into billions of euro and have consequences for their solvency and stability. There is every good reason for taking care in this area so as not to impose on taxpayers an additional burden arising out of bank debt that would detrimentally impact the capital base of our existing financial institutions. There has been some recent publicity with regard to one of the State's final commitments under the troika programme. The commitment is to examine aspects of the operation of the courts' repossession framework, including by the end of October, the possibility of more expedited proceedings for buy-to-let properties and the assignment of additional functions to specialist judges. In addition, an expert group will consider issues around the more general efficient operation of the repossessions system and is to report by end of 2013. There are no proposals for further legislative changes in this area at this time.
These commitments will not have any particular impact on the engagement between banks and co-operating borrowers in seeking to conclude a sustainable solution to a mortgage problem. The protections available to co-operating borrowers under the code of conduct on mortgage arrears will continue to remain in place. The recent Land and Conveyancing Law Reform Act 2013 provides the power to a court, as it considers appropriate having regard to the individual circumstances, to adjourn a repossession case to enable an alternative PIA to be considered.
The Government's objective in everything we have done in the development and introduction of various debt resolution processes has been to help people in genuine financial distress to facilitate their return to solvency and full participation in economic life and to allow individuals and families struggling under the weight of unsustainable debt to restart their lives. The critical message to all those experiencing mortgage debt problem is that they must engage with their financial institution to attempt to negotiate an appropriate resolution. That also requires the financial institutions to engage properly with customers. Now that the architecture of our new insolvency legislation is settled and up and working, I expect financial institutions to more readily and effectively so engage. However, I fully accept Deputy Collins's motivation in proposing this Bill. I share with her a determination to offer the best possible debt resolution processes to home owners in arrears. This Bill, unlike the Personal insolvency Act 2012, unfortunately, does not achieve that aim and, therefore, I must oppose it.