Priority Questions

EU Membership

Michael McGrath


1. Deputy Michael McGrath asked the Minister for Finance the steps he has taken to prepare for the economic implications that would arise for Ireland in the event of a possible vote by the British people to leave the European Union; and if he will make a statement on the matter. [17749/16]

I apologise for delaying the House. As we speak in the Chamber, the people of Great Britain are voting on the question of whether to remain in the European Union. Clearly, a decision by Great Britain to leave the EU would have very significant consequences for Ireland in terms of trade, the free movement of people and the land border we have with the Six Counties. I understand that if the decision goes the way we do not want it to go, a Cabinet meeting is planned for tomorrow morning. Perhaps the Minister might give us an outline of what initial plans are in place in the event of a decision by the British people to exit the European Union.

The Government's position on developments in relation to British membership of the EU has been clearly articulated, particularly by the Taoiseach and the Minister for Foreign Affairs and Trade: we very much want the UK to remain an integral member of the Union.

The UK's continued membership of the Union is a matter of strategic importance for the Government. In this regard, Departments, including my own, have been working on this issue for some time.

In relation to the potential economic impact, under the research programme agreement between the Department of Finance and the Economic and Social Research Institute, ESRI, my Department commissioned research on scoping the potential economic implications for Ireland of a change in the EU-UK relationship. The research was published on 5 November 2015 and is an important contribution to understanding the potential issues arising.

The summer economic statement notes that there are a number of risks to the central forecast scenario set out in the 2016 stability programme update and sets out an assessment of the potential economic impact of a vote by the UK to leave the EU. The scale of the impact would, of course, depend on the agreement entered into between the EU and UK following such an outcome. The prudent and consistent economic and fiscal policies, which have been the basis for our economic recovery, have resulted in a greatly reduced general government deficit and debt ratio, which means we are better placed to deal with the type of risks arising.

As the Taoiseach has said, Ireland will have a clear plan in place to deal with the implications, including the economic implications, of a UK vote to leave, if that is the outcome. The key priority for Government would be to protect and promote Ireland's interests to the greatest extent possible in the event that the UK votes to leave.

Based on the analysis carried out by all Departments, including the Department of Finance, a framework has been developed on a whole of Government basis to identify contingencies that may arise in the days, weeks and months that follow the outcome of the UK referendum.

I thank the Minister for his response. Clearly, we are speaking about a hypothetical situation, but it is a distinct possibility. The opinion polls have been quite mixed in recent days in terms of what the outcome is likely to be. The fundamental pillars of the European Union are the free movement of goods and services and of labour, so for us as a country the key issues that will need to be dealt with from a trade perspective are the possibility of trade barriers and tariffs being put in place and the free movement of labour between the UK and Ireland. If there is a Brexit, there will be a period of uncertainty and one of the key questions is whether it would be possible for the UK and Ireland to enter a bilateral agreement or if it would be a multilateral agreement, involving the remaining 27 countries of the European Union. I assume that is an issue which the Minister's Department has examined. I know the summer economic statement looked at the economic impact of a Brexit and it is an estimate, it is a forecast, and nobody can be certain what the fallout will be. There seems to be a great deal of analysis, but are there steps we are planning to take in the very short term if it is a negative vote?

The immediate foreseeable effect would be the effect on the movements of money in the markets. In that context, I have had discussions with the Governor of the Central Bank and he has assured me that the Central Bank, in the context of discussions with the European Central Bank in Frankfurt, has all the necessary measures in place to deal with any contingency of that nature. Beyond that, the legal mechanism for a British withdrawal is enshrined in the treaties. There is a two-year period before the withdrawal - if that were the outcome of the vote - would be activated, so issues like the free movement of people, whether there would be trade barriers or if there would have to be posts to secure the land border with Europe, as it would be then, 60 km from Dublin, would be discussed over a two-year period.

The negotiations, on the face of it, would be between the European Union and the United Kingdom and it would be the European Union that would be doing the negotiation, but if one takes an issue like the free movement of people, that has been in place as a legal issue since 1922. It was reinforced legally when the Republic was established in 1949 and since it pre-dated the entry of the UK and Ireland into the European Union, I would be of the view that there is a strong legal argument that the status quo ante could prevail.

I thank the Minister for his clarification of the Governor of the Central Bank's comments and the plans that are in place in respect of the money markets and the fallout from a possible vote by the UK to depart from the European Union. The Minister has touched on the central issues. While the free movement of people may be preserved, does that extend to the free movement of labour? People's ability to move is one thing, but will they be able to move and take up employment within the law that would apply to the UK and the European Union? That is an outstanding question.

From a trade perspective, while there may be benefits in terms of foreign direct investment, that is purely speculative, but there would undoubtedly be very large negatives for many indigenous firms here that are dependent on the UK export market. We are at one in hoping it is a vote to remain, but if it is not, there will be very significant consequences, which the Government and the country will have to face up to.

I share the Deputy's concerns. To put it succinctly, the downside is definite and the upside is speculative, so obviously I am on the remain side and I would like very much if that is the way it goes. We have provision for what is foreseeable tomorrow and in terms of the other negotiations over a period of time, I am sure we can share information with the Deputy as time goes by.

Code of Conduct on Mortgage Arrears

Pearse Doherty


2. Deputy Pearse Doherty asked the Minister for Finance his plans to implement the programme for Government commitment to deal with the mortgage crisis by working with the Central Bank to amend the code of conduct on mortgage arrears to include an obligation on providers of mortgage credit to provide a range of sustainable arrears solutions and to put the code of conduct on a statutory basis. [17748/16]

My question this month is similar to the question we put down last month. It relates to the specific plans and the timeframe to implement the commitment that was made in the programme for Government regarding those in mortgage distress and the calls that have been made by myself and my party, along with others, that it should be mandatory for lenders to offer certain solutions to those in mortgage arrears. The Minister said he was willing to make it mandatory for lenders to provide a more effective range of options, so can he tell us what progress there has been and when we will see a draft of the proposal?

The code of conduct on mortgage arrears, CCMA, is a statutory code issued under section 117 of the Central Bank Act 1989. The CCMA applies to all regulated mortgage lenders operating in the State when dealing with borrowers facing or in mortgage arrears on their primary residence, including any mortgage lending activities outsourced by these lenders. The CCMA provides a strong consumer protection framework to ensure that borrowers struggling to keep up mortgage repayments are treated in a fair and transparent way by their lender and that long-term resolution is sought by lenders with each of their borrowers. Lenders are required to comply with all aspects of the CCMA and non-compliance with the CCMA is enforceable against regulated entities by the Central Bank.

The CCMA sets out a process called the mortgage arrears resolution process, MARP. The MARP is a four-step process that lenders must follow. The steps are as follows: communicate with the borrower; gather financial information; assess the borrower's circumstances; and propose a resolution.

Bank and non-bank lenders offer a range of options for borrowers, including term extension, arrears capitalisation, split mortgage, mortgage-to-rent, etc. The CCMA states that in each case, a lender must explore all of the options for alternative repayment. A lender must document its considerations for each option examined, including the reasons that the option or options offered to the borrower is or are appropriate and sustainable for the borrower.

A lender must also document why some options are not appropriate for the borrower.

The numbers in mortgage arrears have been steadily declining. Data released by the Central Bank on 10 June shows that, to the end of the first quarter 2016, the number of mortgage accounts in arrears for principal dwelling houses has declined for the last 11 quarters. Some 120,447 principal dwelling house accounts were also classified as restructured. It is clear that where a borrower actively engages with their lender under the CCMA with a view to agreeing a sustainable arrangement to address their mortgage arrears, it is more likely that an equitable arrangement will be found and that the borrower will be able to remain in their family home. It is important to note also that the commencement of the court process is not a signal that a repossession will occur. It may often be the case that the process then prompts borrowers to re-engage with their bank and to find a solution. Often these cases are adjourned. I raised the issues in the Deputy's question with the Governor of the Central Bank in a recent meeting with him.

The last five or six words were the only part of the answer that addressed my question. I know we are running out of time but we are supposed to be in a different situation now, one in which we get to the nub of issues rather more quickly.

The Minister has made commitments and said he would review the code of conduct to make it mandatory on lenders to provide a more effective range of options. The two options highest on the agenda are split mortgages and mortgages to rent. People want to know when they will be able to say to AIB, Bank of Ireland or Permanent TSB that they are among the customers in mortgage arrears and to ask them where is the split mortgage or mortgage-to-rent offer.

I ask the Minister to outline the process. Is he saying the Government does not have the power to do this? Is he saying it is an issue for the Governor of the Central Bank, who is independent of Government? There is a commitment to do this in the programme for Government so can the Minister tell us the process involved in implementing it? Does the Minister have agreement from the Governor of the Central Bank to its commitment, whether with legislation or something else, to make it mandatory for financial institutions to offer certain solutions to their customers?

The position is that the code of conduct is statutory, having been introduced under section 117 of the Central Bank Act 1989. The issue that arose when we were negotiating the programme for Government was whether the range of options that were on offer from the regulated banks applied to the unregulated institutions that acquired mortgages. In my meeting with the Governor, I asked him if he had data showing what the practice was with the unregulated operators, who are now under the control of the Consumer Protection Act which we put through the Dáil last year. He is to come back to me with the information I requested. Then we will see whether it is necessary to extend the code of conduct to make it a statutory obligation on the unregulated institutions to increase the range of options they offer to mortgagees.

I was not part of the programme for Government discussions but I would say that some people who were would have a different interpretation of the discussions the Minister has just outlined. It is in the programme for Government and the Minister said of the code of conduct on the record of the House last week: "I am willing to review it again to make it mandatory on lenders to provide the more effective of the range of options that are now in the system to their borrowers." There was no talk last month that this was for unregulated entities. There is a clear commitment. The Minister went on to say that split mortgages and mortgages to rent were two of the more prominent options and were discussed in the programme for Government meetings.

I am asking a clear question because it seems the Minister is announcing a major U-turn on his commitment. Is it the intention of Government to make it mandatory on lenders to provide either split mortgages, mortgages to rent or other options to borrowers in mortgage distress? If it is, does the Government have the power to do it? If it does not, does the Governor support the move?

The position is that there is a statutory obligation on the banks to make a range of offers, including those described by the Deputy, to people in arrears with their mortgages. The question that arose was whether the obligation to offer the full range also obliged the previously non-regulated entities to make the same range of offers. I have had discussions with the Governor of the bank, which has data which I do not have. It is examining the data to identify the exact scope of the problem. My commitment to this remains and if it is necessary we will amend the code of conduct so that all beneficial offers to those in arrears are made on a statutory basis and those who have mortgage books are obliged, under law, to make the offers.

That is a major U-turn.

I am saying exactly the same thing.

No, the Minister is not. It is a complete and utter U-turn. The Minister said last month that he would make it mandatory on lenders to offer two options, spilt mortgages or mortgages to rent, but he is saying now that he is not going to do that.

I am saying the same now. I am simply pointing out that it is mandatory on the regulated banks already.

Financial Services Regulation

Michael McGrath


3. Deputy Michael McGrath asked the Minister for Finance if he is concerned at the manner in which commercial loans are being offered for sale and are being actually sold by non-bank entities and the fact that commercial loans can now be bought by private citizens and by persons in business who may be competing with the borrower concerned; if he will make changes in this area to ensure that loans can only be sold to regulated entities with a banking licence; and if he will make a statement on the matter. [17750/16]

This question relates to business loans, as opposed to mortgages. I have previously raised with the Minister the issue of the owners of loans, in some cases vulture funds, not needing to be regulated. The legislation of last year, to which the Minister referred, requires a credit servicing firm as an intermediary to be a regulated entity. My concern is that the large portfolios of loans bought by these funds from NAMA, IBRC and departing banks are now going to wash themselves out. They will be sold on, sold on again and sold on again and we will have no idea of who will end up owning the loans. That is the specific issue, on which I will elaborate in a moment.

The previous Government advanced the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 to ensure that purchasers of relevant loan books must either be regulated by the Central Bank or loans purchased by non-regulated entities must be serviced by a credit servicing firm which is regulated by the Central Bank and therefore subject to the Central Bank's code of conduct.

The Act was introduced to fill the consumer protection gap where loans were sold by the original regulated lender to an unregulated firm. It introduced a regulatory regime for a new type of entity called a credit servicing firm.  Credit servicing firms are now subject to the provisions of Irish financial services law that apply to regulated financial service providers. This ensures that relevant borrowers, whose loans are sold to third parties, maintain the same regulatory protections they had prior to the sale, including under the various statutory codes such as the consumer protection code, the code of conduct on mortgage arrears, the code of conduct for business lending to small and medium enterprises and the minimum competency code, issued by the Central Bank of Ireland.

It should be highlighted that the transfer of a loan from one entity to another does not change the terms of the contract or the borrower's rights and obligations under the original contract.  Also, following a review in 2015, the Central Bank code of conduct for business lending to small and medium enterprises has been strengthened in certain areas resulting in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 which come into operation on 1 July 2016.

It should also be noted that the Deputy's proposal that commercial loans could only be sold to regulated entities with a banking licence would likely reduce the attraction of competition into the SME credit market by deterring the entry of non-bank financing sources to credit markets at a time when there is agreement across the EU on the need for greater non-bank financing.

These funds bought large portfolios of loans from NAMA, IBRC and banks departing Ireland. They are now slicing up those portfolios into much smaller parcels of loans and, under existing law, anyone can buy a loan. If one person owns a hotel in Dublin and I own a hotel down the road, I may be in a position to buy that person's loan. To comply with the law, I would have to appoint a credit service firm as an intermediary but I could do it and take out that person.

The nature of commercial loan agreements means they can be called in at will by the lender. For example, if a single payment is missed, this can trigger a default and the loan can be called in within a matter of days. The issue raised in this question will become a major one as this becomes washed out. There is no control whatsoever on who can ultimately own a loan. The idea that any individual can buy a loan relating to someone else's business and appoint an intermediary firm, hence complying with the law, raises serious questions. As I understand it, this will be coming down the track. I know for a fact that parcels of loans as well as individual loans are being offered for sale to individuals and business people. This will happen and the issue will need to be addressed.

The contractual obligation that is attached to the loan continues with a change of ownership. I therefore cannot see how the person to whom the loan was given originally can be exploited on the transfer because the protections under law are still in place. The solution suggested by the Deputy that only regulated entities with a banking licence should be able to acquire loans would cut across a lot of SME lending. For example, the Strategic Banking Corporation of Ireland has established a way of lending, which is appreciated very much by the SME sector, with three non-bank finance providers, namely, Finance Ireland, Merrion Fleet Management and First Citizen Finance, using the high street banks as vehicles. If the Deputy says there is an issue, I will take his word for it. Further, if he could give me an aide-mémoire on the issue, I will get it checked out and if there is agreement that this is a real issue we will move to amend it.

I believe there is an issue and that it will become a much bigger one. It is true to say the new owner of the loan steps into the shoes of the original lender and all the same terms and conditions apply. However, the nature of a commercial loan agreement is such that it is heavily stacked in favour of the lender. Basically, the loan can be called in at will and in the matter of a number of working days by way of notice. This opens up the real possibility that someone with negative intentions in respect of a loan relating to a business can take ownership of it and, essentially, trigger the calling in of the loan and move on the original borrower. We are entering into a period now when the funds will seek to get a return on their investment. They will want to turn over the loan portfolios they bought. They are slicing them up into much smaller parcels. I take the Minister's point on the issue of non-bank finance, which I support, but a way has to be found to tackle this issue. A person's loan could in theory end up in unsavoury hands. That is the reality. All they need to do is appoint a credit servicing firm to comply with the law. This exposes the original borrower to major risk.

As I stated, the Central Bank code of conduct for business lending to small and medium enterprises has been strengthened in certain areas resulting in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-sized Enterprises) Regulations 2015. These regulations only come into effect on 1 July next. I have not familiarised myself with the details of the regulations, but there may be something in there which helps to solve the problem raised by the Deputy. However, if it is not resolved and it is as he says, I will arrange for him to talk to my officials to see if we can come up with a statutory vehicle to resolve the matter.

In the absence of Deputies Mattie McGrath and Stephen Donnelly, we will move to Question No. 6.

Question No. 4 answered after Question No. 8.
Question No. 5 answered after Question No. 6.