I move: "That the Bill be now read a Second Time."
The main purpose of this Bill is to provide for the introduction of caps on the cost of borrowing under a moneylending agreement.
While the moneylending industry has been contracting in recent years, it remains an important source of credit for a significant number of people. To give Deputies a sense of the market, according to Central Bank figures, at the end of 2020, the moneylending sector had over 283,000 customers with €141 million in outstanding loans.
Research carried out in 2020 shows that the customers of moneylenders are more likely to be women, to have dependent children and to be in their late 30s to early 50s where child-rearing is most expensive. The Bill will serve these people well at a time when the cost of living is going up. It will do this by reducing the cost of credit on new moneylending loans and by improving the regulatory framework to modernise the way providers operate. The Competition and Consumer Protection Commission has been supportive of the Bill and the benefits it brings for consumers.
The Bill is the result of a detailed policy review within the Department of Finance, which included a public consultation in 2019. The report, Moneylending: Policy Proposals, was published by the Minister for Finance last July along with the heads of this Bill.
The main proposal is the introduction of an interest rate cap on moneylender loans. The feedback from the public consultation on the issue was that the introduction of a cap would protect low-income households who avail of moneylender loans, reduce the cost of credit for customers of moneylender loans and reduce the number of customers in default, and align Ireland with other EU countries that have an interest rate cap on short-term credit in place.
The Consumer Credit Act 1995 provides the regulatory regime for moneylenders. It is overseen by the Central Bank and it has regard to the high cost and high risk nature of this form of low volume credit.
Under the Consumer Credit Act 1995, the Central Bank may refuse to grant a licence to a moneylender if, in its opinion, the cost of credit to be charged is excessive or the terms and conditions of loans are unfair. As the Consumer Credit Act 1995 does not define "excessive", the Central Bank, which took over responsibility for moneylenders in 2003, has continued to license moneylenders at the maximum rate as per their last licence issued by the former Director of Consumer Affairs, which was the previous licensing authority. While Ireland does not currently have a statutory interest rate cap, it has a de facto cap of 188.45% annual percentage rate, APR, excluding collection charges, and 287.72% APR, including collection charges.
This rate is too high and it is important that this legislation progresses to introduce a statutory cap to deliver immediate reductions, which can be reviewed over time. I reiterate that, at the moment, the APR can be as high as 188%, excluding collection charges, and 288%, including collection charges. Every Member must support the proposal to bring that to an end and to do so swiftly. The highest rates at which the caps can be set are set down in the Bill. I will discuss the different specific rates in a moment. These ceilings allow for a step-wise approach to be taken in time to come to further reduce the caps.
While lower interest rates are, of course, the preference for consumers, there is a need for balance in setting the ceilings to ensure this regulated sector remains viable and consumers do not face the difficulty of having to go without credit where providers leave the market either suddenly or en masse. When this legislation is enacted, borrowers of the most popular products should see immediate reductions of approximately 13% in the interest charged. This is a real reduction in the cost of credit for consumers. It also gives the sector time to operationally adapt to lower revenue from each borrower.
I thank the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach, for its consideration of the general scheme. Officials in my Department have reviewed the report prepared by the Oireachtas Library and Research Service as part of the pre-legislative scrutiny process and that feedback has been taken on board in the drafting process, where appropriate.
The Bill contains 15 sections, which I will run through briefly. Section 1 sets out that the Consumer Credit Act 1995 is the Act which is amended by the Bill. Part VIII of that Act contains provisions dedicated to moneylending.
Section 2 is an amendment of section 2 of the 1995 Act relating to terms used in the Act. The section provides for the terms "moneylender" and "moneylending" to be replaced by the terms "high cost credit provider" and "high cost credit". This language will help to differentiate licensed providers more clearly from unlicensed ones. Using the term "high cost credit provider" means that everyone will understand that when they go to such a place, they are paying a high cost. In some people's mind, there might not be a clear distinction between legal and illegal moneylenders that operate in the marketplace and, therefore, it is important to use different terminology to show people they are dealing with a high cost credit provider.
Section 3 is an amendment of section 12 of the 1995 Act and deals with offences. The section introduces two new offences. These apply where a high cost credit provider grants a loan with a duration over 52 weeks, as per section 94A, with an interest rate over the set caps.
Section 4 adds a definition for "nominal rate" to the Act of 1995, as this is the type of interest rate cap being placed on running accounts. A running account operates similarly to a tied credit card and is a product sometimes offered by catalogue companies.
Section 5 modernises and streamlines the licensing regime in a number of ways. It removes the requirement for providers to register in each District Court area in which they wish to operate and allows them to operate nationally instead. This should go some way towards improving competition in the sector and increase the number of providers available to people in different parts of the country. It extends the licensing period from 12 months to five years. It updates the licensing process so that where a provider's proposed interest rates are above the rates set by the Minister at any time, the Central Bank can refuse to grant a licence. That is very important. Up to now, some providers may not have registered in every District Court area in the country and instead have cherry-picked certain urban areas. By taking away the restriction on the need to register with every District Court in the country, when somebody has a licence, he or she can lend money anywhere. That will increase competition in areas where there may not have been the full range of competition up to now.
Section 6 inserts a new section, 94A, into the 1995 Act to require that cash loans will not be granted for a period greater than 52 weeks. The longer one is paying interest, the more of it one will pay. There is a strong argument then for banning high cost credit agreements of more than a year's duration because a key rationale of high cost borrowing is that such borrowing is necessary because of short-term circumstances and there may not be an alternative source of borrowing available at the time. That is the reason we have a limit of 52 weeks, which is one year, for such loans.
Section 7 requires providers to include the words 'high cost credit agreement' prominently on the agreement. This will ensure consumers are clearly aware of the nature of the product they are being offered.
Section 8 is the most fundamental provision in terms of reform. This section inserts a new section, 98A, into the 1995 Act to provide for the setting of a maximum interest rate that a high cost credit provider can charge for both cash loans and running accounts. Crucially, it will be an offence under section 12 of the 1995 Act for a provider to grant credit at a rate in excess of the maximum set at that time. Under this new section, the Minister for Finance may, following consultation with the Central Bank, make regulations providing for the maximum rate of interest at which a moneylender can provide credit. The Minister must have regard to a number of relevant factors when making such regulations. These are the impact on competition in the high cost credit sector; the impact on the supply of credit in the high cost credit sector; the average rates of interest offered to customers in the high cost credit sector and any trends in such interest rates; and where setting the proposed rate would reduce the supply of credit in the high cost credit sector, the impact of such a reduction on financial inclusion. Many of the people concerned are in a financially vulnerable position and only have recourse to high cost lenders.
In making the regulations, the Minister must also adhere to the following parameters: in respect of cash loans, the maximum rate of simple interest chargeable per week can only be set at a rate less than or equal to 1%, and the maximum rate of simple interest chargeable per year can only be set at a rate less than or equal to 48%; and in respect of a running account, under a high cost credit agreement, the maximum rate of monthly nominal interest can only be set at a rate less than or equal to 2.83%. A two-pronged approach is being recommended, with separate maximums for cash loans and running accounts. Using a simple interest arrangement for the interest rate caps will simplify the product and enhance transparency. Borrowers will be able to easily evaluate whether the interest rate they are being asked to pay for a loan is in excess of the statutory weekly or annual caps.
Different approaches are recommended for cash loans and loans provided on a running account basis because, in simple terms, running accounts operate similarly to a credit card account in that one can have a credit limit and can make purchases up to that limit and, therefore, the credit one owes could be the result of several purchases over a lengthy period, less the monthly payments. Applying term limits and simple interest rate caps to each purchase that ends up in a single outstanding balance on an account would be too difficult and would likely be unworkable. In addition, it might not be capable of being understood by people in a vulnerable position who are seeking the credit in the first place.
Following its enactment, the Minister for Finance will make regulations setting the cap at the maximum level allowed for under the legislation. These interest rate caps can be varied downwards in the future by regulation, if circumstances and consideration of factors outlined above warrant it. The Central Bank will also be required to prepare a report within three years of the interest rate caps coming into operation.
Section 9 concerns the requirement to maintain a repayment book. This has been amended to include the option of maintaining an online version of a repayment book if the borrower requests it. This is intended as a modernisation of the product and to provide borrowers with greater options, where they could access their payment record in a straightforward way on their mobile phone. It is very important that people will be able to access the details of the repayment on their mobile phone through this requirement where we provide in the legislation for a digital option.
Section 10 amends section 102 of the 1995 Act to include collection charges on the list of charges which are not allowed. Moneylenders that currently charge home collection charges tend to charge a specified amount for every €1 borrowed, with the highest currently authorised charge standing at 14% per €1 borrowed. Moneylenders are in favour of retaining the home collection model because it reduces the occurrence of missed payments and bad debts. Some consumers like the convenience of home collection based on previous Central Bank reports. Several options were explored in respect of collection charges, from leaving the system as is, through introducing a cap per €1 borrowed, to abolishing charges in their entirety.
Abolishing collection charges has many advantages, including the fact the Covid-19 pandemic has shown that providers can implement remote payment systems and move away from an archaic form of collecting loan repayments, if necessary. Therefore, in light of these recent developments in the industry, the abolishment of home collection charges is proposed in the Bill. That is important. We are abolishing the charge that has arisen heretofore relating to home collections and home visits. The existing prohibition on all other charges should continue and this change should encourage the digitalisation of the industry, which could lead to the home collection model being naturally replaced by remote or online repayment options.
Section 11 deletes the previous provision regarding collection charges, which are no longer allowed. The Bill does not abolish the practice of home collection but merely the right to charge separately for it. Moneylenders choosing to continue the practice will have to accommodate the overheads associated with this in their revenue model, which can only be consistent with the rate of interest allowable in the legislation.
Section 12 amends the 1995 Act by inserting a new section 114A, which allows the Minister to require the bank to collect and publish non-personal data on the sector.
Section 13 sets down transitional arrangements for those who have moneylender licences issued under section 93 of the Act before the passage of the Bill. Due to the changes in terminology from "moneylender" to "high cost credit provider" in the legislation, these transitional arrangements ensure that the appropriate provisions are applied to existing moneylending licence holders for the remainder of the term of validity of those licences.
Section 14 provides for consequential amendments to the 1995 Act and other enactments arising from the renaming of moneylenders as "high cost credit providers" and the renaming of moneylending as "high cost credit".
Section 15 is a standard provision. It provides for the Minister for Finance to commence different provisions of the Bill on different dates.
I look forward to hearing the views of Deputies on this very pertinent Bill. It will significantly improve consumer protection for those borrowing from the high cost credit sector. It is my intention to seek an early date for consideration of the Bill by the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach and to constructively engage with Deputies on any proposed amendments. There may be Government amendments at that stage to ensure the smoothest transition to the new regime following further engagement with the Central Bank and the Attorney General's office. I thank the Acting Chairman and look forward to hearing the views of Deputies.