JOINT COMMITTEE ON EUROPEAN AFFAIRS debate -
Wednesday, 23 Jul 2008

EU Mortgage Credit Markets: Discussion.

Chairman

Item No. 1 is the Commission White Paper on the Integration of EU Mortgage Credit Markets, a discussion with the Irish Financial Services Regulator, the Irish Banking Federation and other witnesses. The committee decided that it wished to engage with the regulatory authority in the financial institutions, particularly with regard to the importance and the impact of credit rating and of financial services generally and the regulatory services. I welcome Ms Mary O'Dea, consumer director; Ms Colette Drinan, deputy head of consumer protection codes; Ms Breda Cassidy, EU and international co-ordinator, of the Irish Financial Services Regulatory Authority; Ms Eimer O'Rourke, Mr. Mike Percival and Ms Amy Walsh of the Irish Banking Federation; and Mr. Brendan Kelly, director, Financial Services Ireland. I trust members of the committee will find their submissions interesting and interact with delegates. Presentations normally take ten minutes. I propose that each presentation will be made, that members will raise any points they wish and that there will be an opportunity to wind up. Is that agreed? Agreed.

The first submission is by Ms Mary O'Dea, Irish Financial Services Regulatory Authority.

Ms Mary O’Dea

I thank the committee for inviting me to discuss the Commission's White Paper on the Integration of EU Mortgage Credit Markets. I am joined by my colleague, Ms Colette Drinan, deputy head of our consumer protection codes department, and Ms Breda Cassidy, our EU and international co-ordinator. In my opening statement I will briefly describe the work of the Financial Regulator, in particular our consumer protection and information responsibilities; our views on the Commission's White Paper and our EU-related work in general.

The Financial Regulator is a little over five years in existence. Our overall purpose is to help consumers make informed financial decisions in a safe and fair market and to foster sound, dynamic financial institutions in Ireland. We supervise more than 13,000 firms and entities of varying size and nature across the entire financial services spectrum, including banking, insurance, funds, intermediaries, credit unions and markets. Our mandate has been significantly expanded in recent times across all these areas as a result of various EU regulatory initiatives.

We have established a very strong consumer protection framework for financial services in Ireland. The introduction of the consumer protection code marked a key development for the protection of consumers of financial products and services. It is a legally binding document which sets out a number of general principles, enhanced by more detailed rules to which regulated entities must adhere when dealing with consumers. The code covers all aspects of a firm's interaction with consumers and contains a set of provisions in relation to knowing the consumer and suitability. These provisions require a firm to gather and record sufficient information on a client to enable it to provide a product or service that suits the consumer's needs. A regulated entity is also required to give the client a statement of suitability setting out the reasons for recommending a particular product or service. Mortgage lenders must comply with these suitability requirements. The committee may be interested to note that suitability requirements in respect of lending are not a common feature in other jurisdictions.

The code also contains requirements relating to mortgage arrears, consolidation of loans and equity release products. In respect of mortgages, this ensures a consumer is entitled to the same level of protection, regardless of the mortgage provider used. We also introduced minimum competency requirements, a competency framework designed to establish minimum standards for financial service providers, with particular emphasis on individuals dealing with consumers.

We have a responsibility to raise the awareness of consumers of the costs, risks and benefits of financial products. To do this we engage in a range of activities which include providing services such as a consumer helpline and personal finance website and related public awareness activities to promote these services. The independent and plain English information we provide for consumers is critical to helping people make informed decisions and exercise their buying power to make the market work more efficiently.

We are engaged in the measurement and development of financial capability in Ireland. By convening and chairing the national steering group on financial education, we have gathered together a broad base of key stakeholders from consumer groups, the financial services industry and the education sector to foster personal finance education through the formulation of policy and key development tools. The group also fosters co-operation between State agencies, the industry and the voluntary sector and seeks to leverage existing resources and structures.

On a practical level we have developed several teaching materials for schools, both on our own and in conjunction with other organisations which work in the area. We are undertaking a major piece of consumer research to assess and measure the financial capability of consumers in Ireland. We recently published the preliminary results of this study and expect a comprehensive research report will be published before the end of the year. We are sharing our findings with the European Commission as they emerge. They will inform our approach to our consumer protection requirements and help us identify the information or education initiatives required to help consumers become more financially capable.

In our submission to the committee on the White Paper we have indicated our support for the Commission's overarching objectives regarding the field of integration of EU mortgage credit markets. I reiterate the Financial Regulator's support. We particularly welcome the Commission's commitment in the White Paper that all policy proposals will be subject to individual impact assessments, including a quantitative cost-benefit analysis, and that there will be an opportunity for member states to become more involved in the process before adoption by the Commission. We also welcome the range of initiatives proposed and believe these proposals constitute an important set of steps which will play a key role in the achievement of the long-term objectives of an integrated EU mortgage credit market, the improvement of cross-border activity and the facilitation of customer mobility. Many of these initiatives have been addressed in the development of the Irish market and regulatory structures during the years and some are reflected in legislative provisions such as the Consumer Credit Act 1995, for example, on early redemption fees and the tying of other services to the granting of mortgages.

Our consumer protection code which I have mentioned further enhances the level of consumer protection in the State and contains a set of provisions on knowing the consumer and suitability. These provisions are key aspects of consumer protection and particularly relevant in situations where the product provided for a consumer is a mortgage product. There are also specific provisions in the code relating to mortgage credit which relate to the disclosure of charges, arrears procedures and the timeframe for notification of arrears to consumers.

The Financial Regulator concurs with the European Commission's assessment that improving the quality and comparability of information is necessary to enable consumers to shop around in the European market for the most appropriate mortgage product. We also concur with its assessment that there can be no efficient market without confident and empowered consumers who are able to seek out and choose the best mortgage product for their needs.

In its White Paper the Commission believes mortgage lenders should be required to adequately assess, by all appropriate means, borrowers' creditworthiness before granting them mortgage credit. It is clear that is something already required here. We support the proposal that a means be explored of further increasing responsible lending, drawing on lessons gained in the United States sub-prime crisis. If credit institutions are to provide credit cross-border, access to credit registers is essential. Improving access is something we support.

Following the recent issues regarding solicitors' undertakings, we would welcome and support improvements in land registration procedures which are linked to the quality and value of the security on which the mortgage provider is relying. The proposal that member states be required to provide for more transparency and reliability in their land registers and that such registers be available on-line is to be welcomed. Any proposals which promote the development and use of reliable valuation standards are to be supported, but care must be taken to ensure these standards build on the minimum requirements for the recognition of real estate collateral set out in the EU capital requirements directive and do not conflict with them. We also support the idea that lenders should have access to credit registers and, therefore, have no issue with the Commission investigating whether obstacles to this are in place at a national level.

The Financial Regulator is deeply committed to and fully engaged in policy development at EU level, as demonstrated by our active involvement in EU committees across the securities, banking and insurance sectors. We also assist the Department of Finance by providing technical advice when EU implementing measures are being negotiated. Our involvement in the development of retail financial services initiatives in the European Union is also notable. For example, last year we seconded one of our most senior regulators to the European Commission to assist with the development of its retail financial services programmes. In addition, I visited Brussels late last year for a schedule of meetings with high level EU officials who conveyed strong positive feedback on our approach, in particular with regard to the consumer protection code, the consumer information campaign, themed inspections and our cost surveys.

We were delighted that the European Commission recognised this work earlier in the year when the Commissioner for Consumer Protection, Ms Meglena Kuneva, presented us with an award for the best financial services campaign in the EU for our itsyourmoney.ie website and the related promotional campaign. The award has given us further opportunities to engage with the EU to promote the importance of clear and independent information for consumers.

In the context of our educational role, our activities are in line with EU recommendations on best practice in financial education and one of our senior executives has applied for membership of the European Commission expert group on financial education. We are also contributing to the OECD international network on financial education through our participation at OECD conferences and via the organisation's international gateway for financial education.

Our work continues to be dominated by our commitment, both domestically and in the international financial services sphere, to better regulation disciplines. We strongly support the growing emphasis on better regulation in the EU. Such is our commitment that last year we established an EU co-ordination unit to engage with key stakeholders such as consumers in identifying EU policy matters of significance.

Consumer issues lie at the heart of our work. In light of the extent to which regulation is influenced by international developments, we are continually mindful of the need to promote the interests of Irish consumers in international policy discussions. This is not only a feature of our work in measures relating to retail financial services, such as the Commission's White Paper on the Integration of EU Mortgage Credit Markets, but also in the more technical areas of regulation where such measures have an indirect impact. We continue to engage, at an early stage of policy development, with those organisations that represent the interests of consumers, including the Financial Regulator's consumer consultative panel. We also reinforce our strong representation of consumers in EU and international discussions.

I again thank members for the opportunity to address the committee. We will be glad to answer any questions they may wish to pose.

Chairman

Our next presentation is by Ms Eimer O'Rourke of the Irish Banking Federation.

Ms Eimer O’Rourke

I am head of banking at the Irish Banking Federation. I have provided a submission for the committee. I intend to read through it and share with members some observations on the White Paper.

The Irish Banking Federation has been actively engaged in the consultative process through its membership of the European Mortgage Federation and the European Banking Federation. I sit on the executive Committee of the European Mortgage Federation. I also had the privilege to participate directly in one of the layers of consumer dialogue which took place as part of this process. I sat on the mortgage industry and consumer expert group, MICEG, one of the groups which considered a number of consumer protection issues. It is important to note that we have an ongoing and active relationship with the various institutions at EU level. On several occasions, speakers from the European Commission addressed our members and informed them about the project and how it has evolved.

The White Paper was published in December 2007. It contains a high level overview of European residential mortgage markets, which comprise approximately 47% of the EU's GDP. We commend the Commission on the process it carried out in respect of the White Paper. It engaged in extensive consultations and had discussions with a wide range of stakeholders, which is a welcome development from our perspective.

The headline objective of the White Paper is the integration of European markets. The general understanding is that this would lead to markets becoming more homogeneous and customers engaging in cross-border shopping. It is clearly recognised in the White Paper that consumers prefer to shop locally. One is unlikely to encourage a consumer in France to investigate the possibility of taking out a loan with a German or Irish mortgage lender whose operations are not physically located on French territory.

The focus within the Commission is on supply driven integration. The idea is to see how lenders, rather than consumers, might be drawn across borders. It is important to bear this in mind. The White Paper focuses on consumer protection. There is no doubt that optimising consumer confidence and empowerment is an essential part of any market. It must be recognised that if we want to achieve supply driven integration, we must consider the factors likely to feed into the decision any business makes as to whether it will stay in one market or move into several other markets. Equal emphasis must be placed on these factors. Towards the end of our discussion on the White Paper, we will talk a little more about some of the enabling factors identified in it.

While the Commission likes to see entities, banks, etc. use the passport mechanism when engaging cross-border, many times lenders have shown a preference for acquisition. In reality, what we see is lenders acquiring an entity or establishing a new subsidiary within a member state. The reason for acquiring an entity is that this tends to give lenders a direct line to information on local practice and skills necessary for the local market and to understanding local culture. This is probably the reason this approach is used rather than the passport mechanism.

I will provide a brief overview of the mortgage market in Ireland. Between 2005 and 2007 some 500,000 mortgages were drawn down, with a value of over €100 billion. Growth in the market has eased since 2006, but we continue to see a significant number of new mortgages granted each month. We have 12 mainstream lenders operating, with over €144 billion outstanding at the end of May. These are the most recent figures available from the Central Bank.

Looking at the mortgage finance market, the second slide demonstrates that there are clear segments within the market. For example, we are all familiar with first-time buyers, who form an important part of the market and account for approximately 15% of borrowers. Other distinct sectors are residential investment purchasers and those who purchase property to trade up. I draw the committee's attention to those borrowers who remortgage or switch lenders. They form a significant element of the market. Approximately 20% of borrowers are switching from one mortgage lender to another, which is clearly consistent with the Commission's stated objective of customer mobility.

The next slide demonstrates that our membership represents a diversity of domestic and foreign owned institutions. The market is characterised by competitive initiatives taken by a wide range of institutions which drive competition and customer choice. When we talk about integration, we also look to this slide. As committee members can see, the market in Ireland is relatively integrated, as compared to that in other member states. It can be seen that a number of institutions are owned by entities from other member states.

The next slide is headed "foreign bank penetration". This demonstrates again the high level of integration in the Irish banking market, as against other EU markets. It shows that we have a domestic institution penetration rate of approximately 60% which would equates to the position in Germany. If we look at other countries, there is an 80% domestic institution penetration rate in Denmark, while in France and the United Kingdom it is reckoned to be 100%, which means a low level of integration. It is important to bear this in mind when assessing the White Paper.

I would like to discuss the core consumer protection issues identified in the White Paper, of which there are four - precontractual information, APR, responsible lending and borrowing, and early repayment. With regard to precontractual information, a code of conduct to which our members signed up was agreed at EU level in 2001. We adhere to this code which involves the provision of precontractual information. In general terms, this means the mortgage information documents people receive when receiving up-front information on mortgages will comply with the code which sets out the headings that should be touched on in the documents.

A second element in respect of the provision of precontractual information is the European standardised information sheet, ESIS, which sets out in a prescriptive format specific information that must be given. In Ireland this is automatically generated and provided with every loan offer. The discussion at EU level is on whether the ESIS should be updated. We are open to updating it, as appropriate. If information is required, it should be included. What we hear mentioned, for example, is information on the need to identify and advise people on whether there is a currency exchange risk. This is not as relevant for us, but it could be for newer EU member states. In Ireland there is a high level of compliance with the code, but this is not necessarily the case in other EU member states. There are some difficulties in that regard.

One caveat in this area is that we need to be aware of the risks of information overload. There is always a risk that we will end up giving the borrower a wheelbarrow full of paper to bring away and then regard him as being informed when this is not the case. We need to ensure that we are giving targeted and meaningful information. To do this, we will need to ensure that if proposals are developed at EU level, they are appropriately aligned with any domestic requirements. I would be reasonably confident that we can work with the Financial Regulator to ensure that such outcomes are feasible.

The second consumer protection issue which is addressed in some detail in the White Paper is the issue of APR and whether there should be an EU definition of APR. We currently have a domestic definition in respect of mortgages but the definition of consumer credit is broadly agreed at EU level. The definition comprises two parts. One part is the mathematical formula and the other is the costs included. The mathematical formula is not particularly contentious as it is essentially a discounted cash flow or an internal rate of return. It is set out in domestic legislation and a similar formula would probably be used for any EU level measure. Views vary on the range of one-off costs which should be brought into the calculation. Our view is to keep it simple and comparable and that we should keep to including just one-off costs that are payable by the borrower to the lender for the lender's benefits. In such an example, one would not include taxes or third party costs. This view is reasonably consistent with the APR currently used in the market.

The third consumer protection piece which is dealt with in the White Paper is that of responsible lending and borrowing. We support the Commission's work programme in this area. There is obviously a need to ensure that the credit worthiness of borrowers is appropriately assessed in the loan application process. We need to ensure that we have balanced proposals in this regard. Some consumers need more protection while others need less. The Commission recognises the need for borrowers to be open and honest with respect to the information they provide in applying for a loan.

One specific area that arises in this context is that of access to credit databases. We fully support the concept that there should be access to credit databases across borders. If, for argument's sake, a French lender wants to give a loan to an Irish borrower, he should be able to check the Irish credit database and find out the credit history of the borrower. This makes perfect sense from a legal perspective. I should warn that making something legally feasible does not implement it in an operational sense. These systems are all developed across all the member states. They are built on different IT platforms and they have different protocols attaching, so there are operational challenges, although it is a reasonable objective.

The other point I wish to flag at this stage is fraud risk. A new entrant into a market is particularly susceptible to fraud risk and it is important to ensure they have access to any market information available with respect to fraud. This is an aspect on which the White Paper has not focused but is perhaps relevant.

In terms of working out the complexities of credit histories, databases, etc., the EU is establishing an expert group on credit histories. We hope to closely track the development of that group and await the outcome.

One other point in the context of responsible lending is that the White Paper gives a high level overview rather than a detailed assessment of lending practices in different countries. It is important to draw a distinction between the lending practices widely in use in the EU and those which took place in the US leading to the crisis in sub-prime lending. In the EU the credit decision is very much based on the lender's assessment of the candidate borrower's capacity to repay. A forensic level of underwriting takes place. The US model was based on automated credit scoring which focused on property valuation expectations rather than on repayment capacity.

It is also worth being aware of the fact that we have a fairly robust system in Ireland and this has been noted by many commentators at EU level. Even the European mortgage federation has pointed to Ireland as being a model of best practice when alluding to the stress-testing requirements and the consumer protection code, etc. Our members work hard to ensure that they meet all the requirements set out in those codes.

The final consumer protection piece which is explicitly referenced in the White Paper is that of early repayment. This deals with the notion that a consumer has a legal right to repay a loan whenever he or she wishes prior to the original term. This is a legal right in Irish law but this is not the case in all member states. As an industry we are reasonably open-minded as to the results of the discussion. It is a very sensitive issue in some member states and some of them take the view that this right to early repayment is not compatible with some of the funding instruments in use. That is the subject of ongoing discussion. Such member states might argue that having the right to early repayment here is a barrier to entry because entities from such countries cannot freely market their products since it is not compatible with the early right to repayment. This is an important issue and impacts on several of the objectives that the EU talks about. It impacts on customer mobility, if one wants to move from one institution to another. It impacts on product diversity, if it means certain products will not make it to the market. There is no simple and clear solution and it is a sensitive issue for some people.

In addition to the consumer protection issues, the paper refers to mortgage funding, and obviously this has renewed relevance at the present time. It raises issues that will be examined by the Commission and we are happy to note that many of these are now under discussion. The IBF is involved in various initiatives aimed at addressing some of these issues. For example, we are involved in the European Banking Federation's task force on financial turmoil and the European Securitisation Round Table. Both of those forums are working to deliver industry-based solutions to some of the issues that have presented over the last while. For example, the industry has developed proposals to improve the reporting of securitisation exposures of banks. This, it is hoped, will lead to improved investor confidence in the financial system. The industry also provides a quarterly data report, which will assist policymakers in monitoring trends. Another range of initiatives has been delivered by the industry in respect of making information available to investors because clearly it is important that they should be able to make fully informed decisions. In this regard, for instance, there are codes of conduct about information disclosure as well as the standardisation of definitions to allow understanding and comparability.

The final issue in the funding space addressed in the paper is that of liquidity management. The Irish banks are particularly well placed in this regard because a new liquidity regime was introduced in July 2007, which fortuitously preceded the events that took place in the markets last autumn. This liquidity regime is again seen as a robust best practice-type model and the European Commission has invited the Committee of European Banking Supervisors, CEBS, to look at this area. CEBS has now issued a consultation paper on liquidity, so again that is more about what is ongoing at the moment in this particular space.

I alluded at the start to enabling measures and to the idea that agreement must be reached on how lenders can be enticed to cross borders - which is the objective of the paper. One of the aspects of the paper we consider to be quite important is the infrastructural area such as land registration. Current land registration procedures in Ireland are slow, manual and paper-based. As such, they have a potential to deter market entrants who are accustomed to much more efficient systems. This impacts on our national competitiveness. Ireland ranked eighth overall for ease of doing business in the World Bank's Doing Business report for 2008. However, it was only 72nd for registering property, so it is an area of specific concern to Irish business.

In terms of this particular area, the Commission will publish updated scoreboards that will provide objective information on cost and duration of registration etc. in member states, which should introduce more transparency and reliability. Also, it is expected that, subject to an impact assessment, it will recommend a proposal in 2008 that land registers should be available on-line. This is quite important to us because online registration is very close to the area of e-conveyancing. The committee may have seen reports in the media today about this, as I believe the Law Society published something yesterday. We are strongly supportive of initiatives in this area because e-conveyancing will basically see all the stakeholders, whether public sector such as the property registration authority, the Revenue Commissioners and planning authorities, or private sector such as solicitors, estate agents and financial institutions, ultimately connected in one centralised hub. This will allow much greater transparency, efficiency, consistency and speed in terms of property transactions. This would benefit consumers both directly in terms of their basic transactions and indirectly through potentially attracting more lenders to the market. We encourage public sector representatives to support and prioritise conveyancy initiatives as being consistent with the White Paper.

In its White Paper the Commission has taken a thorough and rigorous approach to this area. It is conducting studies of various issues, several of which have involved participation by members of the Irish Banking Federation, including those relating to credit intermediaries, non-deposit taking lenders and equity release. These studies are helpful to us, as they should serve to deepen and broaden knowledge of the various European markets.

We support the objectives set out in the White Paper, including cross-border supply, product diversity, consumer confidence and customer mobility. However, if the objective is to achieve integration, it must be done in a supplier-led way. Therefore, we must have regard to what will entice suppliers to engage in cross-border activity.

I thank members for their patience. With my colleague, Mr. Mike Percival, our wholesale banking and legal executive, I will be pleased to answer any questions.

Mr. Brendan Kelly

I thank the committee for the opportunity to participate in this discussion. Financial Services Ireland is a unit within IBEC which represents the financial services industry. We have some 140 members active in every aspect of the financial services industry, including domestic and international banking, domestic and international insurance, fund administration, asset management and a range of related services.

Given the diversity of our membership base, I do not profess to have a strong or detailed opinion on the impact of the Commission's proposal on the domestic mortgage industry. Financial Services Ireland's interest in the proposal is largely derived from its broader interest in the creation of an internal market in financial services. The committee is aware that the success of Ireland's financial services industry has been largely due to the opening up of markets throughout Europe for a range of financial products. This ongoing process is of significant interest to the industry. As our initial submission made clear, we fully support the Commission's policy of promoting further integration of EU markets in financial services. There is no doubt that such a process brings about greater consumer choice, more efficient markets and lower costs for consumers.

Notwithstanding our support for this broad policy, each individual proposal must be looked at on its own merits and subjected to rigorous analysis. In simple terms, it is not merely what the Commission wishes to achieve but how it goes about doing it. The financial services industry is highly complex and regulatory and legislative intervention must be carefully considered. The cost of implementing new measures can be substantial and must be justified on the basis that they will deliver tangible benefits for consumers. For this reason, we welcome the Commission's decision to conduct a study of the costs and benefits of policy options in this area. Although the Commission has produced an impact assessment of this topic, the commercial environment has changed significantly since it was prepared and a fresh analysis may be warranted. I will return to the specific areas we would like to see addressed. Before doing so, it is important that this proposal be placed in context.

Based on the title of the White Paper, members would be forgiven for thinking the EU mortgage credit market is not already integrated to a significant extent. However, this is not entirely accurate. On the supply side, mortgage lenders compete against each other to raise funds on a pan-European level.

Similarly, under existing legislation, it is open to any bank or mortgage provider to establish a presence in the Irish market. Many banks and mortgage providers are owned by parent groups which operate in a number of European member states. For this reason, the mortgage market in this and many other member states is highly competitive. Members have been referred to statistics in this regard. In Ireland alone, 16 mortgage providers offer a wide range of products. In simple terms, if a new product or pricing structure works in one market, there are clear commercial reasons for mortgage providers to introduce it elsewhere, provided that it makes sense and there is consumer demand for the product in question.

The result is there has been an increasing level of consumer choice. It is interesting to note that in the course of preparing this proposal the Commission produced a matrix which is set out in Annex 1 of the White Paper showing the availability of six mortgage types across the 27 member states. That gives a possible 162 combinations of mortgage types that one might seek in the 27 member states, out of which there were only 14 incidences of non-availability. In simple terms, most mortgages are available to most consumers in most member states. Accordingly, based on this research, it is not surprising that, as noted, the level of consumer demand for cross-border mortgages, that is, for example, a mortgage bought by an Irish person from a French company based in France which does not have a presence in Ireland, is only at approximately 3% on a Europe-wide basis.

As I mentioned, the Commission has conducted an impact assessment of this proposal which suggested the benefits to the European economy would be in the order of €94.6 billion by 2015. However, this estimate was based on a study conducted by a private consultancy firm, London Economics, which, in turn, made a number of assumptions. It assumed there would be increased economic growth in the European Union during that period. It also assumed the broader availability of mortgage credit would promote greater house building, that the cost of raising funds in international markets would continue to fall and that mortgage debt as a percentage of GDP would rise across the European Union. In simple terms, it assumed that more people would be buying more houses and would be looking for more money, which underpinned the figure it arrived at of approximately €94.5 billion. Based on events in the past year or so, all these assumptions are open to question. It would be wise for the Commission to reconsider the headline figure attached to this proposal.

The costs of this proposal remain difficult to quantify, largely because of the range of approaches one can adopt and the policy options have not yet been nailed down. However, one estimate suggests it would cost approximately €2.4 billion initially to achieve the degree of harmonisation considered and a further €2.4 billion per annum thereafter. The European Commission has identified at least 19 obstacles, many of which have been touched on, to the provision of mortgages on a cross-border basis.

Before moving on, I draw the joint committee's attention to the comments of the Commissioner for Internal Market and Services, Mr. Charlie McCreevy, who noted last December that at the time he did not believe a directive would deliver the requisite added value to justify legislation and that more work would have to be done before a final decision was taken. These are sentiments we broadly support. In particular, greater consideration should be given to whether this is an issue that is best addressed at an EU level or one that, in accordance with the principles of subsidiarity, might be better dealt with by member states.

One of the key themes to emerge from the Commission's research has been the lack of demand for such a product, although the same research indicates that the level of demand is higher in jurisdictions such as Ireland and the United Kingdom. These also are the jurisdictions that have some of the most competitive mortgage markets, as well as the greatest degree of flexibility within those markets. As members have heard, they also are the markets that have some of the most robust and credible consumer protection standards and that have made the greatest strides towards creating that cadre of empowered consumers that is widely recognised to be important to the promotion of greater cross-border trade.

At present, domestic law, including the Financial Regulator's consumer protection code, addresses many of the issues raised by the Commission. Legislation addresses issues such as tying mortgages to other products. There are requirements to ensure that products meet suitability and appropriateness requirements. These requirements, combined with the operation of general competition law principles and consumer awareness campaigns, have seen the so-called switcher market grow in recent years and have greatly reduced consumer inertia. This more fluid market, where consumers are more likely to shop around and seek the best value, is more attractive to new market entrants and has been one of the factors that made it possible for a small market such as Ireland to support a relatively large number of lenders. We see no reason why individual member states who would like to see their consumers benefit from lower costs and greater choice cannot adopt similar measures to make their markets more attractive to potential new entrants.

In conclusion, Financial Services Ireland supports the objective of promoting greater cross-border trade in retail financial services. We await the outcome of the Commission's assessment of the costs and benefits of the various policy options before finalising our thinking on this issue. How this is done is as important as what is done. We hope that this study will examine all of the various approaches that might be adopted and that it will provide a framework for the Commission's thinking on the subject. We see this as being the role of this committee and hope elected representatives take an interest in this issue to ensure the Commission examines all potential approaches.

I thank the Chairman for the invitation to address the committee today and look forward to answering any questions committee members might have.

Deputy Billy Timmins

I thank the various bodies and the Chairman for organising this meeting. It does not surprise me that the Single Market for residential mortgages is far from integrated. Consumer knowledge is at a low level in Ireland, before one considers going elsewhere for mortgages. I note the submissions made in February, some of which may be slightly dated. Ms O'Dea refers to the regulatory authority and the extent of consumer knowledge. Perhaps Ms O'Dea alluded to research that was to be published in June. Can she emphasise what that research shows about consumer knowledge? Is there a percentage of residential mortgages from companies from abroad?

Reference was made to increasing responsible lending, which has been a topical issue in recent times. What methods can be examined to increase responsible lending? Ms O'Dea referred to conveyancing and land registry, which is cumbersome. I do not know how it works in other countries but have heard that it works better in other European countries than it does here. It adds to the costs of people taking out mortgages. The system of land registry needs to be overhauled. There is a correlation between economic activity and prosperity and the ease with which land can be registered and details accessed.

Can a solicitor act for both a borrower and a lender? Can the bank, for ease or to cut down on the financial burden on the person buying, employ the same solicitor? If so, is there an obligation on the banking authorities to inform the person seeking the loan from them that the solicitor is operating for both parties? If the question is not understood I will clarify it. I am interested in this because I am aware that it has happened.

I have a number of questions for the Irish Banking Federation. With regard to customer mobility, a figure of 20% in the fourth quarter of 2007 was mentioned. Is cost a prohibitive factor in customer mobility? An issue which is not part of this but which interests me is credit fraud and credit risk. What is the extent of fraud? There have been a number of high-profile cases in recent months. I am sure fraud has been with us since time began. Will the delegation outline the extent of fraud with regard to residential mortgages?

In the late 1980s endowment mortgages were great products. Many of them are due to be completed now. Is this proving a difficulty? Many people would not have accumulated enough money to repay their mortgages. The issue has received airing but I have not heard it recently.

The various obstacles which exist were mentioned. One is the consumer's right of early repayment. I assume this facility does not exist in most other European countries. Perhaps my interpretation is wrong. How does the delegation see this problem being overcome? Must other countries move to that position or must we row back on it? I would not be opposed to us rowing back on it. It is a good facility.

My next question is addressed to Financial Services Ireland which, reading between the lines, is not too happy with the White Paper. Mr. Kelly asked whether integrating mortgage markets at EU level is desirable at present. Does he believe it is desirable at any time?

Deputy Noel Treacy

I endorse what Deputy Timmins stated. I welcome the witnesses from the institutions represented and thank them for their presentations. Mr. Kelly represents 140 members. What is the gross value of the reserves of these 140 members and what is their total liquidity?

My next question is relevant to Ms O'Dea and Ms O'Rourke. It is my opinion that the banking sector is driven by one premise, which is a return of profit to its investors. It is moving to a cashless, paperless operation. As a legislator, I believe a person joining the banking services, becoming a member of a bank and opening a bank account is governed by our Constitution and our laws on the day he or she joins. Once the person joins he or she has certain rights and no matter how the law changes those rights are only changed and not obliterated. On this basis, banks have imposed exorbitant charges on those who trade and handle a great deal of cash, particularly in the retail sector. This is draconian, uncompetitive and unfair to those who have no option but to handle cash on behalf of consumers. Why is there such a drive towards this?

What progress is being made regarding the mutual enforcement of judgments throughout the European Union? Does it work well? Solicitor's undertakings were mentioned. These were always strong in the past but there seems to have been a diminution of their value. Is this to the detriment of new applicants for mortgages? If so, what has happened to create this environment? Taking into account the bonding situation with solicitors and the fact they are highly regulated, although it is a self-regulated sector, how will this impact on new applicants for mortgages? What comparisons have been made between banking and financial services in the eurozone and how do we rate? What rights do we have as consumers within the eurozone to do business outside the Republic of Ireland on a competitive basis?

The witnesses all referred to the robustness of the banking system. In the past three decades, we have been through three economic downturns. During that time, the banking system failed consumers and the nation by not providing the flexibility that was needed to trade out of the economic difficulties that prevailed. Our economy and our banking system are robust but is there sufficient flexibility within the banking system to allow those who have taken risks in recent years to be recapitalised and given the necessary breathing space and to allow, with Government leadership, renewed risk taking and increased consumer demand to enable us to trade into a fluid economic situation as we go forward?

My colleague, Deputy Timmins, referred to changing the laws governing conveyancing, property registration and so forth. While we have made major progress in this area, we have a very complicated legal system pertaining to land, which is an historic legacy from previous regimes. What could the banking system offer to us as an incentive to expedite property transactions? In the past when a bank held title, it often held on to it without disclosing to either the owners of the title or the successors to it that it still held the title, where there would be no liabilities against it. The banking system would have to give a clear indication of how it would bring greater flexibility to land conveyancing.

Has the operation of the Family Home Protection Act been satisfactory? Is there absolute transparency within the banking system to ensure that all parties under the Act are fully aware of their rights in successive dealings, rather than the instant dealings under the Act, with the banking institution? Once the initial dealings have been discharged by borrowers, banks have often held on to title under the Act and used that security for other reasons, without disclosing the fact to those concerned. Has that situation improved at all?

Senator Déirdre de Búrca

I thank all the speakers for their educational and informative presentations on the integration of EU mortgage credit markets. I wish to ask Ms Mary O'Dea about the work of the Irish Financial Services Regulatory Authority. IFSRA will be critical in terms of dealing with any European Commission proposals to create an EU-wide mortgage credit market. Ms O'Dea mentioned that the job of the authority is to help consumers to make informed financial decisions in a safe and fair market and to foster sound, dynamic financial institutions in Ireland. The recent sub-prime mortgage crisis has engendered a lot of nervousness among consumers. They are very concerned about the proper regulation of financial services and so forth. It was reassuring to hear a number of speakers refer to the fact that Ireland is seen as having some of the most stringent consumer protection requirements relating to these kinds of services.

Ms O'Dea also mentioned that one of the roles of the authority is to foster personal finance education through the formulation of policy and key development tools. I note that the authority has developed teaching materials for schools, which is very important. Taking out a mortgage for most people is quite a challenge and if they are to move across borders and conduct such transactions in other EU states with different cultures, languages, regulatory systems and so forth, they must be well informed and confident. Personal financial education will be important, as will the consumer research being conducted by the Financial Regulator to assess the financial capabilities of consumers in Ireland. It will be useful to know exactly the kind of education and support Irish consumers need.

Ms O'Dea concurs with the European Commission's assessment that improving the quality and comparability of information is necessary to enable consumers to shop around the European market for the most appropriate mortgage product. How difficult will it be to provide information that allows services to be compared? Problems arise in terms of language, differing regulatory systems and data protection. Over the past year consumers have become aware that information held on them by financial institutions had been mislaid. The Financial Regulator supports access to credit registers for EU mortgage lenders but how will the issue of date protection be addressed? I imagine that consumers would be very nervous if they felt a strong system was not in place to control access to confidential information by mortgage lenders throughout the European Union.

I agree that the Land Registry needs to provide greater transparency and reliability. As a former county councillor, I am aware that many gaps exist in the system and we need to focus on improving it.

In regard to the Financial Services Ireland presentation, it was interesting to hear that 16 different mortgage providers are operating in Ireland alone. According to the Commission's research, the present level of consumer demand for cross-border mortgages is negligible, with only 3% of consumers indicating an interest in purchasing such a product. In Mr. Kelly's opinion, what is the reason for that and what is deterring consumers? I cannot decide from the presentations I have heard whether the problem in creating an EU-wide mortgage credit market arises from the difficulty in enticing suppliers or consumers to move across borders. Perhaps Mr. Kelly can address that issue.

I am intrigued by his reservations on the need for EU legislation to create an EU-wide market in financial services, and mortgage credit in particular, rather than leaving the matter to member states. I ask him to elaborate on how it could be managed by member states.

Deputy Joe Costello

I apologise for not being present during most of the presentations. However, I read the submissions from the Irish Bankers Federation, Financial Services Ireland and the Financial Regulator.

The question of a Single Market for mortgage credit should not be contentious. One of the four pillars of the European Union is the free movement of capital, so the same principle should apply for individual citizens as for financial institutions. People looking for mortgages should have the same opportunities as high-powered financial institutions to access cheap and cheerful money. It should be the responsibility of the European Union to provide the framework to ensure a residential mortgage holder or consumer in Ireland is able to access the cheapest mortgage product available in the Union. Why should that not be the principle? I am disappointed with the initial response from Financial Services Ireland, which seems to throw cold water on the whole issue. It seems as if it is using the current global financial markets and credit turmoil as an argument for not going forward. If credit is tight in the global market, as it is in Ireland where we see builders going to the wall because they do not have the necessary cash flow and financial institutions are demanding repayments, surely this is an opportunity to move in this direction. This should be a basic principle and there should be no questioning that principle. Everybody would agree with that.

Tax harmonisation was part of the discussions on the Lisbon Treaty and it gave rise to great confusion. The other aspect of the discussion related to the common consolidated tax base. Thankfully, President Sarkozy has now clearly separated the two by making it clear the French Presidency is not interested in harmonisation, though it is interested in the consolidated tax base. The latter would have the effect of creating a cross-border regulatory structure so that the tax systems in the various countries of the Union could be incorporated in a common tax base without companies, large and small, having to pay big charges to do business in different countries. Can the same type of regulatory mechanism be put forward as part of a common consolidated credit base? As with the tax base, a regulatory mechanism operating across all countries could help cut through many of the extra costs that exist at the moment.

To operate effectively, the Irish market needs the Financial Regulator. I presume there is a need for a European-wide financial regulator to cover this area and that such an office would be part of the package that would be put together. Is this not something that should have been done some time ago? It has not been done because of the many difficulties involved. It was said earlier that local borrowers wished to borrow locally but the only reason for that is that, in a country like Ireland, a local borrower does not have awareness of the markets and of the cost-cutting deals that might be available elsewhere. Anybody will shop around for the best deal if they know about it and it is readily available. Surely that is the basis on which all consumers operate and the basis on which we are told to operate. If there is a better deal in Germany a borrower in another European member state, in this case Ireland, should have access to it and that should be a priority for the Commission.

The new principle applying to conveyancing and registration is that it is no longer a case of caveat emptor, or “buyer beware”. There is now a requirement to share responsibilities so that a vendor will also have to enter a caveat. A combination of both should result in a much more expeditious conveyancing process in cases of residential mortgages. We seem to be moving forward in that regard with electronic registration and other things. This seems to be the ideal time to move forward.

Senator Feargal Quinn

With Senator de Búrca, I have found this very educational. I learned much today and in preparing for the meeting. It reminds me a great deal of the grocery business, which we all claim is very competitive, with so many companies involved, that nothing must be done about it. Both Mr. Brendan Kelly's and, in particular, Ms Eimer O'Rourke's, data shows far more than 16 competitors. It looks like it is a very competitive market. Is there a danger in a market as competitive as it appears to be, if all these are in competition in this way?

I note the European Central Bank expressed some reservations about the White Paper and warned that the risks to financial stability would have to be watched very carefully. It indicated that sub-prime mortgages in the United States have shown that a high degree of integration of mortgage finance and the development of globally used products pose massive risks to financial stability. It also speaks of the similarity between the United States and Europe. It seems that Ireland stands out as an economy which has been dominated by housing and has parallels with the American housing market, where the inventory of unsold homes has hit a 20-year high. That figure is from Capital Economics. In such a competitive market, I wonder if there is a danger that what has happened in the United States will possibly happen here.

I looked at information from the Council of Mortgage Lenders in the United Kingdom, which represents 98% of the UK's residential mortgage market. The British are usually very cool to any EU proposals but they have, understandably, stated they do not want to see a second tier of EU rules which simply duplicate national regulations and require more paperwork. I was impressed when Ms Mary O'Dea stated that a regulatory impact analysis has been done and I hope this will always occur with regard to any suggestions in the area.

There is another issue that concerns me. Is there a possibility that the market data in the White Paper is outdated? It is two and a half years old and, as Mr. Brendan Kelly said, it came from London Economics or another group. If it is two and half years old, in a market that has changed so dramatically in recent times is there a danger it will be out of date?

The Financial Times recently reported that Commissioner Charlie McCreevy is expected to keep the threat of legislation on hand, telling member states that more formal measures have not been ruled out. This is supposed to be voluntary but it must be asked whether the proposals are voluntary. The Commission seems to be leaning on member states to adopt certain preliminary measures into their own national rules, set against a threat to legislate if they do not implement the measures.

If member states such as Ireland were to choose not to follow the proposals, will the European Commission turn these recommendations into directives? There are those of us who are enthusiastic about a Europe that can give all the benefits we can get, but we are also enthusiastic about subsidiarity. Any rules made closer to the citizen are better than those made in a centralised Europe. Is there a danger that in this case, if we are to have the open market that Deputy Costello speaks so enthusiastically about, we will not have a choice but to ensure the regulations are imposed on us from Brussels?

Mr. Colm Burke, MEP

I thank all the speakers for their contributions this morning, which contained much information. I am a member of the Internal Market committee in the European Parliament and it is interesting, in talking about interest rates, that we recently pushed through Parliament a new regulation on small loans of between €200 and €75,000. They are aimed at household equipment, renovations etc. An interesting point in that debate was the difference between member states in terms of interest rates applied. Ireland has the second lowest rates. Across Europe, rates vary between 6% and 12%. I am talking about the lower end of the market rather than mortgages for houses or commercial buildings. The fact that Ireland has the second lowest rates gives an indication of the competition within Ireland. This is welcome. I have not had the opportunity to check mortgage figures across Europe. What the Commission is trying to do is to create competition to ensure that consumers across Europe are on a level playing field in terms of what is available to them. I do not envisage that Irish people will be forced to go to the UK, Spain or France to borrow, as the Irish market is quite competitive.

Following on from the comments of a number of other people, now that there is a lull in the property market, it is an ideal time to review what has occurred over the past ten or 20 years. Before I went to the European Parliament I had been a practising member of the legal profession for more than 20 years. When I started off in this profession I had to hand over five or six documents to draw down a mortgage, but I must now hand over between 50 and 60 documents. We have lost a major opportunity over the past 20 years. For example, when builders bought Registry of Deeds property, there was no procedure in place to force registration with the Land Registry. For every house we are handing over 50 or 60 documents, whereas if we had forced registration with the Land Registry, things would be different. It is interesting how that rule applies to local authorities and State agencies. When they buy property they are required to register it with the Land Registry, but we did not do that with regard to building estates. That represents a major lost opportunity. Now is the time to consider this matter. When the Land Registry was set up the idea was that over time it would become compulsory for each county to register Registry of Deeds property in the Land Registry. That rule has only been applied to two counties in the past 56 years.

Another interesting point about land registration is that in the Middle East, for example, three-dimensional maps which show underground water pipes and services are being produced. We have not even entered into a discussion on that in Ireland. Now that there is a lull in the market we should consider all these issues. I refer not just to compulsory registration but also three-dimensional maps. It is not a difficult exercise; it is possible and it is being done in other countries.

We need to streamline the area of conveyancing. I welcome the Law Society proposals in this regard. As I said yesterday, the system of Registry of Deeds properties goes back more than 700 years. It is now time for a change. We need to put the required mechanisms in place. There are benefits for everyone. Consumers must adapt to a new system but so must the legal and banking professions, particularly lenders. Now is the time to do this.

As someone who comes from Cork, I wish to refer to the issue of centralisation in the banking world. We have discussed decentralisation in this country, particularly in the past five to ten years. One of the problems in terms of efficiency in the housing market is centralisation of certain services. If I write for a set of title documents I must collect them in Dublin. It takes up to three or four weeks to collect a set of title documents from someone who has a mortgage with any of the banks. At a time when we are talking about decentralisation, I am surprised this system has become so centralised in the past five to ten years. This is something that needs to be considered. There is no need for so much centralisation. For example, we have been very lucky in the south as the Land Registry is now based in Waterford. There is no reason everything in the banking world should be centralised. We find that there are few local decisions on financial matters within the banks. In financial institutions all decisions are taken at head office, which causes problems in many ways. The federation and its members might examine this issue. I am not sure the right decision was taken in that regard.

These are some of the issues that come to mind. The idea coming from the Commission is about making a level playing field across Europe. The level of competition in Ireland is clearly evident in the fact that we were the second lowest player in smaller loans. I assume the same applies in respect of house loans.

Senator Jim Walsh

I join in the welcome extended to the delegation. Senator Quinn mentioned the sub-prime issue. There is general recognition now that there was a failure on the part of regulatory authorities, especially in the United States, to foresee the likely outcome of what was occurring in the area of sub-prime mortgages. Banks and financial institutions parcelled up such loans and sold them to other investors, probably without the normal due diligence. There was a decline in standards. It is easy to be wise in hindsight but it must be asked what lessons can be learned from it.

I am critical of the Irish regulatory authority. From 2005, despite the fact that it was clear activity in the construction industry and house prices were at an unsustainable level, the banking industry decided to prime business even further by giving 100%, and, in some cases, 110% loans. The regulatory authority did not take any action in that regard of which I am aware. Bank solvency and liquidity are serious issues for us now so I concentrate on the statement that banks are to foster sound, dynamic financial institutions rather than the consumer. The banks must exist so that the consumer may benefit. I ask for comment on that.

A major aspect of the challenge facing construction finance and, the Government is the significant overhang in the construction industry, the inventory to which Senator Quinn referred, which I have heard estimated at 70,000 residential units. That amounts to probably two years of building requirement. The longer that sits there, the greater its impact will be on the construction industry, on jobs in the industry, on banks and their solvency, on employment and on the greater economy because of the consequent effects on bank liquidity. What initiative do the delegates believe should be taken in that area to meet that challenge and address it in a sensible way to restore confidence to the consumer, the construction sector and the banking sector? It is not an easy problem to resolve but it will test how the economy is to move forward in the short to medium term.

Chairman

The ladies and gentlemen of the delegation have a wide basket from which to choose. I shall add a couple of comments. First, several speakers mentioned the need, now greater than before, for consumer protection. The current degree of indebtedness of the public in respect of mortgages is an issue that must be referred to by both banking and regulatory sectors. For example, a practice was established in recent years which made 100% lending the order of the day. In fact, it was much more than that as those of us know who live in areas where a great deal of development took place. A development would be put on the market in the morning for a price deemed to be 100% of the market value at the time and in the evening the same property would have achieved a new value which was higher by 30%. These were not isolated cases. Was that good practice? Was there a responsibility on the part of the various financial institutions and the regulatory authority to intervene to ensure the integrity of the property markets and the financial services system were not jeopardised?

It has been obvious to everybody, and particularly to those of us who spend time dealing with the public, that for the past five to seven years first-time buyers have been squeezed between investors and the construction side. Anxious to get as quick a return as possible on its investment in the construction industry, the financial services sector encouraged investors into the marketplace, to the exclusion of many first-time buyers. That is sad for two reasons. First, it put a greater share of the equity into the hands of fewer people, which is dangerous. Second, it significantly discommoded first-time buyers and failed to spread liability. Instead of being able to buy a property, first-time buyers were forced to rent from an investor who was funded by the financial institutions. As a result the potential first-time buyer is still renting after five to seven years and has no chance of getting into the market unless something dramatic happens.

The issue of conveyancing was raised by Mr. Colm Burke, MEP. That is an area that certainly needs to be tidied up. I am sure other members have dealt with extraordinary situations where three or four properties were registered, superimposed on one another, sometimes in the names of two or three people. I do not know how that can happen, but the multitude of paperwork that is now required does not help. It should be possible to resolve situations by means of simple searches and simple documentation, but that no longer seems possible.

Several speakers referred to the need for the Single Market to apply across the board. It does not even go near it. Neither does it apply to the registration of property. There are significant differences between various European countries in terms of the entitlements and rights of purchasers of property. In some European countries purchasers have no rights and no protection, despite the fact that financial institutions and others deem an investment to be a good one and allow and encourage it. Many people have been stung. Maybe they do not always tell us the full story. It could be that they were not prudent in the way they went about their business. Nevertheless, the system leaves much to be desired.

E-technology is of significant benefit in that it will speed up land registry proceedings and it will speed up the banking system. However, it will also increase the vulnerability of any system to which it is applied because the extent of speculation right across the world is much greater now than it was 25 or 30 years ago. Will the Commission's paper be able to deal with that? I will not go into the points raised by speakers about scams over the past ten years where individuals within banking and financial services rendered financial institutions useless and, in some cases, penniless. There was not only one instance of this but several. To what extent can we expect protection of the integrity of the system?

A number of speakers mentioned that the banking and financial services systems seem to be totally concerned with their responsibility to their investors. There is no doubt they have a responsibility to their investor but they have other fiduciary responsibilities in terms of the delivery of a financial service because of the impact of those finances and that banking system on the economy in general. Somebody might refer to that.

When we pull into a filling station these days we pay through the nose for the fuel we put into our vehicles, regardless of their size. I attended a meeting in a European country recently at which the issue of an oil shortage arose and a representative of a major oil producing country commented that they did not know what the market was talking about, they were producing more oil than ever before, they can produce even more, and continue to produce it for the next 100 years, but that speculators in the marketplace were storing oil in tankers throughout the world. That is a serious allegation but I am sure there is some truth in it because all the oil price increases in the past 12 or 14 months cannot be put down to scarcity. We hear the argument about China and India using more oil but many of those people still get around on push bikes and rickshaws, some of which we now have in our own city.

Because of modern technology it is much easier for a speculator to freeze a section of the market and invest in it, particularly if interest rates internationally are low. That is the best time to do it. It is the same with the property business. When interest rates are low, that is the time the speculator has most to gain because all he or she has to do is hold on to the product for a few weeks, or a few days in some situations.

I will not bore Ms O'Dea by airing all my other grievances because she knows them by now. They have been referred to by all the speakers around the table but some issues have arisen that are unsatisfactory from the consumers point of view and from a national economic point of view. There is a serious responsibility in the entire area of financial services that must be carefully monitored. We had three presentations. We will now have a short riposte from each person who wishes to come forward.

Ms Mary O’Dea

I thank the Chairman, Deputies and Senators for their interesting and informative questions. I would like to address some points made on one issue, namely, responsible lending. While that term does not feature in our legislation we believe that lenders are responsible. The issue has arisen whereby in lending money or doing their business, generally speaking, banks and mortgage providers are operating for the benefit of their shareholders. That is true, and it is true of most businesses that provide goods and services to consumers. They operate to produce profits for their shareholders. However, banks and financial institutions are different because they are regulated. Not only do they have responsibilities to their shareholders but they have responsibilities under law and they must comply with those legal responsibilities. Some of those include detailed responsibilities to their customers.

In terms of responsible lending, the financial regulator's office has included provisions that are now legally enforceable to define what we mean by "responsible lending". That covers the issue of suitability, which members will have heard us discuss. That concept came about in respect of investment products. When somebody was being sold an investment product, the idea was that the person might not be able to fully understand the product and there was an onus on the firm to sell them a product that was suitable for them and be able to demonstrate that after the event. That is still the case. We have taken that concept and extended it into the lending area which, on the face of it, appears a little more straightforward when somebody is taking out a loan, but it is not because we do not want people extending loans they cannot afford to pay back.

In keeping with the suitability requirements that came into force last year, we require lenders to gather information on their clients - including on their loans - in order to determine whether products are suitable to their needs. That is one aspect of responsible lending.

The second aspect relates to competence. One member referred to endowment mortgages in this regard. Some of our requirements relate to the competence of those selling products in the context of whether they understand the nature of what they are selling. How can a person selling a product possibly engage in a conversation with the individual who intends to buy it unless he or she fully understands the workings of what he or she is selling? We introduced statutory requirements to the effect that front-line sales staff must study for and obtain particular qualifications in order that they might sell certain products to customers.

The third aspect of responsible lending, in which we are particularly interested, relates to information provision. There are a number of provisions in primary legislation and the consumer code which stipulate that consumers must be told various things and made aware of certain information. There are also voluntary codes which state information must be provided in a particular way and that such information must be clear. Within the code we have introduced a requirement to the effect that information must be given to consumers in a way that seeks to inform them. This might sound somewhat odd but what it means is that most of the interventions in providing information for consumers have developed in such a way that they legally protect financial firms. As a result, if, at some stage, a firm is sued, there will be legal protection in place which will indicate that a particular disclosure was made. It is our view that matters must move forward and that financial institutions should provide information in a way which will ensure customers will understand it and be aware of the nature of the risk relating to the type of loan they are seeking.

Members may ask how this might be achieved. One of the best ways is to ask consumers. Financial institutions conduct a great deal of market research aimed at discovering whether products are profitable and whether people will buy them. Such research should include questions regarding whether consumers understand the risks relating to the products financial institutions are trying to sell and whether those institutions are providing information in a way that seeks to inform. We are working with the industry - we will have the opportunity to review our code next year - to ensure information is provided in a way that seeks to inform consumers. This will move matters to a different level. We encourage the industry to ensure information is produced in the way to which I refer.

We published our headline results in respect of consumer research. They showed that 65% of the people surveyed shopped around for their mortgages. This means that 35% did not do so, which is amazing, particularly when one considers the amount a person is likely to spend over the lifetime of his or her mortgage. We advise consumers that when they are purchasing their homes, they are emotionally caught up in the decisions relating thereto and do not tend to identify the purchase of a mortgage as a separate decision. We inform them that if they did not shop around for their mortgage in the first instance, it is not too late to do so. They can still review the position.

We also publish information - some of it in conjunction with the Central Bank and Financial Services Authority of Ireland - on comparisons across the eurozone. In our experience there is a need to work extremely hard to make it easy for consumers here to switch among domestic providers before they begin to consider switching to providers outside this jurisdiction. I would make a distinction between depositing and borrowing in this regard. One member commented that when a person was going to borrow money, he or she was not really concerned about whether he or she knew the name of the financial institution involved because he or she was getting the money he or she required. When a person is depositing or saving money, the position is different and the trust factor is very much to the fore. When borrowing money, people tend to seek the best deal. If an institution from overseas offers such a deal, people will be happy to do business with it.

On customer mobility, there is a need for us to work extremely hard in order that the demand side might be allowed to operate. The supply side is very competitive. Many European institutions are operating in that area of the market here. There is excellent competition and supply. The mortgage market has been extremely competitive. The phenomenon of Irish consumers shopping around for their mortgages is quite recent. We would like to encourage the shop-around message for all sorts of products. We hope we make it easy for people by publishing costs on our website, because it is a pain for people to have to go around comparing costs.

We need to watch carefully to ensure consumers' rights on early repayment enshrined in our legislation are maintained, which is the reason we have tried to get in early with our European interventions. While maximum harmonisation of European directives is good for competition because it prevents us from keeping competitors out by overlaying regulation here, there is a danger that those jurisdictions that do not have the same consumer protection measures we have could drag us down to the lowest common level. We need to be careful in this regard, though I see no danger of this happening at the moment.

Issues were raised with regard to the Land Registry. We support more being done on this issue. Anything that allows security be improved is good, not just for borrowers but also for depositors, whom we are trying to protect from the point of view of solvency.

In terms of having breathing space to deal with issues relating to the banking system, now is the time to deal with those issues. Regulators are now reflecting on what happened and considering how things could have been done differently. We did not have the same sub-prime market here as in the United States. Even when we talk about sub-prime lending here, it is of a completely different order and scale to the type of sub-prime lending in the States. What we mean by sub-prime lending here is more expensive lending for those who have defaulted at some point. We do not have the kind of cases where people will clearly default very quickly, but we do have cases where more expensive lending is involved. There are lessons to be learned for all regulators from what happened. On liquidity issues, we have a very different structure here, whereby the ECB is in a position to provide liquidity support to Irish financial institutions. This support is provided on a different basis and the system proved to be robust during the subsequent turmoil within the market.

With regard to the importance of education, this is something about which we are passionate. We would like to see education move up the agenda in Europe. We are working with our European colleagues to ensure education takes place and that people acquire a life-skill so that whatever age they are or whatever level they are at, they will be able to understand financial products, the seriousness of the decisions to be made and how they affect their everyday lives. This would mean that people would be aware of and understand what products they should have, such as pensions, and be aware how they affect their lives.

On the difficulty of getting information and shopping around, consumers are not stupid and if we make things easy for them to understand, they will act on the information, as we have seen in the past. However, we cannot expect people to plough through very complicated information. We must, therefore, work hard to make things much easier for people who lead busy day to day lives.

With regard to credit registers, I hope the data protection issue will not be a problem. Most consumers do not know credit registers exist. Sometimes they sign an agreement allowing a lender do a credit check, without any notion that this is done. We have been working with consumers on this issue and ask them to check and ensure their details are correct. Details can be wrong, but people do not understand they have the right to check them and have them corrected. I do not expect the data protection issue will be a problem for consumers.

My colleague may wish to add further comment on whether a European regulator will be needed for these initiatives. Most European integration has taken place within the national regulatory framework, which provides for cross-border operations. Some products work well across borders, but others, because of the Land Registry and other issues, do not work so well. However, I do not think this will lead to the need for a European regulator, but it creates a need for harmonised regulation, which is what Commissioner McCreevy continues to promote.

On whether we need the directive, we believe there is a need to examine the regulatory impact analysis. We must be careful, however, when we consider the cost of implementing directives. We do not necessarily look at the cost of implementing these things or at what is the starting point. For example, within Ireland, there is already a cost to the system for complying with the existing requirements. We should perhaps be focusing on the additional cost when doing a regulatory impact analysis rather than on the initial cost as if we had nothing because that is not where we are going to be. We need to look very carefully at the benefits. We can see the benefits for Irish consumers of the initiatives we have undertaken and we would like to see how those benefits might be measured across Europe. We are all agreed that we need to look carefully at regulatory impact assessment.

In terms of whether competition can be dangerous, I think it always works to the benefit of the consumer, provided it is done within a clear regulatory framework and provided an institution does not act in any way to risk the solvency of an institution by its competitive behaviour. I do not think there is any evidence of this behaviour - rather there is evidence that strong competition in the mortgage market is on the basis of various offerings.

This leads me into the area related to 100% mortgages. There was a consumer demand for these mortgages in particular sectors. For instance, a person paying rent for the previous ten years who took out a 100% mortgage would have been required to pay the same amount as repayment of that mortgage and they could clearly demonstrate the affordability of that mortgage. The issue with 100% mortgages is all about affordability, whether the person could afford to repay the money. It is probably not correct to look at this mortgage in terms of the value of the house. If somebody takes out a mortgage of only 40% or 60% and cannot afford to repay it, this is a far worse situation. The amount being lent to that person does not matter because the clear issue is whether they can afford to make the repayments.

Chairman

I must put in a word--

Senator Jim Walsh

Economic issues.

Chairman

Absolutely. I would put in a caveat there. Those of us at the receiving end on the ground see another issue. The ability of the borrower to repay the loan is not and should not be the major criterion. That is for the benefit of the lending institution and it protects that institution but it does serious damage by inflating or deflating the market, as the case may be. There is a problem there that needs to be addressed and has not been addressed in the past. New criteria must be applied; otherwise, there will be a repeat of this performance. We will have the construction industry on the one hand and the financial services industry on the other, with each refusing to move or unable to move. Unless there is some intervention, the economy will not start to operate properly for some time.

It is worrying when Ms O'Dea refers to the ability of the borrower to repay. This is what happened in the agricultural sector in the 1980s when there was significant and unwise over-lending to the sector in general. The chickens came home to roost, unfortunately, and with retribution. This is an issue that needs to be considered. I mean no disrespect to the points made by Ms O'Dea but there are other issues besides what protects the integrity of the financial institutions and these issues must be examined.

Ms Mary O’Dea

I may be able to provide some comfort on that particular issue. The statistics on 100% mortgages show that, in 2007, they accounted for approximately 5.5% of the volume of loans and 7% of the value of loans extended. This is as we would expect because we would expect there to be a very small cohort for whom these products might be suitable. We are looking at the issue of affordability from the point of view of the consumer. We have seen consumers who cannot afford to pay mortgages getting into very stressful situations. We are focusing on the micro-consumer issue with regard to affordability and whether consumers can afford to repay the loan. Ultimately, the bank can repossess a house but that is not very satisfactory from the point of view of the customer.

Chairman

The bank can then damage the credit rating of the customer as a result of a situation for which the customer was not responsible.

I will call Senator Hanafin as we have only ten or 15 minutes left. We should have further discussion on this issue some time between now and Christmas. The deadline for the Commission paper is imprecise at the moment and the discussion will continue. It is a very important issue which has serious implications. I suggest we should invite the delegates back to discuss the broader issues with us in, perhaps, a longer meeting than that scheduled for today. I do not believe we can do justice to it today.

Senator John Hanafin

I thank Ms O'Dea and the group for the submission. While commending many aspects of Irish financial regulation, I would emphasise that only 5.5% of mortgages are in the 100% bracket. A mortgage is normally for 20, 25 or 30 years. Heretofore 100% mortgages were not the norm, so we are effectively talking about 5.5% of mortgages that represent the total market - comprising people who have mortgages for 20, 25 or 30 years. Of late, 100% mortgages have become increasingly prevalent and this is not in the best interests of the consumer. Stress testing normally concentrates on ability to pay and is sometimes based on a couple of salaries, which has not been a serious difficulty as matters stand. My particular worry is that the value of the house property is never taken into account, so that in effect security does not match the mortgage. I suggest that the Regulator should review the banks' position on the 100% mortgage phenomenon. Currently there is a knee jerk reaction as the market overreacts. In other words, 100% mortgages were prevalent while money was being handed out and people were getting loan offers through the post for holidays. Now matters have gone the other way and there is very little possibility of getting a 100% mortgage. However, the market should be regulated on an ongoing basis that accepts in principle that 100% mortgages are not acceptable.

Chairman

We shall bring this session to a close after a short response from the two other groups, and return to it later. I do not believe we can do credit to it at short notice. We propose to produce a report which will be laid before the Houses of the Oireachtas and conveyed to the Commission before the end of the year. We need to go into matters in some more detail than we have been able to do today. The points raised by the various speakers echo the views of the people dealing with the situation on the ground. A typical example is that of a person having to sell the house because his or her financial circumstances have changed, while it was obvious to everyone concerned that the individual could not afford to pay a €3,000 per month mortgage for the rest of his or her life - unless he or she had enormous investments that might be liquidated. In the event, he or she comes to a settlement with the financial institution concerned and his or her credit rating is damaged as a result. It should be a condition of 100% or 120% lending that there should be no interference with a person's credit rating because he or she was misled and given a loan far beyond his or her ability to manage, let alone repay.

I am not cutting Ms O'Dea short, but we shall have to return again to her and to her colleagues.

Ms Mary O’Dea

I absolutely concur with the Chairman that it is all about the ability of a person to repay, and that is a broader issue than 100% mortgages. We have higher capital requirements on those institutions which give 100% mortgages, which of course reduces the number lending at that level as well.

Chairman

It does.

Ms Eimer O’Rourke

I shall pick up, briefly, on some of the points made. One of the Deputies asked about the extent to which we have actual cross-Border mortgages here at the moment. In the traditional sense of the consumer going cross-Border, there has been very little of this. However, when one looks at the participants in the Irish market one sees there are a number of very significant players. For example, Ulster Bank and First Active are owned by the Royal Bank of Scotland, Halifax is owned by Bank of Scotland (Ireland), NIB is owned by Danske Bank and IIB by KBC, so that there are many international players in the market, although I cannot give a precise proportion of their relative shares.

A question was raised about the cost of switching mortgages. The costs that arise are mostly related to legal fees and registration fees to the Property Registration Authority. There are generally no costs payable to the lender unless the applicant is a holder of a fixed rate mortgage, in which case there may be.

Regarding land registration systems in other jurisdictions, I found it interesting to speak to colleagues from some of the newer member states. In some cases, the requirement to register properties was imposed only in the 1990s. However, they are streets ahead of us in terms of efficiency because they were able to develop from scratch in a technological environment. Our system is absurdly inefficient by comparison. I echo members' comments regarding the critical need to streamline and enhance the conveyancing system.

In regard to the responsibilities of the industry in the current environment, it is important to clarify that banks are always required to balance the needs of the various stakeholders. This will involve, for example, balancing the interests of borrowers and depositors or customers and shareholders. This balancing becomes more challenging in a difficult economic environment. It is important to emphasise that we have a relationship model of banking, which involves looking out for one's customers in the medium and long term rather than focusing merely on today's issue. In terms of personal customers, we have a code of conduct on mortgage arrears and repossessions. This is an important element which complements the consumer protection code and sets out the approach in steps to be taken when a consumer is in difficulty. The representatives of the Financial Regulator will agree that the first advice to persons in that situation is to contact and communicate with their lending institution.

Members asked whether there is a diminution of the value of solicitors' undertakings at this point. The Irish Banking Federation made a detailed presentation to the Joint Committee on Justice, Equality, Defence and Women's Rights in which we outlined our ongoing detailed discussions with the Law Society of Ireland. These discussions are concerned with clarifying and strengthening the content of solicitors' undertakings to ensure there are clear and specific responsibilities that must be met within specified timeframes. The imminent finalisation of these discussions will lead to a strengthened undertaking which will serve all involved. Notwithstanding this, we must look to e-conveyancing as the way forward.

I was interested to hear about three-dimensional maps, of which I was unaware. I am willing to consider anything which makes life easier. Centralisation goes hand in hand with dematerialisation. The latter process has begun and there is no longer an absolute requirement for a physical land certificate. However, all the supplementary documentation which must go through the Registry of Deeds remains a significant issue. I understand compulsory registration was introduced in three counties and recently extended to another three. I agree this should be extended across the board and it is a matter of finding out how quickly that can be done.

I would be delighted to say I had a solution to the current overhang in the property market, but I cannot do so. There are many parties examining how best to restimulate the market. Anything that enhances affordability and allows people to purchase property is welcome. However, this must be balanced with the necessity of avoiding an overly interventionist approach to markets.

Deputy Noel Treacy

What about fixed term loans?

Ms Eimer O’Rourke

They are an interesting possibility. This relates to the discussion regarding early repayment. This is an extremely sensitive issue in Germany, for instance, where there is a significant history of fixed term loans. It is the norm in that jurisdiction for people to have a 20-year or 30-year loan which is fixed for the entire duration. However, that is not particularly compatible with early repayment.

Chairman

Would that involve a variable interest rate?

Ms Eimer O’Rourke

No, the rate is fixed for the 30-year or 20-year term of the loan.

Chairman

There is a difference.

Ms Eimer O’Rourke

In cultural terms, we may have some way to go. Obviously, were anyone to come up with solutions, we all would welcome them. The Chairman alluded to the risk of speculation as one enhances technology or enhances access to anything through technology. This is a valid point and were we to proceed we would be obliged to ensure the integrity of the system remains. However, this is a challenge.

Chairman

We will come back to it. I thank Ms O'Rourke. Does Mr. Kelly wish to dip his toe in the water again?

Mr. Brendan Kelly

I am conscious that time is tight and I am keeping members from lunch, so I will be brief. A perception may exist, based on the comments of some members, that we are hostile to this proposal. Nothing could be further from the truth. The internal market has been extremely good for Ireland in general and for the financial services industry in particular. We believe there is a need to think a little about what exactly it is that we are trying to achieve and how best to go about doing it. In that sense, a wide range of approaches could be taken. As many of them have been touched on already today, there is no need to go over them again. However, it is interesting, as Senator Quinn noted, that we are not alone in having reservations about adopting a legislative approach on a pan-European basis in this regard.

The query has been raised as to whether there are other ways in which member states could go about enhancing competition and making the market more attractive to new entrants. Many measures were discussed today that make markets more attractive, encourage new market entrants and do not necessarily require European measures. Ultimately, as I mentioned in my presentation, the costs of something like this may be quite significant, depending on the approach adopted. The initial impact assessment conducted by the European Commission listed approximately six pages of choices and options, as well as cost benefits and impacts. If our presentation today has a bullet point the joint committee may wish to take away, it is that we would like the Commission to work through the aforementioned matters slowly and not to rush into something without knowing how much it will cost.

Deputy Noel Treacy

What about reserves and liquidity capacity? Are we there?

Mr. Brendan Kelly

We are doing well. The Central Bank--

Deputy Noel Treacy

Has Mr. Kelly a figure for it?

Mr. Brendan Kelly

I am afraid not.

Deputy Noel Treacy

He might forward it.

Mr. Brendan Kelly

I will make some inquiries.

Chairman

At our next meeting.

Mr. Brendan Kelly

At our next meeting. I will.

Deputy Noel Treacy

Members wish to examine such figures.

Chairman

With the permission of the joint committee, I propose to adjourn the remainder of the business until next week. The secretariat should make contact with the various witnesses to ascertain their availability. If they are not available, we can continue the debate on this subject at a later date. It is obviously highly important. Every Oireachtas Member has commented recently on these precise issues. The witnesses should not be upset that this subject engages them to a considerable extent.

Deputy Noel Treacy

Members reflect customers' views.

Chairman

That is correct.

Senator John Hanafin

I wish to ask a question because I will not be present next week. Would it be in order to invite the Russian Foreign Minister, who will be in Ireland on 22 September, to attend a meeting on that date?

Deputy Noel Treacy

We need to strengthen bilateral relations with Russia.

Chairman

We do, as does the European Union. It is an important issue.

The joint committee went into private session at 1.35 p.m. and adjourned at 1.45 p.m. until 2 p.m. on Tuesday, 29 July 2008.