JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Thursday, 4 Sep 2003

Vol. 1 No. 14

Consumer Charges: Presentations.

Chairman

The committee will now have a discussion with the Educational Building Society, St. Canice's Credit Union and a representative from the Money Advice Service on policy with regard to consumer charges, interest rates and customer debt. I invite representatives of the Educational Building Society to the meeting. I would like to introduce Mr. Pat Farrell, head of marketing, and Mr. Martin Walsh, head of mutuality, from the Educational Building Society, who are very welcome to the committee. I invite Mr. Farrell to make a presentation to the committee which will be followed by a question and answer session. We have allowed ten minutes for the presentation and 35 minutes for the question and answer session and, therefore, this session should take 45 minutes.

I remind the visitors that while the comments of members are protected by parliamentary privilege, those of visitors are not so protected. Members are also reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person or persons outside the House or an official by name in such a way as to make him or her identifiable. I invite Mr. Farrell to make a presentation to the committee.

Mr. Pat Farrell

We are delighted to have the opportunity to make a presentation to the committee today. I will tell members a little about the EBS as we believe we are a different type of finance institution. I will outline the background of the EBS's heritage and ethos before coming to the substantive points. The EBS was founded in 1935 as a membership based organisation and established on co-operative principles. The founder was Mr. Alec McCabe. He was a Member of the House, having served as a Dáil Deputy for his native Sligo in the early and mid-1920s. At that time he saw there was a great unmet need in financial services. In that period only the privileged few had the financial means to acquire a home but the vast majority of people were excluded from the opportunity to do so. Mr. McCabe was a teacher by profession and, thus, he turned to his colleagues in the Irish National Teachers Organisation for support in establishing what was then known as the Educational Building Society. It all started in a two roomed office in Lower Abbey Street with a staff of three. Today we employ 580 staff and distribute our products to a network of 114 offices across the country. That is complemented by telephone and Internet sales and service channel support.

The principle on which the society was founded was simple; the members of the society pooled their savings in order that other members could borrow to acquire a home of their own. The principle of members' mutual support for each other is important. The EBS has always tried to stay true to these values. We believe they are enduring and give us a distinctive ethos which is different from the general run of financial service providers in Ireland today. Our ethos sets us apart from the plc model which has to react continuously to the short-term demands of markets and external shareholders. We believe there is plenty of room for both models, but we also think it is important that there is choice available based on the corporate form of the different financial institutions in the market.

Our focus is based solely on long-term relationships with members founded on a well established reputation for fair dealing and a fair exchange of value. We are now a leading provider of mortgages, savings and investment products. We are the number four mortgage provider by market share and we are a leading provider of mortgage finance, particularly for first-time buyers. Since our foundation we have helped hundreds of thousands of members to achieve their ambition of home ownership. We enjoy a 9% share of the retail savings market, that is, excluding current accounts, as we are not in that particular market. In all of our key customer segments we are continuing to grow both our market share and our membership. All this has been achieved in a highly competitive market characterised by consolidation, technological change and selective new entrants. Looking to the future, we see continuing opportunities to evolve our business model to satisfy more of our members' critical financial service needs and to grow our membership by demonstrating the long-term benefits of doing business with a financial services provider founded on co-operative mutual principles.

We are almost at the end of a second year of implementation of an ambitious five year plan designed to transform the EBS into a stronger financial force and financial services which we believe will be unique and distinctive in this country. At this juncture, I would like to instance a few examples of how the EBS has consistently differentiated itself as a mutual. Our long-term record as a provider of highly competitive and innovative mortgage products is unquestioned. We must always remember that a mortgage is a long-term commitment of not less than, in these days, typically 20 to 25 years. Looking back over the past ten years we have been the most consistent best value provider in this market. We provide a range of tailored mortgage solutions based on particular needs of different segments of the mortgage market and not selective or restrictive in our offers.

We also seek to be in the top quartile in terms of providing consistent good value to our savers. It is worth noting in this regard that we have many more saving members than borrowers. Our SSIA account is a market leader in both value and flexibility and at launch we were pleased to be only one of a small number of providers to receive the Consumer Association of Ireland's Savermark seal of approval. Our account is the only one in the market which allows savers the flexibility to spread their contributions across cash and equities. We also sell a range of managed funds known as Summit and our management charges are consistently the lowest in the market with no entry fees, exit fees or switching fees. We recently further strengthened our position in the longer term savings market as a new provider of standard personal retirement savings accounts.

We publicly advertise vacancies for non-executive directors setting a standard which, as far as we know, is unique in the market. Our last four non-executive directors were appointed in this way. We recognise the primary importance of our network of offices countrywide and the communities they serve. We know that the local EBS outlet remains the preferred method of contact for most members. In the area of corporate social responsibility, we focus our efforts on supporting the work of community based co-operative voluntary organisations combating social, educational and housing disadvantage rather than pursuing high profile national corporate sponsorships.

I will turn now to the substantive issues the committee asked us to address in our submission, namely, consumer charges. In the early 1990s we introduced limited transaction account and electronic bill payment facilities for our members. We did not require direct access to the clearing system to provide this service. As a relatively small player in this market segment, we recognise that it is not always necessary to do everything in-house so we outsourced the provision of these services in the main to AIB which, in turn, charges us fees based on our usage of the service. Currently, we do not pass on the money transmission costs of this service to our members. We have not offered this facility to new members since 1999 as it is clearly a loss making exercise for us based on current arrangements. We are developing a new electronic based payments proposition for our members which will attract charges, but it is too early to speculate as to the level of charges other than to say they will be highly competitive in keeping with our mutual commitment to provide fair value to members.

The clearing system which supports money transmission works well given the environment in which it has to operate. However, this environment is heavily determined by the Government's policies. On the one hand, the Government continues to be a major generator of inefficient and costly paper based payments, while recently levying both new and increased duties on alternative, more efficient and less costly card based electronic payments services. Europe generally is moving towards the goal of a more cashless society. There is an opportunity for the Government to take the lead in realising the goal of a low cost, more efficient and exclusively electronically based payments system. EBS would welcome the creation of such a system which would have major benefits for consumers and for improved economic competitiveness generally.

On interest rates, I would like to explain a little about how we make our money. We aim to be sufficiently profitable to meet prudential requirements and to reinvest in continuous improvement in both service and value for our members. In our case, we are primarily a savings and mortgage business and a key determinant of our profitability is the margin we earn between the interest rate we pay to our savers and the rate at which we lend to borrowers. Operating as we do in competitive market segments, we are highly responsive to changes in market rates. We apply rate changes to both borrowers and savers at the same time. It is our established practice to publish and communicate to all our members in a clear and timely manner all relevant information regarding rates, rate changes and all other related charges.

As I said earlier in my submission, we have many more savers than borrowers and at times of rate reviews we must carefully weigh the needs of both in striking a fair balance for all our members. Due to the current environment of low interest rates, we have not been able to reduce rates to savers by the same amounts as to borrowers. Naturally that has led to margin contraction. By way of example, if we take a five year view, our net interest margin has declined from 1.81% to 1.37%, which is a reduction of 24% over the period. This reinforces our point about the highly competitive nature of the markets we serve, which currently exclude higher margin business, such as overdrafts and unsecured lending. We expect the downward pressure on margins to continue for the foreseeable future. This means there cannot be any cross-subsidisation of any existing or new products and services.

As regards customer debt, EBS is a prudent lender. We operate a centralised underwriting system and all applicants are individually assessed, taking into account their circumstances and the quality and sustainability of the source of their income. Additionally, we have a well developed affordability model based on the national household budget survey. We stress test all loans as to applicant's ability to meet repayments, currently at base rate, which is 3.35%, and we add 2.65% to that in order to determine whether the applicant will be able to continue to make the repayments at that higher rate.

Where members encounter difficulties with repayments or fall into arrears, we proactively work with them to resolve the issue. We do not apply any surcharges or penalty interest on arrears. Our level of arrears and repossession is and always has been among the lowest in the sector. We do not encourage members to take on additional levels of debt which will likely cause them difficulties in the future. We encourage members to match the life of the asset being acquired to the loan term, for example, car purchase finance. We provide facilities whereby any member can accelerate repayments or apply lump sum reductions to borrowings easily and without charge at any time. At times of recent interest rate reductions, we wrote to our borrowing members advising them that rather than taking the reduction repayment, they might wish to consider the option of fixing their repayment at the higher rate, thus enabling them to save interest and pay off their loan earlier.

I hope I have given the committee a pen picture of EBS, our positioning as a real and growing alternative for consumers of financial services in this market and our policies and practices in relation to the issues in which the committee expressed an interest.

Deputy R. Bruton

I thank Mr. Farrell for his presentation. The EBS does not seem to have entered the clearing system and it is proposing to develop an alternative electronic transfer which does not appear to suggest it will enter the clearing system. Is the expansion of the EBS hampered by the present system of entry to the clearing system? The committee has learned that one has to pay for the sunk costs of the system in order to pay a gate fee to get into it. I would be interested to hear the delegation's view on that.

I note that the EBS is in the low margin segment and the high margin segment is in overdrafts and unsecured lending. However, we have also learned at this committee that it is such high margin businesses which are not passing on the interest rate reductions. The high margin businesses appear to be increasing their margins, while those at the low end are reducing their margins. Why is that happening? Why are margins which are already fat getting fatter, while they are getting thinner at your end of the business? Is there a non-competitive element where there are barriers to entry into these fatter margin businesses? Are the fatter margins justified?

Mr. Farrell made an interesting point about the Government's reliance on paper transfer. I have seen a figure of €400 million for the cost of Government reliance on paper transfer. Is the corollary of that that charges will fall rapidly if the Government moves away from paper transfer and removes expensive administration from the system? Why are charges not falling rapidly if the private sector has already taken on board the savings of the electronic system? It does not seem that the savings are being passed on. The difference between going electronic and the old cheque route is not sufficiently large for the consumer to suggest the benefit is being passed on.

I notice the EBS has a base rate of 3.35% and its spread is 1.37%. It seems to be paying a deposit rate of just under 2%. That is the top quartile. Some of the banks' interest rates are zero. Anglo Irish Bank seems to be offering 2.75%. The EBS is offering 1.99% and some others are offering zero. Is there a large captive market that could benefit from some pro-competition moves to allow deposits to circulate more and benefit consumers?

Mr. Farrell

I will ask my colleague, Mr. Martin Walsh, to answer those questions.

Mr. Martin Walsh

I thank Deputy Richard Bruton for raising a few interesting questions which are at the core of the issue and the perceptions about competition in the banking area. The first one relates to entry into the clearing system. I am the EBS representative on the board of IPSO. On the way the payments system operates in Ireland, we have a well established payments system. It is good and effective and individuals trust it. If we go through the system to make a payment, we have a high level of confidence that it always works. However, it is an older style of system which still uses a lot of paper and documentation. We already have a significantly saturated market in that many individuals already have payment facilities. The State produces a lot of paper and has not encouraged migration to an electronic system. The system is working in a certain way and the existing institutions and their customers are used to it. We would welcome moves in that direction.

The recent report on a new electronic environment, which was delivered to the Department of the Taoiseach, will be good for the economy. Given the way it works and the fact that there are many customers, there is a huge cost for anybody entering the system. There is no rule that says one cannot come in but somebody has to pay for the system that is working there at present. If someone entering the market gets in for free, that places a further burden on the institutions that are operating within the existing model. What is needed is a complete change to a totally lower cost model and that needs greater leadership from the State. The institutions are inevitably moving in that direction because of other forces that are at work, in particular, the lower interest rate climate. This climate is not only in Ireland but is worldwide. When interest rates fall - and they fall for both the lending side and the savings side - the margin is squeezed for institutions. I will return to the different types of margins; there are margins on individual products relative to market rates and then there is the overall margin of an institution. It is important to distinguish between those. However, when interest rates fall there is less of a gap for institutions to pay for providing these other services, so there is pressure to move to lower cost ways of doing business. That is not just a uniquely Irish situation, it happens worldwide.

When I was on holidays a few weeks ago I was looking at a newspaper - it was in a European country - which pointed out that between the charges on savings accounts and the interest rates, one had to have at least €10,000 in the account to break even. This is not uniquely Irish; those forces are working internationally, including in Europe.

Looking at the issue of margins and interest rates, there is another phenomenon taking place in financial services worldwide. While we as an institution have savings customers and borrowers, and we have to look after both, a process is taking place whereby some institutions only serve one side of the market and selectively pick certain products - the best segment of the market. They drive down the attractiveness of that, which means that there is less margin on that side. There is less margin within the system to pay for other services. If there is less margin on one side then costs must be reduced elsewhere. So, one has a number of forces working within the system that are putting on pressure. Those forces are at work driving the system in one direction, but there are other forces which are retarding progress, such as the reliance on a paper-based system. Sometimes it takes a need for a lead to move that on, but the change will take place anyway because this is essentially an information-based business and information technology will drive that change.

The figures on our overall net interest margin, which Mr. Farrell mentioned, represent the overall gap in the business. If one takes the mortgage business, essentially the margins on the mortgage business are not much different than they were before the euro came in. This is an important point to remember. There are certain costs in running that business, including servicing loans, looking after more expensive loans and processing loans for first-time buyers. So, across the industry as a whole there is a lot of competition in a relatively small mortgage market, compared to Europe.

The margins over inter-bank rate for mortgages had settled down at 1.2% or 1.25%, give or take a few basis points on either side. During the time Ireland converged to the euro, there was a widening of the margins with respect to market rates on the mortgage side, but also in an attempt to try to maintain margins for savers. That appeared to leave a gap, so that mortgage margins looked high but within a number of months of the introduction of the euro that was going to go. It was precipitated but that extra margin disappeared. The margins for the mortgage business are generally in line with where they were pre-euro because there is a lot of competition in this business and there are certain economics in running it. On the other hand, because of the lower interest rates, given the costs that are involved in looking after small savings accounts and in having products that require a lot of personal interaction with individuals, the margins across the industry no longer exist. So, everybody is addressing different aspects of how to deal with that and that is one of the challenges. If we, as a society, want to ensure that there is more access to individuals, to the unbanked and to everybody with a lower cost service, we must realise that certain things will change in the way that the service is delivered, but we should be able to provide greater access through a modern electronic system that is open and accessible to all at a lower cost overall.

Those are a few aspects which I hope have dealt with the points raised by the Deputy.

Mr. Farrell

The Deputy raised a point on higher-margin business. As I said in our presentation, we are not particularly in the unsecured lending business. The arguments that will be advanced, and they have validity, as to why margins are higher in the unsecured lending business include the fact that it is a shorter term. The period over which interest is earned on the product is much shorter and there is a shorter period in which to recoup a margin on it. It is a higher risk business; by its nature unsecured lending is not secured against any assets, as such. Therefore, there is a risk and the level of provisioning for bad debts that is required would be higher than it would be for, say, the mortgage business where it is secured against the asset of the home. For some of those products there would be periods of free credit, so to speak. Those are the reasons why margins would be higher in unsecured products than they otherwise would be.

Deputy R. Bruton

Why are they expanding relative to EBS margins? They are getting fatter while EBS is getting thinner.

Chairman

Deputy Burton had indicated she wants to contribute next.

Deputy R. Bruton

I am sorry.

Deputy Burton

I wanted to ask about three areas. To take up Deputy Bruton's point on the Government contributing to the generation of inefficient and costly paper-based payments, will Mr. Walsh provide some examples of where he thinks Government Departments or agencies could actively cut down on paper relatively easily, within a couple of years? Are we talking about the whole mechanism of paying salaries or payments to suppliers? Will he give us some concrete examples of that?

Mr. Walsh

It is a very relevant point. If all payments by the State - social welfare payments through to agricultural payments, them all, were made electronically straight into an account, which was accessed either through the Internet or through a card, the whole process of processing paper on a weekly or monthly basis would no longer exist. In that way, it would become totally electronic. It is interesting to raise the areas where the system can be changed and that is one such area. There are other types of barrier to entry into the market here and it is worth thinking about them. If an external institution wants to enter a market like this, it obviously wants to be able to get in without a big fixed cost, so an electronic system would allow that but how does one get to know the market? Where does one build up one's knowledge on the credit history? As the new boy on the block, a financial institution would be exposed. The depth of credit information that is available in our society and the fact that we have not got postal codes, which are the building blocks of many credit referencing systems in other countries, are simple examples. There may be data protection issues that have to be addressed.

In some countries - and there are examples in Scandinavia - one can apply for a loan through the Internet, which automatically checks one's credit reference, which is tied in with one's social security number. By pressing the button, one can have the proceeds of a loan in the account within 20 or 30 seconds because the system is integrated. There are data protection issues involved which we, in this country, might not appreciate. There is a process there. Rather than thinking in terms that there are conscious barriers to entry into the market, there are areas in which the State can act to create a system whereby it is easier for someone from outside to come in. One can say there are not barriers but there are real commercial barriers. We must remember as well - it is important to recognise this - that we have an efficient system here, that customers are familiar with the institutions with which they deal and know if they have a good relationship with an institution, as we do in that we look after the children of our existing customers, and that a new institution coming in must also establish a track record.

Deputy Burton

There are two other areas on which I want to touch. I am aware of the long record of EBS as a mutual organisation. While I know EBS want to make money, the organisation does not have quite the same for profit ethos. As such a big and important player in the Irish market, is EBS, or its directors, concerned about what is happening in relation to land values? I represent the Dublin West constituency and I have been a member of Fingal County Council to which I was twice elected. The information which has recently been revealed and which I was aware of is that, effectively, land speculation by a group of up to 20 developers means that the average land-site cost of a modest three bedroomed house in Fingal, which is the biggest area of building in this State between Blanchardstown, Swords and so on, is anywhere from €120,000 up to €250,000. For a couple buying a house worth €300,000, 40% to 60% of the mortgage they take out is to pay for the site cost.

With the low interest rate regime and the fact that both partners have been working people have been able to take on these much bigger mortgages than traditionally, particularly from mutual societies. In fact, most of that mortgage does not pay for the bricks and mortar but pays for our uncontrolled system of land speculation. In the context of the debate about how we price houses and the fact so much of the price goes to the speculator, the rezoner and this group of about 20 developers operating in the greater Dublin area, does EBS, or its directors, have concerns and suggestions as to how that might be approached?

I am aware from dealing with people who have dealt with the EBS that you have a very good structure for dealing with clients who may run into difficulties. However, not all Irish building societies deal fairly with people who run into problems with their mortgages or with other loans. Penalty clauses can be very high. It concerns me that there is no clear code of practice among financial institutions in Ireland as to what penalty clauses people will incur if they default. One operator in the sector has penalty clauses which can be so severe that they would make one's hair stand on end. Unless the person experiencing a period of financial trouble, because of jobs or other problems, tries to regularise the situation immediately, they can incur spiralling costs for not meeting the terms of the loan. Does EBS have a view on a clear code of conduct so that people know where they stand if they do not meet the commitments into which they have entered on loans?

Mr. Walsh

We are a mutual building society and it is important to remember that the system benefits by having two different types of institution. It is very good for competition. If all the institutions were plcs or if all were mutual, you would get a particular class of behaviour. Having both types of institution thriving in the marketplace, plcs with their focus on shareholder value - there is a dynamism in that - and mutual co-operatives with their focus on long-term customer benefit, is important. The two types competing with each other is very good for the system.

The Deputy touched on land values and house prices. This is a complex area which has been discussed a great deal. The real issue is that over the past number of years, there has been an inadequate supply of housing in the market. We are building many new houses but, given the number in the market compared to the demand in the market, there is not enough supply. The market is not adequately free in either new houses or existing houses. This has been commented on a great deal by domestic commentators. There have been reports by the OECD, IMF, ECB and The Economist which look at the Irish market, to the effect that there should be a freer market. How can that be achieved? The perception of the amount of building land available is that it is tight. When a population and economic activity increase, there is more demand. If we continue to build new houses at further distances, that requires a lot of new land with a big infrastructural cost. Economies which became significantly more developed before ours have gone for far higher densities. There are issues in that because that may not be popular in some areas, while it may be popular in others. The supply, and the perception of supply, and a market that is freed up in both new and existing houses is the best and is, ultimately, the only way. Any barriers to supply to the market or perceptions of future supply must be addressed. That is the only way in the long-term to bring supply and demand into equilibrium.

On the question of individuals taking on debt, this is obviously a concern. We, as an institution, and as Pat Farrell pointed out, go through the affordability and we try to make absolutely sure by stress testing interest rates that individuals do not take on too much debt. We would much prefer to see a situation in which young individuals did not have to take on disproportionate amounts of debt. It comes back to the situation of real action in the housing market which changes the perception of supply.

When it comes to terms and conditions of individual loans, as Pat Farrell said, we do not charge penalties on customers in arrears. Obviously, as a big institution with a very broad segment of the population as customers, we see a whole spectrum of human problems, including unemployment, marital breakdown and so on. It is very important that individuals talk about them to their institution early on and then they are dealt with sympathetically. However, when it comes to whatever costs are involved, it is absolutely essential that the individual knows the obligations they are taking on and what charges they will face.

Absolute transparency and openness should be required of all institutions. That is something to which we would fully subscribe. There are voluntary codes. In large measure, if they are followed, they cover many of the issues. If there is any area in which they are found to be wanting, we would certainly welcome them being strengthened. Transparency and absolute openness are terribly important.

Mr. Farrell

On the housing issue, we have actively commented on this situation for a number of years through our annual reports and other media. We have said consistently that there is an opportunity for the establishment of a national housing authority. We called for this on a number of occasions. Such a body could get its arms around this whole issue and cut across all the inter-departmental, or inter-local authority, issues that are, in some cases, addressing this issue in a piecemeal. They should be looking at the big picture. A national housing authority would have the wherewithal to look at issues such as whether there is an adequate supply of zoned serviced land and all the other issues that are causing the problems in the housing market. We reiterate that there could be good progress if there was one authority that would focus single-mindedly on this issue and how we break the logjam that is there at present.

Deputy Ó Caoláin

I would like to join in welcoming the EBS representatives. The EBS chairman, Mr. Brian Joyce, indicated at its annual general meeting in April that it was the hope of the EBS to transform itself into a co-operative mutual bank. I would like Mr. Farrell to elaborate on this because we have witnessed the emergence of permanenttsb, which was part of the earlier deliberations of the committee on the financial sector. Instinctively, I welcome that development. However, is it only aspirational or is there serious intent on the part of EBS to move towards such a development, which would excite the current static situation that maintains? How will that evolve? What timeframe has been set?

Mr. Walsh remarked that he represents EBS on IPSO. Has EBS been brought into the clearing system? If so, that would facilitate it moving into a new area of activity. If not, what is Mr. Walsh's representative role in regard to IPSO? He agrees with Stewart McKinnon's views that ran contrary to Mark Duffy's presentation to the committee on behalf of the Royal Bank of Scotland.

The EBS has been very much to the fore in a number of innovative areas, including the recognition of the importance of providing mortgage opportunities to co-habiting couples, people in partnership relationships and others sharing homes, which is welcome. Apart from the initial public concerns expressed, what was the result of the company's product released earlier this year to enable parents to help children buy homes, given that it is not marketed as much now? I would like an insight into how that product progressed from the initial public reaction and concern about the advertising campaign. What was the EBS's experience in the intervening period?

The company has reported 30% growth in its owner-occupier mortgage business in the year to date. However, last year it reported buy-to-let business growth of a massive 359% to €202 million. As someone who is concerned about the spiralling cost of homes for people who wish to be owner-occupiers and that Government policy has facilitated and encouraged the speculator in the housing market, I am doubly concerned that there has been such phenomenal growth in EBS's lending pattern to people who are intent on becoming part of a landlord class within our society, thereby further increasing house prices and putting them beyond the reach of families and couples who intend to set up homes. I would have expected that would have been the critical focus of an organisation such as the EBS and I am concerned by these statistics because they suggest the institution is a facilitator of a particular pattern in the housing market and is, thereby, contributing to the ever spiralling cost of houses and placing home ownership out of the reach of many who may be EBS members.

Mr. Farrell

As head of marketing, I will deal with Family First. This product was based on solid research which showed that clearly 70% of young people were receiving financial assistance for the acquisition of their first home through cash from parents or relatives or other means. There was a clear and demonstrated need, which has been with us for a number of years. The product simply put together the elements that are already being done on a DIY basis by people in this market, whereby they must go and talk to parents and family members to find a way of putting together the money to buy a house. We repackaged a product that is there at present. The element that caused controversy was the creative execution of the advertising campaign, regarding which we put our hands up and said that obviously trespassed on a social issue, which was the problem of young people trying to acquire homes.

We freely acknowledged at the time that we should have conditioned the market in terms of explaining it to personal finance journalists, in particular, and others. We eventually got our message across regarding the product and it has been successful because 70% of young people require help. This figure is based on a study conducted by IMS. A similar percentage of parents said they would be willing to provide financial assistance for their adult children to allow them to get on the first rung of the property ladder.

We clearly signalled the move to a co-operative mutual bank at our agm. We have studied the co-operative mutual bank model as it has evolved in continental Europe. Such a bank is a mutual, is membership-based and is established on the same basis as EBS, which is a membership-based mutual organisation. There is no difference. However, the continental European mutual model has evolved in a way whereby banks are full service providers, offering a full range of products and services. I referred in my presentation to our limited range of products, albeit in three important segments of the market. Given the necessary framework, we plan to evolve into a co-operative mutual bank that will be able to meet more of the critical financial service needs of our members and do more business with them. One in five personal finance customers in Europe bank with co-operative mutual banks. Such banks enjoy franchises in some countries of between 20% and 40% of the market, which demonstrates their relevance.

Two million adults in Ireland are members of credit unions or mutuals such as EBS. That demonstrates there is clear public support for choice in corporate form. We believe both the plc model and the mutual model have validity but there is a clear signal that people would like more choice. The debate about banking services in Ireland up to now has been focused too much on pricing and competition between plcs when it should be about competition between different corporate forms, including the behaviour exhibited by plc banks, which has validity, and the behaviour we exhibit as a mutual, which is concerned with long-term profitable relations with our members and passing as much value back to them as we can. My colleague will deal with the question on lending volumes.

Mr. Walsh

Deputy Ó Caoláin referred to the figure for growth in our buy-to-let lending but much of that is basically arithmetic. The figure for the previous year was very small, so it is an increase on a small figure.

It is important to look at one aspect of the housing market, that there is choice for individuals between buying and renting a house. Well developed, successful economies need a very strong, vibrant rented sector for people who have not made their final choice about where they want to live. It encourages labour mobility and it is very good. It is important that everyone has access to housing but they should also have access to real choice. There should be a real volume of supply on the home ownership side or on the rented side. Economies that have been very successful over the longer term in Europe, in particular Germany and Switzerland, have very high levels of rented accommodation, of the order of50%, and the populations are very happy with that. It helps economic growth. A number of economic studies indicate that a higher level of rented accommodation and that freedom and labour mobility, add a significant amount, possibly up to 0.5% to gross national product growth.

However, individuals must have choice. If they are to have it, there should be a big supply and the market should be able to supply anyone who wants to buy a house at the right price. It should also be able to supply rented accommodation at the right price and the right time to those who want it. If the market is functioning properly, there will be an adequate supply of both, but both of these need to be funded. Individuals who want to buy a house need funding, as do investors. They are needed if one wants a rented sector, and a vibrant rented sector is good for individuals and for the economy. Where the exact balance lies depends on the overall economy, the age of the population and their desire to move into a house. Individuals should have the choice. Where there are levels of rented accommodation of the order of 50% in very successful economies and where the people are very happy with that, that works.

We have a high level of home ownership in Ireland. That has big advantages but it also raises other issues from the point of view of labour mobility and the economy as a whole. There should be freedom of choice. Both are good. We feel it is very important for us as a provider of mortgages to individuals and the provider of finance for housing generally that we are very active in competitively supporting all areas of the housing market and that we are not selective in that because that is part of consumer choice.

Chairman

I will conclude this part of the proceedings at this stage. I acknowledge the number of members who have indicated they wish to put questions. I suggest that, when we invite in the next group, St. Canice's Credit Union Limited, those members who have not had an opportunity to speak will be first in that next session. There will not be an opportunity for everyone to speak to each organisation that attends today.

I thank Mr. Farrell and Mr. Walsh for attending the meeting and for the informative presentation and the question and answer session. I thank them for their time. They will see a copy of the report of the committee's proceedings in due course. I will suspend for a few minutes to allow the witnesses to withdraw and St. Canice's Credit Union to come in.

Sitting suspended at 12.33 p.m. and resumed at 12.36 p.m.

Chairman

I welcome Mr. Michael Saunders, treasurer; Mr. Marius Cassidy, director; Ms Claire Lawton, manager; and Mr. Gerald Power, financial controller, from St. Canice's Credit Union Limited.

I am obliged to remind the visitors that, while the comments of members are protected by parliamentary privilege, those of visitors are not so protected. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

Before I ask Mr. Saunders to proceed, I wish to clarify that we have invited St. Canice's Credit Union as an individual credit union as opposed to inviting the Irish League of Credit Unions. In a similar way we met individual banks at an earlier meeting as opposed to the Irish Bankers Federation. This is because the committee wishes to meet organisations dealing with ordinary people rather than meet national representative bodies. That is why we have invited St. Canice's Credit Union.

We acknowledge that the witnesses experience is theirs alone and is not a commentary on practices in other credit unions. We will take them as we find them. If Mr. Saunders is ready, he may proceed.

Mr. Michael Saunders

As the largest community based credit union operating in Ireland, we thank the Chairman and the committee for giving us this opportunity to make a submission. As co-operative organisations, credit unions are very different from the financial institutions that make presentations to the committee. As a financial co-operative, St. Canice's is a member-owned, democratic organisation whose prime objective is the economic and social betterment of its members. It follows directly from this that we provide services to our members on a not-for-profit basis. In focusing on this unique position we will demonstrate how our lending and operating philosophy meets a need in our community that simply cannot be met by ordinary financial institutions. Our presentation will describe how we meet this need and will clarify the way our position on member charges, interest rates and member debt differs dramatically from other financial service providers.

St. Canice's Kilkenny Credit Union Limited operates for and on behalf of the people of Kilkenny city and its immediate environs. From our foundation in 1964, our membership has grown to more than 30,000 people with assets of €166 million. Along with more than 500 other credit unions operating on the island of Ireland, we are affiliated to the Irish League of Credit Unions. However, we emphasise that our presentation is based solely on the experiences, successes and challenges of St. Canice's We do not seek to represent either the league or the credit union movement as a whole.

St. Canice's offers its members a range of services, including savings facilities, access to credit, savings and loan protection, budget facilities, death benefit insurance and school credit unions. We promote thrift, which means members are encouraged to take control of their financial situation by developing a habit of saving. We also give members ongoing advice and support and develop a relationship with them based on mutual knowledge and trust. Savers and borrowers are valued equally and each member has one vote in the running of our credit union.

As requested, we will concentrate on issues around lending. The lending approach of our credit union is based on the co-operative philosophy of pooling and sharing financial resources. The savings of members in our community are made available to their fellow members as loans at a reasonable rate of interest. The decision about whether a member should get a loan is based on the history of that member and on his or her individual needs rather than solely on commercial risk factors. Currently we have €68 million out on loan to our members and each week as many as 500 loans totalling €800,000 are paid out. Members are asked to bear in mind that this amount refers to our lending environment which is predominantly the personal market. In line with our commitment to service and in-depth knowledge of our members, approximately 95% of loan applications are available to be decided on the spot, with the remainder decided at the weekly credit committee meeting. Each application is dealt with on its own merits and decisions are made based on the criteria of lender history and ability to repay, taking account the member's other outgoings. The general rate of interest we charge is 9.6% per annum and is calculated daily on the outstanding balance. We have also given interest rebates in the past few years of 10%. This compares favourably with personal lending rates charged by financial institutions and is especially true of small loans, which make up a large proportion of our business. Smaller loans would usually attract proportionately higher rates elsewhere.

Credit union borrowers also benefit from life and disability insurance at no extra cost, while these would typically involve extra charges elsewhere. Credit union repayment terms are flexible and there are no charges or penalties for late payments; there are no hidden charges at all, justifying our assurance to members that what one sees is what one gets.

Recently the problem of increased levels of personal debt has been highlighted by the media and credit union members are not immune to the tempting offers of easy credit and debt restructuring. In some cases they set aside our credit union values of thrift and avail of such products. By doing so they may erode their ability to get necessary credit in the future.

Take the example of the mortgage products which are specifically designed to help members own their own homes, but increasingly members top up their mortgages, consolidating their short-term debt. This type of restructuring can generate some breathing space for the borrower and can even give a sense of financial well-being. However, this is often very short-lived and we have even seen cases where the reduction in monthly repayments is used to support new borrowings. The fact is that putting a home at risk to convert a car or holiday loan into a secure debt of 20 years is seldom in the long-term interests of the borrower and members often return to the credit union for assistance in worse financial condition than before the restructuring. What we cannot determine at this time is the effect interest rate increases in the future will have on those who remortgage to the limits of their repayment capacity now.

This is a real cause of concern to us as a credit union. Our own policy and approach is that a loan should not be approved for a period longer than the life of the asset it is being used to purchase. Over the past few years, the number and value of applications for loans that could be considered problematic has increased. Our prime concern is to deal sympathetically with the situation of the individual member while safeguarding the savings of the members overall. We notice that loan refusals arise mainly because applicants are already fully borrowed, meaning that their combined debts and outgoings indicate they may not be able to repay the loan for which they have applied or to meet another financial commitment.

When a loan is refused it is our policy and practice to explain to the member the steps he or she needs to take so that future borrowing needs can be met. When a loan is approved for a member in financial difficulty it may be contingent on the member actually taking steps to squarely face their indebtedness. This could involve referral to MABS for independent financial advice. In some cases where a member is in financial difficulties with other institutions we agree to clear those debts on a piecemeal basis over a period of time rather than giving a once-off loan. This takes the pressure off the troubled member as he or she knows adhering to the agreed credit union repayment means a return to financial stability. This piecemeal approach also reduces the likelihood of the member taking out new loans until they are back on a sound financial footing. In all cases we look at the life circumstances of the applicant and try to structure loans to deal with problems such as redundancy, illness and family crises.

Credit control is a critical part of our responsibility to our members. We are ever conscious that it is the members money which is leant and we owe it to our membership to ensure it is repaid. The approach of our credit controllers is to intervene early when problems come to light. A high degree of flexibility is offered to members who are in genuine difficulty and if necessary a loan is restructured over a longer period if that is more manageable for the member. Members are supported and encouraged to alert the credit union to repayment problems so they can be helped to work through them. This approach reflects not only the unique nature of the relationship between the credit union and its individual members, but also the dual social and economic character of the relationship between the credit union and the community. Its effectiveness can be seen in the comparatively low bad debt rate, which is less than 0.4% of loans outstanding for our credit union.

At our credit union we take pride in the way in which we have promoted financial independence for our members for decades. For example, our flexible education loan has been in existence since the late 1980s and has enabled many members to access third level education, such as families who were not in a position to build up large lump sums for their children's education. This initiative was particularly vital when third level fees were in place. Another example is our start-up business loan, which is aimed at those who are unemployed or on low incomes. What other institution would lend up to €15,000 at 2% per annum without security to someone with a viable business idea rather than a proven business record?

It is hard to imagine an ordinary financial institution doing that, but this merely highlights the difference between the broader commercially oriented credit sector and the credit unions, which are community based, not-for-profit organisations. The flip side of independent is dependency and despite our history of co-operative self-help, we are reliant on many external agencies for our future prosperity and perhaps our very survival. Take for example our relationship with the financial institutions, particularly the commercial banks. Collectively as credit unions we are very lucrative customers of the main banks in our day-to-day banking requirements as well as our significant investment needs. However, we are also competitors in certain sectors of the personal market, in the main those segments which are least attractive to the commercial banks.

The second example arises in relation to information technology. Credit unions need access to certain technologies to develop and to continue to meet the needs of our members. For example, becoming part of the EFT system is a necessary precursor to becoming part of the national payment strategy. In addition, we must find a means to ensure social welfare payments can be guaranteed to be made available in members accounts on the due date before the Government can include us. Of course, once funds are lodged we will have to facilitate their withdrawal through ATMs or even Laser. To achieve this both co-operation from the banks and significant investment by the credit unions will have to be forthcoming.

Finally, we are also highly dependent on the support of Oireachtas Members as legislators to ensure our unique position is protected. We are depending on you to help us to continue to support the community within which we operate and in particular to provide credit to the weaker and more vulnerable in our society. Your understanding and safeguarding of our unique nature will enable us to work towards the betterment of our community and to foster self-help, financial independence and dignity for our members.

One of the objectives of a co-operative is to involve its members in designing the services that will meet their needs. The board focuses on the needs of members and by consultation and involvement with them, services are provided specifically to satisfy those needs. As a result we can genuinely say that what credit unions do is done by the members as well as for them. In that context, in the summer of 2002 St. Canice's arranged for an extensive survey of our members to be carried out by independent consultants, Marketing On Demand Ltd. The survey established that members were extremely positive about the role played by St. Canice's in the community. They appreciate the credit union because "it makes them feel like a valued member and not like a second class citizen." They emphasised the listening ear that affords repayment flexibility when difficulties arise and they value the friendship, goodwill and caring attitude of the credit union towards its members. They appreciated the fact that operations are conducted in an informal, flexible and non-bureaucratic manner and they especially value the way this is counterbalanced by professionalism and managerial efficiency.

Our credit union has a very strong community base and it is with quiet pride that we celebrate with the citizens of Kilkenny the many major achievements and progress our city has made and that we have been part of. This community spirit and involvement takes its most practical form through the credit union board of directors who are volunteers, elected by the members to represent them. Successive boards have ensured that St. Canice's played a pivotal role in meeting the needs of our savers and borrowers. Over the years we have helped our members to help themselves through both the prosperous and not so good times.

From very small beginnings nearly 40 years ago our credit union has grown to become a vital supporter of the development of our city. We believe the ethos of not for profit but for service is as relevant to us today as it was to our founding members and we look forward to continuing to be of service in the future.

Chairman

Thank you, Mr. Saunders. Many groups have made presentations to the committee over the summer months. Yours was practical, down to earth and concerned with your customers. We have heard much talk about financial product and marketing from many other institutions but yours is focused on the ordinary person, your customers. It is obvious from your presentation that you have a different focus from some of the institutions we have met over the summer months. They have a different job to do but you do a very good job yourself.

Senator Mansergh

I thank the representatives from St. Canice's for their presenation. Most of us appreciate the significance and importance of credit unions for large sections of our community. Many of us greatly admire the progress made by the city of Kilkenny in recent years and enjoy every opportunity we have to go there.

Mr. Saunders mentioned a very low figure of bad debt. Can he quantify or even qualitatively assess the increase in strain in the past couple of years? To what degree are people getting into more difficulties than was the case in the late 1990s?

Ten years ago the capital sums of mortgages were very much smaller than now but interest rates were between 11% and 13%. Taking these factors into account, is it now more difficult for a young person to acquire a house or is that merely a question of perception? We have already heard of the widespread perception, not least among one's own family and friends, that there are impossible barriers to young people getting into the housing market. On the other hand the figures show steady increases in mortgages given.

What is the average mortgage figure? What percentage of the total cost does that represent? What sum, on average do customers have to come up with in order to buy an average two or three bedroom house?

Mr. Marius Cassidy

On the first question about members' increasing difficulties, in the past two years there is evidence of people looking for assistance in order to restructure financial situations. This would arise, particularly, where members have a collection of debts which are eating into their funds for day-to-day living. That is an increasing problem which puts us in a difficult situation. In most cases we try to work with other agencies, like MABS, in order to make a plan which will work the individual out of those difficulties. We also try to pay off portions of the debt in a piecemeal way. Sometimes we find that if we clear the debt the individual will slip back into the previous situation. This is an ongoing issue. These are all loans which would be brought before the credit committee. They would not be dealt with by loans officers. On the basis of information received from members loans officers bring such cases to the credit committee and they are dealt with there.

On the housing market, we do not give mortgages. In recent times there has been an issue regarding people wishing to borrow for the deposit on a house. This is clearly outside our guidelines. In such cases members would be seeking to take on very high loans and mortgages. We have turned down 14 such applications in the past year. These were good members but it would have been irresponsible of us to allow such a degree of indebtedness. We are approving small loans for finishing houses or for putting in kitchens or bathrooms and we work with members in order to get them back on a sound financial footing.

I am sorry, I did not hear the third question.

Senator Mansergh

It relates to something that Mr. Cassisdy said. If a person wanted to borrow for a deposit what sum might he be looking for?

Mr. Cassidy

Typically, it would be around €20,000.

Senator Higgins

I join with my colleague, Senator Mansergh, in welcoming the representatives of the credit union. I commend them on their excellent presentation, on the outstanding work they are doing and on the humane and understanding way they deal with their customers.

Earlier this morning we heard a presentation from the Educational Building Society. One of the issues raised by the EBS related to the declining net interest margins because the market has become so competitive. They projected a 40% reduction in the next five years. Is St. Canice's credit union experiencing problems in this regard? Mr. Saunders mentioned that his credit unions gives priming loans for small businesses. He asked what other institution would give an unsecured loan of €15,000. The delegation referred to the decision to approve unsecured loans of €15,000 for start-up businesses. I was not aware of that scheme. Has the credit union approved many of these loans? When did the scheme commence? Has it been successful? Is €15,000 the maximum one can get? Does this limit apply only to unsecured loans?

Mr. Saunders

The start-up loan scheme commenced in 1996. At the time many of our members found it difficult to secure loans because of job losses in Kilkenny and its environs. Kilkenny is more of a service town than an industrial city. Members came to us with ideas and we found a way to support them. At the beginning we lent £10,000 but we now lend €15,000 because costs have risen. We gave our members an opportunity to start their own businesses. They had skills and ideas but no financial backing. We gave them six months grace because they would not have been able to pay us back immediately after setting up a business. Most of our members started paying back after only a month because they were accustomed to doing so when they had personal loans from us. They were so grateful for our support that they paid us back earlier than agreed.

Since 1996 we have paid out €1.5 million to the community and Kilkenny city in small business loans. It gives us great pleasure to see many of those businesses thriving and to be part of the development of Kilkenny city that the previous speaker spoke about. I am delighted that he visited Kilkenny and was able to enjoy the benefits of that city.

As a co-operative we are in the personal loans market and our interest rates compare favourably with other lending institutions in the same market. As I stated earlier, we also give an interest rebate. This may be new to many people because it is not usually mentioned in commercial terms. The rebate is based on a percentage of the interest that the borrower has paid in the previous year. This is typical of the co-operative spirit that we work in. We reward borrowers and savers. Usually our AGM is at Christmas or around 1 December. Members appreciate this type of rebate on their interest charge.

We are aware of mortgage interest rates. Unfortunately, interest rates on personal loans have not dropped considerably.

Deputy Ó Caoláin

I congratulate St. Canice's credit union on being the largest community based one. I have nothing bad to say about the credit union movement. I am a member of my local community one and I wish the league every success in the future.

As I am not familiar with the situation in Kilkenny my question will be broadly focused. At present there are 535 ILCU members and 12 disagree with the loan protection insurance product claiming it is 30% above the market price. I know a few of the dissenting credit unions. Is St. Canice's opposed to the product? Many of the dissenting credit unions are located in new and developing population centres in Dublin. One such credit union is located in Newbridge, County Kildare and is close to St. Canice's. What does the delegation think about the matter?

The annual interest rebate is an interesting practice. I welcome the measure. It should be encouraged. Does St. Canice's have a problem competing with the 57 licensed moneylenders operating in its jurisdiction? Are people still confronted with interest rates of up to 196.5% APR? One of the core issues at the heart of the credit union movement is to provide a safe alternative to moneylenders. Only God knows how many unlicensed moneylenders operate in the area.

Mr. Saunders

First, I shall reply to the Deputy's question about the 12 credit unions that have taken issue with the league. Each credit union is a separate entity with a board of directors. Decisions are made by individual credit unions on whatever basis. I cannot comment on other credit unions and it would be unfair to expect us to do so. The Deputy's question should be addressed to the ILCU.

I would love to say that moneylenders do not operate in our area but they do. My credit union gives a lower rate of interest than moneylenders and we educate people about the benefits of a credit union through newspapers, the local media, radio, etc. However, people still decide to go to them. They fulfil a need for a section of our community. People have easy access to moneylenders and do not think about the interest rates. This issue could be addressed in schools.

In 2000 St. Canice's gave all of the schools in our area free computers and printers and installed a credit union software system. We also provide computer back-up systems and stationery free of charge. Parents and teachers were very co-operative. The credit union has benefited from the scheme. The schools operate their own credit unions and the children save for events like school trips.

Chairman

I thank Mr. Saunders and his colleagues for attending today. We appreciate the positive response to our invitation. We also appreciate the presentation and the response to members' questions.

Sitting suspended at 1.10 p.m. and resumed at 1.11 p.m.

Chairman

I welcome Mr. Liam Edwards, national co-ordinator of the Money Advice and Budgeting Service, MABS; Mr. Leonard Burke, principal officer, and Mr. Michael Culloty, co-ordinator with Finglas money advice and budgeting services. I remind visitors that while comments of members of the committee are protected by parliamentary privilege, those of visitors are not so protected. I remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise, or make charges against people outside the House, or against an official in such a way as to make him or her identifiable.

Mr. Leonard Burke

I thank the committee for inviting us to make a presentation. I will briefly give an overview of the Money Advice and Budgeting Service and Mr. Edwards will take members through the aims and objectives of the service. Mr. Culloty, from the Finglas money advice and budgeting service, will address the issues of the causes of debt and the effect on customers of the Money Advice and Budgeting Service.

The Department of Social and Family Affairs has been directly involved in activities to combat moneylending since the publication in 1988 of a report by the Combat Poverty Agency, entiled Moneylending and Low Income Families. Budget allocations have been provided since 1992 when five pilot projects were set up in Limerick, Waterford, Cork and Dublin cities and in west Clare. Since then the number of projects has grown to 52 and we now have a countrywide service with up to 120 people providing advice on a one-to-one basis and a back-up administrative staff of 60. The budget in 2003 for the Money Advice and Budgeting Service is just short of €10 million, at €9.867 million.

I will leave it to Mr. Edwards to outline the aims and objectives of his organisation in his presentation. The emphasis is on practical, budget-based measures that will succeed in removing people permanently from dependence on moneylenders and open up alternative sources of low cost credit through the credit unions. The MABS has a special relationship with the credit unions which operate "special accounts". Mr. Edwards will give more detail of those.

The projects give advice and assistance but do not pay debts. The aim of the service is to help people to regain control of their finances and to budget for the future. At any given time there are 11,000 customers presenting to the Money Advice and Budgeting Service. The service is now available throughout the State. Its national advisory committee has identified three areas requiring money advice attention in the future. These are community education, customer credit and the responsibilities attendant to both the lender and the person obtaining credit, and ways in which the Money Advice and Budgeting Service might influence cost cutting issues in Departments.

The Department of Social and Family Affairs has overall responsibility for management of the programme, including the monitoring of the projects, financial administration and executive decision-making. The national advisory committee is made up of voluntary community and statutory members and reports to the Minister in regard to policy on the Money Advice and Budgeting Service.

The most recent evaluation of the Money Advice and Budgeting Service, carried out in 2000 by Eustace Patterson Ltd., found that more than 90% of those surveyed were positively disposed towards the service. This included clients, community and voluntary bodies, the finance industry and statutory creditors. The evaluation found that two thirds of the caseload were female clients, just over half of whom were aged between 25 and 44 years. One third were aged over 45 years and a small proportion were aged under 25 years. Approximately 70% were receiving some form of social welfare payment, 19% were unemployed, 31% were lone parents and 21% were receiving some other form of social welfare payment. A further 22% were employed and 3% were self-employed. The overall conclusion was that the MABS has proven itself a worthwhile intervention with a rationale for its continuation.

Mr. Edwards, the national co-ordinator, appointed in 1994 to liaise with the various companies, will now give his presentation.

Mr. Liam Edwards

I will talk about the aims of the Money Advice and Budgeting Service which is a service to help people with debt problems. I have listed various debt problems people may have, beginning with priority ones such as rent and mortgage, public utility debts, the increasing number of debts relating to mobile phones, debts to financial institutions such as credit card and personal loans, debts to moneylenders - licensed and unlicensed, and personal debts. Many cases involve all or some of these. The Money Advice and Budgeting Service helps people to prioritise their needs in favour of the most pressing, such as housing and utilities, and also deals with income maximisation.

The objectives of the service are to give an independent, free, confidential money advice and budgeting service, to give people the knowledge and skills to deal with their debt problems and to identify sources of credit - typically the local credit union, a partnership approach with which I will deal later. It also aims to involve the target group because they are the people who have the debt problems and know the types of solutions or options that would suit their needs, to give access regardless of location and to highlight changes in policy and practices which impact on people with debt problems. This would include statutory bodies and the credit industry.

The target group are people on low income or social welfare. We see their limited access to financial services and credit as part of the cause of the indebtedness problem. They are confined to borrowing from high interest sources such as moneylenders and mail order or hire purchase companies.

The objectives from the customer point of view are to help people to regain control of their finances, to plan for the future and to gain access to affordable credit. The plan also aims to introduce people to their local credit union if they are not already members. There they can save and borrow small amounts, which hopefully will prevent further debt problems in the future. We have a national strategy on community education and that is about to be put in place. At present it is being dealt with at various levels in the various MABSs throughout the country.

I will give a flavour of a number of policy initiatives in which MABS has been involved. The first is the use of budget meters by utility companies to collect payments for their energy supply. We deal at national level with the main utility companies, which also have finance arms as part of their service and ensure the budget meters are not used to collect for the finance company. One of the earlier problems that has always existed is that which people have with the payment of TV licence fees. We worked with the manager of licence services at An Post and once we agreed a strategy with him, we had a series of regional meetings that helped to create contacts between the An Post collection service for the TV licence and the MABS.

On local authority rents, we dealt with the IPA housing unit and worked closely with it on the publication of guidelines for local authorities on rent and arrears management. We have worked with the community welfare services on drafting a protocol to be implemented for our joint clients, which would work in favour of the client, and we have also initiated a debt pilot settlement with the Irish Bankers Federation. This has been in place for approximately 12 months and gives people an alternative to using the legal system for debt recovery. The banks were quite happy to work with us on that and other credit institutions have also bought into it.

The management of the MABSs is such that they are incorporated as companies limited by guarantee and they are composed of representatives from statutory and voluntary bodies, who are locally based. Typically these would be the social welfare services, credit union, Society of St. Vincent de Paul, community welfare service, local authorities, public utilities, citizen information centres, people who are community activists and maybe even gardaí.

The value of MABS lies in it being a friendly third party service. Somebody with a debt problem can share it with a friendly third party who will listen. This may be the first opportunity a person gets to share all his or her problems. The experience is that people with a problem will settle at any cost. When the pressure comes on dealing on a one to one basis, their priority is to have a settlement, regardless of how realistic that is. They may finish the interview with an unrealistic agreement. That is like a crash diet - it is unsustainable. The MABS approach would be to help people prepare a budget plan, which might be their first opportunity to look at all their debts and to reschedule so that any repayment plan they make will be realistic, reasonable and sustainable. The bottom line is that before repayments are looked at, the person must have enough on which to live. It will also help them to prioritise their debts.

We have very close links with the credit unions at local and national level. We operate what are called "special accounts" with the credit unions, which is a debt management system to allow people to make repayments to their creditors. This operates on the basis that the money adviser introduces clients to the credit union and helps them to make the application for membership. At that point they sign an authority to establish a relationship between the credit union and the money adviser in order that information can be passed. The system allows them to pay regularly - on a weekly or fortnightly basis into the credit union in respect of their debts. The creditors are paid on a monthly basis but only to the extent that the person has put the money into the credit union. Side by side with that they are encouraged to operate a shares account and that will enable them to get credit for the future in their local credit union.

We operate another scheme that we do not advertise. As an alternative to borrowing from moneylenders, people may use a loan guarantee fund to guarantee very small loans of maybe €200 to €300, which represents the amounts people typically borrow from a moneylender. This arises for people who are not authorised by their local credit union to borrow that amount. We recognise that for people working with the Money Advice and Budgeting Service putting a discipline on themselves even for a very short period can be significant.

The budgeting tools used by the money adviser are as follows: the household budgeting scheme, which is operated by the Department of Social and Family Affairs in conjunction with An Post and which allows deduction at source from the person's social welfare payment for local authority rent or utility bills; the credit union's special account, about which I spoke earlier; Billpay which is operated by An Post in local post offices; and our own MABS link for people whose local credit unions for some reason are not operating the special accounts.

I will now hand over to Michael Culloty, who works at the coalface to speak about the causes and effects of debt.

Mr. Michael Culloty

There are many causes of debt, but the ones that come to mind are economic and structural ones, low income and no access to low cost credit. Incidental and unforeseen circumstances can arise in many people's lives, for example bereavement, loss of employment, marital relationship breakdown, accidents, new children arriving, etc. Social peer pressure, particularly on low-income families, can also cause debt and does so on many occasions. Particularly with the explosion of credit available, there is a lack of education in people's ability to choose wisely. Lack of access to information, which is provided in a specific and simple form that people can understand, can also cause debt. The complexity of the system and the language used can throw people off and result in them not knowing the consequences of borrowings. Behavioural problems can lead to indebtedness. People over commit to borrowing, have poor budgeting skills and addictions of one kind or another.

The effects of over indebtedness are myriad and severe in people's lives and can cause huge financial, mental, health and other consequences. From a psychological point of view, we see people in very anxious states, very embittered people who are in the blame game, conflict at home, people in denial, people suffering from guilt, homelessness, shame, stress, stigma and sometimes people contemplating suicide.

From a physical point of view, we would say that probably 60% or 70% of people who approach MABS are ill because of indebtedness. We see people with blood disorders on medication of one kind or another. There is eczema, increased drinking, migraine, weight loss and many other symptoms.

Chairman

I would like to make a general observation before I allow Deputies Burton and Ó Caoláin to speak. Earlier this summer, and again this morning, the committee held hearings with financial institutions, the Irish Financial Services Regulatory Authority, the Office of the Director of Consumer Affairs and the Competition Authority. One of the main messages the committee received from such bodies was that there should be ease of transfer from one agency to another. There should be full competition and openness. One should be able to borrow at every hand's turn. I wonder if there is too much emphasis on ease of transfer. Much of the criticism coming from certain bodies relates to the difficulty in moving from one institution to another. Many people believe that this area should be freed up and that one should be able to walk in, sign over and move on. This would increase the risk of people taking on more debt than they can handle. I know that the Money Advice and Budgeting Service has dealt with the moneylenders, but it did not seem to refer to the ease of credit associated with financial institutions, credit cards, store cards, mobile telephone bills and mail order companies. My instinct is that such matters are also part of the problem. The MABS's customers might not cause the problem, but they are at the bad end of it. I am making a general observation in that regard.

Mr. Culloty

I agree that credit is far more easily available now than it was and that it brings its own problems. We are experiencing the effects of the ease of credit. While it is accepted that there can be irresponsible borrowing, we sometimes wonder if there is also irresponsible lending.

Deputy Burton

I welcome the delegation and thank our visitors for their time. In particular, I welcome Mr. Edwards who has worked in this area for a long time. I would like to follow up on what the Chairman said by asking about a number of specific matters.

I deal with a couple of people each year who encounter great trouble because of credit card borrowings. A typical example of this is a person living in a local authority housing estate who borrows on a couple of different store cards or credit cards to pay for renovations to their house. I am often shocked by the level of penalties that apply when one defaults on such borrowings. I can understand why default mechanisms are in place, but the charges that result in some cases are sky high. The person in question, who is usually a woman, quickly loses control. I am aware that MABS advisers work with people in such situations. Mr. Edwards referred to a pilot scheme with banks and lending institutions that has been running for the past 12 months. Have there been any reports of reductions in the bundles of exceptional charges, such as interest rates, that have to be paid? Has there been any response that suggests that the penalties and charges will be levelled off?

The second question I would like to ask relates to my Fingal experience, but it may apply to other local authorities in the future. As a consequence of pressure in the past year from the Department of the Environment, Heritage and Local Government, Fingal County Council has significantly revised its differential rents scheme, essentially to abolish the maximum upper limit on differential rents. This is a particular problem for women. The relevant figure under the new Fingal scheme is 11%, unlimited, of the salary of the top earner in the house, as well as €15 or €20 per week for every other earner, including those with social welfare incomes. I would like to analyse what this means, from a social point of view, for someone who has reared three or four children who are now 18, 19 or 21 years of age and are earning about €300 per week in the Blanchardstown town centre, or a person who has returned from the UK. I have encountered many families that have very quickly built up large debts, perhaps of €1,000 or €2,000, with the local authority. I have seen, over a long period, that such a debt can be the catalyst for complete disaster in a family. Mr. Culloty knows that all sorts of other things come in on top of such people.

I would like to know if the MABS has any input into the decisions of the Department and the local authorities. I know there is a policy of trying to remove local authority tenants if they are earning. There may be four children earning money in a family, and they may have been doing so for four to eight years. The income of the parents is not the relevant detail. I have seen many families go to the wall as a consequence of the manner in which they were assessed for arrears of differential rents. I accept that many people understate their earnings, but a great deal of pressure is involved in the cases with which I deal on a regular basis. I know that the MABS people try to help, as do many local authority officials, but the scheme is relentless. It is my experience that the scheme is causing a significant amount of difficulty in my local authority area.

Mr. Edwards

I will deal with the issue of penalty charges in the first instance. The MABS has not made any headway with the financial institutions on penalty charges. We considered another plan a couple of years ago, but a lender tested it under the unfair terms and consumer contracts and we did not proceed with it. I think the Office of the Director of Consumer Affairs will have to take a High Court case in that regard. It is not a simple process. Mr. Culloty may be better able to deal with the differential rents scheme and the Department of the Environment, Heritage and Local Government. I hope that we will be able to deal with policy issues to a greater extent in the future. We are in the process of setting up a national development team, with a social policy worker who will be able to take on board the issues. The information and advice about money that is available from the coalface is very important, but it needs somebody to pull it together and to move it on.

Mr. Culloty

We have a great deal of anecdotal evidence similar to that of Deputy Burton. We have noticed that children are beginning to stay at home for longer. They often do not see themselves as having to contribute to as great an extent as they would if they had moved out. This usually places an awful lot of pressure on the mother of the children in question, as she has to collect rent. It can be an extraordinarily difficult situation, as young people want to have their way. They want to have social lives, etc. I have seen heads of households who are very traumatised as a consequence.

Deputy Burton

Can Mr. Culloty see a way around that? I can assess this problem from both sides, but I am concerned about some of the areas I represent. There are 2,000 local authority houses, in seven different estates, in one part of my constituency. Those living in such houses are often good and long-standing tenants - the kind of people that the local authority wishes to retain in the area. They are being pushed out, however, as a consequence of the fact that their families grow up. The mother and father may well have a social welfare income such as disability benefit by this stage because they are probably in their late 40s. Such people could not afford to buy a house in the 1980s because they were unemployed and now they are suddenly accumulating large debts which have a catastrophic effect on family stability. I raised this matter with the local authority and the Department on many occasions, but I got nowhere.

Mr. Culloty

It is a significant problem and it is possible that it should be studied. The MABS has no ready answers. There is a real conflict, but we do not know how to resolve it. I agree that the issue warrants some study.

Deputy Ó Caoláin

I wish to pay tribute to the work of the Money Advice and Budgeting Service. I am aware that the organisation is doing eminent work in my constituency of Cavan/Monaghan and it is right that it should be acknowledged today.

It was interesting to listen to the presentation and to note the instancing of the television licence. I thought for a moment and I realised that for so many people, it presents only but the thought to remember to do it. It points up the gap in our committee and while I congratulate Senator Mansergh for staying, it is no coincidence that the only Dáil Members present are Deputy Burton and me. Everyone else has left because the constituency in which so many of the people under discussion are so sadly clustered is not being listened to or heeded adequately by all elected opinion. That is a tragedy.

I wish to focus in particular on the issue of money lending. I raised this matter with St. Canice's, the last group we met. Has the Money Advice and Budgeting Service or some other agency undertaken an examination of the reasons people go to licensed or, worse again, unlicensed moneylenders? Is any agency able to carry out such an examination? There are now 57 licensed operators as against 64 five years ago and one hopes the trend is indicative of a contraction which is leading to a further curtailment of the outrageous interest rates being imposed on unfortunate people. A rate of 196.5% APR was charged in one particular case by a licensed moneylender. Comparable rates of 180% are charged which is absolutely incredible. Has an analysis of this been carried out and does the MABS have a role in this regard or does it see the matter as one for its parent Department, the Department of Social and Family Affairs? Whose function is it to carry out an in-depth study of the reasons people use moneylenders when there are more appropriate agencies, including the credit union movement, available in almost every community throughout the island. Why did the AIB, a major Irish bank, buy out a licensed moneylender which had €10 million on its books? That is an incredible statistic for people to take on board, but it is a fact. What constituency of people felt there was no other door or option open to them but that of the so-called licensed moneylender given the interest rates I described?

Something is terribly wrong when so many people feel so compelled. According to the Director of Consumer Affairs, Ms Carmel Foley, who has to license these bodies, there are some €57 million on the books of the 57 licensed moneylenders in this State. That is an awful lot of money which is earning an awful lot of interest while causing an awful lot of grief for those who deserve anything but that. Already, they have to cope with difficult circumstances in their lives. Can the delegation indicate to me any study which might inform progress on this issue?

The text of the delegation's introduction states that the MABS intervenes frequently to prevent the repossession of family homes and the disconnection of gas and electricity supply. How does the service contend with difficulties which arise in the moneylender sector? We understand how an intervention can be made in relation to repossession orders or the threat to cut off essential utilities, but how does one deal with this other major problem? I cannot emphasise enough the importance of addressing the issue.

Mr. Edwards

I continue to emphasise the reason for the establishment of the Money Advice and Budgeting Service, to help those on low incomes, typically those who borrow from moneylenders. Money advisers deal with licensed moneylenders who, for want of a better term, are co-operating with the MABS. If someone has an agreement to pay back €10 a week, but cannot afford it, the moneylender will accept €2 a week instead. The interest is front loaded which means that if the period is extended beyond 20 or 26 weeks, the annual percentage rate drops significantly when repayments are stretched out over two years. We do not make any deals with moneylenders in respect of quick fix settlement figures. We do not work with any creditor at that level, we work to ensure that a person takes responsibility for their debt and repays it at a level they can afford. While it puts pressure on them, that pressure can be kept to a minimum which allows them enough on which to live.

The Money Advice and Budgeting Service was established as a result of a study carried out in 1988 by the Combat Poverty Agency which looked at money lending and low income families. We continue to reach out to our target group in which regard we initiated recently an advertising campaign in credit unions and post offices, institutions used by those on welfare. People make choices and if they choose to borrow from moneylenders it may be because of a family history, a culture, a need or an inability to access credit from any other source. To obtain credit from a local credit union a person must have a savings record and must have been a member for a number of weeks. We try to deal with the problem and the loan guarantee fund has been established for that purpose. Mr. Culloty may have something to add as he operates closer to the coalface while my information is anecdotal.

The issue of television licences was identified at a very early stage as being a huge problem. It is not so much the cost of the licence that is the problem but the ultimate penalty whereby people can end up being incarcerated. That is the reason we took the matter on at first and we have made good headway.

Mr. Culloty

There is a very strong tradition in local areas, as well as in families, whereby relationships are built up with a moneylender which people find difficult to break. It is remarkable, but people have asked us how it is possible for them to tell a moneylender that they do not need him or her in future. Clients also look at the weekly payment rather than at the totality of the sum involved. As they wish to satisfy the immediate need which appears, the only thing they judge is the weekly payment which is another factor as well as the cultural one. The Money Advice and Budgeting Service tries to break the relationship by putting another system in place for people which is as secure and which responds as speedily to their emergencies as does the moneylender at the door. The moneylender at the door is a priority creditor because he or she is at the house looking for the money which is something that creates difficulties. The MABS attempts to provide the culture and security which allows a person to switch from moneylenders to main stream credit access.

When a person comes to us, the special accounts scheme allows the moneylender to be paid by monthly cheque through the credit union rather than at the door. We maintain reasonable relationships with the legal moneylenders. We negotiate with them and on many occasions we point out to them what the priorities of the borrower are and where the money lender appears in the borrower's list of priorities. Normally, they accept the outcome of that process.

Senator Mansergh

I welcome the delegation from the Money Advice and Budgeting Service, clearly one of the most worthwhile social initiatives of the past 15 years. The MABS can be traced back to the Combat Poverty Agency. I remember Deputy Woods was keen on and committed to this project when he was Minister for Social Welfare. I am sure the initiative was also put forward in the programme for economic and social progress in 1991-92. It is good to see it is one of those initiatives which have evolved from pilot projects and rapidly expanded under successive Governments.

Will the delegation give an overall assessment of the organisation's success over the 15 year period in dealing with the problems created by moneylenders? Has it succeeded in reducing this problem or merely kept it at bay? Will the delegation give an overall qualitative assessment of the results and effects of the initiative?

Mr. Edwards

The biggest result or effect of the initiative is that a service is now available, whereas people had no one with whom to share their experiences or talk to before the Money Advice and Budgeting Service was established. This is a significant strength. Another major achievement on the national scene is the relationship we have built up with creditors, namely, the banks, building societies, Bord Gais, the ESB and local authorities. Nowadays, if people come to the Money Advice and Budgeting Service, they are assured creditors will listen to them. In the early 1990s, when MABS was set up, some of the creditors resisted this by refusing to deal with third parties. They did not know what the Money Advice and Budgeting Service was about. Now it is established, the creditors recognise it is as a bona fide organisation, an honest broker, and will now deal with it.

Chairman

On the honest broker dimension, I got the impression earlier that MABS does not negotiate with creditors but empowers people to deal with their personal financial situation and creditors. Is that correct? Does the MABS negotiate with creditors?

Mr. Edwards

It comes back to the capacity of the person coming to the MABS. It is best to empower those with the capacity to undertake negotiations. The sooner they are in charge and regain control of their finances, the better. Many of the people who come to the MABS have low literacy skills, are not well educated and are unable to cope with officialdom. This is where the intervention of the MABS is significant.

Chairman

The MABS acts as an intermediary?

Mr. Edwards

Yes.

Chairman

That is the point I wanted to have clarified and is my understanding of its role from cases of which I am aware. The links with the credit unions were mentioned as were the loan guarantee fund and crisis loans. Who underwrites crisis loans? Do credit unions provide such loans with the MABS guaranteeing them?

Mr. Edwards

When the various money advice and budgeting services were set up, they were given an amount as part of their budgets to lodge to a loan guarantee fund in one, two or perhaps three credit unions. It is not a huge sum as the loans are usually in three figures and therefore not substantial. It is a revolving fund and the demands on the Department to top-up the loan guarantee fund are few and far between.

Chairman

I have two final questions. When clients approach the MABS - as public representatives, members of the committee will also be aware of this - they are anxious as they have reached a crisis point and are possible physically and psychologically drained by their experiences. Do many of them fail to return after the first visit? What is the level of follow-up visits? I am sure some people who make commitments during the day will have forgotten about them by 6 p.m. on the same evening.

What kind of relationship does the MABS have with the Society of St. Vincent de Paul and similar organisations? I am sure some of the staff of the MABS also approach the Society of St. Vincent de Paul when, for example, a client's electricity supply is about to be cut off.

Mr. Culloty

On the question of clients who access the service, it usually takes considerable moral courage and strength to come to a money advice and budgeting service. When people come they are inclined to stay and see their problem through because they will probably have agonised about the issue before approaching us.

On the second question, we have significant co-operation with the Society of St. Vincent de Paul, which is represented on the boards of management of many of our services. There are, therefore, strong relationships.

Chairman

On behalf of the joint committee, I thank Mr. Edwards, Mr. Burke and Mr. Culloty for attending today's meeting, for the informative and helpful question and answer session as well as their presentation. It has been of benefit to all members of the committee to meet and speak with the delegation directly. We will now suspend for lunch and recommence with a delegation from the Department of Finance.

Sitting suspended at 1.56 p.m. and resumed at 3.00 p.m.