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Joint Committee on Finance, Public Expenditure and Reform debate -
Wednesday, 4 Sep 2013

Overview of Financial Sector: Discussion with Ulster Bank

We will continue with No. 5 on today's agenda, which is an overview of the financial sector. The next module involves representatives of Ulster Bank. I welcome Mr. Jim Brown, who is the chief executive of the bank. Mr. Brown is accompanied by Mr. Stephen Bell, who is the chief risk officer of the Ulster Bank Group, and Mr. Tom Leahy, who is the southern regional director of Ulster Bank's corporate banking division. Mr. Brown will make some opening remarks, which will be followed by a question and answer session. I remind members, witnesses and those in the Gallery that all mobile telephones must be switched off.

I advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they will be entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

Before I ask Mr. Brown to make his opening statement, I remind the witnesses that the main focus of today's meeting is on the general performance of Ulster Bank and the other banks. In addition, we are focusing on how the target figure of 20% by the end of June was arrived at. We are also keen to get a statistical breakdown of how many people are now in a resolution process. What is the menu of resolutions being applied in such cases? I invite Mr. Brown to make his opening statement.

Mr. Jim Brown

I thank members of the committee for the opportunity to provide an update on Ulster Bank's progress and its strategy in the areas outlined in the committee's invitation. I will make some brief introductory remarks before responding to any specific issues the committee may wish to address. Ulster Bank is and remains committed to the island of Ireland. It is the third largest financial institution in the Republic of Ireland and the largest in Northern Ireland. It is unique because it is the only systemic bank operating across both markets that is owned by an international parent with a global network. Ulster Bank is an integral part of the financial and social economies in both jurisdictions. We believe a healthy and functioning financial services sector is essential to a vibrant and competitive economy and marketplace.

Ulster Bank has a significant presence in Ireland. It currently employs 5,800 people. It has a network of 214 branches and serves almost 2 million customers. It has lending of more than €53 billion in the Irish economy. It holds more than €27 billion in customer deposits. Ulster Bank supports small and medium-sized enterprises with approximately €8.2 billion in loans, with new lending to businesses in the Republic of Ireland amounting to approximately €1.5 billion in 2012. It continues to hold strong market positions across all of its major customer segments, with stable or improving trends in most areas.

Ulster Bank, like most financial institutions, has not been immune to the difficulties experienced in the financial services sector. It is an absolute priority that we address the issues we face and return to profitability as soon as possible. Our target is for the bank's core operations to be back to profitability during 2014. We have a clear strategy to achieve this objective and are focused on building a good bank for our customers, while ensuring we deal effectively and responsibly with our legacy issues.

Our 2013 interim results which were announced in August are solid and encouraging. They demonstrate consistent progress, compare very favourably with the industry and confirm the effectiveness of our restructuring process and approach. It is worth highlighting some of the key year-on-year figures from these results. Total income increased by 7%; customer deposit balances increased by 12%; our loan-to-deposit ratio improved by 400 basis points; impairment losses decreased by 30%; and our operating loss improved by 41% to €387 million. Separately, we also deleveraged our non-core portfolio by €1.4 billion. This is clear evidence of the progress we are making, which will no doubt be assessed as part of the ongoing review of the RBS Group, including Ulster Bank, by the United Kingdom Government. That said, we are building a business for the future, while managing the issues of the past and making real and evident progress on our strategy to do so.

I will comment specifically on two important areas, as outlined in the joint committee's invitation, namely, mortgage arrears and our support for small and medium-sized businesses. Our objective in dealing with mortgage arrears is very clear. We want to keep as many as possible co-operating customers in their homes. To do this, we need some core fundamentals to be in place. First, customers must be willing to engage with us, as their lender, to ascertain what sustainable arrangement can be put in place for their mortgage arrears. Second, we must be allowed to contact and consult our customers and make arrangements to assist them. The regulatory structure for handling arrears must be sufficiently flexible to take into account each and every customer's position, rather than having a crude one-size-fits-all arrangement. The system for dealing with mortgage arrears must be fair and equitable. It must be fair to homeowners experiencing arrears, lenders and the approximately 80% of homeowners who are servicing their loans. It must always be recognised that secured debt takes priority over unsecured debt. The former is usually priced to reflect the fact that it is supported by a charge on a property. If Ireland is ever to see a recovery in the housing market and attract new lenders to the market, this fundamental building block of the mortgage market must be recognised and supported.

Addressing the mortgage arrears issue is correctly a priority for the Government, the Central Bank and the banking industry. At Ulster Bank we are committed to working with the authorities to achieve this. In doing so, it is accepted that there have been failures on all sides in how mortgage arrears have been handled. As lenders, in addition to having insufficient resources and solutions in the early stages, we have been restricted by delays in giving us the necessary tools to deal with the issue. Matters such as the code of conduct on mortgage arrears contact restrictions, the Dunne ruling and the absence of a centralised credit bureau have exacerbated and extended the problem, as has the continued debate on debt forgiveness. To stress this point, I highlight an interesting trend. In most markets levels of mortgage arrears are directly linked with unemployment. A comparison between our mortgage books in the Republic of Ireland and Northern Ireland, a neighbouring market of which we have intimate knowledge, is persuasive. The correlation between unemployment and mortgage arrears continues to hold true in Northern Ireland where there were no such interventions, impediments and discussion of potential mortgage write-offs. In the Republic the correlation between mortgage arrears and unemployment started to break down in the second quarter of 2011 and there is no longer any correlation between them. It appears, therefore, that there has been a breakdown of payment discipline among some mortgage customers.

In addition, against this backdrop, sight has been lost of two key fundamentals which are the basis of any mortgage or housing market. First, there is a cost to living in a home and, second, secured debt must be prioritised over unsecured debt. As a result, there continues to be a sizeable minority of customers who have not engaged with us and are refusing to make any payment on their mortgages. Living in a home costs money. Unless owned outright, this cost must be met through mortgage repayments, rent or the provision by the State of social housing. Some people do not appear to accept this premise and are living in a home without making any contribution towards its cost, despite someone else advancing the money to acquire the property. Put simply, this is not fair.

At Ulster Bank we are working with co-operating customers to enable them to resolve their issues. We have committed considerable resources - more than 400 people - to work with and help customers in mortgage arrears. We have a wide range of options to address the particular circumstances of individual customers. We are committed to working with those customers who work with us to find a solution. Our goal is to keep as many co-operating customers as possible in their homes and we believe that in the majority of cases mortgage arrears can be satisfactorily resolved on a case by case basis, given time, good will and co-operation.

Our approach is beginning to show results. I refer members to some of our latest statistics which are available as an attachment to the document circulated. At the end of August 2013 our levels of mortgage arrears for 90 days past due were reducing for the fifth month in a row. This is the first time such a trend has been evident since 2008 and it is contrary to the general trend on mortgage arrears, as reported by the Central Bank. According to our data, ours is the only bank experiencing this improvement. We are completing arrangements for an average of 3,000 customers each month. This is strong progress, which is in the best interests of all of those involved.

With the recent removal of the regulatory restrictions, we have also been able to make contact with 71% of our mortgage arrears customers in the past three months. It is not a coincidence that these industry leading results have followed the changes to the code of conduct introduced in December 2012 which loosened contact restrictions and the enactment of legislation to address the Dunne judgment. However, there remains a danger of another series of unintended consequences arising as a result of excessively prescriptive definitions regarding "sustainability". It is critical that regulatory imposed targets are realistic and sustainability criteria used to assess compliance with such targets are wide enough to take into account individual circumstances, the long-term nature of a mortgage arrangement and the potential for customers' financial circumstances to improve over the life of the mortgage. I welcome the Chairman's comments supporting this view which were reported in the media over the weekend.

As we have consistently advocated to all stakeholders on this matter, we need to be joined up in our thinking and recognise the long-term implications for a sustainable and affordable property and mortgage market. We must also recognise the social policy implications, namely, that people need accommodation and that, in our experience, modified mortgage payments, particularly in the current environment, will almost always be more affordable than the rental cost for the same property in the same location. I reiterate that we are working with co-operating customers and our approach is beginning to show results.

On business lending and restructuring, in terms of market presence, Ulster Bank's total core loan book to small and medium enterprises, SMEs, is approximately €8.2 billion. While we cover the market broadly, we are highly focused on agriculture, food, exports, health care and professional services. There are two main areas of focus within our SME core operations, namely, new business lending and supporting SMEs in financial difficulty. New business lending in the Republic of Ireland amounted to €1.5 billion in 2012. We are well positioned, have a strong pipeline of business and look forward to expanding in the SME market, especially as demand increases in an improving economy.

We place considerable importance on SME businesses and provide significant support and financial resources for the sector, including the provision of more than 4,000 start-up packages in 2012 and ongoing investment in information technology to support faster, decentralised decision-making.

We would also welcome the opportunity to share with members and the Government our experience from other markets in terms of our support for Government-led initiatives to stimulate and support the sector. Our approach to distressed SMEs is similar to the approach on residential mortgages. We have a wide range of forbearance options which can be brought to bear for individual circumstances. Our primary focus is to support businesses through their difficulties and return them to financial health. We are also keenly aware of the need to safeguard jobs where at all possible. We view formal recovery actions as an option of last resort. In the first half of 2013 alone, we have restructured numerous trading businesses small and large, restructuring which supported business and in turn provided over 7,300 jobs.

In conclusion, Ulster Bank has a clear strategy and is making strong progress towards becoming a simpler, more efficient and sustainable bank, while also dealing with our legacy issues. Second, our objective in addressing the mortgage arrears problem is to facilitate co-operating customers and keep them in their homes, while also ensuring a viable property and mortgage market for the future. Our approach is beginning to show results. In dealing with SMEs, we are supporting the sector through new lending and bringing those enterprises that are experiencing financial difficulties back to financial health.

Finally, we are proud of our contribution and recognise our responsibilities as a key player in the only systemic full service bank across the island of Ireland providing much-needed competition to the two pillar banks in the market. We have 177 years of history serving customers and communities across the island of Ireland and look forward to continuing to do so in the future. Mr. Stephen Bell, Mr. Tom Leahy and I will be happy to deal with any questions.

I will begin by trying to get some figures before going on to detailed questions. First, I would like to establish how many distressed mortgage books the bank has at this time.

Mr. Jim Brown

I refer the Chairman to the table I attached to my opening presentation. Ulster Bank has 122,831 mortgage lines in terms of its total portfolio as of end of July this year. Of that total, we have 18,025 mortgages that are 90 days or more past due.

Therefore, 20% of those 18,025 should have been in a resolution process by the end of June. Is that correct?

Mr. Stephen Bell

It is slightly different. We were asked to set the target for those mortgages that are overdue by 90 plus days at the start of the preceding quarter. We have been able to move some customers out of 90 plus days and have had some success there. The starting number for the quarter 2 qualifying period was 18,922 and 20% of that came to 3,784 to be put on sustainable arrangements.

Can Ulster Bank supply us with a breakdown of the type of resolution applied in those cases, in terms of split mortgages and so on?

Mr. Jim Brown

I will share the broad outline of how we have handled the breakdown of the 18,000 plus customers and will deal with comments following that. Looking at the 18,025 mortgages to which I referred, some 8,868 are in some sort of arrangement. To clarify, 4,038 are in a long-term arrangement -----

To interject, some thousands of customers have been in arrangements. Some arrangements have been interest only arrangements and some have been on mortgage holidays and so on. The 20% figure refers to moving people away from arrangements towards long-term sustainable solutions. What we would like to focus on this afternoon are the figures for people who are in long-term, sustainable solutions.

Mr. Jim Brown

Yes. I will answer the question, but I would like to share how we have approached the issue to get to a solution.

The difficulty is time. I do not know who chairs the Ulster Bank board, but this Chairman is a stickler on time. I will run out of time, so I need Mr. Brown to be concise.

Mr. Jim Brown

I will be concise. We have 8,868 customers who are in an arrangement, of which 4,000 are in a formal arrangement with us already. Another 500 are in a very short-term arrangement. These may be experiencing short-term difficulties, so we give them a payment holiday for example. Another 4,000 are paying through an informal arrangement that has not been formalised with us yet. Separately, we have just over 3,000 who are not engaging with us at all, but we are attempting to engage with these before we go to the legal process. We then have another 4,900 who are in the legal process and another 1,000 for which we have appointed rent receivers. That is the broad breakdown. Therefore, there are approximately 8,800 in some sort of arrangement, 3,000 that are not engaging, 5,000 in the legal process and 1,000 with rent receivers.

I will hand over to Mr. Bell to explain how the 20% was arrived at.

First, has Ulster Bank made the 20% target?

Mr. Jim Brown

Yes we have.

There seems to be a level of ambiguity as to what puts people into the 20% target figure. Does Ulster Bank include in that 20% people to whom it wrote who have not been in communication with the bank?

Mr. Jim Brown

No.

Mr. Stephen Bell

In regard to the number of arrangements we declared as at the end of quarter 2, the total was in excess of the 3,784 in terms of those cases where the qualification was through legal proceedings. These were only where the case had been lodged with us, not where we had simply written out to say we might take legal action if something did not happen. We know this is not necessarily a universal definition, but it is the one we felt was most appropriate to the circumstances.

I believe Ulster Bank has a number of people on split mortgages. How many split mortgages does Ulster Bank have?

Mr. Jim Brown

I would like to share how we address this issue. We have 20 cases that are on a split mortgage - where the loan is separated with two different interest rates. We believe we have a better solution to that, termed an "economic concession", which looks at a reduced interest rate across the entirety of the loan. What this enables the customer to do is to pay more towards a principal reduction during a period of financial distress. As a consequence, we think this is a better outcome for the customer. Perhaps Mr. Bell would like to add a further comment on this.

Mr. Stephen Bell

We have a split mortgage available and we have committed that the deferred portion of that split mortgage will bear zero interest. As Mr. Brown said, when we did some comparative analysis, we found the cost of a split mortgage is higher to the customer, because the total cost of credit stays outstanding for longer. We find we can bring the payment down to a lower level, which also allows the customer pay towards capital. Therefore, at an earlier stage in the process the customers become better positioned in terms of loan to value.

Has Ulster Bank tweaked the split mortgage system?

Mr. Stephen Bell

We offer both. If a customer said to us he or she felt a split mortgage was the right solution, we would make that available.

Mr. Jim Brown

We have approximately 1,000 customers on the economic concession.

I want to address the issue of payment breaks. Does Ulster Bank have a structured means of dealing with these when people go into resolution processes? I know the insolvency agency has been in contact with Ulster Bank with regard to this area. If somebody who is in a resolution process and has committed to paying €500 or €1,000 a month has to meet a €3,000 or €4,000 payment, can that person step out of the resolution process? Does Ulster Bank have some sort of guidelines or protocols to deal with that?

Mr. Jim Brown

Yes they can.

Mr. Stephen Bell

The terms of the Central Bank's guidance notes provide that an arrangement can be stepped out of for up to 60 days and will still qualify as a sustainable arrangement. Therefore, a provision is built into the mechanics for somebody to do this. What Ulster Bank does is, even where customers are on arrangements -----

The difficulty if they can only step out for two months is that if Mr. A is paying Ulster Bank €500 a month and Mrs. B is paying €1,000 a month and the unforeseen bill is €1,500, Mrs. B can meet that emergency payment, but Mr. A cannot.

Mr. Stephen Bell

Exactly. The point I was going to make is that we have an ongoing dialogue with customers even where they are on arrangements. We felt it was wrong to say the situation is fixed and we can ignore it. Therefore, we have a regular programme of contact with all of our customers, even those on arrangements, to ensure we are fully apprised of any payment circumstances they may have.

There was something else to which Mr. Brown referred several times in his comments, that is, the correlation between employment and arrears. Will he expand on that?

Mr. Jim Brown

Certainly. In most markets unemployment is directly correlated to mortgage arrears. The higher the unemployment rate, the higher mortgage arrears tend to become. We have done some analysis in Northern Ireland, which has experienced similar distress to here, and what we have found is that until 2011, that correlation held to about 80%. Since then in Northern Ireland it has continued to be the case. As unemployment has moved up or down - it is generally up at the moment - then mortgage arrears have risen. What has happened here is that unemployment has come down from a peak of 15.1% to 13.7% while in the same period mortgage arrears throughout the market have increased.

I put it to Mr. Brown, based on my experience, that there is a major flaw in the analysis he is making. Approximately 250,000 people who are unemployed at present were not unemployed three or four years ago. They were on good wages at the time, then they lost their jobs and went into arrears and perhaps into a resolution process with Ulster Bank. A number of them have returned to work but they are not returning to work within an ass's roar of what they were earning when they were last employed. Their ability to pay their loans, which they had originally taken out on ratios of between eight and 12 times their income, is still unattainable, although I note we are back now to more modest and prudent lending practices. There is a mindset in the banks in this regard, and I call on the representatives from Ulster Bank to address it this afternoon. Are the loans unsustainable anyway regardless of whether these people return to work, and therefore it does not matter?

Mr. Jim Brown

This is why we advocate customers engaging with us if they are in that type of situation to come up with a solution and to work through the issues. The other point to note is that over the same period, as well as unemployment coming down, interest rates on trackers have also fallen. Let us consider rates in 2007, for example. At the time, interest rates were approximately 5% or 5.5%. Interest rates now for a tracker are approximately 1.5%

In the Ulster Bank mortgage book, what percentage of people are on trackers and how many are on variable rates?

Mr. Jim Brown

A total of 72% are on trackers. During the same period, as a consequence of the rates coming down, the repayment on the average loan has reduced by 31%. The point I made in my opening remarks was that, in our experience, there has been a strong correlation between unemployment and mortgage arrears. The point we are highlighting is that it seems several factors may have contributed to those arrears continuing to increase while the unemployment rate or repayment rate are coming down.

There was something interesting in the Ulster Bank proposals this afternoon in that they seemed to be implying a range of solutions. They have certainly broadened in recent years. From the get-go there was a limited menu of solutions and many of them simply involved deferment and elongation. More processes have been made available to the bank now. They are indicating that perhaps there needs to be some more or that there needs to be some flexibility around them.

Let me broach the issue. Is there a difference between a sustainable solution and what might be considered a sustainable mortgage? As I understand it, the Central Bank has given Ulster Bank targets involving sustainable mortgages whereby they are mortgages that are cleared before someone hits the age of retirement. Perhaps the Central Bank may need to revisit that and allow payments to continue into the post-retirement period, especially in a situation where the capital is rather small. For example, if someone is on a tracker, then an interest-only payment would be far cheaper for that person than renting a house in the private sector following repossession.

Mr. Jim Brown

Yes. We have shared our views with the Central Bank. I support the Chairman's comment. Let us suppose someone has a relatively small payment to make. For example, if a person is in positive equity and the cost of the mortgage is lower than renting, then my personal view is that is a sustainable solution for the customer. Having said that, it needs to be worked through on a customer-by-customer basis.

Naturally it should be done on a case-by-case basis. Does the definition of sustainable solutions, rather than sustainable mortgages set with the barrier that the loan must be cleared by the time of retirement, give more flexibility to both the banks and customers in distress?

Mr. Jim Brown

Yes. I mentioned this in my opening remarks. Mr. Bell may wish to comment as well. In my opening remarks I commented that we need to work through and be clear about the definition of "sustainable". In terms of the numbers that we declared for the second quarter results, we took a very conservative definition. When we start considering cases such as the one the Chairman mentioned, careful consideration needs to be given about whether they meet the definition of sustainable.

Is a protocol built into the resolution process? I understand that targets have to be reached and that there will be unexpected and unforeseen criteria and that difficulties will arise. Is there a protocol by which Ulster Bank can communicate to the Central Bank and make the case that it believes these other solutions should come on the table, and, if there is, has the bank made a communication or does it intend to make a communication to the Central Bank at that level?

Mr. Jim Brown

We have made communications. Perhaps Mr. Bell will comment.

What other solutions is Ulster Bank proposing that are not in place at the moment?

Mr. Stephen Bell

I would not say there are additional solutions but the example the Chairman illustrated is exactly right. A home loan is a long-term arrangement that provides accommodation for a family or individual, whatever the case may be. We believe it is not correct to treat short-term or medium-term arrears as if we are trying to collect the money. One of the key factors is that Ulster Bank Ireland Limited is not trying to collect the arrears of anyone. We are simply trying to normalise the repayment on the home loan in order that the customer can get back into a sensible position.

One reservation we have had around the sustainability wording is that it sort of requires a degree of foresight about what might happen in the next 25 years which we do not believe is available to us necessarily. This may cause us to take premature action to crystallise a position which we do not believe is right. Therefore, we believe there is a role for solutions to go forward that are not necessarily going to fully discharge the loan. Hence, we believe there is a role for split mortgages within that context.

I will return to this towards the end of the meeting but I have come to my last question. I asked Mr. Duffy the question yesterday afternoon and I asked Mr. Boucher the question this morning. Yesterday afternoon, Mr. Duffy made the assertion that there is a certain percentage of people who are more than 90 days in arrears but who have money in significant levels on deposit or on account which would be sufficient to clear their arrears and perhaps even put them into a resolution process. Is Ulster Bank finding the same in its assessments?

Mr. Jim Brown

Yes, we are. Mr. Bell may wish to share some of the experiences.

Mr. Stephen Bell

I have no wish to generalise from particulars but we have had single payments of in excess of €20,000 paid from customers who were beyond six months in arrears. They said they had the money and paid it over to clear their arrears in full.

The proposition to rebut that could be that people, who perhaps have €25,000 or €30,000 or a sum from redundancy, compensation payment or even an inheritance, are holding that money back because they do not believe that the resolution processes are sustainable.

Mr. Stephen Bell

It would not be our experience. There is one thing we welcome, although we have some feedback in general terms. The standard financial statement requires the bank to go through a proper discussion with customers about the sources of income and the nature of their expenditure. Certainly it would not be in our interest to take 100% of a person's savings if it meant that it put him in a difficult position simply to maintain a normal lifestyle. It would not be our experience.

I welcome Mr. Brown, Mr. Bell and Mr. Leahy. I wish to continue along the theme the Chairman started. Mr. Brown outlined that the target in respect of the 20% measure used by the Central Bank was 3,784 and he has given us a breakdown of the 18,000 customers that Ulster Bank currently has in arrears of 90 days or more. How does he regard the bank's performance against that target? Does the figure include those in arrangements plus legal plus rent receiver situations? What has the bank included as being in the performance?

Mr. Jim Brown

I would like to give the committee an overview of the percentage that we have reached and then perhaps Mr. Bell will give a breakdown of the numbers. In terms of meeting the 20% target, we exceeded that. The percentage that we reached was 32%. That was broken down by a combination of legal cases and rent receiverships as well as permanent solutions.

Mr. Stephen Bell

The total number we declared in our quarterly return was 6,121, which was made up of 5,172 from PDH and 949 from buy-to-let.

Could Mr. Bell repeat those figures?

Mr. Stephen Bell

Yes. The total declared number was 6,121, which was made up of 5,172 from PDH cases and 949 from buy-to-let. The latter were largely rent receivership cases. On the PDH, at this stage we saw a bias towards legal being a contributor to hitting the target. It is not what I would like to see on a go-forward basis.

I apologise for interrupting but will Mr. Bell clarify if those offers relate to Q2 or are they cumulative? In other words, is that the position as at the end of June?

Mr. Stephen Bell

The requirement is that at the end of each quarter one resets the qualifying 90-day population and then one calculates the percentage off the next figure. From an Ulster Bank point of view and because we are actually moving people out of the 90 plus zone, our target population is coming down and the percentage is increasing. So the numbers are slightly difficult to reconcile. It is not a static pool from 1 March, for example.

So the 5,172 breaks down as-----

Mr. Stephen Bell

The 5,172 is made up of 1,048 long-term payment arrangements with customers and 4,124 cases where we took legal action. In the case of buy-to-let, it was entirely driven by rent receiverships appointed where the customer was not handing over the rent received from the tenant to discharge the mortgage. It is a matter of some concern to us that this is the proportion in which the target is to be met. We mentioned at some other forums that we have had some difficulty in engaging with all of our customers until quite recently. Given the need to demonstrate good faith to the Central Bank in hitting the targets, we have taken a fairly cautious approach in only including those things we know it would not disagree with.

Mr. Jim Brown

One other interesting observation is that of the cases in respect of which we have commenced legal proceedings, 20% of those involved have re-engaged with the bank.

Just so that we are clear in respect of the figures, Mr. Bell indicated that 1,148 of the 5,172 cases in question involved some form of arrangement agreed with customers and that the other 4,124 involved the initiation of legal action in a formal sense.

Mr. Stephen Bell

Those cases have been lodged with solicitors. It is not just simply that a letter saying we are thinking of taking further action is issued.

All of the 929 buy-to-let cases involved rent receivership.

Mr. Stephen Bell

That is correct.

Is Mr. Bell in a position to provide a breakdown in respect of the 1,148 arrangements that were arrived at?

Mr. Stephen Bell

Something in excess of 80% of them were for a payment in excess of the original principal interest. There are a number of cases - these were included in the slide attached to Mr. Brown's opening remarks - in respect of which we have agreed a revised payment that is lower than the original monthly payment. We have chosen not to include those in the target for now but we are working through that exercise with our board and we will be coming back to it before the end of the Q3 targets. The majority of those payments are where customers agreed to pay back at least the monthly repayment.

So Mr. Bell is stating that in excess of 80% would involve interest plus some capital. It would, therefore, be something less than the full repayment but more than would be obtained under an interest-only arrangement.

Mr. Stephen Bell

It will include, in some cases, what we call "step-up arrangements" where the reason for the arrears has passed and the customer is now able to repay in excess of the monthly payment.

Will Mr. Bell provide an indication of the position with regard to the remaining cases in this category?

Mr. Stephen Bell

There would be some where we have offered to agree to a lower payment because it seems to be more reconcilable with their current financial circumstances. Our view is that recommencing a payment habit - even if it is less than the original monthly payment - is better than simply allowing the situation to drag on in perpetuity. There will be a proportion of cases where we are getting less than the original monthly payment. Our approach to those would be that we then have a regular engagement with the customer, where appropriate and where circumstances permit, to try to then move that payment back to one that is more representative of the original loan.

If we consider that quarter in isolation, it is evident that in the region of 80% and 85% of Ulster Bank's sustainable solutions under the Central Bank's targets programme were accounted for by the appointment of rent receivers or some form of legal action being undertaken.

Mr. Stephen Bell

With one addition, which is that we actually saw a reduction of 548 in cases that were no longer 90 days plus in arrears at the end of the quarter. It is important to reflect the fact that where one has solved the problem, one no longer reports it in the numbers. To some extent, therefore, one does become something of a victim of one's own success in that one takes the numbers out of the denominator as well as the numerator. We have taken 548 cases out of the 90-days-plus category. Of the ones that are in this category, the split the Deputy gave is representative.

I am sure Mr. Bell can see from where I am coming in respect of this matter. I am trying to drill down into the numbers in order to obtain a sense of what Ulster Bank has been doing, particularly under the formal regulatory targets programme. It seems that in the region of five out of every six of the offers under discussion relate to legal action which could, in many cases, result in voluntary or forced repossession of properties. In the buy-to-let category, 100% of cases went to rent receivers. When the concept of sustainable solutions was considered and when a new drive to resolve the mortgage arrears problem took place, people would have understood that some more innovative solutions would have been wheeled out in great numbers and that resolutions would be achieved. I would be shocked if the Central Bank were satisfied with the extremely high levels of legal proceedings in the owner-occupier category and rent receiverships in the buy-to-let category.

Mr. Jim Brown

It is worth highlighting that, as I said earlier, we are not seeking to repossess homes. That is not our intention. We want to keep people in their homes. We have initiated legal action in cases where customers have not engaged with us, despite our writing to them, calling them, etc., on numerous occasions. These are generally cases that are nine to 12 months in arrears. What we believe will happen is that through initiating the legal action, there will be a percentage of customers who will re-engage with us. That is already happening and 20% have re-engaged with us. We expect that figure to rise over time. In other markets, that is likely to reach something of the order of 70% based on our experience. The key thing is that what we are looking for is for those people who are not engaging to talk to us. At present, the only tool we have available to us in this regard is the legal process because they are not communicating with us in any other way.

In the context of the targets, under this measurement Ulster Bank has already achieved the end of September target. Earlier, Bank of Ireland gave a figure of 53% and indicated that it has achieved its end-of-year target in the context of resolution. There is a serious mismatch between what people understood to be sustainable solutions and the actual measures being rolled out by the banks. I do not really expect our guests to respond to that, I am merely making a general observation on the roll-out of the programme.

I wish to move on. Ulster Bank is not using the term "strategic default". Our guests referred instead to a breakdown in payment discipline and to a sizeable minority of customers not engaging. They also indicated that when the bank obtained the additional powers under the code, it managed to contact 71% of those in arrears during the past three months. They are holding this figure up as being high. The problem of people not engaging seems, according to our guests, to be very serious. In addition, the bank seems to be using a different term in respect of those who are strategically defaulting.

Mr. Jim Brown

Since the amendments to the code of conduct in December of last year, we have been able to increase our contact with customers. As a result of that, the number of customers who were not engaging has fallen significantly. In fact, that number has halved since late last year. As highlighted by Mr. Bell, the key from our perspective is to be able to contact customers in the first instance. We have now reached 71% of those customers. Another thing we want to do is get them back into some sort of repayment habit. In other words, get them back into the habit of paying and then we can work through solutions with them. That has been our approach to addressing the mortgage arrears issue. As a consequence of that, we are starting to see our overall arrears come down. That has been the case for the past five months.

The term "economic concession" was used and it was indicated that the bank has approximately 1,000 cases in which reduced interest rates have been applied. Are such reductions temporary?

Mr. Stephen Bell

It is a long-term reduction. It would typically last for five to seven years. It could even be for the lifetime of the loan. It would depend on the customer's circumstances.

Where does that fall under the Central Bank's quarterly statistics?

Mr. Stephen Bell

We did not include any of them this time around. As stated, there had been a lot of contention and a lack of definition around the different targets. We wanted to declare only those things that we were absolutely clear were not going to be contentious. If we are having a review of the Ulster Bank Ireland board shortly and if we are going to consider some of the other definitions of what is sustainable - which would be more in accordance with the examples the Chairman provided - then I suspect that number will rise considerably as the year progresses.

Does the bank need Central Bank permission to move into the area of defined resolutions?

Mr. Stephen Bell

We have had some exchanges where we have agreed to disagree. We think it would be an unfortunate state of affairs if the customer was happy with the payment, the lender was happy with the payment, the court was happy with the payment and the only person who was unhappy with it was the regulator. We expect some differences of view and would rather we could stand by our actions on the basis of what we think is right for the customer, even if that means we disagree.

The final area I wish to address is the future of the bank in the Republic of Ireland. It is extremely important that the bank is committed to continuing in business in this country to provide essential competition in the SME sector, in particular, but also for personal customers. In that regard, Mr. Brown said in his opening statement that the bank was committed to a future in this country. I welcome this.

Consultants have been appointed to look at the possible split into a good bank and a bad bank. Would Mr. Brown like to comment on this? Has there been any fallout from the IT systems failure in the summer of last year, which I accept originated at RBS? Will he also elaborate on that general topic, the future regulation of the bank and the speculation that the regulatory centre may be moved from the Irish system to that of the United Kingdom and the implications, if any, for such a move?

Mr. Jim Brown

In terms of the history of the bank, it has operated here for 177 years and is committed to the market. As I mentioned in my opening address, there are two aspects that we are dealing with: addressing the legacy issues of the past and also being able to build a sustainable business for the future.

There is an ongoing review of RBS in looking at whether it should split into a good bank and a bad bank and in that scenario looking at moving impaired assets out of RBS. We are involved in that process, but no conclusion has yet been reached. We expect the review to be completed probably sometime in the next month or two. In the meantime, from my perspective, we will carry on delivering on the strategy we have outlined and will continue with the progress we are delivering.

In terms of the IT incident, we have not experienced a fallout from a business perspective, as can be seen from our results. If one looks at the deposit numbers, for example, our deposits have risen by 12% year-on-year. That is as a result of the good relationship we have with our customers, the goodwill shown by our customers during that period and also the support of the staff to minimise any impact on our customers. That said, following on from the initial incident, the root cause of the problem has been fixed and we are working with RBS on an ongoing basis to ensure the resilience of all the IT systems across Ulster Bank and RBS and that they are improved.

The third point was around the legal entity. There had been some discussion of this when I first arrived in Ireland. It primarily came as a result of the fact that up until ten or 15 years ago Ulster Bank had always operated under one entity which was separated into two legal entities. Therefore, we did a refresh as to what was the best structure under which we should operate. The current legal entity structure is the one within which we intend to stay. We will have an Ulster Bank Ireland Limited entity and also Ulster Bank Limited as a separate legal entity. There will be no change from the current position.

I now move to Deputy Simon Harris who I believe is sharing time with Senator Paul Coghlan. I advise members to ask one question at a time. If they have limited time, if they bunch their questions and run out of time, the questions that have been bunched will not be answered.

Senator Paul Coghlan will go first.

I will take seven minutes or less than that. I have four quick questions.

I welcome Mr. Brown and his colleagues. I am concerned that the Central Bank's targets will prove counter-productive. They will have the effect of increasing arrears and forcing the banks to go legal. Based on what has been said by the Bank of Ireland, AIB and in the presentation of Ulster Bank, the measures taken by the Central Bank to deal with the issue of mortgage arrears will lead to an increase in the level of mortgage arrears and increased foreclosures on home loans by the end of the year. The increase in the level of arrears seen last month will increase because the Central Bank's targets-based approach is forcing banks to move towards legal solutions or else face major capital sanctions. Mr. Brown might confirm this.

Given that regulatory failure has contributed in the first place to our problems, we must be sure a tick-box approach by the Central Bank is not exacerbating the problem and forcing more people out of their homes and into arrears. Does Mr. Brown agree with this analysis? Would a less prescriptive approach by the Central Bank that recognises the difference between individual customers lead to better outcomes for them?

The second question is whether the bank is writing off bank debts, specifically where a property is sold and the proceeds of the sale are inadequate to cover the shortfall on a loan. Is the bank going after the poor, unfortunate debtor for the balance, given that he or she will have lost his or her home or possibly retirement investment? Could the bank cut some slack for the genuine debtor?

The committee is trying to get to grips with the definition of “strategic defaulter”. What are the characteristics of a strategic defaulter? Will Mr. Brown give some examples of the types of behaviour that characterise such a person? Does such a person exist or is it a myth of the banking sector? My final question is-----

The Senator will have more questions than the time allowed to reply.

I will not. Mr. Brown will be capable of encapsulating what needs to be said.

He will run out of time because I will stop him.

I will take less than seven minutes. What is the arrears level in respect of a figure of 90%? It looks bad when compared with the other banks. Was that because Ulster Bank was more responsible than the other banks or how does Mr. Brown account for this? What is behind Ulster Bank’s higher profile compared to Bank of Ireland, given that it has a smaller market share?

Mr. Jim Brown

I thank the Senator for his questions. First, in terms of the targets, as we mentioned in the discussion earlier, we will meet the targets, but we will make sure we do so in such a way that it gives the right outcome for the customer and the bank. We think there is a need for a less prescriptive approach in some circumstances for some customers.

On the second point, we do not have a policy of writing off debt. We believe the solutions we have available which we offer to customers in arrears ensure people are able to keep their homes, which is the primary focus for Ulster Bank.

I cannot give a definition of “strategic defaulters”. I could not even give a number for Ulster Bank, other than to say that of the people who are in arrears, 35% are not engaging with us or making payments.

The last point was about arrears. Overall, if one looks at the average across the market and Ulster Bank arrears as a percentage of the value of loans, we are in line with the overall market and for buy-to-let properties, we are probably slightly better than the market. There may be individual categories in which we are better or worse, but generally we are in the pack.

We are all pleased about the bank’s commitment to the future in the Irish market.

Mr. Jim Brown

I thank the Senator.

I welcome Mr. Brown and his team. I wish to start with his commitment to the market. I do not doubt his personal commitment or that of his team, but it is disconcerting for staff, some customers and the wider stakeholders in the economy to see comments in the British media which describe Ulster Bank as the fly in George Osborne’s ointment, to see that the British Prime Minister wants RBS to be returned to the private sector by the next general election in Britain in 2015 and to see Mr. Vince Cable, Secretary of State for Business, Innovation and Skills, argue for a slightly different timescale. A lot of this is outside Mr. Brown’s control, given that it is part of a bigger macro issue, but will he outline his take on the situation? When he says he is committed to the Irish market, I believe that to be the case personally, but how sure can we be of that commitment?

Mr. Jim Brown

The bank has been operating across the country for 177 years and, throughout the majority of that period, performing well and serving our customers well.

There is no doubt that over the past few years the bank has been in financial stress and that a significant part of our portfolio is non-performing, and we are working through those issues. As we stand at the moment we need to go through the parliamentary review and wait to see the outcome of that, but clearly, as it has been scoped so far, the Government is looking at whether the bad parts of RBS - the bad bank, so to speak - should be separated from the rest. Clearly, we have parts of Ulster Bank that would meet that criteria but we need to wait to see the outcome of that. In the meantime, while that is happening, we should continue to serve our customers well and continue to deliver on the strategy to turn the bank around.

Perhaps Mr. Brown is just a straight shooter in terms of the way in his opening address he stated that there is a cost to living in a home. That is a fairly basic concept that most of my constituents, including those in mortgage arrears, appreciate. Obviously, there is an issue, and we have heard from Mr. Brown's colleague chief executives across the banks, of what some call strategic defaulters. Can Mr. Brown expand on that? He spoke to Deputy McGrath about it but how big a problem is that? What percentage of the people who have mortgages with Ulster Bank does Mr. Brown believe do not accept that there is a cost to living in a home?

Mr. Jim Brown

From my perspective, and as I mentioned, there is definitely a cost to living in a home, be it a mortgage, paying rent or even social housing, and it is a reasonable expectation that people should pay something to live in a home, I could not tell the Deputy the percentage of customers who do not necessarily agree with that but the fact is that 35% of our customers who are in arrears today are paying nothing towards the cost of their home.

Has that 35% engaged at all? Have they filled out the financial statement?

Mr. Jim Brown

They are not engaging.

They have not done that.

Mr. Jim Brown

They are not engaging.

Okay. The second point Mr. Brown made in that comment is that secured debt must be prioritised over unsecured debt. Again, this is something we have heard from the other banks and we can understand that, but another issue that has come up, and all of us meet it in our constituency offices, is that people are trying to juggle a good deal of debt, and some of that debt is essential such as car loans because they need to keep a car on the road or they need to keep their children in college. Can Mr. Brown explain to us the consideration he takes for other debts - non-mortgage debt - when reaching an agreement with his customers?

Mr. Jim Brown

Yes. I will hand over to Mr. Bell who will give the Deputy a little more detail on that.

Mr. Stephen Bell

Without repeating what we said before, everything has to be done on an individual basis and that will come down to the reason there is an arrears problem in the first place. We find there are some customers whose difficulty in making the payment is that they may have young children who are preventing one of the family members from working. We would be very sensitive to that and we would look to make sure that we did not try to have such a high payment that it effectively compromises the family's ability to live a normal life. If anybody had loans that relate to tools of the trade, such as a car which they need for work or whatever, we would not seek to put downward pressure on that if it was legitimately related to the means of generating an income to service a loan.

Where we would have some concerns is where people have multiple cars or they are making expenditure choices that do not seem to be commensurate with the fact that they may be three or more months in arrears with their home loan. In saying that, I refer to Mr. Brown's earlier point. With 72% of our mortgage customers on tracker rates of around 1.5% and with the average loan size for Ulster Bank at €173,000, it means that even a full capital and interest repayment is less than €700 a month. That is not an economic concession; that is a straight interest rate arrangement. When we look at available housing elsewhere through the private rental sector, one would be very hard-pressed to find some kind of reasonable accommodation for that, so what we try to do is instead of waiting until we have spent all the money and then see what is left to pay for the home, we try to think about what is a reasonable amount to pay towards the home loan and then make sure the rest will not compromise an ability to live a normal life.

My final question, and I have a concern with the phrase "voluntary sale", relates to the number of homes whereby the bank has told the home owner that the only solution is to sell their home.

Mr. Stephen Bell

We would not typically want to do that. We would say to customers that it is an option. If the customer has got himself or herself into a position where their employment prospects have changed or if their revised income simply is not sufficient to service their ongoing obligations, it might be a better option, but in terms of the Deputy's colleague's earlier question, we would not then start chasing people for a shortfall if they had agreed to sell the property without all the costs associated with legal proceedings and all the time delays that may occur. Again, on a case by case basis, there may be circumstances where a shortfall would not be fully chased if the circumstances-----

The bank would cut them some slack.

Mr. Stephen Bell

Absolutely.

Does Mr. Bell have a number?

Mr. Stephen Bell

We have had very few voluntary surrenders. We have had very few foreclosures. Our focus has been to ask people where they will live after this has happened because if they will have to spend 50% more to rent a place than they are to stay where they are, why can we not find a solution?

I welcome the witnesses to the committee. I have been going through the figures. We have had two sessions with representatives of AIB and Bank of Ireland. I will not rehearse all of that but I ask the witnesses to read the transcripts. Everything I said to them about providing the information this committee required is applicable to the witnesses also. It is disrespectful not to give us a submission and disrespectful not to give us the figures we need in written format. The witnesses know exactly what they are doing. The banks know exactly what they are doing. There are about a dozen committee members here. It is a case of running down the clock while we try to prise the information from the witnesses instead of getting to the depth of the issue.

I want to move to the detail of what this proposal by Government and the Central Bank was about. The witnesses know it better than me. There were 20% targets for quarter two but that was only the first part of it. There were 30% targets for quarter three and 50% targets for quarter four. The Central Bank was supposed to come out at the start of the summer and say that those targets were offers, but they were supposed to set targets for acceptance of offers. The witnesses accept that. To meet the targets today, the witnesses have relied on 82% of the offers being legal letters. I am not sure how customers can accept those legal letters, and it is the same with AIB and the Bank of Ireland, but it goes against the spirit of what this measure that was introduced in March was all about. In my view, this was about forcing the banks finally to step up to their responsibilities and deal with this issue.

In the last quarter, Mr. Brown's bank had issued 4,124 legal letters. If people are not engaging, they should be engaging. If people are not talking to the bank, they should be engaging and the bank has to do what it needs to do, but there are customers of Mr. Brown's bank who have been engaging and who are trying to come up with solutions and he has failed to come up with solutions for them. The problem here is that AIB and Bank of Ireland have done the same thing. To reach the targets, they issued a couple of thousand legal letters, but this was about the genuine people who wanted a solution to allow them get on with their lives. Why did the witnesses not deal with that? If they take away the legal repossessions, the number of long-term offers made in quarter two was 1,048, which would mean that they missed the target by about 75%. Bank of Ireland relied 50% on legal letters, AIB relied 70% on legal letters and Ulster Bank are relying 82% on legal letters. That is my first question. Why did Ulster Bank not deal with the customers who genuinely are engaging and want a resolution but who have not been offered one so far?

Mr. Jim Brown

I thank the Deputy for the comments. In terms of the specific question, we did include a significant number of legal cases in the reporting of our quarter two numbers. That was the result primarily of customers who have not engaged with us at all. Separate to that we have 4,038 customers who are on long-term arrangements and we have another 511 who are on short-term arrangements. As we mentioned earlier, we chose to take a very conservative approach to what we included in terms of it being a sustainable solution or not, and hence the reason we have reported the lower figure but, overall, we have over 4,000 customers who are in a long-term arrangement with the bank outside the legal process. I do not know if Mr. Bell wants to add any further to that.

Mr. Stephen Bell

I would just say that the target issue was there to drive better payment solutions and not simply to drive litigation.

However, when a target is issued that has significant financial consequences for not hitting it, boards of directors will then do what they must to hit that target. Unfortunately, while I am not pointing any fingers anywhere because we are as responsible as anyone and regrettable as it is, there was a two-year period in which there was no credible threat of consequence and limited ability for banks to contact customers and in which that natural dialogue between bank and customers has broken down. It will take more than a few weeks for that relationship to re-establish. Looking forward, while there is a very high proportion of legal cases in the quarter two target, we do not expect to see that rising significantly through the remaining two quarters. However, we expect to see a very significant increase in the payment relationships that we establish in the rest of the year.

At the outset, I appreciate the honesty in that answer, because there is a financial penalty and it is clear the banks have met the target in the easiest way possible, namely, non-engagement and the sending out of a legal letter. Moreover, Ulster Bank itself expects this is not a long-term solution because it expects the threat of repossession will not materialise in the majority of cases. I wish to ask a question of Mr. Brown. When I spoke of the target, he talked of 4,038 long-term solutions. However, the aforementioned 4,038 long-term solutions cannot be included in the data Ulster Bank provides to the Central Bank to reach the target. Is that correct?

Mr. Jim Brown

On the earlier comment, we have 4,000 customers that we have entered into the legal process but we have 14,000 other customers with whom we are in dialogue or with whom we intend to get into dialogue. As I mentioned earlier, a sizeable portion of these already are in some sort of arrangement.

Yes, that is my question. Mr. Brown mentioned there are 4,036 account holders in long-term arrangements with the bank.

Mr. Jim Brown

Yes.

However, the aforementioned 4,038 accounts cannot be provided to the Central Bank to meet the targets the latter has laid down.

Mr. Jim Brown

We have chosen to take a very conservative approach to the first submission, which we made in quarter 2, as to the types of loans we should include therein. To share with the joint committee the conservative nature that we took, as I mentioned earlier, we have not yet included the 1,000 loans that are on economic concession that we have already entered into long-term arrangements. Consequently, I expect that-----

Would a sizeable proportion of Ulster Bank's long-term arrangements include interest-only?

Mr. Jim Brown

No. It is very small.

Mr. Stephen Bell

To clarify that point, there has been some lack of certainty around definitions. What we did not wish to do was to have a public discussion about whether we had met a target with the Central Bank in the full glare of publicity because there are differences of interpretations about what is a long-term appropriate payment arrangement. The Chairman made some very good points on that matter earlier. Consequently, we chose to ensure the targets we declared were correct and could not be challenged, in order that we could do what we committed to do. Whatever our views may be of targets, we committed to be part of the regime and that is what we are doing. However, it is not appropriate and we would not confuse hitting the target with doing the right thing for customers. The two, to some extent, are slightly different debates with slightly different angles to them.

On the economic concession model, which is Ulster Bank's variant of the split mortgage or its alternative to it, the witnesses should explain to the joint committee what happens. In an example of someone who has a €200,000 loan, what would be done by Ulster Bank is that the sum of the capital would be reduced and the interest rate would be reduced. It would then be extended over a 30-year period in a new loan. What would happen to the residual capital and interest that was not paid?

Mr. Stephen Bell

If I may make two separate points, the economic concession keeps the principal as it is and reduces the interest rate to as low as 0.5%. It allows the customer to then eat into the capital repayments, while making a payment he or she regards to be reasonable and fair in an assessment with which we agree. In the case of a split mortgage, a product for which we have not seen a huge increase in demand although it is available, we would put a proportion of the debt in a sort of warehouse. No interest would be charged on it and it simply would be addressed at the end of the mortgage term or at the end of the customer's life. Sadly, this may sound a bit gross but Lorcan O'Connor has stated quite publicly that if the warehouse part of the split mortgage had to be part of the resolution of an estate, then so be it.

Basically, the economic concession model is an interest rate reduction. That is all it is.

Mr. Stephen Bell

Yes.

Is the interest rate reduction for the long term? It is not for the duration of the loan but is only for part of the term.

Mr. Stephen Bell

It is as long as it needs to be to resolve the customer's difficulty. I think it does constitute a significant loss to the bank.

Mr. Brown stated that 1,000 of these are up and running. Is Ulster Bank entering into three-year, six-year or seven-year contracts with its customers or is this for the lifetime of the loan?

Mr. Stephen Bell

The approach we are taking is that everything should be reviewed periodically, because that is right for the customer. We would not say irrevocably that it is the same for the remaining 25 years but we would not seek to withdraw a treatment that was helpful just because its time was out.

However, is there a potential clawback, whereby I would be offered a reduced interest rate for the period but were my circumstances to change, this could increase? Alternatively, is the bank offering a contract that is for a duration of five years after which it will be reviewed?

Mr. Stephen Bell

Were one's circumstances to change dramatically, which meant one could afford significantly more than the rate of interest on the economic concession, we would have that conversation at the time.

I will move on. There is much other detail that is missing and hopefully it will be furnished to the committee. We probably will have a further round of these meetings later in the year. Has Ulster Bank shed jobs recently, particularly in the arrears support unit?

Mr. Stephen Bell

No, we have not. A small number of fixed-term contracts have expired but on a net basis, we actually are adding to the Republic of Ireland employment headcount with regard to arrears management.

Given the problem Ulster Bank has, why is it not renewing fixed-term contracts in the arrears support unit? Mr. Brown has explained that 35% of the bank's base, which equates to approximately 6,000 people, is not even engaging with the bank.

Mr. Stephen Bell

Relatively small numbers are concerned and the reason is we want to put further investment regionally to support customers where they are, as opposed to where we are. Consequently, we have done some analysis to show there are certain counties in which there is a disproportionately high number of arrears cases and we want to put the resources there, as opposed to having it all in one centre in Dublin. It simply is a question of shifting the balance, not taking the numbers down.

It is ironic that I have received correspondence from an individual who has been sacked or whose contract has not been renewed by Ulster Bank.

The Deputy should be careful in what he says.

I will not name anyone and he has given me permission to deal with this case.

Yes, but I cannot have the Deputy talking about it.

No. My point is it is ironic that he worked in the mortgage arrears section. His contract is not being renewed and now he cannot pay his mortgage, which is with Ulster Bank. Mr. Brown mentioned earlier that a holistic approach must be taken in this regard. The bank itself must consider some of these cases.

I refer to Priory Hall and a question members have asked of the other banks. Does the bank have tenants or customers who own property in Priory Hall? Is the bank seeking to add individual solutions? AIB in particular suggested it wished to find individual solutions and it has engaged with its customers.

If the Deputy wishes to include any other questions, I will take them now.

As for my final question on the bank's commitment, the witnesses have addressed it earlier. However, members are all concerned - and as a member of Sinn Féin I am particularly concerned - regarding the bank's commitment to its presence both here in the South and in the North. I acknowledge this is outside the witnesses' control. How many lifestyle reports has the bank conducted in respect of its customers, either itself or through its legal entities? How many such reports have been commissioned in the past and is Mr. Brown aware how much they cost on average?

Mr. Jim Brown

Lifestyle reports?

Yes, with regard to people who are in mortgage arrears. Other banks are using them and Bank of Ireland has just confirmed it is using them. Basically, it employs special investigators to follow people to ascertain what type of lifestyle they are living.

Mr. Jim Brown

Perhaps I will hand that question over to Mr. Stephen Bell in a minute. On Priory Hall, Ulster Bank has 12 customers who have properties in that development. Some of those customers are making regular payments, some customers are in arrears and we are working through each customer's situations on a case-by-case basis.

Is interest still being accrued on the mortgage? That is one of the issues. If I may ask Mr. Brown a leading question, I note that AIB appeared before the joint committee yesterday. Its representatives acknowledged that while a process was under way with the banks, it was not going to work and they stated AIB's intention was to deal with the individuals with which it was concerned and was going to try to get them a new home.

Mr. Jim Brown

We are working through each customer's situation on a case-by-case basis and are working with those individuals. There is a bigger issue regarding the Priory Hall development itself that must be resolved but we are helping our customers on a case-by-case basis.

Will Ulster Bank freeze their interest rate?

Mr. Jim Brown

We work through on a case-by-case basis with our customers, just as with other customers who are in arrears.

Mr. Brown will not give a commitment to freeze their interest rates at this point in time. There is only a number of them and it is a unique case.

Mr. Jim Brown

We need to look at it on a case-by-case basis.

Mr. Stephen Bell

In terms of customers who are primary dwelling home mortgage holders, we do not appoint private investigators.

As to the bank's legal entities, has the bank been involved in it? Other banks, such as ACC and Bank of Ireland, are all involved in this. Has Ulster Bank not done this, not commissioned?

Mr. Stephen Bell

I hope I am not answering the wrong question. In terms of individual investigations of customer circumstances, we are not employing third parties to do that.

I welcome the Ulster Bank representatives to the committee. Representatives from Bank of Ireland stated here earlier that the majority of distressed mortgages in their bank are tracker mortgages. Is that the position in Ulster Bank's case?

Mr. Jim Brown

The performance of our tracker mortgages versus our variable rate mortgages is exactly the same and the percentage that are in arrears, regardless of whether they are on the higher rate or the lower rate, are the same. In terms of the mix of the portfolio, just over 70% of our portfolio is tracker mortgages, but the performance in terms of arrears is exactly the same.

Is Ulster Bank working proactively or has it a policy to get more of its customer base off tracker mortgages? Are they dragging the bank down?

Mr. Jim Brown

No doubt tracker mortgages are a drag on the industry as a whole in terms of financial performance. The reality is that the cost of funding to banks, including Ulster Bank, is higher than the base rate that those loans are benchmarked off, but right now we are looking at whether there are solutions that we may be able to offer customers that may be better than trackers. For example, as interest rates are very low right now, is it better to offer a customer a five or ten-year fixed-rate loan? We have not come to any conclusion on that. We are looking at various options, but we will look at it on a case-by-case basis. It has to be something the customer would want to enter into, and there has to be a benefit to the customer as well.

If tracker mortgages are, in Mr. Brown's words, a drag on the industry, does that mean there is extra pain being front-loaded on those on different types of mortgage?

Mr. Jim Brown

On the variable rate mortgages, and for that matter all our lending facilities, we look at them on a product-by-product basis and we assess the product based on the risk that we are taking, the potential credit losses and what may generate a reasonable return. Right now, our variable rate mortgages are at 4.5%. That reflects the cost of funding to the bank, the operational costs as well as any potential credit losses that come through on that portfolio. At this stage, compared with other markets, it is a reasonable spread.

I got two very different answers from AIB and Bank of Ireland when I asked about the potential for an increase in the variable interest rate in the next year. The AIB representative stated he could not really foresee it and the Bank of Ireland representative stated he would not rule it out. What is Mr. Brown's view?

Mr. Jim Brown

It depends on two key factors. One factor is what happens to the cost of funds over that period. If the cost of deposits rises, then I would expect that the rate could rise. The other key factor is what happens in terms of ongoing credit losses. We believe right now that steps that are being taken with the Code of Conduct for Mortgage Arrears and to make changes to the Dunne ruling have clearly helped banks in their ability to collect on loans and arrears, etc., but if those tools had not been there, then it is likely that arrears could have continued to stay elevated and, therefore, the cost of those mortgages could have gone up. That aside, right now the key determinant for us is what happens to the cost of funds over the next 12 months.

Will the bank be engaging with those on tracker mortgages and can they expect contact from the bank with a range of products that the bank thinks may be more favourable to them?

Mr. Stephen Bell

We are differentiating. If a customer is on a tracker mortgage and wants to move for family reasons, we will look to find opportunities to make that possible. If a customer is on a tracker mortgage and has no desire to move, we do not have many options to do anything other than live with that.

On strategic defaulters, it is a little like when people talk about social welfare where the word "fraud" is always included. Sometimes I wonder whether this is part of the policy in the banking system where the banks talk about defaulters, the word "strategic" gets in there and, before one knows it, that seems to be all we talk about. I am not necessarily suggesting that the Ulster Bank representatives are doing that. Those are merely my own thoughts.

AIB's representatives told the committee that they felt 20% of those with distressed mortgages were strategic defaulters. I apologise if Mr. Brown has already answered this question. Would the position be similar at Ulster Bank? Did Mr. Brown give a different figure?

Mr. Jim Brown

We have not stated a percentage who are strategic defaulters. What we have stated is that of the total number of mortgages that are in arrears, 35% are not engaging with us and are not paying anything.

In Mr. Brown's experience, are these mainly buy-to-let properties or are they owner-occupiers?

Mr. Jim Brown

Both.

Why would somebody want to strategically default on a property that is their only property that they are living in?

Mr. Jim Brown

There are a combination of issues that may have led to that. One is that I do not think the banks had enough staff to talk to them, specifically on mortgage arrears. The banks also did not necessarily have the right solutions. I think that was a factor. Then one adds on the delays in resolving the CCMA, then the Dunne ruling and just the talk of default. All of those factors have probably played a part in some of those customers choosing not to pay.

Surely someone who is a strategic defaulter, in Mr. Brown's terms, of an owner-occupied home, is not somebody who is being devious. It is somebody who needs help.

Mr. Jim Brown

We do not need the answer to that because they are not talking to us. Our view is that there is a cost of living-----

Would they be frightened? Is that the reason?

Mr. Jim Brown

There may be an element of those, but we actively try to encourage all of our customers who are in arrears to talk to us because we are able to come up with solutions, as we have done for many thousands of customers already.

If strategic defaulting is a problem as identified by Mr. Brown and if somebody is frightened to deal with a bank and is an owner-occupier, surely the bank would have imaginative ways of dealing with that situation.

Mr. Jim Brown

We have tried to contact them, for instance, call them, in many different ways to try to get them to engage and to date they have not, which at this stage leads us to using the legal process, which, by the way, we would rather not do. Some of those customers have not responded to any other form as of yet. What we have found is that as we have started that process, already 20% of those customers have started to engage with us and are coming to some sort of arrangement.

The reason I am saying this is because when people start throwing out terminology such as "strategic defaulters", what forms in somebody's mind is an image of somebody who has a broad portfolio, is merely playing the system, is trying to out-fox the bank and is not playing ball whereas what we possibly have is somebody who is terrified of hearing the telephone ring.

Mr. Jim Brown

That is why we have said that we are focused on the fact that there are 35% of customers who are in arrears who are either not paying or not engaging with us. As to the reasons for that, whether they have chosen to default strategically, they are afraid or there is some other reason, we do not know the answer to that yet because they have not engaged with us in a way that would enable us to clarify that.

Okay. I have two quick questions. The first is on the link between mortgage arrears and unemployment. Would Mr. Brown accept that many mortgages should not have been given out?

Mr. Jim Brown

In hindsight, that is true, yes.

Given the financial situation of the families and individuals involved and their income at that time, would he accept they should not have been given those mortgages?

Mr. Jim Brown

That is a different question.

In my mind, it is the same question.

Mr. Jim Brown

At the time, the loans were given to customers based on reasonably expected financial circumstances, for example, in terms of employment, and the reality is that since the financial crisis, customers' financial circumstances have changed. Customers have lost their jobs. Their incomes have decreased as well. In hindsight, maybe in some cases one might not have.

I am sure that experience will teach Mr. Brown as to how to manage the bank's affairs in the future and the bank would never go back to that kind of practice ever again.

Mr. Jim Brown

That is correct. There are a number of practices to which the market as a whole should not go back, for example, loan-to-value ratios in excess of 90% and tracker mortgages. Those are just a couple but there are others as well.

I would assume these things are written up in 9 ft. letters on the side of a wall somewhere in Ulster Bank?

Mr. Jim Brown

I think that is indelibly written into our policies going forward.

I would hope so. I know Mr. Brown has already made some comments about Priory Hall. The families involved in Priory Hall are clinging to every sentence from Mr. Brown. We had two different responses. The response from AIB was reasonably positive and said it would deal individually with families and that in a number of weeks it should have positive solutions for these families. It was disregarding the court case and everything else and said it would be generous, open and honest and try to find a solution for these families in the short term. This was welcomed by the families. The response heard earlier today was not as encouraging. We can easily say it can be done on a case-by-case basis and use the proper formal language or Ulster Bank can say that it is aware that the situation is unique and that it can find imaginative and positive solutions to it. Mr. Brown can give me the coal-face, strait-laced banker answer or he can give me something that the families will respond more positively to but it is over to him.

Mr. Jim Brown

I have made my comments that we are working with our customers who have properties in Priory Hall on a case-by-case basis. I do not think there is a blanket solution for individuals in that development just as there is no blanket solution for any other customers experiencing financial difficulty.

Does Ulster Bank feel it can be imaginative?

Mr. Jim Brown

We will look at each case on a case-by-case basis.

Does Ulster Bank think it will be led by what other banks do?

Mr. Jim Brown

We will look at each case on a case-by-case basis.

Does Ulster Bank have a timeline or target date for when those cases will be resolved?

Mr. Jim Brown

It depends on each and every individual's circumstances.

I know that but Ulster Bank was given targets of 20% by 30 June 2013 with regard to tens of thousands of people. We are talking about possibly a couple of dozen people in Priory Hall in Ulster Bank's case. We must get this issue resolved. I am not asking Mr. Brown for a date but does he have a quarter of this year or next year by which the Priory Hall residents' situation would be resolved?

Mr. Jim Brown

No, we do not. The reason for that is down to two things. One is that the circumstances for each individual are different. Some people are paying their loans and some are experiencing financial difficulty. There is a larger issue that needs to be resolved in this case, which is what happens to the overall Priory Hall situation regardless of whether customers have a mortgage on their properties or not.

I will conclude with this. We got a positive answer from AIB but did not get a great response from Bank of Ireland but at least it said it might be influenced by what other banks might do in that regard. What I am getting from Mr. Brown is that Ulster Bank will approach it on a case-by-case basis and will not be influenced by any other factors.

Mr. Jim Brown

I have already given my answer.

We will now move on to the Technical Group. Deputies Higgins and Donnelly are sharing their time and Deputy Donnelly will lead off.

I welcome Mr. Brown and his team here today. I think he has been quite candid in all matters with the exception of Priory Hall. Perhaps he has been candid in that. Before we get into some of the numbers, it is worth recognising the improved performance of the bank. No doubt the members of the delegation have all been working very hard on that.

I acknowledge the 0% offered on the split mortgage. It is very important and I am delighted to see that Ulster Bank is doing it unlike Bank of Ireland which is pretending to have a split mortgage product. I had not heard of the economic concession product and have not gone through the numbers on it but Mr. Bell says it works out better in terms of repayments for the consumer so I acknowledge and recognise that Ulster Bank is being creative in bringing in things that are better for the consumer than the split mortgage. I think I am right in saying that Ulster Bank is allowing people to move house and keep their tracker mortgages. Is that correct?

Mr. Stephen Bell

We do.

That must be acknowledged. In respect of voluntary surrender, there will usually be a gap between the sale price and the amount owed to the bank. Did I hear Mr. Bell say that in these cases, Ulster Bank is surrendering any legal hold on that debt to the borrower? Is that correct?

Mr. Stephen Bell

We are taking a case-by-case approach but where it is necessary and appropriate, we are not seeking to enforce the full shortfall.

And surrendering a legal option to do that in the future?

Mr. Stephen Bell

Absolutely.

I welcome all of those things, which are very important.

I do not think Ulster Bank has hit the targets. In respect of the PDH, which is the owner-occupied section, 5,172 offers have been made but 4,124 of those are legal letters. Therefore, is it safe to say that those legal letters do not include an offer for a restructuring of the mortgage?

Mr. Stephen Bell

There have been many earlier correspondences which will have offered alternative solutions and they have not been taken up and typically they have not resulted in any engagement so we have hit a point where we have no other option to move the case forward.

I appreciate that and have no problem with the legal letters being written. It must be deeply frustrating to have over one third of the customer base not paying anything. That must be a deeply frustrating situation to be in. The Government target is offers made that Ulster Bank deem to be sustainable against a set of criteria. I put it to Mr. Bell that while the legal letters may be necessary as part of the ongoing operations of the bank, they do not constitute long-term sustainable offers.

Mr. Stephen Bell

They meet exactly the definition with the Central Bank. We have discussed with the Central Bank specifically whether the approach we are taking to legal proceedings counts towards the targets and we have had confirmation that they do.

Would Mr. Bell be willing to provide the committee with that confirmation from the Central Bank?

Mr. Stephen Bell

We have it in a written form. Otherwise, I am happy to confirm it to the Deputy by whatever means he would like.

If that is what the Central Bank says and Mr. Bell has confirmation of that, I guess that when the Central Bank audits the bank's figures, it will show that the bank has hit them. I do not believe the legal letters meet the spirit of what the Government is trying to do here. I believe the real figure is 1,048, which is 6% rather than 20%. However, what Mr. Bell is saying is that Ulster Bank has clarified this with the Central Bank and it is saying that legal letters, which may result in repossession which nobody wants, count as offers of sustainable solutions to borrowers which means that Ulster Bank has met its targets. If this is the case, I would like to see the Governor of the Central Bank in here as soon as possible.

I am on record in the earlier meeting and without show boating-----

I am not remotely show boating.

The Governor is scheduled to come in around 25 September and all committee members are aware of that at this stage so there is no need to call for it.

I did not know that.

Mr. Stephen Bell

Managing this problem is not something one does with one instrument. The way one prevents cases getting into over 90 days arrears is as important as how one deals with cases that have already got into arrears of 90 days or more. There are over 14,500 cases that are either current or less than 90 days because we intervened and found appropriate solutions for customers. We have seen a net reduction of 549 cases in the 90 days plus portfolio over the quarter in question so I would be prepared to say I feel very strongly that we have met the spirit of the intent, which is how we provide appropriate solutions to people with genuine payment difficulties. The target regime to some extent sits alongside that, which is something we must do but it does not necessarily drive every action we take.

I thank Mr. Bell for that explanation. It seems that Ulster Bank has engaged in debt write-downs in terms of voluntary surrender. I have read reports where Mr. Brown is reported as saying that Ulster Bank will not engage in debt write-downs. What is the bank's position on debt write-downs being part of some solutions?

Mr. Jim Brown

We have a policy of no debt write-downs as part of a solution. As we commented earlier, as we work through a case and there may be a shortfall once the process has completely exhausted, the bank from an accounting perspective may need to write off that loan. The reality is that there have been relatively few cases of that so far because we only recently got the tools to enable us to address the issue.

As part of a personal insolvency arrangement, is the bank's policy that no personal insolvency arrangement will include a debt write-down?

Mr. Jim Brown

We support the personal insolvency arrangements that have been put in place and will work through the insolvency service on a case-by-case basis. It depends on the individual circumstances.

I asked the specific question whether it is the bank's policy that debt write-downs will not be included in circumstances involving the insolvency arrangements.

Mr. Stephen Bell

We entered into discussions with the Insolvency Service of Ireland and have observed that a zero coupon split mortgage achieves the same effect without disadvantaging the lender by forgoing interest in a potential future outcome that nobody can predict at this point. Our most recent conversations with the service suggest that is an acceptable way of dealing with the situation.

I appreciate that but we are short on time. It is a yes or no question. Is it bank policy that there will be no debt write-downs as part of the insolvency arrangements?

Mr. Stephen Bell

Our bank policy is that the idea of writing down arbitrary amounts of debt while people stay in a house is not something we are going to do.

The answer is: "Yes, it is bank policy."

Mr. Stephen Bell

That is correct.

When the bank works with the borrower to determine the amount he or she can pay if a mortgage is unsustainable, does it have guidelines? AIB based its calculations on the ISI minimum requirements plus approximately 20%. What is Ulster Bank's approach to determining what a family should be left with?

Mr. Stephen Bell

We are using the same basic agreement as AIB but because we have been able to recruit a significant body of people who are experienced collectors, we can draw on a body of knowledge and experience to interrogate matters more than we might otherwise. It is a combination of the ISI figures and some additional flexibility.

Can Mr. Bell provide the committee with those guidelines?

Mr. Stephen Bell

They tend to be specific to individuals but we can certainly describe what we mean by them.

Perhaps we could also be provided with worked examples.

Mr. Stephen Bell

Absolutely, yes.

Of the €58 billion the bank says is the extent of its involvement in the Irish economy, what is the amount of loans to owner-occupiers of residential properties in the Republic of Ireland? I apologise if Mr. Brown has already provided the figure but I cannot find it in his document.

Mr. Jim Brown

We have €20 billion in mortgages, approximately 85% of which are for owner-occupiers.

Has the bank conducted an assessment of the amount of negative equity involved in this total?

Mr. Jim Brown

The average loan-to-value ratio on our portfolio is just over 110%.

I ask Mr. Brown to explain in a way that an ordinary householder could understand. In absolute figures, how much negative equity is involved in the property for which the bank has loaned money?

Mr. Jim Brown

If the average property was valued at €100, the average loan would be €110.

The bank has issued what I would describe as hard-line press statements with regard to the question of debt forgiveness. I have raised this issue with the other banks. Given the disaster inflicted on ordinary home owners - I am not referring to those who bought a string of properties for speculative purposes - and the young working people in their 20s and 30s who are now obliged to pay massive amounts because of the rampant profiteering in Irish property, is it not reasonable to expect the banks, along with the Government and the European financial system, to agree a policy of general write-down of the capital value in each over-priced home to today's value and thereby calibrate downwards the monthly repayments on those properties? Is that not the ideal and proper solution for those who are in desperate straits at present?

Mr. Jim Brown

From my perspective, the bigger issue is acknowledging that there is a cost to being in a home. If we look at our average mortgage and the average cost to rent, our mortgages are the same or even less than rental payments. Certainly, our repayments are considerably lower if we end up agreeing something like an economic concession. From my perspective, the key issue is to work with customers on a case-by-case basis to examine their financial situation, and for those who are not engaging or choose not to pay, to come to some realisation that there is a cost to living in a home. In our view, it is probably better for them to be talking with us and coming to an arrangement rather than to lose their homes and going out to rent.

With respect, just about every ordinary home owner has experience on a monthly basis of the huge trauma of meeting the cost of staying in a home. A minority of the bank's customers are in arrears. We can be certain that among those who are not in arrears are people who are struggling to meet their payments, and other aspects of family life are suffering because of the prices gouged from them during the bubble. The issue of strategic default is being suggested as a diversion from the fact that the majority of people are not strategic defaulters but are trying to survive. Some of these people are not in arrears and others are. When the practices, profiteering and speculation of the banking system and the financial markets plunge an entire society into the mess that the Irish people experienced, is it not reasonable for me, as a public representative, to expect the system to find a more global way out rather than the case-by-case approach which leaves people at the mercy of the banks?

Mr. Jim Brown

We need to acknowledge that 80% of customers are paying their home loans and are current or less than 90 days in arrears. Some 19% or 20% of our customers are 90 days past due. In the majority of cases we are working with those customers and putting in place solutions to help them work through their financial difficulties. A small proportion - one third - of that 19% of customers are choosing not to engage with us and we need to work through the legal process to get them to re-engage. The reality is that 80% are paying their home loans.

That is the point I made to Mr. Brown but many of those who were caught in the bubble are making huge sacrifices. It is also a drain on the economy because funds that should be going into goods and services to create employment are being diverted to the financial system. Rather than the business as usual approach, does Mr. Brown not think the financial system as a whole should find a global solution along the lines I mentioned?

Mr. Jim Brown

The key point we have been trying to make is that there is a cost to living in a home. The cost to the 80% of customers who are paying is the real cost of servicing the debt. In many cases, the cost to service that mortgage is cheaper than the alternative of them not having the property and moving to rent the property. It is true that property values have moved up and down. It is also true that in the first half of this year property values have increased somewhat, particularly in Dublin. The reality is that when we make a home loan available, we are looking to finance someone who chooses to move away from renting a home and wants to buy a property over a period of 25 to 35 years. That is the way we approach our mortgage business. The purpose is to help people own their homes and give them an alternative to renting whereby they can ultimately own a property.

That is how we are approaching it. It is not a question of looking at the ups and downs of property valuations in the short term. If there are customers who are in financial distress we are certainly willing to engage with them to help them through the short-term solutions. However, the aim is to provide finance in order that people can ultimately own their homes.

I have one last question. Obviously, Mr. Brown will not agree. I do not expect, unfortunately, that the bankers and the European bondholders will become socialists overnight.

Anyway, that is the solution and we will come back to it.

I am curious about a comment made by Mr. Brown in the Sunday Independent in August. He was asked by the newspaper if he believed it was time for the Government to row back on austerity. He stated:

It's important the government continues with the programme they've agreed with the Troika. Clearly very good progress has been made.

I wonder if Mr. Brown is aware of the great contradiction in his view. He is urging the Government to proceed with a vicious programme of austerity that is taking so much from the pockets of ordinary people and making it far more difficult for them to pay their mortgages on a monthly basis and thus exacerbating the financial problems of some of the banks but mainly of themselves. Does Mr. Brown not see a great contradictory position in that?

Mr. Jim Brown

There are two issues but they are related. Clearly the country has experienced financial difficulty during recent years, there has been no doubt about that. The Government's commitment in delivering on those commitments has resulted in Ireland being seen in a positive light by international markets and that is reflected, for example, by the bond rates investors pay in the market here as well. The financial difficulty that Ireland as a market got into was broader than simply the issues the Government is dealing with more directly in terms of the country.

There are people who are in deep financial distress as a consequence of the financial crisis that has unfolded and a significant proportion of our customers have been impacted by that. This is why we are providing significant resources in terms of the number of people to talk to our customers and the solutions we are putting in place with the ultimate aim of helping them through their financial distress but, where possible, to try to keep them in their homes as well.

I put it to Mr. Brown that in his response to the last question there is an absolute glaring double standard and contradiction. On the one hand Mr. Brown is endorsing a global solution to the Irish economic problem when it comes to imposing austerity. That is okay for the good of the economy. However, it is not okay to have a global solution when it comes to the banks acknowledging their role in getting people into the mortgage crisis they are now in and in getting the whole economy into the mess it is now in. It is a matter of case-by-case and squeeze every cent the bank can get out of the mortgage holder. However, when it comes to what the Government should do, it should have a global solution, no case-by-case approach, no fairness and no justice. It should simply impose austerity because that is what the financial markets want. Does Mr. Brown not see a glaring gross injustice in that?

Mr. Jim Brown

The two issues are different. As I mentioned, in the case of customers or mortgage holders who are in financial distress, we are helping them and we are working through those issues with our customers on a case-by-case basis. As we mentioned, we have already got solutions in place for 17,000 of those customers.

Then how can Mr. Brown seriously and in the same breath encourage the Government to cut people's pay, jobs and income to the extent that they are unable to pay their mortgages to the bank? That is beyond comprehension. I find it fascinating and frankly a little alarming that Mr. Brown says there is no correlation any longer between unemployment and mortgage default, the implication, nicely put, being that people are simply not bothered paying. I put it to Mr. Brown that the vast majority of people are not paying because they are having extraordinary difficulty paying. Often this is because of income loss, it is not always job loss. Incomes have been slashed in this country by between 20% and 30%. Even the people who are currently paying their mortgages are often doing so at the expense of not feeding their children properly or not being able to pay other bills. That is the position people are actually in. Therefore, I suggest that for Mr. Brown to separate the economic crisis which the banks helped to cause from the current problem of mortgage default is a sleight of hand that really becomes a justification for Ulster Bank to launch into an aggressive programme of repossessions and legal action.

Mr. Jim Brown

The first point is that the vast majority of people in Ireland are actually paying their mortgages. Fully 81% of our customers are actually paying. We have 19% of customers who are experiencing financial difficulty and the vast majority of those have entered into some arrangement with the bank. As we mentioned earlier, there is a portion, 35% of that 19%, who have not engaged with us and are not paying anything at all. The point is that 80% of customers are paying their mortgages and we have entered into arrangements with a significant proportion of the 19%.

We will agree to disagree. Mr. Brown will find that Ulster Bank did not have much default before 2008 and it has a good deal of default now and for him to suggest there is no direct connection between those two things is bordering on the preposterous.

Mr. Brown stated that 35% are not engaging and 35% of 15,328 home mortgages, which he says are in default of one description or another, is 5,364. The bank has already gone down the legal route in the case of 4,354 and Mr. Brown has said that 2,851 are not engaging. This makes a total of approximately 7,000, or 2,000 in excess of 35%. Does that mean there are possibly up to 2,000 people above the 35% figure who are engaging with Ulster Bank but the bank is still going down be legal route with them?

Mr. Stephen Bell

I will come in on that. We offered the information earlier that of the 4,300 cases where we have initiated legal action, approximately 20% have now re-engaged. It is not despite the fact that they are engaging that we have taken legal action, it appears to be because we have finally been able to take legal action that we have encouraged engagement. A high proportion of the 4,354 cases will result in a mature and sensible conversation between us and the customer such that we do not have to go to the end of that process. However, unfortunately there are still 2,851 cases where we have not got as far as the legal process and where we are unable to establish meaningful contact and we are not getting payment.

The jury is out on this stuff and we will know a little more in six months or a year. It is alarming that in the case of all of the banks which have come before the committee a very high proportion of the supposed solutions they have offered to meet the targets involve their going down the legal route. One could be forgiven for thinking that there is an avalanche of repossession cases on the way. Ulster Bank maintains that is not the case but certainly the evidence at the moment at least is pointing in the direction of wholesale repossessions taking place as a result of the change in the legal obstacle.

Mr. Jim Brown

There are two key points that I wish to highlight. One is the calculation by which the 20% target was met. As we have stated already, a sizeable percentage of that was met through the legal route. However, over and above that, and not as part of the target regime, we have entered into 17,000 arrangements with our customers, some of which are pre-arrears, some of which are early arrears and some of which are more than 90 days past due. In these cases we have come to an arrangement with the customer to help alleviate the problem.

There are two separate points. There is a significant amount of action to get customers into some solution that will work for them in dealing with their financial problem.

I take the point which I heard earlier. The economic concession is an interesting issue. Anecdotally, what I hear is that people are not interested in split mortgages because they think they will be sunk in debt for the rest of their lives. There has been some emphasis in the media debate to the effect that split mortgages are akin to Moses and the Messiah coming to save people in mortgage distress. I do not think they are.

Are we coming back to tablets?

The economic concession runs short of a debt write-down, which is what I would like to see, but it is an improvement and we need to look at it more closely.

If Ulster Bank, unlike Bank of Ireland in cases of voluntary surrender, is not chasing as a matter of course the shortfall which is very fair and reasonable, it is, in effect, giving a write-down on an unsustainable debt.

Mr. Jim Brown

It is a write-off.

What it is doing is giving people an incentive to throw the keys back at the bank. Why does it not give them an incentive to stay in their homes and give them a write-down? Why would Ulster Bank not extend that logic to keep people in their homes? I do not understand. The bank is going to take the hit.

Mr. Jim Brown

Just to be clear, on the issue of a write-off, what we said was that when we have exhausted all avenues for recovery, there may be a situation where, from an accounting perspective, we may have to write off a loan. That is different from writing down. We believe that with the solutions we have in place, be it economic concessions or some other form, there are sustainable solutions we can offer customers that will keep them in their homes that do not necessitate the need to write down the loan.

In conclusion, I think the banks need to work harder at getting the message out. The bank needs to be fair. It is making efforts to some degree, but it needs to-----

The Deputy has one minute left.

I have no doubt that people are not engaging with the bank because they are terrified. The bank must recognise its role in creating the fear and genuinely reach out to people by saying it will help people to stay in their homes if that is at all possible and that it is willing to take some responsibility for its role in the mess in working out a solution with them. If that message was sent, it would begin to change the dynamic.

Mr. Jim Brown

Our message is very clear. We want customers to engage with us. It is in our interest and everybody’s interest if we can get them to engage with us in order that ultimately we can keep them in their homes. That is our intent.

I thank Deputy Boyd Barrett. Before we move on, I wish to clarify two issues with Mr. Brown. As the targets that have been set by the Central Bank increase, what are the penalties for the bank if they are not reached?

Mr. Jim Brown

There are potential penalties in terms of additional capital overlays.

In the unforeseen event that Ulster Bank does not reach its target, how would the penalties apply?

Mr. Jim Brown

Ultimately, an additional capital overlay – I think it is about €600 million-----

Mr. Stephen Bell

The way the mortgage arrears document from 30 March is written, it states that in the event that the bank fails to hit the target, it would no longer be able to make any assumption of future cure rates for people who are more than 90 days in arrears. It is very difficult to say, but one would have to assume that in every case 90 days plus in arrears the property would simply be repossessed. All banks, as a matter of international accounting policy, make assumptions about cure rates and they can vary by between 25% and 30%. One is effectively saying that for all of the balances 90 days plus in arrears, a significant proportion would either become an additional provision or additional capital.

Would the bank have to charge-----

Mr. Stephen Bell

We would. In the joining of the dots the banks need capital to support their future business, as well as in dealing with the problems of the past. If more capital is consumed in dealing with the problems of the past, there will be less to support investing in growth in the future. We are determined to ensure we do not inadvertently end up having capital tied up in something that is avoidable.

To clarify matters, unlike the two previous banks that have appeared before us, Ulster Bank has not been capitalised by the State to any extent. The sum of money would not come through Government capitalisation but would have to be found from another source.

I wish to deal with the issue of debt burdens and the write-down of debt. I am surprised that Ulster Bank has made a categorical statement this afternoon that it will not engage in any debt write-down. I am not talking about a blanket debt write-down, which I do not think anybody is suggesting. It would be nonsensical because if it were to happen it would just create an incredible situation. Some of my colleagues might use a discourse or theoretical framework that would not immerse itself with what might be seen as capitalist bankers and they might be coming from a different perspective. I will speak in capitalist terms about a debt write-down. Like the other banks, Ulster Bank wants to see normalisation in the housing market. It wants to engage with new mortgage customers and bring in new loans. That is the business it is in and it wants to increase numbers. Mr. Bell gave an indication, with Mr. Brown, as to what prudential lending practices will be in the future. We will see loan-to-values, LTVs, ratios of 90%. What ratios in terms of income are we talking about?

Mr. Jim Brown

First, we are active in the mortgage market. Last year we lent €270 million, which was up significantly on the previous year and expect the amount of new lending to be higher than that again. We are actively in the market for lending.

In terms of prudential debt ratios, again, it depends on level of income, but my expectation is that it would be three to four times one's income. Mr. Bell might want to add some colour to this.

Mr. Stephen Bell

There are different ways of looking at this. It is not in any way unusual for net disposable income of 40% to 50% being allocated to home loan repayments. That is usually where the lender will stress that amount to cater for circumstances.

The national industrial wage is approximately €37,000. Let us round it up to €40,000. A couple with one person earning just over the national industrial wage of €40,000 and with a partner working part time on €20,000 has €60,000 gross coming into the house every year. They would have to meet the 10% deposit themselves. In principle, what level of mortgage would be given to the couple under the criteria applied by Ulster Bank?

Mr. Stephen Bell

It is difficult to work out the calculations.

I mean generally. I am not looking for the specific sum but to the closest €10,000.

Mr. Stephen Bell

The average loan size for Ulster Bank is €173,000. I would not see it being particularly different from that figure, given the circumstances outlined.

Someone on the national industrial wage who is cohabiting with somebody on half the industrial wage or a little more than this is in the ball-park for lending of €150,000 to €170,000.

Mr. Stephen Bell

I was trying to do the math backwards, but I would have thought that with the marginal tax rate at less than 50%, one would be talking about €30,000 to €35,000 of net disposable income and at four times the amount, it would be in the territory of €150,000 to €160,000.

By my calculation, somebody on the national industrial wage should be able to buy a three-up, three-down entry level house on a regular estate in a normalised market. That would indicate to me a return to normalisation. The difficulty is that six or seven years ago the people concerned were getting loans in excess of €250,000 and as much as €350,000. That is the problem. Even if they do not lose their jobs and become unemployed or see a reduction in wages, they are knackered. They cannot pay their existing loans. The fear I have is that Ulster Bank does not engage in sustainable solutions with those people whose debts span 35 years. At the latter end of a 20 year or 25 year schedule, paying a mortgage is a hassle, but it can be paid. On a 35 year schedule, when children are going to university, one is only halfway through the mortgage. Big bills are coming in when one should be seeing the end of it. Further debt difficulties are coming down the line for the people concerned. Leaving dogmatic left-wing, communist or socialist rhetoric to one side - I am talking in capitalist terms - the bank is not making sense.

Please restrain yourself, Chairman.

Let me assure the Deputy that there is nothing wrong with a bit of good left-wing rhetoric.

You should moderate your views, Chairman.

The bank is not making sense, even in capitalist terms.

A great number of people are heading into a personal insolvency arrangement, but from the target Mr. Lorcan O'Connor has indicated, he would be expecting the bank to be receiving 35 cent on the euro. I strongly suggest to the witnesses that Ulster Bank will have to review that, and I am not talking about blanket write-downs of 100%. Otherwise it will push people into personal insolvency arrangements that they do not want to be in.

Chairman, it is the same for AIB and Bank of Ireland. As you said, these meetings are about the overview of the financial sector.

(Interruptions).

The Deputies will distort the answer to the question. Can they be quiet please?

Mr. Jim Brown

I understand the point the Chairman is making. The key comes back to affordability and looking at each case on its merits. Regarding the case he has outlined, in my view, that would be a case in which an economic concession may be required where the bank significantly reduces the interest rate it is receiving-----

Reduce the variable that they are on at present.

Mr. Jim Brown

That is right. Reduce the interest rates so that a greater proportion of the repayment can go towards reducing the principal over time. That is why we think that is a better example than the split mortgages.

Mr. Stephen Bell

As stated, the estimates around net disposable income or income multipliers are based on a more normalised interest rate environment. As we have said before, with 72% of customers on a tracker rate where the interest rate is 1.5%, obviously that gives one a different profile to examine.

One of the things I am picking up from Ulster Bank, and I will refer to it in my summation, is that it is looking at some solutions that seem to be outside the prescribed list. One of the misconceptions about buying a house for €150,000 or buying a house for €300,000 is that the person does not pay back €150,000 or €300,000. They pay a staged payment every month for the next 20 to 35 years and the net sum is what they actually pay for that house. Mr. Brown is suggesting this afternoon that by way of the restructuring, that net sum over the 25 to 35 year period reduces.

Mr. Jim Brown

Yes.

I would like to hear more about that because I believe other banks need to be looking at that as well.

Mr. Jim Brown

We can share more on that, Chairman.

Okay. I call Deputy O'Donnell.

I welcome the witnesses. I want to pick up on a few points. I want full clarification on the legal aspect. I am looking at quarter two, the figure for which I believe was 4,124. Mr. Brown said that 20% of those have now re-engaged. Were letters sent to all those people and what criteria would the bank use in terms of legal letters being sent out? For instance, in the case of AIB, that was done when it had not received payments in three years. Bank of Ireland appeared to operate that. What would be Ulster Bank's criteria on that? Mr. Brown might give me a general overview on that.

Mr. Jim Brown

When we looked at the cases to go into the legal system we challenged ourselves to make sure we had exhausted every possibility, and so in 1,400 cases, we sent a further letter out to make sure we had given people every single opportunity to respond to that change-----

Some people would have got two letters.

Mr. Jim Brown

Some people will have had ten letters, frankly. We have a series of letters. They start off with a very friendly "we really need to talk" letter.

Does Mr. Brown regard that as legal?

Mr. Jim Brown

No. That is absolutely not. The last letter before we go into the legal system is reasonably strongly worded and states: "If we cannot now reach some kind of accommodation we will have to then consider ...". Even at that point we do not regard that as legal. We have only regarded things as legal once we have appointed solicitors. We believe that we have taken all reasonable steps to ensure the customer is aware of the next step in the process.

Of that 4,124, 20% have re-engaged. Therefore, it is about 800 or 900.

Mr. Jim Brown

Yes, so far.

What does Mr. Brown anticipate will be the balance? What will be the process?

Mr. Jim Brown

When we look at international comparisons, where the legal market has been unaffected by matters such as the Dunne ruling, up to 70% of customers respond positively when the legal process commences and the best solution can be reached. One would hope to get somewhere nearer to 70% than 20%, but what we have been very clear about with all of our different stakeholders is that this is a situation that has been two years in the making. It will take more than two months for it to be resolved.

If it transpires that some of those end up as voluntary repossessions or repossessions, what view does Mr. Brown take on the balance of the negative element of the equity?

Mr. Jim Brown

It is always done on a case-by-case basis. If a customer was manifestly unable to service the debt and was clearly going to be in a difficult position, the calculation any bank would make to avoid what could be anything from €3,000 to €13,000 in legal costs and anything up to five years of delay in resolving the situation is whether it makes sense if the customer works in a sensible way with the lender to resolve that with a mutually agreeable sale. Would we look favourably at whatever the residual might be and, on a case-by-case basis, yes we would.

In essence, there is debt write-off within the bank.

Mr. Jim Brown

In essence, where there is a voluntary co-operative relationship with the customer and there is no other means, then as with every other international banking market, it is not debt forgiveness but simply banking operations.

I refer to a number of points Mr. Brown made in his presentation. He stated that the bank's level of arrears provision has gone down, which is the opposite of the position in the other institutions that have come before the committee. Will Mr. Brown explain to me the reason that is the case? Mr. Brown spoke about operating in the North and operating in the South.

Mr. Jim Brown

Yes.

He appeared to give the impression in his presentation that on similar type loans, the reaction of the mortgage holder is different. Will Mr. Brown explain that? It appears to go against current trends and I wonder about the reason for that.

Mr. Jim Brown

We have had a decrease in our arrears for the past five months. I cannot speak for other banks but I can share with the Deputy what we have done which I believe has contributed to that decrease.

In that time, how much has the bank written off in terms of write-offs and in terms of mortgages?

Mr. Jim Brown

We have not written anything off.

Mr. Jim Brown

The approach we have taken is that we have treated any customer who is in arrears as a high priority. It does not matter whether they are one day past due or two years past due; everybody is a high priority. We have increased the number of people to contact the customers experiencing arrears in that we now have 400 people making calls. That is the first point.

The second point is that we have come up with a wide range of solutions. We have talked about some of the more innovative ones. We have a wide range of solutions available to customers, but the initial approach we are taking to customers in terms of the calls we make is to get them back into the habit of paying something towards their arrears. The second approach is highlighting to customers that in many cases the arrangements they can come to with us to resolve their financial situation is in many cases cheaper than the cost it would be for them to rent. It is contacting customers, sharing with them the implications of not paying, getting them into the habit of paying something and then working through a sustainable solution. That is the order in which we have approached it.

In the past year, how many houses has the bank repossessed?

Mr. Jim Brown

Some 74 and the majority of those have been voluntary where people have handed back the keys.

Regarding the 74 voluntary repossessions, has the bank sold those houses or kept them in stock?

Mr. Stephen Bell

Some will have been sold. We are still working through those cases. Therefore, we can provide an answer subsequently.

The bank has not got to the point where it is doing a write-off on that.

Mr. Stephen Bell

Correct.

Mr. Jim Brown

The process is still relatively early in terms of us, first, having the capacity but also the tools to be able to contact, and the repossession process is still new.

Will Mr. Brown tell me about the position in the North relative to the South?

Mr. Jim Brown

Until April 2011, mortgage arrears for both markets were highly correlated.

As unemployment was rising, so mortgage arrears were also rising. That is quite common across more markets than just simply the North. A number of factors have happened in the Republic - such as the inability to contact, not having the Dunne ruling sorted out, the lack of a credit bureau and so on - that in our view have had an impact on our ability to collect and may have been a factor in causing a divergence in the correlation between mortgage arrears and unemployment. What has happened is that since 2011, that correlation has continued to hold in the North. Even though unemployment is rising, arrears are rising. However, in the Republic, unemployment has come down from its peak of 15.1% to 13.7% but over the same period, arrears have increased. Over the same period, the average repayment on a tracker mortgage has reduced and so what we are highlighting is that other factors must be at play here that have caused that correlation to break down.

Is Mr. Brown stating the provision Ulster Bank is providing has reduced over the last-----

Mr. Jim Brown

The number of cases that are in arrears is reducing. That is because we have managed to cure some of those customers who were in arrears by providing solutions and they have become current again. We have actually seen a decline in the number of cases that are having a problem with servicing their mortgage.

On the issue of strategic defaulters, does Mr. Brown believe this is a factor in the Republic?

Mr. Jim Brown

While I think strategic default has happened, I do not think I can quantify it. What we do know is that 35% of our customers who are in arrears in their mortgage are not engaging with us and are not paying anything towards the cost of living in their home.

How long has that pattern been happening?

Mr. Jim Brown

The majority of those who are in that category have not been engaging with us or making a payment, generally speaking, for nine months to one year or even longer.

Mr. Stephen Bell

To be clear, there can be sporadic payments. It is not to say there is absolutely zero, as one might get a €50 payment one month and then nothing and then a €100 payment.

So, one quarter of those who are in serious arrears are not engaging.

Mr. Jim Brown

That is correct.

AIB has told members that its equivalent figure is 20%, while Ulster Bank is stating the figure is 35%, which is 5% of its loan book.

Mr. Jim Brown

No, not of our loan book. A total of 35% of our customers who are in arrears more than 90 days past due are not engaging with us.

What percentage of Ulster Bank's customers are in arrears?

Mr. Jim Brown

A total of 19%.

Approximately 20% are in arrears and it is 35% of that 20%.

Mr. Jim Brown

That is correct.

That is approximately 7% or 8%, which is very high. Finally, in the presentation Mr. Brown made reference to-----

Mr. Jim Brown

I should point out that having started the legal process, 1,000 have started to re-engage with us.

It is still very high.

Mr. Jim Brown

Yes, it is.

Is Mr. Brown surprised by how high it is? What is the relative figure in the North?

Mr. Stephen Bell

The 90-plus arrears statistic is 4.5% in the North.

While it is not quite double, there is a significant difference. It is actually higher than AIB's level. The latter bank has put out a figure to the effect that 20% of its customers in arrears are strategic defaulters. Ulster Bank is telling members that it is 35%. Does Ulster Bank have empirical evidence for that?

Mr. Stephen Bell

We would not start to get into this definition of "strategic default", which has so many different meanings to so many different people. I guess that what we are seeing is that mortgage arrears tend to be accompanied by difficulties with other outlays. We carried out some analysis on the standard financial statements and found that for every €1 of mortgage repayments, there was in excess of 60 cent of unsecured debt repayments. If someone is prioritising the repayment of short-term consumer finance and, as a result, is prejudicing his or her ability to remain in his or her home, we would consider that to be a bad choice. As to whether it constitutes strategic default is not really for me to say. Where we see people who, month after month, simply do not pay anything and do not respond to considerable attempts from us to contact them, we would regard that as being something beyond bad form and to be something we need to deal with quite vigorously.

Senator Barrett has ten minutes.

I am sure the Acting Chairman will call me to account. I welcome the witnesses from Ulster Bank. The sentence on page 3 of the opening statement, "there is a cost to living in a home", needs rephrasing. Both members and the people know this. As the witnesses are aware from The Economist over the years, Ireland had the highest house price inflation of any country for which Pam Woodall collected the data. Mr. Bell has just stated it is 40% of one's disposable income. Consequently, that statement must be rephrased. People know darn well what is the cost of living in a home, because they have been paying it. There is house tax, water tax and television tax. According to the Minister, Deputy Rabbitte, even if one lives in a cave, one still will be obliged to pay that tax. Moreover, there has been a 25% reduction in retail sales in this economy. Consequently, it is insensitive to include that sentence to the effect that people do not know this. They are groaning under the burden and it plays a major part.

What loan-to-value ratio is being used in the Ulster Bank at present?

Mr. Jim Brown

On the Senator's first point, we agree there is a cost of living in a home. We do not disagree with that at all.

Mr. Jim Brown

What we are pointing out is there is a significant minority of customers who are in arrears in their mortgage and who are paying nothing towards the cost of living in the home in question. That is where we have the issue. We want those customers to engage with us and for them to work with us on coming to an arrangement whereby we can keep them in their homes but also have them servicing their mortgages. That is the point we were trying to make.

As for the current loan-to-value ratio up to which we will lend, it is 90%. Generally speaking - Mr. Bell may correct me if I am wrong in this regard - most of the new loans we advance are between 65% and 70% of the value of the property.

I welcome that because I do not think we should go over 80%. I believe that was the cause of the problem, which included Ulster Bank. In the history of this decade, albeit before Mr. Brown's time, Ulster Bank changed from being an industrial bank to being a major ingredient in the Irish property bubble. I have discussed this with people such as Frank O'Reilly, the previous chancellor of Trinity College. This was a huge mistake, as we need banks that get involved in industry and agriculture and do not become so exclusively property-based as did Ulster Bank and all the others as well. I believe that behaving that way was the core of the problem and that loan-to-value ratios should never again exceed 80%.

I refer to the letters that were issued as part of the 5,176 adjustments, that is, legal letters were issued in 4,128 cases and long-term solutions amounted to 1,048. I believe Mr. Bell referred to this issue earlier. Does issuing such letters meet what the Central Bank was trying to do or, as was hinted earlier, is it that when banks come under pressure, they redefine the rules to define these letters as being part of the adjustment?

Mr. Jim Brown

Yes, that metric does count towards the inclusion of having met the targets.

It may be that in time, those legal letters will have no effect if it is seen to be the result of irresponsible lending by banks and a judge could very well make such a decision. Members encountered cases yesterday of people who had bank debt of more than €300,000 and an income of €40,000. If Ulster Bank has any similar cases on its books, it is quite likely that a judge will state the bank was responsible through reckless lending. Consequently, were one to assume that all this is the kind of adjustment the Central Bank seeks, the mere issuing of 4,128 letters might not accomplish what Ulster Bank seeks.

Mr. Jim Brown

The reason we are issuing the legal letters is because we are looking for customers to re-engage with us in order that we can come to some sustainable solution. The problem today is that those customers have not engaged, despite us contacting them through letters, by telephone or whatever it may be. Consequently, that has left us no recourse but to issue the letters. Having said that, since we have issued the letters, we already have had 20% engage with us. If the trend continues as per other international markets, we expect this could increase to as much as 70%. While we still are very early into the process, I do expect to see a lift from more than 20%.

Has mortgage protection insurance played any role in this at all or is it like the umbrella that only works when it is not raining?

Mr. Jim Brown

We have not seen mortgage protection insurance as a factor at all in any of these loans. I do not know whether Mr. Bell wants to comment on this issue.

Is that not what the insurance was for - that if one could not pay the mortgage, one had mortgage protection insurance? Has it been invoked at all? Has the bank sought to use it?

It is life assurance.

Mr. Jim Brown

Yes. There are two issues. One is payment protection insurance which is available if someone loses his or her job or something like that, as opposed to writing down his or her mortgage or something like that. These are two different matters.

The unemployment rate in Northern Ireland is much lower than that in the Republic.

Mr. Jim Brown

It is. The Senator is correct.

On the correlation Mr. Brown was trying to find earlier, what I see in this economy is people who have had five years of massive income reductions. On Mr. Brown's econometrics that applied before to large chunks of the economy, where people in work have been seriously deprived of income, I would expect Northern Ireland to be doing better and the relationship might still hold.

Mr. Jim Brown

What we were highlighting - we used Northern Ireland as an example because it had very similar economic stresses, with property inflation, etc. - was that in most markets there was a direct link between unemployment and mortgage arrears. If unemployment rises, mortgage arrears rise and as unemployment falls, mortgage arrears tend to fall. That was the case in the Republic up until April 2011, but since then unemployment has come off its peak and we are still seeing a rise in mortgage arrears. That is the point we were trying to make.

On the discussion in the newspapers from time to time that Ulster Bank in the Republic will be offered to the Government, has Mr. Brown been at boards where this issue has ever been discussed?

Mr. Jim Brown

To my knowledge, it has not, no.

We already have a good suite of loss-making banks and, at minus €387 million, I think we will decline the offer, if Mr. Brown is talking to the Chancellor.

Mr. Jim Brown

We are working very hard to make this a profit-making bank.

I thank Mr. Brown.

On one of the points Senator Barrett made, in some jurisdictions the concept of having mortgage protection insurance, for payment as opposed to where somebody dies, is mandatory. Canada is one such jurisdiction. As a result, it did not have a property bubble because the affordability and valuations of properties were triangulated whereby the insurance companies would not stand over insuring a loan if they thought the property was overvalued. Would Mr. Brown hold a view that, as we learn these lessons, a similar approach should be considered whereby it would be mandatory to have mortgage protection insurance for payment, which would also give the State an insulated period of time before it would have to make an intervention?

Mr. Jim Brown

That is something we would have to take away and look at more deeply. Our approach to lending, as we have outlined, in terms of income multiples or loan-to-value ratios, is such that we are trying to make matters plain vanilla and as simple as possible, but it is something we should probably take up and have a look at and come back to the committee, if that is okay.

I have one other question. I was surprised this morning when Bank of Ireland stated it because I thought it was merely confined to principal mortgages or home owners. Is Ulster Bank applying split mortgages in the buy-to-let sector also?

Mr. Jim Brown

No.

Would Mr. Brown consider such a concept?

Mr. Stephen Bell

It would depend on circumstances. What we are looking at is whether the rental income being derived from a tenant is being used to pay the mortgage. If it is not, we have little option but to intervene because otherwise the money would be used elsewhere. If there was a genuine set of circumstances, we would be happy to consider it, but it is not likely to be the case.

I call Deputy Peter Mathews.

I have ten minutes, is that right?

I will give some grace. Ten minutes.

Thank you, Chairman.

I thank Mr. Brown for coming. I have a certain amount of sympathy for him, as I do for all his peers in the other banks, in this regard only, that he is the meat in the sandwich. Where are the banks' boards of directors? They direct the banks and the financial sector. They are the guys who signed off on the behavioural policies and strategies of the banks leading up to 2008. They are the guys who were the architects of and designed the balance sheets that led to weighted average loans-to-deposit ratios of 170%. Royal Bank of Scotland, RBS, was steady, at a figure between 135% and 140%, for several years. A credit bubble is what causes an asset price bubble and it is the houses priced in markets that people live in. The cumulative derogation by the boards of banks during that six year period meant a cumulative turbo-charged rise in asset prices and when they collapsed, 100% of the loans was still in place. That is what is shocking and unjust. There is nothing personal in this, but I wish the directors were here. They are getting big fees and telling these guys what to do. They are telling Mr. Brown and his colleagues to try to fight with limited ammunition and their hands tied behind their backs because they have not stood up and matched their responsibilities.

There was a lethal cocktail. Mr. Brown's bank offered tracker mortgages. Bank of Ireland has whinged that more than half of its mortgages are tracker mortgages and that they are loss-making. Whose big idea was it to give them, if they were going to be loss-making? Was it a way to get market share for three years and then switch everybody to variable rate loans and was it a case that asset prices would remain high? That could never have happened in the ponzi scheme they had created. Now citizens are financial galley slaves, including Deputy Spring and his generation. I am lucky. My youngest is 22 years old and one of mine is in Australia. That is why Mr. Brown has an anomaly whereby he is wondering as the arrears are rising at a time when unemployment is falling. There is emigration. Those who are stuck here are unemployed and the ones who are getting deeper into debt. The lethal cocktail of tracker mortgages, loss-making products which all of the banks like lemmings raced over the cliff to provide, is still in place.

The banks have a problem and it is a capital problem. This morning Bank of Ireland told me that the provisions of AIB, at 18.5% of its total loan book of €89 billion, were different from those of Bank of Ireland and that Bank of Ireland was not comparable to AIB because it had a different spread of risk and portfolio. I do not believe that because Bank of Ireland stated, in the original listing in September 2009, in the PwC list of runners and riders for NAMA, that it had gross loans of €16 billion to go into NAMA. In three months it changed and, suddenly, the bank's portfolio had improved and gross loans of only €12 billion went into NAMA. My suspicion is that Bank of Ireland wanted to stay out of majority State control. That is what all of the banks were trying to do at the time because they did not understand the ponzi scheme of credit. There was this wall of asset prices that was going to collapse and leave the loans with families and businesses to be crushed, distressed and demoralised. My heart goes out to the individual families affected, to the bread winners and those who are receiving less income.

A question, please.

Senator Barrett is correct. The bank did have those standard financial statements before the bubble. What happened then? What minds were working? At the top were they cocaine fuelled rather than credit fuelled? It is a very serious responsibility with which we have been left.

Bank of Ireland had €61 billion of senior secured debt on its balance sheet in March 2008. That is nearly the amount of money the troika has lent to the country. One bank had senior secured debt resulting in this credit-fuelled bubble and asset prices that were going to collapse. That has now all whittled down.

Does Mr. Brown know who paid the bonds? It was the euro system. The Central Bank of Ireland and the European Central Bank gave the busted zombie banks, which remain zombie, the cash to pay the bondholders. Even the hedge fund managers could not believe it.

They thought the world had gone mad. They expected the bondholders to take a bath but they did not. The ECB stepped in first, followed by the Central Bank to create promissory notes with joint sign-off and signature of the Governor of the Central Bank. There were three waves of promissory notes totalling €31 billion. There was no deal earlier this year. It was given to us because Ireland would not have survived without the conversion of the promissory note into a series of 40-year bonds for an equivalent amount. The liability to the euro system remains. We should be going in with our shirts off and our sleeves rolled up to tell Mr. Draghi that it is all wrong and the €75 billion is actually €100 billion of losses in the six Irish banks. The losses for Ulster Bank amount to €15 billion or €16 billion and its loan book peaked at approximately €50 billion. My figures are right. Bank of Ireland is in cloud cuckoo land if it thinks provisioning of 8% on a loan book worth €95 billion is sufficient. That is nuts because only 26% of that overall loan book involves normal businesses producing goods and services. The remainder is property related, whether mortgages, buy-to-let, construction, development or investment properties.

Deputies Higgins, Boyd Barrett and Donnelly and Senator Barrett are right but the great gap is the lack of outside directors. I realise it is tough. I have worked in banking. This is why I understand what I am saying. I had to do the collections in ICC Bank. It is off the map now. Senator Barrett noted that we need the banks to help SMEs and understand business and industry. That is what ICC did. It was an equity bank but HBOS took it over and trashed it. It is now sinking and writing off between 45% and 50% of its entire loan book as it settles its debts.

The Deputy has two more minutes. If he wants to put a question I will take it.

It is unfair to the staff of the banks, who are distressed. There is no communication because people are frightened. Luckily I only have a current account with Bank of Ireland. When I ring that bank's branch in Stillorgan my call is diverted to a call centre in Limerick. It is mad. The banks paid millions of euro to management consultants to tell them how to run their businesses but they cannot even communicate internally. The people in Limerick do not know whether I am 22 or 62 years old. They just hear a voice even though I have been a customer of Bank of Ireland for 45 years. Why should people engage? They are getting letters but do not know who is writing them. When they contact their banks they are transferred to a call centre or an automated menu. There is music while they are on hold. It is mad.

A mortgage is a loan secured on an asset. If all things are equal in terms of multiples of earnings, the guidelines on prudential borrowing are observed and loan-to-deposit ratios are maintained at 90% over time, a credit bubble mathematically cannot happen. The boards, in all their stupidity, allowed it to happen and, boy, they let it rip. They compounded the problem by offering tracker mortgages, which are loss makers. These are the people who are now supposed to vet people getting back on their feet. It is unbelievable.

Thank you, Deputy.

Mathematically, 66.66% of the loans advanced during the course of the bubble should be written off because they are for the accounts of the banks. The customers cannot create credit for themselves. They receive credit and in turn the banks get credit from investors, including in senior secured debt in the case of Bank of Ireland. That bank hosed €61 billion in senior secured debt at the people and invited them to take out tracker mortgages. It did not say it was creating a bubble that would burst.

Thank you Deputy. I call Deputy Creed.

I have a last question.

You are out of time.

How many property receivers -----

Please, Deputy.

----- have been appointed?

I am not going to allow the Deputy to do that. He was given ten minutes to ask a question but he did not do so. I call Deputy Creed.

You have come in on many questions all over the place. It is very unfair.

I am Chairman.

I know you are. You have to be fair.

I have been fair. Let me be very clear. It is not the first time I have said this to Deputy Mathews. I have been liberal with him in the past. He is not a member of this committee but I have allowed him to speak prior to members, which is against the protocol.

Have I shown myself to be disposed to be helpful?

I invited the Deputy to ask questions. That is the purpose of this committee. If the Deputy wants to have a conversation with Mr. Brown he is welcome to bring him to the bar for a cup of coffee. I call Deputy Creed.

I thank the representatives of Ulster Bank for their presentation. Much of our emphasis has understandably been on the 19% of borrowers who are in arrears of 90 days or longer. I want to focus on the other 81% of borrowers. Mr. Bell spoke about current lending practice and the bank's lending rates in the mortgage market. It is difficult to put all of the aforementioned 81% of borrowers in the same boat but a significant number are under enormous pressure to balance electricity bills, gas bills, school expenses and car and health insurance in order to pay their monthly mortgage repayments. Is the bank stress testing these borrowers in regard to their ongoing capacity to repay their mortgages? In the context of how a mortgage applicant would be evaluated today, Mr. Bell indicated that up to 40% of disposable income is used as the basis for repayment capacity. How many of these borrowers are paying more than 40%? How many are paying 50% or 60% of their disposable incomes to remain on the right side of the line? What is his prediction in regard to how many of that cohort are likely to fall into the arrears bracket in the next three months?

Mr. Jim Brown

We have seen a reduction in the arrears in our portfolio over the last five months. While the figure for arrears of 90 days past due is still at 19%, it has decreased from where it stood previously. We stress test the portfolio to determine whether customers may be about to get into financial arrears and we speak to them about putting solutions in place. We have already done that with several thousand cases. We have been proactive in entering into arrangements and the loans remain current as a consequence. I ask Mr. Bell to speak further on the issue of stress testing.

Mr. Stephen Bell

More than 14,500 customers who are either up to date or fewer than 90 days past due are already on alternative payment arrangements because they have contacted us or we have contacted them out of fear that they may be experiencing stress that will in due course manifest itself as arrears. We are being proactive in contacting such customers. An outreach programme has been put in place as part of the Central Bank's mortgage arrears strategy, which we think is a good idea in terms of encouraging banks to engage with people who might get into difficulty and not just those who are already in difficulties. It remains the case that the average mortgage size with Ulster Bank, limited to the average interest rate prevailing, produces a monthly payment of less than €700 or, with economic concessions, considerably less than that. If somebody's circumstances mean he or she simply cannot afford to live anywhere unless the housing is provided by the State, it is difficult to see where alternative accommodation could be found for the level of monthly payment we could construct for a mortgage.

We should talk about home loans, but we should also remember that it is about keeping people in their homes. Even the Personal Insolvency Act is very clear that unless the cost of a home is unreasonably burdensome, we should not be looking to move people out of their homes. Therefore, our approach is entirely to work with customers to ensure they can afford the repayment on some basis that makes sense, that allows them to remain in their homes.

It is welcome that Ulster Bank is looking at the figure of 80% because there are many people who are under as much and perhaps more pressure than those who have reached the point where they acknowledge that they cannot pay any longer. There are those who, for some reason, continue to pay enormous amounts of their disposable incomes. Is Ulster Bank stress-testing them on the basis of a profile of their category of employment and level of income? In the solutions it puts in place does it use the criteria it now applies in respect of mortgage approvals? What level of disposable income does the bank consider it appropriate to take?

Mr. Stephen Bell

We were very actively involved in the discussions with the IBF and the Central Bank around what is soon to be the pilot exercise to examine the wider debt position in which customers find themselves. There is a "waterfall" arrangement which uses internationally recognised practices to walk through a customer's personal situation to see to what point on the waterfall one needs to go to resolve the underlying issue. We fully support this, were very much engaged in its design and incorporate it as a key part of our conversation strategy with our customers. The whole thing is based on whether the nature of the arrears is short term and if a small change in domestic expenditure can solve the problem, that is probably fine. Where we see customers spending more on unsecured debt than they are paying on their home loan, we encourage them to talk to their unsecured lending providers. The committee is aware that the banks have collectively agreed to deprioritise unsecured borrowings the customer has to give primacy to the home loan. For the vast majority of customers, a combination of-----

Is that across the banks?

Mr. Stephen Bell

That is across the main IBF membership.

Therefore, if a customer has a mortgage with Ulster Bank and an unsecured loan from AIB, the banks have an agreement.

Mr. Stephen Bell

We have an agreement through the IBF that if Ulster Bank held an unsecured loan and Bank of Ireland held the mortgage, we would step back from any collection strategy on the unsecured loan to ensure the mortgage could be maintained. We think that is a very important principle for the return to normal performance of the market.

Is the downside of that the fact that the unsecured loan is very often with the local credit union? If one enters into that arrangement, one burns one's local credit union as the unsecured creditor. Some mortgage holders are reluctant to engage in that process because in a couple of years' time they may have a child who is going to college and want to borrow €5,000 and it is unlikely that Ulster Bank or any other bank which holds the major mortgage debt will be inclined to give them a hearing. That is why there is a reluctance to engage in this process, because the unsecured creditor is very often a person the customer knows in the local credit union.

Mr. Jim Brown

We have been involved in those discussions. The key point is that approximately two thirds of the unsecured debt is with the banks and we have worked through that process as part of the discussions the IBF facilitated. Separately we are involved in discussions facilitated by the Central Bank on how to deal with unsecured debt other than that at the banks.

Has Ulster Bank discussed it with the Irish League of Credit Unions?

Mr. Jim Brown

The credit unions have been involved in those discussions with the Central Bank and other banks and we have been party to those discussions.

I will move towards the summation of the meeting. Members can ask one supplementary question. If they are short, I will take them separately, but if they are long, I will take them together.

I would have liked to have raised this issue with the other banks and perhaps the committee might do so. Ulster Bank's customers have been very loyal to the bank, despite last year's IT fiasco. It has 1.3 million customers here and 2 million across the island of Ireland. It is closing a number of branches - the number is on its website. It has slipped out that the bank intends to close another 39 branches in the future. As we discussed the issue of debt write-down, I will not go into it again. These branches are central features in many towns and villages. There is no Ulster Bank in my parish, but there were three banks which are now closed. They are centrepieces of the town, but they will be left idle for a long time because they are not suitable for anything else. I ask the banks to come together to develop an initiative which could see some of these properties handed over to the local communities on a long-term lease or for a nominal fee if it could be shown it would be for a community benefit. This would reward the loyalty of its 1.3 million customers in the South and its 700,000 customers in the North. The bank wants to be profitable and get its assets back, but many of these properties will lie idle for a long time and I am asking whether it would consider such a scheme. Ulster Bank could take the lead, but I also make the same suggestion to Bank of Ireland. It would also take the sting out of the fact that the bank was withdrawing from the community.

Mr. Jim Brown

Branches are vitally important to Ulster Bank and play a key role from a community perspective, as Deputy Pearse Doherty mentioned, and in terms of interaction with the bank for business, as well as retail customers. The way customers interact with the bank is changing rapidly. Last year Ulster Bank processed 200 million transactions for our customers. Some 22% of these transactions were processed through branches, 45% through new technology such as mobile applications and the Internet, while the rest were processed through ATMs, etc. The change in the branch network is driven significantly by changes in customer behaviour. We expect the traditional branch network to reduce over time, but we also expect an increase in other physical points of presence such as kiosks, mini branches or tie-ups with third parties. There is a change in customer behaviour. We are making significant investments in serving the customer through the changes they want. The way people interact through branches is evolving. We are doing things aside from investing in technology to support this; for example, our call centre has gone 24 hours a day, seven days a week from the beginning of August. We have not communicated this widely, but a sizable number of customers are ringing through that channel and we are doing other things also. We would be happy to engage in a discussion to investigate the details of Deputy Pearse Doherty's proposal. We would be happy to participate.

I thank Mr. Brown.

I am an Ulster Bank customer and want to appeal to the bank on Deputy Mathews's earlier point. I understand having a call centre out of hours, but I find it bizarre when I am trying to telephone my branch that I am diverted to somebody who tells me he or she will act as an intermediary with my bank and that I will receive a call back some time. That disconnect between bank customers and the local people in the bank whom they usually like and with whom they have a relationship is crazy. It does not make sense from any point of view and the bank needs to think about this.

The budget is coming. Ulster Bank has been reported as stating it thinks the Government should stick to the troika arrangement.

I must stop the Deputy. One of the administrative staff has just told me that people are telephoning the Oireachtas to complain about the fact that mobile phones were turned on during this meeting. They are watching the meeting live and cannot hear what people are saying. I have just heard another phone go off. If it happens again, I will have to ask the member to leave the meeting.

It is very irritating for people who are watching this evening's proceedings and hoping to hear some positivity from the banks about movement if they cannot hear anything other than a buzz. I ask the Deputy to turn off his telephone.

Apologies. Mr. Brown is on record as having said the Government should continue with the troika's austerity programme. It was put to him that there is a big contradiction between that and the sustainability of people being able to make their mortgage repayments. Regardless of what he might have said in the past, not only for those currently in mortgage distress who are trying to move to a sustainable position, but also for many of the 80% who are put to the pin of their collar to make their payments, should Mr. Brown not change his view and urge the Government not to do anything in the budget that would impact negatively on the incomes of ordinary people in terms of social welfare cuts, income cuts or increased taxes on people who could be in mortgage distress?

Mr. Jim Brown

The key point from my perspective is that it is vital that the Government continues on its programme to restore Ireland to the position it was in before the financial crisis. My point is that the Government is making good progress in doing so and that should continue. That has been recognised by markets in countries outside the Republic. Separately, it is very clear that customers have been through deep distress as a consequence of the crisis. At Ulster Bank, we are trying to work through solutions that can assist people to make payments on their mortgages while, importantly, also keeping them in their homes.

I call Senator Barrett followed by Deputy Higgins.

I do not want to listen to Deputy Mathews going into another piece of rhetoric on his own views. It would be different if he had a question.

I need ten seconds for a question.

I gave the Deputy ten minutes a while ago and he could not manage one.

I have a ten second question. The Chairman can time it.

I will be very strict with him. I call Senator Barrett.

I ask Mr. Brown to outline the details of how the target of 3,784 customers was attained and exceeded. The numbers would help the committee in its subsequent deliberations. Regarding the rent receivers, we have concerns that the resident has not defaulted - it may be the principal private residence. The landlord has defaulted, but in some cases the receivers are seeking vacant possession, which means the tenant who has paid does not enjoy protection under the Family Home Protection Act and is evicted or faces the threat of eviction. Does the bank have a policy with the receivers that they are to pursue the landlord and not the tenant?

Mr. Jim Brown

From our perspective, we are looking for the rent the tenant is paying to come to the bank to service the mortgage rather than going to the landlord. We are not in the business of evicting tenants who are paying their rent.

I cannot find the exact date, but I saw that Ulster Bank is projected to return to profit within one or two years. Is that correct?

Mr. Jim Brown

That is right. We have said we will be back in the black some time during 2014.

Ulster Bank has 5,800 employees at present. How many has the bank shed in the past 12 months and how many does it intend to shed in the next 12 months?

Mr. Jim Brown

We announced a redundancy programme of 950 jobs at the beginning of last year. The majority of that will be completed by the end of this year, which will take our staff numbers to approximately 5,500 at that stage. Over time, as the bank works through the issues with which we are dealing, we expect that the number of employees will reduce, but we expect that any decrease in jobs will come about as a result of natural attrition rather than any specific redundancy programmes.

Does Mr. Brown recognise the huge contradiction here? Against the background of massive unemployment in the State and all the ravages of the economic crisis, Ulster Bank, which projects profits, is adding to the crisis by adding to the number of people on the dole. Why does the bank not take a different approach?

Mr. Jim Brown

We said that the bank would be back to profitability during 2014, but it will not be back to some kind of reasonable return for another two to three years after that. It is just that we will have stopped losing money during 2014.

Will Ulster Bank make any special provision for its employees whose contracts are being ended and who have mortgages with the bank so that they do not lose their homes if they cannot find other jobs?

Mr. Jim Brown

It is not our intention for our employees to lose their homes and lose their jobs. We would consider on a case-by-case basis each employee who may be experiencing financial difficulty, as we would with any other customer.

Many bank employees naturally got mortgages from their own banks. If they now no longer have a place in the bank, it creates a problem for them, particularly those of more recent vintage. Does Ulster Bank not need to look at that very sympathetically and in a special light?

Mr. Jim Brown

We would look at it sympathetically, just as we look sympathetically at every case where a customer is having financial difficulty.

I call Deputy Matthews.

Does the bank subcontract any collection and recovery work to outside third parties?

Mr. Stephen Bell

We have relationships with external firms, which help give us more geographical reach. I earlier mentioned our consideration of whether we should provide more jobs outside Dublin. We are using some agents in the rent receivership model, for example, and they are third parties separate from ourselves.

Would this include organisations such as Certus and KPMG?

Mr. Stephen Bell

We are not using Certus at this stage. We obviously have normal solicitors' panels and we have bolstered those with specialists in rent receivership. Some third parties are involved, but we do not subcontract customer contact.

I suggest that the bank should retain in-house people who will help to educate the future lenders in order to avoid the excesses of the past. There is no point in giving it out to third parties and not having the skills to anticipate the problems in the future.

I will bring proceedings to a conclusion. I thank Mr. Brown, Mr. Bell and Mr. Leahy for appearing before the committee this afternoon. I appreciate how they engaged with the committee.

We have requested the Governor to appear before the committee and he will do so on 25 September. In preparation for that meeting I will probably write to Ulster Bank in coming days requesting a breakdown of the number of people in a resolution process as it determines the guidelines to be. We would like an itemised breakdown with regard to mortgage-to-rent, if that has happened in some cases, split mortgages and other resolution processes.

Further to what Mr. Brown has told us this afternoon, I would be grateful if he could indicate some other solutions Ulster Bank has been applying that are outside the prescriptive list of resolutions. He has had some interesting things to say this afternoon about how the bank is operating solutions other than split mortgages because customers are finding that a more sustainable long-term approach. I would be particularly interested in hearing any solutions the bank may be applying or considering applying that are not allowed by the Central Bank at the moment, such as the concept of an interest-only payment post-retirement. At the moment, resolution processes require a home owner to have the mortgage cleared or some resolution in place in order that there is no legacy issue on retirement.

I would appreciate it if that could be forwarded to the committee prior its meeting with the Governor. The witness was quite frank earlier in stating that prior to publication of the Keane report, there were no targets, the options open to the bank were limited, but that they have since broadened out and that there may be other options that need to be considered. There may well be unforeseen difficulties that are now arising in respect of which a strategic approach is required. One of these is access to emergency credit or payment breaks. There may be other issues of which we are not aware currently that we need to know about. We would welcome any further thoughts Mr. Brown may have that may be relevant as we work together to try to resolve this difficulty.

A number of curve balls have been thrown over the past couple of days in regard to strategic defaulters. If there are strategic defaulters, they should be pursued to the high heavens. The mission of this committee is to try to ensure that people who are in serious difficulties and are doing their darndest to resolve those difficulties are provided with solutions that are sustainable. By sustainable I mean a solution which allows them meet some level of obligation, work their way through their difficulties, see light at the end of the horizon and, like the banks who want to become viable and profitable, become viable citizens and customers.

I thank the witnesses for appearing before the committee today.

The joint committee adjourned at 5.45 p.m. until 10 a.m. on Thursday, 5 September 2013.
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