I welcome the opportunity to appear before the committee. In my introductory statement, I will focus on how our mission to safeguard stability and protect consumers is demonstrated through our work on the tracker mortgage examination, Brexit, the banking sector, the insurance sector, and the macroprudential mortgage measures.
I am joined by Ms Sharon Donnery, the deputy governor for central banking; Mr. Ed Sibley, the deputy governor for prudential regulation; and Ms Derville Rowland, the director general for financial conduct. This reflects the reorganisation of the Bank’s financial regulation functions in recent weeks into two pillars. Mr. Sibley is in charge of prudential regulation and Ms Rowland is in charge of financial conduct, which includes consumer protection. Mr. Sibley is now responsible for the supervision of credit institutions, banks and credit unions, insurers and the asset management industry. He represents the Central Bank on the supervisory board of the European Central Bank under the Single Supervisory Mechanism, SSM, and on the boards of the European Banking Authority, EBA, and the European Insurance and Occupational Pensions Authority, EIOPA. On the financial conduct side, Ms Rowland is responsible for the financial conduct of firms in relation to their customers and clients. This includes consumer protection, securities and markets supervision and enforcement. She is a member of the board of supervisors of the European Securities and Markets Authority, ESMA. The reason we did this reorganisation is to reflect the evolution of the European System of Financial Supervision, ESFS, including the centralisation of prudential supervision of systemically important banks under the SSM. It also recognises the dual regulatory approach by which the Central Bank is responsible both prudential regulation and financial conduct regulation.
I turn to our consumer protection role. Our vision is for a well-functioning, well-managed and well-regulated financial services system that safeguards stability and protects consumers. This is best delivered by a strong culture of compliance, with firms and individuals within firms acting in the best interests of customers. However, this needs to be reinforced by comprehensive and enforceable legislation, intrusive risk-based supervision, a credible threat of enforcement and powers of redress when consumers have suffered detriment. As was harshly illustrated by the financial crisis, a fundamental protection for consumers lies in ensuring that the financial system is stable and that individual financial firms are subject to prudential regulations which require them to be sound and solvent, that is, to maintain substantial capital and liquidity buffers to guard against risks. Our oversight of the system includes the authorisation of firms - the gatekeeper role - a fitness and probity regime and other governance-related requirements. It also includes a regime to manage the resolution or closure of firms in the event of failure. Finally, our macroprudential measures seek to build resilience across the financial system, for example, through the limits on mortgage loans to guard against over-lending and over-borrowing.
The national consumer protection framework is formed by us the Competition and Consumer Protection Commission, CCPC, and the Financial Services Ombudsman, FSO. In addition, we actively participate in European and international bodies that work to safeguard the interests of consumers. Our role as the national resolution authority also contributes to both our stability and consumer protection mandates. We are responsible for the orderly resolution of failing credit institutions, credit unions and certain types of investment firms. For example, members will be aware of the recent appointment of provisional liquidators to Charleville Credit Union. We took this action to protect the savings of members, which are underpinned by the deposit guarantee scheme. The Central Bank is conscious that there is a demand for the services of a credit union in the local area and is committed to ensuring credit union services are available in the community.
I will now turn to the tracker mortgage examination. The examination is focused on ensuring that lenders provide fair outcomes for all debtors damaged by unacceptable failings in the handling of tracker mortgages, which has caused considerable suffering for many of those affected. It is clear that all lenders did not sufficiently recognise or address the scale of those unacceptable failings until Central Bank intervention. We have had to repeatedly challenge certain lenders and push to the limits of our powers in order to drive them to identify and remedy affected customers in an appropriate manner. This is a basic reason the examination has required significant time to progress. If certain lenders had conducted their reviews in line with the requirements of the framework and offered better initial proposals in respect of redress and compensation, the examination would be at a more advanced stage. We recognise the hurt and damage the actions of lenders have caused for many debtors. This is evident in the calls we receive to our helpline and the powerful testimony from the brave individual who appeared in public before this committee last week. As I will outline, we are pushing the limits of our powers to ensure affected customers are remedied appropriately.
The examination is the largest, most complex and most significant conduct review that we have undertaken to date in the context of our consumer protection mandate. Unusually for a live supervisory investigation, we publish regular updates on the examination as our work progresses, precisely because we realise customers and, indeed, the wider public need information. The latest one was published in the past few days, which the committee has received. We have also set out principles for lenders to pay appropriate redress and compensation to affected customers, commensurate with the consumer detriment. Among other important aspects, the principles provide for an up-front payment to enable borrowers to take independent advice regarding the redress and compensation offers made to them. The appeals process ensures that customers have the option to challenge any aspect of the redress and compensation. Importantly, the customer can accept the offer while still making an appeal and the offer cannot be reduced by virtue of lodging such an appeal. In addition, customers have retained the option to bring a complaint to the FSO and-or to initiate court proceedings.
The examination is being conducted in phases. Phase 2 required lenders to conduct a review of their mortgage loan books, identify affected customers, as well as those deemed to have been in-scope but not impacted, and submit a report of their findings. All relevant lenders have provided phase 2 reports to the Central Bank. As our latest update shows, by the end of September, lenders had identified approximately 13,000 affected accounts . Approximately 60% of these cases arise as a result of customers not receiving a tracker product, and the balance relates to customers not receiving the correct tracker margin. As of end-September, lenders have rectified the interest rates applied to approximately 7,700 affected accounts. This represents 98% of customers identified by lenders as requiring rate rectification. The submission contains a table outlining the progress comparing the March update to the September update. The table also indicates that the total payout so far is €120 million to 3,300 customers. With regard to the payouts, lenders are required to categorise affected customers by reference to the type and level of detriment suffered. The types of loss identified range from overcharging as a result of the application of incorrect interest rates up to loss of ownership of mortgaged properties. Where home or property loss has occurred, a lender is further required to conduct a causation analysis to determine whether loss of ownership resulted from its failings. To date, lenders have reported that as a result of their failings, loss of ownership has occurred in respect of 23 homes and 79 buy-to-let properties. As the analysis continues, we anticipate that more such cases will be identified.
As the overall reviews by lenders are subject to ongoing assurance work and challenge by the Central Bank, it is possible that more accounts may be identified more generally as the examination progresses. We will publish a further update in early 2018. Our assurance work involves challenging the findings of the reviews by each lender through on-site inspections, reviewing materials and meeting with the directors of these banks. We also are receiving information directly from customers which has informed our approach and focus in particular institutions. While assurance work is ongoing in a number of lenders, the Central Bank is concerned from the work completed to date that two lenders may have failed to identify populations of impacted customers or failed to recognise that certain groups of their customers have been affected by their failures.
We are of the view that some of these customers have been affected and, accordingly, are entitled to redress and compensation. We have challenged these two lenders on these issues and they will report back to us by the end of October. As the Central Bank progresses this work, other lenders will be challenged in a similar way. Where we believe there are customers who may have been wrongly excluded by lenders, we will, using our statutory powers as appropriate, require those lenders to inform them of their decision and of the recourse options available.
The framework has been designed so that the phases can run concurrently within lending institutions in order that each lender can be dealt with as quickly as possible. This means that third and fourth phases - the calculation and payment, respectively, of redress and compensation - can begin while the assurance work continues.
In respect of redress and compensation, the Central Bank does not have the statutory power to compel lenders to implement redress and compensation in respect of failures that occurred prior to 1 August 2013. Having said that, we have made our expectations very clear to lenders and published principles for redress so that people are aware of what is expected of their lenders. However, initial proposals from certain lenders fell materially short of our expectations. Examples of material deficiencies included: failing to offer compensation for certain affected cohorts of customers; unacceptably low offers of compensation; unacceptably low payments for independent advice; and failing to recognise certain types of detriment sustained by customers for compensation purposes, including customers who may have switched lenders as a result of being on the incorrect interest rate.
As a result of our repeated challenges, lenders have significantly improved their redress and compensation proposals and appeals processes. To the end of September, €120 million had been paid out in redress and compensation under the examination. Prior to the launch of our examination, under the separate mortgage programme for Permanent TSB and Springboard Mortgages Limited, there were payouts of €36.8 million and €6.2 million, respectively. This was required by the Central Bank as part of that previous process.
We expect all relevant lenders to have initiated redress and compensation by the end of 2017. In the meantime, our work continues. We are also liaising with other State agencies, including the CCPC, the FSO and An Garda Síochána.
Finally, we have two enforcement cases open, two more are in train and I expect more to follow. We will continue to provide updates to the public on our examination and enforcement actions as this work continues.