Banking Sector: Quarterly Engagement with the Central Bank of Ireland

I wish to advise our guests that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to 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 and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I ask Professor Lane to make his opening statement.

Professor Philip Lane

Good morning, Chairman and committee members. I am joined by Mr. Ed Sibley, deputy governor, prudential regulation, Ms Derville Rowland, director general of our financial conduct function, and Ms Helena Mitchell, head of consumer protection supervision. I will first briefly give an overview of the current economic environment and then turn to some of the specific issues that the committee raised in its invitation to me, including the tracker examination where we published our most recent report on 25 April.

The Central Bank is committed to serving the public by safeguarding stability and protecting consumers. We operate as one bank, recognising the operational effectiveness of deploying the whole resources of the bank in meeting our goals. For example, our macro-prudential mortgage measures contribute to both financial stability and consumer protection by guarding against over-lending and over-borrowing. Equally, our work to ensure that financial firms are prudentially sound is essential if these firms are to meet their obligations to consumers and investors. In these ways, consumer protection is embedded in all key aspects of our work through close co-operation between our central banking, prudential regulation and financial conduct pillars.

In terms of the macroeconomic outlook, we are currently experiencing buoyant domestic activity and a strong international economy, which has lead to a broad-based expansion in employment and an increase in earnings. Our projections for the labour market indicate that Ireland is heading towards full employment, although some extra capacity is possible through broader participation in the labour market. While the near-term outlook is positive, Ireland faces substantial tail risks. These include hard Brexit scenarios, protectionist pressures and any change in the international tax system that would effectively penalise small economies as locations for multinational production activity. In addition, a sudden shift towards tighter conditions in international financial markets is widely cited as a possible trigger of a contraction in international economic activity. We think it is important that policymakers are mindful of such vulnerabilities in order to ensure that Ireland is resilient if any of these tail risks are triggered.

In terms of the Irish housing market, the increase in house prices seen in recent years in part reflects the strong increase in employment and the increase in aggregate household incomes, together with a low interest rate environment. However, a primary influence has been the limited supply response even if there is some evidence of increasing levels of construction activity. Our research points to house completions of approximately 23,500 units in 2018 and an increase of 28,500 in 2019. However, these projections remain below the estimated housing demand of between 30,000 and 35,000 units per annum outlined in Project Ireland 2040.

On the composition of the housing market, second and subsequent buyers remain the largest single cohort of purchasers accounting for 45% of market activity. We have seen a significant role played by non-household buyers, including private equity firms and real estate investment trusts that mostly operate in urban markets, which accounts for 14.3% of transactions. We also highlight the fact that non-mortgaged transactions or cash transactions are also quite significant.

In terms of the mortgage policies of the Central Bank, this is now an annual process. Last November, we released our review of mortgage measures. Our assessment is that the system is important and appropriate in ensuring that the credit market does not lead to unsustainable dynamics in the mortgage market. We look at credit developments every three months and we stand ready to respond to changes in credit dynamics. Our assessment feeds into our policies on bank capital policies, both from micro and macro-prudential perspectives. Behind all of this is the intention to make sure that both those taking out mortgages and those providing mortgages are better equipped to deal with any future shocks.

In terms of commercial real estate, we have seen the dynamics here moderate in recent quarters so that Dublin is no longer an outlier in terms of market activity. However, Dublin remains at the heart of activity with 80% of commercial property transactions last year but transactions outside of Dublin are also rising. What we have now is a record low in terms of vacancies. While the stock of office space is visibly increasing throughout the city, it is also the case that Brexit is contributing to additional demand in the near term.

We know that a lot of the funding here is international in nature. Having an international investor base for commercial real estate aids recovery from the lows in the market. It also provides increased levels of liquidity and provides non-bank sources of credit. This means that the risks in the commercial real estate market are internationally shared and are not concentrated in the domestic financial system. At the same time, as part of a global system, it is important to recognise that if these flows go into reverse that this carries some risks here in terms of disorderly market price dynamics. Having said that, when one considers the amount of debt in the system and the amount of adjustment since the last boom then one will see that the market is a lot more sustainable than it was. At this point, the Irish banks have commercial real estate lending of just under €19 billion of which 20% is non-performing. It is important to note that the domestic banks, the capital situations of the banks and their resilience is far different than a decade ago. It remains the case that this area is the focus of our supervisory approach, and it is part of the Single Supervisory Mechanism.

The tracker mortgage examination is one of the prime remaining changes in terms of dealing with the legacy of the crisis, both between the tracker examination and our work on addressing the high levels of non-performing loans that remain. In our most recent report, we have given the latest update in terms of numbers. We remain committed to the follow-on work to makes sure, through our inspections and challenge, that all cases should be included are included. We reported that as of the end of March the number of customers who are now included in these schemes stands at 37,100, which is an increase of 3,400 compared with the end of December. In terms of the scale of what is involved, by the end of March the payout was €459 million - an increase of €162 million since December.

Eighty-eight per cent of identified accounts have received offers of redress and compensation and the vast majority of the remaining cases will be dealt with by the end of June.

Provisions by lenders in respect of the examination now stand at €969 million, of which €626 million relates to redress and compensation and €343 million relates to costs. The total cost of this to the banks is virtually at the €1 billion mark.

I mentioned that there will be some exceptions to the end of June. That relates to those customers who we have had included in the scheme in recent weeks. Essentially, it is down to the fact that we are finding some cases now. In some of these cases, they can be paid out within the end-of-June timeframe. In other cases, it will take a bit longer. I would say, however, the supervisory phase of getting all customers included is reaching its end.

In relation to enforcement, we stated there are enforcement proceedings against six lenders. We are including all possible angles, including potential individual culpability, in these investigations.

What I have given the committee in my submission is a process answer about all that we are doing but, of course, it remains the case that whatever financial compensation can be delivered will never make up for the personal impact on the families which have been most affected by this scandal, including those who have lost homes and properties.

The other leg of our work here is the issue about the culture of the banks because it is quite important for the future conduct of these banks that they take responsibility for building a consumer-centred culture. This is a matter for the top level of these organisations, for the boards and the senior management, and we as regulators must have an effective toolkit in pressing for the development of a consumer-focused culture. We will report on this in mid-year. This culture report will feed in to our ongoing supervisory work.

Turning to the issue of non-performing loans, non-performing loans cause considerable distress to those who are having to grapple with unsustainable debts. Of course, it is also a major issue for the banking system. Ireland has been to the forefront over the past decade in dealing with this. Much has happened in Ireland, both in terms of our work but also in terms of the legal system, which has been identified in many places as a barrier to resolving non-performing loans.

What we have seen here is a lot of restructuring of loans rather than loss of ownership. The protection of consumers who have arrears has been a key priority throughout with the code of conduct on mortgage arrears, CCMA, playing a critical role. According to our data, there have been 120,000 restructured owner-occupied mortgages, 87% of which are meeting the terms of the restructuring arrangement. This shows restructuring has been possible and has played a big part in managing the non-performing loan problem.

In relation to loss of ownership, which always must be one possibility in a mortgage system, there have been just over 8,000 cases, where 5,500 cases have been from voluntary surrenders and 2,700 through court ordered repossession. This has to be the last resort. Restructuring, where possible, is desirable. Let me emphasise that compared with the international evidence, the Irish system's ability to deliver many restructured loans has meant the numbers of properties lost would have been much higher without these efforts.

We continue to press on this issue because there is a clear risk to the financial system if the number of non-performing loans remain at an elevated level on bank balance sheets. This creates uncertainty about the financial positions of the banking system. While in good times that might not be an immediate issue, in any future downturn, if those non-performing loans remain unresolved, that creates a clear sustainability issue in the markets. Therefore, it is important, here and across Europe, to continue to work to bring down non-performing loan ratios.

In the grand scheme of things, back at the peak of the crisis, commercial real estate and small and medium-sized enterprise loans formed the majority of non-performing loans. At this point, much of that has been worked through. Approximately, two thirds of the remaining non-performing loan balances are residential mortgages. This is why it is important at this point to recall that we have a strong consumer protection framework in place here and all that will happen in resolving these loans is within the context of a strong consumer protection framework. In terms of how the Irish banks have been handling these loans, there has been a mixed approach. There has been loan restructuring, voluntary sales, use of the legal system and loan disposals through a sales process.

What we have now is an unusually large amount of loans which are in long-term arrears of over two years. We continue to encourage anyone in this situation to engage with his or her lender because we have seen evidence that sustainable restructurings are possible in many cases. Where a restructuring is not possible, I emphasise that the development of the Insolvency Service of Ireland has been an important innovation and this can be an important support to debtors in reaching debt solutions. However, for those who do not engage either with their banks or with the Insolvency Service of Ireland - I remind all of those in this situation that there is much support for them - the legal system remains the last resort outcome.

Turning to non-bank entities, whether these are retail credit firms or unregulated loan owners, they hold 7% of owner-occupied loans and 11% of buy-to-let mortgage accounts. Within this category, 2% of owner-occupied mortgages and 5% of buy-to-let mortgages are owned by non-regulated loan owners. What is clear, however, is that these are not like for like. The unregulated loan owners hold a disproportionately high share of the long-term arrears cases with half of their owner-occupied mortgages and three quarters of their buy-to-let mortgages in arrears of over 90 days. In 2017, non-bank entities accounted for 148 or 10% of repossessions of owner-occupied cases. On those repossessions, half were voluntary and half were by court order.

While it is only one option in the resolution of non-performing loans, loan sales can play an important role in transferring risks from the banks to other types of investors, which reduces the vulnerability of the Irish banking system. It is important to emphasise that, no matter who owns the loans, all of our codes of conduct are afforded to debtors. Ireland has been a leader through developing the credit servicing regime in 2015, which means that we have a way to ensure that consumer protection rights are enforced through regulating the credit servicing firms while not adding frictions to the sale process for mortgages. It bears repeating that customers whose loans are sold continue to have the benefit of the same consumer protection regulations they had before the sale. As the committee will be aware, we are currently reviewing the operation and effectiveness of the CCMA in the context of the sale of loan books. This review provides an opportunity to assess whether any revisions to the code are necessary.

I will turn to the EU developments in banking regulation because there is a relevant initiative at present.

In March the Commission published a proposal for a directive on credit servicers, credit purchasers and the recovery of collateral. The aim is to have a European approach to the sale of non-performing loans. Across Europe the same imperative is shared more widely - that it is important for the banking system to have a lower ratio of non-performing loans. It is important that one of these options, the sale of non-performing loans, be taken in a way that protects consumers. Essentially, the European directive will arrive at a very similar system to what we have in place here where there is a distinction between credit servicing and the ownership of a loan. The European directive will provide that the credit servicing firm should be regulated, but the loan owner will not require authorisation. Essentially, the solution we have found in Ireland is being used as a template. It should be the pan-European approach because regulating credit servicing firms will deliver consumer protection, while allowing the sale of loans to happen, which is important to the overall stability of the banking system.

I will now comment on the European deposit insurance scheme, the final leg in completing banking union. We think it is important that it move along in the coming weeks and months. Together with progress on capital markets union, the completion of banking union is important to allow the European Union to deal with future challenges.

On credit unions, we have a clear strategy and our vision for the sector is of strong credit unions in safe hands. That underpins our statutory responsibility to ensure the protection by each credit union of the funds of its members and the maintenance of the financial stability and well-being of credit unions generally. The past decade has seen many challenges for credit unions in dealing with the financial crisis, increased competition, the challenges to the business model, restructuring and increased regulation. Considerable progress has been made, but significant challenges remain because of declining investment returns on assets which, in turn, interact with the reduction in the loan-to-asset ratio, low investment yields and rising costs. People who look at this sector have made the consistent observation that not all credit unions have developed future business models that are robust to deal with these structural changes. While there has been an increase in governance standards across the sector, this remains a key risk. It is essential that sound governance and control systems be in place for the credit union sector.

As regulator, we support efforts to undertake the transformation of business model in line with our vision. In 2018 we are introducing a number of important changes as follows: a refinement of our supervisory approach to strengthen core foundations; a review of lending to accommodate the future lending growth ambitions of the stronger credit unions as part of a balanced loan portfolio; a new chief executive officer forum to support advancement of the development of new business models; and workshops to support credit unions in addressing key risk vulnerabilities.

I hope this overview of some key topics has been helpful.

I thank Professor Lane. On 10 January he wrote to the committee about the meeting we had had with Mr. Jonathan Sugarman. That issue has not gone away. I was delayed in preparing a minute, but I have it now. I will be circulating it to him and coming back to him again on the issues he raised, particularly the issue of him being told by senior managers in the bank not to report further breaches of the regulation, which I found particularly shocking. I will deal with it in my correspondence to the Governor and other committee members.

Cuirim fáilte go dtí an coiste roimh an Ollamh Lane agus a chomhghleacaithe. Ba mhaith liom tosnú le ceist ar na morgáistí. I will start with the issue of tracker mortgages. We had 3,400 additional victims added to a list which has now reached 40,000 according to the Central Bank's recent report. Are there other cohorts the bank is disputing with the banks or is the Governor satisfied that the numbers have been identified?

Professor Philip Lane

I will ask Ms Rowland to reply.

Ms Derville Rowland

The numbers we have identified to date represent, in our view, the vast majority of customers who should be admitted into the tracker mortgage examination. As we are doing this work, we have a significant number of very detailed work blocks under way with all of the lenders in the examination to ensure the correct customers are identified and responsibility is taken. As we go through that very detailed work, some of which is complete, there may be additional smaller numbers or groups of customers who should be included. We believe it is a very small amount.

I will outline the work involved to give the Deputy a flavour of how it can come about. We have identified groups of customers that should be included for a particular reason. However, we are actually doing verification work on the numbers of customers in a group. We might have an unverified number of, for example, 200 customers affected by a particular issue. However, we are going back to spot-check and recreate the data to inform us on whether 200 is the correct or incorrect figure. In that work we have found the figure sometimes adjusts downwards and that it can actually occasionally adjust upwards. It is with that verification that the number can adjust, as we have found. Equally, we have closed out the known issues with some of the lenders; therefore, we think there will be no more movement, bar that verification adjustment with these lenders. However, we are still in dialogue with others on issues that could result in an adjustment. It is our view that the vast majority affected have been identified and we anticipate very small adjustments in the number.

I understand exactly what Ms Rowland has suggested. At this point there is no dispute between the Central Bank and any of the financial institutions on what it and they believe are impacted customers, although they might have a different view.

Ms Derville Rowland

We have no dispute where we have come to a point where we cannot find a resolution or agreement, meaning that everything that we have asked to be done so far with respect to inclusion of groups or what is required to be done has occurred, but there are some issues that we are still discussing with firms that could result in the number being adjusted. However, it has not yet reached the level of dispute where they do not agree with us. If that happens - we do not anticipate that we would allow it to happen - we will deal with it.

There is ongoing engagement and the Central Bank is of the view that there are certain cohorts that should be included.

Ms Derville Rowland

There is engagement on some issues. That is how I-----

Is the issue of the prevailing rate closed in the Central Bank's view? This will come as a major disappointment. I am sure all of my colleagues have the same experience. We have received countless emails and other correspondence from individuals who want to know if it is now up to them to seek redress through the courts on the issue of the prevailing rate.

Ms Derville Rowland

I cannot talk about particular institutions in detail. I can tell the Deputy that we have looked across the different contracts lenders have in the different customer journeys. Certainly, it is clear that the prevailing rate issue has been dealt with in some of the entities. We are still in discussion with others.

Does that mean that there is a chink of hope for individuals to say there is still engagement between the Central Bank and some institutions on the issue of the prevailing rate?

Ms Derville Rowland

I can only say we are still in discussions on those issues with some of the institutions.

Okay. The committee has discussed, for example, EBS customers. It is clear from the documentation that they were entitled to roll on to a tracker mortgage rate.

Have those issues been resolved?

Ms Derville Rowland

I cannot get involved in discussing any particular institution or issue.

I welcome Professor Lane's opening statement, which was very good and focused on way more than the tracker mortgage scandal. It is quite frustrating that we are still talking about this issue and we have to because it is not yet resolved. Professor Lane identified many other issues in his report that, hopefully, we will come to. He has identified that the cost of the tracker mortgage examination has been €969 million, which involves money costs but this has had a huge human cost also, and that it is fast approaching €1 billion. Obviously, we expect it to exceed €1 billion by the time enforcement proceedings are concluded and other individuals are identified. He also talked about looking at possible angles, including potential individual culpability. At the beginning of this session, we talked about accountability in terms of health. I demand accountability relating to financial scandals that have cost €1 billion, some €626 million of which was mostly wrongly taken from customers' accounts. With the information the Central Bank has at its disposal at this point in time, is there any chance of there being individual accountability?

Professor Philip Lane

We have an enforcement directorate in the bank which is quite big. We have many very good lawyers in the bank and what they are essentially tasked with doing is investigating. An investigation phase is taking place which involves trying to work out how this happened. They have various information-gathering powers. They can carry out interviews, go into these banks and look at documentation. I do not think it is a good idea for me to speculate on where this will go in terms of individual accountability but in the absence of being able to speculate about that in respect of trackers, let me point out that one thing we have been saying in recent weeks and months involves the Law Reform Commission. We wrote to the commission to say that a changed approach to individual accountability might be something for the Oireachtas to think about for the future. The UK introduced this recently. In the UK, essentially, the senior management of financial institutions must take responsibility. It would not be a defence under that system for someone to say they did not directly write any letter or email authorising some inappropriate behaviour. The head of or someone in senior management in one of these organisations must take responsibility for the conduct of the organisation. It might be helpful if Ms Rowland weighs in on this issue.

Ms Derville Rowland

There are six investigations open with respect to the tracker mortgage issue. All of the institutions have been named. There is a team of lawyers, accountants and financial services experts working on those cases. They are carrying out data acquisition looking at the IT systems and the information they have. They are carrying out interviews with current and former staff. It is an investigation that follows the rigorous structure of legal investigations. We cannot comment on the outcome of those investigations. Were we to do so, it would mean that we would hurt any subsequent proceedings.

Could Ms Rowland outline the timeframe regarding when they are expected to conclude?

Ms Derville Rowland

All those investigations were opened at different times with different types of information so they are all on different deadlines. Of course, it will then adjust depending on the difficulty we have in ascertaining information. The ones that were open first are further advanced. As part of the feature of this investigation, we prioritised getting customers identified and getting the money paid to those customers, which was the right thing to do, but because of that, the investigations need to follow that work as well so they are running concurrent to but are all on their own deadlines.

Has the bank received full co-operation from the six financial institutions under investigation by the bank's investigation team?

Ms Derville Rowland

We have no cause to take issue with their conduct in the course of the investigations.

This committee has invited Ulster Bank to appear before it with regard to the so-called technical glitch that left its customers high and dry with missing mortgage payments again. So far, Ulster Bank has refused to come before the committee. The committee will continue to engage. It is not acceptable. We will pursue that with Ulster Bank. In respect of the Central Bank, its role as overseer and the assurances it gave this committee and the Irish people about IT systems within Ulster Bank, how did this happen? Can Professor Lane confirm whether last Monday, Ulster Bank believed it was a bank holiday and, therefore, payments were not processed?

Professor Philip Lane

I will turn to Mr. Sibley in a minute. Whether it is here or elsewhere, probably the number one topic in financial regulation is IT. When Danièle Nouy was here last week or the week before, she probably made a similar comment. We think banks need to make significant investments. Cyber risk and cyber crime are increasing. There is a shift towards digital provision of banking services. During the crisis, many banks had to cut back on investment. The world is in a situation that is not very good with regard to managing all sorts of IT risks in the financial system. It is a big priority for us and other regulators. Mr. Sibley will address how we are handling this.

Mr. Ed Sibley

The Deputy may recall from our last appearance that I referenced issues and weaknesses in IT capability in some of the banks. That remains the case today. We certainly have a degree of concern around IT resilience and the level of investment that is needed in some, although not all, of the banks. I am very limited in terms of what I can say about the specific incident but I will probably be able to address the thrust of the Deputy's question. Our overriding view is that customers of banks have a legitimate and rightful expectation that they can access their funds, execute payments and so on. This is entirely dependent on the resilience and availability of the banks' IT systems. Inevitably, over a long period of time, incidents will happen that result in IT outages. This is part of the nature of IT. We certainly look to make sure that those incidents are minimised and that when they do occur, they are fixed as quickly as possible and there is clear communication to customers around what is happening, how the quickly the issue will be addressed and that if customers are out of pocket, they will gain redress. In respect of what we are doing with IT, and to follow on from the Governor's remarks, we recognise that this is a very significant risk for the financial system. This is why we set up a dedicated IT risk inspection team in late 2014. We have undertaken 19 inspections across the banking system since then and have issued over 150 findings in terms of requirements for banks to improve how they look at IT to make sure they are resilient in terms of security and the capability of the IT system improves. We have issued 90 findings relating to the domestic retail banks, about half of which have been closed and about half of which are still open, so there is work to be done and we are making sure it is being done.

When Ulster Bank closed services to its customers in 2012 or so, it went on for six weeks and the fine was €5 million. I think that speaks volumes. Now we see that money has disappeared completely from people's accounts. I imagine that there will be an investigation and, hopefully, there will be a response at the end of it. Can I put a specific question that was put to me by customers of Ulster Bank last Monday - not Monday gone, which was a bank holiday, but the Monday before that? I am informed that Ulster Bank's IT system believed it was a bank holiday even though all the branches were open and as a result of the IT system believing it was a European bank holiday, transactions did not go through. For example, mortgages that were being called for by a bank to Ulster Bank did not actually happen.

Is the Central Bank aware that that happened on 30 April?

Mr. Ed Sibley

I am limited in what I can say about a specific institution but that is certainly not consistent with what I understand happened.

So Mr. Sibley does not believe that there were any IT problems on 30 April in Ulster Bank?

Mr. Ed Sibley

Not that I am aware of at this stage.

Not that Mr. Sibley is aware of. The final issue I want to discuss is the economy and the macroeconomic outlook, which I think this committee needs to focus more on. The Governor did not say that the economy is overheating. I ask him to inform the committee of the factors which inform the opinion that it is not overheating. I am glad that he referred in his opening statement to the issue of non-mortgage buyers. I have been in communication with Professor Lane privately about this. I have major concerns about this. The figures presented here today speak volumes. Some 55% of home purchases are by non-mortgage buyers, with a sizeable section done by real estate investment trusts, REITs, which we facilitate generously through our tax codes. This is having an impact and pushing ordinary buyers out of the market, people who rely on mortgages. Has the Central Bank any projection of when demand is likely to meet supply? We are currently behind on that. The witnesses mentioned that the tax-efficient structures, the REITs, make up 14.5% of all home purchases during that period. If we were to just look at the urban regions, such as Dublin, what proportion would they be? REITs are not buying houses in Donegal, Leitrim or Cavan. What proportion are these tax-incentivised structures buying up where there is acute pressure on house prices and demand?

There are concerns about commercial real estate, the true trigger to our economic collapse, which we do not pay much attention to. I have written to the witnesses about my concerns with the super-geared business model of some of these businesses. The statistics stand for themselves. They are shocking and alarming. I ask the witnesses to comment on that and also to comment on whether they believe that the increase in stamp duty has had an impact on dampening what we are seeing in the commercial market. I have said this before at the committee. I believe that we are in bubble territory with commercial property and, unless we get a handle on it, things could go very wrong very quickly with a change of international direction on the issue.

Professor Philip Lane

The Deputy asked a number of interesting questions. The question about the fraction of the Dublin market or urban markets, where REITs are obviously more important is fair, and while I do not have it in front of me, we can probably calculate it. We can write to the Deputy on that.

I appreciate that.

Professor Philip Lane

That is a fair point. I will come back to overheating first. Unemployment is currently around 5.9%. I said in the opening statement that one question is how low unemployment can go. We think, and many members of the committee have probably thought about this, that Ireland still has a high rate of people who are not in the labour market. If there were policies of many types that could bring people who do not currently find it possible to make themselves available to work or do not have the support to enter the labour force, that could help. We as a Central Bank, and equally the political system, need to think about this in advance. We are not overheating now. We are seeing wages starting to go up, which is welcome. It differs across sectors and regions but having some recovery in living standards is important. We want unemployment to continue to fall. We see revisions around the world about how low unemployment can go. In the US, unemployment has gone below 4%. This was not expected but is maybe evidence that the world has changed a little, that the level that it operated the labour market may be able to push unemployment lower. This is silent on the quality of jobs. We also have to ask if these are well paid jobs, the jobs that people want, and so on. Our message is to think about if that day comes.

This is all dependent on the current good conditions continuing. If Brexit goes badly, if the current trade disputes broaden, or international tax issues disadvantage small open economies, or, on the last point the Deputy made, there is a revision in international financial sentiment, there will be issues. These are well-known risk factors which could derail this good outlook. With overheating, the big question, which will be interesting for the Deputy for the rest of this year, is what the appropriate budget balance is when facing the risk of overheating. I will work more on this in the coming months before I give my pre-budget advice. I would generally flag that the debate here is maybe a little too narrow. Trying to target a budget balance of zero will maybe not be enough. The conversation about significant budget surpluses is not something I hear too much here. I do not think it is an issue for now but in the next year or two, we may have a situation where, for the stability of the economy, running a significant surplus may be important. That does not cut across anyone's desires for more public spending. It is a question of balancing public spending with raising revenue to match it.

Turning to financing of both the residential market and the commercial real estate market, what is the alternative? For the rental market, having large, professional investors can be a positive force. Having a professional landlord institutional class, where they may not own very large portfolios, may have a better outcome for many people seeking to rent than having to deal with small-time buy-to-let landlords. We all want a stable rental system where one can expect professional standards from the landlord. Large-scale professional investors who buy up apartment buildings and complexes to rent them out can be part of what we want. On leverage of these firms, banks are highly leveraged institutions. The leverage of a private equity investor or investment fund would be less than a bank. Banks, while they take on debt, are, through deposits, bank bonds and so on, usually more indebted. The other issue is the consequence. We care a lot about banks because we put our money in banks. We have to keep depositors safe. If some global professional investor decides to lend money to a big private equity fund and that fund gets into trouble, the losses are not for the general population. They will be concentrated on those who took that risk. It is a different type of risk. It is a real risk, where there is some disruption in the international financial system and some of these companies may get into trouble. The question is, if they get into trouble, what the systemic consequences are. It is bad news for their shareholders and their bond investors but it is easier to mop up that type of problem than to mop up a problem where it is bank-funded. Having diversified funding in the system is important. I recognise that it increases competition for the individual in the short term, in the Dublin market, for example. On the other hand, for the wider system, we should be cautiously optimistic about having professional investors who will play an important part in providing apartments and homes to rent. That can be a positive development.

I welcome Professor Lane and his colleagues. On the tracker mortgage issue, Professor Lane referenced that redress and compensation will be made to the remaining 12% by the end of June. Does he believe that on conclusion of this process that will be the end of the tracker mortgage crisis?

Professor Philip Lane

We do stand over that. The banks are on timelines, in respect of which there is a lot of supervisory engagement. However, as some cases were only identified in recent weeks the mechanics of completion will not conclude by end of June, but that is a relatively small group. I will ask my colleague, Ms Rowland, to comment further.

How small is the group? How many people are involved?

Ms Derville Rowland

There are an estimated 1,500 unverified accounts.

In regard to the 1,500 unverified accounts, where do they fit into the 37,100?

Ms Derville Rowland

They are part of the 37,100, but this figure is not absolutely verified. We carry out a very rigorous checking process. We are confident that all of the timelines we have set out will be met. We are monitoring them closely and we expect that they will be met. The 1,500 cases mentioned were only recently identified.

Were they identified in the last month?

Ms Derville Rowland

It may be a little longer than that, but in the time since we last reported.

How many institutions are involved?

Ms Derville Rowland

One institution. These 1,500 cases need to be verified. It is through the verification process that we can be certain they receive their compensation and redress.

Which institution is involved?

Ms Derville Rowland

I cannot specify the name of the institution. The redress and compensation schemes are up and running and the evidence is that they are paying out. We expect them-----

How many of the 11 institutions involved have completed their redress and compensation schemes?

Ms Derville Rowland

Three.

Can Ms Rowland name those three institutions?

Ms Derville Rowland

I cannot give that information. On conclusion of the process, we will report further.

Can I take it that the 1,500 cases about which we are speaking relate to one of the mainstream banks?

Ms Derville Rowland

Yes, they are relevant to one of the main lenders.

I have a fair idea which institution is involved. It was reported this morning that Ulster Bank has been fined US$4.9 billion in respect of the mortgage scandal in the US. In light of the fact that Ulster Bank in Ireland has sold many of its mortgages to funds and given the Central Bank is taking enforcement proceedings against this bank, would the witnesses like to comment?

Ms Derville Rowland

I cannot make any comment about-----

Mr. Ed Sibley

The parent entity, Royal Bank of Scotland, RBS, is the institution that is being fined in connection with its operations in the US dating back to before the crisis.

They are all part of the same group.

Mr. Ed Sibley

Yes. Royal Bank of Scotland is the parent of Ulster Bank.

Does this in any way have implications for Central Bank's investigations into Ulster Bank in Ireland, which is part of the RBS Group?

Professor Philip Lane

The investigation is not specific to Royal Bank of Scotland. The issue of misconduct scandals and following up on what went wrong and how it was handled is very widespread. There is a commission of investigation under way in Australia about misconduct there. We are in alliance with our fellow regulators in terms of a rethink on how we strike a balance between banks making bad judgment calls versus embedded cultures of misconduct. The culture report which we are doing now, which we will deliver in terms of the consolidated report to the Minister mid-year, is part of a global issue. Regulators do need to rethink how they interact with these firms given the accumulated evidence and the many billions in fines, whether in the US, across Europe or elsewhere. This is an important time for a rethink in terms of how these firms conduct themselves. The firms, too, are also rethinking their operating structures because this crisis has been very expensive for them. As regulators, we need to rethink how we manage regulation of conduct.

The Central Bank is currently taking enforcement proceedings against Permanent TSB, Ulster Bank, Bank of Ireland, KBC Bank, Allied Irish Bank, AIB, and the Educational Building Society, EBS. These are six of the lenders involved in the tracker scandal. Are other enforcement proceedings anticipated and, as of today, what level of fines have been imposed on the financial institutions around mortgage and lending activity over the last number of years? This information may be in the public domain but I would welcome if the witnesses could identify the institutions involved and how much they were fined.

Ms Derville Rowland

A decision has been taken about the open investigations and they are under way. We will keep under review further cases where the conduct merits such a reaction. This will remain an open prospect depending on what we discover as we look through cases in detail. With respect to the Senator's question on previous enforcement actions, I do not have the particular sub-set of information available because since enforcement in the Central Bank was established there are more than 110 enforcement outcomes delivering more than €60 million fines. There are also disqualifications. The enforcements relate to a wide variety of issues, some of which will relate to mortgage lending, conduct issues and so on, the public outcomes on which have been made available and are on the Central Bank website. I am happy to write to the Senator with the detail.

I thank Ms Rowland. When is it anticipated the enforcement proceedings will be concluded and will, or has, any of these proceedings been referred to An Garda Síochána?

Ms Derville Rowland

Each enforcement case is being pursued by a dedicated team and all of them have their own deadline so I cannot say precisely when those cases will be concluded but they are being investigated thoroughly and with rigour. To date, no referrals have been made to An Garda Síochána but the Central Bank takes its reporting obligations very seriously and such action remains under constant review.

There are 31,700 cases in total. It is expected that this figure is materially accurate. There are 3,400 cases yet to be dealt with, of which 1,500 are unverified. Is that correct?

Professor Philip Lane

There are 37,100 cases, which is an increase of 3,400 since the end of December. Within this 31,700, there are 1,500 cases which may not be paid by the end of June but all other cases will be paid by then.

As of today, how many cases, inclusive of the 1,500 mentioned, have yet to be concluded for redress and compensation?

Professor Philip Lane

Approximately 88% of cases------

What number of cases remain to be addressed?

Ms Derville Rowland

The number will adjust. Of the numbers that we have, approximately 12% will be paid by June. To be precise about the figure, as it goes through the verification----

In how many cases has redress and compensation yet to be paid?

Professor Philip Lane

As I said, there are 31,700 cases. Apart from a fraction of the 1,500 cases not yet verified, everybody else will be paid by the end of June.

As we speak, what is that number?

Professor Philip Lane

The figure we gave at the end of March was 88%-----

Twelve per cent is approximately 4,500.

Professor Philip Lane

Yes, but day by day and week by week, from the end of March to end of June, that number will be------

Am I correct that there are approximately 4,500 cases yet to be addressed and compensated, 1,500 of which are yet to be verified?

Ms Derville Rowland

That is correct.

I would like to move on now to the issues of non-performing loans and overheating of the economy.

How does Professor Lane define an overheating economy?

Professor Philip Lane

That is a good question. I emphasise that this involves judgment calls. One only really finds out after the fact, which is why this will be a risk-based assessment.

With due respect, we found out after the fact at the end of 2008 when the lid blew off the kettle.

Professor Philip Lane

Exactly, and that is why it is important to act on one's risk assessment, rather than adopting a wait and see approach. In the United States, for example, the fall in unemployment to below 4% has been a welcome surprise and the Federal Reserve has started to raise rates. This will always be a balancing act but I fully agree with the Senator that one should not wait until it is too late. As to the risk of overheating, unemployment has declined to between 5% and 6% but I will not become too concerned about the labour market until it falls below 5%. Even then I will have an open mind. We are not there yet.

The overheating in the economy before the crash was caused by property. Will Professor Lane address the issue in that context?

Professor Philip Lane

That is a good point. It is important to note that is not what is happening now.

Does Professor Lane not have any concerns about escalating house prices? Young families in some places outside Dublin must pay almost €300,000 for starter homes. This is unaffordable for ordinary people seeking to purchase a home.

Professor Philip Lane

I fully recognise the affordability crisis in the housing market.

Professor Lane believes there is an affordability crisis.

Professor Philip Lane

Of course there is.

How should it be addressed?

Professor Philip Lane

I will answer the Senator's question and then address the issue of overheating. There is only one answer to the affordability crisis, namely, to further increase supply of affordable housing. That depends partly on the market delivering and partly on the choices made by the political system. There are many choices to be made. As I noted in my opening statement, there has been an increase in supply this year and last year and there will be a greater increase next year. However, these increases are not sufficient to address the significant mismatch between the numbers of people seeking a home and the scale of what can be delivered. As I consistently state, there is a material risk of a reversal in house prices.

There is a material risk of a reversal in house prices.

Professor Philip Lane

Yes. People are under pressure because they fear the ongoing increase in house prices. On the other hand, as supply picks up and more and more houses are built, we will have downward pressure on house prices in the coming years. While there will be downward pressure on house prices in the coming years, it is not there right now. The reason we have mortgage rules is to avoid the risk of excessive debt being taken on at exactly the wrong time. Mortgages are often for 30 or 35 years and only those who are financially prepared can take on a mortgage at the moment. This is not, therefore, solving the problem of affordability.

Affordability is a significant issue. What needs to be done to ensure houses are affordable for first-time buyers and ordinary people?

Professor Philip Lane

There are many choices to be made in terms of the balance between public and private provision of housing. There is a political choice and different parties will have different views on the matter. If there were only one solution, the parties would have found it but there are many choices to be made on this issue.

What is Professor Lane's view? As the Governor of the Central Bank, he is the guardian of the economy and I want him to outline his professional opinion on the policies and measures required to ensure my children and other young people can afford to purchase a home.

Professor Philip Lane

Policies that boost the supply of affordable housing are what are important. The precise balance of public and private provision is a political judgment on which I should not express an opinion. There are many options available and politicians must work on them.

I return to the overheating issue because the last overheating episode was property driven. What we are seeing now is not credit or property driven. The wider macroeconomic position is being driven by other factors. We must remember that multinational firms and commercial real estate investors are not relying on the Irish banking system. It is possible to have a scenario where there is not a significant domestic credit issue but there is still a great deal of activity taking place in the economy that may prove to be unsustainable. Overheating is a much broader issue than just the housing market. While the housing market is important, it is not the only issue and we all need to think about that. When we have broader types of overheating, the Central Bank will do what it can to respond but ultimately it will come down to fiscal policy because that is the tool available, especially for a member of a monetary union. It is important to note that managing an overheating risk will be a fiscal issue.

I welcome the Governor of the Central Bank, Professor Philip Lane, and his colleagues. I will stick with the issue of housing for a moment. The most recent figures show that house prices are increasing by approximately 13% per annum. What is Professor Lane's forecast for house price growth in the period ahead?

Professor Philip Lane

The Central Bank does not forecast house prices, although we survey different types of real estate professionals on their expectations over a three-year period. We find that they expect an increase in house prices of approximately 15% over three years. It is not the case, therefore, that they are expecting double-digit growth in house prices every year. Many in the industry expect a single-digit increase this year. It is not an accelerating market and we are beginning to see the Central Bank's rules bite more severely. I do not expect double-digit growth every year.

If I may clarify the matter, the figure Professor Lane cited is from a survey of industry experts, rather than the view of the Central Bank.

Professor Philip Lane

Exactly.

Does the Central Bank not take a view on future house price growth?

Professor Philip Lane

Regardless of what happens, the Central Bank's role is to ensure we keep the system safe. Forecasting is not a core focus for the Central Bank. Our role is to make clear that regardless of what happens, whether house prices increase or decrease, the system will be stable. Our mortgage rules are brakes in the system.

Professor Lane indicated he did not envisage double-digit house price growth. Is that correct?

Professor Philip Lane

What I stated was that the market does not believe there will be double-digit house price growth.

What is Professor Lane's view?

Professor Philip Lane

I reiterate that my focus is on the consequences for financial stability, regardless of what happens. Those involved in the market are not expecting double-digit growth in house prices. It would be unsustainable to have double-digit growth every year.

Professor Lane's statement that there is a material risk of a reversal in house prices is significant and important. Will he clarify what he means by that? How does he define a material risk?

Professor Philip Lane

To address a broader issue first, we should all be much less concerned about trying to forecast and much more concerned with trying to manage risks. As I stated, the market is expecting single-digit increases in house prices. What we have to think about is what if the market is wrong and what if there is a reversal. I believe a reversal in house prices is a material risk for several reasons.

Number one is time. I agree that these may be over a two or three year horizon rather than a 2018 risk. I am not saying this is for 2018. Over a two or three year horizon, more and more houses are being built. In the mid-2000s there was a very big house-building response in Ireland and the overhang of so much supply was part of the reason houses prices eventually tumbled so much. Straightforwardly, more housing of different types becoming available will relieve the pressure on the rental market. This is not just family homes. Student accommodation is being built all around Dublin and this will take some students out of the normal rental market, and so on. This will relieve pressure on the rental market.

With regard to interest rates I do not believe that multi-policy rates will move dramatically in the years to come. The market does not think these will move dramatically but the rates relevant for mortgage funding are more like the five to eight year rates that banks can raise money at. There is a risk that these can move. More basically, we have seen a strong increase in incomes in Ireland from more employment in recent years. The Irish employment story has been very strong and as we get towards lower levels of unemployment it will slow down. Add into the natural slowdown the trade risk, the Brexit risk and the end of the cycles in the US and so on, and there are multiple reasons this kind of current positive momentum may go into reverse. I am not expecting it but it is a material risk and should be planned for.

Just to be absolutely clear, because words matter from Professor Lane as he is the Governor of the Central Bank, when he said a "material risk" of a reverse in house prices is he talking about a slowdown in the rate of growth in prices or a material risk of house prices actually falling in the next two or three years?

Professor Philip Lane

The latter. This is very important. We insist on people paying downpayments because downpayments provide protection in case house prices fall. If it is just a question of a slowdown in house prices we would be much more relaxed about looking for deposits or loan-to-value ratios, where we look for them. This is to guard against house prices falling. I say consistently that we should recognise this as a genuine risk and this is why it is important that we insist that our mortgage rules provide protection against actual downturns.

Does Professor Lane have any concerns for people who are buying now and who are taking out massive mortgages? They will be mortgaged to the hilt for the next 30 years and Professor Lane has said there is a "material risk" that prices will actually fall in the next two or three years.

Professor Philip Lane

Taking out a mortgage is a consequential decision. If a person is absolutely planning on taking out a mortgage now and absolutely planning on trading up in two or three years time, the person needs to recognise that risk. For people, however, who are planning on living in that home for a sustained period of time, the fact that house prices rise or fall should not be a matter for over concern. When people are trying to flip houses, however, and the kinds of stuff that happened in the boom of 15 years ago it means that they should not count on expected demand and a one-way only momentum. For all mortgages now and for first-time buyers there is pretty much no lending above 90% so there is already a lot of protection there. The system is a lot more resilient now. I am troubled, however, by the temptation in some quarters to believe that it is one direction only. Over time there will be a natural increase in house prices. Over decade by decade house prices rise in line with the fact that GDP and incomes go up, but over a shorter period of time - as we have just spoken of - it is not a one-way bet.

I shall now turn to budgetary policy. We are still five months out from the budget but if there is fiscal space of more than €3 billion - and this is not yet certain - would it be prudent to use all of that or does the Governor think there should be a scaling back of expectations and a more cautious approach to the budget?

Professor Philip Lane

I welcome, first, that over the past five years there has been substantial progress. There has been a lot of discipline and pain taken in controlling public sector pay. It is important that there is an aspect of participation in the recovering economy with regard to the choices made by the Oireachtas. It is freer now than it was before. As the economy gets closer to full employment, and given that we have these significant tail risks, the level of our ambition should not be just to try to balance the budget, or to get close to it, but to move into significant surplus. I would not say that running a very big surplus is necessary for the next budget and for 2020 and 2021 if these current good conditions continue. If that is not the case then we should be levelling out at a zero budget balance or close to it but if these conditions continue the debate should be about reconciling all that the Oireachtas wants to do with running a significant surplus.

On the issue of split mortgages and in the context of non-performing loans, what work is ongoing around the definition? This relates to Permanent TSB's split mortgages and the fact that AIB's split mortgages are deemed to be performing loans under the European Banking Authority's single supervisory mechanism, SSM, technical definition. What work is ongoing around the more than 4,000 split mortgages in Permanent TSB, which are performing according to the terms of the agreements, to be accepted in a technical sense as being performing loans?

Professor Philip Lane

Let me turn to Mr. Sibley.

Mr. Ed Sibley

I have been very clear for a while now on this issue and I am working with the European Central Bank to make sure that this clarity is communicated from an EU perspective. This is not just an Irish issue. Split mortgages can cure, absolutely, and can return to performing status from an accounting point of view. This requires certain conditions to be fulfilled, including the condition outlined by the Deputy that the loans are meeting the terms of the restructure, and in how the warehoused element is dealt with in the accounting context. They absolutely can cure. This has been communicated to all firms.

The current classification remains that - in the case of one bank - they can be deemed as non-performing by the SSM. That is the reality. In this bank's case, the warehoused element can be transferred at any time into the active mortgage, whereas in the case of AIB the warehoused element cannot be transferred in until the active mortgage has been fully repaid. The fact that it is open to the bank to transfer that in at any time seems to be the issue. We have a situation, however, where more than 4,000 Permanent TSB mortgage holders have done all the right things; they have taken the advice, they have engaged, they have reached an agreement with their lender and they are honouring the terms of those agreements, yet they are in the same basket of loans where nothing has been repaid for several years. These homeowners face a sell off. They are really worried because, according to the terms of the agreements, their split mortgages can be revoked at any time.

Mr. Ed Sibley

I absolutely recognise that this is a very sensitive issue, especially with split mortgages where there is a high degree of vulnerability and concern, from the borrowers' and the lenders' perspectives. A lot of work has happened to restructure these loans to make them sustainable. I completely understand why this is a sensitive topic and why people would be concerned in circumstances where they have a split mortgage. There is absolute clarity with the relevant firms about the action required to cure these loans and move them to a performing status - to use a technical description - so they can be treated and classified within the banks' books as performing. I cannot talk about a specific bank. I am aware that Permanent TSB is to have its annual general meeting next week.

I imagine this would be a topic for discussion there and I hope through that process there will be more clarity for these borrowers but it is clear to all firms that it is relevant to what needs to be done to cure these mortgages. Previously, there was concern that it was not possible to cure them but it is possible for these loans to cure and to return to a performing status. Choices have to be made in what is required.

The banks are clear on what they need to do to meet that.

I will raise one other issue and come back in later to discuss tracker mortgages. The definition of a "first-time buyer" in the context of the macroprudential rules makes a huge difference, particularly when the Government's help-to-buy scheme is considered. In the case of a house on sale for €400,000, if I am a non first-time buyer, I need a 20% deposit or €80,000 whereas a first-time buyer requires 10% or €40,000 and can then claim half that back under the help-to-buy scheme, which means the deposit required is €20,000. That is a dramatic difference. This is not only because of Central Bank rules because the scheme is a significant factor as well. What is the Central Bank's rationale for having such a different approach for non first-time buyers? I am thinking of people who may have bought ten or 15 years ago and who may be coming out of negative equity or who might not have much equity but their homes are unsuitable because their families have grown and they need more bedrooms. However, they are faced with the prospect of a 20% deposit requirement, even though their repayment capacity may be good and, therefore, they are stuck. What does Professor Lane say to those people?

Professor Philip Lane

I recognise that category. This is why when the rules were designed, the negative equity situation was excluded. People might have crawled into positive equity recently and this is why we allow a significant fraction of loans for non first-time buyers to be outside the loan-to-value ceiling. Without that category, which comprises those who were hardest hit by the crisis, I would probably pick a tighter rule. The fact that we have these allowances to be exceeded is a recognition of that category of homeowner who through no fault of their own were caught by the crisis. That is why the system of allowances is in place for the second and subsequent buyer population. It is in recognition of the many cases such as the Deputy outlined. In some of the other correspondence we have had, it comes back to the same answer. We recognise that one size does not fit all. This is why these rules have exceptions to allow the banks to exercise discretion when they have clear reasons to do so.

Why does the deposit need to be 20% for the non first-time buyer in the first place, aside from the variation allowed in lending?

Professor Philip Lane

The reason we have ended up with almost a complete separation in the treatment of first-time buyers and second and subsequent buyers with different loan-to-value levels and exemption levels for loan-to-income is when house prices increase, life becomes more difficult for first-time buyers. They have a higher target price to achieve and it is harder to save for the deposit. For somebody who owns a home, there is an offsetting benefit because he or she is building up equity. When house prices increase, life is more difficult for first-time buyers but there is a build-up of equity for existing owners. We have seen before - and there is global evidence for this - that there is a risk of procyclicality with a boom being amplified by people with equity in their homes deciding they have significant equity built up their homes and using that to take out a buy-to-let mortgage and adding to the pressure in the market. The differential between the first-time buyer and the second-time buyer is based on that. They have different exposure to house prices. The existing owner wins when house prices increase while to some extent the first-time buyer finds it more difficult.

I wish to raise two related points. One is the issue of returning emigrants. I have a number of cases of people who went abroad when the economy crashed. They bought a property in London, for example, lived there for a number of years, sold it and returned home. They do not have a huge lump sum and they never owned a property in this jurisdiction but they are deemed to be non first-time buyers. Is that necessary?

Professor Philip Lane

We essentially align withe the Revenue Commissioners. The definition of a first-time buyer does not originate with us but we cannot have a different answer from the Revenue on this. We can provide a more complete answer regarding the origin of how we define first-time buyers.

Will Professor Lane come back to me on it?

Professor Philip Lane

Yes.

There are different definitions. The Government's Rebuilding Ireland home loan scheme provides for exceptions, including where someone owned a property in the State previously and he or she is divorced under a court order or party to a separation agreement and then buys a property which is the first since leaving the family home. There are, therefore, a number of exceptions whereby even if one owned a property previously, one can be deemed to be a first-time buyer under this scheme. However, under Central Bank rules, there are no exceptions nor are there under the help-to-buy scheme. Life is complex and relationships break down. Family homes are sold and people have to start again but they are deemed to be non first-time buyers. The Central Bank should re-examine the position of these people under its rules and that of returning emigrants.

Professor Philip Lane

The best way to answer the Deputy is to confirm that we will write to him on this topic.

I thank Professor Lane for his presentation. I look forward to the day that we do not have to take up time dealing with tracker mortgages examination because it is holding the committee back from dealing with other issues. I would like to put a few questions to him about what the Central Bank thinks might be acceptable under its code of conduct for dealing with tracker mortgages. I refer to somebody who initiated correspondence with a bank in January 2016 and has engaged constantly since then but who has to date received no information. The latest correspondence on 10 October 2017 states the examination is ongoing and there is no timescale for completion. There is a lack of communication, which is contrary to the Central Bank's expectations on how this debacle should be addressed. Is Professor Lane concerned that some banks do not have the capacity to do what they need?

Professor Philip Lane

I will refer that question to Ms Rowland.

Ms Derville Rowland

We made clear from the outset our expectations on communication with customers who are impacted and affected and it does not sound like that case is meeting our expectations. I would like the Senator to provide me with details of that. I will make sure, as we do with all issues that come to our attention, to follow that up because that does not accord with what we have clearly set out in the framework and expect to happen. We were clear that adequately resourced communications needed to be set up with customers and I am disappointed to hear about that. As the tracker mortgage examination moved through to delivering a lot of results for people, it is true that some of the complaints by people who were concerned were not being progressed because they were waiting to hear the outcome of their cases. Many people have received information and payments to date but we have been clear with lenders that we know and they know when we do not have an issue and they need to get on with dealing with complaints. We have communicated that specifically to them and did so again recently. We have also been in communication with the ombudsman to reiterate that we have no difficulties with some of these complaints being dealt with and it is only a narrow subset of issues that the lenders and the Central Bank are aware of which we must continue to keep under review.

The vast majority of complaints can be dealt with. Lenders are aware of that and the FSO is now very clear about it too. We do not expect them not to be answered.

The vast majority of the complaints I have received about communications relates to a single bank. There is a pattern with this that needs to be examined. I appreciate the witness saying she will look further into this because I believe it must be probed-----

Ms Derville Rowland

They have been very clear instructions. I will be happy to take that information from the Senator.

I thank Ms Rowland. I have a couple of questions for Professor Lane. One thing that bothers me is whether the Central Bank is a bank for Dublin or for all the State. With regard to unemployment, reducing unemployment and so forth, I am from Mayo in the west and there are vast areas that have huge unemployment. It is up to 30% or 35%. My colleague, Deputy Pearse Doherty, spoke about emigration. It is still a reality for most of the people in my area who cannot get jobs. For example, there were 1,500 applications for 30 outdoor staff jobs in Mayo County Council. I am concerned that Professor Lane's opinions are feeding into the concentration of the Government's policy, which will not address what is happening in the regions. Without the regions we are not a full country. Will he speak to that in terms of how important he considers the development of the regions is in the context of what is happening at present?

Professor Philip Lane

The bank does not just look at the overall number. We now have a great deal more detailed data than we used to have so we have quite a good understanding on a county-by-county basis. For example, we have detailed regional data in respect of mortgage problems, house prices and employment, and that feeds into our thinking. We are mindful of regional differences but ultimately, at macro level, we have national policies. What is necessary, not for us as the Central Bank but in terms of the conduct of government and in addition to striking the right balance at a country level, is an arsenal of regional policies to address the clear differences across the country. Incidentally, when one looks back on the crisis one sees that the scale of the downturn was far more severe outside Dublin than in Dublin. Dublin had a recession but it was in no way as severe. There is a symmetry in what has been going on. More broadly, we are seeing Dublin, Cork, Galway, Limerick and the urban areas performing quite differently from more isolated areas.

I will explain how it connects to all of this, and I understand the difference between Central Bank policy and Government policy. Consider what is happening with the deferred tax assets, which are quantified at €215 billion. A sum of €215 billion could provide a great deal of vital infrastructure in the west and rural Ireland. Indeed, it could provide many homes to address the homelessness crisis. Does the witness think there should be a sunset clause or a time limit on organisations and, in particular, banks being able to carry forward deferred assets?

Professor Philip Lane

Ed Sibley can speak on the role of deferred assets in the capital structure of the banks.

Mr. Ed Sibley

It is an element of an answer to the question the Senator raised, which is a much broader and more political point around the wider level of deferred tax assets in the system. From a financial services perspective and particularly from a bank's perspective we are looking through them now. When we think about the level of capital a bank has we look at what is termed a fully loaded basis, which is stripping out those elements, including deferred tax assets that are being phased out, as something one could recognise as a strength from a capital perspective. When looking at the strength of the banks' balance sheets and their capital positions we look beyond deferred tax assets. In effect, from ours and a market perspective, the banks do not get credit for them because we are looking through them. They are being phased out in terms of their treatment under the capital regime. That is a different issue from the one the Senator raised, which is about what should happen with the profits that are being generated now by firms that had losses in the past and can offset those losses against future profits. That is very much a tax and political question and I cannot give an opinion on that from the Central Bank's perspective.

I wonder how much we are losing in all of this and the choices - the witness mentioned "compared to what" earlier - instead of giving these tax breaks and incentives. I believe there is a threat there in terms of us losing control over our property market. There is all of this activity but there is little to back it up, and we have little control over it. For me, it is just adding to what the external shocks and threats might be in the future. Professor Lane's report was very interesting, but it made me recall the time we heard that there would definitely be a soft landing. Then there would be a whispered "bar an external shock". We know what happened when we got the external shock and we did not have control over many of these things.

Professor Philip Lane

What the Senator has raised is a recurring theme in many discussions we have had, which is basically whether we understand and recognise what it means to be part of an international financial system. The Senator referred to a loss of control. There is a balance there. There is a recognition that we have an open border for the financial system. That is locked into the meaning of the EU. More broadly, the EU vis-à-vis the world has virtually open access in terms of the global flow of finance. People who think about globalisation think that a strong state is needed to counterbalance it. The view is that the only successful way to deal with globalisation is to have a strong state, including a robust central bank.

We spoke earlier about house prices and so forth. Many forces will influence house prices, commercial real estate prices, the role of real estate investment trusts, private equity firms and so forth. There are many forces that can influence the level of prices. It is not open to domestic control. What is under domestic control is ensuring that the system is resilient. Ultimately, we have options about deciding the amount of capital the banks must hold here and in respect of the mortgage rules the level of exposure of individual households to mortgage debt. This is not true everywhere. Ireland, partly because it had such a severe crisis, is much more advanced than other countries in recognising that the nature and volatility of having these open financial systems mean one must proceed on a safe basis by insisting on significant deposits, limiting loan-to-income ratios and making sure the banks have sufficient capital.

I appreciate that. My time is limited but while I appreciate the reassurances that the same thing could not happen again, I believe there is too much that is external.

Professor Philip Lane

That is an interesting point. It is the "compared to what" situation. On the role of the global finance system, there is a risk factor, but there is also a lot of insulation. Previously, we had the worst combination, namely, that while there were foreign owned banks, a huge amount of the credit was provided by the domestic banks and that put the domestic system at risk. Having a system where more and more of the finance in the Irish property system has an external risk attached to it makes it less risky. It is a question of if there were a downturn here, who would bear the losses. Increasingly, they are being loaded onto global investors who are better placed to take them. They would not remain here, which is welcome. Having openness to the global financial system has risk factors but also important benefits. In any case, it is not a choice; we are part of it and it is a question of managing it.

The risks outweigh the benefits, particularly in housing and dealing with homelessness and all of the other factors that feed into it. We cannot take any of these things in isolation.

Does Professor Lane think it is right that the banks which we have bailed out and with which we have struggled and with which we on this committee continue to struggle can get away with not paying corporation tax for decades?

Professor Philip Lane

That is another domestic decision. The decision on tax rates is clearly one for the political system to make, but nothing is cost free. It is not cost free to have a situation where there are deferred tax assets. Equally, if there is a decision to use a sunset clause in dealing with these matters, there will be consequences. Any decision should be based on the analytics and also political judgments on who would bear what costs. It is not a cost free decision to say that should be let through because of a sunset clause.

It is not and the people who have suffered as a result of the crisis and what the banks did in this country know that it is not cost free.

The committee will soon deal with the markets in financial instruments directive which shines a light on many of the darker areas of financial services. In November a Russian bank defaulted on $500 million worth of loans made through a Dublin office. The IMF and the Financial Stability Board have warned about our exposure and there was some commentary on the issue in yesterday's edition of The Irish Times. Lawyers, accountants and bankers generated €284 million in fees from hundreds of special purpose vehicles last year. The growing use of such entities by Russian groups has come into sharp focus as investors track risks related to US sanctions. Are we creating trouble for ourselves by marketing Dublin as a hub for shadow banking?

Professor Philip Lane

It is important to look at the structure. Ireland does play a big role in European activities of special purpose entities and different types of investment vehicle. That is the reality. For several years we, in the Central Bank, have worked quite hard to try to shine a light on that activity. We gather information on much of it which most countries do not collect. The Central Bank has published quite an amount of material, highlighting the geographical patterns and the role of Russian entities here. It is something at which we have a responsibility to look and explain. We are playing a big part in the international shadow banking work being done at the Financial Stability Board and so on. The Central Bank is very alive in looking at it. It goes back to the issue of the global financial system and the legal framework in place. Ireland is recognised as having accumulated expertise among its lawyers and accountants on the operations of these vehicles.

Is there a reputational or economic risk involved in it?

Professor Philip Lane

That is exactly the right area on which to focus to ask who is responsible for these funding vehicles and what are the risks involved. I emphasise that it is mostly a wholesale trade. The products are not being marketed to retail customers, to whom exposure would require a higher level of oversight. Just because something is legal does not mean that the State is offering a moral judgment on the activity. There is a considerable legal framework in place. There is an anti-money laundering framework in place, as well as a sanctions framework. The lawyers, accountants and everyone else involved in the industry have responsibilities to respect all of what is legally required in the anti-money laundering, the sanctions regime and so on. It all takes place within a legal framework. Investors in these products should have open eyes on what it is they are investing in. Largely, the cases we have seen here have been high risk investments where the pricing has recognised the risks. It is something that is located here, but it does not really interact dramatically with the Irish financial system, to which there is not an economic risk. The reputational damage questions should be placed firmly at the door of the firms that are raising finance. We are not endorsing any firm which raises money in Dublin. They must respect the legal framework in place. If they are raising money through public securities markets, we have a limited role regarding the prospectus, but it is quite a narrow function. However, it is a significant issue globally. We are to the forefront in being active participants in examining this area, at which we are looking carefully. However, it is important to separate the financial risks from the wider issues of what it means politically and the global money trail. Collectively, the world needs to do more in knowing about the global money trail. The phrase "shadow banking" is very acute. As far as I am concerned, everything should come out of the shadows; we should know what is going on. Ireland has taken a lot of steps forward in that regard. We do more than many other places, but, globally, there is a long way to go in ensuring what is in the shadows will come out of them.

We should never facilitate it.

Professor Lane and his colleagues are welcome. I was not going to ask about the housing market, but I feel as if I must based on what he has said. I do not think his analysis that the market may decline or lose ground in two or three years' time is earth shattering. It will be reported as being quite a statement, but my view is that it is in no way earth shattering. He has given the reasons he thinks it might occur, which is fair. He has also said it is a consequential decision for any individual to buy a house. We know that housing markets are invariably volatile. Professor Lane has mentioned things that he thinks have improved the position or that will protect house owners that were not in place, even in the recent past, such as large down payments and levels of exposure to household debt, things the Central Bank can determine. In Professor Lane's opinion there have been improvements in all of these factors.

However, when Professor Lane talks about managing risk versus learning hard lessons from the past, are there more things which we should be doing now based on his commentary that this may occur in three years' time? Are there further policy measures that need to be taken to counteract what may be coming down the tracks? What does Professor Lane mean by managing risk? What steps is he taking or have all the steps been taken? Surely this is the question. From my experience, and I was here in 2008, commentary from governors of the Central Bank is important, but in the past it has fallen on deaf ears. It makes for a newspaper headline and then the market quickly forgets it. In the past Professor Lane's organisation has not taken concrete steps to make sure that people are not badly affected, so when he makes that statement I have to ask what exactly he is saying. With that in mind, what prescriptive steps need to be taken by legislators and policymakers?

Professor Philip Lane

That is a great question. I completely agree with the Deputy that talk is cheap. Historically, not just here but in many places, central banks come out with reports and after the fact governors will mention that they mentioned that such a risk existed on page 57 of some report. For that to be credible in terms of our own policies if we think there is a material risk - and the Deputy used the term "material risk" earlier on - it should feed into our policies. One thing that happened on a pan-European basis after the crisis is that every country now has what is called a macroprudential policy. In Ireland we, as the Central Bank, have the lead role. In some other systems that lead role might be allocated to the finance ministry, but here it is allocated to us. One manifestation of that policy is the mortgage rules which we have talked about. If I believed the risk was zero, I would not be looking for deposits on houses or loan-to-income ceilings. That is one example. If the risks got more intense, we could recalibrate those measures.

Let me emphasise that every three months we also have to decide on what is called a countercyclical capital buffer. Much of the global effort says that as cyclical risk goes up, national central banks and national regulators should raise the capital requirement on banks. That is an option open to us and we can do it every three months. If one goes back to 2004, 2005 and 2006, there was a paralysis not just here but everywhere. People were recognising that something was going on but were saying that they would think about it and that they would perhaps delay acting. We now have a mechanism that allows us to move more quickly. This is something which we review every three months. Every three months we publish our assessment on our website. We decide whether we need to start raising this buffer, which will raise the amount of protection in the system. We can be held to account because we now have an extra policy instrument and we are committed to using it when we think it is necessary.

That covers our own policy. Let me come back to the situation more broadly. I have now told the Deputy that a lot of what is going on is not coming out of the domestic credit system, so it is outside of our direct regulatory control. For broader types of overheating, the responsibility will be on fiscal policy. I broadly believe that where the spring statement signalled the 2019 budget should be in terms of the overall balance may be okay for 2019 but, if these pressures continue to build up, seeking to run a significant surplus will be part of risk management. The risk management will partly be on us, but there is a heavy responsibility on fiscal policy for it to run on a prudential basis.

Mr. Ed Sibley

If will come in and add something from a microprudential aspect, which is also important. In the context that it is certainly plausible that we are closer to the next downturn, which we certainly hope is not as severe as the last one, than we are to the start of the financial crisis, it is really important that we recognise that as a risk. That is important context when we are talking about non-performing loans and the need for continued repair in the system to address that particular risk. If we go into the next downturn with a significant number of non-performing loans in the system it will be a problem from a prudential perspective. We also need to make sure that consumers are protected to the maximum in addressing that issue.

The other aspects we think about from a risk management perspective include looking differently at the business models of financial services providers today than we have done in the past. We are looking at them through the cycle. Are they sustainable over the long term? We have done a huge amount of work but there is more to be done in terms of resolution planning. How do we deal with failing firms in the system, perhaps not with the systemic issue but with individual firms? How do we make sure not only that there is sufficient capital in the system but that there is bail-in-able debt so that the first to feel the pain is not necessarily the taxpayer and that we can resolve firms in a way that does not cause significant externalities more broadly?

Professor Philip Lane

I will just come back to the first point we made here. What I am saying is absolutely not rocket science. It is fairly obvious. We have fairly obvious risk factors now. It is hard to quantify how likely they are to occur, but given that there are fairly obvious risk factors here, we have to manage the consequences of those risks and accept that we cannot do much about some of them. For example, if there is going to be a global trade war we cannot control that. We have to make sure that if those risks come to pass we will be able to deal with the consequences.

I understand that. The Governor understands the question and he has answered it. It is incredibly important that, if he makes a statement similar to the one he has made today, he assures people that he has thought about what has happened in the past and what needs to occur within his organisation to prevent the same kind of catastrophe for individuals occurring again.

Professor Philip Lane

Exactly. It is a matter of the fallout.

Professor Philip Lane

As Mr. Sibley said, that partly needs to be handled on a firm-by-firm basis.

The Governor has given us some confidence that he is actively working on that, but I did ask whether there were other measures which he needs to implement in terms of policy that are not currently implemented.

Professor Philip Lane

This new phase of macroprudential policy is an ongoing thing. It is fair to say that it remains for the full universe of the policy to be explored. There may be existing instruments which have not yet been put into Irish legislation. I will mention one such instrument, which is called a systemic risk buffer. A systemic risk buffer is where we think that there is some particular type of risk facing the economy, which is not cyclical, so we tell banks that they need to hold extra capital if they are lending to a particular sector because we think that sector is especially risky. That is something which is allowed for in European legislation but which has not been put through the Irish system.

That would seem pretty obvious from what Professor Lane has said. Why has it not been implemented?

Professor Philip Lane

That decision was taken before my time, but the issue is live and it could be brought in. That is probably an interaction to be had between ourselves, the Department of Finance and so on. Whether that type of instrument should be brought in is a live issue. There are broader issues about commercial real estate, which we talked about earlier on. Given the role of non-banks in funding commercial real estate, what other measures should be looked at at a European level in that regard? More broadly, globally banks are less and less important than market funding. We can impose capital ratios on banks, but what can we do in respect of market-type investment in terms of stabilising the system? There is a lot of ongoing discussion about that.

I would not want to claim that every instrument has been worked out but we have got a lot more than we had. The most important message is that the capital ratios of the banks here and across Europe are far higher than they were. Their dependence on unstable funding is much less than it used to be. The fundamentals are very different. It is much safer now than it was previously. We would also be much more interventionist, maybe, than was historically the belief 15 years ago.

It is a lot different from how it was ten years ago. Maybe I am exaggerating but I do think so. Professor Lane's answers give me confidence with regard to what the Central Bank is doing. It is his belief that there is a reasonable chance of a downward correction. Ten years ago, if the Governor of the Central Bank came in here and made that prediction, he would have risked being fired. I had to ask the question. It is good that Professor Lane is verbalising his honest opinion with regard to the market. I am not so sure that would have occurred ten years ago.

Professor Philip Lane

Without trying to recount history, the Central Bank did express concerns about over-valuation. I think the real issue is not so much opinions but what to do about it.

That was why I asked that question and this is fair enough. I wish to ask about the part of Professor Lane's opening statement that dealt with the macro-economic outlook. He touched on the issue of broader participation in the labour market but did not elaborate on it. What policy measures, in his view, need to be taken to allow for broader participation?

Professor Philip Lane

This is an area in which there are many dimensions. The ESRI, the Government's own economists and various academics, especially in institutions like UCD, have worked a lot on this. Ireland is unusual in having many adults who, in other countries, given their characteristics, might be expected to be working or not. I can give a list of issues to think about but the precise programmes would require careful analysis. There are people in the ESRI and elsewhere who could give the members more guidance on that. Do we have a childcare system that allows parents with young children to enter the workforce? Are we doing enough for people who do not have the correct skills? Although it is less of an issue now than it used to be, there are people who do not have enough educational skills. There may be people who have had particular health issues such as people with disability-----

These questions are asked all the time around here. For the Governor of the Central Bank to raise them is interesting. Is the Professor saying they are not being developed?

Professor Philip Lane

I am sure all of these are recognised. What I am saying is that the speed limit of the economy would be different if policies were successful in helping some of these people to enter and work more within the labour force.

Professor Lane sees the unemployment rate dipping. He mentioned America. Is he saying that he sees the areas he just mentioned as being increasingly critical and in need of attention?

Professor Philip Lane

What I am saying is that the potential for the economy to employ more people and grow more would also be influenced by the availability of workers. One area in Ireland in which we could add to the labour market is by bringing in people who currently find it is not possible to work for different reasons. That is a much broader population than the unemployed. Many people are not registered as unemployed who might, if conditions were right, be interested in being able to work.

As an organisation, what kind of nexus, discussions or communications does the Central Bank have with Government in that regard?

Professor Philip Lane

We have been fairly consistent in publishing on this issue. Of the other parts of the Government system which have the lead responsibility on this, it is across different areas and obviously part of it is social protection and part of it is the Department of Education and Skills. It is across different areas. This is really a governmental-----

I get that but considering Professor Lane's role, for him to raise these issues - I know that Government as a whole deals with these issues - what he is saying effectively is that this needs to be taken more seriously as it affects the economy.

Professor Philip Lane

That is a reasonable point. These issues are always there. When we are at full employment, the consequences for the economy may be different. At this point, for the economy to continue to expand, there is an even greater potential economic return from improving labour market access conditions for these people than was the case in the middle of the recession.

The macro-economic outlook given in Professor Lane's opening statement is about whether the glass is half empty or half full. It is half full as far as I can see. For Professor Lane to use the phrase "buoyant domestic activity in a strong international economy", considering where we were not too long ago, is very positive. However, he tempers it. There is a balance with regard to what he sees as the dangers and risks. The issue that pops out at me is the shifting in international tax regimes. Tax regimes by their very nature evolve. We know about the measures we have seen in the past ten years when it comes to the US, transfer pricing or the efforts throughout the European Union and within the Commission to harmonise tax codes, etc. Is Professor Lane talking about something different, something else that is on the horizon? I will ask him again, although I am not asking him to be prescriptive, if there are things we are not doing in this House that we should be doing when it comes to what he sees as the dangers.

Professor Philip Lane

That is a good question to ask. Clearly, some of the driving forces here are global. Global corporations are accounting for a larger and larger share of the world economy. The profitability of some of these corporations is unprecedented in global history. There is a global interest in finding a viable global tax system which ensures that these corporations pay taxes in a way that is acceptable to political systems all over the world. That is a common background which the IMF and others will repeatedly comment on.

The OECD, etc.

Professor Philip Lane

Exactly. Then, in terms of designing a policy response, maybe for viability reasons the relevant group is that of the advanced economies globally, for which the OECD is the forum. The OECD has 30-something advanced economy members and this is where a lot of the tax reform is leading. The position of the Irish Government is that it is the best forum in which to work on this issue. Within the EU we see local variations on it and this is an area in which countries have a lot of autonomy. We have just seen the new tax Bill in the US since the end of last year. The net impact of that tax reform is still unclear. There is a lot in it and many corporations are still working out their strategic response to it. It is partly the US tax Bill and partly it is the final outcome, for example from the OECD, on digital taxation. Partly it is the question of whether there will be an EU dynamic within the OECD dynamic.

This is a constant issue. It is coming back to policy actions.

That is fine. What exactly is Professor Lane saying?

Professor Philip Lane

I think a big issue for the Government is how it treats corporation tax revenue. Does it view all of corporation tax revenue as here forever or does it take the view that some of the surge in corporation tax revenue we have seen in recent years should be analytically treated as a windfall and necessarily here forever?

Professor Philip Lane

If one has taxes which may fall in the future, one should not build one's spending plans around them. The action point is how we plan in a world where the level of corporation tax is subject to downside risk. Not all of the corporation tax revenue we are getting now, for whatever reason, may be here forever.

What should we do?

Professor Philip Lane

This comes back to my basic point which is if one essentially allocates some of that to the rainy day fund or say that we will not spend all of that windfall because we may not be able to rely on it in the future, that comes back to some combination of running a surplus and building a rainy day fund.

Okay. This is my last question. Is there not a slight contradiction in what Professor Lane said about us joining and militating with groups like the OECD with regard to reform and at the same time ending up with a result that would not benefit us and be negative towards our economy?

Professor Philip Lane

As with many other global issues, what we have to work to is what is globally sustainable and if that is a net positive or a net negative for Ireland we have to live with that. These global corporations operate in many countries and I do not think we can ignore this global momentum. Rather than just say we will be concerned about our own tax system, I advocate being an active contributor in the global debate. We are experts here. We know a lot about global corporations because they are here. The technical experts here know a lot and can add a lot to that global debate.

Surely Professor Lane's job, to a certain extent, is to quantify how much we could lose. If he sees this going in one direction, he should quantify effectively what we will lose in tax revenue and project it over ten years, and if he sees a point where it is extremely damaging for our overall tax revenue and what we are taking in surely he has to say, hang on a second, this is a massive amount of what we use for public services and other expenditure and we need to draw the line here. Am I reading Professor Lane correctly?

Professor Philip Lane

Yes. This is something on which many people have the same message. Later this year when I write my annual pre-budget letter to the Minister I will address corporation tax. It is not really a question of projection because that conveys some degree of certainty that is just totally impossible to have, but so long as there is a risk that some corporation tax revenue may not be relied upon in the future then the answer is to allocate some of it either to reducing the national debt or to building up a rainy day fund. The answer is really the same. We are in a world of uncertainty. We know what happened with the construction-related tax revenues 15 years ago, but now in relation to corporate tax revenue some probability has to be given to the fact that not all of this tax revenue is necessarily sustainable. There are different strategies on this but when one has global corporations contributing to our corporation tax base we have to take this global perspective on it.

I thank the Governor.

I thank the witnesses for attending. I wish to touch on a few topics very briefly. In terms of the non-performing loan classifications that were touched on, and those in the State who have split mortgages and are meeting the terms of their restructured arrangement, they look to the Central Bank as well for their protection and to act as a watchdog for their rights. Loan sales are being undertaken in the State whereby those individuals are categorised in the same bundle as people who have not met with the bank or discussed their case with the bank in almost a decade in some cases. With the engagement banks have with the Single Supervisory Mechanism, SSM, what level of protection can the Central Bank offer those people who dealt with the bank originally, who met the terms of the restructure and who do not want to deal with a vulture's agent?

Professor Philip Lane

I will hand over to Mr. Sibley.

Mr. Ed Sibley

There are a couple of things. As I referenced earlier, there is absolute clarity, including for the banks, as to what is required for the loans to be classified in a different way - to move from a non-performing loan to a performing loan or from securities to another term. The banks are clear on what needs to happen and they have choices as to how they go about it.

I did not get a sense of that clarity when the banks were in here. There was major disagreement between two particular banks over the classification. Why is that the case when Mr. Sibley says there is clarity?

Mr. Ed Sibley

There is a timing question there. I have been clear throughout in terms of my engagement with the firms that these loans can cure. They need to be treated in a consistent way, and included in that is both the bit that is being repaid, where capital interest is being paid, and what is called the warehouse. There is a requirement for consistency in the system in terms of how that happens.

A question was raised into the SSMs and because there are variations of this type of restructure in other jurisdictions it took some time for us to land on a final perspective that could be consistently applied beyond just Ireland. Probably the last time the banks were in, that process was still under way. Subsequent to that we have written to the banks and it has been confirmed to them that they can cure loans in the way I have said all along, namely, subject to certain conditions, including those that were discussed earlier around the performance of the bit that is being repaid and the treatment of the warehouse element.

Can Mr. Sibley see the huge fairness issue that would pertain in terms of someone who engages with the bank and meets with the terms, where potentially the loan can be cured in many cases and that it would be classified as such by a major bank in this State, is put in the same bundle as individuals who have not engaged with the bank at all?

Mr. Ed Sibley

I can see that this is a particularly sensitive issue and there is a specific vulnerability for those borrowers that are on splits because it involves not only the repayment of the bit that they are repaying as of today but it also involves a degree of uncertainty as to how that warehouse element is going to be treated in the future. I can fully understand why there are concerns but I emphasise that in terms of our consumer protection codes the approach that we take to consumer protection travels with borrowers in all circumstances where there are splits or in other circumstances. They are not dependent on them being in the banking system. We work very hard to make sure they are all okay.

That is questionable in some cases in that the tone can change in terms of the engagement through agents. At times it can even be difficult to get basic information. We as a committee need to follow that very closely.

In terms of the tracker scandal, as we approach payments of €500 million by banks, what has the Central Bank learned from this whole process?

Professor Philip Lane

That is interesting. We have obviously learned from the trackers but as I said earlier, globally, there are so many misconduct scandals. I encourage members to look at what is going on with the commission in Australia which has had quite an impact in recent weeks. When one looks at the history of consumer protection, one focus which remains necessary is whether customers are getting the right information and if they are being sufficiently financially educated to make financial decisions. That is not enough because there will always be asymmetry between the big financial firm and the individual, so the focus must be on the conduct of the firms and whether they are conducting themselves in a way that is fair to consumers.

This is why last year the Central Bank created a dedicated financial conduct pillar to ensure consumers and investors are protected appropriately and that markets are properly run. Ms Rowland leads that as director general of financial conduct.

Ms Derville Rowland

Globally, conduct is to the forefront of regulation. Not just this jurisdiction but many others are looking at how we can further strengthen the regulatory frameworks. At the end of the day, responsibility for fair conduct rests with the providers of the service to the customers. What we have seen in Ireland and in other jurisdictions is that there is not much trust in the behaviour of the banks towards their customers. This is a global phenomenon. Accordingly, it is right that we further heighten the focus on the way products are sold to customers, such as looking in great detail at the behaviour that informs how they are sold.

A report on culture will be delivered in the middle of the year. Culture informs the motivations and results in the behaviours one sees. Does one have the right tone from the top of the organisations when one is designing and selling a product? Have the highest levels of the organisation decided what benefit this product will be to the customer and what is the right customer segment for it? Is it in fact being sold to the right customer segment? Are front-line staff being rewarded for delivering good customer outcomes? Are the right kinds of staff being promoted for this kind of behaviour and are they rising up the ranks?

In large organisations, one wants to see the whole of the system working in an integrated way from boardroom decisions right down to the provision of the service to the customers. We need to further strengthen our approach to ensure that it is structured and clear when we look at product governance and oversight, as well as closely examining the way which products are sold and if they are appropriate. We are committed to that.

We have also made recommendations to the Law Reform Commission about accountability and responsibility frameworks. It is likely that we will further develop those.

I note those points and I know that the Central Bank has a report going to the Minister. Was the Central Bank shocked at the way banks were treating their customers through this process?

Professor Philip Lane

If one looks at the evolution of this, preventive measures were taken. The risk factor was recognised by the Central Bank and warnings were issued. The warnings should have been enough. The banks needed to handle their customers coming off fixed-rate mortgages correctly. We introduced a consumer protection code in 2006 which essentially stated that, in handling financial contracts with customers, the banks needed to put the customer first. The scale of ignoring that has been a shock.

The way financial regulation is supposed work is that much happens through prevention. Some elements of this were caught. We think the scandal would have been even bigger without some of the actions taken several years ago. Eventually, we flipped it around. Instead of the banks just working on a point where we see a problem, it is up to them to prove where they do not have a problem. We assume all mortgages have to be examined. When we went universal in 2015, we said it was not enough for us to follow up where we see a problem. What we have seen over the course of the examination - this is why the numbers have climbed - is that some banks have taken a narrow approach trying to limit the scope of it. Only under sustained probing over the past several years has this examination widened sufficiently to ensure all of those who are included should be included.

There are two parts to it, namely, the original problem and how the examination went. It should have gone a lot quicker. It would have gone a lot quicker if some banks had a more consumer-focused attitude as opposed to being overly defensive.

Are those in the institutions going to be held to account? Consumers who deal with banks need to see accountability in the banking system.

Professor Philip Lane

There are multiple levels to this. The shareholders in these banks will be following up on the costs of dealing with this issue. We have enforcement investigations which include both institutional and individual angles to them. As Ms Rowland said, for the future and as part of a politically acceptable regime, we have heard repeatedly about accountability. The accountability of individuals would be more extensive under this senior manager type regime where responsibility has to be fully accepted by those leading these organisations, even if they may not be personally or directly involved in some cases of mishandling. If one is responsible for an organisation of tens of thousands of people, one needs to be accountable.

If the deferred tax assets in the banking institutions referred to were stripped away or a sunset clause was put in places in respect of them, how much of a shock to the banking system would that be? How material are they for the health of the banking system’s balance sheets? Has the Central Bank a measurement for this?

Professor Philip Lane

The market value of banks depends on the market calculation of whether those deferred tax assets can be counted upon. As Mr. Sibley indicated earlier, in terms of the capital treatment, it is different.

Mr. Ed Sibley

Looking at it from a capital strength perspective, the treatment of deferred tax assets has been phased out under the capital requirements regulations. Typically, we look through them in any event on what is called a fully-loaded basis to examine the true financial strength of a bank. In that regard, the capital position of the banks with the deferred tax assets would be sufficiently robust without them. It is not a cause for concern to us from a capital perspective.

On risks to the economy from digital taxation, the committee gave a reasoned opinion after meeting various stakeholders in the area. We also examined the global approach. Ireland is a leading participant in the base erosion and profit shifting, BEPS, mechanism to ensure that there is a global approach to taxation and that there is no erosion of sovereignty in terms of Ireland setting its own tax rules. In terms of loss of income and risk to the economy regarding this proposal, is the Central Bank discussing this in any shape or form with its European counterparts?

Professor Philip Lane

The OECD has said that, sooner rather than later, there has to be an answer. As digital activities can be allocated across jurisdictions, there needs to be an international answer. We have to learn to live with that. It is no surprise that there is a range of views in Europe. There are those who believe it is imperative that tax rate decisions remain a national decision. Then there are those who would prefer to move towards a more harmonised and consolidated tax base. That is essentially a political judgment. Central bankers do not overly discuss tax issues. We recognise the distance between what is the responsibility of political systems, which is tax, and what is our responsibility, which is the financial system.

This issue is really high up on the global agenda and the ideal forum for dealing with it is the OECD. We will have to see what it comes up with but it may lead to a revision of what happens here.

It is very difficult because the OECD has a different definition of the digital economy from that used by the IMF, for example, and there is no individual impact assessment being carried out for member states. Is it the responsibility of the Irish Central Bank, if it sees a policy being devised in Europe that could present a real threat to our economy but where that risk is not being quantified before policymakers make a final decision to implement it, to respond as guardian of our financial system?

Professor Philip Lane

Absolutely. We did so when the new US tax laws were proposed. If anything else is proposed, we will examine its implications for our financial system. Tax is a big issue, especially for this economy given the size of the multinational sector here. We absolutely will do that. It is important to recognise that tax systems are partly based on principle or philosophy, regardless of any impact assessment. If there is a philosophical decision made that tax systems should behave in a certain way, one must live with that regardless of the impact assessment. Decisions do not always wait for impact assessments. The reality is that decisions may be made using a values-based approach rather than on the basis of a cost-benefit analysis.

I welcome Professor Lane and his staff. In response to a question from Deputy Peter Burke, Professor Lane said that were it not for measures put in place in 2005 and 2006, the numbers involved in the tracker mortgage situation would be much higher. Is that the case?

Professor Philip Lane

Yes. A year ago in our tracker update of spring 2017 we included a section explaining the narrative of the steps we took, including direct preventive measures. Measures were being proposed by particular banks which we stopped. Some of this was caught at that point but clearly a lot was not caught and that is why we have such a big issue now.

In terms of the wholesale breaches that were made with regard to tracker mortgages, did the Central Bank issue any instructions to any of the banks to get rid of staff who breached the regulations?

Professor Philip Lane

There were enforcement actions in respect of certain banks at particular points on this issue but I will ask Ms Rowland to respond in more detail in terms of how we deal with problems when we see them arising.

Ms Derville Rowland

Is the Senator asking whether individuals have lost their jobs as a result of their conduct in the tracker mortgage examination?

Ms Derville Rowland

The answer is that there are enforcement investigations currently under way which will analyse all aspects of that, including individual culpability.

It is 12 years since the regulations to which Professor Lane referred were breached. That was in 2006 but Ms Rowland is telling us that the investigation is still ongoing. Nobody has lost his or her job yet over those breaches.

Ms Derville Rowland

To be clear, before the tracker mortgage examination commenced, the Central Bank took a lot of steps, from policy through to supervisory responses, to ensure that people were better protected. Some of these responses were demanding that before any harm occurred to anyone, trackers be given to customers and that happened. That meant that people got their trackers and harm to them was avoided. It also meant that where there were loopholes or weaknesses in the framework-----

I asked a specific question as to whether anybody lost his or her job over this but nobody lost-----

Professor Philip Lane

This goes back to the question of what we do, as the regulator, when we see a problem. Particularly in the context of an enforcement action, there are institutional consequences for an institution but how those institutions in turn deal with the fallout internally is-----

Professor Lane is not answering my question so I will move on.

Professor Philip Lane

I ask the Senator to let me answer. In terms of how we deal with individuals, there are, in general, are different steps we take. I will ask Ms Rowland, as head of financial conduct, to go over the different fitness and probity and enforcement actions and so on.

Ms Derville Rowland

There is a regulatory framework in place that we must follow. We have a lot of options, from fitness and probity to taking enforcement cases. In the tracker mortgage examination, the first priority has been to identify the customers who were affected - they number 37,100 - and to ensure the payment of compensation and redress to them. That work is ongoing, with €459 million having already been paid out to customers and more to follow. As part of that examination, a separate approach to this is to take enforcement cases which require a forensic investigation into the conduct of the lender to establish if it has broken the rules, the evidence to support that and the participation of individuals. That must be a rigorous and detailed process so that we can bring those cases properly through to fruition. The Central Bank has a good track record on enforcement cases, having concluded more than 100 already, all of them made public. We do take fitness and probity cases and have prohibited people in the past and I am quite certain that will continue. We are very committed to that.

Professor Lane said that the number of customers affected by the tracker issue has risen to 37,100 and that the Central Bank is responsible for that. I would contend that this would not have happened at all were it not for the relentless pressure from this committee on the Central Bank and on the various banks that we hauled in here, month after month. Eventually, the Minister for Finance called Professor Lane into his office and that is why the numbers have increased. There is no other reason.

Professor Philip Lane

This committee has played a helpful role and I acknowledge that. As I have said repeatedly, the Central Bank operates on a confidential basis with the banks and often we cannot disclose information. This committee has been incredibly helpful in shining a public spotlight on the issue, especially with the testimony of those who were harmed by the tracker scandal and the testimony of various representatives from the banks. We learned quite a lot when we heard how they talked to this committee. This committee has been very helpful but it is also the case that behind all of that, the mechanics of how this is happening is through the work of the Central Bank. In October, when we had the interaction with the Minister, the outcome was that the banks were reminded of the need to comply with our examination. The framework has been our examination, which we designed. Essentially, that has been consistent throughout and has led to this outcome. This committee has played a very important role but, essentially, it reinforced the process that was already in place and which remains in place, namely, our examination.

When NAMA was being set up in 2010, the then Minister for Finance, the late Brian Lenihan, said that there would still be a need for 25,000 houses per annum. The Central Bank has all of the information at its disposal, in terms of the wages people are earning, rates of unemployment and so on. What recommendations did the Central Bank make to the Government? It has laid a lot of blame on politicians today. We heard Mr. Tony O'Brien of the HSE say at committee that it is a matter for politicians to come up with health policies. When it suits the Central Bank, the HSE and other organs of the State, they try to lay the blame at the door of politicians. As I said, the former Minister for Finance said in 2010 that there was a requirement for 25,000 new houses per year. In its statement today, the Central Bank predicts that approximately 23,000 houses will be built in 2018 and up to 30,000 in 2019. Almost ten years after the former Minister made that statement, we are getting up to the required level of house-building. What recommendations did the Central Bank make to the Government at that time? Did it outline what the Government needed to do to ensure that the required 25,000 houses per annum were built so that we would not be in the situation we are in today whereby in places like Dublin, nobody can buy a house?

Professor Philip Lane

We will have to write to the Senator on that matter because I am not directly or instantly familiar with what the Central Bank said at that time. No matter who was involved in these conversations back at the worst time of the crisis, it is an interesting issue and interesting for the future as well to think about this matter. There were concerns back in the worst of the crisis that maybe not enough was being done in terms of investment for the future. Clearly, in terms of the overall austerity, public investment took a big hit during the crisis. One of the lessons for the future is at what level of austerity does one cause long-term damage.

In terms of learning from how the crisis was handled, it was important for Ireland to do a lot of fiscal consolidation. Clearly, one of the potential cost factors was excessive pessimism about the future. Those were some very dark days.

In terms of reasonable expectations and taking a long-term perspective, we can continue to look back and assess that. We have ended up in a situation where there is a supply deficit and although housing and construction are moving more needs to happen. There is some supply response now but it is an ongoing challenge. The instruments for dealing with that remain with the other arms of the State and not with the Central Bank. Our role is to keep the financial system safe and protect consumers, and through our mortgage measures we are doing so. The construction industry and policies towards construction involve genuine political choices. It remains the responsibility of the political system to make those choices.

Does the Governor think that the price of an average house is too expensive? Is there enough competition among banks to enable people to secure loans?

Professor Philip Lane

There are several issues involved. First, how does one ensure more affordable houses are built? That will done by using a mix of private initiatives and public policy. Second, there is the cost of mortgages, which this committee has focused on before. We are seeing a bit more competition in the market and Mr. Sibley will comment on the matter. As the economy recovers and confidence levels in the economy rise then the prospects for more competitive pricing improves but that is a separate issue. There is only a certain number of houses available to buy. If we make credit policies easier, it will not result in more houses being available for purchase.

The normal pillar banks are AIB, the Bank of Ireland and Ulster Bank. The PTSB has told us that it cannot lend to developers to develop houses. If a person has two sites he or she cannot get funding from the PTSB to build two houses because of the regulations that the Central Bank has put in place. Basically, lending is limited. An ordinary person or small developer who wants a mortgage has a limited number of places to go other than to vulture funds.

Professor Philip Lane

As the Senator has said, there is an important distinction between the conditions facing individuals who want to buy a home versus funding for the construction industry. An important lesson that has been learned from the crisis is that the role of debt financing for construction must be in proportion with equity finance. We cannot have a situation where the construction industry is overly reliant on bank debt. That causes a problem especially when the retained earnings of many construction firms have been wiped out by the crisis. There is a financial problem but the answer is not for the banks to lend more money without equity. The answer is that we need more sources of equity funding for construction and we have seen that through the entry of large construction firms, which raise money on the stock market. It is welcome to have more equity funding coming in. This is the genuine reason the housing supply response has been slower than in the past. The answer is not to make bank debt financing easier. The answer has to be, in part, more equity financing.

The Governor has said that equity funding is a good idea. Does he not think it is also a bad idea because equity funds buy up all the sites and there is no competition?

Professor Philip Lane

When I say equity funding I mean in terms of a construction firm that-----

Cairn Homes has between 12,000 and 15,000 sites in the city of Dublin and I cannot see how that can be positive.

Professor Philip Lane

What we had before was a situation where the construction industry was quite fragmented and we had lots of small builders but there has to be some mix . It is a fact that we now have some larger operators coming in. This market requires ongoing monitoring in terms of market dynamics. Recreating an industry that excessively depends on small firms is probably not the future for the construction industry.

Earlier today the Royal Bank of Scotland was fined $5 billion by the United States for selling some bad products. Did the RBS sell the same type of products in this country? If so, were fines imposed on the bank? Will Ireland have to pay a portion of the fine?

Mr. Ed Sibley

That is a distinct and separate issue. It relates to the mortgage backed securities, I think, in the US. There is no evidence that there is the same issue here. The RBS Group operates in the US but not the Ulster Bank, which operates in Ireland.

We, as a committee, have tried on numerous occasions to get representatives of the vulture funds to come in here. Is there anything in the armoury of the Central Bank that can help us to bring the vulture funds before the committee? The vulture funds operate in the system and I am sure they are governed by some Central Bank regulations. Is there anything the Central Bank can do to help bring the vulture funds before the committee?

Professor Philip Lane

Ms Rowland will respond. I can confirm that we had some correspondence with certain types of firms.

Ms Derville Rowland

On the last occasion, we were told that credit servicing firms had been asked to attend here but had not done so. As a result, we wrote to them and told them that we support democratic accountability and their appearance before the committee. We were also told about the credit servicing firms. Under the current legislative construct, credit servicing firms are regulated by the Central Bank and conduct all the interactions with the consumers on behalf of any unregulated loan owner. That is the way that the system is constructed. We wrote to them and communicated to them our support for their attendance here.

That is not what Senator Paddy Burke referred to. He referred to the private equity firms and not the regulated credit servicing firms.

The private equity firms will not come here.

Professor Philip Lane

I agree with Ms Rowland. It would be in their interests to explain themselves to the committee. In terms of accountability, I agree with the members that they should be able to explain themselves to this committee.

I will follow on from Senator Paddy Burke's questions on credit servicing firms. First, the firms acknowledge that the Central Bank has been in touch. However, they still refuse to come in here.

It is hugely important that they come in to explain how they operate and so on. As long as they do not, the customer is badly served. Customers are complaining to us about the treatment they receive at the hand of credit servicing firms, which are being dictated to by vulture funds. In his opening statement, the Governor referred to how effective the code of conduct on mortgage arrears is in the context of the sale of loan books. I want to bring to his attention again the fact the vulture funds or credit servicing firms seem not to give a damn about the code of conduct. I have received numerous complaints from customers. For example, a credit servicing firm was asked for information on the make-up of a portfolio and the amount that was originally paid into the bank before it was sold to be managed by a vulture fund and, in turn, the firm. To this day, it has not responded to that client. There is nothing in the portfolio bar properties and the client has no information. The firm wanted to sell all the properties and the client said that was okay. The firm came back to him last week and said it wanted €175,000 from him. He does not have a penny.

In another case, the client has been harassed so much that he had to pledge his sister's pension fund to them. I have been present at some of the interactions and it is anything but pleasant. Dealing with banks is not pleasant but dealing with these servicing agents is the worst that I have witnessed. Professor Lane referred to EU developments in banking regulation and said that Ireland is an example for other countries to follow. It is not and I appeal to him to examine this issue. When he drills down into the detail, he will find the greatest blackguards ever in those firms, and they are acting on behalf of vulture funds. What additional powers can be inserted into the code of conduct? What insistence can the Central Bank put in place that the funds deliver on the code because that is not happening?

Professor Philip Lane

I will turn to Ms Rowland on this but we are mindful of the fact we have this new credit servicing firm regime. The initial phase was to authorise these firms and ascertain whether they were meeting our regulatory requirements. The follow-up has been to ascertain whether they are respecting the codes that they need to operate under. The level of protection for consumers is different from the level of protection for someone, say, with an investment portfolio but perhaps Ms Rowland can provide an update.

Ms Derville Rowland

The consumer protection framework in place travels with the loan. All the protections of the CPC and the requirements to treat people fairly embedded in it travel with the loans and they are required to be adhered to. The protections of the code of conduct on mortgage arrears also travel with the loan and because this is an area about which there is considerable concern and because we are also concerned about the risks, we have conducted on-site inspections in the credit servicing firms, particularly focusing on the issue of people's homes and how they are being treated in compliance with the code of conduct on mortgage arrears. Given our careful scrutiny of that, I am interested in the Chairman providing us, as he said he would, with any information about requirements to pledge people's pension funds or otherwise because we will take that into account. One of the key parts of the framework is that no implementation of an instruction from an unregulated loan owner that is in breach of the regulatory requirements is permitted. If anyone acts in that way, we will take that seriously. I want to be clear that we are carefully looking at inspecting compliance with the code. One of the key foundation stones of the code of conduct on mortgage arrears relates to people's family homes - if one only owns one property, that is probably covered as well - and that requires sympathetic, speedy but respectful resolution, where possible. We do not tolerate harassing behaviours and the code provides for that. Where the Chairman has information in this regard, we would welcome it because it is something we take seriously.

We have also separately been asked to conduct a review of the code of conduct on mortgage arrears to ascertain if it is optimally effective as the problem moves on, and we are committed to this. As part of that, we are looking at the on-site inspections of their conduct, particularly with respect to family homes. We are also speaking to the Insolvency Service of Ireland to gain its insights into what is happening in its sphere and to the Money Advice & Budgeting Service, because it is important that we examine this from a number of points of view to see if anything else can be done and if the problem has moved on. We are committed to work in this area.

I accept the Central Bank is committed. Is it an acceptable standard that someone would make a submission in December 2017 seeking basic information and not receive a response to date?

Ms Derville Rowland

To give that the full consideration it needs and in order that we can look into that comprehensively, I would like the Chairman to provide me with the detail. I am happy to commit to that.

This is a simple question. I write to someone in December and he or she does not bother answering me. Is it not a basic courtesy to go back and forth? That basic courtesy is not being afforded to clients of vulture funds and that is a problem. They are turning to us for protection. I am turning to Ms Rowland and she is wrong in respect of unregulated entities and having a solution with the front-of-house being the service agent. It is not working for people. I will give her the detailed information. I know it is true because I have been working on cases myself. I pointed out previously when the officials were before the committee that other members have contacted service agents directly and have had the same experience trying to defend individuals who are making a legitimate case to them. I will come back to Ms Rowland on this case. I ask the Governor, however, to reflect on this issue in the context of what he said about European developments and the code of conduct.

I would like to ask about receivers in this context.

I propose that we adjourn for 30 minutes as we have to attend the House for a vote.

Yes, we have a vote. We will suspend until 1.30 p.m.

Sitting suspended at 1 p.m. and resumed at 1.40 p.m.

Before the suspension I asked Professor Lane about regulated service agents and unregulated vulture funds, and about the role of receivers.

Professor Philip Lane

The Chair also asked whether this would be a good framework for Europe to adopt. In recent weeks and months, especially since the Bill that Deputy Michael McGrath proposed, we went back and re-examined the matter, root and branch. A natural starting point is to ask why regulation is not in a position to deal with it. Indeed, that was the reason for the initial establishment of the Central Bank and indeed the Department of Finance. The conclusion, a number of years ago, was that from the point of view of consumer protection the credit servicing firm is the correct level to do it at.

I remind all witnesses and members to check their phones.

Professor Philip Lane

Everything that consumer protection delivers can also be delivered by regulated credit servicing firms. Nothing extra would be delivered by regulating the owners themselves. We went back and looked at that, because it was our view. It remains our view. We have examined the issue up and down. We are talking about reviewing how credit servicing firms are regulated, and the answer remains that for consumer protection purposes, regulating the credit servicing firms can be effective. Nothing extra will be added by regulating the owners.

I am aware that this is a long-standing issue. We have looked at this from the consumer protection point of view, and nothing extra will be added by regulating the owners. The issue concerns how these firms interact with those who are in distress. Anything that consumer protection can deliver on that question can also be delivered through the regulation of credit servicing firms. We have been carrying out inspections and we have not seen these problems in terms of consumer issues. Investors were mentioned earlier, for example, someone who might have an investment portfolio who may not fall under the consumer code. It is still relevant in terms of correct conduct, but we believe that this distinction is important, and that, for consumer protection purposes, the credit servicing firms are the appropriate venue.

Can the witness address the question on the role of the receiver?

Professor Philip Lane

I did not catch what the question was.

Receivers are in the middle of the mix from time to time. What is their role? Is there any regulation that mentions receivers within the Central Bank?

Ms Derville Rowland

There is no specific mention of receivers in the financial services regulatory framework. However, they may have a more general role in the wider legal framework. Perhaps Mr. Sibley can address that.

I know the role receivers play. I am wondering whether there is any regulation in place relative to the banks and the appointment of receivers and how they operate.

Mr. Ed Sibley

Mortgage contracts for buy-to-let properties in some banks contain a provision that the bank can appoint receivers without necessarily going through the court process and then use the rent-roll to service the mortgage. That is a contractual matter.

Who regulates that? Is it regulated?

Mr. Ed Sibley

The receivers are not a matter for the Central Bank.

I searched my emails when the session was suspended, and I want to give the witnesses an idea of the emails we are receiving, apart from the examples I provided earlier. A lady writes that listening to politicians talking about vulture funds over the past few days has been infuriating, and that some have no understanding of the process, never mind the paralysing effects on human beings. This lady's family home is involved in this. She goes on to explain that while her personal insolvency practitioner, PIP, was negotiating with the bank - AIB in this instance - it sold everything to a vulture fund. The stress and suffering is unnecessary, she says. She has had five psychiatric hospitalisations since 2011. That is the type of negative impact that this is having on the lives of citizens. In that instance, as in many others, this code of conduct does not work. That is the point I am making. It is very difficult for the individual to deal with these people. They never expected to be in this position, and they are not getting the protection of the State as they try to work their way out of these loans. I ask the witnesses to consider that. That is the evidence I am giving.

Professor Philip Lane

I emphasise that all of the consumer protection codes and the wider legal framework remain available to people who find themselves in a troubled situation, including the code of conduct of servicing firms that we are responsible for, or the important insolvency framework we have here, which is quite an innovative development, or the legal system itself. I agree with the Chair that there is an issue of unfamiliarity. If one had a loan with a nationally known bank here but the loan is subsequently sold to someone else, it will create some uncertainty. However, regardless of who owns the loan the same legal framework and the same codes apply. The same consumer protection framework is there, no matter who owns the loan. This is the fundamental issue.

Professor Philip Lane

In our inspections of the credit servicing firms we do not see a general issue in terms of failing to comply with the codes of conduct. That is what we are finding. For people who are suffering from having distressed debt, the wider framework has many supports for individuals. Perhaps negotiating the situation is not entirely obvious for those people, but the Money Advice and Budgeting Service, Abhaile and the Insolvency Service of Ireland are available and I would advocate that anyone in this situation should try to avail of those supports. The codes of conduct and the consumer protection framework is what we can deliver on. In some cases there will be the prospect of restructuring.

In other cases the insolvency service can be effective while in other cases, which I hope would be a last resort, whether through voluntary surrender or through the court's system, there will be repossessions. All of that does not change no matter who owns the loans.

This exchange is farcical on this point. I have read out one email - I have loads of them - and I gave Professor Lane examples of the others. I acknowledged the code of conduct and everything else that is there. The point is that these funds and the banks know the code of conduct is there but they ignore it. For example, Professor Lane said to me that restructuring would go on. In one case the woman was attempting to restructure in the middle of negotiations and the bank sold the loan on to a vulture fund. I am asking Professor Lane to deal with the reality we face here and the questions we are being asked by the constituents we represent. I am being told that this is not working. God forbid that any other European state would take on these unregulated vultures and have them dress up their shop window with a regulated agent. It is not working.

Mr. Ed Sibley

As Ms Rowland said earlier, we are undertaking a review of the code of conduct on mortgage arrears in connection with the change in the system since the last review in 2013 and specifically in relation to loan sales. As we have also said, if there are specific circumstances the committee wants to share with us, we will look at them.

I will just say to Mr. Sibley that no civilised society could possibly accept what is going on in the banking sector, with the vulture funds and these regulated agents. We should be stopping it. The Central Bank of Ireland and whoever is responsible for the code of conduct should be kicking these firms around the place to acknowledge it and protect the rights of citizens.

Professor Philip Lane

Let me come back to that. This is a fundamental point because it comes back to the legislative proposal. There is a set of issues which is basically procedures. Are the procedures fair, civilised and reasonable? That is what a code of conduct is about. Is the process for code of conduct for mortgage arrears fair, civilised and reasonable? It is not about the nature of the final outcome. The final outcome, whether it is a restructured mortgage, whether it leads to repossession or whether it is the individual going to the insolvency service, does not turn on the code of conduct. If the Chair is referring to what the outcome will be, that is a wider issue. Let me again point out that fundamentally the Irish system has put in a lot of support for the individual. It is about the insolvency service. It is about the support the advisory services make available to people in deep distress. It is not a code of conduct issue. We are saying that the credit servicing funds are under a code of conduct. We are saying that from what we see in our inspections they are respecting those codes of conduct. I do not think the Chair is talking about that but about the kind of outcomes that will be delivered.

No. It is that very point. They are not acknowledging the code of conduct in dealing with people. They are not even civilised in their exchange with individuals.

Professor Philip Lane

We invite the Chair to submit these individual cases to us and we will take a look. We look at all information we get. We are supervising these credit servicing firms and we take that very seriously. What I am telling the Chair is that on the basis of we have seen so far we have not seen a systematic violation of these codes of conduct. I ask Ms Rowland to come in.

Ms Derville Rowland

I want to add to that because there may be people listening who are worried. We all acknowledge how worrying it is for people who are in distress or worried about paying their mortgage or who may be in arrears. The code of conduct on mortgage arrears and the consumer protection code apply equally, whether one's loan is owned by a bank that is regulated or sold to an unregulated loan owner. The protections of the code travel with the sale of the loan. People are entitled to expect the full adherence to the code of conduct on mortgage arrears and the consumer protection code whether they are dealing with a regulated bank or whether their loan has been sold to an unregulated loan owner. It is important that people realise that and engage to the maximum extent because the code of conduct represents the Central Bank of Ireland working to the maximum it can within the framework of the State as it is currently structured. The example that was given was a proposal coming from a personal insolvency practitioner which means that the case has sadly reached the stage where it is in the phase of the insolvency service trying to support somebody to come to a sustainable solution. It is important to know there are a number of actors in the system of the State to deal with that. People have the support of the Money Advice & Budgeting Service, MABS, and I know the insolvency service is concerned with being as active as it can in that. The protections travel, notwithstanding where the ownership of the loan rests.

To pick up on that point, it is important to say that Dáil Éireann decided unanimously at the level of principle on Second Stage that loan owners should be regulated. That decision was made. We will, of course, take on board the views of the Central Bank of Ireland as to how best to do that but that decision was made in principle and it will be put into effect. What I have not heard from the witnesses is what the downside is of regulating funds and loan owners. Perhaps the witnesses will give us their views on that. I heard previously from the director of consumer protection, Mr. Bernard Sheridan, that the preferred approach of the Central Bank of Ireland, at the time of the credit servicing legislation, was that loan owners be regulated. I have that in writing. I think the witness is indicating that was not the case.

Professor Philip Lane

No.

If Professor Lane wants to-----

Professor Philip Lane

Let us deal with that first point. The letter Deputy Michael McGrath received from Mr. Bernard Sheridan said that the preferred position of the Central Bank of Ireland, when this issue first came up, was to regulate the loan owners. That was also the position of the Department of Finance. At that point, and as a result of the consultation process before that Act was passed, the conclusion, which I think was shared one by us and by the Department of Finance, in respect of the practical issues about regulating the loan owner versus regulating credit servicing would have been that consumer protection can be delivered just by regulating credit servicing.

In essence what is the downside from the Central Bank of Ireland's perspective of regulating loan owners?

Professor Philip Lane

There are two things to the downside. If we saw that there would be an advantage, I would say it but we have gone up and down on this. We have looked at everything from every angle and we do not think it will deliver any extra protection for consumers by regulating the owners. There is a separate issue about accountability which I think is-----

My question again was what is the downside.

Professor Philip Lane

The downside is that there is an extra cost to those who want to buy a portfolio of Irish loans. It is not an infinite cost but they will have to go through the process of setting up a legal entity here in order to do so. I am not saying it is a gigantic cost but it is a cost. I do not see an upside in terms of delivering a different outcome for customers. My honestly held view is that I do not think anything extra will be gained. This is also the conclusion across Europe and that is why this European directive is there. That is important. It would put us in an unusual position where the State would be saying it is deviating from this emerging European norm by not only regulating credit servicing but regulating the owners. We will live with any legislation that is passed. We can think about the practical consequences of that but it will not change the fundamental which is that mortgages operate within a legal framework. We have a responsibility in terms of fair process through codes. We can all look at the insolvency process where a lot has happened and ask what else can be done there but in the end that legal framework will not be changed based on whether these ultimate owners are regulated or not because what does that mean?

It means that they will set up a legal entity here. The ultimate shareholders of everything can be global. Ownership is about the behaviour of the regulated entity. Regardless of whether it is a credit servicing firm or becomes a retail credit firm, ultimately it has to comply with our codes. That is already true for credit servicing firms. It is not the case that consumer protection will differ if we require those who wish to buy up loans to become regulated here. That would not provide anything extra.

Professor Lane has mentioned two drawbacks of the proposal - that it varies from emerging European norms and that it will impose some costs on vulture funds - and said he does not see any benefit from it. They seem to be his key points.

Professor Philip Lane

Yes.

I think Professor Lane is completely wrong. The reality is that if my loan is sold to a fund, it will make all of the key decisions surrounding it. Such a fund would be beyond the reach of the Central Bank. We heard a while ago about ongoing inspections with the credit servicing firms. The credit servicing firms are the conduits and channels of communication between the borrowers and the lenders. They do not make decisions. When we contact them in our capacity as public representatives, they say they will pass on what we have to say to the fund that owns the loan in question and we are eventually informed of the decision made. There are no inspections and no powers of investigation or enforcement. The people who control loans, businesses and homes are accountable to nobody. That is the current position. The Central Bank can hold the credit servicing firm to account, but it cannot hold the people who are making the actual decisions to account. I cannot understand the Central Bank's reluctance to embrace its powers and deal with these matters.

Professor Philip Lane

We have had this exchange before. The credit servicing firms are regulated in the conduct of business with customers. That is where it takes place. I agree that decisions are made by the ultimate loan owner. That decision-making happens in the context of the Irish legal system. If it is legal, perhaps the Deputy's context needs to be elaborated on for me. What would change within the legal framework if we were to regulate the-----

I ask Professor Lane to answer my question. What can the Central Bank do directly to a loan owner or fund that is in flagrant breach of a code or regulation?

Professor Philip Lane

The entities we hold to account for the codes and regulations are the credit servicing firms.

Yes, the middle man.

Professor Philip Lane

As they have to operate through credit servicing firms, their behaviour is completely captured by these firms.

I would like Professor Lane to answer my direct question. What can the Central Bank do to a loan owner that is in flagrant breach of a regulation or code of conduct?

Professor Philip Lane

It is all captured by the credit servicing firm. It is in the law that credit servicing firms cannot act on any instruction from the ultimate owner that deviates from our regulations. No such instruction can be accepted. We have complete regulatory oversight of the credit servicing firms.

Professor Philip Lane

Essentially, that provides what is necessary to enforce our consumer protection codes. Nothing extra would be added by regulating the loan owners.

That is a long way from saying the Central Bank cannot hold the decision-makers directly accountable.

Professor Philip Lane

Given that the emerging norm is that consumer protection can be delivered by regulating credit servicing, we do not see how regulating the loan owners would lead to different consumer protection outcomes. It seems, having read some other statements made by the Deputy, that this is an issue of accountability. We can hold the credit servicing firms to account. That enables us to enforce our regulations. In what sense does the accountability of the owner make a difference?

The difference is that the Central Bank can talk to them, inspect them, rock up to their offices to look at their documentation and hold them to account.

Professor Philip Lane

I emphasise that I do not see what extra layer of consumer protection would be added. If we can do this to the credit servicing firms that are engaging directly with the debtors for consumer protection, what would be added by interacting in the way the Deputy is advocating? If the loan owners were regulated, we would be able to inspect a legal entity established by the funds, but we would be doing so within the same framework. We would be assessing whether the codes were being respected. I remind the committee that we regulate non-banks for conduct, not for prudential reasons. That is the fundamental issue. It is not the case that if we regulated for consumer protection purposes any entity that they would be compelled to set up, the outcome would be different. The Deputy played a lead role in passing the credit servicing Act. It was hoped beforehand that there would be voluntary compliance. The passing of the legislation was an act of leadership by the Oireachtas.

Professor Philip Lane

It established a logical framework. As we have all been saying, it ensures protections are available, regardless of who owns one's loan. We do not think anything extra would be added by requiring the firms to set up an Irish legal entity.

Does the Central Bank have information on the number of loan restructures the funds have originated? I am not referring to those that were inherited from the previous loan owner. How many arrears capitalisations, split mortgages, term extensions and interest-only agreements have been entered into by funds - unregulated loan owners - with borrowers? Does the Central Bank have that information?

We have. Mr. Sibley will provide the details.

Mr. Ed Sibley

Yes, we have the information sought. Whether the proposed legislation will have any impact on this critical question is relevant. Among the non-banks, including both regulated and unregulated loan owners, there is less restructuring activity and more keeping up with what they have inherited. Typically, the restructuring that has taken place or is taking place among these entities tends to be less deep than what is happening in the banks.

Mr. Ed Sibley

There would be fewer split mortgages among regulated and unregulated non-bank loan owners. There would be a greater prevalence of the use of things like arrears capitalisations.

Mr. Ed Sibley

The point I am making is that the hooks and the ability to drive different outcomes - we were able to deliver different outcomes in the banking sector - occurred through the prudential arm working with the conduct-----

I have tried to get that information by asking parliamentary questions, which, presumably, have been passed on to the Central Bank for reply. The answer has been to the effect that the Central Bank does not know what restructures are being entered into by the unregulated loan owners. It seems to know what restructures they have, but it does not know how many of them were inherited from the bank entering into an agreement-----

Mr. Ed Sibley

I am sorry, but I will try to be crystal clear in my answer.

Mr. Ed Sibley

We know what is in place today.

I am asking if the Central Bank knows-----

Mr. Ed Sibley

We know less well, or with less precision, how much has changed over time. We have carried out research to give us an indication of what has changed, but our information is less precise.

Yes. It seems from the reply I was given that this information is not available. In my question I am looking for data on the origination of restructured agreements. If the Central Bank does not have that data, perhaps it might get them. Can it provide data on the extent to which unregulated funds have entered into new agreements in respect of the different forbearance measures? Can it check if that information is available?

Mr. Ed Sibley

Perhaps the easiest or best thing is to do is to come back with precision and provide the data we can provide. Typically, we have a snapshot. We have carried out research into how our loan books have moved over time.

We can see almost loan by loan what is in place today. We have to look at the loan book as a whole to see how it has progressed over time to see whether it is treated or untreated. I can provide the Deputy with more detail and we will come back-----

The reason I asked about this is that my experience has been that the funds are far less willing and far less likely to enter into these restructuring arrangements. Typically, they do not do the mainstream most popular forbearance measures of arrears capitalisation, term extension, interest only and so on. They just do not do them. I am dealing with these types of cases. I have written to the bank about Tanager, which involves a group of customers who had arrears several years ago and have had consecutive years of making their repayments 100% in terms of interest and capital. They have asked can they recapitalise those old arrears, put them on the mortgage and spread them out over the remainder of the term, and the answer they have got is: "No. We do not do arrears capitalisations".

Mr. Ed Sibley

I can certainly accept the evidence the Deputy has from his experience, which is consistent with what we have seen from our research perspective. We can certainly provide more information on that. The question is whether the proposed legislation addresses that problem and whether it can force the currently unregulated entities to drive through specific restructuring. That is where-----

A related point is a review of the code. Is Mr. Sibley open to and will he invite submissions on a review of the code? Will he examine the provision whereby a lender only has to consider the restructuring options that it offers? This was a key change in the 2013 code and it lets these funds completely off the hook. They can say they will not do arrears capitalisation, interest only, split mortgage or term extension arrangements. They can say no alternative arrangement can be agreed and that the options are voluntary sale, voluntary surrender or court proceedings. That is the reality of what is happening in practice. Will Mr. Sibley take submissions on a review of the code and will he specifically look at clause 39? My iPad has just locked out, but under clause 39 they are not obliged to examine the appropriateness of the full suite of forbearance options? They could say: "We just do not do them".

Professor Philip Lane

That goes to the heart of much of what the Deputy is seeking but, first, I will ask Ms Derville Rowland to respond on the code of code review.

Ms Derville Rowland

We are very happy to take suggestions on what we propose to include in the code of conduct review. As I said, we are already undertaking one element of it that we believe is very important, which is a review of the credit servicing firms and their compliance with the provisions of the code. They are prohibited from putting into place an instruction that is in breach of regulatory requirements. That means if an underlying loan owner tells them to breach the code or gives them an instruction to do so, they cannot and we can hold them to account for their conduct in that. If an underlying loan owner reaches out and starts engaging with customers, then because of the framework, they too can be held to account and brought into regulation. We are also looking at getting insights from, as I have said, the insolvency service and the Money Advice & Budgeting Service, MABS. We will consider anything the Deputy wishes to suggest to us and, as we want to get on with work, I ask that he would make any such suggestions sooner rather than later. If we were to propose any changes as a result of this, I want to be clear in pointing out that we would have to then undertake a consultation, as per our normal framework. Therefore, there would be a later opportunity to consult on any proposals. However, we would certainly take on board any suggestions at this time.

The Deputy referred to clause 39, which is a reference to mandating the actual provision of different options. Am I right, is that----

The key issue is that a lender is only obliged to consider the forbearance options that it offers.

Professor Philip Lane

Yes.

It can make a policy decision as an entity that it does not offer all of the common most possible restructuring options. Therefore, the consumer is seriously disadvantaged if his or her loan happens to with a loan owner that just does not do those options. That is the reality if one's loan is with a vulture fund.

Professor Philip Lane

What I have been trying to say is that the code of conduct would not alter the ultimate decision making power of the owners alone. The code of conduct cannot mandate a particular way of handling a loan. The legal framework provides for the decision making power to lie with the owner and that will remain no matter who we regulate. It is not the case that we could mandate a loan owner where, for example, it must offer splits or must do X, Y and Z. That is not part of what a regulatory code would do.

The Deputy said that basically that the only avenues followed by these funds are either voluntary surrender-----

Professor Philip Lane

-----or court repossession. We have not seen that so far. What are the exit strategies for these funds? It is not the case that the exit strategy is to repossess every house that is possible. I would point to them having restructured loans that generate some degree of income, which then can allow an exit through securitisation, for example, of restructured mortgages. We have reported that the number of repossessions, either voluntary or by court order, by these firms remains very low. It is not the case that repossession is the primary strategy.

Okay. Thank you.

I call Senator Kieran O'Donnell.

I have a few brief questions. To follow up on the regulation of both the service agents in the country and the funds, from my perspective, the name "funds" is a bit of a misnomer for many of these funds. They borrow from funds in American and they then invest in the Irish market. They are not funds; they are basically loan sharks, which are 100% geared. They come into the Irish market. Some of them are funds, and some of them are based here and some of them are based abroad.

In the opening statement provided to the committee, the Governor made reference to:

foreign capital flows into the commercial property market that are the result of the global search for yield in the current low interest rate environment are vulnerable to a sudden stop or even a sharp reversal should there be an adverse shift in global financing conditions. In turn, this could generate disorderly property market price reversals.

I have two questions on that. I understand the type of regulation the Central Bank does of these service providers is effectively desktop based. I would have thought these service providers should be required to make returns to the Central Bank. It regulates them, therefore, I assume they deal with most of the restructuring. They should be making returns to the Central Bank like any other institution regarding what they are putting in place. I would have thought the Central Bank should have had people physically out conducting audits, as would happen with any other normal institution. I understand the Central Bank does not regard them as material in terms of their individual size relative to larger institutions when in fact they could be quite significant.

From my perspective, their current footprint is quite astounding. I am based in Limerick city and these funds are involved in most of the developments, ranging from housing estates, commercial developments to apartments, taking place there. Does the Governor have a concern about stability in terms of that property creep? We are talking about regulating these entities. I would have thought there is sufficient provision in terms of the powers the Central Bank has over the service providers to get that level of information, and to heavily regulate them in the same way that it regulates the other financial institutions or even more so because of the threat they may pose to the stability of property market.

Another issue I have found is that many of these funds are appointing receivers. They may have typically bought a fund from someone else, a bank or from the National Asset Management Agency, NAMA, and then they suddenly appoint a receiver. What powers does the Central Bank have over the receiver? Could a fund, which is in some way regulated through the service provider, suddenly appoint a receiver to call in the loans it has in order to sell a large amount of property, and by doing that, would they be bypassing any form of regulation?

There is a looseness in the regulation of such service providers that is within the power of the Central Bank to address in a more prudential-----

Professor Philip Lane

I understand what the Senator means. He has raised many issues. First, we are doing on-site inspections. We do think these credit servicing firms, because-----

I would say that is quite recent.

Professor Philip Lane

It is but it is recent legislation. The first wave of engagement was the authorisation process. We have a gatekeeper function and only firms that are capable of meeting our regulations get through in that regard. The first wave, in 2015, 2016 and 2017, was to authorise them. Once the law was passed, they had to meet the requirements. Therefore, there is a lot of engagement.

When did the Central Bank start the on-site regulation?

Professor Philip Lane

More recently. Earlier this year or late last year, the-----

Ms Derville Rowland

February.

February. They are here for a lot longer than that, with due respect to the Governor.

Professor Philip Lane

I refer to the areas covered by consumer protection. The roles of funds in other activity, such as buying up housing estates, the construction of hotels etc., comprise a very different issue, to which I will come back.

With respect to the receiver issue, receivers have to operate within the law. I do not believe there is any getting around our financial regulation. Any role for receivers would be within the legal framework. The wider concern, over what the financial system looks like when there is a significant role from non-bank operators-----

It is a question of stability in the property market.

Professor Philip Lane

Yes. In general, there are risks but there is a strong net positive gain.

Professor Philip Lane

Essentially one is bringing a lot of risk capital from overseas. In this regard, one should bear in mind the next downturn. It is a question of who would get the hit if there were a reversal?

Do they have too much control over the property market at present? As for their control over the rental market, it initially was assumed the funds would just be asset disposal agencies. What happened is that they came in suddenly, bought property and loans for half nothing and suddenly realised they were sitting on a goldmine. They are holding on to the property. I see too much of this on a day-to-day basis. Does the Governor have concerns over the pervasiveness of disposal agency activity in the property market in Ireland, bearing in mind stability, consumer protection and control over the rental market? A myriad of issues arise but they are all linked. What is the Central Bank doing this regard? If it is identifying that there could be disorderly property market price reversals, effectively owing to the activities of vulture funds here, what is it doing to address this to ensure they do not happen?

Professor Philip Lane

It is not so much a case of whether it happens; it is a matter of the consequences. We recognise that when foreign investment flows here, we are exposed to what is happening elsewhere.

Does the Governor accept that many of these bodies are nothing more than highly geared institutions that are borrowing from funds themselves? They are operating with borrowings themselves. They are not funds; they are highly geared.

Professor Philip Lane

In general, the ultimate nature of funding for any of these vehicles will involve some mix of equity and debt. There is a significant amount of equity in general in that area but, regardless of whether it is equity or debt, the question is one of who suffers in a downturn. Our attention is very much to ensure the local banks are appropriately provisioned and hold appropriate capital against commercial real estate here so that if there were a fall in prices, the Irish banking system, on which we all rely for daily business, would remain okay. It is to ensure that if some bunch of global investors loses money, we will be less concerned and a systematic risk will not be imposed here. For the Irish financial system, it is a net positive to have the entry of international finance providing extra funding here.

Can I get a commitment that the Central Bank will seek to ensure that the service providers will stop making returns in terms of the restructurings put in place? I would have believed the legislation was in place to allow the Central Bank to make that request.

Professor Philip Lane

Let us be clear: we do know what they have. Deputy Michael McGrath asked how much the balance of the different types of resolutions was inherited when they bought the books and how much reflects what they are doing on an ongoing basis. We can look at that question but we do receive information from these firms.

I contend that, up to now, the Central Bank was not using the full powers at its disposal to regulate these service providers. I am glad the Central Bank is doing this now. I very much look forward to receiving the information it can bring back.

Professor Philip Lane

Let us remain clear that the our regulation of all non-banks, whether they are credit servicing firms or retail credit firms, is for conduct with a view to determining whether they are treating customers in line with our codes. It is not a prudential motive because these agencies are not taking money from Irish depositors. They do not pose the same systemic risk, which is why we prudentially regulate banks and so on. The nature of the regulation is very different.

I will move on. The Governor referred to market price reversal and a material risk that there could be a fall in property prices over the next two or three years. What price increases or decreases are built into the Central Bank's economic projections for the next two or three years? What is the percentage?

Professor Philip Lane

Again, let me emphasise that in all of our reports, we always outline what we believe will happen to the economy. We then go through different downside scenarios. Therefore, the reversal in house prices is in the category of a downside scenario. What we publish in our forecasts is macroeconomics, including what will happen to GDP and consumption. We do not forecast house prices. What we do is try to understand the beliefs of those involved in the market. Fairly consistently, based on a three-year horizon, the figure is around 15%. This is based on adding up the figures over three years.

Is that a 15% increase?

Professor Philip Lane

Over three years. That means single digits every year.

How does the Governor reconcile that with the fact that, over the previous 12 months, we have seen double-digit growth in the price of houses, in the order of 11% or 12%?

Professor Philip Lane

Up to now, we have been in catch-up mode. There is obviously more room for prices to grow quickly when coming from the bottom of the crisis but, as we get closer to fundamental values, more constraints kick in. The constraints associated with income levels, our rules and what is happening in the economy will kick in.

I have two questions on that. Does the Governor believe there are early signs that the housing market is overheating? By how much would property prices have to increase before the Governor would be concerned that the property market is overheating and that we are moving into territory that might see a reversal in the price of houses?

Professor Philip Lane

One reason house prices could go into reversal is overheating. This is fundamental. Apart from that, the more likely scenario is that house prices will not overheat.

No. The Governor has said the rate of increase in the price of houses over the next three years will be 5% per annum. At what rate would the Governor be concerned that the property market is overheating? Are we seeing early signs of that as we speak?

Professor Philip Lane

Every year, as part of the review of our mortgage rules, we review that.

The annual review that was completed in November concluded that the strong price increase we saw last year was still within the neighbourhood of what we might expect given the economic environment. That is not overheating. It is a balance between what is going on in the economy. This year, we expect employment to grow strongly and we expect wages to go up. We are not expecting serious interest rate movements this year. The economic conditions remain strong. That will support some movement in house prices.

What level of house price increase would cause concern for Professor Lane, as Governor of the Central Bank, and suggest that we are moving into overheating of the property market?

Professor Philip Lane

It is going to depend. This is not an absolute statement because it depends on the state of the economy. Under the good economic conditions we have, some degree of price increases will remain in line with fundamentals. Honestly speaking, I think it is probably fair to say that if we saw national house prices growing in double digits again this year, I would be looking at that. It depends-----

Professor Lane would have a worry about that and it would set off alarm bells. Is that correct?

Professor Philip Lane

I would not go as far as that, because typically it is when such increases go on for a sustained period that we would be concerned. It is compared `with what is going on with employment, wages, interest rates and housing supply. It is important that we look at this every year, but it is important that we do that in the context of our programme. We will be coming out in November with our annual update.

My final question is on Brexit. What is the view of the Governor on Brexit and where it is at? What are the implications for the Irish economy on the financial, economic and social sides? What is Professor Lane's view as Governor of the Central Bank?

Professor Philip Lane

There is a potential disruption effect versus when it all settles down post Brexit with regard to where it is going to be. We are drawing strong consensus across many agencies on the view that if we take a ten or 20 year horizon, this change is very regrettable. In the end, however, it is a loss that will be absorbed by the general improvement in the economy.

The greater concern for us is disruption if it turns out that the Brexit negotiations end up badly. Right now, there is considerable market confidence that a reasonable negotiation will happen, that there will be a reasonably soft Brexit, that there will not be massive disruption to trade and so on. In the context of a soft Brexit, the world is prepared for that.

The risk factor is if it turns out that no deal is concluded or if it is a deal with serious trade restrictions. In that case the way this will affect us depends on how it will affect the UK. The question is whether the UK is going to suffer a severe slowdown because of a bad outcome. If the UK suffers a slowdown, it is bad news for us. However, much else is going on in the Irish economy. We usually think about this in terms of the 30% rule. If the UK slows down by one percentage point, then 30% of that will pass on to us. It is not one for one. We are not so integrated with the UK that it is a one-for-one relationship. It is negative for us but it does not overwhelm the domestic economy or our interaction with the USA or the rest of Europe.

For every 3% slowdown, the effect is 1% for us. Is that correct?

Professor Philip Lane

Yes, that is essentially the way we think about it.

I want to concentrate on the vulture funds. I am rather alarmed by some of what we have heard today. I want to clear something with the Governor. Does the Central Bank have a consumer protection role for farmers, small businesses or homeowners who may have bought a second property? Does the Central Bank have a consumer protection role in respect of the loans sold off?

Professor Philip Lane

I will turn to Ms Rowland to address the question.

Ms Derville Rowland

The consumer protection code applies to people in their personal financial transactions. It also covers up to €3 million of turnover of small businesses. All those protections apply. The code of conduct on mortgage arrears applies to a family home. It also applies where a person owns a property. That may not be the house the person lives in all the time. It could be a buy-to-let property, for example. If it is the only property the person has, it is covered in that code as well.

We also have regulations that cover lending, principally to small and medium-sized enterprises. They provide protections and how they should be dealt with in the course of any engagement.

Some are covered under the code of conduct and some are under the consumer protection role. I want to get at this in terms of accountability. All of these cases are unravelling in terms of how small businesses, farmers, homeowners and those who have bought a second house are being treated by vulture funds. I want to know about this for the future.

We are dealing with tracker mortgages in the main now. I can see down the line where we will be dealing with this. We are dealing with it at the moment but this will gather pace in the coming months and years. I want to know where the buck stops when it comes to the consumer protection role in terms of having the proper measures in place and when it comes to implementation as well.

There is an alarming disconnect between the stories we are hearing and what is coming from the Central Bank. Where do people go when they have a problem with vulture funds? I will offer one instance. Will the Central Bank representatives tell me where someone like this could go? The person has the vulture fund calling to the house, ringing all the time and harassing all the time. The people involved had bought a second property. It is a case of the fund agreeing to stop harassing the woman if she signs over the family home. The thinking is that the woman will be fine then because the fund will not bother her anymore. She can live in the property for as long as she is alive. Then when she is dead, the fund will take over the property. That is the solution being provided. What would the Central Bank say to that woman?

Ms Derville Rowland

The first thing I wish to say that no vulture fund should be dealing directly with a consumer at all. That is prohibited. If the case involves a buy-to-let property, the person should not be dealing with the woman directly. The funds can only operate in the legislative framework through the regulated entity. They cannot operate directly. If that is happening, it should not be happening.

Senator Conway-Walsh asked about the protections. Let us suppose the case involves a buy-to-let property where the person owns more than one property. The protections of the consumer protection code would not permit harassing behaviours or threatening or menacing behaviours. That would not be permitted as a way of engaging with the consumer.

This is the approach even in respect of a buy-to-let property if it is in addition to the family home. The aim of the engagement as envisaged by the code is constructive. The idea is to assist and to come to resolution. There may be cases involving an unsustainable situation, unfortunately. None of the behaviour, however, should be threatening, menacing or harassing, as described by Senator Conway-Walsh.

The problem is that much of this is not written down. Rather it is done verbally. How does the Central Bank know through its investigations what is happening when things are done verbally? It is the word of the property owner against the vulture fund or the regulated entity.

Ms Derville Rowland

We take many sources when we look at a situation. We will go out on site and look there too. If Senator Conway-Walsh has information from someone who is saying that these behaviours occurred, we will take that into account. We take our information from many sources when we examine a problem. It is typical for us to receive information from multiple sources to inform our view on whether there is a problem. It is not a matter of one line of information. That is how we inform our views.

Does the Central Bank make it mandatory for the agent or the vulture fund to inform the people they are dealing with of their rights? Where do they get that information? There is confusion over what rights people have and whose responsibility it is to ensure those rights are upheld.

Ms Helena Mitchell

When a book is sold by a regulated entity, it has to inform the consumers of where the loan is going. The unregulated entity then has to appoint a regulated entity to be the interface between it and the consumer. In the scenario the Senator gave, I am not sure if she means the unregulated entity dealing directly with the consumer or whether it was the credit servicing firm. If the latter, we have access, we are on site and we are looking at how it is engaging with consumers.

People should contact the Central Bank in individual cases of the codes being breached.

Professor Philip Lane

Anyone in distress should avail of all the advisory services, such as MABS and Abhaile. They should not deal with the creditor in an unadvised way. If a person does not have the expertise or the knowledge of what is appropriate, there is a very important role for advisers, including the publicly funded advisory service. People should not feel they have to deal with this on their own.

People do feel they are dealing with it on their own, however, so they ring and ring again, but there is quagmire of information failure. I am asking about cases where the vulture fund is not willing to negotiate with small businesses and receivership has been instigated, or a building is sold from under the business and the owners are forced to sign a lease for multiples of what the property's value had been. I am not referring to non-performing loans but loans where the interest was being paid. The main aim of the vulture fund was to take the building and make as much money as it possibly could. I am also concerned about the risk to jobs in the small businesses which experience this behaviour from vulture funds.

Professor Philip Lane

Outside the parameters of consumer protection, where people have a commercial mortgage with an investment fund, it is within a legal framework. If there are concerns that what is happening is a violation of their contract, people should go through the legal framework to resolve them. That goes beyond consumer protection. There is a recognition that the legal route is inappropriate for individual consumers and the system is better off having an ombudsman and a regulator to protect consumers, but commercial transactions are legal contracts. If there is something the small business feels is at odds with its contractual rights, the courts are the framework.

It depends on who has the most money to fight these matters. Vulture funds pay a minute amount of tax and avail of section 110 and other loopholes. If the Central Bank does an investigation and finds a vulture fund to be in breach of the code of conduct or regulations, can the favourable taxation terms be withdrawn from it?

Professor Philip Lane

That is a separate issue. We can use our regulatory sanctions but the tax treatment of investment funds is for the Oireachtas and for Government tax policy. We do not have any control over that. Ms Rowland will talk about the sanctions we can impose through enforcement.

Ms Derville Rowland

Where we find regulatory breaches, we have all the enforcement options available to us. They are not just administrative sanctions - there is a set of powers of direction and other powers within the regulatory escalation pyramid and we have the appropriate tools to get at the harm we see, depending on the breaches. We have fitness and probity powers, administrative sanction powers and other powers.

How much has been levied on vulture funds for misconduct to date?

Ms Derville Rowland

I do not believe any enforcement cases against regulated credit servicing firms have been concluded. The legislative approach is fairly recent. The first thing was to put in a strong authorisation framework, and we play a rigorous gatekeeper role. The fitness and probity of the individuals leading these firms was scrutinised. The legislative framework does not contain a strong capital requirement and is more orientated towards being a conduct framework. Part of the foundation of that is a requirement to have robust governance and appropriate risk management to ensure they deliver appropriately in terms of their conduct role, particularly when engaging with consumers. They have to have clear structures and organisational competence to show they are well organised and resourced so that they can comply with regulation. We put additional regulatory requirements on them and we have been implementing our supervisory strategy. This has culminated in on-site inspections to ensure we have a very informed view of their compliance.

Does the Central Bank have enough resources to implement the framework? The framework is wonderful, but if it is not implemented in the right way, it will be of no use.

Professor Philip Lane

We have the independence to decide our own resources. In other parts of the public sector there would have to be sanction for certain expenditure.

The Central Bank has sufficient resources to ensure the code of conduct and the framework are fully implemented.

Professor Philip Lane

All of what we do is subject to ongoing review. If more loans are sold and more come to credit servicing firms-----

How many of the loans owned by vulture funds is the Central Bank looking at?

Professor Philip Lane

The numbers are given in my introductory statement. If there are more in the future, the sector will get bigger and we would have to add resources for effective supervision. We are continually reviewing the position. In recent years we have seen a fairly big increase in bank staff and the target for the end of 2018 is nearly 1,900, having been 1,500 when I arrived in 2015. We are prepared to increase the number and have made a lot of effort to add staff when we need to. We are not bound by an embargo or limit.

The bank has enough resources to do what it needs to do. I am concerned that it is looking at vulture funds through a very narrow prism and from the point of view of the need to protect banks and financial institutions. I am worried that farmers, small businesses, homeowners or people who have bought a second home are being sacrificed as a result. The governor said that, were there to be a banking collapse, there would be less of an impact for vulture funds than for regulated entities.

Professor Philip Lane

It is the other way around.

If there were a problem with a non-bank with these funds, the consequences for the Irish system are less than if a bank gets into trouble. We have tried to be clear here. We regulate the banks not only for conduct but for prudential reasons to keep them safe. We do not have that prudential motivation for the non-bank funds because the investors are elsewhere and they are not man on the street depositors. There is a clear logic to that.

I understand that. Has the Central Bank done an analysis on how much we have lost out on because of the tax loopholes and the tax avoidance measures that are being taken by these vulture funds to weigh it up against the benefit of protecting the solid banks?

We covered that matter earlier on.

Professor Philip Lane

Let me come back to this issue. The tax situation faced by these funds is for the Oireachtas to decide and that can evolve over time. Clearly, in the more favourable regime they used to operate under, the price they were willing to pay for these loans was influenced by that tax regime. Every year it is at the discretion of the Oireachtas to change that tax system. That is part of what is possible from the Oireachtas. The taxation of any type of investor is entirely up to the Oireachtas. There will be an interaction with the value they are willing to pay for a loan but the impact of that tax is a normal calculation one always makes when one taxes anyone.

I will leave it at that.

Ms Derville Rowland

I would add on the point the Senator made about the consumer protection mandate that the consumer protections that the Central Bank is able to put in place to the fullest extent of its mandate are applied and they attach with equal measure to regulated entities such as the bank as well as when the loan is sold. There is no trade-off with the consumer protections that are afforded to loans that have been sold to these funds and we take the discharge of that mandate seriously. There is no lessening of the protections that are afforded to consumers. They apply equally.

In response to Senator Conway-Walsh earlier, the Governor stated, referring to the banks and regulation, that we regulate the banks to keep them safe. Earlier this morning, he stated that we care a lot about the banks. What does he mean by those two statements?

Professor Philip Lane

Those are short-hand comments. When I say that, I mean that what we care about is the safety of Irish society. If the investment fund loses money, we are not exposed. If banks lose money, as Mr. Sibley stated earlier on, part of the post-crisis reforms mean that where an individual bank gets into trouble, we now have a structure and a plan to be able to shut that bank without causing losses to the taxpayer. Ultimately, if the whole banking system is in trouble, there are scenarios where the Government would have to step in. The risk to society is through the banking system. Having a role for non-banks means it is less likely that all of the lending risk in the economy is in the banks. I do not care about banks, as such. We work for the public. We do not work for the banks. If the banks are unstable, however, there are social and taxation consequences.

This is where the difference is. I have listened attentively from 10 a.m. to what the Governor had to say. That statement and how the Governor now balances it in terms of society emphasises the difference between the Central Bank and myself and, I believe, the Oireachtas Members because our task here is to put people front and centre. One might apply, in legislation, the so-called lesser evil for the greater good, and it would seem from how the Governor describes events and the regulated entities that that is not the case in the bank.

Let me explain. Over the long weekend just gone, that lady, Yvonne, was jailed because of the efforts she was making to keep her family home, and to this day she is in jail. In Iceland, the 26th banker was jailed since 2008. I have listened to the Central Bank state time and time again - Ms Rowland said it a moment ago - that the regulation and rules travel with the loan as it is sold on from the bank to the vulture fund looked after by the regulated entity, but the Central Bank is not listening to what is being said, certainly, in what I stated to the Governor earlier. As Chairman of this committee, I and other members are trying to convince the Governor. It may travel but they completely ignore it. We have given the Governor examples and I will follow up on them in writing.

Senator Conway-Walsh talked about the vulture fund representative knocking on the door of the individual concerned. I can tell the Governor that in my own constituency the same happens but they might use another person, such as the receiver, connected with the regulated entity who is almost independent of the regulated entity. Essentially, what is happening is they are running rings around the Central Bank.

They are bypassing what the Central Bank is doing. I ask the Governor to listen to us. I am not making up the story. I do not believe any other member is making up the story. It is fair to say from what I and others know that they are running rings around the Central Bank to push people out of their homes. When they turn up at the door, it is a frightening experience. When the letters come through the door, the occupant does not know what to do.

The Governor rightly mentioned earlier that there are supports, such as Abhaile. Will the Governor tell me what Abhaile does? Here is what it does. It will give the person a voucher for legal representation. The person is waving his or her voucher for €100, €250 or whatever and across the desk from him or her before the court is a senior counsel, a barrister and a solicitor all staked against the individual. That individual's only recourse is to ask us for help and our recourse is to explain this to the Governor and ask him what he will do. Having listened to his explanations today, I have to tell the Governor that he is not listening. The Governor has missed the point about the sales to these vulture funds and how they are regulated. I firmly believe what Deputy Michael McGrath is trying to achieve in terms of regulating the funds themselves is the proper way to go.

Will the Governor consider after our meeting the points that we have made out of our experience with customers who are affected by their loans having been sold on to vulture funds? Will he tell me in short sentences what the regulated entity reports to him? I refer not to the Central Bank looking for information but to what they are obliged to report to the Central Bank.

Professor Philip Lane

Let me make a few points on the opening remarks of the Chairman's contribution. We are public servants.

We have only one mandate, namely, to serve the public by delivering on the requirements set for us by the Oireachtas to protect consumers and ensure financial stability. That is the only motivating force for what we do. In delivering that mandate we have to make assessments of the prudential health of the banking system, in addition to conduct. We have the same motivation as Oireachtas Members, namely, to do what is best for the people. That is all we care about it. We have listened carefully to everything members have said and take correspondence from Members of the Oireachtas very seriously. We go to great lengths to be as complete and comprehensive as possible in following up on matters communicated to us. It is helpful to us to receive information from Members on issues of conduct and whether the banks are behaving correctly.

I find the Chairman's comments on receivers and perhaps other agents interesting. If members explain what information they are collecting in that area, it will be interesting to think about the issue. If something is being used as a kind of an escape route around code of conduct, we can examine the matter. We can pursue any matter related to conduct. Ultimately, however, the issue is one of outcomes. Will the bank in question restructure a debt? Is someone-----

That is a different issue, one which was dealt with by Deputy Michael McGrath.

Professor Philip Lane

As Senator Rose Conway-Walsh stated in respect of what consumer protection delivers versus other elements, it is very important to think about the whole system. Compared with many other countries, the Oireachtas has, over a number of years, put in place many elements, all of which are open to question. If Members informed us that Abhaile was not providing sufficient help or that the insolvency system was not working in the way the Oireachtas had intended in legislation, all of this should come under continuous review, given the change in the market and the likelihood of more sales. However, if the ultimate issue is about what outcomes there will be, that is all within the legal framework. I do not believe there is any distance between us in that regard.

We listen to Members and have to ask what we can do in terms of consumer protection. To respond to Deputy Michael McGrath's point on that issue, if we believed we could deliver more by directly regulating the loan owners through some other vehicle, we would be happy to say that, but our honest belief is that the parameters of consumer protection can be delivered through regulating the credit servicing firms. In terms of conduct, we have open ears.

What are the credit servicing firms obliged to report to the Central Bank?

Professor Philip Lane

We have general information gathering powers. If we believe we need to know something in pursuit of our mandate, we can collect a wide range of information. The credit servicing firms are reporting the nature of the loans they have and we have good information on what is occurring. As Mr. Sibley stated, until now the numbers of repossessions sought by these firms have not been dramatically different from those sought by the banks. We also acknowledge that the nature of the restructures is different. We do not believe a large number of new split mortgages are being generated.

We have been through this. I want to use my time wisely because we are approaching the end of the meeting.

Professor Philip Lane

We have information gathering powers and can gather the information we believe we need.

Is ACC Loan Management still regulated or is it working out its loans through another entity?

Mr. Ed Sibley

It has handed back its banking licence.

Is it regulated?

Mr. Ed Sibley

I am not sure whether it is a regulated provider, but it has handed back its banking licence.

I understand it is working through its loans. To return to my earlier example, the individual in question informs me that he has tried time and again to engage with and contact the lender but nothing has happened. This wears borrowers down. They become worn down by the ducking and diving in which regulated entities, namely, the agent, engage. This is the cause of greatest concern to borrowers because they want to deal with the issue but cannot do so. I ask the Central Bank to focus on this matter.

I want to question Professor Lane about the courts. While the number of repossessions is low, that does not mean that only the odd repossession case is turning up in court. I attend sittings of the registrar's court and other courts and they are backed up with cases. The master's court may deal with 40 or 50 cases in one sitting. All the banks and their representatives are doing is stalling the ball until they squeeze the borrower to the point where he or she agrees to voluntary surrender. There is nothing voluntary about such surrenders because the borrowers have been squeezed into agreeing to them. I ask the Central Bank to examine the role of these agents and the work of the vulture funds and determine for itself whether its understanding of the position is correct or whether it agrees with me that there is a case to be answered. Will Professor Lane give an undertaking to examine the agents who are representing the vulture funds?

Professor Philip Lane

Absolutely. Credit servicing firms fall within the regulatory supervision of the Central Bank. We have a range of means of supervising, including on-site inspections. The issue of correspondence is interesting in the context of the review of the code of conduct on mortgage arrears. If more direction is required regarding expectations about answering correspondence and so on, we can examine that matter because it falls within the remit of conduct regulation.

Will the Central Bank take a closer look at the agents?

Professor Philip Lane

Absolutely.

In one estate in Kilkenny an agent issued letters to residents, some of whom lived in housing owned by the county council. These house were not in the agent's portfolio, yet representatives of the agency in question visited the estate and knocked on doors. That is the carry-on Members experience on the ground. As I outlined, in one case a representative of an agency knocked on the door of an elderly person and asked the person to leave the property within one or two weeks, even though negotiations were ongoing with the local council. I ask Professor Lane to examine that matter. I will submit all of the material in my possession to the Central Bank and hope other members will do likewise.

I have some questions about the credit union sector.

Mr. Ed Sibley

I wish to clarify that ACC Loan Management is a retail credit firm.

Is it regulated?

Mr. Ed Sibley

Yes.

I will circulate to the Central Bank the material I have on ACC Loan Management.

As a member of a credit union, I am a great fan and supporter of credit unions. Professor Lane indicted that the Central Bank had a clear vision for the credit union sector in terms of what credit unions should do, how they should be regulated and so forth. He noted that credit unions had dealt with the effects of the financial crisis. How does the Central Bank's vision for the role of credit unions align with the vision of the credit union movement? As has been well documented, a statement was made in the Seanad that sorting out the credit unions would cost €1 billion. The cost has been nowhere near that figure. Professor Lane noted that the credit unions had dealt with the effects of the financial crisis. Is it correct that they did so with their own money?

Mr. Ed Sibley

I will address that question.

Like the Chairman, I am a strong believer in credit unions. They have an important role to play in Ireland. They have a hugely important role to play from the perspective of financial inclusion and I hope they will thrive long into the future. They face several challenges and this committee has shown a very strong awareness of those challenges. The Central Bank is absolutely committed to working with the sector in addressing those challenges. The level of engagement and support that we give to the sector, some of which the Governor referred to in his opening statement, is well beyond any other sector that the Central Bank regulates. Through the work of the member bodies, the individual credit unions, the Central Bank and other agencies such as the Credit Union Restructuring Board, ReBo, the sector has delivered a huge level of safe restructuring and dealing with those credit unions that were at the very weaker end in a way that has protected members' funds and protected the services of credit unions into the community in a strong way and without recourse to taxpayers. On the overall number that was given, I was not around during the period when stress-testing was undertaken on the credit union sector, and I assume it was a stress-test rather than a prediction. As with any of these things, it has not played out quite like that. Instead the credit union sector, through the hard work of many constituent parts, has addressed some of the fundamental weaknesses-----

Without recourse to the taxpayers, in the main.

Mr. Ed Sibley

Yes, in the main.

Is the Central Bank's vision for the credit union sector the same as that which the credit union has for itself in terms of future business models?

Mr. Ed Sibley

To be consistent with what I have said and what the last few registrars have said, from a collective perspective we had hoped to see more leadership collectively across the sector and a better articulation of a vision. From the Central Bank's perspective, and consistent with what we see across other sectors, we hope to see the credit union sector thrive, for it to serve its members well and that its members funds are protected. Specific business models, either on an individual or overall basis, is something for the leadership of the sector to come up with. We are very supportive of it and have a business model development team that works with the sector on the area but it is not for the Central Bank to opine definitively on what the credit union business model should look like, whether individually or collectively.

No, because the current regulation affects their ability to take in savings because of the costs on that. The current discussion with the regulator refers to the age profile of credit union members and so on and the need to bring in newer members. However, there is a slow approach to sanctioning new types of business and new ways of doing business. One will not get young members in if one has not got the range of packages to sell to them or the technology to manage their affairs. In the example of the €700 million of credit union funds that was recently sanctioned to go into the voluntary housing sector, does the Central Bank recommend the special purpose vehicle on that or is it the Department of Finance?

Mr. Ed Sibley

It is not for us to make the determination of how that comes into effect. What we are doing is allowing the credit unions to invest in approved housing bodies.

So the Department of Finance makes the ultimate decision. What is the Central Bank doing to respond to the sector in relation to expanding its business?

Mr. Ed Sibley

We look at any proposal that comes into the Central Bank. Typically, at the moment, it is quite fragmented. Through work done by this committee, there is a focus on longer-term lending as an example. The proposals tend to lack some depth and really well thought through plans on what it means for the overall business model of a particular credit union or the credit union sector as a whole. It is very much focused on individual product development rather than considering what it means for the credit unions. In the discussion on longer term lending and investment, it is critical that the credit unions think about both sides of the balance sheet. They are talking about very long term products, in excess of 20 to 25 years in some cases, where their funding is on a demand, instantaneous basis. There is a need really to think through how the product development fits in with an overall mix of business and how it works on both sides of the balance sheet. It is also important that the sector as a whole coalesces around this common vision because it is very difficult for an individual credit union to be particularly innovative or to offer some of these services that require a great deal of infrastructure by which to operate and offer in a competitive way, and that brings us into more of a shared services model. We have not seen the vision from the sector as a whole. We see some very good managers who try to move their individual credit unions forward and some high level proposals come from the centre, but there is not enough thinking through as to how this will work overall.

Is it not the case that the very nature of credit unions means that the one-size regulations will not fit all? Each one responds to its own community in a way that feeds into that market. The fact they came through the financial crisis in the way they did and are now restructured in the way that they are shows that there is a willingness within the credit union sector to restructure and to repackage the products they put on the market, but that those products might differ because of the demand in each county or each credit union area itself. It is not as if one can achieve the same set of regulations as one would do with banks because it is a completely different movement. I often question whether the regulation of credit unions should be within the remit of the Central Bank.

Mr. Ed Sibley

To be absolutely clear, I largely agree with what the Chairman has described except, perhaps, for his final point. There is a proportionate approach to the regulation of credit unions. There is both explicit and implicit proportionality. Our work in the credit union sector is to focus on those areas of highest impact and highest risk. With the exception of those which are in trouble from the sustainability perspective, we are essentially looking at the smaller credit unions on an off-site basis. We get their returns and engage with them through seminars and speeches. We have a minimum expectation in what we expect from them. The intensity of our supervision is much lower. Connected to that is the expectation that they are not doing things that are particularly exotic or innovative. Typically, they will not have deposits that go beyond the deposit guarantee scheme and we would not expect them to engage in significant longer-term lending and so on, because they are small, very local and should be ensuring that they are protecting their members' funds and delivering on their purposes. As the credit unions get bigger or they look to do more, such as longer term lending, invest or hold higher numbers of deposits, then our expectation grows both in some of the requirements we put upon them and also in the level of our intensity of our supervision. There is a natural tiering and proportionality of our supervision. We absolutely expect that they will serve local members' needs - that is the purpose of the sector and we are very supportive of it - but it is different where they are discussing getting into more sophisticated products that are very costly and complex. There was a lot of discussion about mortgages today. In some respects, people think they are simple but they are complex products that have many costs associated with them.

If a credit union wants to start lending longer term and doing mortgage lending then it needs to have a degree of scale or access to scale, so either it is large enough to do it itself or it has access to some kind of shared services model. We are working really hard with the sector. There is a business model development team and we are meeting the CEOs. Individually the registrar meets them through the seminars. The level of engagement we have, not just because we are supervising them but in all manners of ways to try to support credit unions' development and growth, does not compare to any other sector in which we are engaged. It is so much more.

I get the sense that the Central Bank could relax its overview of credit unions, not relax the regulation but focus them all in the right direction. There are individual issues, as Mr. Sibley has said, but credit unions should be encouraged because they are responding to local demand and need. They know their customers. The opposite to this is the banks, who do not know their customers. They are exiting and they are gone. What we will be left with is credit unions fulfilling the role of community banking. That really is what we will have.

I ask the Central Bank to understand what credit unions are all about and understand where they have come from. Recently I addressed the Irish League of Credit Unions, ILCU, AGM in Kerry. The registrar was also there. I have to say the difference between the AGM of the credit union movement and the AGM of a bank is considerable. Credit unions are there and they want to work. Many of the people involved are volunteers. They serve the local community. Over the years they have done a fantastic job. I want to see a structure in place that allows them to respond to the new marketplace that is developing, and to capitalise on the fact that greedy banks are retreating and there will be nothing left in the parish now only a credit union. That would be a good day for local people, provided the Central Bank gives credit unions the tools necessary to compete and do the work.

This is coming at the end of a long day so I will suggest to the committee that on another day we will have only the registrar before us and we will go through everything in detail, because I believe the credit union movement is important enough to have a separate session on it.

Mr. Ed Sibley

I would be perfectly happy to come back before the committee and for the registrar to come. I have been at the ILCU AGM. I was there last year. We are absolutely committed to working with the credit union sector to deliver on a shared vision. There is work to be done in this respect and we are committed to it.

I have a quick comment for the Governor of the Central Bank, Professor Lane, on the tracker mortgage examination. I still get letters from people who do not know where they stand with their bank. They receive correspondence which states the bank is looking at the matter and will come back to them in 60 days or whatever it might be, and the bank still has not made a decision on the case or cases. At the first meeting we had with the Central Bank the figure might have stood somewhere around 10,000 or thereabouts and now it is 37,100. I believe more will be added to this.

I have a general question but I will mention a specific bank. AIB is now the owner of EBS and it is handling all of the mortgages of that entity with its own. Is the Central Bank satisfied the figures are all out now and there is nothing in the separate entity and make-up of mortgages that has yet to come out?

Professor Philip Lane

In general our approach has been universal because, of course, many of the entities that originated these loans back in the mid-2000s are no longer here or have been merged into something else. The responsibility is there, no matter who has these loans at present, to fulfil our expectations. Regardless of who is the current owner of the loans all of them are within purview. Week by week the number of unresolved cases is shrinking. As we have indicated, we believe a lot will be done by the end of June, but we will continue to pursue every case we think needs resolving until they are all in.

It was First Active and EBS.

Mr. Ed Sibley

First Active went into Ulster Bank.

Yes. The Central Bank is happy that all of the figures have been captured, in terms of the reporting-----

Ms Derville Rowland

There were a couple of issues in the points raised by the Chairman. There may be some additional but much smaller increase in the figures. We have some matters that are still open and under scrutiny and discussion, but we know what they are and the lenders know what they are and they are being dealt with. We have had specific conversations again recently. We have these regularly to be clear there is no reason the vast majority of complaints or concerns from customers cannot be proceeded with, because we know a lot of the decisions. The banks certainly know where areas are clear and that they can deal with them. They have been told this and they are very specifically aware of it.

I said earlier today that we have spoken to the ombudsman about this because there is no point in keeping complaints on hold when we know the outcomes. We have been very clear they are included, and the framework from the very beginning made very clear the banks were expected to have contact units for the public to give them information. It is no answer to us now, when there is no ambiguity, that they are giving answers to the public that are about holding on for some event. The areas in which we are in discussions or looking at are very clear, but there is a vast number of areas on which we are not in discussions, and if people have made complaints about those issues they can be put through the system. This is what we expect.

Does the Central Bank have any idea of the number, with regard to all of the banks, of outstanding cases that have yet to be decided? What does it anticipate might be added to the 37,100? Is it hundreds or thousands?

Ms Derville Rowland

I cannot speculate on that. It is as we check issues. In some of the work we are doing we are recreating the actual groups of customers to check it was done properly. It is in this checking work that the figure may vary. In some of the examples I have used the number has actually been less than the estimates. Occasionally the number is only slightly greater than the estimate. There are other occasions when the number is off by 20, or it could be by 80, or it could be reduced by-----

Can Ms Rowland share that figure with us?

Ms Derville Rowland

Certainly when we report at the end we will give as much information as we can. Right now we are working through it. The information I have been very clear to give is that we have the 37,100 and we have the payment figure, which is very clear. It is possible this will adjust slightly. We are in discussions about some issues, but we do not expect significant changes in the numbers as we close out. If we find a surprise I will be very disappointed because we have been looking at the major risk areas all the way through this.

In terms of business loans, which is something the committee will look at, does the Central Bank intend to have an inquiry into such issues as Ulster Bank's global restructuring group, GRG? Has it looked at it?

Ms Derville Rowland

The Central Bank is aware of the Ulster Bank GRG issue that arose originally in the UK. Over a long period of time we have been working in tandem with the UK regulator, and only recently I travelled to speak to it about this issue. Ulster Bank was required to make a commitment, in similar terms to the framework put in place in the UK, to its customers to refund the complex fees that were levied on its customers. I believe it has written to the committee giving some information on the number of customers it has identified and refunded fees to. What I can say is this is an open supervisory task for us and we will continue to engage on the matter until we are satisfied the commitment has been made that all SME customers who fall within the framework of this and who have been charged those complex fees are refunded, and this remains an ongoing supervisory item for us.

I presume the Central Bank will investigate how it happened and why.

Ms Derville Rowland

Yes, and certainly there has been an independent law firm report into it-----

Ms Derville Rowland

-----in this jurisdiction. That was done previously. These matters have been looked into in considerable depth.

Are the 57 complaints Ms Rowland is mentioning being processed through the Global Restructuring Group, GRG?

Ms Derville Rowland

It is an open supervisory matter for us.

On the mortgage issue, Ms Rowland is correct about the work of this committee in terms of the tracker mortgage examination. The testimony we have heard here from the affected customers shocked the country and this committee is committed to staying with this issue until the end.

Professor Philip Lane

If I may add to that, I directly receive a lot of correspondence from individuals who are explaining their position. More broadly, our public contacts unit, especially the dedicated team in consumer protection, have received so much information and interacted with so many distressed customers that it has been a very motivating force for this work. In the end, however, financial compensation does not compensate for other losses people have suffered. I believe that in the end this examination will have delivered a good deal to many people, but it has been a very difficult situation for many.

I appreciate all the time we are getting from the witnesses. On GRG, my understanding is that the complaints process set up within Ulster Bank is entirely internal; it is run by the bank. I do not believe there are any external independent persons involved. Will Ms Rowland comment on that? Contrast that with the tracker appeals panels in all the banks where, in most cases, they are not represented on those panels; my understanding is that the Ulster Bank GRG complaints process is run entirely by the bank, without any independent input.

Ms Derville Rowland

My understanding is that an independent oversight of that has been required by us. I do not want to speak to the matter of the detail of running a reception part of the complaints process. I am happy to get back to the Deputy in writing about the detail of that but-----

Please do because-----.

Ms Derville Rowland

-----my understanding is that we required external independent oversight of that process, and that is part of our requirement. However, I am happy to clarify the granular detail about where that point of independence-----

Does it say that in the correspondence, Chairman?

It does not say it here.

I am not sure that they are involved on an ongoing basis but I ask Ms Rowland to check that because it would be important that there is-----

Ms Derville Rowland

The independence is part of the requirement in the process but in terms of whether it is embedded in the reception of the complaints process or at a different point, I am happy to see what I can say about that.

My point is that the working out of those complaints should involve independent input. It should not be run entirely by the bank.

Ms Derville Rowland

I will repeat what I have said already. We are committed to the supervisory engagement on this matter until we are satisfied that the outcome we expect has been achieved.

It states that Mason, Hayes & Curran was engaged to undertake the independent review.

Professor Philip Lane

We discussed that at an earlier stage. This is a separate-----

It is an earlier phase, but that is the only mention here of the-----

Ms Rowland can come back to us on that.

Ms Derville Rowland

I will, but I will confirm that Mason, Hayes & Curran were commissioned at an earlier point in time to execute an independent review with respect to the underlying allegation, similar to the Tomlinson report in the United Kingdom, to establish whether it was made out or not. They did report, and that was put into the public domain for a period of time. I believe now that in addition to that, independent oversight of the redress scheme is required as part of this arrangement but as I said, I will come back to the Deputy on that.

In addition, my understanding is not that the bank has identified affected customers. It has dealt with complaints that have come in. I do not believe the bank has done a trawl and identified people. It responds and processes complaints submitted to the GRG complaints process.

Ms Derville Rowland

It is true that it was set up for people to come forward and make a complaint, but it still requires an independent element.

That is fine. Will the representative bodies be represented on the credit union CEO forum? Who will be on that forum? I do not believe it is up and running yet.

Mr. Ed Sibley

It is focused on the CEOs. I will revert to the Deputy to confirm whether the representative bodies are engaged. We have separate engagement with the representative bodies. I meet the representative bodies at least annually, and the registrar meets them separately as well. This is designed for the CEOs, but we are certainly not looking to bypass the representative bodies.

There is a CEOs representative body as well.

Mr. Ed Sibley

Indeed, yes.

Mr. Sibley might consider that the representative bodies would be involved.

Regarding personal contract purchases, PCPs, in the car finance area, we now have the Central Bank letter. We have the Competition and Consumer Protection Commission, CCPC, report and therefore we now have a handle on the scale of this new form of finance. It is very substantial at approximately €1.5 billion across approximately 126,000 PCP arrangements. The report we have contains good recommendations. The stand-out point is the fact that affordability checks currently do not have to be done, therefore, background checks on the consumer are not done, and there is no assessment whatsoever of the affordability of the product. There is a very obvious gap in that regard which needs to be corrected. Whose job is it now to bring about the application of the consumer protection code to PCPs?

Professor Philip Lane

I will say a couple of things on that and then hand over to Ms Rowland. We have studied this, and the CCPC has studied it. A range of issues arises, one of which is that this is a new form of finance. When we have a new form of finance which is superficially attractive to many people, we must ask if there are hidden risk factors. This is more developed in the United Kingdom. Some of the concerns are not intensive here. The funding of the PCPs is not, by and large, coming from the main Irish banks so the concern that this poses a financial splitting risk is not really present here. For many individuals, we have looked at the question of financial gain going through a PCP versus a car loan and so on. It depends on individual circumstances. On average, it is quite finely balanced.

We then come to the consumer protection issue, which is people who may not run through the calculation an accountant like Deputy McGrath might make in terms of calculating the financial pros and cons and the protections available to them. I will hand over to Ms Rowland shortly but I want to say that this is not a simple because buying a car is partly non-financial. We also want to have consumer protection in terms of whether the person is being sold the car they were promised, whether all of that is in order and assessments about wear and tear. All of those are non-financial issues which, typically, would not be a Central Bank issue. On the other hand, there is a financial component to this, as the Deputy mentioned.

There are no easy answers to this. The current legislation is clear that we do not regulate hire purchase agreements but we have been thinking about it, so I will ask Ms Rowland to expand on that.

Ms Derville Rowland

Obviously, the Deputy read the report-----

Ms Derville Rowland

-----and its proposals. What we have here is a position where the credit is usually sold on the garage forecourt in the car dealerships. The credit intermediary is currently regulated by the CCPC. It is also responsible for the sale of goods in terms of consumer provision of goods. That is where we find that the provision of the good - the car - is fairly intermingled with the financial service because some of the terms and conditions of that hire purchase agreement can be to do with servicing, the mileage etc.

The worry in this regard is that one could end up with a patchwork quilt of regulation which might not deliver an optimal outcome for the consumer. One might find providers saying that the issue is the condition of the good, not the way in which the financial product was sold. We would see a big risk in unpacking that and putting it into separate areas. The key observation for us it that we have a very limited role under the Consumer Credit Act 1995. We have some hire purchase responsibilities relating to what should be in the contract, but we do not actually authorise any of the regulated entities in the area of hire purchase because anybody can provide that service. The question the Deputy asked at the beginning was about the consumer protection code. It is mentioned as one of the solutions in the report. It cannot actually be extended to this area under the current legal frameworks because the code travels with authorisation from the Central Bank and we do not authorise hire purchase providers. There are a couple of things to think about with regard to any solution which some might desire be put in place. Responsibilities for the sale of the car, which in inextricably linked with the condition of that car, and for the seller of the finance sit with another agency at the moment. Of course, we are happy to take part in any fact-finding, solutions or discussions that would be of benefit. That is why, at the moment, it would not even be legally possible to put the consumer protection code into use in this area. It is because we do not authorise those entities.

Professor Philip Lane

There can be a step forward on affordability. It is currently on the legislative calendar as part of the Markets in Financial Instruments Bill 2018. It is a fix for the consumer credit register in order to include information on these hire purchase providers. That also means that, when credit firms are making a loan agreement, they will know if the individual has other outstanding debts. That can help the firm make a decision about whether a car loan is appropriate, given that they would be able to see the debts which would be on the register. There will be extra information. The firm selling the personal contract plan, PCP, will have extra information about the credit situation of the individual and that will help in the future.

All I know at the moment is that if one does an online search in Ireland one will see all of these advertisements pop up which say that a bad credit history is no problem and that one can get a PCP and a new car. The fact that there are no protections is being exploited. No affordability assessment has to be done. We do not have any statistics on default levels or arrears levels, do we?

Professor Philip Lane

We do. Our understanding is that one in 200 or 0.5% of PCP contracts are in arrears. It is not a big issue.

They will only be crystallising in the next couple of years. It is coming.

Professor Philip Lane

I appreciate that but, to come back to the issue, when the legislation is passed the lacuna with regard to not knowing the existing debt profile of the customer will be fixed. That will help. It is also important to put the matter in context. For many people the PCP makes sense. It is not the case that we should think about this as a kind of obviously bad product.

No. I am not saying that.

Professor Philip Lane

The mis-selling is the risk factor. We need to educate and publicise. The Competition and Consumer Protection Commission, CCPC, can do a lot through its information and education function. I know from our own staff that it is tempting when it looks like a particularly-----

The Governor is hardly giving advice to his staff.

Professor Philip Lane

It is tempting but-----

I would say the Governor does not need a PCP himself. Who is going to publish regular statistics on them?

Professor Philip Lane

We recently put out quite a good report on PCPs. We are looking at the issue and will be doing quite a bit.

So the Central bank will be doing it. Okay.

Ms Derville Rowland

We plan to continue publishing information on this. For the sake of completeness, I know that the CCPC has announced that it is undertaking a financial education initiative on this issue in order to inform people about the product, its features and some of its risks.

We will continue to raise the matter. I would briefly like to encourage the Central Bank to continue its efforts towards the development of a single European market in financial services from a consumer perspective in respect of insurance, mortgages, small and medium enterprise, SME, borrowing and so on. We do not currently have it. We have questioned European Commissioners and so on here. We are aware of the current state of play. Any support that could be lent to that development would be positive.

On commercial trackers, I have had correspondence with the Central Bank and have passed on certain information which I have received. Is it fair to say that there is currently no investigation or examination into whether some of the characteristics of the tracker mortgage scandal also apply to commercial borrowings linked to, for example, EURIBOR; in other words tracker-type commercial loans? Are there any concerns at Central Bank level that customers were wrongly taken off of such loans or had terms changed?

Ms Derville Rowland

We have had some correspondence from the Deputy on these issues and he has given us contracts and further information about it. We have undertaken a review of the main SME lenders in order to assess their treatment of lending to SME customers. The kind of information at which we have been looking in that regard is the kind of information the Deputy has provided to us including contracts and the terms and conditions of those contracts. We are looking at these to see whether cases are commercial disputes which involve permitted interpretations of the legal contract. It may be the case that an interpretation is unfortunate for a person in business, but we cannot interfere with those kinds of cases. We are also looking at the outcomes of court cases, complaints made to the lenders and the data the lenders have in order to come to an assessment on the issue. That is under way at the moment. We are looking at that to see whether issues arise.

That review is live.

Ms Derville Rowland

It is live.

On the tracker issue, this has been gone into earlier on but the outstanding issues which continue to be referred to us would include the AIB prevailing rate and related issues in Permanent TSB. Bank of Ireland staff members continue to report issues. We are getting emails from former customers of First Active who are now customers of Ulster Bank. Customers of EBS are also sending in significant complaints. I know the Central Bank is continuing to focus on them. The point is coming quite quickly at which we will need to give people definitive answers and definitive conclusions. They may not be the ones they want to hear, but people deserve to know the final position pretty quickly so they can then take the matter further through the process if they so desire, whether that is through the Ombudsman or the courts. As the Chairman has said, some of the lack of engagement, lack of response and lack of information which individual customers are getting from lenders is not satisfactory. The Central Bank owes it to them to reach a conclusion, as it appears to have done on the AIB prevailing rate. It is supporting the bank's interpretation in that case. The Central Bank should be up front and tell people so that they know exactly where they stand.

Ms Derville Rowland

I will say a couple of different things. It is true that in the case of AIB we already communicated that we reached a conclusion. It is not our view that we support the bank's interpretation, but that, from a systemic perspective, we could not interfere in the decision it had made about its interpretation of the customer journey in the contracts. I completely agree with the Deputy that people deserve to know as soon as possible in cases where a matter is not going to be contested further. I said earlier that we and the lenders know where there are no issues between us and they have been instructed very clearly to get on with replying to people on those issues so that people can have their complaints brought forward. The Ombudsman is aware of that so that the system can work and so that complaints can be dealt with. The matters with Permanent TSB are not yet closed. They are still under discussion and we do not propose to take any action with any further or different staff issues in Bank of Ireland. I will be clear on that as well.

We had a discussion on the issue of credit servicing firms and so on. My suggestion to the Central Bank would be to write to these regulated entities, the credit servicing firms, of which there is only a small number, and to ask them to provide information on the forbearance agreements they have entered into for their customers, which are the funds and the borrowers.

Would the witnesses be agreeable to doing that?

Professor Philip Lane

That is part of the operation of the code of conduct on mortgage arrears, CCMA. If they offer a range of alternatives, they have to offer those to each customer. That is part of our regulation of these firms. We also said, as I indicated, that we know at each reporting date the nature of their different types of solutions. The element that we said we would have to come back to the committee about is the balance between what they inherited versus what they have done. We can look at that area.

The Central Bank can ask them for that information.

Professor Philip Lane

Yes. The information that we gather is important in how we regulate these firms.

On the other point which the Chairman made about small and medium enterprise, SME, loans, we have no data on the quantum of SME loans that have been sold to these funds, on arrears levels and so on, or we certainly have not been able to access it. We have that for mortgages. It is published on a quarterly basis. We do not have it for SMEs. That should be sought and provided.

The President of the High Court, Mr. Justice Peter Kelly, said that one had to be either very rich or very poor to get to the courts to get justice. This could apply to many people in the SME sector too. I am sure the Central Bank would agree that everybody should have a good and well-funded pension. Members of the Oireachtas recently received a lot of mail from staff of Irish Life, where the defined benefit pension will be wound up. The pension has €1.3 billion in assets and has €240 million accumulated in savings. It is a well-funded pension. They feel that, if their defined benefit pension comes to an end, this will escalate to other defined benefit pension schemes and that will leave people with just the State pension if that happens. It would be a shock to the system. It is extraordinary, when one thinks that Irish Life's business is selling pensions to people, that it will bring to an end its own staff's defined benefit pension. How does the Central Bank feel about it? Is there anything that the Central Bank can do about this? Have the witnesses any thoughts on it?

Professor Philip Lane

Without commenting on that company, this is a huge issue for everyone. The one area of the financial system that we do not regulate is pension funds. There is a different regulator for pension funds. As part of a new European system, we are starting to gather more information from pension funds. In general, this issue will be important for Ireland. The Government has been developing it for years. There have been many reviews about how to build a sustainable occupational pension system so that people do not just have to rely on the State pension system. There are huge political issues there with the balance between individuals versus their employer and the appropriate rate of contribution, whether compulsory or opt-in. There is a huge range of issues which I would hope that the political system finalises sooner rather than later. Pre-crisis, we had a partial answer for some of this in the State system, with the National Pensions Reserve Fund, but that was blown away by the crisis. We have to rebuild. Post-crisis, this is a case of focusing on these issues which do not manifest themselves in a crisis or year by year. This is one of the biggest financial issues facing the country. It is not just about one employer and its workers. It is very broad. It is a fundamental inter-generational issue here and elsewhere. It is not a good system if workers rely on their employer to provide a pension. We saw with Waterford Crystal a number of years ago, and so on, that it is not a good system to have what we have here, which is a very fragmented pensions industry where there are many specific pension funds. Coming up with a national policy on this is important.

Will Professor Lane come back to the committee with recommendations?

Professor Philip Lane

We will be engaging. This is not a financial regulation issue. Pensions are part of the future financial stability of the country. We have an ongoing interest in how this plays out. It drives savings behaviour and so on. It is important to all of us, including the Central Bank, but we do not have that regulatory role which we have elsewhere.

I thank Professor Lane and his colleagues for attending the meeting. I know it was long but there are many issues that confront us which we have to deal with. The clerk might take up the discussion on the credit unions for the future. We might have a fuller engagement on that. In closing the meeting, I referred earlier to the case of a young woman who has been jailed since the long weekend, Yvonne Walsh. I strongly appeal to the financial entity and those that represent her in court to visit her in jail and bring about a resolution to the problem. No one wants to see a young mother in jail in her efforts to protect her family home. It is not what this country stands for and we do not want it. I thank everyone for attending.

The joint committee adjourned at 4 p.m. until 9.30 a.m. on Thursday, 17 May 2018.