Matters Relating to the Banking Sector: Bank of Ireland

I welcome Ms Francesca McDonagh and her colleagues, Mr. Gavin Kelly, CEO of Bank of Ireland’s retail Ireland division, Mr. John O'Beirne, head of products, and Mr. Tony McMahon, head of customer loan solutions, to the meeting.

I draw the attention of witnesses to the fact 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 the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I invite Ms McDonagh to make her opening statement.

Ms Francesca McDonagh

In its letter of invitation, the committee highlighted a particular interest in two areas, namely, Brexit readiness and the proposed individual accountability framework for the banking sector. I will address both in my opening statement but, first, I will provide a brief overview of some developments in Bank of Ireland since our last meeting in July 2018.

Bank of Ireland is focused on the delivery of the multi-year strategy we announced last year. This strategy sets out the plan we are following from 2018 to 2021. It seeks to transform our culture, our systems and our business model, as well as improve customer service and grow sustainable profitability. In 2018 we delivered new lending of €15.9 billion groupwide, an increase of 13% year on year. Last year was the first year of net new lending growth in ten years.

A core part of our strategy is to strongly support home building and buying. In 2018 we increased mortgage lending by 17%. We are funding the construction of 5,500 residential units across approximately 140 sites nationwide. We are also the largest provider of new business lending into the economy and support two out of every three foreign direct investment projects coming into Ireland.

In addition to lending, since last June, we have taken several steps to improve the service we deliver to our customers. With more than 250 branches nationwide, we have the largest network of any Irish bank. In the second half of last year, we expanded cash services at more than 100 of our locations, opened two new branches and increased the number of front-line staff serving customers directly by more than 200.

We are also focused on reducing our non-performing exposures, NPEs. At 6.3%, we have the lowest level of NPEs of any bank in Ireland but we must do more. This is why, last week, we announced a transaction involving a potential securitisation of a portfolio of non-performing buy-to-let mortgage loans. In common with all banks, our regulators have set out the capital requirements we must adhere to in respect of any NPEs that we hold. This includes holding up to ten times more capital against certain impaired mortgages compared with others which are current with their repayments. This represents capital that could otherwise be lent into the economy or invested in improving customer service.

Brexit, is of course, a topic that dominates the landscape in Ireland, the UK and across the EU. It is also top of mind for many of our customers. Bank of Ireland’s economic pulse, our monthly index which tracks consumer and business sentiment, has reported weakening sentiment over the recent 12 months.

In March, this was down by 1.4 points to 89.4, a reduction of 7.7. compared with a year ago, with Brexit being the key factor.

At Bank of Ireland we look at Brexit in two ways. First, how we can support our customers to navigate Brexit. Second, how we are prepared as a Bank to deal with the outcome whatever that may be. Within our customer base we see resilient businesses that are adapting to changing circumstances. Nonetheless, particular challenges do arise for some customers. These can include managing foreign exchange risk, investing in their working capital or changing their supply chains, operations or logistics. In response, Bank of Ireland has launched a €2 billion Brexit fund to support businesses across the island of Ireland. Notwithstanding present issues, many businesses are also identifying opportunities for investment and growth, domestically and internationally, which we are keen to support.

Regarding our own business, Bank of Ireland was subject to two European Banking Authority, EBA, stress tests in 2018 - a baseline test and an adverse scenario assuming a severe economic downturn. We performed considerably better than UK peers. These tests demonstrated our resilience and showed we have enough capital reserves in the event of a severe financial downturn.

The committee raised in its letter the individual accountability framework for banking. I mentioned earlier that transforming Bank of Ireland's culture is an important element of our strategy. We believe that the individual accountability framework will act as an enabler of cultural change, not just in Bank of Ireland but across the sector. A good corporate culture makes a tangible and positive difference for our customers, colleagues and sustainable financial performance. Given this significance, we have made the transformation of our culture a core element of our entire transformation programme, and just as important as the transformation of our technology and how we are structured. Bank of Ireland has, therefore, welcomed the proposals to increase accountability in the sector in Ireland. We believe this will help to further drive the ongoing cultural change in banking, and we look forward to engaging proactively with the Central Bank on this matter.

Banking touches all parts of society. I look at the work under way on culture and an increasing accountability in our sector as core to Bank of Ireland's task of rebuilding trust with our customers and the wider society that we serve. I thank members for their attention. We are happy to take any questions now.

I thank Ms McDonagh and call Deputy Doherty.

I welcome the delegation's appearance before the committee. I ask Ms McDonagh to address non-performing loans, NPLs, first. Bank of Ireland has reduced its non-performing exposures to the lowest of any of the banks. It has been claimed that the bank has done so without selling any family homes. Will she outline where the bank is at now? Ms McDonagh said that the bank is now close to the 5% ECB target but we heard from the ECB this week that there is no such thing as a hard and fast target. What securitisations has the bank entered into over recent years? Were they synthetic securitisations or more like the Project Glenbeigh securitisation where the borrower has a new credit servicer and deals with a new agent in respect of them?

Ms Francesca McDonagh

I will take two questions NPE performance and where we are right now and the question on the topic of securitisation.

As the Deputy said, we have made very good progress in reducing our NPEs as a percentage of our total book. We have the lowest NPEs of any bank in Ireland currently of €5 billion, which is 6.3% of our total lending book. That has been going down consistently through working with our customers to find individual solutions. We speak to our customers and find forbearance solutions that work for them. When we speak to a customer who has come to us or we have identified as having financial distress, we find that in nine out of ten of those cases we are able to find a solution and those solutions hold. That has been a positive improvement.

Our NPE performance and that reduction is over four times better than the industry average. We have talked about getting close to 5% by the end of 2019. The Deputy is correct that we do not have a 5% target. Some other banks in Europe may have but 5% is a psychological line to cross to get to a more normalised level. The average NPE of European banks is 3% to 4%. We are focusing on getting to 5% and then to continue. To date, we have done that exclusively from working with our customers. We signalled, in the course of 2018, that we are looking at all options on the table and that we are open to all of the resolution strategies that could exist to reduce that further. That is primarily because the definitions of what is impaired, a default and the capital that is allocated to those non-performing exposures is changing. There is more and more financial incentive and reason to reduce NPEs because they are becoming more capital intensive. Capital is finite and comes at an expense. We can allocate that capital to supporting growth in our lending book and supporting Irish consumers and businesses. We can use that capital to invest in our systems, improve customer service, meet regulatory requirements and make returns to our shareholders, which include the taxpayer. We have trade-offs there. We find that the amount of capital that is allocated to, for example, a non-performing buy-to-let mortgage is ten times the capital needed to allocate to a performing principal dwelling home, PDH, type mortgage. That just gives the committee an idea of the quantum.

Let me outline one of the options. Last week, we articulated or announced our intention for a securitisation of part of our non-performing buy-to-let mortgage book. This is a transaction that we intend to do for approximately €375 million, which will create a securitisation of the cash flow from those mortgages. There will be no transfer of legal title nor will there be any intention of a transfer of servicing of those mortgages. From a customer perspective, we will continue to engage with the customer and collect the mortgage. Nothing will change from a customer lens.

Will the majority of the risk remain with the Bank of Ireland in those circumstances? The customer will continue to service the loan and the ownership of the loan will be with the Bank of Ireland.

Ms Francesca McDonagh

The title of the loan will not change and the relationship, servicing and day-to-day management of the mortgage will stay with the Bank of Ireland.

The beneficiary ownership will be with whatever securitisation vehicle that is there?

Ms Francesca McDonagh

It will be part of a special purpose vehicle, SPV, which would generate securities that would be invested in. That would securitise, effectively, the cash flow that is generated from customers who would repay the principal or interest.

That is very different from the most recent project by the Permanent TSB, Project Glenbeigh. How does that model reduce the NPL exposures?

Ms Francesca McDonagh

Our non-performing exposures would reduce because they would not be included within the definition of MPEs on our balance sheet. That reduction, which we have articulated, would get us closer to the 5% that we have talked about.

Even though the title is there and the bank will continue to service them - and please correct me if I am wrong - the proceeds from them that will go to the SPV but there is a still for the bank. The risk is, hypothetically, if everybody defaulted, that the SPV would have a call on the bank. Is that correct?

Ms Francesca McDonagh

Not necessarily. The risk comes off of our balance sheet from an MPE perspective. That risk and the capital associated with it would not be directly on the Bank of Ireland's balance sheet.

Will there be no difference between how the bank treats those customers and customers who are not securitised through this vehicle in dealing with arrears, interest rates and so on?

Ms Francesca McDonagh

The treatment, the ongoing engagement, the servicing and the payment would be the same. The protection of the consumer protection code that is afforded to all customers with a mortgage would stay in place.

Why is that Bank of Ireland's preferred option, instead of other options we have seen, where there is a transfer of legal title? In the past there have been direct sales, and now Permanent TSB is engaged in securitisations-sales. Why does Bank of Ireland feel that this is the best model for it?

Ms Francesca McDonagh

We feel this is the best model for this particular group of mortgages. We have spoken about having all options on the table, and the option to sell mortgage books is still possible. We are not saying that this is the only option we would take. Until now we have been totally focused on working with our customers. This is a securitisation, but all other options are on the table. This particular group of mortgages is particularly relevant and attractive from a securitisation perspective because they are generating cashflows. These are re-performing mortgages, but there is cashflow in terms of the repayment of principle and interest every month. The generation of cashflow makes that pool of assets a good candidate from a securitisation perspective.

This securitisation is worth €365 million. On completion of this securitisation what will Bank of Ireland's non-performing loan, NPL, ratio be?

Ms Francesca McDonagh

Our non-performing exposure, NPE, ratio at the end of 2018, when we reported our results, was 6.3%. This element would reduce our NPEs to 5.8%.

I note that the tracker mortgage scandal was not mentioned in the opening statements of the witnesses. I understand that Mr. O'Beirne met with employees yesterday to discuss their ongoing issues and concerns that the bank has not acknowledged that they were entitled to a tracker rate. Did anything emerged from that meeting to convince Mr. O'Beirne that they have a legitimate case?

Ms Francesca McDonagh

I would like to provide some context before Mr. O'Beirne provides more detail about that very important meeting. We have spoken at previous meetings of this committee of our commitment to fixing this problem and treating it as a priority. We are in the final stages of doing that. We had 9,700 tracker cases in total, which included 1,800 employees. The group the Deputy referred to is a smaller group of 200 individuals. I just wanted to put that into context.

I appreciate that Bank of Ireland took up my request to meet that group. That meeting happened yesterday.

Mr. John O'Beirne

I met three representatives of the group. They are former members of staff of Bank of Ireland, and that description covers a large portion of the group they represented. We are somewhat restricted in what we can say as the group is subject to ongoing analysis and discussion. We have thoroughly examined the additional cases. I welcomed the opportunity to sit down and discuss the nuances yesterday. They put forward a detailed version of their case and referred to the impact this issue has had on many of those individuals. I have also met many current members of staff to discuss this issue in the course of the past 12 to 18 months. I have not yet seen anything to indicate that there is an ongoing entitlement to a tracker mortgage. These customers were never on a tracker and did not take up the option of a tracker mortgage when the product was available. I do not want to pre-empt the findings of the analysis. I have undertaken to take this piece back and to take the further information we have been provided with under the course of the review through a further re-visitation and to keep the Central Bank informed.

I welcome the fact that Bank of Ireland has met with the representative group of the 200 staff and former staff affected. This issue will not go away. Deputy Michael McGrath and others in this committee have raised this issue and have gone into great detail in terms of the documentation available to us. I refer to verbal commitments, emails received from Bank of Ireland confirming that they would roll on to a tracker mortgage rate of ECB plus 0.75%, and the internal communication, of which we have screenshots, which leaves a very clear impression that there was an entitlement there. I do not want to go into the details because I know that Bank of Ireland has engaged on this issue. I hope that engagement is meaningful and will continue, but I have a series of questions I would like to put to the bank which are quite specific to this issue. I propose to put the questions to the bank through the committee, and perhaps it could respond in detail on each question. I believe that is a helpful approach, rather than going through it now. Some of the questions are quite detailed, and the bank may need to look at documentation in order to answer the questions.

Mr. John O'Beirne

I am very happy to come back to the committee on that.

My final point concerns the issue of charges. How can Bank of Ireland justify charging 10 cent for every transaction on a Visa debit card?

Ms Francesca McDonagh

Mr. Kelly might respond as this questions relates to our retail customers.

Mr. Gavin Kelly

The current pricing on our current accounts was brought in three or four years ago. It looked at the cost to the bank for transactions and set an appropriate fee for those transactions. We charge 1 cent for contactless transactions, 10 cent for a Visa debit transaction at point of sale that is not contactless, and 60 cent for a teller transaction in-branch. We believe that the price for the mix of services we provide for those transactions represents very good value. On average a current account customer pays around €60 for a year's worth of banking. On top of that there are various concessions, meaning that around 50% of our personal current account base do not pay those transactional charges at all.

It is a hidden charge. If I go upstairs to the canteen and buy a cup of tea it will cost me 60 cent, but if I use my chip and pin it will cost 70 cent because Bank of Ireland is taking 10 cent every time I carry out such a transaction. If I have €3,000 in my account I will not be charged at all. The people who are being charged these transaction fees are those who are less cash-rich and the more vulnerable members of society. They are being gouged every time they buy a newspaper using their debit card.

Mr. Gavin Kelly

We brought in this service three or four years ago. The idea at the time was that transactions that did not involve teller interaction would be significantly cheaper than service at a cashier's counter.

Can Mr. Kelly clarify that, so there is no mistake? A cashier has to type in 60 cent or €1, or whatever the transaction demands. If I tap my card it costs 1 cent. If I put in my card and use my PIN-----

Mr. Gavin Kelly

Using a card costs 10 cent, and that applies to any transaction value after that.

If I tap the card it costs 1 cent and if I put my card in a machine it costs 10 cent.

Mr. Gavin Kelly

The tap can be used in transactions up to €30. We have seen a significant increase in those tapping transactions. From the Deputy's example, 90% of transactions involving items costing 60 cent are happening via the tap-and-go contactless method.

How can the bank justify charging ten times more for the same transaction? A person is buying the same Mars bar or newspaper; only the payment method has changed.

Mr. Gavin Kelly

Standing back and look at transactions and the way the charge is based, and from the perspective of the service we give to the merchant, there is a guarantee from both the cardholder and the merchant. The Deputy gave an example of a purchase worth 60 cent, but if it was €60, €70 or €80, or even more, the same transaction charge of 10 cent applies. We like to look at the total cost of banking. We provide a service to our customers for the price of €60 a year, which is €5 per month.

That is very good value for a service that provides 24-7 access through all our channels and services.

How does Mr. Kelly justify wealthy persons with €3,000 in their account not having to pay charges but such charges being levied on people on social welfare or relying on disability benefit who may not have the ability to have that amount of money in their account?

Mr. Gavin Kelly

Some of what the Deputy is saying is fair. That package is under review. I cannot give any information on the review because we must make at a full application to the Central Bank for changes to fees and charges. As the Deputy may be aware, we recently we launched a new financial well-being initiative and are seeking to simplify what we do and our fees and charges. I believe the service we brought in a few years ago represents very good value for our customers. We are now standing back and looking at it in the context of what is currently happening and the day-to-day banking needs of our customers. The fees and charges are under review and we will be looking at something later in the year in that context.

It is definitely good value for Bank of Ireland because it made €431 million on the back of fees and charges last year. That is a huge amount of money. It is not just about the differentiation in regard to charges between those who are wealthy enough to have €3,000 in their account and those who are not. If I open an account in Belfast or London, I will not have to pay such charges. Regardless of my income, lodging and withdrawing cash in branches will be free, as will making debit card payments in pounds, online transactions, phone transactions, in-shop transactions, withdrawing cash in pounds from cash machines or post offices and withdrawing euros from Bank of Ireland cash machines in Ireland. In Ireland, we are charged 25 cent for each of those transactions. A bank that was rescued by the Irish people offers free banking services to people in England, Scotland, Wales and Northern Ireland, but if one of its Irish customers buys a Mars bar and uses a PIN, he or she is charged 10 cent. If one withdraws one's cash from a Bank of Ireland ATM one is charged 25 cent. That adds up to a nice profit of €431 million for the bank, predominantly, I would argue, on the back of low-income customers. There is a significant inequality. How can the witnesses stand over the fact that the bank offers these services free of charge to its customers in Manchester and Liverpool, but customers in Dublin or Donegal are being gouged?

Ms Francesca McDonagh

I will address that question more broadly. The Deputy referred to poorer or more vulnerable customers. To be clear, students and older customers are not charged. The charges also reflect the difference in cost between a contactless transaction and a PIN or chip verification. It is not necessarily an apples-to-apples comparison to compare fees and charges, whether for a transaction or a mortgage, in the Republic of Ireland with those in our UK business. There are different dynamics, positionings and segments and a quite distinct set of charges and infrastructure associated with payments which mean that it is not a like-for-like comparison.

We generate business income. The Deputy referred to our business income in 2018. It resulted from a variety of areas, including corporate banking transactions. We are the only bank in Ireland that provides assurance. The sources of the income included our growing insurance business and other aspects of the bank's overall income. The amount referenced by the Deputy does not solely result from fees and charges on accounts.

The committee will revisit this issue and I hope the delegates will take on board some of the points that have been made as the bank reviews it.

On standard variable rates, it appears that in almost all circumstances the bank's customers would be better off on a fixed rate than a variable rate. Obviously, the danger is that variable rates could go down, however unlikely that may be. The bank has 47,000 customers on variable interest rates. What is the bank doing to inform those customers of better offers within the bank and, under the new rules in place since 1 January, better offers in other banks? Are the witnesses willing to reconsider the bank's position in regard to having a stubbornly high variable interest rate of 4.5% for loans with a loan-to-value ration of more than 80%? That rate has not changed since 2015. Is it under review?

Ms Francesca McDonagh

We are focused on a fixed-rate mortgage strategy and have been so for many years. Some 90% of our new mortgage business is on fixed-rate loans and we have led the market in that regard. Fixed rate for first-time buyers and movers has grown to nearly two thirds of the market, up from slightly more than half of the market one year ago. That is a market trend indicating customers voting with their feet and having a strong preference for the security and clarity provided by a fixed-rate mortgage such that they know how much will come out of their salary each month to pay their mortgage. We keep our fixed rate under review. We offer a fixed-rate mortgage at 2.9% for one or two year mortgages, which is very competitive. We have reduced our fixed-rate mortgage rate over time. Historically, we have reduced it by one third in the past three years. We offer a competitive proposition. We write to our customers annually, as required. In addition, we have written to our customers on higher variable rates and reminded them of the opportunity to switch to a fixed rate. That is good business because keeping a customer on a variable rate when he or she can get a better deal involves a risk of attrition and losing that relationship or mortgage which, obviously, would be a negative for the bank. Some 8,000 existing customers moved from a variable to a lower fixed rate in 2018, while approximately 7,500 customers did so in 2017. I am keen to continue increasing that number as we engage with our customers to encourage them to avail of what we believe to be our best offer in fixed-rate mortgages. Standard variable rate is not necessarily the area in which we compete; fixed rate has been our strategy for several years.

I welcome Ms McDonagh and her team and thank them for completing the detailed questionnaire and providing their opening statement. I will pick up on mortgage pricing where Deputy Doherty left off. He referred to the variable rate of up to 4.5%. The bank indicated in response to a question that 47,387 customer mortgage accounts are on a variable rate. That is 25% of the bank's total mortgage accounts. Of those 47,000 accounts, how many are on 4.5%? I presume some are on 4.2% and others on 3.9%. What is the breakdown in that regard?

Ms Francesca McDonagh

I will ask Mr. O'Beirne to respond on that level of detail.

Mr. John O'Beirne

Of the 47,000, slightly more than 38,000 are owner-occupier and the balance of slightly more than 9,000 are buy-to-let. I do not have a breakdown of the number of accounts on each of the various standard variable rates of 3.9%, 4.2% and 4.5%, but I will revert to the committee with that information if that is acceptable.

Notwithstanding everything Ms McDonagh stated regarding variable rates not being the area in which the bank is really competing, a quarter of the bank's total mortgage accounts are on a variable rate, which is high relative to its competitors in the market, although the number is falling. Ms McDonagh provided statistics regarding the number who have moved to a fixed-rate offering. Can the bank do more to accelerate that? It is bordering on criminal for a customer to be paying 4.5% today on their mortgage. It is significantly out of line with the market, given that Bank of Ireland is offering a fixed rate of 2.9%, Ulster Bank offers a rate as low as 2.3% and Finance Ireland, a new non-bank lender, also comes in cheaper than the Bank of Ireland rates. To have a quarter of the bank's mortgage accounts on a variable rate does not present a pretty picture.

Ms Francesca McDonagh

The Deputy made the point about account numbers. Many customers will choose to split their mortgage. They may take out a mortgage that is two thirds fixed, because they want that certainty, and one third variable, because they want the flexibility to make additional payments or they are confident that they can pay it off in a shorter term. That is customer choice. Choice comes out of competition and competitive markets result in different choice and differentiation in terms of products. The 4.5% to which the Deputy refers is only in the 80% to 90% loan to value bracket. Customers below 50% LTV will be on a 3.9% rate. As I said, we write to customers. We go beyond the minimum requirement and go the extra mile to let customers know that they can avail of a very attractive fixed rate. We have marketing campaigns. We recently reset our brand in the market and we have some very active campaigning about our lowest ever rate of 2.9%. With the cash-back, which our customers like, we feel we have been very active, transparent and engaged with our customer base. Someone who walks into any one of our 250 branches will see marketing materials and campaigns. As a significant part of colleague growth, we have created new roles are in the front line. We have put over 200 people in the front line and any of them will be able to talk about our mortgage pricing. We are being proactive, responsive, transparent and competitive in our fixed rate pricing. That is the area in which we compete and we certainly encourage any customer on a variable rate, whether they are with Bank of Ireland or a competitor, to have a conversation with us about what we think is a very compelling product.

Ms McDonagh says people with a loan to value of less than 60% who are on a variable rate are on 3.9%. That is if they have been proactive and have responded to the bank's letters and sent in an up-to-date valuation. I bet thousands of customers have a low loan to value ration but are still on the interest rate for over 80% LTV. They have never gone about sending in that up-to-date valuation and have never moved down the loan to value band. It would be very interesting to see a breakdown of the 47,000 customers. It would tell us some of the story in that respect. I appreciate that the bank writes to them and sets out what they need to do. If any message comes out of today's meeting, although I am not sure it is one Ms McDonagh will want to hear, it is that those customers should certainly contact Bank of Ireland to see if they can get a better rate. If they want to stay on a variable rate, they can submit an up-to-date valuation and avail of a reduction of up to 6.6%, move to a fixed rate and go on 2.9% or else shop around and switch their mortgage elsewhere to get an ever lower rate. That is what they should be doing. I would be very interested if Ms McDonagh would drill down into that data. There are longstanding Bank of Ireland customers whose mortgages are probably less than 50% of the value of their homes and they are paying 4.5%. It is just crazy.

Ms Francesca McDonagh

The average LTV of our mortgage book is 63% so we would actually see customers who would be at or below that range anyway. What we do is exactly what the Deputy has described in terms of being proactive. We saw 8,000 customers last year and I imagine that trend will only continue. It has been increasing because of our proactive engagement approach, switching from higher variable rates to lower fixed rates, so we continue to have that engagement. I would echo the Deputy's sentiment that they should be contacting us if we have not contacted them already to avail of a better market fixed rate offer.

The public debate on this issue is helpful. One thing that has surprised me is the number of people who do not know what interest rate they are paying on their mortgage. It is the first thing people should check because there are tens of thousands of customers across all the banks who are paying too much. It is an overall message that we all need to continue to convey.

Ms Francesca McDonagh

May I have an opportunity to respond? On that point about many Irish consumers not necessarily knowing what interest rate they are on for a mortgage, that would apply to personal lending as well. Mr. Kelly touched on the issue of financial well-being. We have launched a major financial well-being initiative. We have committed €5 million to an investment over multiple years to improve the financial well-being of consumers in Ireland, not just our customers. We launched it because despite the relatively high levels of education and GDP per capita growth that have come through since the crisis, the level of financial literacy in Ireland is very low, with 45% of people feeling confident about their interest rate. Our target is to engage with 200,000 customers or non-customers in Ireland to offer them a financial well-being health check. That will involve questions about meeting their financial commitments each month, so people can see how they rate or rank versus the rest of the population. That should open a conversation about helping with their financial well-being. We have also committed to entering every single primary and secondary school in Ireland as part of our youth financial literacy programme, and we are doing some innovation looking at international best in class practices in our financial well-being lab. It is not just about sending another letter to a customer on SVR about a fixed rate offer; the broader issue is about making people more aware, from their time in education through all stages in their lives. This is not just for people who are financially not well off; it is for all customers to look at how healthy their finances are. We have committed a €5 million investment to that so it is something we take incredibly seriously.

Deputy John McGuinness resumed the Chair.

I welcome that commitment and I think it is an area where we all need to be doing more. On pricing generally, and I have had this debate with Ms McDonagh before, even Bank of Ireland's fixed rate offer is not risk based. The bank does not do risk based mortgage pricing. We were always told that the price of the mortgage was commensurate with the risk yet Bank of Ireland has gone with a flat 2.9% across the board, no matter if I have only a 30% loan to value or I have one that is 90% or 95%. Why is that? I thought it was a cornerstone of banking that the price of the product was relative to the risk.

Ms Francesca McDonagh

The price is flat at one, two and three years, independent of loan to value. It varies on the longer-term mortgages.

It varies by the length of the fixed term but not by the LTV.

Ms Francesca McDonagh

For five or ten year mortgages, depending on LTV, the pricing would vary. A ten year term with LTV below 60% would be 3.5% while an LTV over 80% would be 3.7%.

That is the only differentiation in the whole fixed rate offering on LTV.

Ms Francesca McDonagh

In a competitive market we can have a lot of differentiation but we also want to have simplicity. I agree with the Deputy that a lot of people do not know what their interest rate is. Varying it and having a proliferation of different pricing mechanisms can actually cause complexity, which is not necessarily helpful either. We have gone for more simplicity in our mortgage offering so the 2.9%, which is the lowest rate we offer, is regardless of LTV. What we see, particularly because of the growth in first-time buyers in Ireland and because the demand for first-time buyer property is so high, is that this is actually very attractive because for first-time buyers whose LTV would typically be a bit higher, that is actually a more attractive proposition.

On a related point, when it comes to the bank making decisions in its operations and putting the consumer first, it is a great slogan but what about when it runs counter to profit maximisation goal of getting the best possible return for investors? Bank of Ireland is part of this bank culture board which will be reporting in the next ten or 11 days and we will see what it comes up with. Bank of Ireland has contributed and has helped to pay for that initiative. What is Bank of Ireland going to do to put the customer's voice at the centre of its operations? How can it square that circle whereby what is in the best interests of the consumer is often not in the best interests of the bank, certainly in the short term?

Ms Francesca McDonagh

Customer focus is one of our four key values. We set our values at the end of 2017 and have gone through a very detailed programme of embedding what those behaviours are and what our culture means. We want to see it as a differentiator for our customers and our employees but also for our shareholders, because a good culture ultimately results in more sustainable results.

We define customer focus as increasing the volume of the customer's voice and listening more. There are many examples of us having listened and we have put more colleagues back onto the front line to serve customers. We have put cash services back into branches and we have put a welcome adviser in each branch, specifically in response to customer feedback. We also define customer focus as achieving minimum standards and service levels. We have improved our journeys and contact centre service levels and there has been an extensive programme of process improvement. There is more to do but we have raised our minimum standard. Finally, we define customer focus as offering tangibly different customer propositions such as financial well-being, protection and insurance and fixed-rate mortgage offerings. I do not see it as being either customer-focused or shareholder-focused as we see a good, engaged satisfied customer as good for business. Being customer-focused does not mean we will always have the cheapest lending in the market. We look at an overall proposition and its sustainability and we believe we are offering very good value in our mortgages and personal lending offers, as well as in the broader relationship. We have more to do to improve customer satisfaction and focus but we have made tangible improvements in front-line branch and contact centre service levels since the last time I appeared before this committee.

The bank has announced a securitisation programme which it believes will bring its non-performing exposures, NPEs, to about 5.8%. Is Ms McDonagh saying the bank is not working to a particular target for this or was it given a target? Does she expect any further initiatives, apart from working through each individual loan? Does she expect more securitisations or actual portfolio sales to reduce the figure further?

Ms Francesca McDonagh

The 5% is not a target set by the regulator but is a psychological line to cross to get into a more normalised NPE quantum. It is a number which we want to be close to by the end of 2019 but it does not mean we will stop once it has been achieved. We will continue to try to improve our overall portfolio but it is in order to be capital efficient, rather than just to hit a certain number. A capital density is associated with NPEs and if we have fewer NPEs it will release more capital to lend, to invest, to meet regulatory requirements or to return to the shareholder. Beyond securitisation, we are looking at all options to continue to reduce our NPE.

What is the bank's current policy on the sale of owner-occupier mortgages?

Ms Francesca McDonagh

We do not necessarily have a policy but, while it is not something we have done, we are certainly looking at all options, including the sale of portfolios of different types.

Ms McDonagh is not ruling it out.

Ms Francesca McDonagh

I am not ruling it out.

A pay review commissioned by the Minister, Deputy Donohoe, and being undertaken by Korn Ferry, was due to be completed a few months ago and is presumably not far away from being completed. Has Bank of Ireland been involved in the process or been consulted? Did it make a submission and does it have any observations to make to the committee on it? We know that AIB has lost a CEO and a chief financial officer. What is the labour market like for Bank of Ireland? Is it dealing with similar retention issues? Has the entrance into Ireland in a significant way of Bank of America Merrill Lynch and Barclays Bank, in the context of Brexit, changed the landscape as regards the competition for talent? Perhaps Ms McDonagh could answer in the context of the bank's remuneration policy.

Ms Francesca McDonagh

I appreciate that bankers' pay is a highly emotive issue, particularly in Ireland, but we are supportive of the normalisation of bankers' pay, aligned with European Banking Authority guidelines.

What does Ms McDonagh mean by "normalisation of bankers' pay, aligned with European Banking Authority guidelines"?

Ms Francesca McDonagh

At the moment there are restrictions around variable pay based on performance, which is not allowed at any level. We have over 10,000 employees and there is no opportunity to differentiate financially between a fantastic colleague who goes the extra mile for a customer and a person who does not meet the standard. There are other ways to differentiate and we do that by recognising, promoting and developing staff but there is no way to vary pay under the current restrictions. If there is a variable payment there would be a large tax associated with it. In the Minister's letter there is also a restriction on a total payment of €500,000 for any individual. When I refer to normalisation of pay, I am thinking of being more aligned with other banks in Ireland. At the moment the restrictions only apply to Irish banks, including Bank of Ireland, but other banks and financial services companies, along with all other private industry companies, are not restricted in the same way. We know the historical reasons for this, of which I am mindful, but we are encouraging normalisation at this moment in time. This is not just about a couple of senior people at the top of the organisation - variable pay can help drive accountability and reward the right behaviours and performance that are customer-focused at all levels of the organisation, including those who work in a branch. Second, it is very difficult to compete for highly specialised roles and such people can be offered much larger packages by non-Irish banks in Ireland. We are increasingly competing with "Silicon Docks" for people with very strong IT or transformation skills. Third, it is making Irish banks unable to compete on a level footing with other banks and other sectors in Ireland. This is a political matter and a matter for the Government. We were asked for input into the third-party review and we shared that perspective with it. We also gave detailed information of where we are seeing salaries and variable pay packages being offered which provide benefits that we are simply not able to provide. As a result of Brexit, we are seeing it increase quite significantly and it can represent a risk to Irish banks in their ability to retain and develop our talent.

What operational impact has it had on Bank of Ireland? Has it had retention problems as a result of the pay cap? What are the issues the bank is facing?

Ms Francesca McDonagh

There are certain areas in the organisation, whether in finance or risk, where the skill sets are very attractive to other banks in Ireland or other companies here and we have seen increased attrition in more specialist areas. It is taking us longer to recruit and that leaves vacancies open for longer, which can challenge our ability to serve our customers and execute against our strategy. To embed the culture and values we want, I would really like to be able to vary people's pay based on their performance and on how they drive customer outcomes and give value. At the moment we incorporate such things into their appraisal and we give an employee a rating every year to differentiate what they do and how they did it, but we cannot vary their reward to reflect that. As we transform the bank, improve service and embed our culture, normalised pay within European Banking Authority guidelines would enable a better outcome, both for the culture of the bank and for customers. I know that the issue is divisive and I appreciate that there may be a challenge to that position but it is my view on the normalisation of pay in Ireland.

This committee has started the scrutiny phase of Deputy Pearse Doherty's Private Members' Bill, the No Consent, No Sale Bill 2019.

We invited submissions and received them from Banking and Payments Federation Ireland, BPFI, and others in the industry, as well as from debtor advocacy groups that are in favour of the legislation, which seeks to provide that prior to the sale of a mortgage to a so-called vulture fund or anyone else, the borrower must consent. What is the position of Bank of Ireland on the Bill? The bank has commented on it publicly but I ask Ms McDonagh to share its views with the committee. Has the bank carried out any initial assessment of what the Bill, if enacted in its current form, would mean for the Bank of Ireland and its customers?

Ms Francesca McDonagh

The view of Bank of Ireland is that the No Consent, No Sale Bill ultimately would be bad for the consumer by reducing the availability of capital to support borrowing, not just for mortgages but for Irish SMEs. It would be bad for the Irish sector and the Irish economy.

Why? Ms McDonagh has given us a conclusion there but not how it was arrived at and why.

Ms Francesca McDonagh

In the interests of brevity, I wanted to be concise, but I am happy to expand. The Bill conflicts directly with the guidelines the European Central Bank has put in place to encourage banks to reduce their NPEs to get towards European norms. The capital allocated to non-performing exposures is much higher than to performing ones. I said at the beginning that, for example, we require ten times more capital to be associated with a loan in respect of a non-performing buy-to-let mortgage than for a performing private dwelling house, PDH, or owner-occupied mortgage. Having inflated NPEs and fewer options to reduce them would result in trapping capital associated with those NPEs. It is essentially landlocking capital that we need to increase lending into the Irish economy to Irish consumers and businesses, to invest in our systems to improve services, to meet regulatory capital requirements or to provide a return to shareholders, including the Irish taxpayer. That is the only way we can allocate capital. I argue as a banker that competition, while it can represent challenges, is ultimately good for the consumer and the sector, whereas the Bill would disincentivise competition in banking. It would make mortgage lending less attractive and less profitable to new entrants, which would reduce the competition many politicians and stakeholders would like to see within the Irish banking market. If the ultimate objective is to increase consumer protection, the Bill will not achieve it. That is not just my perspective. The committee has heard from the BPFI representing the sector but also from the Central Bank, whose representatives were here. I do not need to quote what they said on the record but the same CPC protections exist independently of who owns the asset. The Bill would increase costs for consumers while affording them no additional protection. In fact, it would reduce the availability of capital in the market. For those reasons, it does not make sense and would be bad for the Irish consumer, the sector and the economy.

The witnesses are very welcome to the committee. On the desirability of people in Ireland being able to buy homes, in particular younger people on moderate wages, the witnesses are probably aware that the Government has a scheme to give couples with an income of €75,000 or single people with incomes of €50,000 access to State-sponsored funds. One of the conditions of that funding is that the applicants should have gone to a financial provider on a couple of occasions and been refused loans. I acknowledge that the bank cannot be absolutely accurate on the following question, because people explore options, go away and come back over a lengthy period. However, how many people does the Bank of Ireland turn down and can it share with us the reason for doing so? I take on board what Ms McDonagh said about wanting to be able to lend into the housing market. As one of the biggest banks in Ireland, how many people inquire about entering a mortgage and what proportion of applicants are turned down? While in some cases the bank might simply say that a person does not qualify and should come back when he or she has done this, that and the other, can Ms McDonagh share that information with us?

Ms Francesca McDonagh

I will respond briefly and then pass to Mr. O'Beirne to speak in more detail. Part of our strategy is to be the leading supporter of home building and home buying in Ireland. We increased our new mortgage lending during 2018 by 17%, which is €2.3 billion, by engaging constructively with customers to help them get the homes they want. We do not do that if it does not make sense or is not sustainable for them from a personal debt perspective. I will ask Mr. O'Beirne to talk a bit more about the help-to-buy scheme.

Mr. John O'Beirne

I might break the question into two parts and deal first with how the bank assesses individuals and borrowers as they come in to ensure we can provide a sustainable mortgage. I will then talk about the help-to-buy scheme, to which I think the Deputy is referring. On the affordability side, the key for us, as we have seen over the course of mortgage lending in Ireland, is to ensure we provide an affordable and sustainable mortgage. When people come in, we work through what position they are in. We work through what income they have, what is sustainable, what expenses do they have and what does that lead to in terms of an affordable mortgage. Of those who proceed to a full application, we approve nine out of ten mortgage applicants.

Is that people who have entered fully into the application process, filled in the bank's forms and been accepted as applicants?

Mr. John O'Beirne

Absolutely.

So, it is nine out of ten.

Mr. John O'Beirne

Once they are in that process. There is an element before that where it is a more discursive engagement with people. Sometimes, we find that people want to buy a home but may not have saved a deposit. They may need to manage either their incomes or outgoings in a slightly different way. We call that a "getting mortgage ready" process. We have other elements outside mortgages to help with that. We have a mortgage saver product so that as people save towards that deposit, we pay a good rate of interest and a bonus to narrow that journey. When I look through all the customer research we have, the two things that come back from all customers consistently are whether they will be able to get a mortgage and whether they will be able to manage those mortgage repayments as they come through.

The help-to-buy scheme was launched in October 2016 and it has had a very positive impact on the market. When one looks at the mix of housing coming through, the number of first-time buyers as a proportion of the mortgage market is starting to increase dramatically and is now just over 50%. Within that, the proportion of new homes for the help-to-buy scheme, which plays a very viable part, has also started to expand. It is due for completion later this year and Bank of Ireland would certainly welcome any extension of it. It is helpful for borrowers to meet that deposit requirement by way of a tax rebate.

I ask about a couple of urban myths about the scheme. A lot of people ask me about the scheme and I try to give them some advice. One of the urban myths is that if one takes out a PCP, one can forget about being treated favourably, perhaps by Bank of Ireland but pretty much by any other bank. Someone in their late 20s or their 30s might have a very large car loan or a more modest credit union loan. A significant car loan of €30,000 does not rate that high and if credit union debts go over €5,000 or €6,000-----

Mr. John O'Beirne

The Deputy has absolutely nailed it with her "urban myths" description. They are good for fiction but in practice, we ask about customers' ability to repay all of their debts, including their mortgages. When we look at things like PCPs, car loans or credit union loans, we look at whether repayments on those debts relative to income are sustainable. We also need to understand why such loans were taken out. Certainly they are a factor in the decision but it is not a binary question of customers having borrowed X amount and therefore not being eligible for a mortgage. We look at these things and try to work with customers, depending on their circumstances. It is an overused phrase, but we look at these things on a case-by-case basis. If a customer has debt elsewhere, that is absolutely fine. People take out loans for many reasons and they use credit unions for many reasons. We also provide personal loans for a variety of issues and we look at loans in terms of what they mean for customers' ability to repay a mortgage. Once we are comfortable in terms of their net disposable income, we will look to the macro-prudential lending rules on the loan-to-income ratio. In principle, there is absolutely no issue with that.

Mr. O'Beirne is saying that if someone is preparing a mortgage application, it does not matter what other debts are outstanding. There is a great deal of advertising and competition in the lending market right now. One of the areas of intense competition is in car finance where there may be very attractive options available. However, it would be difficult for a couple on a relatively modest income of €75,000 with a car loan of €20,000 or €30,000 to get a first-time mortgage.

Mr. John O'Beirne

It is exactly as the Deputy characterises it. The decision is unique to the specific circumstances. If a couple with that income profile has a substantial personal loan that is taking a large amount of their net disposable income to the extent that we cannot see a sustainable way for them to be able to repay a mortgage, that would be a factor in our decision. It depends on income levels and debt amounts. It is all taken into account but it is critical for us and for the borrower that any new debts being taken on are sustainable in the context of overall financial well-being.

This is important in the context of the comments that were made earlier about financial education and levels of public financial knowledge. This is an issue that the banks could address collectively. People in their late 20s who cannot currently afford a mortgage may think that it is okay to take out a car loan but in fact the consequences of that may be that their debt level relative to their income is higher than it should be. In terms of financial education, people should perhaps opt for a second-hand car and a smaller loan if they are planning to apply for a mortgage at some point in the near future.

I am interested in the refusal rate because my impression is that it is much higher than 10%. I am not talking specifically about the Bank of Ireland but banks in general. Bank of Ireland has been involved in the development of the Irish Banking Culture Board. In terms of people who are interested in getting a loan from Bank of Ireland or from the Rebuilding Ireland loan scheme, much more customer information needs to be provided. People should be given a pathway. The bank may well have data which show that arranging a loan when one is on a fairly tight income takes between a year and 18 months and that people must plan for it, above and beyond getting a deposit together. In terms of consumer education, I do not believe that people understand this clearly.

Ms Francesca McDonagh

I agree that the need for increased financial literacy is very high in Ireland and that is exactly what our financial well-being programme is about. Mr. Kelly will expand a little on addressing those specific issues, some of which are individual. We would encourage customers to join one of our financial well-being clinics or to speak one-to-one with our advisers.

Mr. Gavin Kelly

The Deputy has touched on a number of important issues. We did some research on financial well-being using some international benchmarks. When people undergo a financial health check and look at their financial circumstances, they come out with a score. The score puts them into a category. The categories are struggling, stretched, managing or thriving. Our research shows that about 40% of the population are in the struggling category. These are people who struggle day to day, or from pay cheque to pay cheque, to manage their finances. They do not think about things like savings, the impact of loans on their ability to borrow or planning for the future. When one moves up the categories into stretched, people have a bit more breathing space. They are thinking about saving but crucially, are not doing it. People in the managing category have surplus income on a monthly basis, understand that they need to save, start putting some money away but do not necessarily plan for the future. We know from other research that only 50% of the Irish population has a pension plan, for example. People in the thriving category are planning for their future. They are thinking about their long-term future, rainy day savings and so on.

What we are trying to do is build awareness. We see this in other aspects of life, where people look at their physical well-being for example. We believe that financial well-being is a crucial part of one's overall well-being. What we are trying to do is build awareness. We launched our health check service and within two weeks, 20,000 people had undergone the check. People can attend one of our seminars or come into the bank for a needs review with an adviser. They do not have to be a customer of Bank of Ireland to do this. They can go online, check it out and get a sense of where they stand. That is what is really important. The points the Deputy made about younger people saving for a mortgage and proving their repayment capacity are crucial.

Another issue that is very interesting and about which there is a lot of debate is the rental market and the cost of rent versus a mortgage. This raises issues like the amount of disposable income going on rent that could be going into savings. This is about helping customers to plan and save as they go forward. In the past few years I have noticed that our clients and customers have become much more serious and resilient in this regard. They are more aware of the issues and are planning and saving. The days of going off at the weekend and buying a house are long gone. People are now really planning out their future and are being very serious about that planning. There is also an increased awareness among many of our younger customers that it is not a good idea to take on too much debt. They consider the impact of car loans and other debts. It is important for people to look at their finances in the round and to plan ahead, whether those plans involve buying a house, going on a holiday or securing their long-term future. There are tools and services available that can help customers to plan ahead. This is a really important part of what we are trying to do as an organisation.

In terms of future trends in the market in Ireland, particularly in the context of Brexit, it is obvious that lots of equity funds have already arrived here or are planning to come. Rents are extremely high and these funds are pitching heavily into the buy-to-rent market. Does the bank have any concerns that the entry of these funds into the buy-to-rent market will significantly reduce the supply of properties for purchase by way of a traditional mortgage? People who would traditionally have obtained a mortgage are now being outbid by these funds, some of which have very significant resources. Rent levels, particularly in the greater Dublin area, are very high by international standards.

What is the bank's take on that from a social as well as an economic perspective?

Mr. Gavin Kelly

I welcome that some of these landlords, which are buying up some of the schemes, are coming into the market. We have funded a fund coming in to build a 300 unit apartment block in Dublin. We must have a thriving, long-term rental sector. Many of these landlords bring that certainty to tenants and bring a particular quality of management to these blocks. For us, overall supply is the key. Supply, and the lack of it, is what is really putting pressure on rent. We need to get more property built, we need it built for renting and for purchase. As a bank, we would like everyone to buy a house with a mortgage because that provides us with an opportunity. However, as we touched on earlier, if someone bought an apartment today in Dublin for €350,000, they could be renting it for over €2,000 monthly. The mortgage on that same apartment would be about €1,100 or €1,200. There are costs which are picked up by the landlord, maintenance, etc., but there is around €800 difference which is €800 that could be used to save for a mortgage from us.

For us, the mix is what is important. Ms McDonagh touched on it earlier. We are funding the development of 5,500 units during 2018 and that has increased further in the last couple of months. When we were last before the committee that figure was 3,000. We are seeing much more development in building. We need a mix. Some of those developments will be for buy-to-rent in the market where funds are coming in, other developments will be for purchases for mortgage customers and people to buy a house. Ultimately, we need to see rents easing off and coming down so that customers can choose to live rental. We see it in many European cities and we will have to see it coming into Ireland, especially Dublin, with longer-term renters coming in. In order to do that there must be the right quality there from a landlord's perspective. There is room in the market for both of these stakeholders. Ultimately, that must push up those developments and numbers. Last year, 18,000 units were built in Ireland, which is welcome. We reckon that will be 22,000 or 23,000 this year and the number will continue to grow over the next two or three years. We need to see this continue to grow and see those numbers going up because all these pressures are driven by the issue around supply and we must ensure that we manage that in the right way over the next few years.

Does the bank have a sense of what percentage of household income should go towards a mortgage? Say someone was paying 35% of their income on a purchase-----

Mr. Gavin Kelly

The macroprudential rule is 3.5 times which sets the mortgage debt for a customer at roughly 30% or 35% of their take home pay. That feels about right to me. There are exceptions for customers in different circumstances who could probably afford to go a bit higher but that feels right and hits the right price point.

In some cases, of course, rents account for more than 35% of income.

Ms Francesca McDonagh

That 35% figure is a good guide and a reasonable amount of income to spend on housing. The fact that the average rental price in Dublin is €1,620 per month-----

It is higher than that.

Ms Francesca McDonagh

There would be examples, but the average in Dublin, according to our data is that figure. Obviously, it is lower outside of Dublin. To earn the sort of income where that is one third of take home pay would suggest that is unaffordable for the average teacher, nurse or many young people who have got their first job.

The Deputy asked whether the larger funds or institutions buying property were pushing out regular individual private home buyers from the market. There were 57,000 homes purchased in 2018. We often refer to the number of new build homes, which was 18,000, but in terms of the homes which were purchased, the secondary market was 57,000. We estimate that around 15% were from the larger big investors to which the Deputy referred.

On supply and demand, we are seeing the supply come through, even though it is not keeping up with the demand. The demand for new homes in Ireland is around 35,000 to 40,000 per annum. The supply has increased from 15,000 in 2017, as Mr. Kelly noted, to 18,000 last year and the market consensus is that this year will be about 23,000 and 27,000 in 2020. That increased supply has meant that price increases have reduced or softened slightly. At the beginning of 2018 there was double-digit price increases in the residential property market. That increase is still positive but is beginning to fall as supply comes on stream. The macroprudential rules are also having their intended effect of slowing down demand. The outlook for price this year is an increase of about 4% to 5%. That has been more subdued than it was previously as supply increases.

The last time the bank was here we had a conversation about staff and remuneration. Several staff in Bank of Ireland, in my own area and nationally, have approached me over an outstanding difficulty they have with the bank on the settlement of mortgage issues and mortgage price issues. These are people who took out two-year fixed-rate products in 2005, 2006 and 2007, just before the crash. I understand that several thousand people are in this category. I understand that 1,800 cases have been sorted but about 200 cases are outstanding. As with many cases which arise from the crash, many of these are very difficult for the individuals and families involved. Does the bank propose to address this? The 200 people who have not received a settlement do not understand why they have been excluded. Does the bank propose to review their cases so that they might avail of settlements similar to those of their colleagues? The delegation spoke of the difficulty of staff retention. I know the Bank of Ireland fairly well and think that many of its staff are excellent. It is a long-running sore point that some staff have been included in the settlement while others were not. What is the explanation?

Ms Francesca McDonagh

We treat staff as we would customers in the context of the tracker examination. We are committed to fixing this issue. As the Deputy noted, of the total number of customers who have been included in redress and compensation, some 1,800 were existing or former employees. There is a group over which there is a difference of opinion and I will ask Mr. O'Beirne to expand on that.

Mr. John O'Beirne

As Ms McDonagh said, we have made it a priority to bring the tracker issue to a conclusion under the full extent of the examination framework. I met a set of the representatives of the group to which the Deputy referred earlier this week. I have also met many of the parties individually over the past 12 to 18 months or so. We are restricted in what we can say here because we are still part of an ongoing analysis and discussion. However, I went through in depth with the representatives the reasons there is a difference in inclusion or exclusion.

While we have not seen anything yet that indicates an entitlement to a tracker mortgage, I understand the impact that this has had on people and the way they are framing it right down to the human level in terms of what it means to have seen some colleagues returned to tracker mortgages when they have not been. We sought to be as expansive as possible. It is a group of staff who were never on trackers and did not take up the offer of a tracker when it was given, but I do not want to pre-empt anything. I have given them an undertaking to re-examine the specifics of the issue in light of some of the additional points that they have brought to bear. I have also given an undertaking to discuss the matter with the Central Bank.

Will the bank revert to us, as it is a significant issue for the people affected? In our earlier discussion on culture, the word "bonus" was not mentioned, but we are aware that a great deal of pressure has been put on the Government to jettison the caps on payments to senior executives. We understand the arguments that our guests have made about the difficulty in recruiting staff. In light of Mr. O'Beirne's comments just now, though, one has to smile at that. The people who are in a middle or lower position in the bank are in a dilemma. They are not receiving €500,000 or €600,000 in annual remuneration and, like many others, are still struggling in the aftermath of the crash.

Our guests might keep us informed about developments in respect of that cohort of staff. How many are involved?

Mr. John O'Beirne

The number quoted is 200. We need to be sure as regards the final figure.

Does Mr. O'Beirne accept that those 200 staff are right in stating that they were told verbally and by the bank's internal information system that they would have a right to move to tracker mortgages?

Mr. John O'Beirne

What we have seen as we have gone through the documentation is that, after the tracker product was withdrawn - we went through this in considerable depth-----

Does Mr. O'Beirne accept that they are right?

Mr. John O'Beirne

I accept that their view is that there is a strong entitlement to a tracker. We are trying to ascertain how to manage that expectation in terms of what we-----

We can discuss that again, but does Mr. O'Beirne accept that they are right in asserting that they were told verbally and by the bank's internal information system that they had the right to move to tracker mortgages?

Mr. John O'Beirne

No. What I accept is that, when the mortgages were taken out, the way that the mortgage system was put together meant that, when a fixed rate expired, all options available at that time would be given to the customer, be that customer a member of staff or otherwise. Anyone who rolled in that period would have been offered a tracker. After trackers were withdrawn - this is effectively at the centre of the tracker piece - the product was no longer available and there was no contractual element. Typically, customers would have drawn down on a standard variable rate. Since they never had a tracker, it was difficult to return them to it. Having met the group and spoken to people individually, however, I understand their view and expectation that there was no difference for them in terms of what they felt they would be returned to.

Are our guests able to rule out the sale of performing restructured loans?

Ms Francesca McDonagh

We mentioned the progress we had made in reducing our NPEs. We have the lowest rate of NPEs in the market. We are going through a process of securitisation of some non-performing buy-to-lets.

Ms Francesca McDonagh

We will put all options on the table, so I will not rule anything out. We are considering all options to optimise the management of our capital and reduce our NPEs.

Ms McDonagh cannot rule out the sale of performing restructured loans at this stage.

Ms Francesca McDonagh

When the Senator uses the term "performing restructured", from a European Banking Authority, EBA, and ECB regulatory perspective, mortgages that were restructured in certain ways are regarded as non-performing.

Once they are restructured, they are vulnerable to-----

Ms Francesca McDonagh

No. I stated that we are considering all options. At the moment, that involves securitisation and continuing to work with individual customers. Other options could include a sale. Currently, our focus is on the securitisation of the non-performing buy-to-let book, but we need the optionality of having everything on the table to manage our capital efficiently.

We get the picture.

The bank has indicated that it completed its review of the tracker issue at the end of 2018 and shared the information with the Central Bank. Did the review name the people the bank viewed as being responsible?

Ms Francesca McDonagh

No, it did not assign blame to any specific individual. The Central Bank's tracker mortgage examination is ongoing and I would not want to pre-empt it or opine on the Central Bank's behalf because it would be inappropriate to do so. The observations from our internal review into what happened and what could be learned from it are the same as I have shared previously with the committee. The operational processes that were applied to tracker mortgage customers were inconsistent and incorrect for some cases. Hence those we have included in the redress and compensation programme. We have apologised for the impact that has caused customers. We have also observed-----

I commend the bank on that, but I am asking about individual accountability. Did the bank pass the report on to the Garda, for example?

Ms Francesca McDonagh

No. We have not named or identified any individual. There is no individual accountability regime in the banking sector in Ireland. It is being recommended to the Department. I have been explicit in my belief that it would be positive to have an individual accountability framework in place. I am happy to expand on the reasons for that, but no specific person was blamed for the tracker issue.

Nobody is going to be held accountable.

Ms Francesca McDonagh

The bank is being held accountable, which-----

But no individual.

Ms Francesca McDonagh

-----is why we have worked hard to address this issue as quickly as possible to the satisfaction of our customers. We had-----

I accept that, but no individual is going to be held accountable.

Ms Francesca McDonagh

The Central Bank has not completed its review. From a regulatory perspective, opining on accountability is for the Central Bank and the regulator. In our internal review, our primary focus was to resolve the issue but, in terms of identifying what caused it, we did not say that it was because of any specific individual.

We get the picture. Given the bank's €935 million profit in 2018, will Ms McDonagh update the committee on the extent of its corporation tax credits? Based on current profit levels, how many years will it be before the bank has to pay corporation tax?

Ms Francesca McDonagh

We are already paying Irish corporation tax. Across the various tax headings, we paid a total tax of €247 million in 2018, of which €21 million was Irish corporation tax.

How much corporation tax?

Ms Francesca McDonagh

Some €21 million. It came from companies that never had a tax loss or where no deferred tax allowance existed or had been utilised.

In Britain, the group made a profit of €173 million and paid €22 million, or 13% approximately, in corporation tax. It made €935 million in this State and paid €21 million.

Is that correct?

Ms Francesca McDonagh

The profit from our subsidiaries is attributed to the group. Group profit before tax was €935 million. The total corporation tax we paid was €21 million. We also paid €29 million in respect of the bank levy. We are fully compliant with tax legislation and requirements in all markets in which we operate.

It is interesting to compare the two. The bank pays €21 million in tax on €935 million here and pays €22 million on €173 million in Britain.

Ms Francesca McDonagh

As I have said, we fully comply with all tax legislation and rules in the markets in which we operate.

I am sure that is so.

Ms Francesca McDonagh

There is no special treatment and there are no rules that apply to us or to banking that do not apply to any other organisation in Ireland.

When will the bank's tax credits run out. Is it 2030?

Ms Francesca McDonagh

We do not provide profit projections in our annual accounts but, based on normalised profit, we estimate that the deferred tax asset in individual subsidiaries will run until 2030. That does not mean that we will not pay corporation tax here until 2030. As I have said, we paid €21 million in 2018.

Is it the bank's intention for 100% of its ownership to be in private hands in the coming years?

Ms Francesca McDonagh

At the moment, ownership is held by a number of institutional investors and individual investors. The Government holds a 14% shareholding on behalf of the State. It is not necessarily our strategy for that to change. That is a matter for the Department of Finance and the Minister. It is not part of our strategy. We have set out a very clear strategy but it does not consider which of our shareholders should buy or sell our shares.

All of my other questions have been answered.

I thank Ms McDonagh and her team for attending. Nearly all of the points covered by sections 1 to 6 of the questionnaire have been discussed with the exception of the Central Bank lending rules. I know Ms McDonagh has previously outlined her opinions and thoughts in that regard. Will she give us a summary of her thoughts on these rules? She seems to be happy enough with them and with their effect on the property market.

Ms Francesca McDonagh

We comply with the macroprudential rules and the regulations as set. They are doing what they were intended to do, which is to moderate demand for higher loan-to-value or loan-to-income borrowing, particularly in the Dublin area. We comply with those regulations. Perhaps Mr. O'Beirne would like to add to my comments.

Mr. John O'Beirne

As we set out at the beginning, we are supportive of the rules overall. They have helped to put a brake on property price inflation. We certainly seek at all times to ensure that we comply with them. In many cases they overlap with the bank's own credit and lending policies. The rules set out that one can only borrow up to three and a half times one's income and 80% of the value of a loan, with a slightly higher allowance for first-time buyers because such borrowers tend to be younger and may have more earning potential over the rest of their careers. As we come through this year with no changes to the macroprudential rules, we hope to be in a position to maintain the ability to provide that allowance to individuals, where required, throughout the year.

Is it fair to say that the bank is carrying out more stringent testing on new borrowers in respect of their resilience in the event of a downturn? Nobody can predict the future totally. People can lose jobs and companies can go wallop and so on. Is what happened more than ten years ago now much less likely to happen based on what people are allowed to borrow relative to their circumstances?

Mr. John O'Beirne

There is a wide range of factors involved. With regard to the bank's approach, many lessons were learned from the crash. We have tightened our credit policies. In the Senator's words, we have introduced a lot more stress testing in respect of the durability and sustainability of people's income. We think ahead with regard to where interest rates might go. That is one of the reasons why we have been very forthright about seeking to brink more fixed-rate mortgages into play as they provide a bit more certainty in terms of repayment. At a macro level, Irish banks retain a legacy in terms of the level of capital that must be set aside for mortgage lending. It is much higher in an Irish context than elsewhere. Other factors have also come in, such as the macroprudential lending rules. Over the next ten years, as we get to 2027 or 2028, nearly all of the mortgage lending in the Irish market will be carried out under the macroprudential rules which were introduced a couple of years ago.

Ms Francesca McDonagh

If the Senator will allow me to broaden the perspective with regard to the bank's resilience, the resilience of businesses - whether SMEs, one-employee companies, or large banks - is particularly relevant in times of uncertainty. There has been a lot of uncertainty as a result of the Brexit situation. Our focus in this time has been to be there for our customers when they are uncertain but also to be ready, as an organisation and institution, to be resilient in respect of whatever outcome to Brexit comes to pass. It is not just about macroprudential rules and one specific proof point. More broadly, it should provide reassurance that our capital resilience and liquidity resilience will be regularly stress-tested from a regulatory perspective. The EBA conducted stress tests in 2018. One was a baseline and one was based on the scenario of a very severe macroeconomic situation arising from a severe downturn. In those stress tests, we demonstrated that we had enough capital reserves to deal with a financial shock. We actually fared better than some of our UK peers. That stress-testing has give some reassurance on the broader question of the resilience of Irish banking, whether in respect of lending to mortgage customers or responding to a broader macroeconomic situation.

My initial point was about the resilience of the bank's customers, but I take the point that it is important that we have a resilient banking sector. We certainly do not want to see what happened before happen again. In her opening statement Ms McDonagh talked about Brexit. The bank has an economic pulse which comes out every month and has a team of economists within its network looking at Ireland. It has the largest branch network. It is all over the country and picks up signals from every part of Ireland, which is no different from how political parties operate. The bank sees customers. It sees people under pressure in, I presume, the areas about which we all worry in terms of Brexit - agrifood, tourism and so on. What are Ms McDonagh's thoughts on where Brexit is heading? I do not want her to predict what will happen at Westminster, rather I am asking which areas are more vulnerable. We all have our own opinions on that but what is the bank's perspective?

Ms Francesca McDonagh

As the Senator suggested, I will leave the politics to the politicians. With regard to our customers, we think about Brexit in two ways. We need to make sure we are resilient and ready as an institution, but the majority of our energy and day-to-day activity relates to supporting our customers. We do a monthly economic pulse. The March results showed that both consumer and business confidence were at a low ebb. Consumer confidence was at the lowest level we have seen since we started measuring it in the pulse four years ago. We have seen some rebound in respect of business confidence, but businesses, particularly SMEs, are very concerned by the uncertainty which Brexit represents. That is manifesting itself in many ways. Many SMEs are not necessarily cancelling, but deferring investment decisions. They are not buying extra capacity for their warehouses, employing more people, or replacing machinery because they want to see what Brexit will mean for them. It depends on the sector and the part of the supply chain in which the business operates. The sectors most exposed to Brexit, which the Senator mentioned, are those that are highly dependent of imports or exports and which are affected by volatility or lower margins. Where they are lower down in the supply chain, their ability to respond to that threat is quite limited.

We are speaking to our customers. We held over 250 events across the island of Ireland in 2018. We have a team of sector specialists focused on agrifood, health care, hospitality and those manufacturing firms which may be more exposed because they are located closer to the Border, either in the Republic or in Northern Ireland.

We have also launched a €2 billion Brexit fund. This is putting our money where our mouth is in terms of supporting customers at times when developing a contingency plan may require money. This should enable them to take on sustainable borrowing to support them during uncertain times. There will also be opportunities. Brexit may represent opportunities to develop into new and continental markets, moving away from the UK, or in acquiring manufacturing or production capacity in the UK as a hedge.

We have a €50 million unsecured foreign exchange fund for small and medium-sized enterprise, SME, customers who are exposed to foreign currency exchange to help them reduce that volatility which can eat into their margins. We continue to have point-in-time commentary. The Bank of Ireland website has regular videos and information guides for those exporting and importing about what to do. Being there for our customers, not just in the public sense but for one-to-one conversations, is a priority. We have the leading market share of SMEs and we are the largest lender to corporate Ireland. Having our relationship managers and our people in the front line speaking to customers during this uncertain time is a key priority.

Ms McDonagh made a point in her opening statement that new lending was up 13% in 2018 on the previous year and it was the first year of net new lending growth which is a positive statement. Brexit changes every hour. As I have been in this committee room since 9.30 a.m., I do not know what has happened today and it could have entirely changed by the time I finally get to see daylight. It is becoming more uncertain by the day, if not the hour. Are the figures for lending in the first quarter in 2019 a little lower or softer than last year?

Ms Francesca McDonagh

Last year, we set a strategy to grow our total lending across all of our businesses by 20% to €90 billion. Last year was the first year we had a net lending book growth which is positive. The total strategy from now until 2021 is that two thirds of that growth will come from our Irish business and a third from our UK and international business. What we are seeing at the moment, however, is more 50-50. Half the growth we are experiencing comes from our UK and international businesses while the other half comes from retail Ireland such as SMEs, mortgages and consumer lending.

We believe that when there is more clarity on Brexit, whether it is good or bad, there will be more certainty, particularly for Irish SMEs, to activate deferred business decisions. It does not necessarily impact on mortgage lending. However, it impacts on consumer confidence. The supply and demand dynamics are much more prevalent in Irish mortgage growth. For SMEs, we would see that there is some overhang from the crisis. They are generally cash generative, meaning they can invest some of their cash reserves. There has been a reticence among SMEs to take on new borrowing until they have clarity in respect of Brexit. When clarity, hopefully, does come, that will provide some more direction for SMEs in terms of whether they broaden their manufacturing in Northern Ireland or partner with a supplier in continental Europe. Some of these decisions are waiting due to Brexit uncertainty.

We remain committed to our 20% loan book growth strategy. It depends on external factors and it is predicated on some type of deal being done on Brexit with a reasonable transition period.

The level of NPEs, at 6.3%, is the lowest for any of the Irish banks. Although the Central Bank has not given Bank of Ireland a target, 5% is a level which the organisation would like to reach. Once it achieves that, is it willing to tolerate that level or would it like to reduce it further to, say, 1%? Will it keep disposing of these types of loans or restructuring them? Ms McDonagh has outlined the reasons the bank does not want NPEs. Obviously there is a challenge for those affected by this. Is it her aim to get to 5% or to 1%? The 6.3% NPE level means the bank’s loan book has tied-up capital. Equally, this involves vulnerable customers who went into a loan with the full expectation that the outcomes would be different than how they ended up. What is the game plan for the 6.3% level?

Ms Francesca McDonagh

We have not provided our shareholders and the market with guidance in terms of NPE reduction beyond the end of 2019. We stated that we would seek to get closer to 5% by the end of 2019. We will look to continue reducing this.

Across Europe, banks on average have a 3% to 3.4 % NPE level. That would be considered normal but it can vary. Regulators obviously would encourage banks to minimise as much as possible their NPEs during a benign period of a credit cycle, meaning that as one goes through a cyclical change, one is starting from a lower base. After reaching 5%, I do not have a hard number that we will pursue. It goes back to optimisation of our capital. We will work with customers. In cases where customers are willing to work with us on a forbearance solution, we will find a solution in nine out of ten cases. In turn, in nine out of ten of those cases, the forbearance solutions will hold. That has always been our preferred option.

We will certainly explore other ways to be more optimal in terms of how we manage our capital in that this would be capital which we can lend to more of our customers and improve service. There is a clear incentive in terms of the intensity of capital attached to those NPEs increasing. A definition of what is a NPE is also evolving.

Is that from an ECB or a Single Supervisory Mechanism perspective?

Ms Francesca McDonagh

We must balance this. We need to treat our customers fairly and in a transparent way, looking at ways to find a solution which works for them. We also need to meet out regulatory capital requirements which are partly a reflection of NPE levels.

In her opening statement, Ms McDonagh focused on Brexit and culture. We have had several meetings with the Banking and Payments Federation Ireland, the Central Bank and the Irish Banking Culture Board. In my time on this committee, four of the five banks have changed chief executives. The cultures are evolving. Some might say they are doing so slowly, while others would say too quickly. Clearly, there is a journey for all of the banks to make their cultures more customer-focused. Bank of Ireland may have had less of a journey than some of the others. Can Ms McDonagh describe Bank of Ireland’s journey?

Ms Francesca McDonagh

We have made this a key priority. We have three priorities, one of which is transformation. People often think transformation means IT because it does in business generally. It also means culture, however. We are off to an improved start. I know that because we ask our people and look at other outcomes related to culture. We are on the foothills. While journey is a slightly overused term, there is much further to go than we have come so far.

We articulated our purpose and our four key values. At the end of 2017, we embarked on significant communications activity to increase awareness and understanding of what those purposes and values are among all of our employees. Over 6,000 colleagues have attended 50 roadshows across the country. These were led by managers and leaders who talked about culture and what it means to be customer-focused or accountable.

We have made changes in our customer focus perspective in terms of how we resource our front line. We have made improvements in some of our processes, and there is more to do. We are investing in our technology to be more customer focused in that role. We have also increased two-way communication so it is not just top down but bottom up and across, with informal communication through split level meetings, greater use of technology and just general openness. We have improved recognition of our people. When they exhibit the values that we feel proud of as Bank of Ireland and that a customer would be delighted by, we recognise, encourage and celebrate that. We are investing in developing the skills of our people whether they are leaders or people managers. We are embarking on people manager training and investing to help them understand their values and actions. There is a huge amount of activity.

I chair a group customer board, on which Mr. Gavin Kelly and Mr. Tony McMahon join me, that looks at specific metrics and how this manifests in how the customer feels. Do they feel that the effort of dealing with Bank of Ireland is improving and would they recommend the brand? There are the net promoter scores and we look at verbatims. I have a live feed of verbatims from customers, good and bad, about how they feel. We are very responsive and take them very seriously. We contact many of those customers. We have a meeting tomorrow and we will call customers who have given us some feedback to understand it better. We spend a great deal of time on the front line. I will spend the majority of next week just with front-line colleagues on our customers and clients.

Is the huge amount of activity working? We survey our people regularly. We have seen a significant improvement in staff engagement and cultural embedding since we started to measure this approximately 18 months ago. It is still not where we want it to be. There are areas of great progress around understanding of purpose, values and belief. The behaviours that are expected of people are well understood. Our colleagues' understanding of their risk responsibilities is very high. There is also recognition that there are opportunities to improve our technology and processes, and we are working on those. However, there has been a tangible improvement in what our people are saying about our culture over the past 18 months. That is great, but I want the customers to feel that through improved customer service. We are seeing that but the challenge for ourselves in our ambition is that there is more to do.

The individual accountability framework is for more senior people, but it trickles down to everybody in the organisation. The individuals who are going to be named and held responsible for various parts of the bank will have staff under them who are either doing the right things or the wrong things and being measured for doing the right things, although historically they were measured and rewarded for doing the wrong things in terms of lending money they should not have been lending. That was before Ms McDonagh's time, but every bank was guilty of lending out more than it should to people who should never have been given those loans. How will she implement that or can she describe that process?

Ms Francesca McDonagh

The individual accountability framework was recommended by the Central Bank to the Minister for Finance. We want to engage proactively with our regulator to see how that will be implemented in Ireland. It does not stop us from increasing accountability. Accountability is one our core key values so we are doing things in advance of that framework being established by the regulator. Many of the team have worked or work in the UK, and before I joined Bank of Ireland I was part of the senior manager regime when it was established in 2016 in the UK. What that meant was that senior leaders would have a very clear statement of responsibilities and what they were accountable for. There was no nebulous understanding of who was doing what in a bank. It was very clear that the SMR is where the responsibility would start and finish, and who that responsibility was handed over to was written down.

Ms Francesca McDonagh

Senior manager regime. Over here it is the individual accountability regime, IAR, or senior executive accountability. It is all the same. IAR or SMR relates to the same concept of holding individuals to account in banking. Senior bankers in the UK will have a statement of responsibility. They will formally delegate it to their team. That is a formal process and that delegation has to be accepted. It has to be very considered about people being qualified to accept that delegation. Then there would be an expectation that, as a SMR, one would demonstrate reasonable steps in the execution of one's responsibility. Reasonable steps would be the right reporting and the right governance, but also challenging, approving explicitly or not, demonstrating that one has done the checks, challenged oneself and that one has an assurance that what one is responsible for is happening as it should. That is the regime I operated under before I came to Ireland. It is a regime under which our senior team in the UK will operate. It ultimately increases clarity and the accountability of senior bankers. That is a good thing and absolutely consistent with what we are trying to achieve in our cultural transformation within Bank of Ireland.

The questionnaire is very detailed. I have gone through all 39 pages and all the sections in them. Clearly, the upgrading of the branches to have full cash and so forth is a welcome development. I have seen the clusters and community hubs in my area, and the ability of people to come in has been a very positive development. How far has that concept been rolled out? My branch is in Montrose and it is transformed from what it was. Most bank branches are very different from what they were five or ten years ago in terms of the interaction of people and using the facility for all kinds of things that would never have been considered previously. Some people are on a journey with technology but most people are getting there.

With regard to the branch network, Bank of Ireland is not trying to close branches and, in fact, has opened branches recently. In terms of ATM security, there were nine incidents and at least one involved Bank of Ireland. There are diggers travelling around the Border digging out ATMs. Is there a plan to try to ensure this does not happen too often? These things can happen but I believe there have been nine incidents on either side of the Border in the past year. It is a challenge. I am aware of the future of money. I attended a recent talk in the Central Bank about payments technology. It is 1 cent for contactless and 10 cent for chip and pin. There are issues today that probably none of us appreciated previously. There is the future of the network and the journey we need to bring some people on in terms of technology and being cashless. We are dragging money out of the Central Bank at the end of every month under Army escort to bring it to post offices and to secure it while people have it under the bed.

What does Ms McDonagh envisage in the banking sector? Many people have voted with their telephone, online presence and so forth, but some people are very challenged by that and perhaps need some training or help to go on that journey. Some people do not want to go on that journey, which is presumably their own business. Where does Ms McDonagh see banking in five years at customer level?

Have the Senator another short question?

I have two or three more.

Ms Francesca McDonagh

I will ask Gavin Kelly to respond.

We are here until 6 p.m. anyway.

Ms Francesca McDonagh

They are important questions and we are happy to respond.

Mr. Gavin Kelly

The Senator referred to some of the upgrades and investments we have made. We have seen an explosion in online transactions, such as card transactions, Internet transactions and so forth. We are now processing 50 million payments per month through out business, which is a significant increase on a number of years ago. The more online we get, however, the more important we believe the community presence is. We will invest another €11 million in our network this year and in upgrading branches around the country. The workbench facility the Senator mentioned in Montrose gets much use. That has been rolled out to 12 other locations around the country. We recently opened workbenches in Letterkenny, Tralee and The Quay in Waterford. This concept is taking off in communities. Communities love the use of the branch, its layout and so forth. We certainly see a strong future for that.

With regard to the ATMs, I will not comment on an ongoing security issue. We had two regrettable incidents in two of our branches in Monaghan and Cavan. At times like this we must stand up and be counted. We are very committed to those communities.

In Ballybay, which I visited a couple of months ago, the ATM was put back in within two months and is fully operational again. That incident hit the community in Ballybay hard because it happened two weeks before Christmas. We kept the branch open for nine consecutive days because it was the only branch in the town.

We are the only bank branch in 64 communities in Ireland. We take that very seriously. We are very proud of that. We are committed to staying in those communities and providing those ATM services. We work with the relevant authorities, whether it is the Garda Síochána or the PSNI, to assist when it comes to incidents like that one and we continue to adapt our security measures. However, what is most important is our commitment to our staff, the safety of our staff and our communities but also to continue to provide that service. That is very important as we go forward.

In terms of five years, I wish I had a crystal ball but I still believe that for us to differentiate what we do as a bank in this market, that mix of online and community presence is essential. We will continue to invest in both our online and mobile channels but, equally, in our branch network.

I thank the witnesses for their contributions. To be fair to him, Senator Robbie Gallagher acknowledged in the Seanad that Bank of Ireland opened over Christmas. I believe it opened even over the weekend because the ATM had been removed.

Mr. Gavin Kelly

I am aware a number of the Senator's colleagues complimented our staff earlier. It is at times like this that we see the value in our teams and our staff. Members of the Monaghan team pooled together and made sure that branch opened for nine consecutive days while there was no ATM facility in the run-up to Christmas.

I certainly echo that. In terms of the staff on the ground, I find the staff in all the branches I deal with are particularly good but I suppose the banking sector is on a journey and we, as a finance committee, are here to provide some level of scrutiny of that. I thank the witnesses for their contributions. I thank the Chairman.

The Senator's own journey has ended now.

For now; I might come back in in a second, Chairman.

I want to ask some additional questions if I may. With regard to restructurings or forbearance measures the bank entered into in respect of mortgages, we can see the table for private dwelling houses, PDHs, for example, and the vast majority of them are term extension or arrears capitalisation. Currently, the bank has done 2,916 PDH split mortgages. I ask about the bank's policy down the line when that warehoused debt crystalises. It is a good solution for many people. It buys time. The debt is parked. The Bank of Ireland, as I understand it, continues to charge some interest on the warehoused element of the debt, unlike most other banks. The witnesses might clarify what the rate is on that. What is the bank's policy at the end of the term of the mortgage? If, say, a family had €100,000 parked, the house could be worth €200,000. Let us say they retire from work. They are on fixed incomes or perhaps social welfare pensions and they do not have the €100,000. My question is, what happens then? Do the witnesses have a figure for the amount of mortgage debt that has been warehoused by Bank of Ireland using that solution?

Ms Francesca McDonagh

I will ask Mr. McMahon to expand on that.

Mr. Tony McMahon

I thank the Deputy. Specifically, in respect of split mortgages, if the Deputy is referring to the owner-occupier ones rather than buy-to-lets-----

Mr. Tony McMahon

To clarify, some of those buy-to-let split mortgages are part of the announcement of the securitisation last week in respect of a certain cohort of buy-to-let loans. That is where some of those would feature. However, the principle is the same. For example, in those split mortgages for owner-occupier, on average, about 40% to 50% of the mortgage is on interest only and, on average, about 50% to 60% would be paying down capital and interest. For the remaining duration of the mortgage, therefore, the first part of it will pay down to zero and then there will be a lump sum left at the end of the period. It depends on each individual circumstance but we would be looking towards people who have retired who may have lump sums or pensions. One or other of those dynamics may change over a period of time. It depends on certain circumstances. The children get older, but the sale of the property would be one of the repayments that was envisaged when those were contracted with those customers.

It would be case by case.

Mr. Tony McMahon

It will be case by case.

The bank would hope, as each of those mortgages is reviewed on a periodic basis, that some of the warehoused element will come into the active mortgage and that they will start making inroads on the capital and interest. However, notwithstanding that, there will still likely be a residual warehoused element when the mortgage term ends and people are legitimately asking what will happen at that point in time.

Mr. Tony McMahon

Yes, and because of that potential dependency on the sale of the property, that is where the classification comes in. Those mortgages would be classified as non-performing from a European Banking Authority, EBA, and a European Central Bank, ECB, guidelines point of view. Like all of our non-performing mortgage customers, we have more than 200 staff just dealing with mortgage customers in difficulty. We proactively look to engage on an ongoing basis with those customers to make sure we are looking towards solutions that work for the customer also.

What is the interest rate on the interest-only part, as Mr. McMahon calls it, the warehoused element?

Mr. Tony McMahon

It is the same interest rate on the interest-only part. The extra piece, the capital repayment, is just on the first tranche.

On the warehoused element, therefore, it is the exact same interest rate as it is on the active part.

Mr. Tony McMahon

Yes.

Potentially it could be up to 3%, 4% or 4.5%.

Mr. Tony McMahon

Potentially, but bearing in mind when some of these mortgages were done, it depends on whether they were on a tracker or a variable rate but for those ones that were on a tracker, they would certainly be lower than that.

In terms of the amount of debt warehoused, does the bank have about 3,000 PDH mortgages where it has a warehoused element? If that was an average of €50,000, that would be €150 million.

Mr. Tony McMahon

Directionally, that would be the figure.

With regard to mortgage lending, the macro prudential rules and the exceptions policy, does that work well? We read from time to time that the banks have used up their exceptions under loan to income and so on and that no more mortgages will be approved outside the macro prudential limits for the remainder of the year. Does that system need to be tweaked in any way or does it function well as far as the bank is concerned?

Mr. John O'Beirne

From our perspective, I think we are supportive of the rules. When they were introduced it was challenging to start to manage that process because for the first time it introduced a checkpoint after a mortgage was approved and before it drew down. However, as time has gone on we would certainly look to see how we can manage that in as clean a way as possible and as we look into this year, our intent is to make sure that we try to keep available exceptions throughout the full course of the year.

Is it based on approvals or drawdown?

Mr. John O'Beirne

It is measured once per year on the drawdown amount through the course of the calendar year, so it is measured on 31 December. Effectively, the challenge with managing to it is to make sure that if the market and mortgage lending is lower or the amount of drawdowns we would expect is lower than normal, then it is one number divided by the other. However, we look at that and look ahead through the course of the year and try to make sure that we keep a level of availability there.

Not all approvals are drawn down. Does the bank factor that in and provide more approvals to allow for the fact that not all of them will be drawn down?

Mr. John O'Beirne

In a cautious manner, yes. What would one expect? If somebody is approved on the basis of an exception, the likelihood of them drawing down tends to be slightly higher than if they were not.

Mr. John O'Beirne

It is just to make sure that we learn as it is developed over time and that we get that right.

In general, what is the ratio of approvals to drawdown, not in the case of exceptions but generally, where the bank approves a mortgage? Would 70% or 80% of them be drawn down?

Mr. John O'Beirne

No. It tends to be lower than that in the Irish market for a number of reasons. For the industry overall it is around the high 40s and for Bank of Ireland it is in the high 50s. We have tried to work very hard on our process, as Ms McDonagh said earlier, in terms of managing the customer process through and, as I discussed with Deputy Burton earlier, in terms of making sure people are mortgage ready, so we tend to have that higher rate.

What proportion of the bank's profitability is attributable to the mortgage market? Is it half or two thirds? What is it?

Ms Francesca McDonagh

We do not break it down in that way but in terms of the contribution on mortgage business in Ireland and the UK, they would be two of the larger portfolios that would be a key driver of profitability. I would not assign them an absolute percentage but they would be a major driver. It is also a very important product from a customer perspective because it is what most people spend the majority of their disposable income on. It is their biggest asset and it is where their family lives.

It is one of the key drivers of our revenue.

Does Ms McDonagh have any views on the risk-weighted assets issue? I refer to the amount of capital that has to be put aside for mortgage lending. The Department of Finance recently had a good report on the issue.

Ms Francesca McDonagh

Yes.

It quoted Bank of Ireland at 29% for performing mortgages. Ireland has the fourth highest rate in the eurozone. Sweden has the lowest rate at 4%. In aggregate terms, Ireland was about 38%. Non-bank lenders, such as retail credit firms, are not bound by these risk-weighted asset capital requirements. Are they a major threat to mainstream lenders such as Bank of Ireland? Finance Ireland has now entered the market with residential mortgages. It is not bound by those risk-weighted asset capital requirements. To what extent is that a determinant of mortgage pricing? We had Mario Draghi before the committee some months ago and he described the Irish market as a quasi-monopoly. The Department of Finance, however, still seems to be attributing much of the reason for high Irish rates to the capital requirements.

Ms Francesca McDonagh

I also welcome the recent report issued by the Department of Finance on risk-weighted assets in Ireland. The density of risk-weighting in Ireland, particularly on mortgages, is a multiple of the European average. We cover that issue in our annual results. Other research in the market has compared mortgage pricing in Ireland with the European market. It is difficult to make direct comparison because application fees are common in other markets but we do not have them in Ireland. The cash-back aspect is also a differentiator. Mortgage risk-weighted assets in Ireland, which vary from 35% to 40%, are 3.2 times the average in Europe, where it is 11%. That translates into an Irish bank needing to hold €50 in capital against every €1,000 it lends in mortgages. The typical European bank needs just €16.

That gives an idea of the comparison and that feeds into the conversation on pricing. People state the absolute price of a mortgage in Ireland is higher than in Europe. We would state that is not a fair comparison because of the application fees and cash-back elements and because of the amount of capital banks must hold against risk-weighted assets. That density is much higher and reflects historic losses experienced in the Irish mortgage market during the depth of the crisis. It also reflects the time it takes for the legal process in Ireland to work through cases and some other factors. We welcome the report from the Department of Finance and the comparison is vivid and important. We will speak to our investors frequently about this issue and it is reflected in pricing. It is a key driver of our mortgage pricing.

I accept that. The extent of the look-back in those risk-weighted assets means there will not be any major change any time soon. New bank entrants would be bound by these rules but my point is that new non-bank entrants, such as retail credit firms, are not bound by these risk-weighted assets requirements. Do they offer the potential to shake up the market and, therefore, represent a real threat to Bank of Ireland and the other mainstream banks? Ms McDonagh and others state the risk-weighted asset requirement is a major factor in mortgage pricing. If that is the case and if the new entrants are not bound in the same way, they can then come into the Irish market and undercut Bank of Ireland.

Ms Francesca McDonagh

I cannot opine on the capital requirements of potential competitors planning to enter the market with mortgage offerings. They certainly will represent increased competition. Their product offering may be one of pricing or of risk. There is much competition in the market today and new entrants will increase that competition. We feel confident about our ability to compete and to continue to compete in the Irish market. The changes we have made, such as reducing our shorter mortgage pricing and improvements in our services and our processes, are part of our differentiation. We are confident in an increasingly competitive market.

I have some more quick questions. Does Ms McDonagh have a figure for the number of vacant properties in the ownership, possession or control of the Bank of Ireland? I do not think we asked that in the questionnaire.

Ms Francesca McDonagh

We do have a number for 2018. Mr. McMahon may want to share that.

Mr. Tony McMahon

Is Deputy Michael McGrath referring to housing?

I am referring to houses, apartments and residential units.

Mr. Tony McMahon

We have 79 vacant properties and the properties we had for sale via possession was 95 at the end of 2018.

There are 79 vacant properties and the 95 others are in addition.

Mr. Tony McMahon

The 79 properties are a subset of the 95 properties that came via possession and were in stock at the end of December 2018.

That is a low number compared to other banks. The Bank of Ireland obviously makes an effort to turn these properties around when it comes into possession. It is does not sit on them.

Mr. Tony McMahon

We do not. Overall, prior to possession, many of our staff are regularly engaging with our mortgage customers. Legal proceedings are always a last resort and we continue to proactively engage right throughout the legal process with our borrowers, and any third parties advising them, to see if we can find alternative arrangements right up until the last moment. We discontinued legal proceedings in 164 cases which were very advanced last year. We continue to push and make every effort we can to avoid repossession.

That is fine. I assume the voluntary sale numbers are different. They are still in the ownership of the borrowers and those people may well remain in those properties until the sale is completed. Those are separate to the numbers outlined. There were 288 assisted voluntary sales of owner-occupier properties in 2018.

Mr. Tony McMahon

Yes, that is correct.

There can be significant difficulties for returning immigrants to Ireland in seeking to set up a bank account and access a mortgage. The issues involved include criminal justice legislation aimed at money laundering and the need to have a permanent address in Ireland, as well as other factors. When it comes to underwriting and making a decision about a mortgage application for a returning immigrant, however, how does the bank view that? How does the bank consider an individual's work history in another jurisdiction, for example, and what weight is attached to that? Many of the people returning may not be coming back to secure and permanent employment immediately. Do the witnesses have any observations to share on that issue? It does come up.

Ms Francesca McDonagh

I will pass over to Mr. O'Beirne for a full answer. I will just say that this is an increasingly topical issue. It concerns Irish individuals or families coming home for personal or professional reasons and, increasingly, non-Irish nationals who are also attracted to Ireland. That is particularly the case in a post-Brexit environment with much job creation.

Mr. John O'Beirne

We have absolutely no issue once people return to Ireland. We lend to many people who have just returned, whether new immigrants to Ireland or Irish people returning home. In recent years 1% to 2% of applications have been from people returning to Ireland or people who may have worked overseas. We work on a case-by-case basis when underwriting those applications and look at each individual involved. The types of questions we ask include are applicants in a type of career or work practice that is suitable to the employment environment in Ireland and what is the common salary payable for a job here compared with overseas. We have paused some of that activity in recent months because we want to make sure we are compliant with all regulations as we look to our obligations in other jurisdictions. While we are very comfortable with all the lending we have done to date, we do need to look at what is ahead and make sure we are up-to-date with people resident in the UK, for instance, or in other markets.

I thank Mr. O'Beirne. The Chair is being very generous with time. I have other questions about the bank's investment in technology and the transformation promised in that area. It involves a significant investment by the bank. Will Ms. McDonagh bring us up to date on where Bank of Ireland is in respect of modernising its IT infrastructure?

Ms Francesca McDonagh

We have talked about transformation being a key priority. Upgrading our core banking systems is a big part of that. We have successfully built the foundations. We have the functionality for a single customer view where we can see all of our retail Ireland customers across a range of products, as opposed to having individual systems or views by product.

We now have that functionality.

We have also tested and loaded live transactions on a pilot basis for personal lending and savings account products. Our focus this year is on improving and resetting our channel offering. We have 15 million log-ins a month on our mobile app. There is an opportunity for it to be better, with improved functionality and user experience, whether on a mobile phone, iPad or desktop and that is our major focus for 2019.

The Bank of Ireland staff tracker group has been raised a couple of times already and I will not labour the point but I encourage the bank not to take a legalistic approach when examining this issue. I have read the documentation and will submit questions about it which, I imagine, will be the same questions Deputy Pearse Doherty will have. When the bank reads the documentation, if it is genuine in its efforts to make the bank customer focused, it will recognise that those customers, some of whom are staff or retired staff, inarguably had a legitimate expectation that they would have rolled onto a tracker mortgage. The fact that these people were never on a tracker is not directly relevant. There are thousands of customers who have been deemed impacted in the whole tracker examination and were never on a tracker but had a contractual entitlement to one. I know that, in accordance with the letter of the mortgage contract, these customers did not have a legal right and that appears to be the case on my reading of it. It is, however, also undoubtedly the case that there was much communication telling those customers that they would have the option of rolling onto a tracker. It is not relevant that the tracker product was withdrawn.

We are talking about 200 customers and I really think the smart thing for the bank to do is to come down on the side of those customers. Those people had a legitimate expectation that they would be in a position to benefit from a tracker and I am not aware of any other major outstanding issues from Bank of Ireland's tracker examination. We have outstanding issues with other institutions. I am sure Bank of Ireland has already done this but I suggest it quantifies the extent of this issue and, if it is as insignificant as we think it is, the bank would be better off dealing with it and concluding the matter in that way.

Ms Francesca McDonagh

Without getting into the details of the case, and Mr. O'Beirne may wish to add to this, I note the Deputy's encouragement not to be excessively legalistic. I hope he would reciprocate by noting that we have not been excessively legalistic in any of our responses on tracker issues and we are mindful of balancing legal, contractual obligations and requirements with what we consider to be fair.

We must also apply that fairness in equal measure to staff members as we would a customer. We should not be providing unfair advantages or disadvantages to our colleagues that we would not provide to a customer in this tracker mortgage examination approach. We note the Deputy's comments and Mr. O'Beirne might wish to add to my answer.

Mr. John O'Beirne

We have covered it a couple of times during the session. I am happy to pick up any further specifics the Deputy might have.

I am just giving our guests my take on it.

I support what Deputy Michael McGrath has said about the staff and the numbers. I want to be sure that the number is 200. That figure was given earlier.

Mr. John O'Beirne

The figure quoted by the Deputy was 200 and I think that is the number that is being looked at. I want to make sure that is the right number form our own figures.

It is approximately 200 and that is the extent of it.

Mr. John O'Beirne

That is it, give or take.

How much was the bank's profit for 2017?

Ms Francesca McDonagh

It was €935 million before tax.

What about 2018?

Ms Francesca McDonagh

Those were the results for the full year of 2018.

What about 2017 then?

Ms Francesca McDonagh

Did the Chairman ask about 2017? My apologies. It was slightly above that figure on an absolute profitability basis. Return on tangible equity, which is another way of measuring profitability, had increased.

What is the figure?

Ms Francesca McDonagh

I apologise, give me one second. I have the 2018 numbers in extensive detail. I have it here. Our underlying profit before tax was €1,078 million in 2017 and €935 million was the figure in 2018.

The profit in 2017 was approximately €1 billion?

Ms Francesca McDonagh

Yes.

What was the figure?

Ms Francesca McDonagh

It was €1.078 billion in 2017 and €935 million in 2018. This is a technical aspect but it is important from an investor perspective. We look at return on tangible equity which is another way of looking at profitability from an investor perspective. That increased from 6.9% in 2017 to 7.2% in 2018.

Ms McDonagh said to Senator Conway-Walsh that Bank of Ireland paid €21 million in Irish corporation tax. What entity paid that?

Ms Francesca McDonagh

I do not have the specific name of the legal entity. That €21 million of Irish corporation tax was at a total level. It was from companies which never had a tax loss, or where tax loss utilisation was being used.

I am drawing a distinction between that and the fact that the bank is free of paying tax in the main entity until 2030.

Ms Francesca McDonagh

We are required, in our annual accounts, to give an estimate based on profitability trends for the time when the deferred tax allowance will be completed or used up. That is 2030 in our accounts. That does not mean we would not pay any Irish corporation tax between now and 2030. Indeed, we have been paying corporation tax for a number of years, including the €21 million in 2018.

That deferred figure-----

Ms Francesca McDonagh

I do not have-----

-----goes out to 2030.

Ms Francesca McDonagh

It will-----

The tax is being paid by other entities within the bank.

Ms Francesca McDonagh

Yes. There are some legal entities that will continue to have a deferred tax allowance, DTA, until 2030.

Ms Francesca McDonagh

That is correct and, under accounting laws, is absolutely accurate.

It gives the impression the bank is paying tax from-----

Ms Francesca McDonagh

We are, as a-----

I know the bank is paying tax from those companies but there is still the deferred figure until 2030.

Ms Francesca McDonagh

The total tax allowance continues until 2030. At a group level, we paid €21 million of Irish corporation tax in 2018.

I think I heard Ms McDonagh say the bank has dealt with all the cases to which the tracker issue applies. Are all the cases dealt with?

Ms Francesca McDonagh

We have 9,700 cases in total. We made an offer to 98% of those customers. There are approximately 300 who have not received an offer because we have not been able to locate them. Many have moved or retuned overseas. We have been using tracing agencies and sending contact to their last known addresses and details. I will have to confirm this figure but we expect that, by the end of March, approximately 50 customers will still be outstanding.

We have completed in the range of more than 99% cases in this issue. It was a key priority to resolve this for our customers.

A lady called me this morning and told me her family had been with the bank for 40 years. She had issues and got out of it and said that she was impacted by the tracker mortgage issue. She was in tears on the phone because she was not prepared to fight with the bank again and had heard nothing on the issue. Hers must be a rare case.

Ms Francesca McDonagh

I am understanding of a customer who feels that frustrated and is clearly being emotionally impacted. I am keen to understand the details of that case so we can proactively contact her and try to resolve it. I do not know the details of the case but I am surprised. We have put many resources into addressing this situation proactively. It should never have happened in the first place.

There are a couple of cases I will forward to Ms McDonagh because those concerned contacted us today.

Ms Francesca McDonagh

Please. We will certainly examine those cases.

On the figures given to the committee by the bank on court cases and so on, in 2018 there were 1,300 court proceedings initiated. I presume this was on top of the number already in the courts. There were 411 court judgments at the end of 2018. As of today, what is the total number of ongoing proceedings in the courts?

Ms Francesca McDonagh

I ask Mr. McMahon to provide that information.

Mr. Tony McMahon

The total number of court proceedings for owner occupiers at 31 December 2018 was1,317.

It states they are "initiated". Is it the total in court?

Mr. Tony McMahon

That the total in court for owner occupiers.

As of now, the figure is the same, 1,317. Do we deduct the number of judgments in 2018 from 1,317 or are the 411 judgments separate?

Mr. Tony McMahon

It is incremental. It refers to where the judgment from the court has already occurred. It would be classified as an unexecuted possession order.

It is separate.

Mr. Tony McMahon

It is separate from the 1,317.

When possession orders have been obtained through the court system and have gone to the sheriff, is there still room for manoeuvre for the customer, or is the customer closed off?

Mr. Tony McMahon

As I mentioned earlier, we keep up the engagement at all times with borrowers or, particularly at the very latter stages, third-party advisers. It may be a new adviser. Last year, 52 possession orders that had come via the courts were executed. That is a much smaller subset by comparison with 411. It exhibits the timeline between the granting of a possession and its execution. In that period, we continue to engage with the customer to determine whether we can find a solution.

Where there is a stand-off between the customer and the sheriff, who has the order for repossession, is the bank still willing to ask the sheriff for some time?

Mr. Tony McMahon

Yes, if a customer is engaging. In some cases, a payment will not have been made on the mortgage for five, six, seven or eight years but where there are reasonable endeavours or where a third party comes to us on behalf of the borrower seeking to reach some sort of solution, we are always willing to listen.

Rather than the repossession.

Mr. Tony McMahon

If we can avoid it, yes.

Does the bank have contact with the sheriff? If the sheriff has the repossession order, does the bank have to say to the sheriff it is continuing to negotiate and ask for some time?

Mr. Tony McMahon

What happens is that the sheriff schedules the possession date. If something occurs bilaterally, such as contact by a customer or an adviser to the customer, and if we have written back to say we would welcome the receipt of a proposal or further engagement, we notify the sheriff at that point that there has been further contact. This may result in a deferral.

Is mediation provided as part of the solution?

Mr. Tony McMahon

We would ask all customers if they would engage given the opportunity. We welcome third party advisers, particularly on the borrower side.

If there were a need for a professional to mediate, would the bank appoint one to assist in determining whether the matter could be resolved?

Mr. Tony McMahon

It is not so much a mediation type-role in those contexts. The customer can get his or her own independent adviser. We welcome circumstances where the customer gets an adviser to advise him or her on what he or she should do.

Would the bank pay for it if the customer got an independent adviser and was making the effort to try to conclude matters?

Mr. Tony McMahon

They can get advisers under the Abhaile scheme, so there are advisers available to people in those circumstances. There is a State scheme that would provide-----

Would the bank ever pay for professional mediators?

Mr. Tony McMahon

Have we paid for mediators? In the context of mortgage cases, I am not aware that we have paid for a mediator in any particular case.

I am just asking.

Mr. Tony McMahon

I am not aware of a specific case.

I am not going to give Mr. McMahon a particular case; I just want to explore how far the bank would go in trying to resolve the really difficult cases in which independent advice has been taken. Where the customer wants to turn back from that advice and the courts have ruled, resulting in a possession order, is there room to go back to the bank? Would the bank assist and say it will try to provide a mediator or suggest that a mediator be obtained, after which it will participate?

Ms Francesca McDonagh

We would always want to engage with the customer. Legal action is the absolute last resort. We want to keep people in their homes. We would proceed to legal action where engagement has been refused, where there has been no payment for a number of years or where restructuring solutions have not been implemented for a sustained period. Typically, we do not use mediation in the way it is formally defined, nor do we pay for it. It is not something that is part of the success we have had in reducing NPE down to a quarter of the industry average. We work in many other ways. They have been successful to date.

The Irish Mortgage Holders Organisation tends to give advice to those in distress. Is that organisation, headed by Mr. David Hall, used by the bank?

Mr. Tony McMahon

Yes, we interact with Mr. David Hall, iCare and many other third-party advisers.

I am only using the Irish Mortgage Holders Organisation as an example.

Mr. Tony McMahon

We also interact with MABS-----

If somebody decided they were in a stand-off with the sheriff and the bank and decided the best route was to go to the Irish Mortgage Holders Organisation or any other body, would the bank engage with him?

Mr. Tony McMahon

Yes.

I am aware that the bank says it engages right along the line. The court cases I have witnessed, involving the county registrar or other courts, lead me to believe there is little contact being made during the course of those court cases between the bank, or the account manager of the individual concerned, and the firm of solicitors. The solicitors tend to pursue the individual doggedly. It may not be an instruction from the bank. How much engagement is there by the bank with the firm of solicitors employed in each case? Are the firms just let loose on the customers?

Mr. Tony McMahon

They are not let loose on the customer. The legal process is complex and very elongated. My characterisation of the process from start to end is that the banks endeavour to reach a solution for the customer. A lot of engagement takes place. I cannot recall whether the Chairman was in the room when I mentioned we had 164 cases in court proceedings at advanced stages last year that were discontinued. This is an example of where we reached solutions outside the court process.

We are down to the really difficult cases now, having dealt with quite a number of others. I have seen the banks become more aggressive. I am not singling out Bank of Ireland but speaking in general. Through the courts, the banks have become more aggressive. It concerns me because of the number of cases still in the courts. I urge Bank of Ireland to get a decent handle on each case, or on the firm representing it in each case, to ensure some form of understanding is applied to what is being done in court, particularly where there is a lay litigant or a family trying to retain its home. It may not always be explained clearly to the firm that the bank is open to discussions or to listening to the customer's case. The opposite happens in the court scene in that the customer is subject to aggression and asked for the keys.

The paperwork is not sound in some of these cases. There is a great deal of angst on the part of customers. One of the ways to address that is to highlight it here and suggest there is a need for some guidance for those legal firms when they deal with those cases.

If somebody is invited to consider a case in an independent process, would that normally be carried out in-house? Is an independent process seen as another arm of the bank investigating the case, or is it truly independent when someone is invited to examine the case?

Mr. Tony McMahon

It would depend on the context but it is clear that in the case of a complaint, it would be independent of the unit that previously had responsibility for the case. While it would not be truly independent in the organisation as a whole, it would be independent if, say, there was a complaint from a customer in my area-----

That is not really independent. It is as though there is a member of Fianna Fáil and a member of independent Fianna Fáil.

We would not have that.

My point is that for Mr. McMahon and the bank dealing with these people, it is serious. Their house is on the line and they are offered an independent assessment because there is a dispute, but what they receive is another arm of the bank conducting the independent assessment. That was my experience in one such case. Why does the bank do that? Why not give it to someone truly independent, outside of the bank? There are not many such cases but where they arise, people expect independence.

Ms Francesca McDonagh

Mr. McMahon will expand on the detail but I will comment broadly. We are committed to working with our customers if they are willing to work with us. Our desire is to keep people in their homes. We have a track record that is unrivalled in Ireland in respect of working with our customers to improve their situation. Nine out of the ten times that customers have financial distress in respect of their mortgage, we find a solution that holds. We have a track record of considerable resources and experience associated with this and we consider all avenues to find a sustainable solution for the customer, as demonstrated by our reduction of approximately 80% of NPL exposures from their peak. Without knowing the details of those cases, it is difficult to understand the exact context or situation. We would be happy to examine individual cases.

I am not asking for an answer on an individual case but rather for a comment on the general approach of the bank to such hard cases. I return to the independence of the process and to seeking examples to determine what is happening and the processes of the bank. In one such case, a person involved in the financial services industry discovered that the file that was being considered by the bank in an independent appeal by Grant Thornton was incomplete. The person had the full file and the pieces that were missing made a difference to the outcome. The person appealed to the bank for an oral hearing and asked to put the case before the bank. The request was constructive and professional but the answer was "No". I acknowledge that is an individual example but it brings us back to the question of how far the bank will go to ensure that any process teases out the issues to the end. In the examples I am providing, the individuals do not seem to have felt that it had been worked out to the nth degree, where both parties were at least convinced by the process.

Ms Francesca McDonagh

In the context of an independent appeals process specifically for tracker mortgages, we set up an independent appeals process in line with the Central Bank requirements. It is an important part of the tracker mortgage examination, where customers have up to 12 months to submit an appeal. Some of our customers have asked for an appeal pack and several have proceeded to lodge appeals, some of which have been upheld. They have typically been upheld because of personal circumstances. Due to the independent nature of the panel, I do not get involved in individual cases but I examine the outcomes such as what numbers of cases were processed and upheld and the themes of why they were upheld. Often, as no two cases are the same, there is some individual information in the case or a personal circumstance that the bank would not have known about. The appeals process is in place for that very reason, that is, to look at the individual circumstances and try to find a solution. The solution may not be to the liking of every customer but it is an appropriate and independently led appeals process facilitated by Grant Thornton and chaired by independent members who examine the cases with great rigour.

When the panel is told it does not have the complete picture but continues to make the decision, that is not great rigour.

Mr. John O'Beirne

We have re-examined the process in recent months because one of the independent advisers, separate to the bank representing the customer, raised it with us. I fully agree it is important that all the issues raised are dealt with. We have tried to ensure consideration of aspects of the case that did not specifically relate to tracker mortgages but which were a broader part of the customer's experience with the organisation. We have set up a process to twin-track the appeals panel with the broader complaints in order that all the documentation can be provided back to the appeals panel, which can make a broader decision in the round.

In this case, Grant Thornton rejected the appeal but the customer claimed it did not have the full picture. When Grant Thornton indicated it was not interested in an oral hearing, the matter returned to the bank.

Mr. John O'Beirne

Yes, and we are trying to ensure------

I will send the bank the details of the case because I would like to see how it deals with it.

The bank is a member of the Banking & Payments Federation, BPFI. What does that cost?

Mr. Gavin Kelly

I do not have the costs to hand. Although I am the president this year, I do not have to hand the figure for the bank's contribution. I will revert to the committee in that regard.

It is not €50 per member, in any event.

Mr. Gavin Kelly

There are a number of members. Depending on size of the bank and the market, banks pay different membership fees. A number of the mainstream banks are members-----

Will the bank revert to the committee with a note on the matter?

Ms Francesca McDonagh

Yes, we will revert with details of our contribution.

The BPFI represents the bank in lobbying and so on.

I am not sure if, in the course of the discussion on tracker mortgages, the witnesses covered whether anyone with a tracker mortgage lost his or her home. There were cases where homes were lost to the banks.

Ms Francesca McDonagh

Yes. Regrettably, we identified a number of cases that involved a loss of residential homes. In total, ten accounts, that is, ten properties, identified as being affected by tracker mortgages involved the loss of a residential home. It is obviously a very poor and negative outcome resulting from what happened with tracker mortgages.

Have they been compensated? How has the bank approached the matter?

Mr. John O'Beirne

When we appeared before the committee in January 2018, we discussed that in detail and I will cast my mind back there now. Any customer who lost a personal dwelling home received the same level of compensation as the rest, that is, all the interest was refunded and fair value was attached. An additional, flat sum of €50,000 was paid as compensation.

Any difference between the market value on the date of sale and the current market value, given that we have had a recovery in market prices, was also returned to customers. Depending on whether the customer wanted a new mortgage from us or to purchase a new home, we had to make sure they were provided with a mortgage. Let us say their individual circumstances were such that they could not afford a home in that way, we looked to make an additional sustainability payment based on the difference between the interest that was contracted to have been paid originally. We worked that out.

Perhaps I should have put the question this way: Have the ten cases been satisfied with regard to-----

Mr. John O'Beirne

I believe so. I will have to come back with the exact numbers but for the most part we are approximately 80% of the way there.

Ms Francesca McDonagh

We will come back.

Mr. John O'Beirne

I will have to revert with the exact number.

I will send on the information that I have before me.

Ms Francesca McDonagh

I thank the Chairman.

The witnesses can let me have a response in due course. That was a long session and I thank them for coming along. It has been very helpful. I wish them well in their work.

Ms Francesca McDonagh

I thank the Chairman and the committee members.

The joint committee adjourned at 6 p.m. until 2 p.m. on Tuesday, 9 April 2019.