Matters Relating to the Banking Sector: Allied Irish Banks

The purpose of this session is to engage with Allied Irish Banks, AIB, on banking matters. I welcome Dr. Hunt and his colleagues. It is Dr. Hunt's first time before the committee. I wish him well in his time with the bank and I hope his engagement with this committee is positive.

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 Dr. Hunt to make his opening statement.

Dr. Colin Hunt

I thank the Chairman. It is my pleasure to meet the members today for the first time as CEO of AIB. The relationship between AIB and the State at every level is a matter of enormous importance to the bank and me. I look forward to open, positive and productive engagement with the committee. Alongside me are the members of my executive team: Ms Helen Dooley, Mr. Tom Kinsella and Mr. Jim O'Keeffe.

It was a privilege for me to be appointed to the helm of AIB. I am keenly aware that the bank is not just a financial institution that accepts deposits from the public and channels money into lending activities, critical as these functions are. The bank plays a vital role in the Irish economy and operates under very strict social licence, reaching into every community across the country.

AIB and the State are inextricably linked. With 2.2 million customers and a staff of almost 10,000, the bank has a uniquely close relationship with the country. As a bank, we put the rights and interests of our customers first. We must establish trustworthy financial products, support Ireland's positive economic development and ethically conduct our operations in compliance with regulatory requirements, stakeholder expectations and our customers' needs.

The financial services sector has experienced the implementation of far-reaching regulatory and supervisory reform. Members are aware that we work in a radically transformed regulatory environment where the European Central Bank and Central Bank of Ireland concentrate on all aspects of our business, from customer conduct, prudential and policy perspectives. Now, leadership, accountability and culture have come under particular scrutiny. I support that level of surveillance. I do not regard it as an imposition and I assure members we will continue to implement the standards and behaviours expected by our regulators, shareholders and customers. I will continue to drive the kind of organisational culture that, over time, persuades the public we have successfully made the transition to a more customer-focused ethos. Good culture is not built on slogans, however. Good culture is built on unified and highly developed awareness of proper governance and an appreciation of the imperative to deliver fair outcomes for all our customers. Enhancing accountability at every level across AIB is one of the cornerstones of my ambitions for the bank.

In addition to reinforcing a consumer-focused culture, another central priority of mine, as CEO, is to see the return to the State of the recapitalisation moneys provided by taxpayers following the financial crash. At this point, AIB has returned €10.8 billion in capital dividends, fees, coupons and levies. The State's remaining shareholding, of 71%, currently has an estimated market value of some €8 billion. My team and I will spare no energy in ensuring AIB remains positioned to allow the Government to recoup its investment at a time of its choosing.

In order to achieve this, it is essential for the growing economy that AIB continue to be a well capitalised, sustainably profitable and stable institution that is sufficiently robust to deal with increased risks and uncertainty, including Brexit. Without that basic profitability and stability, other bank functions and obligations cannot be fulfilled, most importantly, for our customers.

Members will be aware following the publication last month of AIB's 2018 annual report that the company delivered a strong operational performance. Its full year profit before tax was €1.25 billion, allowing the payment to our shareholders, including the State, of an increased dividend of €461 million, bringing the total dividend paid by AIB to the State in the past three years to €810 million. New lending exceeded €12 billion, up 15% on the figure for the previous year. In spite of significant supply constraints in the housing market, mortgage lending rose by 16% to €2.8 billion in 2018.

As a market leading bank, it is essential that we remain technically advanced. The unrelenting customer shift to digital banking is increasing at a rate of 10% year on year. Of our 1.8 million daily customer transactions, 1.4 million are now conducted via digital channels. AIB has more than 1.38 million active digital customers, a growth curve that demands significant investment if it is to be the kind of digital retail bank that can compete in a rapidly changing and technologly driven world. However, in addition to developing offerings such as our new digital business banking platform and dedicated apps, we must also focus investment on ongoing system resilience improvements. The threat of cyber crime remains high in modern day banking and continuous risk management involves the purchase of costly tools and services. New regulatory requirements for GDPR readiness also require a significant spend, as does the ongoing need for enhanced data and analytical capabilities.

When I joined AIB in August 2016, I was struck by a number of elements. One was the tangible progress the bank had made in recovery and restructuring, while another was the level of resources still required to resolve enduring legacy issues, principally rooted in the financial crisis. The committee is well versed in the facts surrounding the tracker mortgage examination which is now coming to a conclusion for AIB. We are, of course, co-operating fully with the Central Bank of Ireland in its enforcement process. The examination programme is materially complete, with final technical activities under way during 2019. This does not in any way obviate the fact that we will continue to deal on an individual basis with impacted on accounts that require further attention through the appeals and complaints processes. I am very aware of the financial losses and human distress caused by the tracker mortgage issue and can assure members that this chapter in the bank's history will not be finally closed until all adversely affected customers are properly compensated with fair settlements.

There is another legacy issue that does not just critically impact on the bank's viability and future, it also potentially impinges on the resilience of the economy. It is the question of how we deal with non-performing loans, NPLs. I emphasise the progress that has been made so far. Exposure has fallen, from €31 billion in 2013 to €6.1 billion at the end of last year. In personal customer terms, this means that there have been almost 100,000 solutions which include 43,000 primary dwelling houses, PDHs. We are now ten years past the financial crisis. In that time, AIB has devoted significant resources, including approximately 1,500 people, with the key objective of enabling our customers to stay in the family home, keeping viable businesses operating and supporting jobs. We developed the largest range of solutions for customers in the Irish marketplace and continue to initiate new solutions such as the development of mortgage-to-rent with iCare. We also engaged with a number of external agencies, including the Irish Mortgage Holders Organisation, StepChange and the IFA, in our overall approach to address customers' difficulties.

Our clear preference is to restructure on a case by case basis with customers who engage and provide sustainable solutions that sometimes include writing off debt. We do this as retention of our customers in good and bad times is key to our sustainability as a bank. As noted, 93% of our mortgage customers continue to meet the terms of their restructures. Addressing NPLs in a sustainable way is essential to the resilience of the banking system and borrowers since elevated levels of NPLs will severely compromise the capacity of lenders and borrowers to weather future downturns. The Central Bank, as part of the Single Supervisory Mechanism, SSM, continues to require banks to reduce NPLs to European averages by the end of 2019. However, up to now, the NPL resolution process has been gradual and frequently lengthy. The pace of reduction has begun to moderate as we deal with the more intractable cases. Meanwhile, we cannot ignore the pressure the ECB is exerting on Irish banks to reduce within a relatively short timeframe their non-performing exposure, NPE, ratios. At the end of 2018 AIB's NPE level was 9.6% of gross loans, or €6.1 billion. Last week we announced a portfolio sale of €1 billion where 95% of the arrears were non-performing for over two years and 80% of connections were non-performing for over five years. This sale further reduced our NPE ratio to market estimates of some 8%. The European average is approximately 3.5% and our aim is to reach circa 5% by year end. However, this should be seen as a milestone, not a destination.

AIB is still carrying a large chunk of deep long-term arrears that simply must be reduced. It is imperative that we bring clarity to the debate and confront the reality of the impact of NPLs on individuals, the economy and banks' viability. NPLs inhibit banks' primary function of lending to the economy and, ultimately, increase bank costs, resulting in higher rates for businesses and home buyers. It is also true to say the individual customers who do meet their loan repayments are, in effect, negatively impacted on by those who do not repay. Overall, Irish banks must hold more capital than other European banks because of our credit default history. This requirement to hold large and expensive provisions or buffers against the possibility that customer debts will go into default means additional costs for customers. For example, Irish banks must hold approximately €50 of capital for every €1,000 of lending compared to €16 per €1,000 in the case of other European banks. The deeper the arrears, the greater the buffers, all of which impacts on banks' ability to function normally. AIB has to ensure it is not left vulnerable to future economic downturns by existing NPLs and potentially new defaults. While the bank is very well capitalised, as CEO, I would find it unconscionable to allow it to confront future shocks while still fettered by legacy issues we can actually deal with now. To best equip the bank to deal with future economic challenges and continue to support the economy and our customers, we must work to put our balance sheet in the strongest possible position.

I appreciate that some members of the committee are strongly opposed to the sale of NPL portfolios, but let me be clear. AIB is not in the business of allowing its customers to be cast aside as an inconvenience. The Oireachtas has ensured the protections of the Central Bank of Ireland's codes of conduct are transferred with the loans to the new owners, something we fully support. Our strong preference is to retain these customer relationships where they are in our mutual interest and the customers engage with us.

Meeting the demand for housing is obviously a continuing struggle for the market, in spite of a 25% increase in the number of new dwellings completed last year. AIB is actively engaged in residential development as an area of strategic importance for the economy and the bank. In 2018 the bank was the primary funder for live developments comprising 4,600 units - up by 53% on the figure for 2017 - as well as funding €175 million of mortgages for self-builds. We are in our third year of funding a development in Poppintree in Dublin for the not-for-profit developer Ó Cualann Cohousing Alliance. It has proved to be a strikingly impressive model for affordable housing, allowing local purchasers with a maximum income of €79,000 to buy their own home.

Brexit is, of course, just one of the exposures Ireland faces as a small highly globalised economy. We are also conscious of cyclical risks associated with changes to international trade patterns and taxation regimes. I mentioned the symmetries between AIB and Ireland. We must all work to ensure resilience in the economy and the financial system in the face of these risks. We may not be able to control the external environment, but we must be alive to actions we can take domestically to minimise future adversity and downturns. As of now, Ireland's economic outlook remains positive. I am very glad to become CEO of a bank that can help to fuel the economy and play a strategic role in ensuring the future of the company and that the country will remain optimistic. We very much appreciate the opportunity to meet the committee and look forward to taking members' questions.

I welcome Dr. Hunt and his colleagues. I wish him all the best in his leadership of AIB.

I will start by focusing on the tracker mortgage examination and the prevailing rate group of customers.

A figure of 5,195 was included in the answer to Question No. 25 on the questionnaire. I presume that is the number of mortgage accounts in this category. We have been looking at this issue for some time, as has the Central Bank of Ireland and AIB. We had extensive engagement with Dr. Hunt's predecessor and the bank's team on 26 September 2017 and 23 January 2018. We also had detailed engagement with the Central Bank on 18 January 2018. Coming in as the new CEO affords Dr. Hunt the opportunity to take a fresh look at the issue. I suggest he do that, if he has not already done so.

It is clear from the original mortgage documentation that when this group of customers came to the end of the fixed rate period for their mortgages, they were then to have the option of continuing with a fixed interest rate for a further period, converting to a variable interest rate mortgage or to a tracker interest rate mortgage. The documentation goes on to state it would be at the bank's prevailing rates appropriate to the mortgage loan. "Prevailing rates" is not defined within the mortgage documentation, as far as I can see. However, a tracker interest rate mortgage is defined in section 3.6 of the documentation as being a mortgage at the ECB rate, which is a published rate, with a tracker margin as stated in Part 1 of the particulars of offer of a mortgage loan. To my knowledge, Part 1 does not actually specify the margin.

AIB withdrew tracker rate mortgages for new customers in October 2008. However, existing customers continued to remain on a tracker rate mortgage, while those coming off the fixed rate had a contractual entitlement to be offered a tracker rate. There was, therefore, a breach of contract which the bank was late in acknowledging. It did so eventually under pressure from the Central Bank. AIB is on very thin ice in its interpretation of the prevailing rates, of which there is no definition. After looking at the issue, customers had a legitimate expectation that the prevailing rate - this is the only element up for discussion - was the margin that prevailed at the time the mortgages were initially given out or the margin for a tracker interest rate mortgage when customers came to the end of their period on a fixed rate. Has this issue been looked at in detail by AIB? Will Dr. Hunt give us his interpretation of and view on this issue?

Dr. Colin Hunt

I will hand over to my colleague Mr. Kinsella who has been charged with looking after the tracker rate mortgage issue for us in recent years.

I will briefly outline my view. The tracker rate mortgage issue is a stain on the reputation of AIB and other Irish banks. It arose from a lack of foresight, weak controls and poor communication. As CEO, I want us to draw a line under the affair once we have concluded the examination and resultant enforcement to the satisfaction of the Central Bank of Ireland. We have been engaging on this issue for more than three years. A significant number of people have been working on it, which is right and appropriate. They have focused on examining the issues involved and providing redress and compensation, where appropriate.

We have also focused on enhancing controls in the bank to minimise the risk that such an issue will happen again. However, we can improve controls and communication as much as we want. The best protection against a recurrence of this issue is ultimately the culture of the institution. We have made significant strides in recent years in putting the customer at the centre of our concerns and becoming a genuinely customer focused organisation. However, we have more work to do to enhance our openness and transparency. That applies to our internal communications and also how we deal with external stakeholders. I take seriously my responsibilities as CEO to lead and drive that cultural change.

Mr. Tom Kinsella

The programme has been running for three and a half years. We have analysed more than 650,000 accounts and identified 40 groups of customers who have been impacted on. Where there is ambiguity, we have at all times tried to fall on the side of fairness and the customer. On the particular issue, the customers we are discussing did not have a tracker interest rate mortgage. They rolled off their fixed interest rate mortgage at a time when there was no tracker interest rate mortgage available at the prevailing rate. We are satisfied that if a tracker interest rate been available, it would have been priced at an unattractive rate. Our contention, therefore, is that customers suffered no detrimental impact. We took a long time to reach that view. We took on board conversations with the Central Bank of Ireland and the oversight of our independent overseers and are satisfied at this stage that the customers in question suffered no detrimental impact. There was, however, a service breach. We should have had a prevailing rate available, but we did not. The remedy is the €1,000 being offered, as well as €615 for independent advice. The customer, of course, has the right to appeal and take the matter further.

That is a good summary of AIB's position. It has been its position for some time. Is "prevailing rate" defined anywhere?

Mr. Tom Kinsella

We define the "prevailing rate" as the rate now existing in the marketplace. Let me give an example. Today's fixed rate is today's fixed rate. It is not the fixed rate of five or six years ago.

That is fine. However, at that stage tracker interest rate mortgages had been removed for new customers but not for existing customers.

Mr. Tom Kinsella

They had been removed for new customers.

Mr. Kinsella has stated the customers in question were never on a tracker interest rate mortgage. AIB makes this point consistently, but it is completely irrelevant. It has been deemed that thousands of customers, across all of the banks, have been impacted on because they had a contractual right to be offered a tracker interest rate mortgage. The customers we are discussing are in that category. There has, therefore, been a breach of contract which I think AIB now accepts. That is the nub of the issue. Mr. Kinsella has said no tracker interest rate mortgage was available when the customers came off their fixed interest rate mortgage, but they were entitled to be offered a tracker interest rate mortgage at the prevailing rate. We agree that "prevailing rate" is not defined. We also agree that new customers were not being offered a tracker interest rate mortgage, but existing customers continued with them. That was the prevailing rate. There was also a prevailing rate when the customers in question who had a contractual entitlement were offered and drew down their mortgage. There was a defined margin that applied to tracker interest rate mortgages at the time, even though it was not specified in their contracts.

Mr. Kinsella has given an interpretation that is very much in the bank's favour. Dr. Hunt spoke about a customer focused culture. Without a doubt, there is ambiguity in this case. An argument can be made in both directions, but it is not clear. As I said, there is no definition of "prevailing rate". Trackers interest rate mortgage were gone for new customers, but existing customers of AIB continued to have them. The only issue is what the margin should be. The ECB rate is a published rate. My analysis is it should have been the margin that applied when the mortgages were taken out. I refer to the margin generally offered by the bank on its tracker interest rate mortgages at the point in time or the margin that continued to apply to existing tracker interest rate mortgages. Does the bank have a response?

Mr. Tom Kinsella

We considered the issue for a long time, as I am sure Deputy Michael McGrath is aware. We took on board a lot of advice and the Central Bank of Ireland's view of the world. That is how we arrived at the position where we accepted there had been a service breach. However, no margin was identified in the contracts of the customers in question-----

Mr. Kinsella is calling it a service breach. Does he accept that it is a contract breach? The customers in question were entitled to be offered a tracker interest rate mortgage under the terms of their contract. I am not sure why Mr. Kinsella is sticking with the words "service breach" instead of "contract breach".

Mr. Tom Kinsella

Because we believe it was a service breach.

Is it a breach of contract?

Mr. Tom Kinsella

No. We believe-----

I am not sure why it is being haggled over. The contracts the customers had were very clear; they were entitled to be offered a tracker interest rate mortgage. We can argue about the exact rate to be applied. However, they were not offered a tracker interest rate mortgage and that is a breach of contract. Is that correct?

What is the difference?

There is a reason AIB is not accepting use of the word "contract".

Ms Helen Dooley

The customers in question were entitled to choose another fixed interest rate mortgage, a standard variable rate, SVR, mortgage or a tracker interest rate mortgage at the prevailing rate. They had the option to choose, but we are stating there were then no tracker interest rate mortgages at the prevailing rate because we had withdrawn them in the circumstances outlined by Dr. Hunt. We did not foresee the consequences of that withdrawal.

The relevant date, to which Mr. Tom Kinsella alluded, when we determined the then prevailing tracker rate is the event of rolling off the fixed rate. It is not the date the customer takes out the loan. There was no credit in the bank and if when somebody rolled off a fixed rate, the tracker rate had gone down in the last few months, they would have got the lower tracker rate. Equally, if it had gone up, it was rate then prevailing on the event which was the rolling off the fixed rate.

The bank retrospectively manufactured a prevailing rate.

Ms Helen Dooley

No, we have not retrospectively manufactured a prevailing rate. We reinstigated the tracker rate in December 2013 to remedy the service failure, to which Mr. Tom Kinsella referred.

Can Ms Dooley nail that point? Why does she keep calling it a service failure?

Ms Helen Dooley

That is what it was. We failed to have available a prevailing tracker rate.

Explain how the bank arrived at that prevailing rate.

Mr. Tom Kinsella

Which prevailing rate?

The one that was subsequently offered to these customers when the bank accepted they were impacted customers.

Ms Helen Dooley

In the same manner that we always determine our pricing, we take into account the cost of funds and a range of factors in order to determine the pricing. In December 2013 when we reinstated the margin over the European Central Bank, ECB, rate, that would have taken into account the various factors a bank takes into account when it is setting its margins. However, we have not manufactured a prevailing tracker rate for the period when we did not have one.

The bank did not offer any new trackers from October 2008.

Ms Helen Dooley

That is correct.

What was the prevailing rate at that point when the bank withdrew trackers from the market for new customers? What was the margin at that point?

Mr. Tom Kinsella

I am not sure; I think it was 1.5%.

I think it depended on the loan-to-value, LTV, ratio. It was between 1% and 1.5%.

Mr. Tom Kinsella

The LTV, correct.

That was the last point in time when AIB was offering trackers at a particular rate. Over what period of years did these 6,000 customers finish on their fixed period and become entitled to be offered to be offered a tracker?

Mr. Tom Kinsella

Between October 2008 up to December 2012.

October 2008 to December 2012.

Mr. Tom Kinsella

My apologies, December 2013.

It was over that period of time that those customers individually were rolling off their fixed rate. Is it not the reality that throughout that period of time the only tracker rate that was in existence from AIB's perspective had a margin of between 1% and 1.5% depending on the LTV? There was no other tracker rate.

Mr. Tom Kinsella

No. There would have been people who had gone on the tracker rate earlier than October 2008 who would have had different margins. Over the course of the product the margin changed.

What was the trough and what was the peak? What was the span of that margin during its entire history through AIB? When did the bank start offering trackers? We know when it ended offering them, which was on 10 October 2008.

Mr. Tom Kinsella

In 2004.

What was the span of the margin, roughly?

Mr. Tom Kinsella

The span of the margin was roughly 0.75% up to about 2% to 2.5%

At the peak it was about 2.5% and at a minimum it about 0.75%. The reality is this issue will work its way through the Financial Services and Pensions Ombudsman and the High Court. It would be a great shame, given all the good work that has been done in acknowledging failings and in leading the way on mortgage rates, for which Mr. Hunt has got credit, if in the end the bank has to be forced to provide for the redress and compensation, to which there is at least a very arguable case these customers are entitled. The bank can argue it the other way in the way it has done but there is a very good chance that it will not win this ultimately and it would come at a high cost to the bank not only financially but reputationally. What would be the cost to the bank of offering these 6,000 customers redress and compensation and putting them on a rate of between 1% and 1.5% of a margin above whatever the ECB rate is at any at any point in time? Has that been costed?

Mr. Tom Kinsella

To be honest, it depends on the individual size of the mortgage, how long is left to run on it, etc. That are so many variables that I could not put a cost on it.

It has not been costed. Equally, I assume it has not been provided for within the accounts. There is no provision for it.

Mr. Tom Kinsella

No.

Has the bank taken legal advice on the issue?

Mr. Tom Kinsella

Yes. We sought legal opinion on the issue.

As far as the bank is concerned this issue is closed, is that it?

Dr. Colin Hunt

The issue will be closed when the Central Bank of Ireland concludes its tracker mortgage examination. We have a 12-month period beyond this for the submission of appeals. We will not decide that the tracker mortgage examination is at an end; it is the Central Bank of Ireland that will make that decision.

What it has said to us is that these customers are impacted and they are now within the framework, and they can take their cases through the system, the internal appeals committee, the ombudsman and potentially to court, if required. I am sure my colleagues will pick up on this issue.

I would like to deal with one other issue and I can come back in later. Many of the bank's small and medium sized enterprise customers have received correspondence in recent days regarding the sale of their accounts to Everyday Finance DAC and the withdrawal of overdraft facilities because Everyday will not be offering overdraft facilities. Can Mr. Hunt put that in context? To what portfolio sale does that relate? How many such customers are there who have overdrafts that need essentially to be ended by 7 June?

Dr. Colin Hunt

I will hand over to my colleague, Mr. Jim O'Keeffe, to deal with that matter. However, it is important to bear in mind the context in which we are undertaking these measures. We are 11 years post the peak of the financial crisis. We are under instruction from our regulator to continue to reduce our non-performing exposures down to European averages. Even leaving aside the instruction from the regulator, I am very conscious of the fact that this is an economic cycle that has had a very long run. The global economy has performed very well in recent years but I am equally conscious of the fact that we are beginning to see some straws in the wind regarding the economic outlook for the next number of years. The Deputy would have noted the International Monetary Fund, IMF, earlier this week reduced its growth forecast for Ireland. Last week, the World Trade Organization reduced its estimate for growth in trade globally last year from 4% to something of the order of 3%. We are dealing with major uncertainties with respect to potential trade wars and potential economic wars between America and China and that is not to take into account the stress Brexit is imposing on the economy. We have managed to escape having a hard Brexit tomorrow but the can has been just being kicked down the road for another six months and that impact is being felt particularly by our small and medium sized enterprises. In the opening quarter of last year we saw the deferral of many investment decisions taking place because many of the small and medium sized enterprises we service are very heavily dependent on the British economy. If there was no certainty about their ability to access that market, they were not willing to take the sort of investment decisions that would be conducted in the ordinary course of business. We are dealing with a very uncertain economic outlook. I have an obligation as the chief executive officer as have my colleagues, as members of my team, to ensure that when times are reasonably good we put the balance sheet of the bank into the strongest possible position now so that we can continue to support our customers regardless of what the economic cycle throws at us over the course of the next number of years. That is the context in which we are reducing our non-performing exposures. We have a very clear preference to engage with our customers to come to agreed solutions and to keep them as customers of AIB but no option can be ruled out because the overriding consideration must be to put the bank in the strongest possible position to deal with whatever may unfold in terms of an economic downturn ahead of us. I will pass over to my colleague, Mr. Jim O'Keeffe.

Mr. Jim O'Keeffe

Good morning, Deputies and Senators.

Mr. O'Keeffe might outline the options for these customers who are facing the prospect of the loss of their overdraft facilities within a two-month period. They have been contacting us and many of them are in real trouble. What are their options?

Mr. Jim O'Keeffe

This is an item that has been raised with us and I will explain the steps we have taken in regard to it. I want to make one of points regarding the portfolio.

Clearly from our perspective, in dealing with the issue the Deputy has just raised, I am also conscious that we have given every opportunity to our customers. As Dr. Hunt mentioned, we still have a significant team operating here. Even within the timeframe since we started looking at this portfolio, €500 million has not been included because we have been able to work through that amount with our customers. We have constantly reached out to, and engaged with, customers here.

Notwithstanding that, we recognise that there may be customers who are not reaching out and engaging with us who are putting their businesses at risk. We know that the overdraft is a particular challenge in terms of cashflow. We have engaged with customers and written to them to state clearly that cashflow will not disappear. A customer who is at a particular level of their overdraft will have an opportunity to draw that down before the loan transfers. That amount will then transfer as part of the loan and they can use that cashflow in a credit current account thereafter.

It is the same as the last time we teased this out. A customer with an overdraft of €50,000 who is currently €10,000 overdrawn can max that out, so to speak, prior to 7 June and then it carries over to their everyday account.

Mr. Jim O'Keeffe

Exactly.

It will cease to exist as an overdraft and what follows is a matter for the new relationship.

Mr. Jim O'Keeffe

We have tried, in the circumstances, to put the customer at the centre of it all. It is making cashflow available to the customer albeit that it may not come in the form of an overdraft.

I want to ask Dr. Hunt a final question about the overall position with non-performing exposures, NPEs. He said the latest transaction that AIB announced will bring it to circa 8%. The aim is to get to 5% by year end and Dr. Hunt is laying a clear marker that that is not a destination but a step along the road to reducing them further but, in nominal and book value terms, by how much does the bank need to reduce its non-performing loans, NPLs, or NPEs, to get from 8% to 5% in the remaining nine months or so of the year?

Dr. Colin Hunt

That is a number we have not disclosed to date. It is dependent on the flow of new arrears into the stock of NPEs but it would be a significant lift for the organisation to get from a position where 8% of gross loans comes down to circa 5% of gross loans by the end of the year.

We can easily work it out from the figures Dr. Hunt has provided.

Dr. Colin Hunt

Yes.

Dr. Colin Hunt

There will be an ongoing flow and we do not disclose what that flow is. There is an ongoing flow coming in at the same time we are dealing with the stock.

Dr. Hunt is very welcome and I congratulate him on his appointment. If €6 billion is about 9.6% of gross loans and €1 billion brought that figure down to 8%, one can probably say that another €2 billion and €3 billion will be required to get to 5%. I think that is a reasonable figure to put on what would have to be disposed of.

Dr. Colin Hunt

It is not a matter of disposing of that amount but we would have to reduce the NPEs by that amount. There are multiple ways to do that and Mr. O'Keeffe went through some of them. We have a clear hierarchy of preference at the top of which is to restructure the loan in an agreed way with the customer because we want to have a continuing relationship with our customers and a growing balance sheet because that is the best way in which we can deliver on our purpose as an institution and support the economy.

That is a fair assessment of how this committee would much prefer all the banks to be dealing with people and not through transfers to ultra funds or whatever one wants to call them. To be fair, AIB has made great progress in getting from €31 billion in 2013 to €6.1 billion at the end of 2018, as Dr. Hunt outlined. I ask Dr. Hunt to contradict me if this is not the case but the €6.1 billion that is left must be the most difficult of the €31 billion that was there at the end of 2013. The low-hanging fruit of loans that were relatively easy to restructure have already been dealt with. I acknowledge that many of those loans were restructured and 93% of them had reason to be restructured. It is surely reasonable for the committee to surmise that the €6.1 billion after the recent reduction of €1 billion must be the hardcore, long-term non-performing stuff. If it has not been resolved by now and the bank is under pressure from the ECB and the Single Supervisory Mechanism, SSM, as has been acknowledged, to reduce levels to European norms - whether that is 3.5% or 5% or whatever - what other methods can be used to reduce the really hardcore debt in time to get to where the bank wants to be?

Dr. Colin Hunt

The over-riding ambition must be to get it down to a sustainable and appropriate level. We have, as I said, an array of options available and none of them can be ruled out. As a last resort, if we have to have a further portfolio loan sale, we will do so.

Dr. Hunt may not wish, or may be unable, to comment on the following but to get from 8% to 5% means that €2 billion to €3 billion needs to be removed from the AIB balance sheet of non-performing exposures.

Dr. Colin Hunt

That is, broadly speaking, the order of magnitude.

New lending was mentioned at the end of Deputy Michael McGrath's questioning. I have heard anecdotally that everything is on hold and nothing is going out across the country but particularly outside Dublin. All the banks are deferring everything and none is meeting its targets in lending of anything right across the sector. What would Dr. Hunt say to that?

Dr. Colin Hunt

AIB as a whole has had a solid start to the year. We are responding to customer demand so if our small and medium sized businesses, many of which are already heavily reliant on the British marketplace, are deciding to defer investment and are not demanding funds from us, we are not going to be supplying lending into the market. We are very eager to support our customers at this time. We are eager to see lending to SME enterprises growing over time. We have restructured the way we address this market in recent months to become ever more customer focused, to have an end-to-end solution for our customers in the business space. It is a simple truth that Brexit has had an extraordinary impact on business confidence. We have been running a Brexit sentiment tracker for the past number of years both north of the Border and in the Republic. It is overwhelmingly negative on SME expectations for Brexit. One things that has struck and surprised me has been that the degree of negative sentiment is much greater in the Republic than north of the Border. That is a reflection of the scale of the British marketplace versus the Irish one and also of the clear dependence and reliance of many small and medium sized Irish enterprises on the UK as an export destination. Those enterprises are typically outside Dublin and supporting communities around the country, typically those in the food and agri spaces.

It is reasonable to say that some of the people in the North, approximately one third, voted for Brexit whereas 99% of those in the South would have said "No" to Brexit. Presumably people who were in favour of Brexit are less put out by it than people who wanted to remain in the EU.

AIB has performance targets for lending, new lending and so on. Can Dr. Hunt share with us what those targets were supposed to be and how the bank is performing relative to those? I have been picking up that generally, and Dr. Hunt has acknowledged this, people are not seeking lending. A bank cannot and should not want to lend to people who do not want to take it. Is AIB at 50% or 30% of what it expects to lend?

Dr. Colin Hunt

As a publicly quoted company, we have to be very careful about the sort of information we give out-----

Dr. Colin Hunt

-----outside the formal financial calendar. We will have our AGM later this month and we will issue an update on the bank's performance in the first months of 2019 to market shortly after that. That update will cover all those issues but I cannot, for very good legal reasons, say anything about the specifics of the performance of the bank at this point.

Can Dr. Hunt speak about the bank's 2019 performance?

Dr. Colin Hunt

No.

That is fair enough and I will accept it if Dr. Hunt has to answer another of my questions in that way but I will keep asking questions.

We asked all of the banks about Brexit, something which Dr. Hunt has covered a little, banking culture and the move or journey all banks need to make in that regard. Some are a little further down the path than others. The representatives of AIB have referenced it a little more than our visitors on Tuesday who had just one sentence about it. Where is AIB in getting to where the Central Bank of Ireland wants all of the banks to be and where, presumably, the delegates and the shareholders of the bank want to be? This is in the context of the changed culture being more consumer and customer focused and less reliant on staff performance and bonuses and so on, something on which I will touch.

Dr. Colin Hunt

I am very conscious of the fact that I am in my first few weeks as CEO of the institution. I hope to serve for a very long time, something that will be determined, largely, by the board in its appraisal of my performance.

My ambition for the institution is to see its reputation being fully restored in the eyes of its customers and the public. Underpinning that restoration of reputation are three factors. They are issues I have called out to all of the people who work within AIB, its shareholders and customers, the first of which is cultural change. We have made significant progress in recent years in emphasising the primacy of the needs of our customers. It is enshrined in our values and pillars. If one was to ask anyone who works in AIB to explain our pillars and values, the first thing they would say is that we put our customer first. That has been recognised externally: it is not just me who is saying it. Alongside it, we have further work to do in enhancing openness and transparency in how we deal with all stakeholders, be they employees, shareholders, policy makers, politicians or regulators. This is something I will certainly be promoting in the next few years.

Accountability is the second issue on which I want to see significant progress. On a personal level, I am very conscious of the fact that the Central Bank of Ireland is enthusiastic about introducing a senior executive accountability regime. The only thing delaying it is the availability of parliamentary time. I welcome that development which should be applauded. We are already preparing for it within AIB.

The third prominent feature that I want to characterise my time as CEO of the institution is sustainability. The bank has a greater role to play in the decarbonisation of the economy, supporting renewable energy development within the economy and further afield and committing to supporting the sustainability of communities throughout the State. There is an inexorable drive towards digitalisation and mobile transactions. In 2015 the number of interactions or touch points between us and our customers conducted using mobile devices to check a balance, rather than make a transaction, was nearly 148,000 per day. Today it is 1.2 million. Despite the race towards digitalisation, it is very important that we continue to have the best-in-class digital technology. Given the number of interactions with our customers, we are by some margin Ireland's biggest financial technology company. We marry that highly efficient, speedy means of engagement with our customers with a commitment to communities in the form of our staff who operate all around the State and live and work in every county. I remain very committed to having the shop window our branch network provides us all around the island. There are more than 200 AIB branches and more than 70 EBS branches. This forms a very important part of our sustainability as a bank and commitment to communities. By sustainability I mean something far broader than renewable energy, although renewable energy development is a major personal priority for me and the institution.

I thank Dr. Hunt. On sustainability, is it reasonable to say he is not expecting or planning further branch netowrk reductions?

Dr. Colin Hunt

We are not planning further branch network reductions. We have plans to open some new EBS branches. We have also been busily engaged in refurbishing a significant number of branches around the island in the past four years. We look forward to continuing that process.

Other than the reference to some campus type non-cash branches with ATMs and various other automated machines, is AIB expecting to keep the full range of services in all of its branches across the country?

Dr. Colin Hunt

Typically, the customers who choose to come into a branch like to see a welcoming smile. We try to provide it all the way around the country. We are not talking about any diminution in the quality of the service we provide throughout the branch network. We are trying to engage with our customers in the way they choose. Some may never have to enter a branch. They include mortgage customers who can engage with us entirely digitally. We are rolling out a product which is positively regarded and has been well received. It allows a person to apply for a mortgage using digital technology. I am very conscious, however, that we need to offer a wide variety of service points: digital, mobile and branch.

Does AIB plan to upgrade, increase and spend a lot of money on technology?

Dr. Colin Hunt

Yes. We spent a total of €870 million between 2015 and 2017 in the upgrade of our technology. It has paid dividends in the customer engagement and use to which I have just referred. We will continue to invest in our technology. While it will be at a slightly lower level, it will still be well north of €200 million per annum in the years that lie ahead and we have to do it. There are ongoing enhancements in technology and there will be a particular focus on improving the bank's resilience in the face of growing cyber crime threats.

With reference to the pay review, the cap on bankers' pay and so on, I note from the answers in the questionnaire that AIB has 11 personnel earning between €400,000 and €500,000; 15 earning between €300,000 and €400,000; 67 earning between €200,000 and €300,000; 856 earning between €100,000 and €200,000; and 8,822 earning less than €100,000. There is still a very significant number - almost 1,000 - earning more than €100,000. Representatives of other banks have explained to the committee that the pay cap and the lack of bonuses, incentivised pay and so on are hampering their ability to recruit. There are nearly 1,000 staff in AIB earning more than €100,000. Presumably, a lot of them are working hard in doing their thing and they are not being poorly compensated for it. I am sure everybody working in the bank is well compensated for what he or she does. What is Dr. Hunt's view on the pay cap and the guidelines and regulations applied to performance related pay?

Dr. Colin Hunt

The pay cap has been the focus of attention, but it only affects a very small number of the nearly 24,000 staff across Bank of Ireland, AIB and PTSB, the institutions affected by the restrictions put in place a number of years ago. It is important to note that there are many financial institutions that are not subject to the restrictions.

I read earlier this week that thanks to Brexit over 100 institutions are either coming to Ireland or increasing their headcount in Ireland as they seek to continue to have access to the European marketplace post Britain's possible or probable exit from the European Union. We compete for the same pool of talent and the most acute pressure we are experiencing is typically for people in their late 20s or early 30s who are being enticed to work in other institutions because those institutions have flexibility in terms of remuneration that we do not have. We spend a considerable amount of investment on bringing high quality graduates in and training them. They become wonderful bankers and very good at relationship management and writing credit papers, but then another competing institution that is not subject to the same restrictions that we are comes along and says, "Thank you very much for that investment but we are going to offer them a bonus and other benefits" and in many cases they take the decision to leave the institution. From our perspective this cohort is key to the future sustainability of the institution because they are the future leaders of the organisation but in many cases they are being stripped out.

I presume they are not so much affected by the pay cap as the pay structure being a base salary with no ability to provide great levels of performance-related pay, as opposed to the other institutions.

Dr. Colin Hunt

The performance-related pay restrictions are the problem.

Presumably the bank could pay them a greater base salary and keep them.

Dr. Colin Hunt

One could, and one could impose a higher fixed cost base on the bank as a consequence. I would prefer to have the same fixed cost base and a greater variability in terms of cost for pay.

What is Dr. Hunt's assessment of what a percentage bonus on a base salary should be? We have heard figures from London and various places where people were on €200,000 or €300,000 and were getting bonuses of double that. What is Dr. Hunt's assessment? Clearly, in the bad times people made decisions they should not have made. They loaned money they should not have loaned because they were getting paid for lending it rather than when it came back in and performed. What is a reasonable bonus level and, equally, what is an unreasonable bonus level as a percentage of base salary?

Dr. Colin Hunt

It depends on the part of the institution in which one works and many other factors. It obviously depends on one's personal performance. The key thing is that it is linked to long-term performance rather than short-term performance.

I have a brief final question. What is AIB's percentage share of the new mortgage lending market?

Dr. Colin Hunt

Our percentage share of the new mortgage market as a group is of the order of 30%.

Cuirim fáilte roimh Dr. Hunt and his team. I wish Dr. Hunt good luck in his stewardship of AIB. All members of the committee want success for AIB as the State is a majority shareholder. We want the bank to be successful but in a way that is fair to its customers and treats its customers with the respect that was often lacking the past. I argue that it still is lacking in many regards, and I will delve into them. However, I will first pick up on Senator Horkan's line of questioning on remuneration. How many individuals in AIB does Dr. Hunt believe should be paid above the €500,000 cap? Currently, 11 are paid in the €400,000 to €500,000 range.

Dr. Colin Hunt

Decisions on the remuneration of senior executives are for the remuneration committee of the board. My views are-----

Dr. Hunt made the point that it is affecting the talent and so forth. Obviously AIB could move others up from €200,000 to €300,000 and €300,000 to €400,000 if it wishes, but 11 people are receiving between €400,000 and €500,000. That includes Dr. Hunt. I presume it is those 11, or a portion of them, who are being impacted by the cap. Perhaps not all of them are on €500,000 and perhaps some of them are only on €400,000.

Dr. Colin Hunt

Currently, there are 11 people impacted by the cap. However, the issue is not those 11 people but the 10,000 people who are employees of AIB whose remuneration is different from that of all our competitors, with the exception of Bank of Ireland and Permanent TSB, in that we do not have variable remuneration.

It is something of a stretch to suggest that the people AIB employs to service its customers when they go to the branches are affected by the €500,000 cap.

Dr. Colin Hunt

I am not talking about the cap. I am talking about the restrictions with regard to variable pay, not the cap.

I am dealing with the cap because Dr. Hunt has an issue with the cap. Is it just the 11 who are affected as a result of the cap? If we removed the cap in the morning, which I would strongly argue against and which the ECB also argues against, the 11 best paid in the bank would be the beneficiaries. Is that correct?

Dr. Colin Hunt

The key focus should be that if there are any changes in the remuneration restrictions, they should apply to all people. We want to have the opportunity to reward our staff in variable ways. We want an opportunity to tie the reward we give our staff to their long-term performance. This is a-----

That is the re-introduction of bonus payments.

Dr. Colin Hunt

Yes, or share options, long-term incentive payments.

Let us strip the long-term incentive share options from the bonus, although it is the same thing. They are financial. I was on the banking inquiry and we all know what bankers did. They drove their staff to sell products and loans on the basis that their remuneration was tied to the amount of products sold. It was far from customer-centric. The staff should be financially rewarded appropriately and do what is in the best interests of the customers, as opposed to pushing products or credit on a customer that the customer does not want. It is ten years later but many members of this committee have memories of getting telephone calls or text messages telling them they were approved for an overdraft facility of €10,000 or were pre-approved for a loan of X amount. That was the culture within the bank and it was very much tied in with an incentive and bonus-driven culture, which Dr. Hunt is now arguing should be brought back into the bank.

Dr. Colin Hunt

I am arguing for the return of long-term incentives to the bank. The Minister has commissioned a report from Korn Ferry and that report is expected to be published in the next number of months. We await the conclusions of the report with interest. I should point out that this issue is uppermost in the minds of our shareholders when we engage with them. They want to see remuneration structures in the institution that align their long-term interests with the long-term interests of the employees.

The Irish people are the biggest shareholder. I have not heard many of the Irish people say they want to bring in deferred annual share plans for the top executives of AIB. The minority shareholders might have that view but I believe the Irish people, who have 75% of the bank, have a different view. The proposal AIB announced in its plan last year was extremely presumptuous. What it announced required us as legislators to change the law for the bank, without any consultation or the like. I would strongly oppose that. Is the plan for the deferred annual share plan, which was to benefit the top executives in AIB to the equivalent of an annualised salary, now dead in the water as a result of the Minister blocking it last year or is it something Dr. Hunt, as CEO of the bank, intends to pursue with the Minister? Has the bank dropped this idea or is it still a live option?

Dr. Colin Hunt

I will return to the investors first before dealing with the last point. In referring to the institutional investors I am talking about the international investors who have chosen to deploy some of their capital in the Irish economy through AIB. They are the concerns I am reflecting, and I am obviously conscious of the fact that the State is a 71% shareholder in the company.

At last year's AGM, the bank brought a set of proposals to the floor and they were defeated. We will have our AGM again in a number of weeks and we will not be bringing proposals because it would be entirely inappropriate for us to do so in advance of the Korn Ferry report being published and the Minister making his position and that of the Government known.

Last year, AIB made a profit of €1.25 billion. What was the total paid in Irish corporation tax?

Dr. Colin Hunt

I am going to hand over to my colleague, Ms Helen Dooley.

Ms Helen Dooley

Twenty-five million was paid in tax in the Republic of Ireland on profits.

In corporation tax?

Ms Helen Dooley

Yes.

What was the British figure?

Ms Helen Dooley

The difference between €44 million and €25 million, which is €19 million.

The law was changed in 2015 to allow the bank to use 100% of its deferred tax assets. If those assets were used up, what would have been the tax liability of the bank?

Ms Helen Dooley

We do not record that information. I do not have it. It is important to note that the deferred tax asset is taken into account when the bank is valued. I refer to the value of the State shareholding and the value of the bank overall. The deferred tax asset is currently about €2.7 billion.

Is the period less than 20 years?

Ms Helen Dooley

Depending on profitability, it would take between 15 and 20 years to utilise. In recognition of the fact that the banks were carrying such losses, that is one of the reasons the bank levy was introduced. The group has paid €280 million through the bank levy since its introduction.

AIB operates is Britain. There is a bank levy in Britain.

Ms Helen Dooley

Not in the same manner.

It is calculated differently but there is a bank levy in Britain. In Britain, there is a higher rate of corporation tax applied to financial institutions than to businesses because the authorities recognised the damage the financial institutions did to the wider economy. They are treated differently and more harshly in terms of corporation tax. The deferred tax assets cannot be carried forward at a rate of 100% forever. Is that not correct?

Ms Helen Dooley

The treatment of deferred tax assets is different in the United Kingdom.

There is a levy there but banks have a higher rate of corporation tax than any other businesses. The authorities do not allow deferred tax assets to be carried forward. Almost uniquely, Ireland is one of the countries in the world that allows deferred tax assets to be carried forward forever at a rate of 100%.

I acknowledge Ms Helen Dooley did not write the law, which was passed with the support of the Fine Gael-Labour Government of the day. Do the delegates understand that AIB made €1.25 billion in profit last year and is not paying corporation tax on that profit in this State?

Ms Helen Dooley

I understand the reality of the law here is such that tax losses are allowed to be applied against profits. The deferred tax asset on our balance sheet is an asset that is taken into account when valuing the State's investment in the bank.

I am sure Ms Dooley has read the report commissioned by the Department of Finance. It stated that if we changed the law, to reflect a rate of 50% again, we would still be better off within a period of less than two years in terms of the amount of money we would get in tax, even accounting for a potential drop in the valuation of the shares the State holds within the banks. We are losing out. It is a lose–lose situation. The beneficiary is obviously the bank. We get a dividend but 29% of it goes to international investors. I will move on from the issue. I am sure it is a matter we or I will continue to pursue in the Oireachtas.

How many of the properties held by AIB are currently vacant?

Mr. Jim O'Keeffe

Last year, we reported in our annual accounts that we had 583 vacant private dwelling houses and 45 vacant buy-to-let properties in our possession. The Deputy will be aware from previous discussions that we are obviously working with the Housing Agency to move the stock through constantly. Over a period, we provided approximately 1,500 properties to the Housing Agency. The vast majority of those properties are available through the agency, with which we are working. We have all been challenged sometimes in terms of the take-up rate of the properties. The current phase indicates a rate of take-up of what we have offered of approximately 86%. We have another 150 that we are working through with the agency. I accept that we have the property but I assure members that the work is ongoing to ensure we can continue to make it available to meet the housing challenge that the country is facing.

I appreciate that. I was not making a point; I really wanted to know the answer to the question. AIB had 583 properties in its possession at the end of last year and 45 buy-to-let properties on top of that. How many of them are vacant?

Mr. Jim O'Keeffe

By and large, the majority would be vacant.

What is the majority?

Mr. Jim O'Keeffe

They should all be vacant in reality because, in many cases, they have been handed back to us. Much of the housing stock we are getting is stock that is being handed back and left vacant. The majority of the properties would be vacant. As we have gone through the work with the Housing Agency, that has been the experience.

Have all the houses been offered to the Housing Agency?

Mr. Jim O'Keeffe

There is just a small number that have not at this point. That is just because certain details have to be sorted out. They will go through it. It is not a matter of reluctance on our part to make the properties available; it is just the process that we go through. Probably 90% to 95% of them have been made available at this stage.

Fixed-asset receivers were mentioned in the opening statement. The bank appoints fixed-asset receivers. I questioned Permanent TSB representatives on this and they said they do not appoint fixed-asset receivers. They appoint rent receivers. Can the delegates give the rationale for AIB's approach? Can they tell us whether the 519 assigned to receivers at the end of 2019 are likely to be sold? What option would a borrower have in those circumstances?

Mr. Jim O'Keeffe

As the Deputy knows, I cannot comment on how Permanent TSB and other banks operate. We are attempting to be in constant engagement with the borrower to find a solution and have the rent etc., paid in terms of the debt. At a point in time, when we are unable to make progress in this regard, we will move to appoint a fixed-asset receiver, with the purpose of selling the properties. In some instances, the process may be prolonged and the fixed-asset receiver collects rent but it is not typical for us to appoint rent receivers. I am not able to give the Deputy an indication as to why circumstances might be different in the other organisation. Where we have fixed-asset receivers appointed, the intent is to sell the property.

If a buy-to-let customer is in arrears, which would mean a breach of contract, does the bank have the power to appoint a fixed-asset receiver without any further intervention? I realise this is not what the bank does. Mr. O'Keeffe has explained it works with those concerned and all the rest of it but it has the authority at that point to appoint a fixed-asset receiver because, technically, the contract has been breached. Is that correct?

Mr. Jim O'Keeffe

That is my understanding.

With regard to the bank's sale of buy-to-let properties to vulture funds — up until the past two weeks, the bank was not selling private dwelling homes to them — the individuals concerned are in arrears of some magnitude.

How concerned would the bank be if a vulture fund to which it sold loans, on the basis that an individual was in arrears, decided to execute its right to appoint fixed-asset receivers as a policy option?

Mr. Jim O'Keeffe

Before we discuss what happens post sale, we have to return to the point of why we ended up where we are with the borrower. I spoke on this issue earlier and somebody asked if we are getting to the tougher end in regard to this matter. We are, but only because it is tougher to get engagement. We are not reaching the point where it is tougher to put solutions in place. We have been putting difficult solutions in place for a long time, working with customers to find solutions. The issue is engagement. In regard to loan transfers and the risk of the purchaser appointing receivers etc., clearly that is part of the process. It could happen at that point. That process would happen with Allied Irish Bank as well where a borrower has not afforded us the opportunity to restructure the loan.

I am speaking about people who are making payments. There may be people who are not paying the bank any money and are not engaging. In regard to individuals who are making contributions to the bank, how concerned would the bank be if a vulture fund, as a policy option, offered a person in arrears 30 days to clear those arrears and where the arrears were not cleared the fund appointed a fixed-asset receiver to take possession of the property? This is an action that no bank in this State has taken as a sweeping policy option. The banks may have considered it in an individual case where somebody was not engaging. As a policy option, how concerned would Allied Irish Banks be that a vulture would do that because it has the right to do it?

Mr. Jim O'Keeffe

I do not know what is in the minds of the purchasers. The evidence we have to date is that the customers who have moved across have had the opportunity to engage. We all know from anecdotal and recent research and the review carried out by the Central Bank in terms of the operation of the code of conduct on mortgage arrears, CCMA, within the purchasers, that customers are being afforded the opportunity to engage.

The Central Bank is engaging with a vulture fund on the basis of information that I have provided it with in relation to what I am speaking about. The problem is that once the banks offload their loans to the vulture funds, the banks have no idea what way the vulture funds are going to treat customers that were loyal to the banks for many years. The reality is these vulture funds have the right to do exactly what I have pointed out. In regard to accounts in arrears, they have the right to call in the loan within 30 days and the right to repossess, an action that no Irish bank has taken as a broad sweeping policy but the vulture funds, I understand, have started to do it.

Mr. Jim O'Keeffe

I refer the Deputy to Dr. Hunt's statement and how he referred to duration in terms of where we are at. It has to be recognised that today, we still have over 1,500 people available to restructure and work with customers. As part of that process, we write down debt and we right-size loans. It has to be recognised at some point that we are working with customers. The sum of €500 million has been moved out of the portfolio since we commenced this process. There is much talk about customers being loyal and making payments etc. We are affording every opportunity to the customers. Our discussions often move directly to discussion about purchasers etc. For us, meaningful engagement is critical as with meaningful engagement, we can find solutions. The Deputy has previously acknowledged that we have reached out in that regard.

I have done so. Leaving aside the recent sale, AIB has not sold principal dwelling homes, PDHs, which is an important point for many of us. We recognise AIB's engagement with iCare in terms of mortgage-to-rent. In some areas, AIB has broken new ground but there are issues in terms of its sales to vulture funds which will take a different approach to the approach taken by the bank.

When the European Central Bank was before the committee I asked if it would support the sale of mortgage portfolios to non-profit organisations. Is AIB supportive of that proposal? In this regard, I am speaking about organisations involved in debt restructuring, but not to make a quick buck. Would AIB be willing to examine that proposal?

Mr. Jim O'Keeffe

We mentioned previously that we were initiating a project with a number of external parties to examine the feasibility of that proposal. We have put a lot of effort into that work over the last while. The parties with which we are engaging would not want me to disclose any details or to provide any certainty today on the outcome of that process. We have embraced it in the same way as we embraced our approach to championing the mortgage-to-rent scheme. If there is a solution to be found, we will not be found wanting.

I accept that Mr. O'Keeffe cannot disclose details or name organisations with which the bank may be involved but as a point of principle, is the bank willing to genuinely consider the proposal?

Mr. Jim O'Keeffe

We are managing multiple outcomes. We have to resolve our non-performing loans. Obviously, we want to resolve them through restructuring but if there are other options available that allow us to achieve that and are customer-centric we will embrace them.

In regard to the sale of loans to vultures, are all customer files transferred? For example, were my loan to be sold to a vulture fund, would my entire history be provided or would it get only headline data?

Mr. Jim O'Keeffe

The purchaser receives all of a customer's information.

Reference was made to those who do not pay. There are people who cannot pay, people who cannot pay the full amount and people who do not pay. How many AIB borrowers are refusing to pay?

Mr. Jim O'Keeffe

The Deputy sees the issue from the point of the view of the cohorts laid out on paper. We have had discussions previously around estimations regarding who is not paying and who is choosing not to pay etc. It is very difficult for the bank to identify who is choosing not to pay without the engagement of the borrowers.

Leaving aside the rationale, how many individuals are not paying? For example, how many have made no payment for the last six months?

Mr. Jim O'Keeffe

In terms of what is shared in the questionnaire, the data in regard to the legal portfolio probably provide the closet number that I can share. Between 3,000 and 4,000 customers have entered the legal process. Some of them are paying and others are not. The number the Deputy seeks is not one we have shared previously.

We always tell people to engage and to make whatever payments they can afford to institutions. Understandably, when a bank is attempting to take legal possession, there is an incentive for people not to pay at that time. Leaving aside the people that the banks are taking through the courts, how many AIB customers have refused to make any payment over the last six months?

Mr. Jim O'Keeffe

That is not information that we have shared previously. I am not in a position to go into the matter now.

It has been suggested that these customers are impacting on other customers in terms of higher interest rates and so on. Are ten, 100, 1,000 or 10,000 borrowers involved? In regard to the latest sale involving the €1 billion portfolio, how many of those customers had not paid anything to the bank over the last year?

Mr. Jim O'Keeffe

The key impact is in regard to the capital that we have to retain in relation to those loans. The Deputy's question is in regard to the cashflow coming off those loans into the banks, which, obviously, varies across the loans. We have not shared that information previously. It is important to understand that in respect of those in the legal system and those who are non-performing, the bank is carrying higher levels of capital in terms of what it has to hold and higher levels of provisions. This is the key impact that is flowing out to the wider books in terms of less than 5% of customers having an impact on more than 95% of customers.

I understand all of that and the issues involved. When we talk about non-performing loans there is a perception that the customers in question are not engaging. Mr. O'Keeffe stated that if people engage, AIB can find solutions. I want to drill down into this. AIB is selling for the first time and some 10% of these loans include the family homes. Are these customers engaging with AIB, making payments and making their best efforts or are they not engaging or paying, as per the impression being given by AIB? Are these bad folks having an effect on all the bank's other customers by pushing up their interest rates? I would argue that is the impression AIB is subtly trying to give. I believe the reason AIB will not give us information on this is that the majority of these customers are engaging with the bank and are making payments.

Mr. Jim O'Keeffe

The customers who are in this position may be making some payments to the bank but they are not in any way servicing the loans. The reason we need the engagement is in order that we can come to an arrangement with the customers to see if the amount they are paying plus something else may be able to resolve the issue and we will then also write down debt where we can. The issue is that they are not servicing the loan. We will have reached out and tried to engage with them.

I wish Dr. Hunt well in his new position and I thank him for his opening statement. To return to last year's profits of €1.2 billion, what was the profit for the UK operation?

Dr. Colin Hunt

I will get the exact number for the Senator. Ms Dooley will drill into the annual report.

I am asking this question in the context of continuing efforts to deprive Irish citizens of what I calculate to be hundreds of millions of euro over the 18 or 19 years during which AIB will have deferred tax arrangements in place and will not pay tax. The opportunity cost of that and the purposes for which these hundreds of millions of euro could be used are of real concern to people who have already paid so much for the bank bailouts. While efforts are being made to pay back some of the bailout moneys, the issue is the unfairness and injustice of an operation such as AIB, which makes €1.25 billion of profit on its Irish operation alone, not paying tax. I assume AIB is tax compliant. The Government must change the position and we can only appeal to it to see sense and accept the unfairness of the current arrangements and the opportunity costs that arise. If Dr. Hunt has the figure I seek, I would like to hear it. Otherwise, we will come back to it.

Dr. Colin Hunt

The number was €100 million.

How much tax did AIB pay on the €100 million profit it made in the UK?

Ms Helen Dooley

AIB paid some €19 million of corporation tax or the equivalent.

The bank paid €19 million on €100 million profit and it paid €25 million here on €1.25 billion of profit. Those figures speak for themselves in terms of the injustice the Government is perpetrating on Irish citizens in depriving them of hundreds of millions of euro that could be spent on badly needed infrastructure. There is a great focus on the cost of the national children's hospital, and rightly so, but many children's hospitals could be built if the banks paid their fair share of tax in this country. If they can do it in Britain, why can they not do it here?

Dr. Colin Hunt

That is ultimately a decision for Government.

Dr. Colin Hunt

The deferred tax asset, DTA, effectively sits on our balance sheet. It is included in the valuation of the company and it is worth bearing in mind that we have repaid the State €10.8 billion of the total recapitalisation moneys received and the value of the AIB Group, which includes that asset, to the State is still of the order of about €8 billion.

I understand that but we live in a republic where we are told we cannot have respite services for children with disabilities, we cannot build the infrastructure that is needed and we do not have even minute amounts of money to give to the most vulnerable in our society. In those circumstances, people can see the gross injustice that is being facilitated by the Government.

On the issue of the prevailing rate, the contract states very clearly that the margin is constant. It is very explicit in this regard. It states: "So, while your rate will move up or down in line with the ECB rate, you have the certainty of knowing your margin above the ECB rate will remain the same." It is made clear that the margin was meant to be constant. For this reason, I cannot understand why AIB will not agree that what it has done in terms of the retrospective application of the prevailing rate is not a breach of contract. Its position does not make sense.

Mr. Tom Kinsella

The customers we are talking about either started with a fixed rate mortgage or had a variable rate mortgage. They had no margin specified in their contract because they were not tracker customers. The terms and conditions are composite terms and conditions that are used for tracker mortgages, fixed mortgages and variable mortgages.

Where was the certainty referred to in the AIB contract?

Mr. Tom Kinsella

Our view is that if there had been a tracker rate available over the intervening period, it would have been priced to be unattractive to customers and, therefore, customers would not have chosen the tracker rate and would have gone to either fixed rate or variable rate mortgages.

I still do not get it. Where was the certainty referred to in the contract that obviously gives an entitlement to a tracker mortgage? The entitlement to a tracker rate has been ruled on so that is fine.

Mr. Tom Kinsella

If it was a tracker mortgage, there would be a margin quoted in the customer's letter and that is the margin that is referred to. That margin does not apply when it is not a tracker mortgage. The margin is not stated because there is no margin. It is a fixed rate mortgage or a variable rate mortgage.

It should have been a tracker mortgage.

Mr. Tom Kinsella

The customer requested a fixed rate mortgage or a variable rate mortgage. The customer did not request a tracker mortgage.

No. It should have been a tracker mortgage because the customer was entitled to a tracker mortgage. All that is in dispute is the prevailing rate.

Mr. Tom Kinsella

The customer was entitled to choose between the fixed rate, variable rate or tracker mortgage at the then prevailing rate. There was no tracker prevailing then.

The customer was entitled to a tracker mortgage, as has been established.

Mr. Tom Kinsella

If a tracker rate had been available, it would have been priced at a higher level than either the fixed or variable rate and that is why we take a position that the customer suffered no detriment.

How many legal cases does AIB have in the system at the moment regarding the prevailing rate?

Ms Helen Dooley

We have about 60 tracker cases in total. I do not have the breakdown here.

How many are specifically related to the prevailing rate and the issue we are talking about?

Ms Helen Dooley

I do not have that detail here. The total figure is 60. From memory, a handful of cases relate to the prevailing rate; perhaps three or four of the 60 cases.

When does Ms Dooley expect the first one of those cases to be concluded or near concluded? At what stage are they?

Ms Helen Dooley

Perhaps towards the end of this year or early next year.

That should establish what will happen. I feel with great certainty that the outcome of that may not be what AIB thinks it will be. What were the words AIB used instead of breach of contract?

Ms Helen Dooley

Service failure.

I know why AIB is using the term "service failure". According to contract law, commercial common sense cannot be applied retrospectively but it is a breach of contract when it is outlined explicitly in the contract.

Ms Helen Dooley

If a court were to find it was a breach of contract, the remedy for a breach of contract is damages for the loss of the contract. We come back to our position that we withdrew the prevailing tracker rate because we would have had to increase it to such an amount that it would not have been an attractive product. The fixed and variable rates that were on offer were, therefore, lower than any tracker that would have been on offer. We stand over the contention that the customer has not been adversely affected. The customer has suffered no financial detriment here.

We will agree to disagree.

Ms Helen Dooley

We will.

That will be established in the courts. I hope AIB has made provision for that out of the €1.25 billion in profit it made last year. Is it true that AIB's independent redress panel is rejecting all cases where an appeal is based on the issue of prevailing rates?

Mr. Tom Kinsella

Some 96 cases have been decided. All of them have been rejected by the appeals panel bar one, due to extenuating circumstances.

On what basis were they rejected?

Mr. Tom Kinsella

On the basis that the panel agrees with our position that no detriment has been suffered by the customer.

Will Mr. Kinsella remind me of who the members of the independent redress panel are?

Mr. Tom Kinsella

The independent panel is constituted as set out in the Central Bank's framework for the tracker mortgage examination. It is made up of three members. It is chaired by a solicitor and also includes an accountant and a consumer representative. We had the option to put an AIB representative onto the panel as well, as laid out in the programme. We decided not to exercise that choice in order to maintain the independence of the panel.

As such, there is no AIB representative on the redress panel.

Mr. Tom Kinsella

There is no AIB representative.

I want to ask about the EBS tied agents. We received a letter from AIB saying the bank cannot furnish us with a copy of the report into the issue of EBS tied agents because of ongoing litigation. When do the witnesses expect the litigation regarding EBS tied agents to conclude?

Ms Helen Dooley

We expect that to conclude towards the end of this year or early next year.

Who else has seen a copy of that report? Have the tied agents seen a copy of it?

Ms Helen Dooley

Given the ongoing litigation, it is not appropriate for me to comment. We are aware that a redacted version of the report has been furnished to some of the agents.

Very well. Has the bank ring-fenced any moneys for compensation that may need to be paid out, as happened following the tracker mortgage scandal? That would not presume the outcome.

Ms Helen Dooley

We have not taken any provisions with regard to this litigation.

Is AIB concerned about the reputational damage done to the group by the fact that so many business people felt the need to take action against EBS?

Ms Helen Dooley

I apologise, but I cannot comment given the ongoing litigation.

I very much look forward to the outcome of that case.

On fees, AIB's statement of fees tells us that it costs 20 cent to perform a contactless transaction but this fee is waived until further notice. What is the logic of retaining the right to charge this fee but not charging it?

Dr. Colin Hunt

Before I hand this query to Mr. Kinsella, it is worth bearing in mind that approximately half of our customers do not pay any fees. If a customer is over 66 years of age, is a senior citizen or student, has one of our basic banking products or has a mortgage with AIB, he or she does not pay any fees. We are currently promoting the use of contactless payment. It makes good sense from the perspectives of the bank and the retailer. That is why we currently apply a fee of zero. I will hand over to Mr. Kinsella.

Mr. Tom Kinsella

Contactless payment is our biggest interaction. There are 500,000 uses of contactless payment every day. The current fee is zero and we have no plans to introduce a fee.

Under the regulations, how much notice would the bank have to give if it was to start charging that fee?

Ms Helen Dooley

I understand we would be obliged to give customers 60 days' notice of such changes.

What percentage of AIB's personal customers have €2,500 in their account for each fee quarter and thus avoid paying fees?

Mr. Tom Kinsella

I do not have that information to hand. We can supply it afterwards. Some 50% of our customer base pays fees and 50% does not.

Why are EBS customers treated differently by the bank?

Mr. Tom Kinsella

The EBS account is what is known as a basic account. It is there to satisfy a Central Bank mandate obliging us to make a basic account available. AIB makes a basic account available as well. It is effectively a free bank account. It has limited facilities, but it is available to anybody who is resident in the EU and does not already have a personal account.

Can a customer switch from EBS to AIB services to avail of the cheaper rates?

Mr. Tom Kinsella

Is the Senator referring to current accounts?

I refer to mortgages.

Mr. Tom Kinsella

Yes, but it would mean starting the credit application again. It is not just a matter of simply signing a form. That would be a full new mortgage. AIB would provide €2,000 towards the cost of the switch. There is no bar on an EBS customer becoming an AIB customer.

It would be as though they had come from any other bank. They would get the €2,000.

Mr. Tom Kinsella

Yes.

It seems quite bizarre that a State-owned bank says it speaks for all its customers but has an arbitrary difference in rates for some customers.

Mr. Tom Kinsella

We are in the lucky position that we have two brands in the marketplace, which allows us to serve different customer needs. If we made the same offer through both brands, we would not be covering as many customer needs as we could and it would not make any sense to have two different brands. Having two brands allows us to appeal to customers who are looking for the certainty of fixed rates or the most competitive standard variable rate, SVR, in the marketplace. The EBS products offer different pricing, but there is also a cashback element. We know that some customers favour cashback.

As such, AIB is doing it for the good of its customers. The bank is putting its customers first in this instance.

Mr. Tom Kinsella

We try to meet as many customer demands as possible.

I would like to go back to Dr. Hunt, who is starting a new position. Will he re-examine the compensation payment of €1,615 with regard to the tracker issue? Can he understand the sense of unfairness people have? It is not just about the unfairness they feel; there will be legal cases challenging the small amount being offered. Would it not be worthwhile to revisit the matter for the 4,000 people who are affected and see if provision can be made out of profits of €1.25 billion? Even as a public relations exercise for the bank, it might be worthwhile to re-examine that and conclude that €1,615 is a minute amount.

Dr. Colin Hunt

This issue has been examined very comprehensively within the institution. It is worth bearing in mind that I have a very obvious incentive to draw a line under the legacy issues of the past. I want to start my period as CEO of this organisation by being as forward-looking as possible, bringing an end to the legacy issues and looking forward. This has been very comprehensively dealt with. Earlier I made the comment that we will not be the ultimate arbiter of whether the tracker examination programme is complete. That will be an issue for the Central Bank of Ireland, and we are very actively engaged with the Central Bank in working towards the completion of this programme.

It will not just be the Central Bank, but also the courts. The biggest shareholders in AIB are the Irish people. A large cohort of these people are in the process of taking High Court challenges. There will be a huge cost to the bank for that, and the beneficiaries will be those working in the legal system, who do not need more money. This could be righted by re-examining the matter and talking and listening to customers. That would seem to be a much better way of fixing the problem than dragging people through the courts and paying out large legal fees.

Dr. Colin Hunt

We have examined over 40 different situations, very comprehensively and fully. I am satisfied with the bank's position in relation to this.

We will discuss that issue again in the future.

Dr. Hunt said that it is in the bank's interest to draw a line under the legacy issues concerning tracker mortgages, etc. How does that tally with the attitude of the bank towards the 6,000 customers on a so-called prevailing rate? Surely a different approach would enable the bank to draw a line under it.

Dr. Colin Hunt

I am very conscious of the need to balance all of the needs of the stakeholders, including customers, employees, policymakers, regulators and investors. In every decision we make we are taking account of those needs. We want to do what is right and do it expeditiously. Where we make mistakes, we want to correct those mistakes as fully, comprehensively and speedily as possible. We have looked comprehensively at this issue and we are satisfied with the current position.

I wish to discuss a specific case I raised with Dr. Hunt's predecessor in June of last year, which was the last time representatives of AIB were before the committee. When we spoke about the case Mr. Jim O'Keeffe, who is present today, indicated that the best thing to do would be to come back to me directly about the specifics of the case in order to avoid speculation. He made a general comment. AIB very helpfully followed up a couple of days afterwards asking for the details of the case. I responded with the details of the case, and that was it. I received no further response and when I followed up, I again received no further response. A case was raised at this committee, and I acknowledge that this happened before Dr. Hunt was appointed. AIB responded, saying it was happy to look into it, with no guarantee of an outcome. However, when I tried to process the case I got no joy whatever and then had to wait nine months until the AIB representatives appeared again before the committee so that the matter could be raised again.

Mr. Jim O'Keeffe

I was unaware that the Deputy had not received a response. We had given a commitment on the day that we would follow up and I was aware that we had followed up. Something must have taken place. I assure the Deputy that I will personally respond to him on this issue.

I thank Mr. O'Keeffe. I will raise the general matters of the case; it is not a unique set of circumstances. The person involved is probably one of thousands of customers in this position. He is an EBS customer with a tracker mortgage issue. He was on a fixed rate and when that expired he moved on to a standard variable rate. At the end of the fixed rate period, tracker rates were available to new customers walking in off the streets. The rates were advertised and tracker rates were being made available. This man was not informed of all the options open to him. He was only told about the fixed and standard variable rate options. It is undisputed that if he had asked for a tracker rate, the bank would have said that he was entitled to one. The point is that the man had a theoretical right to access the tracker rate in that if he had known about it, he would have been able to access it. However, on the official documentation he was provided with, informing him of his contractual rights, the option of the tracker mortgage was not provided. The final response letter of the EBS states that staff do not provide advice on which interest option to choose, that this is the decision of the mortgage holder and that the obligation rests with the customer to advise the bank of his or her decision. That is absolutely fine, but under best practice and the spirit of the consumer protection code, this man would contend, as would I, that EBS had an obligation to provide him with advice about the full range of products available to him. It seems that this is contested by EBS and AIB.

Mr. Tom Kinsella

I am very happy for Mr. O'Keeffe to have a look at this case. I would have to look at it in detail before commenting.

Let us forget about the individual case and take a hypothetical situation which parallels the one I have outlined. I am on a two-year fixed rate some time in the years between 2000 and 2010. I come off the fixed rate and at that stage tracker rates are available to customers coming in off the street. I go into the bank and EBS provides me with a series of options on a piece of paper indicating what I can move on to. A tracker rate is not included in those options, even though I have a legal right to access a tracker rate. Does Mr. Kinsella accept that that is a problem? Does he accept that I, as a customer with a legal right to access a tracker rate, should have been provided with documentation outlining that right to me?

Mr. Tom Kinsella

I cannot answer the question. I would have to look at the specific case. If the customer had asked for a tracker, he or she would have been offered one at that time. I agree with that point.

I do not believe there is any contest on that. If a hypothetical customer in the mid-2000s asked for a tracker rate mortgage, he or she would have received it. The question is whether EBS fulfilled its obligations under the consumer protection code by not providing written documentation to make it clear that I was entitled to access a tracker and instead, as far as I can make out from the response of EBS, effectively relied on the fact that I should have known about it because there were advertisements on billboards.

Ms Helen Dooley

The Deputy has made a good point. In the past few years, the regulator has introduced, in the context of the consumer protection code, an obligation on banks to write to their mortgage and deposit customers annually to outline the different rate options available. That is an obligation that was introduced in the last couple of years. With the benefit of hindsight, we can question whether that should have been an obligation since we started lending money, but it was not. The Deputy mentioned the legal rights of individuals. Outside of contractual documentation, the customer had a right to request a switch to a tracker and Deputy Murphy appears to have suggested that he did not make that request.

That is correct.

Ms Helen Dooley

Unfortunately, it seems the customer did not avail of a tracker rate when trackers were available. We had 104,000 customers on tracker mortgages when we withdrew them for new customers and, unfortunately, the individual in question was not one of them.

Does Ms Dooley not accept that, under the spirit of the consumer protection code at the time, not informing the hypothetical customer of his or her right to access a tracker was a mistake?

Ms Helen Dooley

I do not believe it was a mistake.

I do not believe it was a mistake to the extent that I do not believe it was an accident. I believe it was a very conscious decision.

Ms Helen Dooley

I am speaking without the facts. All I can say is that if the customer had requested a tracker mortgage, as many other customers did before October 2008, he or she would have been able to move on to that rate.

At the time, under the consumer protection code, obligations existed to offer product options that represent the most suitable from the range available; to act honestly, fairly and professionally in the best interests of the bank's customers; to act with due skill, care and diligence in the best interests of its customers; and not, through its policies, procedures or working practices, to prevent access to basic financial services. Does AIB not accept that by not giving the information to the customer, who has the right to access to a tracker mortgage, there is a problematic imbalance of power between the bank, which is an expert in the area, and customers, who are not?

Ms Helen Dooley

We considered the cohort among the 650,000 mortgage accounts we examined. In the context of the tracker mortgage examination, we came to the conclusion it was not an affected cohort. As Dr. Hunt and Mr. Kinsella mentioned, the Central Bank will ultimately determine when the examination has come to an end.

Dr. Colin Hunt

The Deputy should feel free to provide us with the details and we will revert with the specifics.

Yes, I will definitely do that. The EBS mission statement on the tracker mortgage examination states the review is ongoing but that it has found it fell short of its obligations to some customers, such as in instances where it was not sufficiently clear with them, which resulted in some customers being charged too high a rate of interest on their mortgage accounts. Does the bank not accept that describes this hypothetical situation, where EBS was not sufficiently clear with a cohort of customers about their right to access a tracker mortgage at the time? It was accepted there is a cohort that fits into this category. It does not necessarily apply to all the customers, given that tracker mortgages would not have been the best option for some of them, but for others it would have resulted in them being charged too high a rate of interest on their mortgage accounts.

Mr. Tom Kinsella

I do not think we impinged. As the Deputy noted, trackers were well known at that stage. If the customer had asked for a tracker, he or she would have been given a tracker. I do not think there was an imbalance of power. As I stated, we will absolutely take the case and revert to the committee swiftly. I apologise for not doing so already but we will revert swiftly on the matter. If we find something that causes us to change our mind about something, it will apply not only to the customers to whom the Deputy refers but also to any other affected customers.

I welcome Dr. Hunt, whom I congratulate and wish well in his new position. I also welcome the other witnesses. Like other members of the committee, I have received a considerable amount of correspondence about the prevailing rate. When the Central Bank decided the bank should compensate those people, how did AIB calculate what they should be paid? From all the correspondence I have received, it seems the bank made the same award to all of them, namely, €1,615, of which €615 went towards legal costs. Why did the bank arrive at the same amount? Was it the average amount? Did some people do well while other people were sold short?

Mr. Tom Kinsella

For this particular group of customers, as the Senator has indicated, the payment comprises €615 for advice and a €1,000 flat payment to compensate for the service breach of not having the then prevailing rate available to them. It is the same payment across the board to all customers.

Did some people do well out of it, or were they all refused a tracker on the same day?

Mr. Tom Kinsella

The payment relates to a group of customers who never had a tracker and who rolled off their fixed rate mortgage over a period between October 2008 and December 2013, which is when they all came off their fixed rate mortgage, at a time when no prevailing tracker rate was available to them.

One person might have borrowed €100,000 while another might have borrowed €200,000. Why did everybody receive the same amount?

Mr. Tom Kinsella

It is to compensate for not having a rate available. Our view is that the customer suffered no detriment and, therefore, it is a flat payment for not having that rate available.

How many people were affected? Is it 6,000 or 4,000?

Mr. Tom Kinsella

Some 5,912 were affected.

Have any related cases been taken to the High Court?

Ms Helen Dooley

As I mentioned, although the Senator may have left the room, approximately three or four of these customers have initiated legal proceedings.

In the case of the recent sale to Cerberus, have any loans of people impacted by the tracker mortgage issue been sold?

Mr. Jim O'Keeffe

As part of the process, when customers are identified as impacted or potentially impacted, a protection is provided by the bank to ensure they are protected from any further harm. This ensures that in any portfolio sales we undertake, our customers in the process do not find themselves a part of the process. We wait until the outcome of the tracker review to conclude the process. In short, the answer is "No".

No loans of people involved in an ongoing dispute over a tracker mortgage are being sold.

Mr. Jim O'Keeffe

We have concluded our review across the portfolio and reached our position on it. When we have had our other reviews, the customer could form part of that. If we were still assessing a customer issue, we would not progress the customer through the process.

The bank has sold the loans at this stage.

Mr. Jim O'Keeffe

That is correct.

The deal is done. There are some people who are in dispute over their tracker mortgage and their loans have been sold on to Cerberus. Is that the case?

Mr. Jim O'Keeffe

In fact, we have reached a conclusion with the customer and indicated our position. The customer will have received a letter from the bank as a conclusion of the tracker process, although he or she may well remain in dispute with the bank over that.

All those people have received notice from the bank that there has been a conclusion to their case and their loan has been sold on. For people who have gone through this tracker mortgage case, the new owner of their loans is Cerberus. Is that the case?

Mr. Jim O'Keeffe

We have ensured that we have reached our conclusion on the matter and contacted the customer in that regard.

I understand that but some of those loans are of people who have gone through the trauma of the tracker mortgage issue and have reached a deal with the bank. After all that, they now find that the loan has a new owner.

Mr. Jim O'Keeffe

It is quite possible that somebody could be compensated for any issue with the organisation. Afterwards we have to work with them to find the solution to the fact that they are unable to repay the lending they have, even with the compensation having been given. Often, customers receive compensation for an issue, we continue to engage with them on the loans they have with us to try to find a solution and we often find a solution, resulting in the conclusion of the matter.

The two ways we deal with it are unrelated. We review it from the perspective of whether the customer is due compensation and so on, but the normal relationship with the customer in respect of ensuring the debts are being repaid has to be restarted.

Any loans which are still in dispute are not sold but can be sold at a later date.

Mr. Jim O'Keeffe

The language here is important because we could have reached a point where we had completed our investigation and provided compensation to a customer.

We will then re-enter a discussion with the customer to see how we can restructure and deal with his or her loan. If the customer is unwilling to engage with us or has not engaged with us, it is possible his or her loan would form part of a loan sale.

Where do those who have gone down the legal route stand?

Mr. Jim O'Keeffe

Does the Senator mean if they are taking a legal case against us?

Mr. Jim O'Keeffe

That will still stand in regard to it.

That loan will not be sold on.

Mr. Jim O'Keeffe

I might have to defer to my colleague on that. Is the Senator referring to a specific case or a number of cases?

People who have tracker loans and are in dispute with the bank have found that their loans were sold to Cerberus in the most recent loan sale.

Mr. Jim O'Keeffe

I would highlight for the Senator that we will have reached a conclusion with them on that. If there is an ongoing legal case in that regard, that would work through separately. We have reached a conclusion on the tracker mortgages with customers whom we compensated in some instances and then the customers were unable to resolve their debt. The key point is that there are two completely different issues in regard to that. The first is the tracker investigation and making sure the customer is compensated. Second, post that we have to engage with the customer to make sure he or she can repay the loan.

Are the loans of the customers who are able to repay them being held by the bank? Are they seen as good loans and are not being sold?

Mr. Jim O'Keeffe

Exactly.

It is the loans of the customers who are not engaging or who cannot meet their repayments that are being sold when everything is taken into account, including compensation and so on.

Mr. Jim O'Keeffe

The only comment I would add is that where they cannot pay or they are having difficulty meeting those loans, we will work with them to restructure the loan. The challenge for us is to get the opportunity to be able to restructure the loan.

In that case, it will not be sold.

Mr. Jim O'Keeffe

If we reach an agreement to restructure the loan and we sign them up to a new loan structure, etc., having written off debt in many cases, that loan does not form part of the current loan sale.

I welcome Mr. Hunt and his colleagues. To pick up on a number of points, I take from the presentation that the bank wants to reduce the proportion of non-performing loans on its loan book to 5% by year end. Dr. Hunt put forward the reasons for that. Reference was made to the fact that the bank has to provide three times the level of capital that would normally be provided by banks in Europe. How much does AIB owe Irish taxpayers in terms of the money they put into the banks? If the bank reduces the level of non-performing loans to 5% or the point at which the European authorities will allow it to relax the level of capital it must provide, what impact will that have on interest rates, lending and the repayment of the money taxpayers put into AIB? I want to see light at the end of the tunnel in terms of the pain and hardship inflicted on people who have non-performing loans, with whom we deal every day. The bank guarantee was given in 2008, almost 11 years ago. Will Dr. Hunt indicate where the light at the end of the tunnel is in that regard? As I have very little time, I ask him to be brief.

Dr. Colin Hunt

I will be as concise as possible. The total amount of moneys repaid to the State is of the order of €10.8 billion. That means that €10 billion is considered to be outstanding, of which approximately €8 billion is embedded in the value in terms of the 71% shareholding.

As matters stand, the market value of the State investment is less than the book value.

Dr. Colin Hunt

Based on the current share price.

Dr. Colin Hunt

On the issue of how the non-performing loans, NPLs, impact on our balance sheet, there are two impacts. First, because of the credit default history in Ireland the risk weightings we are compelled to apply to our asset base are significantly higher than they are in other European countries. That is something that will only be corrected over time. There is a very long observation window in that regard that the regulator applies in arriving at the risk-weighted asset - the risk it applies to our balance sheet. That will improve over time. Second, the level of NPLs is also reflected in what we call our core equity tier 1 requirement. The regulator tells us how much money we need to retain in the form of capital-----

To be honest with Dr. Hunt, all of that is great and we have been over it before. I feel as though we are going back to the time of the bank guarantee. I want information for the ordinary person watching these proceedings. We speak about reducing non-performing loans. I want to know the impact that will have on the interest rates the bank charges. Dr. Hunt repeatedly refers to non-performing loans that drag on interest rates. I want to know how that will improve the range of lending and how it will make AIB more marketable to potential investors which would help the State to get back its investment. For the ordinary person watching these proceedings, what impact will reducing NPLs to 5% of the AIB loan book have on reducing interest rates? We have to get to a point where people see a benefit to what the bank is putting forward. Currently, all they see is a negative in terms of people with non-performing loans being under extreme pressure. All my colleagues have dealt with that area. I want Dr. Hunt to show us the light at the end of the tunnel.

Dr. Colin Hunt

It will give us a stronger balance sheet. There will be less of a capital drag on the company. It will make us more attractive to international investors.

Will it bring about a reduction in interest rates?

Dr. Colin Hunt

As a consequence of the increased efficiency of the balance sheet, it will open the possibility of the margins across all lending being lower than they are currently.

When does Dr. Hunt anticipate that the European authorities will allow some flexibility on the level of capital the bank has to provide? Clearly, not enough capital was provided for the rainy day.

Dr. Colin Hunt

No.

I want us to reach a point where the State will get its investment back and existing and new AIB customers will be offered competitive interest rates relative to those offered by European banks. Dr. Hunt is talking about the level of capital the bank requires relative to that in European banks. We continually look to our sister countries within the EU and many of them are providing much lower interest rates to customers than AIB is providing here. If AIB wants the level of NPLs to fall and wants to have European norms, it must reciprocate by providing European norms in interest rates as well. Is the bank willing to provide the other side of the equation by reducing interest rates to reflect European norms?

Dr. Colin Hunt

The Senator will have seen that we introduced a number of rate reductions earlier this week in terms of our fixed rate offering. We extended our fixed rate offering within AIB. The commitment we can make is that, as we normalise our balance sheet, which is what we have control over, we will be engaged with our regulators. The capital weightings applied to the balance sheet are ultimately a decision for the regulator. We are continuing to make progress on that. We want to put the balance sheet into the best possible state so that this bank can continue to support our customers through the next phases of the economic cycle.

I will put the question another way. Why are the interest rates AIB is charging so much higher than the European norms?

Dr. Colin Hunt

A number of pieces of research were done on that in recent months but basically it can be summarised as-----

I am asking about AIB.

Dr. Colin Hunt

Yes. It is a reflection of credit default history in the State and the amount of risk-weighted assets. The Senator is not comparing apples and oranges because of the different structure of fees here compared with Europe.

Fees in the rest of Europe tend to be of a different magnitude.

Is Dr. Hunt saying the fees are higher elsewhere in Europe?

Dr. Colin Hunt

Yes.

If AIB reduces its level of NPLs to European norms, does he anticipate that the bank will charge interest rates to variable and fixed rate customers that reflect European norms? How long will that take?

Dr. Colin Hunt

The observation window is probably of the order of about ten years. The most recent observations are the most important. We should see an ongoing improvement in the capital drag on the balance sheet but we will not get to the end of that period for ten years. We will not get to the end of that adjustment for ten years but there will be ongoing improvements in terms of capital weighting.

If AIB gets the level of NPLs down to 5% by the end of this year, will we see a measurable reduction in interest rates charged to customers?

Dr. Colin Hunt

We do not comment in terms of future market movements in mortgage rates.

Would it be a reasonable observation that if the drag of what AIB can deliver to other performing customers is no longer on the bank's balance sheet, its interest rates should be more competitive?

Dr. Colin Hunt

I cannot comment on the timing of it but what I can say is that the direction will be positive from the point of view of total borrowing margins as the capital drag on the balance sheet is reduced.

With regard to the share price and the State's shareholding in the bank, the price was €4.40 at the time of the initial public offering, IPO, in June 2017. It is currently trading at about €4.10. There seems to be a drag on bank share prices generally across Europe. Market capitalisation is €11.1 billion and, as Dr. Hunt pointed out, 71% of that is about €8 billion. From the point of view of the operation of the bank and the direction Dr. Hunt would like to see the bank travel over time, is it his expectation and wish that the State shareholding would be reduced incrementally to the point where the bank would be returned completely to the private market and private ownership?

Dr. Colin Hunt

Ultimately, the scale, nature and timing of any share disposal is a decision for the State. My job and the job of all of us working in AIB is to ensure that the company continues to deliver an investable proposition to the market. We are very heavily engaged with our investor base. We will publish our interim results for the first half of this year towards the end of July. Our primary focus is on ensuring the performance of the bank is among the best of our peer group so that if and when the Government makes a decision to reduce its shareholding in the company, that can be seen as a successful and fairly valued transaction.

With regard to the issue of interest rates and risk-weighted assets, the report recently published by the Department of Finance was very helpful in highlighting the link between interest rates and the capital requirements in terms of the risk weighting. In respect of the figures for AIB it reports for the first half of 2018, 30% is the total figure quoted while the figure for performing loans is 26% and the figure for NPLs is 73%. As AIB reduces its NPLs, is its risk-weighted asset figure improving? As Dr. Hunt notes, it looks back over time. It is a rolling look-back as such. The picture is improving but how strong is the link between those capital requirements - the risk-weighted asset requirements - and mortgage pricing? If we were moving towards European norms in terms of risk-weighted assets, would there be a clear link with interest rates?

Dr. Colin Hunt

There is a clear link because the greater the risk weightings and the capital drag, the lower the profitability and the higher the interest margins. As the balance sheet is put into a better position and becomes more efficient, the performance of the bank will improve and the interest margins should be compressed.

It is important to put on record that AIB has led the way in rate reductions. It is interesting that when one looks back over the past number of years - one of the tables in the questionnaire is quite useful - one can see that in June 2013, the variable interest rate for loan to value between 50% and 80% was 4.29%. It is now 2.95%. Similarly, for lower loan to value of less than 50%, it was 4.09% but is now 2.75% so there has been a reduction of more than 130 basis points, which is very welcome. The recent announcement of the improvement in AIB's fixed rate offers is also very welcome. It is fair to say it surprised some analysts, who were predicting that the movement would be in an upward direction. Will Dr. Hunt explain the thinking in this regard? Has there been a change in focus? AIB has always prioritised variable rates but it is now becoming more competitive in the fixed rate market. Is that because customers are showing a preference for fixed rates and AIB wants to be competitive in that space?

Dr. Colin Hunt

I will hand over to Mr. Kinsella in a minute. We are very conscious of our standing and role as the largest provider of mortgages to Irish consumers. We keep our product offering and pricing under constant review. We have had a very attractive standard variable rate product in recent years but we monitor market developments. It is clear that an increasing number of current and potential customers are interested in having more competitive fixed rate offerings. The action we announced earlier this week was simply a move to enhance the quality and range of our products in order to ensure we continue to be an attractive and well priced provider of mortgages to our customers.

Mr. Tom Kinsella

The Deputy almost answered his own question in the sense that it is around providing choice in the marketplace, reacting to customer behaviours and providing different cohorts of customers with different propositions that different cohorts find attractive. We have seen the marketplace move significantly towards a fixed rate offering. Therefore, the rates we announced this week make us competitive in that space.

The Irish Banking Culture Board will issue its report on Monday. Perhaps Dr. Hunt might give us a sense of what AIB is doing in tangible terms to improve its culture. As I said, Dr. Hunt referred to a customer focused culture. We await the recommendations of the Irish Banking Culture Board. AIB is part of and co-funds the board and presumably will buy into whatever recommendations it produces. I do not know what they are yet. In tangible terms, what is AIB doing to ensure the voice of the consumer is heard when decisions are being made?

Dr. Colin Hunt

Does Mr. Kinsella want to talk about the voice of the consumer?

Mr. Tom Kinsella

Part of my remit in the four or five years since I joined the business has been to be the voice of the customer in the room. We have a chief customer advocate who sits at all executive committee meetings. This person brings a challenge from a customer viewpoint.

Is this a person?

Mr. Tom Kinsella

Yes. Until very recently, that person was me and I have handed over the baton to Mr. O'Keeffe. We also have a group conduct committee, which is about taking conduct from the regulator's side. From the regulator's point of view, the conduct risk agenda is a very large one. It effectively says that the customer must be put first and at the heart of our thinking. We are tackling this from both a regulatory and a cultural point of view. Dr. Hunt referenced earlier that our core value is putting the customer first and that the customer is at the heart of our thinking. The customer agenda has been building through the business over the past four or five years. We have come a long way on that journey but we have more to do.

Dr. Colin Hunt

We have spent a considerable amount of time working on our brand values. Regarding the annual appraisal process we now go through, 50% involves what we did and 50% involves how we did it so it is about how we lived those values.

The primary value is that the customer is put first. We have enhanced our values and introduced a new purpose statement, which is that the purpose of the bank is to back our customers to achieve their dreams and ambitions. I have recently met the retired judge, Mr. Justice John Hedigan, who chairs the Irish Banking Culture Board. We have nominated our head of consumer banking, Robert Mulhall, to be AIB's representative on that board. He is a member of my team and a member of the group executive and that is a clear indication of the seriousness with which we treat the whole cultural issue.

As I said earlier, of the three building blocks that are necessary for us to fully restore our reputation over the next number of years, culture is a critical one. We have had an increasing focus on customers in recent years and that is well recognised externally but the fact of the matter is that we have further work to do, as we enhance our culture, towards being a more open, transparent and maybe a less hierarchical organisation.

That brings me to my final point, which is reverting back to the whole tracker and prevailing rate issue. It is an ask on my part because there are a lot of people who are watching in about this issue or who will read the transcript later on. I encourage AIB to move away from what I would regard as an overly legalistic approach to this issue. I know that Ms Dooley has a job and she is essentially the chief legal person within the bank but the real test of culture change comes when a bank is faced with a situation where there is the bounce of the ball. Does the ball bounce on the side of the consumer or on the side of the bank when it comes down to a choice? AIB needs to replace the thought process of what it must do with what it should do. For me, looking at the paperwork and the documentation objectively, the bounce of the ball on this issue should favour the consumer because when one looks at the paperwork, it is very evident that there is an omission in the mortgage contract. The mortgage contract refers to a tracker margin in another part of the document and it is just not there when one goes looking for it. What AIB is doing as a bank, from my perspective, is that it is benefitting from an omission in its own mortgage documentation, and that is wrong.

If I were Dr. Hunt coming in as a fresh new CEO, I would look at this again and I would remove the risk, which is very significant, that the High Court or the ombudsman will eventually force the bank to change its position on this issue. Given the journey that AIB has travelled as a bank and the work it has done to repair its reputation in dealing with the other tracker issues, it would be a great shame if AIB was forced to make a change of direction on this issue. I will leave that as a final message. AIB should move away from that legalistic approach of what it has to do and replace it with a thought process of what it should do to demonstrate that AIB really has changed as a bank and is putting the interests of consumers first. Dr. Hunt has an opportunity to do it with this issue and I encourage him to do so.

In his opening statement, Dr. Hunt referred to solutions such as the development of mortgage to rent with iCare and saying that it also engages with external agencies such as the Irish Mortgage Holders Organisation, StepChange and the IFA. Can Dr. Hunt broaden that out and tell us if there is potential, with the homes that have mortgages in distress, to do many more sales to agencies with charitable status or agencies that are acting directly in the interests of saving the families in their homes?

Dr. Colin Hunt

I will ask Mr. O'Keeffe to answer that question.

Mr. Jim O'Keeffe

As we touched on briefly, we certainly are engaged. We discussed with the committee previously the opportunity to look at what it would look like to work with a charitable organisation, to transfer loans to it and how that would work etc. and we have put a lot of work into that in recent times. At this point I am only able to give colour to the committee behind where we have got with that. The other parties that are working with us would not want me to give any other information on that at this stage either or even to estimate the certainty of it but I assure the Chairman that if that works, we will not be found wanting in supporting it.

Dr. Colin Hunt

Mr. O'Keeffe and his team have the full support of all of us working in the bank. We are very open-minded on approaches to the solution of this issue.

Does AIB see potential in the general business model of getting those loans to an agency of that sort and keeping the people who want to pay but are still under pressure in their homes?

Mr. Jim O'Keeffe

There is definitely potential there. The challenge for us is to find out how it will operate and that is the work that we are carrying out with the partners at this point.

My concern is that as these sales come up, as Deputy Pearse Doherty said, AIB is getting down to the more difficult cases and it is easier to sell them on to a vulture fund than it is to continue to drill down into the solutions that might be found for them. I encourage AIB, whatever organisation it is using, to try to expand on the proposal that is there and to engage with that proposal before it engages with a vulture fund. I say that because, like other banks and the Central Bank, AIB tells us that the protections travel with the loan. Very shortly, the witnesses will hear through this committee about the effects that a vulture fund can have on individuals and how they are treated and it flies completely in the face of all of that legislation and protocol on the protections we talk about. It does not work and that it why there is an onus on the banks, regardless of how difficult it is, to continue to drill down into these loans and to determine if people can be kept in their homes and have them pay a sustainable mortgage or rent. That is what I am appealing to AIB to do. I have said it to the other banks as well.

On the non-performing loans, the Central Bank of Ireland and the European Central Bank, members of the committee met these organisations some time ago and we get mixed messages that they are not telling the banks to do this and that this is a target that the banks are reaching of their own accord in an attempt to get their books in order and that there are a lot of solutions that should be examined besides vulture funds. AIB presents it as a very definite stick that it is being beaten with and in fact the ones that AIB says are holding the stick are telling us that this is not the case.

Dr. Colin Hunt

We have very clear direction from the regulator, namely, the ECB, on the future trajectory of non-performing loans. The ECB has signalled across the European Union that in the event that non-performing exposures are not reduced, it would be effectively putting a punitive capital weighting on those exposures. It is very clear to us that the prudential regulator wants to ensure that we can get our balance sheets into the best possible shape as quickly as possible.

How is that particular piece of information passed to AIB? Is it in the form of a letter?

Dr. Colin Hunt

There has been some talk about calendar provisioning in the marketplace and I understand there has been some issuance with Italian banks. On ourselves, I am not in a position to state how that has been communicated.

Dr. Hunt might let us know how this is communicated. The other issue with Dr. Hunt's opening statement is that he talks about some of the committee members being strongly opposed to the sale of NPL portfolios and so on, particularly to the vulture funds, and I am one of those. I appreciate what AIB is doing. I want to acknowledge that I understand the efforts that it is making.

However, the customers who are in difficulty did not walk into it on their own, they were accompanied by banks. People went to banks to seek a loan for a normal house and came out with a loan for a mansion and two cars which they had no possibility of ever being able to repay. Dr. Hunt might say that the bank has an onus to look after its general customer base but there is also an obligation on the bank to accept responsibility and admit it was part of the problem.

To go back to my previous point, the bank must drill down heavily into those loans and try and assist the customers affected to get back to performing in some way again because we are losing a generation of entrepreneurs. Many families feel they have been completely beaten up by the banks and are trying to recover from that. I would like to see much more being done by the banks. I am not asking that people would be freed from their loans but there is pain involved. The other side of the story that would sit in beside the statement that Dr. Hunt made is that these people were not entirely to blame.

Dr. Colin Hunt

We have a clear desire to work in an agreed way with our customers in the resolution of these difficult cases. We have a larger suite of solutions than any other bank in this State and, as Mr. O'Keeffe mentioned earlier, we are continuing to work on increasing the range of available solutions. We want to come to an agreement with our borrowers who are in difficulties and that is our primary objective in this area. At the same time, there is an overriding requirement to deal with the issue of non-performing exposures which means we cannot rule out any option in addressing this challenging issue.

AIB is going through an analysis of how and why the tracker issue happened. Does Dr. Hunt now think it was deliberate of the banks that the tracker issue happened? It happened at the same time in all of the banks. Where does the fault lie? Where will the bank investigate and who will investigate as to who took the decision on all of this?

Dr. Colin Hunt

Ultimately, the tracker examination process is coming to an end and we are moving to a tracker enforcement process, which is likely to lead to the institution being levied with a fine by the Central Bank of Ireland. We will see what comes out of that enforcement process. As I said earlier, the tracker issue is a very large stain on the character and reputation of the bank. The enforcement process is under way and we will address the issue when we see what comes out of that examination.

I understand that, as well as the point Dr. Hunt made about the fine or sanction by the Central Bank. In the light of AIB's newfound interest in the welfare of its customers, will the bank be delving deeper to find out whether it was done deliberately? That would be a means of helping to rebuild trust with its customers. It seems to us that a deliberate attempt was made to save the bank and burn the customer at a particular stage.

Mr. Tom Kinsella

We have established over 40 different groups of customers that were impacted and each and every one of those has led to a root-cause analysis of why it happened. There were control failures, miscommunications, failures to meet our terms and conditions and cases in which the wrong terms and conditions were sent out. There was a range of reasons and we have corrected the causes as we have gone along to ensure it will not happen again. We have not found one case in which a deliberate action was taken by anybody to remove trackers from customers in any of those investigations. Trackers were removed for new businesses in October 2008 and 104,000 customers who had trackers before that date kept them. There were unintended consequences of that decision whereby some customers who had a right to a tracker no longer had one and that is the issue we are dealing with today.

The Central Bank enforcement issue is going through the organisation, root and branch, and will leave no stone unturned in looking for deliberate attempts to remove trackers from customers.

Are we likely to see a complete report at the end of that process?

Ms Helen Dooley

The Central Bank typically publishes a three or four-page statement about its enforcement actions. It may be a longer statement given the extent of the tracker issue, that remains to be seen, but the exact failings that the Central Bank finds will be specified by it when it publishes that statement.

Which entity paid the €25 million in tax?

Ms Helen Dooley

Excuse me?

Ms Dooley said earlier that €25 million was paid in corporation tax.

Ms Helen Dooley

That would have been paid by our old friend Allied Irish Banks, plc.

From where did that operate?

Ms Helen Dooley

The Republic of Ireland.

Is that the group Dr. Hunt represents?

Dr. Colin Hunt

Yes. I represent AIB Group.

Who else does he represent?

Dr. Colin Hunt

I also represent Allied Irish Banks, plc.

Does he represent Allied Irish Banks plc?

Ms Helen Dooley

It is a group company, yes.

I am just asking.

Ms Helen Dooley

The ultimate group company is AIB Group plc. There are still approximately 150 companies in the group and we are trying to reduce that number.

Has AIB any engagement with Deutsche Bank? Is it a servicing agent?

Ms Helen Dooley

In what regard?

I am just asking whether AIB has any engagement with Deutsche Bank. Does AIB represent Deutsche Bank in any way?

Dr. Colin Hunt

Not that I am aware. We had an involvement with Deutsche Bank at the time of the initial public offering, IPO, but it was acting for the State in assisting the transaction. I am not aware of any continuing relationship.

As for EBS, AIB is a separate bank but all of the figures and transactions come under one set of accounts. Is it one set of accounts for the two banks?

Ms Helen Dooley

They are consolidated but individual accounts are published for each group entity with a bank licence, including EBS. I think accounts for EBS were recently published.

Are there two separate licences?

Ms Helen Dooley

Yes.

I have a series of questions. The issue of the prevailing rate has been well teased out and I echo Deputy Michael McGrath's final contribution. Mr. Hunt has said that the tracker mortgage scandal has been a stain on the reputation of his bank and indeed the Irish banking industry. It will be a personal stain on Mr. Hunt's reputation as a chief executive officer if he does not deal with this properly and the courts find against AIB. These are the vast majority of impacted customers identified within Mr. Hunt's bank. We are 11 years on from when this issue occurred and there are nearly 6,000 people affected, many of whom feel they have not been properly redressed.

There was a bit of a play of words earlier when we were speaking about service breach and contract breach and those are significant terms. Is it AIB's position that there was no contractual breach in any of the 11,934 cases of individuals who were impacted by the tracker mortgage scandal?

Ms Helen Dooley

We arrived at a total of 40 different cohorts of customers which were affected by 40 different circumstances and there were very clear contractual breaches in certain cases.

The committee was given a list of 640 individuals who had a tracker before moving to a fixed-rate mortgage and whose terms and conditions allowed them to return to a prevailing rate at the end of the fixed-rate period.

Was there a contractual breach there?

Ms Helen Dooley

To be honest, I would be happy to sit down with the Deputy and go through these but I do not have the detail to hand now.

The 640 individuals whose terms and conditions allowed them to go back onto a prevailing rate tracker at the end of the fixed rate period did not go back onto a prevailing rate tracker after this was resolved by AIB but to the original tracker rate. This is being denied to the 5,915 individuals who AIB is fighting through its own assessment and the independent appeals process.

Ms Helen Dooley

This is a cohort that either originated on a tracker mortgage or at some point had a tracker mortgage. When we took into account ancillary documentation in addition to the mortgage contract we felt, and this was often the case across numerous cohorts, that the marketing material may have led them to believe that the tracker was available for the entire 25 or 30 years of the loan. I do not have the detail with me for that particular cohort. I appreciate that, at times, it might appear that we are taking a very legalistic approach but we take into account the full holistic picture of what the customer's expectations might have been, including brochure ware, advertising and letters that would issue over the course of the mortgage.

This goes back to the contract material and I will return to that, but what about the issue that where the contract is vague it must always be interpreted on behalf of the customer? The vagueness in the contract cannot be interpreted on the bank's behalf. We have discussed this previously as other members have raised the issue. The prevailing rate is not defined. A tracker rate is defined under condition 3.6. The bank's advertising material makes it clear that the only thing that varies is the ECB portion of that rate. Repeated court rulings have established that the authors of a contract cannot benefit from the vagueness of the contract. Taking away that legalistic approach, if the bank is genuinely customer-centric it would take that approach regardless of case law in respect of this matter.

Ms Helen Dooley

Again, it comes back to the position that we withdrew the tracker rate for all new customers, as did the entire market at the time, because of the dislocation in financial markets and our inability to fund. In hindsight, should we have retained a tracker rate at a very high rate of 10% to 12%? Perhaps, but we did not. We have not manufactured a rate for that period but we have proven through independent analysis and expert opinion that if there had been a tracker rate through that period it would have been higher than the rates that continued to be offered. Therefore the customers have suffered no detriment. The Deputy is correct that the contract must be interpreted or construed in favour of the party that does not draft it, but essentially the point as to what losses the party to the contract has suffered remains the same. It continues to be our view that the customers did not suffer any financial detriment.

However, there was no tracker rate at the time so the bank has engineered a tracker rate, and it did that retrospectively.

Ms Helen Dooley

We have not done it retrospectively. We have conducted analysis that we believe demonstrates that if we had maintained a tracker rate it would always have been more expensive than the fixed rate and the variable rate.

Will the witness explain how this was not a contractual breach? I have no legal background but somebody entered into a contract with AIB and that contract states clearly that after a period of time the person can go onto a tracker rate at the then prevailing rate. AIB did not allow the person to go onto the tracker rate, therefore that term in the contract was breached.

Ms Helen Dooley

The Deputy is right. It could be construed as a contractual breach. The way we have characterised it in our communications to customers, because from our point of view we failed to maintain a prevailing tracker rate, is what we call a service failure or a service breach and, unfortunately, we have them in other scenarios aside from mortgages. The amount of €1,000 that we have offered for that service failure, and Tom Kinsella mentioned this earlier, is the type of amount that the ombudsman would typically award for a failing of this nature.

If it is a contractual breach, and the bank dismissed that it was a contractual breach, why does it not------

Ms Helen Dooley

We did not dismiss it. We are describing it as a service failure or service breach.

Is it not a breach of contract?

Ms Helen Dooley

The court may determine it is a breach of contract.

It should not have to go to the courts. Does the witness not understand that these 6,000 people have a contract which states that they are entitled to a tracker rate? Forget about the issue of the rate that was going to be applied at that time. Their entitlement to a tracker rate was unilaterally withdrawn by AIB. It is a breach of contract. In simple terms, let us say I sold the witness a carpet for her house and she paid me a couple of grand for it. I was due to lay it in six months' time but when she came to me for that I told her I was not doing carpets any more and only putting down tiles. That would be a breach of contract. That is what AIB did. People had an entitlement to go on a tracker rate but AIB withdrew a product which it contractually had an obligation to provide to those 6,000 customers. Why not just call a spade a spade and not mince words? Just say, "Yes, we broke the contract", instead of coming up with clever words like a "service breach" and trying to be a little more cuddly. The bank broke the bloody contract. It is black and white.

Then there is the issue that there is a vague contract which case law says must not be interpreted to the detriment of the customer. The bank cannot retrospectively engineer a rate. It must go to the point where the bank entered into the contract. It will be played out in court. I have seen some very serious legal opinion, although lawyers will differ and so forth, but the idea is to allow this to play out in court. Dr. Hunt is a new CEO and this is an opportunity to resolve some of the legacy issues. He should take that opportunity. He should at least take the opportunity to bring fresh eyes to this. In particular, will he give a commitment to the committee with respect to any individual who is taking court proceedings against AIB whereby if AIB settles that case, he will ensure that it will also settle with all 6,000 other individuals affected by the same situation? Too often we have seen instances where somebody has a very strong legal challenge and is willing to take on an institution such as AIB, but the institution knows the person has a case and it settles. With a confidentiality clause it manages the settlement and pays the one or two individuals concerned, but the other 6,000 are left high and dry.

Can Dr. Hunt also speak to us about the Statute of Limitations and whether that will apply to the other 6,000, many of whom have not initiated legal proceedings at this point?

Dr. Colin Hunt

I will hand over to Ms Helen Dooley in a moment. It is very clear that this is an issue of grave concern. We have a genuine focus on putting our customers first. We have comprehensively looked into the issue over the past number of months and have come to a position on it, but I hear the comments that have been made to us here. Ms Dooley will comment on the legal points the Deputy raised.

Ms Helen Dooley

On the last point, we have waived our rights with regard to the Statute of Limitations for the tracker population.

With regard to if we settle a case, when we settle a case it may be on an extraneous factor. Where we settle a case our practice is to look across the book and see if there are any other similar circumstances.

We do not drag people through the courts unnecessarily. We do not go to court unless we firmly believe we have a good position to defend. We cannot commit that a settlement would be extended across a population because settlements are always on a case-by-case basis.

Will the bank inform the Central Bank of the rationale, the specifics of the case and the reasons it was settled? I am aware of other institutions - not AIB - which were taken to court by individuals, where the case was settled on the steps of the court with a confidentiality, or gagging, clause. There are thousands of customers in exactly the same position who do not get the benefit because they are not aware of it. I have raised the issue with the Central Bank and let it play its consumer protection role-----

Ms Helen Dooley

The Central Bank requests regular reports - at least from us - on litigation, and progress thereof, over trackers.

Do those reports include details of legal settlements and the rationale for them?

Ms Helen Dooley

Yes, I believe so.

How many restructured mortgages that meet the terms of their restructured arrangements are classified as NPLs within the bank?

Mr. Jim O'Keeffe

I do not have that number to hand and we have not disclosed it previously. There are mortgages within that category where for a period, once a mortgage is restructured, it must undergo what is called - in the NPE technical field - a probation period. There are mortgages in that category.

Is it only that they have to wait until they have fulfilled the terms of the restructured arrangement for 12 months? In the case of another financial institution involved in restructuring which appeared before the committee, individuals are meeting the terms of the restructuring but, on the basis of the type of restructuring involved, such as a split mortgage where more than 20% of it is warehoused, their loans are deemed by the ECB to be NPLs. Does the bank have categories of individuals who fall into that area?

Mr. Jim O'Keeffe

We have discussed split mortgages, which are different in our case, given that split mortgages are not sustained into a NPE. There are rules within the NPE where there are reduced rates or where we are dependent on the customer selling the property at the end of a period to capture the loans. As I said, I do not have the details to hand.

Does the bank have any data on customers who fully engage with it, who make the maximum payments to it, based on their standard financial statements, but whose only solution, determined by the bank, is voluntary surrender or repossession, where the bank has determined that the individuals will ultimately lose their homes?

Mr. Jim O'Keeffe

In reply to one of the questions earlier, we shared the voluntary surrender numbers. We have reached a point where the mortgage-to-rent scheme has been enhanced, and the solution we have put forward with iCare, in particular, allows us to deal with customers who have no affordability. If the property, therefore, fits within the categorisation of the social housing rules, as laid down by the State, there is an opportunity for the customer to remain in the home, and we share the details in that regard.

How many individuals have submitted standard financial statements which the bank, on examination, has determined to be unviable and decided that surrender of the property is the ultimate outcome? I acknowledge that the bank is engaging with iCare, which we welcome. It is very positive that there are more mortgage-to-rent properties and there are a number of positives that I could raise but I want to focus on the specifics. A Central Bank report has outlined those in long-term arrears of two years or more, which total 40,000 between buy-to-lets and private dwelling homes, PDHs. In last year's report, the Central Bank suggested that 50% or more would lose ownership of their homes in that scenario. From the bank's perspective, it has the standard financial statements and is able to assess where they are viable, sustainable or not. In how many cases involving people who are engaging and have submitted standard financial statements to the bank does AIB expect the ultimate solution to be loss of ownership?

Mr. Jim O'Keeffe

As I stated, I do not have that number available. While we have not disclosed it previously, we provide the committee with the details of those who take up voluntary sale or voluntary surrender.

The book value for Project Beech, the latest sale, is €1 billion. What was the sale price?

Mr. Jim O'Keeffe

We disclosed we received €800 million for the sale of the loans.

Were 220 family homes involved in that sale?

Mr. Jim O'Keeffe

There were 263 PDHs attaching to the portfolio.

Given that a new threshold has been crossed, in respect of the sale of family homes to vultures - I understand the loans are cross-securitised - is it the intention to go down this road with other potential sales of family homes to vulture funds in the future?

Mr. Jim O'Keeffe

We must always return to the fact that we have diverted the attention of a quantum of the team to ensure we are working through our PDH, or family home, solutions. Our main message is that we want engagement because we have solutions. As we have stated previously, we are working through the wider portfolio of our assets, such as investment, commercial and so on, in order that we could allow the enhanced mortgage-to-rent scheme, discussions on charitable loan sales, etc., to take place and give us head room to achieve that. That has worked for us, although the committee will appreciate the difficulty we had with the connectivity of the recent sale, which was just described. As we go forward, beyond 2019, and as there are other targets, there is a real possibility that if customers do not come to us and avail of all the opportunities for restructuring that remain, the loan will form part of a portfolio of sale.

It was a new departure for AIB, therefore, where it sold family homes that are not securitised in other business assets. Is the bank indicating that the only sale that will take place is where there is complete non-engagement and non-payment? That is the impression Mr. O'Keeffe gave with his previous contribution.

Mr. Jim O'Keeffe

Where we do not have true engagement, we have not solved the issue. The Deputy referred to non-payment but, as we discussed earlier in reply to another of his queries, some payments on loans are coming through but they are not meeting the requirements of the loans. If the customer engages with us and allows for some adjustment, those payments could be those required to restructure the loan, but the customer needs to give us that opportunity. Some customers have engaged meaningfully with us, that is, they have provided information. The committee asked whether we are reaching a difficult part of the book in respect of reaching solutions. The solutions we can provide are no different. There are challenges with engagement and, very often, the non-provision of information. That is the key. Once we have that information, it allows us to get to the point of having a restructure and does not require us to put it into a portfolio.

My colleague, Senator Conway-Walsh, spoke about the fees and the deferred charge of 20 cent per contactless payment. AIB sought permission from the Central Bank to apply that charge and one can understand why it would request permission to apply a 20 cent charge per contactless payment. While I accept the charge is currently being waived, the bank has permission and can apply it at any time, although I suggest that the bank should not do so. The bank applies a 20 cent charge for direct debit purchases, however, and if one uses one's chip and PIN, there is a 20 cent charge on every transaction. AIB is quite heavy in respect of charges on ATM withdrawals and other areas. What is the justification for a charge of 20 cent for each payment by somebody using a bank card on a chip and PIN transaction?

Unfortunately, because there are so many legacy issues with the bank where we are dealing the prevailing the rates and issues in terms of vulture fund sales, we are not getting opportunity - perhaps that is partly our fault but these are the pressing issues - and the time to discuss the future of the bank and its lending strategy. In his opening statement, Mr. Hunt spoke of the performance of AIB in 2018. He said that new lending had exceeded €12 billion, up 15% on previous years, and that mortgage lending rose 16% to €2.8 billion. Does the bank have targets for 2019? Can he share those or are they sensitive in terms of new lending? Does he expect to see the same targets that were achieved last year? Is the bank on course to meet those targets or are there issues now within the market that are suppressing some lending, whether it is queries regarding Brexit, uncertainty or the current housing market, particularly with the funds coming in and buying many of the available properties?

Dr. Colin Hunt

I will ask Mr. Kinsella to address the fees issue. I will then address the last point.

Mr. Tom Kinsella

In regard to fees, the fee for contactless transactions is zero. We have no intention of introducing the 20 cent charge. On the other charges, we are cheaper in terms of over-the-counter transactions. I accept the Deputy’s point about the other digital transactions. All of those fees and charges are under active review.

The 20 cent charge for chip and PIN transactions is scandalous. It is ridiculous. Many places still do not have a facility for contactless transactions. I would say most consumers do not know that when they buy a loaf of bread and put in a chip and PIN for the transaction they pay a 20 cent charge to AIB. That is a hefty charge. I had an issue with another bank that was charging half that amount. One of the problems is that these charges do not appear, as it were, and people are completely unaware of them. While they are included in the monthly or quarterly statement, they are all rolled up into one figure.

Mr. Tom Kinsella

I accept the Deputy’s point. The fees are under active review. AIB has 500,000 contactless transactions every day and I urge all our customers to use the contactless facility consistently.

Dr. Colin Hunt

It is the fastest growing means of payment in terms of what consumers wanted.

On the strategy outlook, I am not able to tell the Deputy our actual targets for 2019. That is market sensitive information but I will make a number of general points. Notwithstanding that we have an operation in the UK and an office in New York, we are predominantly a retail banking operation headquartered in Ireland, which is our home market. We are reliant for our future sustainability on the lending we make today and how we treat our customers today. Over time, our medium-term target is to see the balance sheet of the bank continue to grow in line with overall nominal GDP growth in the country, that is, looking at the total amount of growth in the country and taking into account the growth in prices. We look forward to the balance sheet growing. A growing balance sheet is of concern to our investors but my primary obligation is to ensure that the balance sheet growth we enjoy in the years ahead is appropriate and sustainable.

I thank Mr. Hunt and his colleagues for attending today. I also thank members.

The joint committee adjourned at 1.25 p.m. until 9.30 a.m. on Thursday, 18 April 2019.