Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach debate -
Thursday, 17 Jun 2021

Consumer Credit (Amendment) Bill 2018: Discussion (Resumed)

Vice Chairman

I welcome everybody - guests and staff - to this meeting of the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach. I need to bring a couple of issues to people's attention before the meeting proper starts. Apologies have been received from the Chairman, Deputy John McGuinness.

I remind members and participants to switch off their mobile phones because they cause interference. For the purposes of the Official Report, I have been requested to identify members when they are called to speak. Members are also requested to remove their face coverings when speaking in order to ensure that their contributions can be recorded adequately. They can put their face coverings back on when they have concluded their contributions.

We have a number of witnesses with whom to discuss the Consumer Credit (Amendment) Bill 2018, a Private Member's Bill. We extend a welcome to our guest speakers and to those who may be watching in on the Oireachtas channel. We are joined by: Ms Annmarie O'Connor, business manager, national development, Money Advice & Budgeting Service, MABS; Ms Michelle O'Hara, manager, south Leinster, MABS; Mr. Michael Doherty, regional manager, north Munster, MABS; Mr. Paul Joyce, senior policy analyst, Free Legal Advice Centres, FLAC; and Mr. Ed Farrell, CEO, Irish League of Credit Unions.

The purpose of today's meeting is to continue detailed scrutiny of the Consumer Credit (Amendment) Bill 2018, a Private Member's Bill tabled by Deputy Pearse Doherty. This is the final public hearing on the Bill in advance of the preparation of the committee's report.

The format is that Ms O’Connor will give a brief opening statement, followed by Mr. Joyce and then Mr. Farrell. The opening remarks will be followed by a question and answer session with the members. I call Ms O’Connor to make her opening statement.

Ms Annmarie O'Connor

The Money Advice and Budgeting Service, MABs, welcomes the opportunity to contribute to the committee’s deliberations today. I am joined by my MABS colleagues, Mr. Michael Doherty and Ms Michelle O’Hara.

While we support the objectives of this Bill, unfortunately, advising on the rate is not within our expertise. Instead, we aim to show people on the lowest incomes should be able to access the lowest rates possible when they borrow. If this market can only deliver at a rate that risks our clients falling into further debt or being locked into poverty, then action is surely needed. We strongly assert that low-income households do not naturally migrate from legal to illegal lending. MABS clients are capable, astute and resourceful. They are fearful of the dangers of illegal lending.

The risk of migration to illegal lending too often colours this particular debate. There is a risk of unintended consequences, but similar risks arise in legislating all the time. Those risks are mitigated not by a reticence to legislate but by a broader focus on the other measures needed for legislation to have the desired pro-social impact. Occasionally, clients come to MABS at a point of borrowing or having borrowed from an illegal lender, but only when other avenues have been exhausted and usually only out of pure desperation. On 10 May 2021, a major provider of high-cost credit announced it was stopping lending. Since then, we in MABS have been working with colleagues in key stakeholder organisations to ensure there is a coherent operational response to address any fallout and to ensure people facing difficult circumstances and hard choices do not turn to illegal moneylenders in the absence of alternatives.

Actions are needed in four domains: policy, legislation, regulation, and operations. MABS can actively work on operations, but, respectfully, we submit that a holistic policy focus on the credit, financial inclusion and other needs of households living on low incomes or coping with a sudden income shock is needed so that they do not get caught in poverty traps due to high-cost lending. If MABS can work with all stakeholders to build financial resilience through innovation and a commitment to address this challenge, then we think we can potentially bring many borrowers along a pathway from high-cost, to near-prime and mainstream lending.

The main issue we see in our casework is a lack of income relative to fixed costs, a related lack of financial resilience and a contraction in the choices remaining to access credit when it is needed. This is either due to a systemic lack of income or to an insufficiency of income due to a changed circumstance. When a financial buffer in the form of savings is not there, some households borrow at a very high cost to bridge a gap. Despite what we hear about unprecedented levels of post-pandemic savings, we do not see this in our casework. Just now, more of our clients seem to be falling behind.

Our submission highlighted the role of the poverty premiums we see in our casework all the time: late fees, so-called dishonour fees, overdraft fees, disconnection fees, not being able, for example, to afford to bulk buy nappies or other essentials to get a lower unit cost, a previous history of arrears, and so on. All of this means it can cost more just to get by in the poorest households. We highlighted the pain or pressure points that can occur such as a car breakdown, a washing machine giving up, or a bill that is higher than usual. More profound are the effects of loss of hours, a relationship breakdown or a bereavement. Add to that the practices of institutional creditors and their agents with a singular focus on collecting amounts owed, and you will see how our clients can become quite desperate and vulnerable and how loyalties can transfer to a high-cost lender, who can sometimes be viewed as a friend.

Timing is key when pressure is applied. Last year, in our pre-budget submission, we suggested a need for breathing space to enable us to work with our clients for a period of three months, during which they would face no pressure from their creditors and we could work to find a sustainable solution. Unfortunately, some of the biggest household expenditures are becoming more immutable to change through budgeting alone. Accommodation costs, for example, absorb a greater percentage of our clients’ incomes, leaving them with little scope for savings and more at risk of falling behind on other bills. This leads, in turn, to their financial exclusion and a risk they will not be able to access affordable credit when it is needed.

MABS is supportive of the objectives of this Bill. We strongly believe it is within the capacity of all the main stakeholders to work together so that no household has to avail of rates so far from the market norm and to bring the risk premium down. To do this we need to explore what share business, credit unions and banks might underwrite, what other innovative solutions could emerge in the market, the role of personal insolvency, the impact of reducing the poverty premium, the use of alternative data on payments in potentially building a positive credit score, the potential to encourage or incentivise saving, the impact of new forms of finance, such as buy now pay later, BNPL, finance, what unmet need the Department of Social Protection or other Departments might address, and what the response from charities might look like. Our clients want to pay. It is costs, not behaviours, that present the primary challenge.

Vice Chairman

Before proceeding further, I should have mentioned earlier the privilege notice. Members are reminded of the parliamentary practice to the effect that members 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 to make him or her identifiable. I remind members of the constitutional requirement that they must be physically present within the confines of the place in which Parliament has chosen to sit, namely, Leinster House or the Convention Centre Dublin, to participate in the meeting. We cannot permit a member to participate where he or she is not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the parliamentary precincts will be asked to leave the meeting. Witnesses attending remotely from outside the parliamentary campus have been made aware that full privilege may not apply. I ask Mr. Joyce to proceed.

Mr. Paul Joyce

Free Legal Advice Centres, FLAC, is pleased to contribute to the debate. We made a detailed submission last November. Since then, there have been many appearances before the committee from a number of people such as the Centre for Co-operative Studies and the Social Finance Foundation, SFF. The debate has moved on as a result of the number of appearances by different witnesses. The scope of the legislation seems to have narrowed to a number of issues, one of which was understanding APR and how it works in particular for short-term loans. Loans of under a year always carry high APRs. Another was that perhaps a tiered system would be best in terms of creating maximum interest rates.

Another was that tiered rates might be introduced depending on the length of the term of the loan. I also note that Deputy Doherty made a number of requests for information from the Central Bank of Ireland at the last debate, when the director of consumer protection appeared before this committee. The suggestion was made by Deputy Doherty that perhaps a standard of three times the market rate might be an appropriate rate to strike and he requested data from the Central Bank on interest rates charged by various lenders. That seems to be the nub of the issue.

I wish to make a couple of observations. It is not true to say that there are no maximum rates of interest that can be charged by moneylenders right now. Each moneylender applies for a licence annually and sets out the rate that it proposes to charge and the Central Bank either agrees or does not agree to that rate. A fact that is often missed in the media debate on this issue, in terms of the scandal of moneylending rates and so on, is that the State actually authorises each moneylender to charge what it currently charges. If one looks at the moneylenders register, one sees that some moneylenders have two different rates, one for short-term loans and the other for longer-term loans. A number of lenders also charge collection charges and a different APR applies for such charges. It is also worth noting the advisory note at the top of the register which reads as follows: "Please note that while the below register provides detail on the maximum rates a moneylender can charge, each moneylender may have a range of additional products with lower APRs and costs of credit available." That is a particularly interesting statement in the context of setting maximum rates. It seems to suggest that there is some degree of competition among moneylenders. The fear that Ms O'Connor has articulated and which has been articulated by many is that by setting maximum rates, the licensed moneylender option will be cut off and people will migrate to illegal moneylenders. Discussions with the industry, with the Consumer Credit Association which licenses moneylenders and with Provident, which has withdrawn from the market, on how this might work would be worth considering.

The director of consumer protection at the Central Bank suggested that setting one maximum rate might lead to a situation where licensed moneylenders would just extend the term of their loans, thereby defeating the purpose of having a cap in the first place. Obviously that fear could be dealt with by having a tiered set of rates depending on the length of the agreement. The Minister for Finance in his contribution made it very clear that APR is significantly affected by the term of the loan if the latter is less than one year. That is correct. He said that he agreed completely that current interest rates are too high but that a sudden change of this magnitude could be very difficult for the industry. There seems to be a broad consensus emerging that existing rates are too high. We all probably accept that but setting maximum rates needs to be well researched and needs to still allow for some measure of profit for licensed moneylenders in the market.

On the issue of collection charges, 14 of the 35 lenders currently on the register purport to charge collection charges. Our legislation is totally outdated in this regard. Section 103 of the Consumer Credit Act obliges the moneylender to inform a borrower that payments can be made at the business premises of the moneylender but nobody actually does this. It would be more expensive to go to the business premises of the moneylender in the first place. What is extraordinary is that the legislation has not been updated to allow borrowers to make electronic payments. If there are going to be tiered rates for different lengths of agreement, they have to distinguish between home-collected loans, which are obviously much more expensive for the lender to service, and loans that are paid by electronic means which are obviously going to be far cheaper and should attract much lower rates.

It seems to us that a cap, or caps, is needed and tiered rates seem like a good idea. It will be interesting to see what response Deputy Doherty gets to his request to the Central Bank to provide data. Some broader questions also apply here, some of which were touched on by Ms O'Connor. In our lengthy submission in November we touched on a number of them. Credit unions are seen as the main alternative source of credit to licensed moneylenders should a lot of the latter leave the market. It would be useful to evaluate and review the It Makes Sense loan scheme to understand the problems with it. Our understanding is that while a lot of credit unions participated in the scheme, a number of the larger unions did not.

There are obviously huge issues of income inequality in our society. In that context, the supplementary welfare scheme needs to be looked at to see whether the urgent needs payment mechanism is actually working for people who, as Ms O'Connor suggested, get into temporary financial difficulties when their washing machine or cooker breaks down, for example. There is also the issue of the minimum living wage which a number of organisations, including the Vincentian Partnership for Social Justice among many others, have suggested should be set at €12.30, which is approximately €2.10 above the national minimum wage.

The last point I would make is that apart from maximum interest rates for licensed moneylenders, we should also consider maximum interest rates for other lenders. We gave an example in our November submission of an absolutely scandalous loan that was offered by a sub-prime lender to a client in the boom years. We would also like to see the consumer credit legislation changed in some other areas. Top-up loans are banned, for example, but there is no limit on the number of loans that a customer can have simultaneously which defeats the purpose of the top-up loan ban.

This committee is also looking at the Consumer Protection (Regulation of Credit Servicing Firms) Bill. In our submission on that legislation, we made the point that consumer credit legislation in Ireland needs to be properly codified. We have an Act and a number of statutory instruments. It is about time that the legislation was updated into one cogent statute that people can understand properly. There are two very significant directives in this area; one is the 2010 directive on consumer credit and the other is the 2016 directive on mortgage credit. They were both transposed by statutory instrument, thereby depriving the Houses of the Oireachtas and the committee of the opportunity to debate them properly.

Vice Chairman

I thank Mr. Joyce and call on Mr. Ed Farrell from the Irish League of Credit Unions. Following Mr. Farrell, we will hear from Deputy Doherty who has submitted a further detailed amendment.

Mr. Ed Farrell

I thank the committee for the invitation to discuss the Consumer Credit (Amendment) Bill 2018. I wish to restate clearly the support of the Irish League of Credit Unions, ILCU, for the principle of the Bill. Putting a cap on the interest rates of moneylenders is the right thing to do. I welcome this opportunity to outline the view of the ILCU and will briefly, by way of conclusion, put our position on this issue in the broader context of credit union policy.

On moneylending, the ILCU believes it is vital that the Government ensures that extortionate interest rates are not charged. Credit unions know first hand how they trap families and individuals in a lifetime of debt. Everyone, whether employed or not, should have access to affordable credit.

Credit unions are part of a social movement with a financial purpose and are not financial institutions with a corporate social responsibility programme.

Putting that ethos into practice, credit unions have, as the committee knows, rolled out the personal microcredit scheme, otherwise known as the "it makes sense" loan. The original aim was to prove that credit unions could offer a loan product that matched the convenience and ease of moneylenders' offers, address their exorbitant rates and operate within prudential lending guidelines. In an excellent co-operative effort with a range of agencies we have done just that.

The Bill the committee is considering is not simply aspirational. It exists in a context where an alternative exists and which the league is anxious to promote. It is in this context that we support the proposal for the introduction of a cap on moneylenders' interest rates. We note that the Bill proposes the amount of APR chargeable on loans by licensed moneylenders shall not exceed 36% and, in our view, this is appropriate.

We understand that there is concern that a cap may ultimately lead to a reduced supply of loans from licensed moneylenders, thus abetting legal lending. However, the league does not believe that an interest rate cap will result in increased lending by illegal moneylenders. Our rationale for this is twofold. First, as I said, is the fact that the credit union movement is an alternative source of credit which is in place as well as the international experience of where such interest rates caps exist. To expand on that point, I will refer the committee to a report on interest rate restrictions on credit for low income borrowers which was conducted by the Centre for Co-operative Studies in UCC. The report states that there is no empirical and undisputed evidence that interest rate restrictions result in an increase in illegal moneylending.

In the UK, it was feared that the price caps on payday loans would push a large percentage of people towards illegal moneylending. Citizens Advice in the UK has said that caps on payday loans have not led to an increase in illegal moneylending, with analysis of debt held by Citizens Advice clients showing that the number of loan shark debts has remained constant since the introduction of the cap.

Regarding fears of illegal moneylenders, the ILCU believes consideration should be given to the introduction of an interest rate cap over a period of years, thus providing as fluid a transition as possible. This could be achieved by way of a stepped down approach, so to speak, in advance of reaching the expired cap over a number of years. This would allow time to monitor the situation and take relevant steps, if and when required.

Credit unions are a social movement with a financial purpose. This issue has been a priority for the ILCU over several years. The wider policy context for credit unions and the committee is delivery by Government on its plans, as outlined in the programme for Government, which is for credit unions to become the community banking sector they have the potential to become. That bigger issue is outside the scope of today's conversation, but it is imperative if credit unions are to grow and deliver on the range of services people want from a people-led community-based movement. Moneylending is simply one example among many of the failures of conventional banking. I again thank the Vice Chairman.

Vice Chairman

I thank Mr. Farrell. I will open the discussion to the floor. I call on Deputy Doherty who will, no doubt, refer to his own amendment.

Deputy Pearse Doherty

I thank the Vice Chairman. It is to be hoped there will be no more technical difficulties. It is frustrating that we cannot have these meetings in Leinster House given all of the technical difficulties we are having.

I welcome the witnesses to the committee and appreciate, not for the first time, their time and input on this Bill and the wider issue of moneylending. I welcome Mr. Farrell, CEO of the ILCU; Ms O'Connor, business manager, from MABS, and her colleagues; and the Free Legal Advice Centre, especially Mr. Joyce who is a regular attendee at these committees on various subject matters.

I thank the witnesses for their opening statements and submissions on the Consumer Credit (Amendment) Bill which I introduced in 2018. A previous version of the Bill was published a number of years ago. I want to begin, as the Vice Chairman said, by drawing attention to a submission I made on behalf of Sinn Féin to the committee regarding the Bill. I understand it has been shared by the Vice Chairman.

The objective of the Bill is to end what I believe is the immoral status quo which permits moneylenders to charge interest rates of 187%, or up to 280% when charges are included. The Bill seeks to end that by capping the interest rates moneylenders can charge. It is very welcome that key stakeholders, such as St. Vincent de Paul, MABS, the Social Finance Foundation, the ILCU, academics and UCC, are involved.

We have a report from 2018. Others, including the witnesses before us, have supported the objectives of this Bill. I have listened carefully over the past number of months to submissions and opinions from all of the stakeholders in the committee and those that have engaged with me. My submission proposes to amend and improve the Bill if it is to progress to Committee Stage, which I hope it will. It should be, given the moral imperative at stake.

I have made a submission to the committee and have attached an addendum to that which lays out the pre-legislative change I seek. The proposed amendment would move from an absolute cap based on APR to a relative cap based on the total cost of credit. This would put in place a restriction whereby the total cost of credit charged by moneylenders, including fees and charges, could not cost more than three times the market average. The Central Bank would govern this cap by way of regulation. I note Mr. Joyce's comments on my request from the Central Bank for some of the data on what is on the market at the moment. We have not received that as a committee, but I understand it will come to us within the next week.

The Central Bank would govern the cap by way of regulations, with the market average calculated through information gathered from credit institutions and credit unions. It would also be, under the amendment I propose, phased in over a three-year timeframe, allowing for a smooth transition as recommended by a number of stakeholders. Others may have a view in terms of the timeframe, but that is what I am proposing.

Other provisions of the proposed amendment would require the Central Bank to assess the interest rate restriction and make recommendations periodically to the Minister for Finance so that he or she can develop regulations to restrict interest rates further, as appropriate. I hope committee members will consider my submission and the proposed amendment, and do what I believe is the right thing as a committee by progressing the Bill to Committee Stage after we have completed the legislative scrutiny. That is my piece regarding this submission. I have made a submission which the committee has agreed to accept.

In his opening statement, Mr. Farrell restated the support of the ILCU for the principle of the Bill and its proposal to cap the amount of APR to be charged at 36%. While I have said that I propose to move from an absolute cap based on APR to a relative cap based on the total cost of credit, I welcome the fact that the credit union movement supports this Bill.

In the marketplace, for a 12-month loan of €1,000 a typical credit union would charge €62 in interest while a moneylender could charge €560. Can Mr. Farrell comment on his view on this difference, ethically and in terms of cost it imposes on borrowers? To tell the truth, if there is one message I want to get out from this committee it is exactly that. If people go to a credit union it will charge, on average, €62 to borrow €1,000. People who go to a moneylender will be charged up to €560. A wise person will make a journey to a local credit union.

Vice Chairman

Does anyone wish to respond?

Mr. Ed Farrell

As Deputy Doherty has said, we tend to find moneylenders charge ten times the interest for a €1,000 loan over a six or 12 month period. Credit unions, by law, are capped, as it were, at a rate of interest rate of 12% per annum. Moneylenders are capped at 200%, or 300% if charges are included.

As Mr. Joyce said, there might not be a cap at all but it is certainly in the 200% or 300% space if there is. The credit unions cannot impose any extra charges so it is a maximum of 12% in total. There are no other charges on transactions or anything like that. Some credit unions would charge less than 12% but on that sort of small money, I suppose, it is about the social ethos of credit unions. It is not that a credit union would make much of a return at 12% but this was the raison d'être of credit unions when they started in the late 1950s in Ireland and access to credit was a problem for many people. That reason has stood the test of time in the 60 years since credit unions started.

Credit unions exist to facilitate people who have an ability and willingness to repay. That is important as well as it is other members' money that credit unions lend. The board and staff of each individual credit union have a fiduciary responsibility to govern the credit union and mind the money. One member's money might be lodged as savings and this facilitates the sourcing of credit for other members. There are over 200 individual credit unions in the Republic of Ireland and 500 or 600 branches of credit unions within the Twenty-six Counties. It is what they are there for. That is if there is a willingness and ability at all for the proposal, the borrower, the client or the member.

They are called "members" because they own the credit unions and are not shareholders as such. They are financial co-operatives. That is what credit unions are for and members should be encouraged to go in and see if credit can be arranged for them. It is an average of ten times cheaper than we have seen from the bigger moneylenders or door collection moneylenders.

Deputy Pearse Doherty

Okay. I am proposing a limit, as author of this legislation, three times the average cost of credit. Taking a six-month to two-year old charge of interest on a €1,000 loan, if the legislation is enacted as I propose, it would mean the cost of credit that a moneylender could charge would be a maximum of €186 for that €1,000 loan. That would clearly be down significantly from €560 and it would be phased in over a three-year term. For the first number of years, the charge could be higher.

What is Mr. Farrell's view of that proposal? I have another couple of questions that could be taken before I ask Ms O'Connor a couple of questions. There is a repeated argument from the Government that legislation to cap interest on moneylenders would drive people to the hands of illegal moneylenders. The witnesses have rejected the claim, citing research by credit unions and the authors of the 2018 University College Cork report. Will Mr. Farrell elaborate on that?

It is really important that credit unions are enabled to provide credit to borrowers, including those who have availed of high-cost credit and loans from moneylenders in the past. How, in the view of the witness, could that be better facilitated? Does he have any comments on the fact that the Government has failed to increase the interest rate cap imposed on credit unions from 1% per month to 2% per month? I will leave it at that but I have other questions if time permits or I can come in again. I have a series of questions for the representatives of MABS and FLAC.

Mr. Ed Farrell

As I have said, credit unions have a maximum rate of 12% and the phasing in of a 36% rate would be six times better than the current rate for other lenders of between 200% and 300%. For the good of the country, if there is a plan to get to a 36% maximum rate within a stepped process, it would bring the cost of credit and the amount a borrower must repay from 300% to approximately 30%. At that stage, it could be a case of happy days. We could all reflect and see if it needed to go further. A rate of 36% sounds very expensive when interest rates are at zero or negative. When credit unions put members' money in banks today, they get negative rates on that money, so 36% might sound ludicrous. For very small loans of perhaps €500 or €1,000 over six months, it is probably not as outlandish as it may seem. As I have said, in the context of rates of 200% to 300%, it is certainly a big step forward.

I indicated in my opening address that the league and seven, eight, nine or ten other organisations, including some of those before the committee today, have been working on the It Makes Sense loan as part of a task force under the auspices of the Social Finance Foundation with the Department of Social Protection, Citizens Information Board and a range of stakeholders. During that time we have had various other research mini-projects within the overall task force trying to get under the bonnet of the legal and illegal moneylending system, trying to understand behavioural patterns, what makes people loyal and what are the strengths. People are obviously stuck with them or loyal to them, whether it is a legal or illegal operation.

This research and the research within the UCC report tends to stack up and indicate there will not be an explosion in the sector. Time will tell and nobody could guarantee one scenario over another. We can look to research findings and experience in other countries, and there are caps in other developed European countries. There are other examples where there has been no loss of control.

As Deputy Doherty mentions, there is a proposal from the Minister on the cap on credit unions' own rates. Since credit unions started in the late 1950s - the first legislation for credit unions was in 1966 - the cap has been 12%, or a 1% per month calculation. That was before computers proliferated so it was probably just a simple calculation of 1% on a manual ledger system. That cap has not changed in 60 years. Four years ago the Minister for Finance's credit union advisory committee surveyed credit unions to see how they felt about credit unions having a maximum rate of 12% versus moneylenders having a rate of 200% and 300%. Approximately half of credit unions indicated they would like the flexibility to go above 1% per month above the 12% rate but half felt the 12% rate was enough and part of their social ethos was about the possibility of subsidising small loans to more vulnerable people at that 12% rate. Some of the bigger credit unions that would do more loans said it would be nice to have the flexibility.

The Minister's intention is to bring about legislation to allow the 1% rate go to 2% per month, which would be 24% per year, and that is still two thirds of the 36% rate that has been mentioned. If that comes to pass, credit unions seeking that flexibility will be happy because the boards of the individual credit unions will then be able to decide if they want to increase the rate. As I stated, on a purely commercial basis they would not make money at 12%. At 24% they would not be making much money but at least it would pay more of the cost to administer the loan. Many other credit unions will not go above 12% because they feel it is part of the overall offering and average rates will even out.

Deputy Pearse Doherty

I appreciate that. I appreciate Ms O'Connor's comments that MABS supports the principle of this Bill. I have outlined the changes I would like to see but could the witness describe to the committee the kind of cycle of debt that borrowers and some of the MABS clients fall into as a result of interest charged by moneylenders? Could she expand on that?

There is also the issue mentioned by Mr. Farrell that if moneylenders are capped, that will force them into illegal sources of credit. Ms O'Connor has rejected this argument as well. Perhaps she will elaborate on that point, which is important.

What is also important, and it is wider than this but so central to it as well, is the point she made in her opening statement about the broader set of policies that are required to promote financial inclusion and tackle financial exclusion. I note the excellent and comprehensive Building the Box report, compiled and published by National Traveller MABS in September 2020. It is important reading for all of us as legislators. The Government has not published a financial inclusion strategy for the past decade and that is something the committee needs to pursue. Quite frankly, it is a disgrace. My proposal provides for a cap on the interest moneylenders can charge over a three-year period, but it also allows for ancillary policies to be implemented such as some of those Ms O'Connor signalled in her opening statement. Can she outline what some of those policies should be?

Ms Annmarie O'Connor

The Deputy asked about the cycle that leads to our clients using licensed moneylending. In our submission in November, we described the issue as being as much about economics as about ethnography, so it is something that arises in particular communities. It is habituated. It is cultivated by the people who lend in this way. It is targeted at certain individuals and demographics. Certainly, in the research we did for the submission, we saw that with people parenting alone and single females parenting alone. It is about two cohorts, as I described in the opening submission. One is the cohort who live on a low income all the time and are targeted for particular events. I guess that when one always has to say "No", it is important to be able to say "Yes" sometimes. One of the things advisers say to us is that the moneylender can be viewed as a friend. It is a convenient model of lending. There is not a lot of judgment involved in it and that is important.

We have another cohort. We are seeing in our data more recently an increase in the number of males using this type of lending as well as an increase in the number of waged people using it. In those cases what we think is happening is that people experience a loss of income and cannot re-engineer their finances quickly enough so they have a gap to bridge. Then they have an urgent need and they look to the licensed moneylender to bridge that gap. We think there is significant potential for us to work with clients to bring them across. As we said, we use the words "near prime" and that might be what that higher rate the Deputy is proposing is, albeit lower than what is currently on offer in the licensed market from high-cost lending to near prime and then to mainstream, to get it to be as low as possible.

Regarding the illegal lending, we highlighted this because we have looked at the research, both from UCC and other international research. We have also looked at our own experience. The people who use licensed moneylending are well aware of the risks of illegal moneylending so that pathway from licensed to illegal is not a natural one. We think that perhaps it has coloured this space. In fact, sometimes when regulation in this area is proposed, the providers of high-cost credit highlight the risk of the contraction of the market and the migration to illegal lending. We need to look underneath that. We said in our submissions in November and today, which is very much with the idea of a tiered approach over a period, that if the change that is currently proposed was implemented, it is a perfect opportunity to situate that within a broader policy on financial inclusion. We have set out all the things that could be done. They are all possible. They are not high-cost policy measures. They are more about a focus on the stakeholders working together to bring the range of things that are possible to bear on this issue, so that we approach it strategically and bring all the stakeholders involved together. Each has a role to play, and that is the backdrop needed for introducing this change. It is positive to hear what the ILCU said. That is important. That is one element of it. There are probably other solutions and innovations possible within the fintech world and so forth. This is a great opportunity to tackle this issue and to do much better by the clients we support.

Vice Chairman

I want to bring in some other speakers as well.

Deputy Pearse Doherty

I will come back in later.

Deputy Paul Donnelly

I agree with many of the comments about credit and the high-interest loans that have been mentioned. I worked for many years as a family support worker and I saw at first-hand the scandalous rates that were charged. Indeed, I worked with the credit union and MABS to help many of those families to get out of the grip of the moneylenders. In my experience, many parents, particularly lone parents, were paying their entire children's allowance each month for years to the moneylenders. The witness talked about the hook. Just before people had finished the particular loan, at perhaps €100 or €50 from finishing the loan, they would be offered another loan. It just kept ticking over for a long time.

MABS is a fantastic organisation. I worked with it in the Coolock-Darndale area for 20 years and it had a fantastic relationship with the community. I fully support Deputy Doherty's amendment and hope that it is accepted and that we deal with this issue. I have a question for Mr. Farrell relating to one of my constituents. He has a loan from a credit union. He paid his loan weekly across the counter, as many people do, but during lockdown, credit unions were closed and he was unable to pay until he made different payment arrangements. He recently applied for a car loan, not from the credit union, and then discovered he had a bad credit rating due to the fact that he was unable to pay that loan, even though he has finished paying it. Does Mr. Farrell think that is widespread and has he heard of similar cases? I do not know what the responsibility of the credit union is to ensure that this person's good reputation is restored - he had an unblemished reputation in terms of credit - and that this can be removed in some way from the register.

Mr. Ed Farrell

There are 200 individual credit unions. The credit unions, thankfully, were essential services during the pandemic so if a credit union was closed it is news to me. We kept a weekly check-in with credit unions to ensure they were able to continue servicing the members. The door of the credit union may have been closed but people could telephone or email to make an appointment, so they were not closed from a business point of view. They may physically have been trying to keep the directors, staff and members safer by allotting time. I would be happy to look into that. A monthly report has to be sent. The Central Credit Register is one of the things Ireland Inc. had to do coming out of the International Monetary Fund arrangement. There had to be a better credit referencing system. The Central Bank had to put that in place, but it is strange that he would have found himself on that if he was not able to pay the loan because the credit union was unable to take the money from him. I will follow up with the Deputy directly and we will see what we can do, if that is okay. Obviously, I have no sight of that from here at present.

Deputy Paul Donnelly

I appreciate that and I thank Mr. Farrell.

Vice Chairman

Does Deputy Doherty wish to come in again?

Deputy Pearse Doherty

Yes, I do. I was concluding with Ms O'Connor.

I echo the comments of Deputy Paul Donnelly and commend all the organisations on the work they are doing. It would be valuable for the committee to hear from them again about the overall debt situation and where people are at. We hear from the Central Bank's reports that there are surpluses in savings but there are two types of stories and, indeed, multiple stories, in society. Not everybody is in a situation where they are wondering what to do with all their savings. The organisations present, and their clients and staff, are dealing with very difficult stories and I commend their work. It is important that we hear from them again later in the year.

I welcome FLAC's submission. In his opening statement, Mr. Joyce stated that he shares some of my concerns about the Minister bringing forward his own legislation. I have been very clear on this. We first published legislation on this matter in 2013. Our job is to try to make sure there is a cap on interest rates and end the scenario where these companies can charge 288%. I do not care who does it or whether it is my legislation or the Government's. I just want it done and I do not want it delayed. However, I do not like that the Government has said it is planning its own legislation when this Bill is finishing pre-legislative scrutiny and about to go to Committee Stage, meaning it could be a number of months away from enactment. Mr. Joyce raised his own concerns about that. I appeal to the Government to work with this Bill and amend it in whatever way it wishes to try to get something through on this issue, which has gone on far too long.

Mr. Joyce also warned that a cap based on APR may not be appropriate given the uneven impact on APR as a measurement based on the terms of a loan. A number of other organisations have said the same, as has the Department of Finance. I have heard that clearly. What is Mr. Joyce's opinion on my proposed amendment, if he has had a chance to hear about it and understand it? I am proposing that we move away from an absolute cap based on APR to a relative cap based on the total cost of credit phased in over three years. What are Mr. Joyce's views on that proposal? In simplified terms, the Central Bank would develop the regulations on this. It would have to have a basket of loans that are in the market and after three years the rate could be no more than three times the cost of credit, with the Central Bank working out the interim or transitional steps within that three-year period.

Mr. Paul Joyce

It is good to hear that the approach has been adapted. The problem is the question of collection charges. There is still a lot of collective credit and clearly the rate that should apply to that would be higher, on the basis that the cost of collection is greater. That would be one issue. The move towards electronic collection of loans will be a significant development. I understand Provident and others facilitated electronic transactions during the course of the pandemic so the costs of collection were not incurred. The other question that occurs to me immediately is on the length of the loan. If a moneylender offers a six-month loan and a 12-month loan I would think the cap on those two loans should be different, on the basis of the length of the loan. Maybe that is a factor that needs to be looked at as well. A lot depends on what data the Central Bank comes back to the Deputy with. He mentioned three times the market rate but is that for the same length of loan? Collection charges are also an issue.

As another observation, in an ideal world people would join their local credit union, save with it and borrow money from it. However, as has been said already, a significant number of people use moneylenders uniquely or as part of a suite of lending options. The risk of migration is not particularly great but it would remain to be seen if the rates that were struck led to a number of licensed moneylenders leaving the market. That may or may not be the case and I do not know whether their opinion has been canvassed about this. There may be a risk of migration.

Everybody supports the approach the Deputy is taking and I completely agree that, given that this Private Members' Bill has been in pre-legislative scrutiny for quite some time and a lot of work has been done on it, it would be a pity if it was now overtaken by a Government Bill, which would have to be initiated and on which there would be further debate and so on. This is an urgent issue and it has been so for many years. Perhaps a co-operative approach between the different parties is required. The Deputy has helped by seeking information from the Central Bank on rates to help him arrive at a cap or series of caps that would do the least damage and the most possible good.

Deputy Pearse Doherty

I appreciate Mr. Joyce's comments. I know our submission came quite late in the day but I want to tease out the issue of collection charges. This is an opportune time to move on this issue because the pandemic has impacted on the way moneylenders have operated. Door-to-door collection was the nature of moneylending and is one of the reasons many people go to a moneylender, because of the ease of access. They are there on people's doorsteps and they are familiar with their family and children, which lines up the next level of borrowers and so on. However, that has changed as moneylenders have moved to an online system of collection. They were forced to do so by the pandemic and that shows that the system can operate not just on a door-to-door basis. The principle of this legislation is that the cost of credit should be no more than three times what is available on the market, and that includes things like collection charges because they are part of the cost of credit. Whether a company is involved in door-to-door dealings could be taken into account by the Central Bank but the cost still should not exceed three times what is available on the market.

Mr. Joyce's point about the duration of the loan was well made and speaks loudly to the fact that APR was not an appropriate way of dealing with this issue. The proposal here is for three times the cost of credit of what is in the market. If, for example, the credit union offers a loan of a duration of a year and the cost of credit is €50, that means the moneylender can only charge a maximum of €150 for the cost of credit for that term. If the credit union offers a six-month loan with a cost of credit of €30, then the moneylender will only be permitted to charge €90 for that same amount of credit. It is the same amount of loan but for different durations and both the moneylender and the credit union charge a higher interest rate because of that. The principle is to benchmark the rates against what is in the market and apply a maximum of three times that rate. To tell the truth, I am still a bit uncomfortable with that because it is still very high but my job here is to get it moved away from 288% down to an appropriate level. The legislation allows for further reporting on this matter to see if it needs to move further based on Central Bank reports.

Mr. Paul Joyce

Collection charges may well be phased out over time. Nowadays, most houses have a laptop or one member of the family can facilitate paying electronically. I do not know whether that is the future of licensed moneylending. It is also quite true that many licensed moneylenders and customers have that kind of relationship where they call to the door. I do not know if that is on the way out but clearly, paying electronically should attract a much lower rate of interest.

At the moment, each licence holder is authorised to charge up to a maximum rate of interest depending on the length of the loan and collection charges and so on. It brings me back to the question I raised as to what extent there is competition in the licensed moneylending industry. If, therefore, a maximum rate of three times the market rate was put in place, would the maximum become the minimum or would licensed moneylenders compete with each other to offer lower costs of credit?

Deputy Pearse Doherty

I thank Mr. Joyce. I will make a final comment as I know this is the end of the pre-legislative scrutiny of this Bill, which has been quite lengthy. I hope we can now get the pre-legislative scrutiny report and move to Committee Stage. The question I will ask has been posed to me by somebody else so I am plagiarising. If we as an Oireachtas committee were to design a system, would we allow for moneylenders to be licensed and charge 288%, all in, for the cost of credit or annual percentage rate, APR? Would we allow for a moneylender to call to the doors of homes to collect the weekly payments? We simply would not. We would not allow a bank to do it; we should not allow a moneylender. Just because it exists today does not mean we need to tolerate it into the future.

This legislation is about modernising and protecting those customers who sometimes fall foul of moneylending. Perhaps unbeknownst to them, credit was available that was much cheaper, affordable and sustainable. Mr. Joyce made an important point in terms of the future. I can remember as a young gasúr the insurance man calling to our house every month to collect the insurance from my mum. That does not happen anymore. Things move on. Door-to-door collection should not be happening. It is a model that suits the moneylender. It builds up knowledge of when a christening or communion is taking place or when someone has a hospital appointment or family emergency. That is okay but in my view, it preys on vulnerabilities in a family network. We need to make sure there is a proper financial inclusion strategy and that credit unions and others are in a position to lend to consumers who need access to credit in a quick way.

Vice Chairman

I thank the Deputy. Are there any other responses? We will move on. I will make a couple of quick comments. I compliment the credit unions and also Deputy Doherty on bringing forward this proposed legislation. Hopefully, it will come to the stage he aspires to as soon as possible.

One issue that has been brought to my attention over the years is a loan to repay a loan from whatever source. It is always dangerous territory. If a person gets into difficulty arising from an existing loan they are attempting to repay, they will get into more difficulty unless there is a careful evaluation of the situation and the response is tailored to meet the ability of that person to pay. Otherwise, he or she will get into difficulty. That applies at a time when interest rates are low and hopefully, they will remain that way.

The other issue is that borrowing rates with regard to house loans and mortgages at present are, in some cases, three and a half times the gross income of the earner or variations of that amount. I must say, from my experience in dealing with loan applications through the local authorities, etc., I believe that is at the limit of the towns.

Another thing that has come to my notice is the number of people who got loans from lending institutions on an interest-only basis. The interest-only basis encourages people to borrow more, unfortunately. The lenders will say they will try to see if people are capable of dealing with the loan and if they are, the lenders will perhaps facilitate them again. It does not always work that way. Eventually, the day of reckoning arrives and everything comes together at the same time. Some lenders - I am not talking about the credit unions or the people present - do not always wish to accommodate the borrower to the extent the borrower would like or had anticipated when the loan was originally taken out.

I worry about this final point because it will have a knock-on effect on all borrowing. As far as I can see, house price inflation at the moment is at an all-time high. It is a huge disadvantage to first-time borrowers, who see this on two sides. On one side is the investor or vulture or whatever one wishes to call them and on the other is a person, who for very genuine reasons, will say that he or she wants to sell his or her house to move further away, buy a cheaper house and have no mortgage. In actual fact, that displaces the first-time borrower as well. The first-time borrower must face somebody else with the ability to access cash in fairly substantial amounts competing with him or her in the market.

A couple of issues, therefore, need to be monitored in the future with a view to trying to ensure that we do not come to a crash, like we did before, and find many properties in negative equity. Everybody borrowing at present should have careful regard to the fact that rapid inflation can lead to negative equity. While negative equity is not a real problem to a person who is not selling or does not have to move to a different location, it presents a serious problem and impact for someone who needs to move on for one reason or another.

Before I close the final round of questioning, would anyone like to comment?

Deputy Jim O'Callaghan

I do not have any questions for the guests and thank them for coming in today. I commend the credit unions on the role they play in financial services in Ireland. Like the Vice Chairman and others in the committee, I believe it is very important that we try to expand the role the credit unions play in the financial services system in this country, whether it is to deal with the issue of moneylenders or with those outlined by the Vice Chairman when it comes to housebuilding and providing financing to people to achieve home ownership. I thank them for that. Hopefully, we can process this legislation promptly.

Vice Chairman

I thank the Deputy. Are there any final comments? No further comments are forthcoming. I thank our witnesses for attending today and for their participation. I thank the members and Deputy Doherty for his input. We will adjourn the meeting until 2.30 p.m. on Wednesday, 23 June, when we will meet in public session with representatives from Permanent TSB Group Holdings to discuss banking matters in advance of the committee's private session via Microsoft Teams.

The joint committee adjourned at 1.47 p.m. until 2.30 p.m. on Wednesday, 23 June 2021.