General Banking Matters: AIB

I welcome from AIB, Dr. Colin Hunt, CEO, Ms Helen Dooley, group general counsel, and Mr. Jim O'Keeffe, managing director.

Privilege is extended to those members who are present in Leinster House or in the convention centre. Members are reminded of the 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, her or it identifiable.

The procedure for the meeting will be that Dr. Hunt will give his opening statement and then members will be invited to question the AIB officials.

Dr. Colin Hunt

Good afternoon Chairman and members of the committee. We very much welcome this opportunity to give the committee an overview of the bank's progress during the time of colossal trauma and change in the world. We will endeavour to answer all of the members' questions and to take on board their views today. Our direct engagement with the committee is a valuable means of understanding its expectations, while allowing us to explain the bank’s position in terms of supporting the economy and our 2.8 million customers in current and future challenging times. With me today are Mr. Jim O’Keeffe and Ms Helen Dooley.

While the human misery caused by the Covid-19 pandemic can never be calculated, the ultimate cost of the enormous shock to the global economy has yet to be fully assessed. As with the rest of the country, the pandemic crisis, coupled with the uncertainty created by Brexit, tested the resilience of the banking sector at every level. It was a time for AIB to prove that it could focus its resources on playing a major and positive role in helping the country through the crisis and be part of the solution.

Fortunately, the bank had robust capital strength, a good quality balance sheet and digital capability when the pandemic took hold, facts that allowed us to take immediate actions to mitigate the economic impact of lockdown on our customers. With banks deemed by Government to be an essential service, we were required to mobilise our response at speed. We provided almost 80,000 payment breaks with nearly 90% of those customers now having returned to full repayment of principal and interest. More than 80% of our employees moved to working from home, while hundreds of our team members remained in their locations keeping more than 99% of our branches open and dealing with a 400% increase in contacts to our call centres. As the Government introduced unprecedented supports across the economy, AIB rowed in behind the State’s Covid-19 credit guarantee scheme, with an allocation of €746 million to help businesses through the crisis.

As Dr. Michael Ryan of the WHO said during the pandemic, "speed trumps perfection". In the face of the deepening crisis, the bank embarked on compressing what would normally take years of organisational and systems changes into weeks and, in some instances, into days. There were occasions when I wished we could have moved even more swiftly but, within the prevailing constraints, a quick fix was simply not always appropriate. However, at all times, we sought to ensure the best protections were provided to our customers.

As AIB harnessed its resources to help deal with the short- to medium-term effects of Covid-19 on our customers and the wider economy, we also embarked on a longer-term programme to facilitate the bank’s future growth. In December 2020 we updated our three-year strategy to specifically address gaps in our product and service offerings to customers.

Members are all very much aware that one of Ireland’s oldest financial institutions, Ulster Bank, is preparing to exit the market in the Republic of Ireland. When it became apparent that its parent, NatWest, was conducting a review of its Irish operations, we began a process that ultimately led to AIB signing a deal earlier this week to acquire Ulster Bank’s €4 billion portfolio of performing corporate and commercial loans. This will involve the transfer of approximately 280 employees to AIB Group from Ulster Bank.

AIB is currently in the process of seeking regulatory approval for the acquisition of Goodbody Stockbrokers, which will allow it to merge the expertise of both companies and broaden its range of customer offerings. Let me again use this opportunity to nail the canard that the acquisition of Goodbody was a means of circumventing the Government's pay restrictions. Nothing could be further from the truth. The remuneration arrangements at Goodbody are entirely separate and ring-fenced from those at AIB and the Government's restrictions on pay remain fully intact at the bank.

In order to streamline and avoid duplication of services, a very small group of employees from the bank will transfer to Goodbody. None of these can receive remuneration that exceeds the Government pay cap. In addition, apart from this group, Goodbody will not be permitted to hire anybody who has worked for AIB in the course of the previous two years.

Last week also we formally announced to the Stock Exchange a joint venture with Great-West LifeCo to augment our life, pensions and savings propositions, providing comprehensive choices for customers and diversification of the bank’s income streams at a time of sustained low interest rates.

Covid-19 has accelerated customers move to digital and this is reflected in our strategy for branches and offices. For example, we have seen branch transactions fall to 39,500 per day compared with a rise to, on occasion, 2.3 million daily interactions with our mobile app – developments that have led us to examine how to best balance the need for traditional local banking services and customer adoption of new technologies. Banking is evolving but be assured that AIB will maintain its very strong branch presence throughout the country, continuing our personal and business customer relationships in the local community while increasing sales and advisory services.

We have recently amalgamated five branches in Dublin, Cork and Galway that were in close proximity to each other and plan to further review a small number of locations in mainly urban areas where overlaps occur. Our almost 20 year old relationship with An Post continues to deepen to the point where 4 million AIB banking transactions are conducted in post offices every year.

Due to the majority of our employees’ preference for a hybrid working model that allows them to work outside of the urban centres, our need for large office space in Dublin has also shrunk. As a result, we have decided to exit three of our main office buildings in Dublin.

As we emerge from the pandemic, it is imperative that AIB remains resilient and well-positioned to support Ireland’s economy. In spite of the fallout of Covid-19 and the sustained low interest rate environment, the group returned to profitability in the first quarter of 2021. We are confident this recovery will continue as the wider population is vaccinated and the economy returns to solid growth. A robust balance sheet, strong digital capability and an extensive community-based branch network all combine to facilitate the bank’s credit flow to Ireland’s homes and businesses as well as underpinning critical national infrastructure such as renewable energy projects and home building.

Addressing the housing supply deficit is of course one of the country’s most urgent social and economic imperatives. AIB is able to play a crucial role in funding the construction of social, affordable and private homes. We are currently the primary lender to schemes delivering 10,000 new units. Last year, we launched a €300 million social housing fund to deliver more than 2,000 new sustainable energy-efficient social housing units across the country. I am pleased to confirm that this fund has been fully allocated and AIB is about to launch an additional €500 million social housing fund, leading to a build of more than 3,000 homes. Meanwhile, the bank has been providing more than 400 suitable vacant properties to the Housing Agency in what has become a very successful relationship.

The immense challenge of climate change is something that confronts us all and, again, the financial sector has a key role in supporting measures to counter it. Supporting the transition to a low-carbon economy, reducing our own carbon footprint and helping our customers to invest in green projects, such as retrofitting, are now intrinsic to our business model. Green lending amounted to almost €1.5 billion last year, the strongest performing part of our book. Our ambition is that that will account for 70% of overall new lending by 2030.

Green lending amounted to almost €1.5 billion last year. That is the strongest performing part of our book. Our ambition is that it will account for 70% of overall new lending by 2030. In this space, AIB has a €5 billion climate action fund for lending into the Irish economy. We have raised €1.75 billion in green bonds to fund projects with clear environmental and climate change benefits. We have the lowest green five-year fixed-rate mortgage in the Irish market and discounted green retrofitting and car loans.

While AIB operates in a shrinking banking market, competition remains intense, and is set to increase with the arrival of more digital payment companies. We must be equipped to deal with competition from non-traditional lenders. It is for these reasons that I am unwavering in implementing strategies to put the bank on the strongest possible footing, so that we continue as a stable contributor to the economy and Irish society.

We are cautiously emerging from the pandemic. I am glad to say that AIB was able to withstand an economic shock the likes of which we just experienced yet managed to protect our customers from the most severe financial impacts. We remain strongly positioned to contribute to Ireland’s economic growth and employment, helping households, communities, farming, and businesses to meet their financial and social needs. Our entire focus now is on proactively supporting these customers, particularly those facing financial difficulty.

AIB is a central part of Ireland’s economic infrastructure. To give the committee an idea of the scale of the bank’s activities, our total balance sheet is over €110 billion; new lending was €9.2 billion in 2020, in spite of the pandemic; and AIB processes over €870 billion in payments for our business and personal customers annually. These are just snapshots of the extent of our reach. AIB will continue to be a key financial enabler in the economy and in the communities that we serve, contributing positively to our society and working to return the taxpayers’ investment when Government decides the time is right. I thank the committee for its time and we look forward to questions.

I call on Deputy Doherty.

I welcome all our guests from AIB to the committee. We will start with the issue Dr. Hunt raised about Goodbody stockbroker. He mentioned that there was a work-around with the remuneration. Previously, AIB, in its annual publication of its accounts, suggested it would look at an enhanced remuneration, where bonuses would be reintroduced. As CEO of the bank, Dr. Hunt will know that that can only happen with the consent of the Oireachtas. The Oireachtas would have to change the law to get rid of the 45% additional USC surcharge that we apply to bankers’ bonuses. Can Dr. Hunt say whether he has any intention to revisit that issue, that he had previously announced, but set to one side? Can he also explain to me the letter he sent to the Minister for Finance, Deputy Paschal Donohoe, under the terms of the State agreement on the completion of the transaction Gold which is Goodbody? He asked that it would be deemed a group company of the AIB, to which the remunerations provisions would apply. He said in writing he was seeking the consent of the Minister for Finance that, on the acquisition of Goodbody, it would be excluded from the definition of group company, solely for the purpose of the remuneration provisions and that none of the remuneration provisions will apply to Gold or Goodbody. To summarise, he acknowledged in that letter that the acquisition of Goodbody would be deemed a group company. He asked the Minister to designate it as not a group company, but solely for the purposes of remuneration. This is to work around the law that we have passed in the Oireachtas. What is Dr. Hunt's understanding of how the Minister is simply able to exempt Goodbody from this law, by redefining it outside of a group company?

Dr. Colin Hunt

I thank the Deputy. On the first part of his question, the Government pay restrictions in relation to the banking sector remain in place. I have no expectation that they will change in the near term. The Government’s restrictions, as they apply to AIB, post the acquisition of Goodbody, will remain in place. They will remain a feature of the remuneration arrangements within AIB. There will be no return to variable pay in the absence of agreement in advance from the State. It is not anywhere near the top of my agenda. It is not even on the first page of my agenda items, as CEO at this point in time.

On the Goodbody issue, when I became CEO of the bank, I was conscious of the fact that this is a pillar bank. We have an ambition to provide a full suite of products and services to our customers at every stage of their lives. We had a number of product gaps. These were in investments, wealth management, and capital markets. In a move to eliminate those gaps, we engaged in discussions with Fexco and with Goodbody, with a view to bring that company into AIB Group. The remuneration arrangements within Goodbody are different from their remuneration arrangements within AIB. Those remuneration arrangements, for example, variable pay, are a feature of the industry in which Goodbody competes. I would not have wanted to acquire the business in the absence of us having the ability to continue with the pre-existing remuneration arrangements within Goodbody, because if I was not able to continue with them, I would run the risk of the business being significantly damaged by an outflow of talent and staff members. We have put in place a clear set of restrictions to ensure the continued application of the restrictions on remuneration that apply to AIB. That was the basis on which I wrote the letter to the Minister for Finance.

I thank Dr. Hunt for the background. To repeat my question: how does the Minister for Finance - in Dr. Hunt’s understanding, because it was he who requested it - have the ability to designate the acquisition of Goodbody as outside the group company for remuneration purposes?

Dr. Colin Hunt

I am fortunate that our chief legal advisor and group general counsel, Ms Helen Dooley, is present. She will answer on that.

Ms Helen Dooley: The reasons for the consent letter were twofold. It was to request that within the context of the State agreements, which are essentially a contract between the Minister of Finance and the bank, Goodbody would not be regarded as a group company within the context of that contractual arrangement. No derogation was sought on the restrictions in the Finance Act 2020, with regard to the surcharge on bonuses. Clearly, that is a matter for the Legislature.

Obviously, the derogation is that it would be outside of the group company so it therefore does not apply. I ask the CEO to give us, not individual pay scales, but to talk about the varied salary that applies to wealth managers within this new entity? What types of bonuses are there? I see online that there can be bonuses up to €0.5 million. Is that in the ballpark?

Dr. Colin Hunt

I do not think so. Those arrangements are commercially sensitive and I will not outline the exact nature of the remuneration arrangements in Goodbody, save to say that the numbers the Deputy quotes are very high. They are well in excess of what would be the average rate of pay across that particular business.

For wealth managers, would it be right to say that bonuses are up to €250,000? I am not asking about individuals. I am talking about the average across the type of sector. What are we talking about?

Dr. Colin Hunt

To my knowledge, those numbers would be very high. The key thing is that there is no difference in the remuneration arrangements that existed when Goodbody was majority owned by Fexco. We are not changing the remuneration restrictions. We are changing the ownership of Goodbody. We are changing the ownership of Goodbody in order to allow this bank to have at its disposal a full set of products and services to best to equip us to meet our personal and business customers’ demands.

Obviously, the difference is that when Goodbody was owned by Fexco, it was completely private. Today, it is owned by majority by Irish taxpayers. Therefore, you cannot argue that the same remuneration applies in the private sector as is potentially in the public sector at all times.

I want to talk to Dr. Hunt more about looking into the future in capital requirements.

The return on equity expected by shareholders is approximately 9% or 10%. Before the financial crash, it was 15% to 20%. Obviously, the capital requirements applied by the ECB are having an impact on the banking sector. It would be argued by AIB and others that these are contributing to high interest rates, a low return on equity and, hence, a limited appetite for investment and new entrants.

The rate of risk-weighted assets, which are a measure of risk and influence the capital that must be held against a mortgage like any other loan, is high in Ireland compared with other European countries. This means that additional capital must be held against mortgages in Ireland. The rate in Ireland is a multiple of what would be found in, for example, the Netherlands and Germany. The calculation of risk-weighted assets is influenced not only by future risk, but by a look-back provision. I am looking at the Department of Finance's report, according to which Ireland's rate is approximately 37% whereas Britain's is in or around 11% or 12%. AIB has an average of 30% risk-weighted assets. What can be done to bring that number down closer to the European average? Is it the case that there needs to be more transparency in how these rates are calculated at ECB level? Is there anything that AIB can do itself? If we were to reduce our average to closer to the European average, what impact would it have on interest rates?

Dr. Colin Hunt

The Deputy is correct, in that the risk weights applying to Irish banks are significantly greater than they are elsewhere in the eurozone. The primary driver of that is the losses that were experienced in this sector in Ireland during the global financial crisis. The loss experience of Irish banks was significantly greater than that of the average European bank. The models that are used to determine the risk weights that are applied to our capital today are a reflection of the decisions that were made in the 2000s and the events of 2008 to 2013. It is a reflection of historical experience. Those very severe default records and losses will remain part of our modelling framework in perpetuity. We do not control that. They are there because of the history of the Irish banks and the losses that we reported.

The best way that we can influence this is by ensuring that the lending we engage in today is prudent, appropriate and sustainable and that we never again return to the sort of imprudent lending practices that created the environment in which we had those significant loan losses. I expect that those risk weights will reduce over time.

We have just had an extraordinary crisis and we are still emerging from it at a pace that is uncertain. It has been a global crisis that has impacted on businesses and households around the world. Those data points will factor into the model-generated risk-weighted assets, so there may be a significant relativity change over the course of the next number of quarters. I assure the committee that, as those risk weights reduce and the benefits of years and years of prudent, sustainable and appropriate lending are felt, it will have a compressing impact on the spread between the average European mortgage rate and the average Irish mortgage rate. There is a direct link between the spread that is there in terms of interest rates and the spread that is there in terms of risk-weighted assets.

I hear what Dr. Hunt is saying. There seems to be an acceptance by him that the model is the model and, since the losses will be factored in in perpetuity, we must balance them out with better, safer and more prudent lending. That could take us into a different conversation about banks' risk appetite at this point in time. It is important that we lend into the economy as we try to come out of the pandemic.

What is AIB's trajectory in terms of risk-weighted assets? On average, AIB is performing better than the rest of the banking sector, albeit slightly behind Bank of Ireland. However, AIB's rate is still more than double the European average percentage. What is the trajectory over the next five years? Will the bank's risk-weighted assets drop significantly from 30% to closer to the European average of approximately 14% or will it remain stuck stubbornly high?

Dr. Colin Hunt

I will focus on the mortgage market, which is the Deputy's key area of concern. The overall risk weight density of the bank's balance sheet is a reflection of history, but also of the business mix in which we are engaging. In terms of mortgages, we build these models and feed in the data, but we do not have overall responsibility for the risk weights that are deployed. That is external to us. We are handed the risk weights that we use. Over time, though, they should moderate. I have a clear and strong desire to see them reduce. As they do, we will see a compression of the margin of spread relative to other countries in the EU.

I want to hold an appropriate amount of capital. I am conscious of the fact that the banking sector in this country has an order of density that is very high relative to the European average. With the continuation of appropriate, sustainable and prudent lending policies, that risk weight should reduce, which will translate into a compression of margins, or it should in any event. I would be eager for it to so do.

I will not belabour the point, but I would love to know whether AIB has medium-term targets for risk-weighted assets.

I wish to ask some final questions on the tracker mortgage examination. AIB had to make an additional provision of €300 million following the preliminary decision by the Financial Services and Pensions Ombudsman relating to approximately 5,900 tracker customers who were wronged by AIB. It is frustrating for us on the committee because we have asked these questions and made the point that the bank had ill-treated these customers. In 2017, AIB paid this cohort of customers €1,615 each for its "service failure", as it called it. After going through the internal appeals process and all the rest, the customers had to go to the Financial Services and Pensions Ombudsman and win their case. As late as this year, though, the situation is still ongoing and AIB has had to make a provision of €300 million. Will Dr. Hunt update the committee on the progress made in compensating this cohort of 5,900 customers and the average amount of compensation that is being paid out of them? Regarding the €70 million that has been set aside for a potential fine, is Dr. Hunt still satisfied with that level of provisioning? Has the Garda been in contact with AIB over the tracker mortgage examination? Will Dr. Hunt give us the headline numbers of how many accounts have been impacted, how many properties were repossessed-----

I thank the Deputy. He is packing in the questions, but I must remind him of his time.

Dr. Colin Hunt

The Financial Services and Pensions Ombudsman, FSPO, made a decision on one of these cases and we moved to apply its findings to all 5,900 of the customers in that group.

We took a provision in February 2020 of €300 million to deal with that particular issue. Those customers have now been compensated, fully in line with the decision of the ombudsman, as it pertained to that one case. We have a €70 million provision in our books at the moment for a fine. That is a provision. We do not know what the ultimate fine is going to be. We have to arrive at a decision every time we produce a set of accounts as to whether it is appropriate or not. However, €70 million is the level of provision at this point in time. As to whether the Garda has been in contact with us on this issue, it has not been.

(Interruptions).

Full stop, not just this specific issue, but on the tracker examination.

I thank the employees of AIB for attending. I have to ask Dr. Hunt about the point that was raised by Deputy Doherty in respect of the tracker redress scheme. The decision of the Financial Services and Pensions Ombudsman, FSPO, required AIB to write down the value of the mortgage by 12% of the balance due when the fixed rate ended, as well as to pay interest charged on the write-down since then. In respect of the approximately 6,000 customers, did AIB calculate the interest that they were asked to write down on a simple interest basis or on a compound interest basis?

Dr. Colin Hunt

I ask Mr. Jim O’Keeffe to come in on that one.

Mr. Jim O'Keeffe

The calculation was clearly laid out by the FSBO in terms of how it was to be calculated. To memory, it was on the simple interest basis. We confirmed in writing with the FSPO the calculation we were going to use across it. The FSPO confirmed that that was the calculation we were to use. There was some commentary in the media on whether we were using the correct calculation. However, the FSPO was clear on the detail of how it was to be calculated.

I take it from that that AIB applied it on the basis of simple interest, in communication with the Financial Services and Pensions Ombudsman, which confirmed that simple interest was appropriate.

Mr. Jim O'Keeffe

Exactly. We applied exactly what the FSPO required. I will confirm that I have not got my facts wrong on that. I am comfortable that is the case. I am comfortable that we did exactly what the FSPO wanted.

I return to Dr. Hunt on the question of cash-back mortgages. He will be aware that cash-back mortgages are used by some lenders. It appears that the interest rate charged is higher on cash-back mortgages. Let us look at this in terms of the two entities over which Dr. Hunt has some responsibility. In EBS, the lowest three-year fixed rate with cash-back is 2.9%. However, in AIB it is 2.35%. Does Dr. Hunt agree with me that the purpose - whether it is intended or not - of cash-back mortgages appears to be to facilitate the application of higher mortgage rates?

Dr. Colin Hunt

I fundamentally disagree with that. We present mortgage products to our customers under the AIB brand, through EBS and also through Haven Mortgages, which is a mortgage broker. Mortgages are an important part of this bank’s lending book. Roughly half of the bank’s lending book is in the form of mortgages. We are the biggest mortgage lender in the State. We are the biggest mortgage market share in the State. We have the widest array of product that we bring to the market, across all our various brands, in terms of standard variable rates, fixed rates, various durations, tenures and, of course, cash-back product. Under our various brands, we give our customers unrivalled choice of options that they can have at a point in time when they are drawing down a mortgage. We are also conscious that switching activity in the market is important. We want to accommodate our borrowers who want to switch. That is why we provide €2,000 to switching mortgage borrowers. I will hand over to Jim O'Keeffe for more colour on where we currently are in the mortgage market.

Before Dr. Hunt hands over to Mr. O’Keeffe, I will ask the question more specifically for Mr. O’Keeffe. Why is it that the interest rate charged for cash-back mortgages is significantly higher than mortgages that do not offer cash-back?

Mr. Jim O'Keeffe

It is not just tied to the cash-back piece. AIB is a brand. We are fortunate, as Dr. Hunt said, that we have multiple brands in the market. We have AIB, EBS and our broker brand through Haven Mortgages. We have for some time differentiated those brands in terms of how they operate in the market. The reality is that a significant group of customers, probably 30% to 40% of the market, want cash-back as part of their solution. It works for them. They get it up front. They get the benefit of that. That is what they enjoy.

The AIB brand itself for a considerable number of years has laid out price as key. This is both for front book and back book pricing and not just competitive pricing. Therefore, on the EBS side, we price differently and have always done so. This is not just because of the cash-back, but also because of the type of proposition we have there. Even within the grouping, when one compares others with AIB’s front book and back book pricing, we will find that AIB stacks up favourably. Looking at other cash-back providers, they go well beyond what EBS provides. It is not just an EBS issue in that regard. We are meeting the customer demands. Customers are looking for cash-back. EBS is our channel to market for cash-back. On the AIB side, that is where we come to market in terms of pricing, especially on the new to bank.

I ask Mr. O'Keeffe on that point, does the inclusion of cash-back in these products necessarily mean that the mortgage interest rate is going to be higher than it would be if there were no cash-back?

Mr. Jim O'Keeffe

No, not necessarily. When looking at returns, etc., from the products it forms part of it. However, that is not necessarily an offset in relation to the interest rate. Many customers come to AIB and, if 30% or 40% of the market is keen on cash-back, there are similar groups of customers who are keen on getting an attractive price up-front.

I have a final question for Dr. Hunt. I am conscious that my other colleagues want to get in. Obviously, it is not AIB’s business to try to encourage its competitors. However, it is in the interest of the Oireachtas to try to ensure that the Irish banking sector is more competitive. That is particularly so in recent times, since we have lost Ulster Bank and other financial institutions. I ask Dr. Hunt what he believes needs to be done to make the Irish banking environment more competitive, so that we can attract outsiders and increase competition?

Dr. Colin Hunt

Personally, I regret Ulster Bank and KBC leaving. It is bad for the industry. Certainly, I regret their decisions, although I understand them. We should be conscious that competition now comes in multiple forms. There are, for example, fintechs, new banks and other international players that target specific parts of the banking landscape, such as credit cards, mortgages and business lending. It remains a competitive environment. The focus of all the team here at AIB is on ensuring that the bank is as efficiently run as possible, with as comprehensive a suite of products as possible, to make sure that our products are competitive and attractive to our customers. I cannot be accountable for what happens elsewhere.

I would emphasise the fact that competition in the banking sector is evolving and is coming in non-traditional forms. The old high street or main street bricks and mortar retail banks may be diminishing in terms of number, but the competition we face is coming in new and evolving forms.

I thank Dr. Hunt.

Like previous speakers I welcome the witnesses. I want to ask about taking on part of the loan book of Ulster Bank and the relevant staff. Do they carry with them their pensions and any other entitlements or is their move regarded as a new employment?

Dr. Colin Hunt

No, they will be joining the group under transfer of undertakings legislation. Their existing entitlements will continue.

Dr. Colin Hunt

Unaltered.

Dr. Hunt mentioned the losses that generate and cause the risk weighting in terms of what happened in the boom years. Why did that happen? There are answers to these questions. They have been asked before. Why did what happened here not happen in the rest of Europe to the same extent, given that we have a Central Bank which governs all lending and the activities of commercial and pillar banks? We also have the ECB, on the board of which sits representation from our Central Bank, I understand, something which did not exist at that time. Why were we so vulnerable in comparison to everybody else? Why did the horses take off with the carriage in the way that they did here as opposed to everywhere else?

Dr. Colin Hunt

The financial crisis that beset the world 13 or 14 years ago was not peculiar to Ireland. The losses we experienced here were higher than were experienced elsewhere. That would have been grounded in a lack of prudent lending and ungrounded optimism on the part of the banks. I am deeply conscious of the damage that was done to the economy and banking sector as a consequence of imprudent lending. We are determined to ensure that it never ever happens again.

One of the key drivers of everything we have done in recent years has been ensuring that we would enter the next crisis in a position of strength. We are very conscious of the fact that this is a bank that entered the global financial crisis in a position of great weakness. That great weakness ultimately led to the bank requiring a bailout from the Irish taxpayer to the tune of €20.9 billion. Over the intervening years we have focused on building the strength of the bank, lending prudently and appropriately and ensuring that we had very strong capital position to deal with the next crisis.

We had absolutely no foresight that the crisis would come in the form of a global pandemic. We entered the crisis in a position of great strength. We are one of the most strongly capitalised banks in the European Union, notwithstanding the fact that the risk weights we alluded to elsewhere are fairly high relative to other European financial markets and countries across the eurozone. That is what allowed us to support our customers and deploy 77,000 payment breaks at a time of great uncertainty.

We are deeply conscious of the errors in lending made in the past, more than 13 or 14 years ago and, in some instances, earlier than that. We are committed to ensuring that those errors are never again repeated while remaining conscious of our responsibilities as a pillar bank in supporting the ongoing development of the Irish economy.

I note what Dr. Hunt said. We all hope that happens. I also note that Dr. Hunt welcomed competition. Some might suggest that some of the competition during the crucial, outrageous outlandish field to which he referred was not in keeping with good practice. Can Dr. Hunt tell the committee whether those patterns were adequately addressed? Can he now provide an assurance that similar lapses are not likely to occur again?

Dr. Colin Hunt

I cannot give the Deputy an assurance on the sector. My responsibilities as CEO of AIB Group are to the bank and our customers. I can assure the Deputy that the sort of practices that were engaged in in the past by various banks in this country, including AIB, in terms of imprudent lending, will not be repeated. It will not happen. We have an appropriate level of regulatory oversight and an appropriately prudential approach to lending. We have an appropriately cautious approach to all our business because we are focused on the long-term health of the bank and our customers. There is a symbiotic relationship between the well-being of this institution and the well-being of our customers.

The reason I asked that particular question was because we had become accustomed to the fact that various banking activities are licensed by the Irish Central Bank. Presumably, this is also authorised by the ECB. Has the degree of supervision by the ECB increased or decreased in recent times? Is the extra interest because of the risk our customers pay in this country based on a guarantee to remind us of where we were and where we should not go again?

Dr. Colin Hunt

The regulatory environment is fundamentally different now. AIB is what is known as a systemically significant institution in the eurozone. We are a significant institution in the eyes of the ECB, primarily because of the role we play in the Irish economy. As a consequence of our status as one of the significant institutions, we are jointly supervised by the local regulator, that is, the Central Bank, and the ECB. We have a high frequency of engagement with them. I would say that not a day passes that some part of the organisation is not in touch with our supervisory team within the joint supervisory team. It is a very different operating environment from a regulatory perspective and, understandably, a very different operating environment from a regulatory perspective than would have obtained 15 or 16 years ago.

Does Dr. Hunt on a regular basis interact with the ECB to reassure AIB that what it is doing at any given time is in accord with what it sees as necessary best practice?

Dr. Colin Hunt

As I said, we are supervised by a joint supervisory team made up of people employed by the Central Bank and ECB. We are being benchmarked, on an ongoing basis, in terms of our performance and approach to the management of the organisation and the financial, credit, enterprise and operational risks of the organisation against our peers across European Union.

NatWest is coming back and Dr. Hunt welcomed that business.

Are any other incoming financial institutions showing interest following Ulster Bank's decision to cease business here? Is there a possibility we could have cherry-picking?

Dr. Colin Hunt

NatWest is the parent of Ulster Bank and has decided to leave the market here in the Republic of Ireland. I can answer, as I said before, only for AIB. I am not aware of any market speculation about a traditional full-service retail bank headquartered outside the State looking to enter this market. That said, if I had been here 12 months ago, I would not have said to the committee that within the following year the boards of NatWest Group and KBC Group would both decide to leave the market in the Republic of Ireland. At this juncture I am not aware of any speculation or rumour relating to any other internationally headquartered retail bank that is looking to enter the Irish market.

Did some of the banks that entered the Irish market in the past undermine the banking system in the extent to which they competed - unfairly and unwisely competed, I would contend - with the Irish banks? I am referring to Royal Bank of Scotland and others.

Dr. Colin Hunt

Ultimately, the level playing field that is put in place for systemically important institutions such as ours is designed to reduce the risk of that sort of behaviour. The appropriate regulatory oversight under which we operate and the rules by which we all abide should be consistent to ensure that every bank plays on a level playing field. That is what the rules are designed to do.

Why are AIB and some other banks offering cash back to borrowers? Surely that is deception in that it creates the impression that a great deal is being done and a job is being done to assist the customer. It is actually a marketing ploy which could lead to unwise lending or unwise borrowing in that the customer could become convinced he or she is operating in a safe market, as was the case in the halcyon days.

Dr. Colin Hunt

Our lending policies are put in place and designed to minimise as far as possible the risk of the bank engaging in inappropriate lending and our customers engaging in inappropriate borrowing. AIB's mortgage product is a very important product for the bank's balance sheet and for our customers. We present the widest range of products to the market. We have competitive standard variable rates, fixed rates all the way out the curve, out to seven, eight, nine and ten years, and cashback. We say to customers, "Here are our products; it is up to you to make your decisions." Some people elect for no cash back and a lower interest rate over the course of the facility and some elect for cash back up front. What we do is give our customers the choice, and we are-----

Is this always explained to the customer?

Dr. Colin Hunt

The effective interest rate is always explained to our customers and it is made clear that there is a choice there for them.

I will make my last point, if I may, Chairman. All of us as public representatives have had to engage with various banks over the past ten to 12 years where people were in difficulty because of unwise lending on the one hand and unwise borrowing on the customer's part. I have looked at cases, as I know the Chairman and all the members of the committee have, in which not in a month of Sundays would I have considered awarding to some of the people concerned the kind of facility that was given to them. It clearly undermined their ability to have any freedom for the rest of their lives. People were engaging in most unwise borrowing, and it proved so. My request at this stage is that the lending conditions operated by the banks be of such a nature as to protect the borrower as well. I ask that this nonsense of extended interest-only loans, which mysteriously matured in the middle of the crash, not continue. It may suit speculators but it does not suit the long-term customers who want to live their own lives in their own way and in security.

Dr. Colin Hunt

I am very conscious of how important it is that all the activities in which we engage from a lending perspective are sustainable and in the best interests of our customers and the best interests, ultimately, of the bank itself. We have spent the best part of ten years working to correct the consequences of poor lending decisions and poor borrowing decisions that were made in the past. At one point in time we had a total amount of non-performing exposures - "problem loans" is probably a better way of describing them - in excess of €31 billion. Today that figure is below €4 billion. We want to ensure that when we deploy our capital, when we lend money to our customers, we do so in a way that is very risk-conscious and that is appropriate from both the borrower's perspective and our perspective.

Gabhaim buíochas leis na finnéithe as teacht os comhair an choiste. Tá go leor ceisteanna curtha cheana féin, so I will try not to repeat questions members have already asked. If I do, I ask the Chairman to let me know and I will move on to other questions. I thank the witnesses for coming before the committee.

I know that about four years ago AIB's northern business was restructured and about 50% of branches in the North were closed. It is my understanding that that is being reviewed again. How many branches does AIB expect to close? Will this closure of branches lead to closures of any of the six remaining business centres in the North? What will be the impact of these closures on the business as a whole?

Dr. Colin Hunt

We are very conscious of the fact that we are an all-island bank and that we have customers the length and breadth of the country. We have a different status in Northern Ireland from our status in the Republic. In the Republic we are a pillar bank and have a very significant market share. We cater for about 40% of individual customers living in the South. Businesses in the South have their primary bank accounts with us. The situation in Northern Ireland is somewhat different. It is a very competitive banking landscape. I think there are 11 retail banks operating in Northern Ireland, and we are not one of the most significant entities up there. In fact, we are probably more like a challenger bank than a pillar bank in the North. A number of years ago we went through a very significant restructure which was designed to underpin the efficiency of the operation up there and to allow us to enjoy a reasonable return on the capital we deploy in that part of the island. We continue to keep our physical locations under review. We do not have any announcements to make in that regard at this point in time but we are very committed to having a full-service presence across Northern Ireland.

Dr. Hunt cannot give me the details in that regard. I note that he has said it is very competitive in the North and that he answered Deputy Jim O'Callaghan by saying it is very competitive in the South, so I assume he is saying that-----

Dr. Colin Hunt

Competition comes in multiple forms. In Northern Ireland, if you and I went for a stroll down the main street of Enniskillen or we went for a stroll in Omagh or Strabane, and if we were to count the numbers of competing retail institutions we would need more than two hands to count them. Competition comes in multiple forms.

There is another element that must be borne in mind, which is our market share. We have a far smaller market share in Northern Ireland than we do in the Republic of Ireland. We are a pillar bank in the Republic of Ireland but we are not a pillar bank in Northern Ireland.

Dr. Hunt may have already answered this next question for Deputy Durkan. In Britain AIB is currently in non-binding discussions with suitors to purchase the commercial loan book. Will Dr. Hunt confirm that the employees on this loan book will be protected by transfer of undertakings, TUPE, legislation? If I am correct, I believe that Dr. Hunt said he answered this for Deputy Durkan but I just want to check. Can Dr. Hunt say that it would definitely be protected and unaltered?

Dr. Colin Hunt

We have moved beyond commercial discussions. Earlier this week on Monday we announced that we had concluded those discussions with the NatWest Group, which is the ultimate parent of Ulster Bank. We will be acquiring that loan book. More than 5,000 customers and 280 members of staff within the Ulster Bank group will be joining AIB on TUPE.

The witness stated that AIB is a community bank and is committed to local businesses. Dr. Hunt mentioned earlier the move away from bricks and mortar. I am aware that Dr Hunt has said he cannot confirm plans with regard to the North, but given the plans that are there and the assertion that AIB is committed to the community, if there were wide scale closures across all jurisdictions surely that would be a move away. A lot of the conversations that happen around the closures of banks are around the impact it has on local communities and local people. I represent Galway city and the area of Connemara, which is an extremely rural area. There is a local knowledge when there are bricks and mortar banks. In a lot of the current conversations on the issue it is said that the retail banks move away from the community is based on the decreased use of cash and the increased use of online transactions, reductions in footfall at branches, and customers transitioning to new ways of banking. Yet, when we talk to the customers, and I have spoken to people who are affected by this, they tell us that in many senses they are often forced into these new ways of banking since there are no staff only machines. The customers are telling us that the bank is pushing the agenda and trend to online banking because it suits as the cheaper option. Will Dr. Hunt give his view on this?

Dr. Colin Hunt

There are two issues at play here. I will address the issue of transaction banking first. Before the pandemic on an average day some 50,000 of our customers crossed one of our physical thresholds every day.

Apologies, what was the timeframe there?

Dr. Colin Hunt

Before the pandemic, before the virus arrived on these shores, and before we went into any lockdown or had any notion of lockdowns, in the order of 50,000 customers would visit our branch network in the Republic of Ireland on an average day. Obviously this would vary over the course of a day. Some days are busier but on average it was 50,000 customers. Post-pandemic that number is probably fewer than 40,000 people now. It is still, however, 40,000 people coming into our branches. Every day on average we have 1.5 million interactions with our customers using our digital technology. That is an average and some days it goes as high as 2.3 million transactions, as I said in my opening statement. For everyday transaction banking the strong preference of our customers is to use our digital technology. This is just statement of fact.

I recognise, however, that the branch network is very important to us. I regard it as a key differentiator for us. As part of our strategic pillars we have a commitment to sustainable communities. It is our strong view that in order to be committed to our communities we have to be embedded within those communities. Notwithstanding that we have had an amalgamation of five overlapping branches in urban centres, and we may well see further amalgamations of overlapping branches in urban centres, we are very committed to having a strong physical presence of an AIB branch on the main streets of Ireland. That is a major serious commitment on our part for very good business reasons. What goes on in the branches will evolve over time. We are going to see less in the way of everyday transaction banking. That is shifting onto the digital platforms. It is quicker, one can access it 24-7, but what goes on in the branches is going to change.

Over time we will see more of a gradual evolution towards sales and advice. When people come to the big financial decisions they will make in their lives such as the mortgage, life insurance and savings for the future, we will have people right across the group and across the country employed giving that advice. We will continue to have a really strong physical presence in branches that we serve. I believe that the very best brand ambassadors we have are, without question, the people who wear the AIB uniform and who serve on the front line in every single part of the country. They are incredible and they do a wonderful job. I am extraordinarily proud of the fact that it is those people who, in the face of this extraordinary pandemic, went out of their way and worked very hard to ensure that we could keep more than 99% of our branch network open. We thought it was very important that at a time when so many of our customers were forced to close their doors, we wanted to keep our doors open. We could not have done this without the commitment, energy, professionalism and dedication of the very best brand ambassadors we have, who are our staff in the branches.

My final question is about the announcement of the closure of another head office building in Dublin over the past few months. It was stated that the bank would be more reliant on the use of home working into the future. I have worked in banks myself and the different banks I worked in are now seeing the same shift. Obviously there will be massive savings for the bank around property costs and the shifting of those costs onto the employees who must pay all of the costs associated with home working. We are aware that the unions are seeking for the bank to share the cost savings with employees. Has AIB any plans to share the savings from the closure of its head office location with its employees who are effectively making the cost saving for the bank?

Dr. Colin Hunt

The original driver of this was when we surveyed our staff in July of last year. At that stage we were three or four months into working from home. The vast majority of the team of my colleagues here at AIB wanted to continue to work partly from home once the pandemic was behind us and we returned to whatever was normal in the future. We have decided that we will accommodate people to allow them to work from home three days per week and then to work in offices two days per week. The savings that the release of office spaces would generate are very important in underpinning the bank's strategic plan to generate a return of greater than 8% on our tangible equity in 2023. We will work with our staff members to ensure that they have all of the equipment they need in a home environment to work from home and we have done that.

On the issue of the savings being generated by exiting properties, that really underpins the long-term viability of the bank and our ability to continue to compete and to serve our customers. We worked at pace to accommodate that. We asked 80% of our colleagues to work from home and we worked at pace to ensure they had the technology and equipment they needed to do so.

I understand that. We know, however, that when people spend far more time at home, there is a cost in terms of electricity, heating and all of that. From what Dr. Hunt is saying, that will not be reflected in the wages of workers.

Dr. Colin Hunt

Wages are the subject of annual negotiations between the bank and the Financial Services Union. We have just concluded negotiations for 2021. Of course there are also savings that accrue from not having to travel to work.

We can agree to disagree on that point.

Dr. Hunt is aware that we have discussed the issue of EBS tied agents at meetings of this committee. That matter has gone through the courts and continues to be raised with the committee in terms of the advance we are making to assist in finding a solution. In 2019, Mr. Justice Jordan stated in the High Court:

[I] would have thought that a competent mediator could bring sense to bear and mediate a solution to the dispute between the parties. If the parties are committed to doing business with integrity and in accordance with the regulatory requirements that exist, then what possible obstacle stands in the way of both sides starting on a new page even if some re-arrangements and compromises are required of both sides?

He continued:

Large banks and financial institutions, and smaller ones, wish the public to forgive the past and to move on with a positive attitude. They should lead by example. What the parties have enjoyed in business together ought not to be lost if it can be salvaged. The exercise in itself might serve to help restore in the public mind the trust and confidence and faith that they should have in banks and financial institutions and which is being slowly rebuilt with effort over and above any required to solve this ongoing dispute.

The judge further stated: "That may be a high minded and naive recommendation on my part but it is something I would urge on both sides in any event." I am inclined to agree with him. Arising from Mr. Justice Jordan's statement and given the time that has passed, what efforts has the bank made to understand the message the judge gave and to resolve the issue with the EBS tied agents?

Dr. Colin Hunt

EBS has been part of AIB Group since 2011. It has a different model from the rest of the group in terms of how we engage with its offices. We have 68 agent offices around the State. It is a very important part of the group in terms of the delivery of mortgage products to our customers. We have excellent relationships with the vast majority of our agents. All of my colleagues and I are fully invested in the success of EBS and its agents. However, in the context of an EU restructuring programme where we were required to shut 20 of those offices, the issues to which the Chairman referred arose. I will hand over to my colleague, Mr. O'Keeffe, to speak on this topic.

Before Mr. O'Keeffe comes in, Dr. Hunt is the CEO of the bank and I want to know what his attitude is towards what the judge said in 2019 and whether there is any room for mediation. Mr. O'Keeffe may very well be familiar with the detail of the matter but in terms of getting to an end on this, it is only fair that we would look to the judge's words and determine whether the bank is willing to come to the table in terms of mediation.

Dr. Colin Hunt

I am deeply conscious of the need for the bank to put legacy issues behind it for once and for all. I want to see us moving forward but we are in litigation on this topic. That is a simple fact. I am not going to go beyond that at this juncture.

Does Dr. Hunt see mediation as an option?

Dr. Colin Hunt

We are currently in litigation on this topic and I am not going to go beyond that.

Litigation is probably a couple of steps beyond common sense, whereas the judge rightly points out that mediation might be an option. I am just asking Dr. Hunt whether he would consider mediation. His answer seems to indicate that mediation is not an option and the bank is going to litigate this out to the end. I remind him that some of the people who appeared in the Public Gallery on the previous occasion on which this issue was debated at length by the committee have since died. They did not live to see the outcome of the efforts they were making to find some sort of address for this issue. I would have thought that as a common-sense approach, based on what the judge in the High Court suggested, mediation would be an avenue the bank would pursue. Has it even been thought about and discussed by the board or management team, or is it completely off the table and the bank is hell-bent on litigation?

Dr. Colin Hunt

I would not use the phrase "hell-bent". This has been discussed on a number of occasions in appropriate fora within the organisation. We will do what is in the best interests of all our stakeholders in this particular regard.

Would Dr. Hunt consider the EBS tied agents to be stakeholders?

Dr. Colin Hunt

Yes, they are, but we have to take into account the views of all stakeholders.

In taking their views into account, would Dr. Hunt not consider that a meeting for the purpose of mediation and the fulfilment of the judge's direction, as it were, is worth considering?

Dr. Colin Hunt

We are currently in litigation. That is the position we are currently in.

There is nothing to stop the bank from reversing out of it. If the will is there to do so and the bank wants to deal with legacy issues, I suggest that both parties could very easily stand back from the litigation and attempt to mediate. In most cases, in fact, particularly those to do with banks, judges point to customers and banks going to mediation to resolve issues. It seems to be a very sensible approach and it has worked. I again press Dr. Hunt to consider what the judge has said in terms of mediation. If he does not wish to answer, he might tell me, given that the case was heard in the High Court in 2019, where else there is to go.

Mr. Jim O'Keeffe

If it is okay with the Chairman, I will come in on that point.

Mr. Jim O'Keeffe

As Dr. Hunt said, this is an issue that has been discussed. For the purpose of this afternoon's discussion, we have to be cautious around the fact that, as Dr. Hunt mentioned, from our stakeholders' point of view, we cannot prejudice any ongoing litigation. Clearly, we have to avoid any commitments that we might inadvertently make this afternoon that could prejudice it.

As the committee knows, we use mediation on many fronts. We have been working with customers through mediation over a long period, especially customers in difficulty.

We have worked through mediation. There is no question about whether we would use mediation in particular scenarios. This afternoon, we are not at liberty to commit to using mediation in this specific instance. I am willing to take that away to look at the legal side and where that would leave us. I have to refrain from committing to entering into mediation. I cannot go into the details of the case. The committee had the opportunity to meet with the agents on this side. Unfortunately, it is not our policy, as it should not be, to disclose any details about these issues. As the committee is aware, this is a complex, long-running issue. The course of action that has been taken is a result of all of that. It is not unwillingness on our behalf to try to close past issues. It is embedded in the complexity and some of the circumstances of the case. Notwithstanding that, Ms Dooley and I will look at what impact there would be if we considered anything at this time. From a legal point of view, that is probably as far as we can go today.

Is the case before a particular court?

Mr. Jim O'Keeffe

Yes.

Is it before the Supreme Court?

Mr. Jim O'Keeffe

The next phase of that case will be in quarter 3 or early next year and it will be back in the High Court, as I understand it.

The witnesses will hardly go back to Mr. Justice Jordan in view of what he said.

Mr. Jim O'Keeffe

It is due back in February 2022.

It is due back in court then.

Mr. Jim O'Keeffe

Yes.

Committee members will monitor that situation. I firmly believe that in dealing with legacy issues, the banks should be to the fore and not afraid to deal with them. That takes all stakeholders into account. I am not saying that the law is on the side of EBS. I am saying that common sense would dictate that people who have a grievance should at least try that process. That would be not just my opinion but obviously the opinion of the judge too. I ask the witnesses to take note of it and hopefully deal with it in that way.

My next question is about dairy farmers. We have had a number of complaints from dairy farmers about banks generally, especially in the south east, with the factory at Belview which is now going through a process. Some of the farmers have committed to the extension of their dairy systems and dairy herd. Some are new entrants, but not many. They have applied to the banks for money to expand to meet the demands for a new factory at Belview. It would seem that they have been stalled in that process from the reports that I and my colleagues in the House are receiving. Are the witnesses aware of any of that? Some of the loan applications have been approved. Since they have been made, the cost of steel, construction and so on has gone up. Will the witnesses comment on the policy of the bank with regard to dairy farming generally and about the development at Belview?

Dr. Colin Hunt

We provide banking for about 40% of the country's farms. For historical reasons, going back to our heritage as the Munster & Leinster Bank, we provide banking for about 50% of the country's dairy farmers. This is a critically important part of our customer base. I am not fully aware of the issues that the Chairman is referring to but I undertake to take the issue away and to respond in writing as soon as possible, certainly in the next days. We are keen to be supportive of agriculture. We have an especially important role to play with regard to dairy farming, which we are conscious of. I hear what the Chairman says. I do not have the facts at my disposal at this point in time but I undertake to look into this matter and I will come back expeditiously.

I was just making the point that the delay being caused is adding to the costs. They are having to go back to the bank with significant costs because of the cost of building materials and many other inputs from builders. It would be helpful if Dr. Hunt came back to give us some detail on that.

Dr. Colin Hunt

I can do that. I thank the Chairman for bringing that to my attention.

A question regarding Ulster Bank and AIB was already asked. In his opening remarks, Dr. Hunt mentioned that the bank transactions and footfall through banks fell by 57%. Some Ulster Bank branches are now within the AIB network. What analysis has AIB carried out of which branches might be affected? Amalgamations are taking place. Will Ulster Bank carry AIB's brand? How will AIB move that cohort of customers forward? What will it do with the network of branches?

Dr. Colin Hunt

The part of the Ulster Bank business that we have acquired, which will be coming into AIB Group over the quarters ahead, is the commercial and corporate loan book. It does not relate to any branches. That was never part of our negotiations or discussions with NatWest Group or Ulster Bank. The business that we are acquiring is the corporate and commercial business.

Would that be dealt with in the same way in Ulster Bank, not through the branches but through the main centres?

Dr. Colin Hunt

Yes, through the business centres. Completion of the transaction will take some time because we have to go through regulatory approval and Competition and Consumer Protection Commission approval for this. On completion of the transaction, these customers will become customers of AIB and their facilities will be AIB-branded in future.

Another member mentioned the loans that are in difficulty in the banks. Dr. Hunt gave a figure of €31 billion and now has it down to under €4 billion. I have a question about the disposal of mortgages to either vulture funds or to my preference, which is organisations such as iCare, which deal sympathetically with mortgages and the people, families and so on who are in the houses. Will Dr. Hunt explain Project IRIS?

Dr. Colin Hunt

I will hand over to Mr. O'Keeffe in a second because he runs that part of the bank. To give a little colour, the Chairman referred to €31 billion, which came down to €4 billion. Even at €4 billion, notwithstanding that we have made significant progress with our customers, with the vast majority of the reduction being driven by agreed restructuring with our customers, approximately 6.5% of our gross loan book is still defined as being non-performing exposures. The average in the eurozone is about 3%.

We are going to continue to work, preferably with our customers, on reducing this number further, to further strengthen the bank and our balance sheet to best equip us to deal with whatever might be thrown at us in future. If the pandemic has taught us anything it is to expect the unexpected. With regard to Project Iris, I will hand over to Mr. O'Keeffe.

Mr. Jim O'Keeffe

The Chair will be pleased to know that on this occasion I am free to speak about the portfolio sale and I will be able to give some colour on it. To lead into it, over a period of time on the mortgages side, as we all know and committee members have heard us speak about it at a number of meetings, we had a lot of restructuring to do. We have restructured and put solutions in place for approximately 47,000 mortgage customers over a lengthy period of time. The good news is that of those we have in place more than 93% are performing and operating as agreed. This was a hugely important piece of work. As we discussed previously, alongside it we had some loan sales of other types of assets.

In addition to this, a few years ago with the organisation the Chair mentioned, iCare, we put in place and supported an enhanced mortgage to rent scheme. This has worked very well. At the point it was put in place, the entire industry had managed to complete only 250 cases in the preceding years. As of today, we have done as many as the entire industry had done at that period of time. This is hugely beneficial for AIB's customers.

We still had a group of mortgages that were not co-operating or engaging with us so we could restructure them. Within the residual mortgage population was a group of customers who, to be fair to them, were co-operating with us but we could not find a sustainable solution. There was no way we could amend their mortgages to make them sustainable. One of the options was to move to mortgage to rent and the Chair knows how this operates. Because we could not get engagement with the wider group of mortgage customers as we were agreeing to move forward on portfolio sales we created a separate portfolio. This broadly had customers who were co-operating with us but we could not identify a banking solution for them. We felt one of the most appropriate options might be mortgage to rent.

This was something we discussed at length with the committee the last time we came before it. I was looking at my notes. The Chair and others favoured an alternative approach to this issue. We agreed we would embrace and engage with the process, which we have done. We identified a group of approximately 650 mortgage holders in this category. We sought partners who would purchase these loans on the basis they would work with the customers to find sustainable solutions. A number of organisations came forward and we worked through it in a commercial and customer-centric fashion. We agreed to sell the loans to one of the consortia. This took place earlier this year. During the process, we worked to ensure the mortgages to rent in the pipeline were concluded. There was probably a difference because we were so advanced with mortgage to rent activity. It was something we had to embrace, unlike some others. In the round, this is what the portfolio looked like. It probably was groundbreaking not just for Ireland. It was probably groundbreaking internationally in terms of what we achieved. The customers who went as part of it should benefit from a good outcome. I hope this gives the Chair some clarity on it.

Is is possible for Mr. O'Keeffe to give us the name of the company or financial institution that bought the loans?

Mr. Jim O'Keeffe

It was a consortium of Everyday Finance. Home for Life was the local group licensed or approved for mortgage to rent. Arizun Assessment Management and LCM were part of the group also. All of these-----

How would Mr. O'Keeffe classify Everyday Finance?

Mr. Jim O'Keeffe

It is the largest and most established credit management business in Ireland. It was founded in 1976. I have to be careful as I comment but I assure the Chair that from our due diligence we see it as a highly professional organisation.

Is it a vulture fund?

Mr. Jim O'Keeffe

In fairness, this group of people includes Arizun and Home for Life. As I said, Home for Life is approved by the Minister for Housing, Local Government and Heritage to operate the mortgage to rent scheme. These organisations also have proven credentials in sustainable solutions for borrowers in other jurisdictions. I would be-----

The mortgage to rent has a 25 year lease. I encourage the bank to look beyond these organisations. In these cases the bank is going in the right direction and I compliment it for doing so. With a little bit more scrutiny of the system and how it works the bank might find an even better solution. This is not being critical of the solutions it has found already. There are other options available. Should the bank be offloading mortgages in future it might consider greater in-depth commentary on this.

Generally in terms of the bank and the Government's stake in the bank, what is Dr. Hunt's view on this for the future?

Dr. Colin Hunt

The Government has stated it does not have a strategic interest in being a long-term presence in the shareholder register of the institution. This is out there. It is a public statement. I have no influence over the timing of any decision the Government may take in future about whether it will reduce its shareholding in the AIB group. We are deeply conscious of our responsibility to ensure the organisation is as well-run as possible. We have a competitive range of products. We have a very good relationship with our customers. We have a strong investment proposition to bring to market in the event the Government decides to reduce its shareholding in AIB. As I said, we have no control or view on the timing of any decision the Government might take. In the event it makes such a decision we will do our utmost to ensure a strong investment proposition is brought to market.

With regard to the AIB's brand, Dr. Hunt's opening statement mentioned it is expanding and mentioned Ulster Bank. Does Dr. Hunt see the bank having to have the government prop for a long period of time? Is he happy the bank is now getting to a point similar to Bank of Ireland and that it is open to sale? Is there a complete gap between the possibility of a sale of those shares and the financial condition or general administrative condition of the bank? I know it is working hard to get to that point. I am sure Dr. Hunt would like to lessen the shareholding of the Government.

Dr. Colin Hunt

That is a matter for the shareholders. It is a matter for the Government.

The Government is still a significant shareholder in the bank. It is the largest shareholder by far as the 71% owner of AIB Group. In the event the Government decides that it will reduce its shareholding in AIB, I suspect it will happen over time and in several tranches. I do not have any information greater than the information that is publicly available so I am merely speculating at this juncture.

I have to ensure we are delivering as good a proposition and as well-run and sustainable an institution as possible, one that is as focused as possible on the long term at all times in the interests of all our stakeholders. A strong and robust AIB is good for Ireland and the Irish economy and, ultimately, good for our shareholders.

Some of the issues I had wanted to speak on have been touched on especially in respect of the Home for Life. I believe there is general acknowledgement now that the 25-year leasing model of social housing is not a positive model for the State. It has been identified as poor value for money for the State. Effectively, it is the paying of mortgage and profit. When we talk about social housing we need to be clear that it is very much a for-profit enterprise and one where the homes are not for life but become an asset after 25 years. Again, it has been identified as something that is poor value for the State. I wonder whether the model is being reflected on or changed in terms of the engagement or investment approach of the bank.

It would be useful to get information on the properties made available to the Housing Agency. Are they permanently made available to the Housing Agency or leased? What are the arrangements for the vacant properties made available to the Housing Agency? How permanent is the arrangement? That is one part.

The key point I wanted to touch on is the question of the agents, which has been discussed. I have no wish to reiterate the point but I note that when we talk about stakeholders, it is hard to see. EBS tied agents are clearly stakeholders. In many cases customers are key stakeholders. If we are talking about shareholders as stakeholders, the State is the majority shareholder. I am curious about who the stakeholders are. Whose interests are being balanced against EBS tied agents in this case? Who are they?

I realise am asking the questions in reverse order but this is the question I would like answered first. It is in respect of another judgment made by the Financial Services and Pensions Ombudsman. Last year the ombudsman upheld a complaint against AIB relating to failure of the bank to offer a tracker mortgage to a customer in line with the mortgage contract. The judgment was that the difference between the amount of interest paid from 10 April to date and the amount of interest that would have been paid at the reduced capital balance would be repaid to the complainant. That arrangement is now being rolled out to 6,000 customers who had the same contract. This is one of the largest refund programmes under the tracker mortgage scandal.

I would like one question specifically answered. Is it correct that AIB paid simple interest instead of compound interest in making those returns to those 6,000 borrowers? Was calculating the interest refund based on simple interest or compound interest? In that sense, is it consistent with the approach taken in the charging of interest to customers in the first place? I call on the bank representatives to answer that specific question first and then come to the other questions.

Mr. Jim O'Keeffe

Dr. Hunt may wish for me to take that.

Dr. Colin Hunt

Mr. O'Keeffe can address the issue relating to the Financial Services and Pensions Ombudsman.

Mr. Jim O'Keeffe

In fairness we touched on this briefly earlier with Deputy Jim O'Callaghan in respect of the question on simple interest. It was calculated on that basis. As I said to the Deputy at the time, we confirmed with the FSPO in detail that we were applying it in the right manner and we got confirmation of that before we moved ahead to the wider grouping. It is absolutely in line with how the FSPO wanted the decision to be applied.

Is it consistent with the approach to the original charging of the interest? Was the original interest charged on a compound basis?

Mr. Jim O'Keeffe

Being honest, the decision of the FSPO and the request to us was to ensure that it was in line with the FSPO decision. Going outside of that was not where we went with it. We applied it absolutely. As the Senator knows, this was a comprehensive block of work across the 6,000 customers or 5,900 customers. It was done on that basis.

I understand. Mr. O'Keeffe has answered my question in respect of the repayment but I am asking about the original charging of interest. Was that on a compound or simple interest basis?

Mr. Jim O'Keeffe

The calculation would have been different. I would have to go back over the case but it would have been different. However, I have to reiterate that what we were doing was in line with the findings of the FSPO. We should remember that the FSPO was writing down the balance in the first place as part of the compensation and then calculating the interest on that basis. It was completely different from what we would have in normal circumstances where we would calculate interest on capital and repayments. In other words, it would be wrong to look at the interest calculation on its own because the FSPO wrote down the balance by 12%. It was the composite of that write-down and the calculation of the interest which the FSPO wanted to compensate the borrowers for.

It would be useful if the AIB officials could come back in writing to clarify in respect of the original charging of the compound or simple interest. I believe it is relevant. Again, this is not a matter of compliance with the FSPO. The fact of compliance with the FSPO is because of wrongful actions taken by the bank. The concern is in terms of not simply being compliant or in respect of what the bank is required to do but being seen to seek to full redress. The write-down is minimal given that during the period in which these people were being wrongfully charged interest, there were significant financial implications and impacts on people. It is not simply a matter of changing the balance sheet. The impact of the tracker mortgage scandal was very much felt in terms of people's lives and the options they had over the period. In that context I respectfully suggest that the 12% write-down is one thing but that the compound interest question is another. It is a question that I would like an answer to in writing.

Mr. Jim O'Keeffe

That is no problem at all. We will come back to the Senator in writing on that. It is important to note, however, for the committee and for others that the FSPO was opining on what it believed was the appropriate financial redress considering all the factors outlined by the Senator.

I wish to discuss Home for Life. Concerns have been raised around this fact and the 25 year commercial leasing model. Effectively the State pays the mortgage and a dividend. The leasing model is poor value for the State. Can the bank representatives comment in recognition that there seems to be a policy shift in that? Will AIB be changing its investment model on social housing to move away from that? Can the bank officials clarify what is meant by the vacant properties made available to the Housing Agency?

Mr. Jim O'Keeffe

Yes, that is no problem. We have had approximately 400 properties made available to the Housing Agency. That is on a complete basis. In other words, the Housing Agency purchased those properties and there is no lease arrangement. The Housing Agency takes ownership and makes the property available on a permanent basis through whatever organisation the agency operates with. The property transfers over in full.

Mr. Jim O'Keeffe

Yes.

So, the housing agencies purchased 400 properties from AIB?

Mr. Jim O'Keeffe

Exactly.

On the Home for Life model, a number of non-profit housing bodies have raised concerns that the for-profit model would effectively drive up prices and create a profiteering dynamic within the social housing rental market.

Mr. Jim O'Keeffe

As I referenced earlier, the Home for Life mortgage to rent scheme is approved by the Minister for Finance. I am unaware of any changes to that scheme as of now. Clearly, any changes to that would be reflected in whatever dealings we have, on the basis of whatever organisation is approved by the Minister. However, it is not for us to approve or not approve the schemes, or the people who are in the scheme.

It seems that the tide is changing in relation to that model. I have a question on the acquisition of Goodbody. AIB has discussed the issue of pay cap at length. I wanted to talk about a slightly different issue, which is the ethical audit. Obviously, we have discussed Goodbody in this committee previously, regarding unethical activities by executives within Goodbody. If AIB could comment on the bank’s effective-----

Dr. Colin Hunt

Sorry, Senator, Goodbody is not the entity you are referring to. The Senator is referring to another entity. I obviously need to be very careful here-----

Apologies if I have misrepresented anything----

Dr. Colin Hunt

I would like to stop the conversation there.

That is fine. I will ask a general question. I apologise, as I certainly did not mean to cast aspersions on anybody. I would like to specifically comment on the wider question of the senior executive accountability regime, SEAR. This comes up a lot in this committee. This relates to general financial best practices. There is a political commitment to introduce a senior executive accountability regime. I would like Dr. Hunt's perspective on the importance of bringing them through and on the urgency of their application. Has AIB had any engagement with the Government, the Central Bank of Ireland, or with others on the senior executive accountability regime?

Dr. Colin Hunt

At the outset, we have experience of a similar regime in Britain. We have operations across the Irish Sea. The bank would fall under the senior manager regime, SMR. I suspect this is similar to what will be introduced here, under the expected SEAR legislation. The Senator referred to stakeholders earlier. How do we define stakeholders? If we went back 20 years, the stakeholders would have been a reasonably narrow group of people. However, I am conscious that alongside our regulatory licence to operate, we have a social licence to operate. We have a duty to a broad array of stakeholders, who are our customers, our staff, our regulators, our shareholders and the wider public. This is because of the extraordinary role that this bank has in the well-being of this country. I am conscious, as I said, of the social licence to operate. We warmly welcome the expected introduction of the SEAR legislation. We believe it will be supportive of the best management of the banking industry and of the ultimate restoration of our reputation and of trust across the banking system. I have not had any specific discussions with Government on this. It is a matter for Government and for the regulator to arrive at the legislation. However, the commitment I can make today is that when the legislation is introduced and enacted, we will abide by it faithfully, to the letter and to the spirit.

In terms of the preparations that are under way internally-----

Senator, you can continue until the end of the meeting, which is 2.30 p.m., just to remind you of that.

Are others indicating?

No, you can continue on to the end of the meeting.

Considering the senior manager regime in the UK, what preparations might be under way here? We as a committee are keen to see this regime introduced. We have discussed it before. Are there preparations on that? Could Dr. Hunt comment on an issue that arose not in relation to AIB but in a wider discussion? This arose, for example, in the tracker mortgage scandal and others, in terms of GDPR, and people’s access to the information on their own accounts. Could he comment on changes or resources that have been allocated to ensure greater transparency under GDPR for individual clients and customers? Also, could he indicate what steps AIB might be taking in preparation for the senior executive accountability regime?

Dr. Colin Hunt

I will kick off with this senior executive accountability regime. Then, I will hand over to my colleague, Ms Dooley, to give some colour on the other issues. We have been operating with the senior manager regime in Britain for a number of years. We will take away the learnings we have had from that experience. Preparation work is now well under way within the organisation now. We want to be an early adopter, once this legislation comes in. We want to be fully compliant with the legislation as quickly as is possible, because we see the strong rationale for it. We see a strong merit in it. Ultimately, it will benefit the organisation as well as the wide group of stakeholders that I referred to earlier. It is a key focus for us. We see it as intrinsically linked to the long-term sustainability and stability in the organisation. We are committed to introducing it at pace and in full.

Ms Helen Dooley

In terms of the senior executive accountability regime, one the most important elements is to ensure that accountabilities are sufficiently defined and mapped down throughout the organisation. We have taken learnings from the senior management regime, SMR, as rolled out in in the UK. We have also engaged with industry colleagues in other jurisdictions, such as Australia, Hong Kong, and Singapore that have a similar regime. Another key element of the SEAR legislation is anticipated to be a code of conduct for staff. In the past number of years, we spent a lot of time on looking at the code of conduct and building what we believe will be the foundations of the SEAR legislation. We took learnings from other jurisdictions and based our regime on what the Central Bank of Ireland has advised to date. These will be the cornerstones of that regime. The Senator also touched on the GDPR legislation, which came in 2018. We welcome it, as we do anything that gives customers access to their data, and the ability to correct data when it is wrong. We believe that we have dedicated appropriate resources to that. We engage regularly with the Data Protection Commissioner on issues as and when they arise.

Has the “good conduct” been in connection with the union? Has there been strong union engagement around the development of that?

Ms Helen Dooley

The union would have been consulted prior to us launching it.

Again, that is something about which we would consult the union before asking our colleagues to adhere to it.

I think we are finishing up. We spoke about walking down the different main streets and the many actors. There is significant concern regarding Ulster Bank and Bank of Ireland branch closures. I know the witnesses mentioned that they see it as key. I am a bit concerned by the references to customer preference because I think during Covid, it might not be a fully accurate measure because it does not deal with a number of financial activities that would normally take place but have not been taking place. Working online is not necessarily a preference but has been a necessity in terms of public health. As we look to new periods of, hopefully, economic activity, what weighting is the bank giving the period during Covid in terms of percentage usages versus looking to the period of the previous year or two? I am a bit concerned about that because this does not capture a lot of different kinds of financial and economic activity that have been suspended and does not necessarily capture the preference. There may be those who have engaged online. We know in terms of financial independence-----

We have to finish.

Could the witnesses respond to that point?

We must observe the Covid regulations in the House, which forces a conclusion at 2.30 p.m. Could the witnesses give us a quick response to the Senator's question because we must conclude the meeting?

Dr. Colin Hunt

There were 50,000 branch visits per day on average across the network before Covid arrived as opposed to 1.5 million digital interactions on a daily basis. What happens in branches will change. We are seeing more and more everyday transactions being done online. It is a multiple. The number of digital transactions involving everyday banking is 30 times the number of people appearing in branches. However, we are very committed to continuing to have a physical presence on the main streets of Ireland because we have a strategic imperative to support sustainable communities.

I must conclude the meeting. I thank Dr. Hunt, Ms Dooley and Mr. O'Keeffe for attending. We expect their response on outstanding issues in due course.

The joint committee adjourned at 2.33 p.m. until 12.30 p.m. on Wednesday, 7 July 2021.