Seanad Éireann debate -
Thursday, 6 Jun 1996

Vol. 147 No. 13

Adjournment Matters. - Hidden Financial Charges.

Mr. Cosgrave

I thank you, Sir, for allowing me to raise this important and relevant matter. Borrowers, particularly mortgage holders, are being asked to pay hidden charges and are not told the whole truth. The various financial institutions must get their act together or be made to do so. I am glad the Director of Consumer Affairs is launching an inquiry into these charges. The financial institutions, building societies, banks, etc., have a range of charges, some of which are hidden charges and are not fair to the borrower. I ask the Minister to consider this area. I am sure she is aware of the various problems.

The Consumers' Association of Ireland recently carried out a survey which showed that various charges are hidden. At present, seven of the 13 major lending institutions still charge people for the privilege of applying for a mortgage. Not only must one pay back the sum plus interest and other charges but one must also pay up to £200 for the privilege of taking out the institution's mortgage package.

Many institutions spent large amounts of money producing glossy pamphlets and promotional material. However, many borrowers would prefer if the institutions spent less money on glossy and glamorous brochures and more on telling the public about hidden charges. At times borrowers are asked to take out mortgage protection policies and indemnity bonds. However, borrowers are not aware that the institution makes large commissions on these products. The purpose of indemnity bonds is supposedly to back up the security. The old rule was that the house was security for the lending institution, whether it was a bank or building society, if the borrower defaulted. In recent times, the price of houses has increased and the institutions' security is well looked after.

Borrowers should be properly advised and told the truth about various charges and other items which can arise. They should have greater freedom and options. At present, they are not getting a fair crack of the whip. Borrowers pay enough money back to financial institutions and, given that the institutions at their AGMs regularly return vastly inflated profits, it is obvious consumers should get a fairer crack of the whip.

I hope the director will examine these matters and that the Minister will ensure they are investigated. For example, when one has paid back a mortgage, one must pay a fee of approximately £50. If a person is getting a top up loan or selling the house and buying another, some institutions charge up to £40 for the glorious honour of taking up the documents and accounts. This matter must be examined and, if necessary, legislation should be introduced to deal with the problem of hidden charges. The areas where these arise should be identified to ensure the public is aware of them. They should not be in the small print on the second last page of the document.

I welcome the survey published in Consumer Choice because it drew the public's attention to hidden charges. Borrowers deserve a fair deal. They pay enough to the institutions and they do not need further hidden charges imposed on them. They should not be penalised by incurring extra charges. I ask the Minister to respond as positively as possible and, if necessary, to introduce legislation. I hope the director, following his investigations, will be in a position to issue directions in consultation with the Central Bank.

Minister of State at the Department of Enterprise and Employment (Ms E. Fitzgerald)

I am replying on behalf of my colleague, the Minister of State, Deputy Rabbitte, who is addressing the other House.

The Consumer Credit Act, 1995, came into effect on 13 May 1996. This measure, which is one of the most comprehensive of its type in Europe, regulates all forms of consumer credit, including housing loans. The Act enshrines a statutory pro-consumer code of rules and procedures which apply to all institutions issuing housing loans, whether they are building societies or banks. This also applies to local authorities which is important because that involves the lower income end of the market.

The survey undertaken by the Consumers' Association of Ireland was published in Consumer Choice and a selection of the findings was disclosed in the media on 1 May. These did not accurately reflect the position. In particular, it was claimed that the Consumer Credit Bill was diluted. It is the case that the Bill as originally published provided for mandatory disclosure of commissions. However, the advice available to the Government was that if the provisions were not changed, the consumer would have been disadvantaged because conditions written into primary legislation are inflexible. For this reason it was decided to replace the mandatory requirements with a more effective system which can be achieved by far ranging regulation marking powers.

This will better serve the consumer because it will be more prescriptive and more detail can be included. It avoids the lack of flexibility inherent in primary legislation which is neither practical nor suitable for dealing with complex disclosure issues, such as when commissions are paid by way of benefit in kind. If the detail is laid out in primary legislation and other ways of avoiding the disclosure requirement emerge, one is stuck with the legislation. However, regulation can be adapted to deal with new problems, if they emerge.

Regulations allow for the drawing up of a comprehensive range of detailed transparency requirements which can be adapted from time to time to deal with potential circumvention in addition to any anomalies which may emerge. Equal disclosure obligations shall apply to the mortgage lender and the intermediary which was not the case previously. This is equity of treatment, particularly for people who deal through intermediaries. The consumer will get the same disclosure they would receive if they were dealing directly with the mortgage company.

I wish to assure consumers that, following the completion of the consultation process which is well advanced with the Minister for the Environment, a disclosure regime will be established which will be readily intelligible to and form a powerful basis for the making of informed choices by all would be mortgage borrowers.

The association's survey also dealt with the cost of borrowing, having regard to the method of calculating interest and the imposition of fees and charges. Section 122 of the Act prescribes a common method for calculating the total cost of mortgage credit which shall comprise interest and all other associated fees and charges. In addition, a notice must be included on the front page of all housing loan agreements and not buried in the small print.

It must show the following information and indicate the date on which the information is valid: the amount of the loan, the period of the agreement, the number of repayment instalments, the amount of each instalment, the total amount repayable, the cost of the credit, the annual percentage rate of charge, or APR, the amount of the endowment premium, if applicable, the amount of mortgage protection and the effect on the instalment amount of a 1 per cent increase in the first year's interest rate. In combination these protections enable consumers to compare with confidence and assurance the various range of mortgage products on offer as well as giving them a clear picture from the start of their total financial obligations and required outlays. This type of information will help people to shop around.

In addition to providing wide ranging safeguards for new borrowers, the Act provides valuable protection for existing mortgage holders by way of a ban on redemption fees in the case of variable mortgages, the outlawing of any restrictions on the choice of house insurance, a mandatory requirement to provide borrowers with an annual statement of the amount outstanding during the lifetime of the loan, a similar requirement applicable every five years in relation to the performance of the insurance policy underlying the endowment loan, a statutory duty on lenders to disclose interest rates and penalties to be applied to arrears of housing loans and continued protection for the interest of the borrower in the event of the winding up of a mortgage lender.

During the progress of the legislation through the Oireachtas, the Minister of State, Deputy Rabbitte, met many interest groups. Now that the Act is in force, the Minister of State assures me his door is open and he is available to meet interest groups, including the Consumers' Association of Ireland which has been invited to discuss its position on the disclosure of insurance commission generally.

The flexibility of the provisions in the Consumer Credit Act which has now come into force and regulations to be made shortly following statutory consultation with the Minister for the Environment will provide the protection sought. I read the Consumer Choice article and one of the points it makes is that it is criticising the existing situation, but it does acknowledge that the new Act will effect these changes. Maybe there was a misunderstanding about the power of the regulations and how it was more powerful than the original provision in the Bill, as published, to put it all in the primary legislation.

The Seanad adjourned at 4.40 p.m. until 2.30 p.m Tuesday, 11 June 1996.