I move: "That the Bill be now read a Second Time."
I appreciate the co-operation of the Opposition parties in the prompt taking of the Bill. My primary aim in introducing this Bill is to deepen and widen our capital markets by providing a new instrument for secure investment. This will enhance the range of investment opportunities in the Irish capital market.
The main function of the Bill is to provide the legislative backing to the securitisation of certain moneys due to local authorities from the repayment of mortgages financed originally through loans from the local loans fund. This form of securitisation is common in many states of the United States of America. It is beginning to be used in Europe. Ireland will be among the first European countries to utilise this form of financial instrument.
As the House is no doubt aware, the need for securitisation arises from the Government's obligation to pay to women the arrears owed to them arising from a High Court ruling in relation to the EU Directive on equality of treatment in social security payments.
An EU Directive on equality of treatment for men and women in social secruity was adopted by the Council of Ministers on 19 December 1978. The deadline for implementation of the Directive was 23 December 1984. The measures necessary to introduce equality of treatment, in accordance with the provisions of the Directive, were contained in the Social Welfare (No. 2) Act, 1985, which was enacted in July 1985. The provisions of that Act were brought into force by way of commencement order in two phases with effect from May and November 1986. Consequently, equality of treatment in accordance with the provisions of the Directive was not fully provided for in respect of the period of delay from 23 December 1984, the deadline for implementation, to November 1986.
There were four areas of the social welfare code which were discriminatory within the terms of the Directive during the period of delay. These were that married women received a lower personal rate of benefit than men and single women in the schemes of disability benefit, unemployment benefit, invalidity pension and occupational injuries benefits; they were entitled to unemployment benefit for a maximum duration of 12 months, as against 15 months for claimants generally; they were precluded from qualifying for unemployment assistance; and as a general rule, they did not qualify for increases in respect of adult or child dependants.
When the 1985 Act became fully operational in November 1986, many married men lost entitlement to an increase in respect of their spouse as an adult dependant and to half of the increases in respect of children, where the wife was not an adult dependant. To avoid a sudden reduction in income for the families concerned, the Government decided to introduce transitional payments in these areas. These payments, which were paid to men but not to women, were subsequently found by the courts to have been discriminatory also. These payments were reduced annually from 1988 onwards and they were discontinued entirely in July, 1992 by my colleague, Deputy McCreevy, former Minister for Social Welfare.
Arising from the delay in implementing the necessary measures in accordance with the requirements of the Directive, court proceedings were initiated by a number of married women in which they sought to have their entitlements in the period of delay determined on the basis of the rules applied to married men. They also sought payment of the transitional payments to them on the same basis as applied to men.
In a judgment delivered in the High Court on 3 February, 1995, in what was effectively a test case, Miss Justice Carroll found that married women were entitled to be paid on the basis of the rules applied to married men in the period of delay and that they were also entitled to transitional payments paid to men in similar circumstances. The judgment also provided for the payment of compensatory interest at a rate equivalent to the consumer price index on the arrears of benefit up to the date of payment.
The Government authorised the Minister for Social Welfare to put in place arrangements to implement the High Court judgment. This is in line with the commitment given in A Government of Renewal to pay the legally determined entitlements of married women to social welfare equality payments. Under these arrangements the estimated 70,000 women involved are receiving payments on the basis of the rules applied to married men in the period of delay in implementing the Directive. They are also receiving transitional payments. The total cost of implementing the judgment is estimated at some £260 million, of which up to £200 million will have been paid by the end of 1995. The remaining £60 million will be paid in 1996 and 1997.
At budget time, I provided £60 million for the payment of these obligations. I indicated that, if it were necessary to pay more than the £60 million this year, I would consider disposing of certain State assets so that the EBR would not be increased. It was in this context that I asked for an examination of the means by which certain assets of the local loans fund could be realised as a cash payment to the Exchequer.
The National Treasury Management Agency suggested a route which would involve the sale of the proceeds of the mortgages to the private sector. I decided to adopt the NTMA's suggestion. I hoped this proposal would encourage the financial markets in Ireland to look afresh at the idea of securitisation of mortgages and that the scheme would give an impetus to this area of financial market development. It is the Government's policy to encourage the development of corporate and mortgage bonds in Ireland, thus making the real economy less vulnerable to any temporary volatility in the financial markets particularly with regard to fluctuating interest rates. Since my decision earlier this year, two private sector schemes have been announced involving the securitisation of mortgages, albeit floating rate based transactions.
The local loans fund was established in 1935 under the control of the Minister for Finance to provide a new system of local authority capital funding. The fund is financed by the Exchequer. Over the years it provided loan capital to local authorities at fixed rates of interest for various purposes including on-lending to individual house purchasers who satisfied a means test, that is, the so-called SDA loans, or Small Dwellings Act loans.
Since 1988 new loan approvals by the fund have been very limited, having been replaced by direct Exchequer grants in the main for local authority capital projects. In the case of the housing loans, the Housing Finance Agency has since 1986 provided the local authorities with the requisite funds at variable rates of interest.
Total loans outstanding from the fund to local authorities are of the order of £480 million and of these about £440 million are SDA loans. A little less than half of these loans are involved in the proposed securitisation.
The National Treasury Management Agency, at my request, consulted my Department and the Department of the Environment as well as various financial institutions and the local authorities in the development of its proposal. Broadly, the proposed scheme is as follows: first, a special purpose vehicle, or SPV, will be established in the private sector but managed by the NTMA; second, this SPV will raise £140 million in the current year by a bond issue to investors and pay the proceeds to the Exchequer; third, the local authorities, with the help of the NTMA, will agree a pool of mortgage repayments, the revenue from which will be assigned to the SPV — the SPV will fund payments to the bond holders from this assigned revenue; fourth, all payments by the local authorities to the SPV will be routed through the Local Loans Fund which will act as agent for the SPV; fifth, as a local authority makes payments through the Local Loans Fund to the SPV, it will be deemed to have made a repayment of its LLF debt; sixth, the local authorities will continue the existing practice of paying over the mortgage payments as they become due to them, even if not collected; seventh, in the very unlikely event of a local authority defaulting on its payments, the Minister would pay to the SPV the amount due and pursue the local authority by way of the Local Loans Fund's legal powers, which give it a charge on the local authorities' general revenue; eighth, in the event of early redemption of a mortgage in the pool, the sum can be passed to the SPV by the local authority and this would be invested by the SPV and, finally, any surplus remaining in the SPV will be handed over to the Exchequer on the winding up of the company.
In essence, this scheme means that the Exchequer will receive a lump sum up front in exchange for a stream of income that would have been payable to it from local authority sources over the coming years. This structure is necessary because I wish to ensure that the underlying mortgage asset is not affected in any way by the proposed securitisation scheme and also that the local authorities are in no worse position under this scheme than they are at present. I want to emphasise this point. There will be absolutely no change in the existing relationship between the individual mortgagor and the local authority and there will be no adverse effect whatever on the finances of the local authorities.
While the proposed scheme may appear complex, similar schemes are standard financial market practice for securitised bonds and a special purpose vehicle is almost always a feature of such schemes.
As stated already, the scheme provides that the Minister for Finance will guarantee the payments to the SPV thereby ensuring that the SPV will not have, or require to have, access to the security of the mortgage itself. The local authorities will have their Local Loans Fund debt forgiven to the extent of the payments made to the SPV. As each payment is made it will be deemed to be a repayment off their Local Loans Fund debt.
As is the case at present, if there is a default by a mortgagor the local authority will be obliged to continue paying to the Local Loans Fund and pursue the debtor.
If a local authority itself were to default, then the Local Loans Fund would be able, through its general powers, to enforce the debt. This is no different to the present position where the Local Loans Fund can pursue a defaulting authority. Of course, the possibility of a default by a local authority is largely theoretical; no local authority has ever defaulted on its debt to the fund and I do not anticipate that any ever will.
Deputies can be assured that the reason I am dwelling on these points is because I do not wish there to be any misunderstanding of the position and I want to ensure that unfounded fears are not generated. We are not disposing of mortgages; we are disposing of the proceeds of the mortgage loans, and there is a fundamental difference.
I would make one further general point. This scheme involves the sale of a State asset to the private sector. In return for a lump sum payment of £140 million this year, the State sector will assign the loan repayments due to it from persons with mortgages financed by funds from the Local Loans Fund. These repayments are due under contract law to the State and this securitisation scheme involves the sale of the repayments. In this, it is identical to a sale of assets, via securitisation, by a private sector mortgage lender.
I hope this securitisation scheme will act as a catalyst in the development of the securitisation market as a whole, with consequent benefits for both investors and borrowers. In this instance, investors will be provided with a new investment alternative in the form of fixed rate bonds to be issued by the SPV. For some time, institutions here have been channelling a significant portion of their resources abroad, citing the lack of suitable investment opportunities in Irish financial markets. These bonds will provide a new investment opportunity for them.
One of the major gaps in the Irish mortgage market has been the absence of long-term fixed rate mortgages for householders. The lead which we are giving through the launch of this transaction should facilitate the development of a mortgage bond market. In turn this should increase the availability of fixed rate mortgages. This process will, of course, take some time; nevertheless a start has to be made. Such a development would merely be following trends in the United States and Europe which have highly developed markets for mortgage backed securities.
The Exchequer borrowing requirement will be unaffected, as the £140 million to be raised under the scheme in 1995 represents the balance between an original £60 million provision for equal treatment on budget day, and the £200 million which is actually being issued to the social insurance fund for this purpose. While the current budget deficit will be higher, the capital deficit will be correspondingly lower than anticipated, because issues to the social insurance fund are treated as current expendituures in the Estimates Volume, but the proceeds of the scheme are classified as an Exchequer capital inflow.
The general Government deficit will also be unaffected. Under the accounting conventions from which this deficit is derived, on a standardised basis for each member state, loan and equity transactions are not counted as either receipts or expenditures — these international conventions view such transactions as "financial" or balance sheet transactions. It follows that the proceeds of this scheme will not appear on the revenue side of the general Government accounts. However, the accounting conventions also provide that benefit payments should be treated as attributable to the year in which the liability was due — that is, on an accruals basis. The primary benefit payments accrued due over the years 1985 to 1993, when the women concerned did not receive their full entitlements under the EU Equal Treatment Directive, and the benefit payments are thus spread back over these years, rather than recorded in the years in which they are actually being paid. To present the full picture, I should add that the court also determined that in addition to the arrears of primary benefit due, the women were entitled to compensation for the delay in payment. This latter element, which is calculated as representing some £65 million of the total £260 million liability, is not spread back. It is treated in the accounts as due in 1995 — the year in which it was determined by the court.
There is a commitment by Government to limit expenditure increases to 6 per cent in 1995. The exceptional £140 million being issued this year breaks that limit. However, because of the Government's commitment to fiscal discipline, the once-off £140 million has been excluded from the base for the purpose of calculating the 2 per cent real increase for 1996. If it were not excluded, the spending limit for 1996 would accordingly be increased by £146 million.
In addition, I would draw attention to the provisions of section 2 of the Bill. That section provides that should a future Minister for Finance wish to fund expenditure by securitising more of the assets of the Local Loans Fund, the approval of the Dáil must be obtained. I would stress that I have no plans to approach the Dáil for this purpose.
The Bill is designed to facilitate the development of this particular securitisation scheme. Of necessity, because there is no precedent, we must make provisions for all eventualities and not be too restrictive. However, we are being cautious and keeping tight control on the operation of the scheme.
Section 1 of the Bill is a definitions and interpretation section.
Section 2 specifies the purpose for which the provisions of the Bill can be brought into effect. The immediate proposal is for the financing of part of the social welfare equality arrears payments. As I do not wish to restrict freedom of action in the future I have also included provision that the Bill, if enacted, can be used for other purposes, but only with the approval of the Dáil. As I said earlier, this will act as an assurance that this scheme will not be abused or lead to a weakening of our commitment to our budgetary targets.
Section 3 refers to the existing power under section 14 of the Housing (Miscellaneous Provisions) Act, 1992, whereby a local authority, at the direction of the Minister for the Environment, shall transfer, sell or assign mortgages. This power is now defined as including assignment of the debt secured by a mortgage and it is provided that such an assignment shall be deemed to be an equitable assignment. The SPV will not have any right of enforcing the debt directly against the individual borrower. There will be no circumstance in which the SPV can give notice to, pursue, or otherwise deal with the individual mortgagor.
Section 4 gives the Minister for Finance the power to designate the body which will, in return for a lump sum, receive the assigned payments and to arrange for its management. The management of this designated body is a function which will be delegated to the National Treasury Management Agency under section 12. Provision is also made to allow the Minister to own a company as the designated body. This provision, while it will not be utilised for this securitisation, is included to ensure flexibility in the future should a Minister wish, or need, to establish a company for this purpose.
The existing local loans fund legislation provides that the fund will have a lien on the general revenues of local authorities in respect of borrowings by the authorities from the fund.
Section 5 excludes the amounts assigned by local authorities to the SPV from the general revenues for the purpose of that lien. This provision ensures that these revenues are "ring-fenced" in favour of the SPV and that the Exchequer can have no call on them.
Section 6 provides that any payments made by a local authority for the purposes of the Bill to a designated body will have the same effect as a payment directly to the local loans fund. In this way there will be no change in the arrangement for making their biannual payments to the local loans fund. The local authorities will make their payments, as at present, directly to the local loans fund. It is only at that point that the allocation of payments due to the designated body will be made.
Section 7 provides for a guarantee by the Minister for Finance of the amounts assigned by a local authority to the designated body. The reason for this provision is that the SPV is barred from recourse to the mortgagor. In a straight commercial securitisation, this recourse is the ultimate security for the bondholder. In the absence of this recourse in the present case, the Bill provides for a Government guarantee as the ultimate security for the bond.
Other sections deal with related matters, such as the tax treatment of the designated body and securities issued by it; delegation of powers to the National Treasury Management Agency; management of the assets and liabilities of a delegated body; provision of information by local authorities and expenses incurred by the Minister in the administration of the Bill. The accounts of the designated body will, under section 16, be audited by the Comptroller and Auditor General.
I am sure Deputies will have much to say on this Bill. This innovative scheme is designed so that there will be no change in the position of the mortgager or the local authority. It is designed in effect to broaden and deepen our capital markets. All Deputies, I am sure, are conscious of the need to observe the budgetary parameters, but, at the same time, meet the once-off costs of the social welfare equality payment arrears.
I commend the Bill to the House.
