Vol. 687 No. 4
30 Deputy Catherine Byrne asked the Minister for Finance if he has received a report from the Irish Financial Services Regulatory Authority on whether banks have matched fixed rate mortgages with their own borrowings at high fixed rates which would justify the application of high breakage charges. [27883/09]
The Deputy's question refers to the commitment I gave in this House on 26 March 2009 to request the consumer director in the Financial Regulator — which has a statutory mandate to safeguard customers' interests — to examine the level of redemption fees charged by banks to customers wishing to exit from fixed rate mortgages. My Department received a copy of the Financial Regulator's report on this matter on 29 June 2009. The report sets out that the Financial Regulator requested specific information from 26 lenders on how early redemption fees quoted to customers are calculated. Of the 26 lenders, 25 confirmed to the Financial Regulator that they did not impose any fees in respect of the early redemption of a fixed rate home loan other than those which would arise in the context of a normal redemption of any mortgage. In one case, a €95 fee approved under the Consumer Credit Act 1995 is charged by the lender for breaking a fixed rate mortgage. The regulator's report states that independent actuarial confirmation was also sought from all the lenders to substantiate the case that the formulae applied by them to calculate redemption fees were restricted to the recovery cost of the funding of particular fixed rate mortgage arrangements in place.
On the basis of the information supplied by the lenders, including worked examples and the actuarial confirmations submitted, the regulator concluded and has confirmed to my Department that its analysis indicates the early redemption fee calculation in all cases appears to seek to recover costs and lenders do not generally apply additional fees in the case of early redemption. The Financial Regulator has advised my Department in its report that since its findings are based on a review of material provided by lending institutions rather than verification by means of on-site inspections, it intends to carry out at least six on-site inspections on this issue.
Lenders do not, therefore, seem to be applying financial penalties to dissuade borrowers from early redemption of fixed rate mortgages. However, if the additional work to be undertaken by the regulator brings to light any information that does not support the findings and the conclusions contained in its report, the regulator has confirmed that this information will be made available immediately in the public domain.
Although he did not address the matter in his reply, the Minister has committed to examine whether the exposure to fixed-rate mortgages by these lenders is matched by commitments to fixed-rate funding on their part. He has not adverted to the matter but it is a central issue. If the banks do not commit to long-term money they should not charge breakage fees for those committed.
I refer to the finding in the report which showed some lenders limit the breakage fee to six months' interest. In light of the very hands-on involvement the State now employs in the practices of financial institutions, does the Minister agree the approach used by some lenders ought to adhere to a best practice, given a background in which families are being crucified with commitments? If it is possible for some then it should be possible for all and a code of best practice should be employed.
Certainly I will take up the Deputy's suggestion on the matter of six months' interest and whether it is the practice. However, the answer deals with the question, correctly raised, of whether it is matched to long-term funding. It refers to actuarial calculations which relate precisely to the cost of funding the borrowing.
That is a different matter.
That is the basis of the regulator's examination.
The Minister is probably more aware than I that part of the reason for the mess in which the Irish banks find themselves is that they borrowed short to lend long. However, people who borrowed on mortgages have borrowed long. An individual family who bought a mortgage borrowed long but many of the banks borrowed short. The actuarial valuations seek to value the cost of long borrowing, not necessarily the actual borrowing the banks undertook. It may have been what they should have done but the mess they are in suggests that in many cases they did not.
Will the Minister arrange to extend the study to include international best practice on this issue? In one or two years' time, if the European Central Bank began to lift interest rates, fixed term mortgages may become attractive again. As the Minister will be aware, people are advised to shop around in a narrow sense for the best possible deal. We should consider what is available or what takes place in the Untied States and in places where penalties exist. Some of these penalties have been as high as €20,000 or €30,000 for hard pressed families. Will the Minister extend the review deeper and further to include an examination of the approach of other countries to ensure borrowers get a fair deal as far as possible?
The suggestion on international best practice is constructive. The Deputy will appreciate that the regulator sought first to establish whether the basics were being adhered to.
I am simply suggesting it.
However, building on the review, that is a very constructive suggestion and I will follow up the matter.
One of the great difficulties is the banking sector must have fixed rate mortgages as an option and if one were to interfere with that one might close down the option for the future. I am unsure if I am as pessimistic — if that is the correct word — as Deputy Burton about the future trajectory of European Central Bank interest rates.
They are likely to rise a little in the coming two years.
In time it may be possible that will take place. However, I will raise the issue.
The review is all very well but let us consider the historical position with Anglo Irish Bank. The Financial Regulator relied on evidence provided by Anglo Irish Bank whereas it should have carried out independent verification work on day one. Instead it relied on an independent review carried out by the banks and it is now considering whether to carry out a review verification at a later date. A thorough, in depth review should be carried out by the Financial Regulator now. People are being caught with between €10,000 and €40,000 in terms of breakage fees on fixed rate mortgages, many of whom are young families and it is not good enough. Will the Minister call on the Financial Regulator to extend the review to a thorough verification of fixed rate mortgages?
The regulator has made it clear that on-the-spot examinations will now take place in several institutions.
When?
I do not believe it would be advisable to give a specific date for that as it would amount to giving notice to institutions concerned and it would not be normal practice for on-the-spot checks. Clearly, they will be carried out imminently.
Is the Minister aware of the real crisis facing families struggling to repay mortgages? In some cases it is very serious and at the point of being a battle for food. Is the Minister really aware of the extent of the problem? Does he understand why people, including many Members, simply would not trust any information provided by the banks? I refer to Deputy O'Donnell's question regarding when and how soon these six on-site visits will take place?
They will take place very quickly. I assume the regulator will build on the work already done. I will certainly raise with the regulator the issues of the suggestions raised about international best practice and the question of whether six months' interest is now a restriction or has become an industry norm.
31 Deputy Brian Hayes asked the Minister for Finance if he has estimated the staffing requirement and the operating costs likely to be associated with the operation of the National Asset Management Agency; the powers which the interim managing director has; and the oversight and articles of association under which it operates under National Treasury Management Agency legislation. [27919/09]
As the Deputy will be aware I have established a steering group to oversee the preparation of the National Asset Management Agency legislation in parallel with the practical preparations for the establishment of NAMA. Among the issues being considered by the steering group is the policy on the staffing of NAMA once established and the degree to which operations will be outsourced to service providers or participating institutions. The legislation will include provisions dealing with the staffing and providing for the operational costs of NAMA. The legislation will be published before the end of this month.
Mr. Brendan McDonagh, a director of the National Treasury Management Agency, was appointed as interim managing director in May of this year. Mr. McDonagh works in partnership with the steering group which contains representatives of the NTMA, my Department and the Office of the Attorney General in ensuring the implementation process is driven forward in the interim period, pending legislation. Mr. McDonagh is an employee of the NTMA and is one of its representatives on the steering group.
Pending legislation, NAMA preparatory work is subject to the same oversight as the NTMA and is being directed by the NAMA steering group, which reports to me. NAMA will be closely aligned with the NTMA and as a consequence NAMA will benefit from the positive international reputation of the NTMA. The precise nature of the relationship between NAMA and the NTMA will be provided for in the legislation and it would not be appropriate for me to comment further on the detail in advance of its publication.
I refer to the ongoing discussions with the banks which the Minister has overseen. What commitments or indications have been entered into with the banks in terms of valuation criteria? Have these been the subject of any of the discussions or are they entirely out of bounds until an Oireachtas view is taken?
With regard to the management of the property portfolio which the State will soon own, how is it intended to manage that process? Does the Minister intend to establish a special court — as happened in Sweden — where issues of legal challenge could be quickly dealt with rather than having this process endlessly delayed in visits to High and Supreme Courts during the process?
Discussions with the banks have not related to valuation methodology as that is a matter of policy which ultimately will have to be determined by the Oireachtas. At this stage the valuation discussions are taking place within NAMA and with my officials and in liaison with the European Commission at Brussels. The discussions with the banks relate to the identification of their impaired assets and it is essential that we have a profile of those assets as part of the essential preparatory work for NAMA.
On the suggestion of a special court, I will have it examined. However, the Commercial Court in the High Court works extremely well in Ireland. There are greater difficulties with the operation of judicial review and we certainly do not want NAMA marooned in a labyrinth of legal proceedings so that is an important matter. The Attorney General is represented on the steering group and I know a great deal of attention is being given to this aspect.
The Minister referred in earlier responses to the principles of valuation and the valuation process. He referred to a firm of advisers, HSBC, in that process. Will the Minister agree that what is needed is a separate and independent valuation board, like the Swedish model, of independently qualified valuation people? In Sweden this included people from the academic sphere.
The same firms of lawyers and accountants seem to be acting for people in all parts of the process. One firm of lawyers acts for the Department of Finance, and is now acting for NAMA, and also acts for one of the covered institutions and was also quoted as an adviser to a consortium interested in buying into one of the banks. Similarly, one of the major accounting firms crops up as everybody's adviser, on all sides of this issue. I worked for an international accounting firm and I understand the concept of Chinese walls but in accounting and legal firms there are senior partners and more junior partners and staff. For example, if the senior partner is operating for a bank, one of the covered institutions, and some of the more junior partners down the pecking line are operating from NAMA, how does the Chines wall concept operate because the senior partners are the senior partners in any professional firm? I ask the Minister to expand on this aspect because it seems extraordinary that the same set of names crops up all the time for practically all the parties concerned. Do we have other firms of lawyers and accountants?
With regard to the involvement of HSBC and Jones Lang, they are assisting NAMA in devising a valuation methodology while not actually doing the valuations. They are engaged in provisional valuations for the purpose of their general exercise but they are not doing the valuations. I will have Deputy Burton's suggestion of an independent board examined as it is something that will have to be considered in the context of the legislation.
On the question of professional advice and professional advisers, I am glad to say that on this occasion, the NTMA engaged in standard tendering procedures in which I do not have any involvement. On the basis of those procedures it selected those whom it regarded as complying with the tender to the best possible extent in terms of price offered and in terms of the quality of the expertise available.
Is the Minister aware these are all the same firms?
Of course I am aware of matters that are in the public record but I am making the point——
I ask the Minister to allow the other Deputies who are offering.
I apologise to Deputy Morgan.
Are the Minister's negotiations with the banks regarding the charges of their staff doing that element of the work for the Minister, for NAMA, complete or ongoing? What is the estimated level of cost for the activities of the banks' staff associated with NAMA likely to be?
I have a similar question about the operating costs for NAMA. The understanding is that NAMA will take over all development loans, both impaired and performing. Is the Minister satisfied that this is the most efficient model, bearing in mind the cost to the taxpayer? The former Swedish Minister for Finance was before the Oireachtas Joint Committee on Finance and the Public Service yesterday. He was of the view that the Government should put money into the banks rather than purchasing assets as in the NAMA model. I ask the Minister to comment.
I met him yesterday afternoon and we will not argue over what he said. It is important to bear in mind that he endorsed the policy of the Government of a blanket guarantee. He said that was the first essential step taken in the Swedish crisis. He said, rightly, that capitalisation is very important and this is a step we have taken with regard to AIB, Bank of Ireland and Anglo Irish Bank. He mentioned nationalisation with regard to ownership structure and we have nationalised Anglo Irish Bank and do not rule out larger stakes in the other banks if the scale of the losses requires it.
On the question of taking distressed assets and asset disposal, it was a technique he mentioned as one of the techniques to resolving a banking crisis. We decided because of the small size of Ireland and the scale of the development loan book that it would be better to take the performing as well as the non-performing loans to give NAMA a continuing income which will help with operating costs. The Deputy mentioned the word, "negotiations". There are no negotiations with the banks. This is a public policy that is being implemented. So far as I am concerned, all that happens with the banks is discussions about how we are going to proceed with that public policy. The banking crisis here is a very serious problem for which the banks share a great part of culpability and it is essential from a public interest point of view that the Government lays down policy in this area to restore the banking sector to rude good health as quickly as possible.
32 Deputy Róisín Shortall asked the Minister for Finance the estimate of the liability of public sector pensions, including those pension funds recently earmarked for transfer to the National Pension Reserve Fund in the Financial Measures (Miscellaneous Provisions) Act 2009; and if he will make a statement on the matter. [27984/09]
The latest estimate for the accrued liability for public service occupational pensions is €75 billion as of 2007. This accrued liability figure is a single monetary amount representing the present value of all expected future superannuation payments to current staff and their spouses in respect of service to date, plus the full liability for all future payments to current pensioners and to their spouses. It includes those liabilities relating to pension funds transferred to the National Pension Reserve Fund under the Financial Measures (Miscellaneous Provisions) Act 2009. The large size of the figure is due to the fact that it represents a projection of aggregate pension payments that will be spread over perhaps 70 years into the future.
The estimate of the accrued liability should not be confused with the actual cash funding that will be required in the future. The more immediately relevant measure of public service pension costs is the actual annual outgoing on pensions, which amounted to approximately €2.5 billion in 2008 or 1.3% of GDP. This annual outgoing is projected to rise to 2.5% of GDP by 2050, almost doubling. The projected increase arises from the growth in public service employment in the past and from increasing longevity.
I ask the Minister to update the House on the number of public servants who have decided to take the Government's offer of early retirement and the number of public servants, including people such as principal teachers, who are retiring and in some cases have full service so they are not part of this special offer. Has the Minister examined whether he will proceed with the suggestion which arose from the chairman of An Bord Snip Nua, that the lump sum payment received by public servants would be subject to taxation? Has this been the subject of any paper or research?What is the annual cost of lump sum payments? If the Minister is proposing to tax them, would it be on the same basis as the taxation of redundancy and retirement payments in the private sector? It should be remembered that somebody who has built up a private sector pension can receive 25%. In the case of Mr. Fingleton, whose pension pot was approximately €30 million, he was entitled to take approximately one quarter of that tax free. Is the Minister proposing that public and private sector treatment of redundancy and retirement payments would be treated the same? What is the Minister proposing in that regard?
That is well beyond the scope of the question.
Indeed, and the factual matters were beyond the scope of the question as well but I will try to help the Deputy by getting that information together for her. I will ask my officials to do that because I do not have it on my brief in regard to, for example, the take-up in the early retirement scheme. I understand a few hundred applications have been received but the deadline date is 1 September and generally, with any scheme of that type, a larger volume arrives nearer the deadline date.
Regarding the question of the lump sum, I am not aware that the chairman of the expenditure control group had expressed any views on this particular matter. The matter is being considered not by the expenditure control group but by the Commission on Taxation and my understanding is that it is examining this question and will include any proposals it may have in that regard in its report.
What is the Minister's view of the need to reform public pension provisions in the light of this figure? I understand from my colleague, Deputy George Lee, that the total value of private sector funds, which cover four times as many workers, is virtually the same as the value of the liabilities of the public sector. That gives one an impression of the scale of difference in provision for the pensions of different categories of worker. I would be interested to know where now stand the Government's proposals in respect of pension reform.
As Deputy Bruton is aware, the Government has considered in some detail the recommendations of the group set up to examine the issue of pensions. There has been an amount of discussion by the Government about an appropriate pensions policy, and it has formed part of the discussions with the social partners as well, but the reality is that in the middle of the financial storm we are in it is very difficult to devise a pension policy for the future. It is clear the pension policy will have to be reorientated for the future. It involves considerations not just of public sector pensions but also of the basic State pension provision and the whole question of the supplement that can be offered to private sector workers to supplement what they have already accrued on their State pension, and what they can add to that.
There is a very wide range of considerations in that respect and the Minister for Social and Family Affairs and I are devising policy for the future in that regard but it is difficult in the current climate because defined benefit schemes have seen considerable exposures in the current economic climate. We have tended to give attention to that and how we can protect the position of those who are in danger of having no pension in the first instance.
With the €11 billion, sorry the €7 billion, that has been put into the two main banks from the National Pensions Reserve Fund is the Minister confident that, come 2025, the National Pensions Reserve Fund will be able to adequately fund public sector pensions from 2025 on?
First of all the figure, which is €7 billion, and Deputy O'Donnell corrected himself——
It is still a huge figure.
In regard to that investment, €4 billion was taken from existing funds in the pension fund which were realisable in the form of cash, bonds or the like which could easily be marketed.
The very same.
The remaining balance of €3 billion was borrowed through front-loading the borrowing for the contribution to the pension fund. That is how the funding of AIB and Bank of Ireland capitalisation took place and those shares now rest in the pension fund. The shares, and the State's participation in these institutions, has seen an increase in value in recent months and already, because of where the institutions were when the capitalisation took place, the pension fund to date has seen an appreciation in value on those investments. Given the very low scale of the quoted share price at the time of the investment, there is every probability that the pension fund will benefit substantially from that particular investment. Would that the picture was as happy in all the financial institutions.
In respect of the institutions like the universities whose pension funds were taken over, the Minister took over the assets, basically giving an off-balance sheet benefit to the State in terms of assets, but he did not take on the liabilities. The universities have powers and apparently it is the practice among some of them to give added years of service when certain staff are retiring, perhaps in recognition of their contribution to the institution. Could the Minister tell me if that practice is widespread and, if so, is a cost identified with it? Is there any oversight of when added years of service are given? I was a bit surprised to see that.
I would appreciate it if the Deputy tabled a separate question on that some day to which I could reply because I do not have the information to hand. I will have to check it out for the Deputy.
33 Deputy Seán Barrett asked the Minister for Finance if he has received a report from the steering committee established at the time of the bank recapitalisation on credit availability to small and medium enterprises and on the promised extensions of lending capacity. [27874/09]
An independent review of credit availability was agreed in the context of the recapitalisation of Allied Irish Bank and Bank of Ireland. The purpose of the review was to ascertain the position on credit availability to small and medium sized enterprises in Ireland. The steering group for the review consisted of representatives of the Departments of Finance and Enterprise, Trade and Employment, Forfás, Enterprise Ireland, the Irish Banking Federation and the six main banks involved in lending to small and medium sized enterprises, business representatives from ISME, Chambers Ireland and the Small Firms Association. The final report of the review of lending to small and medium sized enterprises has just now been received. The report is quite extensive, running to almost 100 pages together with appendices. It will be considered by the Cabinet Committee on Economic Renewal, which is meeting now, and the intention is that it will be published shortly.
With regard to the extensions of lending capacity, Allied Irish Bank and Bank of Ireland re-confirmed their December commitment to increase lending capacity to small and medium enterprises by 10% and to provide an additional 30% capacity for lending to first-time buyers in 2009. If the mortgage lending is not taken up, then the extra capacity will be available to small and medium sized enterprises. AIB and Bank of Ireland have also committed to public campaigns to actively promote small business lending at competitive rates with increased transparency on the criteria to be met. Compliance with this commitment is monitored by the Financial Regulator. The banks make quarterly reports to ensure compliance and the first reports to the end of March 2009 were received on time.
The report is quite extensive and will require further consideration but from an initial reading there are a number of key conclusions. Total lending to the SME sector by the banks which participated in the review, which included not just Bank of Ireland and Allied Irish Bank but National Irish Bank and Ulster Bank, remains static in the period at €34.5 billion but the value of new applications for credit decreased by 42%. This conclusion is consistent with our own Central Bank published data.
Demand for credit remains significant, with 52% of those surveyed indicating they had requested credit in the previous year. Bank data indicates rates of refusal of credit applications of an average of 14% but a customer survey indicates an average refusal rate of 24% rising to 30%. The reason for that is interesting because often the customer takes an informal refusal as a refusal whereas a financial institution tends to take a more formal view in devising statistics. The difference primarily results from a difference in perception of what constitutes an application for credit. Banks do not record informal queries or requests but a customer whose informal request is rejected counts that as a refusal.
Refusal to businesses with fewer than ten employees were highest at 30%, with lower refusal rates for larger businesses. Requests for new credit were predominantly for working capital and cash flow reasons to address reductions in revenue and slow downs in debt collection.
These figures are extremely worrying. There is a 24% approval rate and static credit, and it appears there is no system in place to carry that on to ensure that people are properly informed. The Minister reported that there would be a 30% increase in capacity for first-time buyers and a 10% increase to SMEs. We hear from the Minister that a report he received in April is still being studied and nothing is being done about it.
I received the report today.
The Minister said the report which was due in March 2009 was submitted on time and he proceeded to tell us the findings of the report, under the recapitalisation package.
The findings I read out are in today's report.
That is not the impression I received.
The issue, then, is that we have commitments to increase capacity by 30% and 10% and that is not happening. Since this has been the Minister's central concern throughout the whole banking crisis, does he now believe that specialist negotiations with the banks to deliver certain types of package are needed? Within what timeframe will Government deal with that? What was the outcome of the April report from AIB and Bank of Ireland, which he has had for two and a half months? Was any action taken on foot of that report, which, no doubt, showed similar trends?
The Bank of Ireland and Allied Irish Bank met their requirements for dedicated pools of lending, as recapitalised banks. The core problem is that there has been a substantial de-leveraging in Ireland by the external banks which provided credit to Ireland. At the beginning of the decade, we saw a substantial increase in credit from these institutions. We are now seeing a substantial de-leveraging by them, with much less credit being advanced by them. That has reduced the overall amount of credit available in the economy.
The Government has established a clearing group to monitor the availability of credit for the recapitalised banks. That clearing group is chaired by a Government representative and includes representation from business interests and State agencies. It identifies specific patterns of events where the flow of credit to viable projects——
Is the Minister saying the 40% capacity from AIB and Bank of Ireland was delivered?
Yes.
How does the Minister define capacity?
One cannot look at Bank of Ireland and AIB in isolation from the whole banking sector. The critical factor in the banking sector is that there has been a substantial de-leveraging by the externally owned banks in Ireland. That has led to a considerable reduction in the overall amount of credit. Taken with the stresses in Bank of Ireland and Allied Irish Bank, it clearly points the way towards the NAMA operation in terms of making these banks far more vigorous in expanding their operations.
The Government has put in €3 billion into Anglo Irish Bank and recently promised another €1 billion. The bank has acknowledged that it is giving out almost no new lending. In fact, the figure for new lending for the first quarter was less than €35 million. Who is codding who? We are putting €4 billion into a bank which is not lending to any sector. It is simply minding developers and capitalising and rolling up interest payments. Can the Minister comment on that?
Has the review group looked at the level of overdraft reduction in existing businesses? Does the Minister now admit that the level of credit available to small businesses in Ireland is reduced and is there a need for a Government guarantee scheme to ensure that funds flow to small businesses?
Can the Minister or his Department do anything to get funding to small and medium enterprises? I do not want to hear what he has done to date. It has not worked. Today's report is evidence of that. Can he tell us what he can do to get finance to SMEs?
Deputy Burton raised the question of Anglo Irish Bank. I have made my position very clear on numerous occasions. Anglo Irish Bank must retain its banking licence and operate as a bank so that worse liabilities are not triggered. The State made clear at the time of nationalisation that any capital required would be provided. That remains the case.
The issue of overdraft reduction was examined in today's report. I do not have the finding before me but it has been examined. The findings will be published and the matter dealt with. Deputies will appreciate that the report was received only today.
Will the Minister recommend publication?
I will recommend publication.
Will he also recommend publication of Mr. Colm McCarthy's report?
Let us leave Professor McCarthy alone.
All our efforts are directed at improving credit to small and medium enterprises. This, along with the establishment of the clearing house and various other operations in connection with the banks, is designed to ensure that the banks can resume their role as motors of the economy.
Written Answers follow Adjournment Debate.
