JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Wednesday, 18 Jan 2006

Endowment Mortgages: Presentation.

Chairman

We will now discuss with the Financial Regulator and Financial Services Ombudsman the main item on our agenda, a survey of endowment mortgages. The committee is joined by Mr. Liam O'Reilly, chief executive at the Office of the Financial Regulator, and Ms Mary O'Dea. On behalf of the committee, I welcome them and thank them for attending. We are also joined by Mr. Joe Meade, the Financial Services Ombudsman. I understand this is his first appearance before this committee and he is very welcome.

I propose that we take an opening statement from our visitors and then proceed to a general discussion, with questions and answers. The report from the Financial Regulator was submitted to us before Christmas and members will have received copies. I invite Mr. O'Reilly to make his opening statement.

Mr. Liam O’Reilly

I thank the committee for the opportunity to meet today and discuss our recent survey on endowment mortgages. The Chairman will already have received the details in my letter sent to him at the end of December. In my opening statement I would like to summarise those details. I know the committee is also interested in hearing from us on the issue of equity release products, and I will briefly outline our position on them.

The popularity of endowment mortgages hit its peak during the late 1980s and early 1990s. At the time, there were a number of advantages associated with these products, in particular those related to mortgage interest relief and tax relief. Another perceived advantage was the possibility that a surplus sum could accrue to the customer at the end of the loan term. Between 1989 and 1992, endowment mortgages accounted for over one third of total mortgages approved in Ireland but dropped significantly in popularity from 1993 onwards. In 2003, the number of endowment mortgages approved as a percentage of total mortgages was only 3.4%.

In recent years, public and media concerns have been expressed about the potential repercussions from the sale of these products for consumers in Ireland. This has echoes of public concerns within the United Kingdom on the same issue. However, in the United Kingdom the level of sales of these products was much greater on a per capita basis than in Ireland, a multiple of about 16. They commenced earlier and continued at a more significant level in the United Kingdom and over a longer timeframe than in Ireland.

In order to get a picture of the extent of the potential shortfalls in Ireland, the Financial Regulator undertook a survey of financial institutions. The survey found that 47,759 endowment policies, which were originally linked to interest-only mortgages, remained outstanding. Of these, 23,264 still retained the related mortgage. This means that 24,495 policyholders appear to have repaid the related mortgage while retaining their endowment policy as a pure savings product.

Mortgage lenders estimate that the outstanding endowment-related mortgage loan amount owed to them is approximately €1.2 billion. This represents 1.46% of the €82.23 billion residential mortgages in Ireland as at 30 June 2005. Using assumed investment returns, the projected aggregate shortfall on outstanding mortgage loans in respect of the responses received is estimated to be of the order of €89 million over the next 15 years, an average of €3,825 per endowment mortgage.

On a wider issue, the total potential shortfall on all the endowment policies written by the insurance companies who responded to the survey could be in excess of €182 million, or an average of €3,810 per policy. However, these endowment policies include not only those used to repay mortgages but also those used for investment and savings purposes.

It is important to note that the legal and regulatory framework in the Irish market was substantially different from that in the United Kingdom at the time most of these products were sold. The major difference was that while a voluntary code existed, there was no comprehensive statutory code in place in Ireland covering the sale of these products at the time they were sold.

When the risks associated with the product were highlighted in Ireland in the 1990s, specific provisions were incorporated into the Consumer Credit Act,1995, which required warnings to the effect that the proceeds of a policy might not be sufficient to repay a mortgage. It also imposed an obligation on insurance companies to issue a policyholder statement every five years stating the current and projected maturity value of the policy, while the life regulations 2001 placed an obligation on insurance companies to issue an annual statement in respect of policies issued after that date.

In terms of our own role, we are assisting endowment mortgage holders in three ways — through the provision of information directly to consumers, through our new consumer protection code and through our work with the industry. The information we are providing to consumers includes information on what they should do if concerned about a potential shortfall in their endowment policy and how to make a complaint. The principles and rules contained in our new consumer protection code, which will be published in July this year and enforced from then, are designed to protect consumers in their dealings with firms and also to clarify for firms the standards they are expected to follow when dealing with customers.

We have been working with industry to ensure policyholders are alerted to possible shortfalls as early as possible and provided with appropriate and clear information. As a result, all life insurance companies, through the Irish Insurance Federation, have now committed to us that they will undertake annual communications to all of their endowment mortgage customers with effect from April this year. This is a significant development in that it will give all those customers a clear picture of their projected position on a much more frequent basis than has been the case to now. This will apply to all policies, irrespective of the outstanding policy term. In addition, we are also working with the industry to ensure this communication, which will be targeted directly at all customers involved, also contains essential information on issues such as the options available to those customers regarding potential shortfalls.

Endowment mortgage holders who believe they were mis-sold or that their issues were not properly dealt with should, in the first instance, contact their financial services provider without delay and seek a formal response to their complaints. If not satisfied with the explanation or response made by the financial service provider, the person may then refer the matter to the Ombudsman for consideration in accordance with the procedure set out by his office. Mr. Meade will deal with that issue in more detail but before handing over to him I want to make a brief statement on equity release.

There are two schemes aimed directly at elderly and retired customers in the Irish market commonly referred to as equity release. The first scheme is known as a lifetime mortgage. This is a loan secured on the customer's home where no repayments need to be made until the property is sold, the owner of the property dies or permanently leaves the home. The second scheme is known as a home reversion scheme, where a customer or a consumer sells part of their home in return for cash. This is not a financial product. It is a sale of property and is not regulated by us.

We have concerns about the potential for mis-selling of home reversion products on the market due to the fact that they are unregulated. We would support the introduction of legislative amendments that would require these products and their providers to be regulated. We are conscious also of the need to increase consumers' awareness of the various schemes and products available and the differences between them. We raised this issue in our consultation document on codes and are publishing specific consumer information on this matter.

In addition to our general principles, we have also included specific provisions in our new consumer protection code relating to equity release. The main thrust of these provisions is to ensure that consumers are advised of the consequences of releasing equity from their home, the need for them to seek legal advice and the implications it may have for the funding of their potential future needs.

Chairman

We will now hear a statement from Mr. Meade.

Mr. Joe Meade

I am pleased to have this opportunity to speak to the committee on the matter of endowment mortgages complaints. As this is my first appearance before the committee, I will give a general outline as to my overall role as Financial Services Ombudsman in the financial services sector before going into the detail of the endowment mortgages.

The position of Financial Services Ombudsman was established on a statutory basis on 1 April 2005. It is completely separate from and independent of the Financial Regulator. It has a completely different role and is funded by statutory levies on the financial service providers, not by the regulator. There is a good and proper working relationship between my office and the Financial Regulator and I will outline that relationship later.

The existing voluntary ombudsman scheme for the insurance sector and the credit institutions was subsumed into my role from 1 April 2005 but the remit was expanded significantly from their former roles. As Financial Services Ombudsman, I investigate in an impartial and independent manner complaints from individual consumers and small businesses who have unresolved complaints relating to financial service providers regulated either by the Financial Regulator or subject to the terms of the Consumer Credit Act 1995. My remit can cover complaints against banks, building societies, insurance companies, credit unions, mortgage insurance and other credit intermediaries, stockbrokers, pawn brokers, moneylenders, bureaux de change, hire purchase providers, leasing companies, credit sales companies and health insurance companies. It is important to note that a complainant must have availed of and exhausted the internal complaints procedures of the financial service providers before they come to me.

I can award compensation up to €250,000 where a complaint is upheld. Unlike the former voluntary schemes, my decisions as ombudsman are binding on both parties, subject only to appeal by either the complainant or the financial service provider to the High Court. My role is therefore a quasi judicial one and whether a complaint can be upheld will be determined on the basis of evidence furnished, examined and reviewed.

On a general level, since April 2005, a total of 2,600 complaints had been received by my office, a 23% increase on the similar period when the voluntary schemes were in place. It has included for the first time complaints against intermediaries, credit unions and stockbrokers because those were not subject to the former remits. In general, where investigations were undertaken I have found in favour of half of the complainants. That helps to underline the fact that the ombudsman is an impartial arbiter of disputes and cannot always be seen as being in favour of the consumer.

There is close co-operation between me, the Financial Regulator and the Pensions Ombudsman. Naturally, I want to ensure complaints proper to my area are referred to me. If a matter comes up when investigating a complaint that I believe is an indication of some kind of pattern or trend, I will inform the regulator in order that appropriate regulatory action may be taken by the regulator. I have done that on six occasions during 2005. I emphasise that I am an ombudsman, not a regulator. I also co-operate with the Pensions Ombudsman so as to avoid unnecessary overlap in the pensions area. All three organisations — myself, the Pensions Ombudsman and the Financial Regulator — are working very well together to achieve the same end for consumers and the financial service providers. A memorandum of understanding is being drawn up and is ready for signature between all three organisations for exchange of data and proper liaison.

On a European wide level, my office is also part of the memorandum of understanding of the EEA on a cross-border, out of court complaints network for financial services in the EEA. This helps resolutions of disputes on a cross-border level within the EEA. That is my general modus operandi and role.

I will now address the question of endowment mortgages complaints. As under the former ombudsman scheme, I investigate complaints involving endowment mortgages. Each case we receive is dealt with on its own individual merits. If it is clearly demonstrated when we are investigating them that a mis-selling had arisen, that it was indicated at the time the policy was sold that a guaranteed amount to repay the mortgage in full would accrue or that a surplus would arise, and if the examination of the documentation and evidence furnished both by the complainant and the financial service provider upholds the complaint and the complaint is made within the statutory time limit as laid down in the Act setting up my office, an appropriate remedy or compensation will be made.

In general to date, both under the former voluntary schemes and my scheme, the complaints fall into two areas — mis-selling at the date of sale or shortfalls in the final or projected outcome. I will deal with the way we investigate those matters in two areas. One is where the individual policies are held to maturity. I will consider complaints where they are held to maturity. However, if the complaint is that the product was mis-sold at a date which is more than six years before the complaint was made, the complaint falls outside my statutory remit, which states that the matter must have occurred within six years before the complaint was made. However, if the complaint is that on the maturity of the policy the financial service provider failed, neglected or refused to pay out moneys in accordance with the contractual promises, the allegation against the provider is one of breach of contract on the maturity of the policy. In this situation, provided the complaint is made within six years of maturity of the policy, I will investigate, make a ruling and direct an appropriate remedy by way of compensation or otherwise if the complaint is upheld.

I will now deal with individual policies surrendered or sold in advance of maturity. Where they have been surrendered or sold in advance by a consumer, no final shortfall has crystalised and, therefore, a complaint to me of failure to pay out in breach of contract may be difficult to sustain. In those circumstances of early surrender or sale, I as ombudsman will consider complaints of maladministration which are alleged to have taken place within the six years prior to the complaint being made but I cannot investigate or rule on what might have happened had the policy run its full course.

I will give the committee some statistics. Approximately 280 complaints about endowment mortgages have been received by me and the former ombudsman to the end of 2005. Regarding those investigated by us to date, both under the voluntary scheme and by myself, the cases that were upheld were upheld on the grounds of maladministration, not on the grounds of mis-selling.

On the question of equity release, if it is subject to regulation by any financial service provider, it will be subject to the remit of the Financial Services Ombudsman. If it is not subject to the normal regulated financial service provider system, it will not. I fully support what Mr. O'Reilly said about the need for legislation in that area.

Chairman

Before calling Deputy Bruton, I have a few questions. Mr. Meade says he can award compensation of up to €250,000. He also said there were over 2,600 cases and in about half of them he found in favour of the complainant. The other half of the complaints were not upheld. What is the largest compensation award made to date? Of the 1,000 or so cases in which he found for the complainant, how many were made awards and does he know the total amount of awards made by his office?

Mr. Meade

I will publish detailed statistics for the first nine months of the operation of the bureau tomorrow or on Friday. So far, the largest individual award was €56,000 against a credit institution and €32,000 against an insurance sector provider. All told, we concluded 1,368 cases last year. We upheld 24% of complaints in the insurance sector, we did not uphold 26%, we settled 34% and 16% were outside our remit. With regard to the credit institutions, 36% complaints were upheld, 38% were not upheld, 6% were settled amicably and 20% fell outside our remit. Sometimes when we make findings it might be to change the practice. The companies may have offered an ex gratia settlement which we felt was appropriate. The average award varies. We have awarded a sum of €30,000, a sum of €50 and a sum of €200. Last October — and I intend to publish again next month — I published significant case studies where we had ruled in favour of complainants. That covered about 20 cases dealing with the type of matters that were arising.

It is important to realise that compensation is only one aspect available to an ombudsman. Regulatory action is taken on a broader scale. While there might be a pattern of complaints arising, not everybody might have complained. If I see the problem could be industry-wide, I can direct the financial service provider concerned to make similar compensation to all its customers and liaise with the financial regulator to take appropriate action.

Chairman

With regard to health insurance companies, I understand there is a health insurance regulator. Mr. Meade is drawing up a memorandum of understanding but how does he deal with the health regulator? If somebody has a problem with VHI, BUPA or Vivas Health, for example, where they think they are covered for a hospital bill but are not, does he deal with those complaints?

Mr. Meade

Yes.

Chairman

Now that we are aware of that, he can expect a few more complaints.

Mr. Meade

Last year, on the insurance side, 9% of the cases received referred to medical expenses. BUPA and Vivas Health are insurance companies and are subject to the financial regulator. The Voluntary Health Insurance board is not subject to the Financial Regulator. However, when the Financial Services Ombudsman was being established, the Minister for Finance made regulations to include VHI, which was already part of the former voluntary insurance scheme, as part of my remit.

Those queries and complaints are some of the most difficult to resolve because there are serious medical and ethical issues involved. It is not unusual for me to have to seek specialist advice from consultants, surgeons and so forth. Very often I must make a Solomon judgment when I receive two conflicting medical viewpoints and must get my own independent medical advice. Ultimately, I make the final ruling. Last year, 102 complaints of the total related to the medical area.

Chairman

I thank Mr. Meade for that information. I did not know he had a role in that area. This is important because up to 1.5 million people have health insurance. It will be of great interest to the public to know there is somebody to whom they can complain.

Mr. Meade

Apart from the formal complaints, we receive many telephone calls. Naturally we ask if people have put the matter through the internal complaints procedure. Another aspect of the medical insurance area which must be borne in mind — it is a matter we are taking up on an industry-wide level — is the fact that medical consultants on occasion will tell patients that they are covered by VHI. Ultimately, it is up to VHI to state whether patients are covered within the terms of their contracts and medical consultants should not take it upon themselves to say this where there could be a doubt about coverage. This can cause much grief later to a patient who, in good faith, took the word of the medical consultant and is out of pocket as a result because the terms of the insurance did not cover it. There is much advice given on this.

Deputy Bruton

I thank Mr. Meade and Mr. O'Reilly. Mr. Meade took up his job comparatively recently. I am sorry that Mr. O'Reilly is moving on but I congratulate him on the work he did during the formation of the organisation.

Senator O’Toole

That should be noted. I am sure all members of the committee will, by acclamation, thank Mr. O'Reilly and hope that he keeps busy in his retirement.

Deputy Bruton

The presentations are disturbing at one level. They show that the regulators were asleep in the early 1990s when an issue that was being actively regulated in the United Kingdom was also occurring here, albeit on a lesser scale, with no regulation. The people before the committee are not accountable for that but it shows that the Central Bank, which had the responsibility, was never particularly consumer orientated. It shows how far we have come but also that there are people who were hurt because we did not have a more active system in place.

The second disturbing issue is that, effectively, two serious flaws appear to have been exposed within two years of the legislation going through the House. One is, as Mr. O'Reilly mentioned, the failure to regulate equity release. The second is that the six-year rule seems to be spancelling the opportunity of the people who may have been seriously injured by mis-selling to pursue their case. If there is need for legislative change in this area, I would be willing to promote it in the Dáil on behalf of my party if there is a question of delay in the parliamentary draftman's office or anywhere else in getting it through the system. This committee would welcome draft amendments being tabled on either the six-year rule or the potential mis-selling of these equity release products. The committee could act to try to drive them through the system quickly. The system of drafting can be extraordinarily slow and these should be fast-tracked.

In the United Kingdom there has been considerable evidence of breaching selling codes and this has triggered an amount of compensation activity. What UK code was breached that triggered substantial compensation and were the same selling practices in place in Ireland when the same products were being sold, even though we did not have a code? Was the same unsatisfactory selling in practice here?

My reading of the document is that it is a catch-22 for somebody who was mis-sold. They must wait until maturity which, by definition, will be more than six years since they were mis-sold. If they try to deal with the case before maturity, it cannot be heard. They seem to be caught regardless of which way they go, according to page 4 of the document. If mis-selling occurred in the period 1989 to 1992, which is when all this was sold, there is virtually no way it can be explored. Does that signal a flaw in the way we have legislated?

Allied to this, it appears from the material given to the committee by Mr. O'Reilly that in the United Kingdom the companies voluntarily agreed to submit pre-regulation cases to the ombudsman for adjudication. I am wondering if Mr. O'Reilly has approached companies to see whether they would agree to voluntarily submit to the ombudsman's office, even though this six-year rule appears to be frustrating our capacity. Presumably, in some cases the same parent companies were selling the products in both jurisdictions.

There is one matter in our system that strikes me as being different from that in the United Kingdom. According to the appendix to Mr. O'Reilly's letter, in the United Kingdom once one discovers that the product will seriously underperform and one is notified of that, one has three years to make a complaint. In the Irish case, however, it seems that one must go back to when the product was originally sold, which is beyond the statute of limitations. Why are Irish consumers being put in a worse situation than UK consumers in trying to defend their position against alleged mis-selling? Are we far off the game in giving consumers adequate defences?

The financial findings of Mr. O'Reilly's survey were interesting but what was missing was an analysis of the sales techniques, the way in which these were presented and the extent to which the survey showed the potential. We all know products can go wrong but were these mis-sold? I do not see in the survey report any analysis of that crucial issue.

I would also like to ask Mr. Meade a question about this. I do not know how many of the 280 endowment mortgage cases have been upheld. Did he uphold 36% or whatever the average was? Will he tell us how many such cases he upheld and describe what sort of maladministration he found in those cases? Such knowledge is publicly required for those who will face significant shortfalls on these products. They need to know what things they should look out for that could provide grounds for some level of compensation for what has happened. Without mentioning individual names, perhaps Mr. Meade could cite generically the cases he has upheld. I was surprised to see that no mis-selling case has been upheld. I would be interested to know if that was because of the six-year statute of limitation or because Mr. Meade was satisfied that no mis-selling occurred.

Mr. O’Reilly

I will take the first question and the one about the analysis of sales techniques, how it was in the United Kingdom and what the evidence was. The evidence was really about the requirements that were put on sales people to record how the product was sold. As a result of this, or the lack of such recording, the UK authorities were able to have documentation, or there was a lack of documentation where such was required. Unfortunately, in Ireland there are no such codes providing for statutory requirements and as a result the problem is one of evidence.

As regards the way we see ourselves going forward, this case is not closed. We must continue to examine this. It is a question of finding an orderly way of going about the job, particularly when we have many issues in our books, particularly about overcharging and where this fits in to the overall scheme of things. Over the next while, as during last year, we will be ensuring that over €100 million will be going back to customers concerning legacy and current issues. One of the big examples is the protection insurance on loans. It is a question of where this falls in the order——

Deputy Bruton

Is Mr. O'Reilly saying the same sales practices were in place in Ireland, but the only problem was that there was no obligation to collect evidence of wrongdoing?

Mr. O’Reilly

Not alone that but the problem is that we had no evidence because there was no requirement to write down exactly how it happened. I am saying, however, that the case is not closed. One of the points we should emphasise is that customers will be contacted directly in April. For the first time, 46,000 customers will be told what the avenue of complaint is if there is a shortfall. As a result of that we will be gathering evidence.

Deputy Bruton

There is no avenue of complaint if what Mr. Meade says about the six-year rule is correct.

Mr. O’Reilly

I will let Mr. Meade go through exactly what the avenue is. My understanding is that if the policy has yet to mature, there is an avenue of complaint but I will let Mr. Meade talk about that matter.

Deputy Bruton

Is Mr. O'Reilly satisfied there is prima facie evidence that some mis-selling occurred in Ireland?

Mr. O’Reilly

We have no prima facie evidence and no documentary evidence whatever. We only have records of conversations but we have no other evidence whatsoever. Part of the evidence that Mr. Meade is describing is that 280 cases have come before him and none of them was upheld on the basis of mis-selling.

Mr. Meade

I wish to clarify three or four matters which Deputy Bruton has raised. An allegation of mis-selling going back many years is a factor which has to be taken into account. According to the legislation under which I operate, if a matter has occurred more than six years before the complaint was made, then I cannot consider it. That is the legislative situation. I am a creature of the law and I carry our my duties under the law. This aspect was discussed when the legislation was going through the Oireachtas. In the Pensions Ombudsman legislation there is a six-year rule also. There is also a small amendment which refers to a matter of which a person became aware within two years, but nothing before 1996 can be investigated by the Pensions Ombudsman.

Many of the complaints are based on what was allegedly said many years ago and that can be difficult to verify. However, with the passage of time, the contractual documentation is very important, including the advisory booklets and all that was signed up to. In most of the complaints that have come before me, the documentation has indicated that the annuity calculation was done, the endowment calculation was done, the booklets and contract indicated that investments could rise or fall, and there was no guaranteed minimum which would arise in the end. It is possible that sales people in their zeal, or people in the knowledge that this was a good product they had got because of the tax incentives which applied both to the mortgage and investment elements of it, assumed that this would be the case.

Unlike the United Kingdom, however, I am a quasi-judicial person whose decisions can be appealed by either party. The decisions of my counterpart in the United Kingdom are binding on the financial services provider but the customer can take it otherwise. There is not an appeals process, as such.

I will outline four cases, without naming them, where I have ruled in favour of complainants or not as the case might be. In one case the complainant was told that the policy would meet the full amount of a mortgage, together with a surplus. When we looked at the documentation we discovered that was not the case. However, because the statutory information — which, as Mr. O'Reilly said, should have been sent out after 1995 every five years and after 2001 every year — was not done for one year, we decided that the person was not in a position to make a value judgment for that one year and therefore we awarded €2,000 because the person did not have the full faculties because the statutory notification did not take place.

Another one was for a 15-year term running from 1991. It was indicated that, as we noted, it was not until September 2001 that the recommended options concerning the 2000 review were put in place for the person concerned. It was said that it was mis-sold in 1991, but in that instance we could not deal with it. However, because of the fact that the statutory notification was not made every year, we made an award of compensation of €2,000 to the person concerned. It should be borne in mind that the average loss on that was €2,500.

Furthermore, we had a person who said that after 13 years and seven months he had not received notification and he could not have made proper investment decisions. In fact, when we investigated, we found that he had been updated on several occasions over the course of the 15-year mortgage term. Correspondence that had been sent to him explained the manner in which the endowment worked and why the fund fluctuated up and down. In that instance, we did not find in favour of the complainant. On another occasion, it was said the borrowing of €50,000 was to be paid in full and that a minimum return of €20,000 would be given on maturity. When we looked into it, we found that what was said was dependent on how it proceeded — a minimum of €20,000 would be paid but the final sum was not guaranteed. In that instance, we did not uphold the complaint.

As regards the statistics, we have received approximately 280 complaints. Currently, 62 cases are under investigation. Some 92 of those on which we ruled were statute barred or outside the terms. Some 19 others were settled on an ex gratia basis or settled on the basis of the company involved admitting that perhaps it was not fully up to speed and would take the necessary action. We have forwarded 23 cases as part of the EEA internal network for solving complaints and these can be dealt with by our UK counterpart. Similarly, we receive complaints that have been routed to our UK counterpart. We upheld two complaints in two specific areas on which there was much disagreement. In 40 cases, when we received all the information, we felt no further action needed to be taken.

Our policy is that if an endowment mortgage is sold or cashed in before the end of the period, there is no loss on that and we do not rule on it. However, endowment mortgages can go up and down and we do not know exactly what the final loss will be until the end.

In the United Kingdom the decision was taken by the Financial Services Authority, in co-operation with the Financial Services Ombudsman, where companies agreed that they would pay compensation. As fact-finding and codes have been in place since 1988, cases could be submitted to the ombudsman where a potential loss arose and he could rule on it. However, most of his rulings have been on the basis that they were sold to elderly people and that the products were not suitable for the individuals concerned. I hope I have covered all Deputy Bruton's questions.

Deputy Bruton

Mr. Meade has been able to shoehorn compensation on a technicality because the companies failed to comply with the post-1995——

Mr. Meade

No.

Deputy Bruton

——but the original mis-selling——

Mr. Meade

The original mis-selling is statute barred. Even if the rule was changed in the morning, unless there is hard evidence, I will not find in favour of mis-selling. I would hate it to go out from this committee that because of amending legislation, everything would be investigated by me and that people's hopes would be raised falsely by saying that the ombudsman would find in their favour. One must have hard evidence. If a complainant can bring an affidavit or get a salesman to swear to me — I can take evidence under oath — that he purposely mis-sold and gave these guarantees, then I will take that factor into account in my decisions. By changing the six-year rule, every endowment mortgage since 1988 would be covered. One must bear in mind this concerns not only endowment mortgages. Every unit linked policy and investment sold can rise or fall and would be subject to the same rule. I do not want people to be given false hope. The office would be overcrowded with complaints which would not stand up.

It is up to the Legislature. I am a creature of legislation andwill carry out whatever the Legislature tells me but it must be conscious of what is feasible. As I said, I am a quasi-judicial officer. I do not want to spend a great deal of money in the Four Courts and to get cases ruled against me.

Deputy Bruton

We have no reason to believe better selling practices were in place in Ireland than the United Kingdom which ultimately fell foul because it had evidence gathering.

Mr. Meade

It is quite significant that the level sold in the United Kingdom was massive and it continued on until the late 1990s. Many of them were sold to elderly people for whom they were in no way suitable. For example, one of the complaints on which I ruled — details thereof were published in October — concerned an investment by an elderly couple of 72 years of age in respect of which they lost £90,000. I felt that was completely inappropriate and I awarded £56,000 in compensation. This was not an endowment mortgage. On the other hand, I ruled in favour of the financial service provider where an 80 year old couple had a similar type of complaint but where their 36 year old son, a financial adviser, told them to take out this policy. They took it out on that basis.

I caution members not to raise false expectations. The overall shortfall is, relatively speaking, quite small in the overall context of a house bought in 1988 and put on the market today. It is €2,500 or €3,300. There has been an increase in property prices since then. If it is a major problem, then there is a need for the industry, the Department of Finance, the Financial Regulator and me to work out what could be a comparable way. As of now, the evidence is not there to support my statutory case to substantiate mis-selling.

Mr. O’Reilly

I wish to add a statistic for the benefit of the committee. In 1998, one third of all mortgages sold in the United Kingdom were endowment mortgages, whereas in Ireland it was approximately 3%. Compared with the United Kingdom, it was a practice which started and stopped very early in Ireland.

Deputy Burton

I wish to be associated with the remarks made by Deputy Bruton. I wish the Financial Regulator well and thank him for all the times he appeared before the committee. The Financial Regulator's loss will be a gain for the world of maths and physics. I look forward to his research in the great tradition of physics in Ireland. I also welcome Mr. Meade.

I wish to follow up on questions asked. In comparing the situation in the United Kingdom with that in Ireland, all of us should perhaps say a word of thanks to a number of outstanding financial journalists in Ireland who constantly warned us. I do not think we are allowed to mention people but a number of these journalists are still very prominent and regularly appear on RTE radio programmes. People such as radio commentators and those in the print media gave extensive warnings that these products were highly risky. For that reason, we do not have the same level of exposure as in the United Kingdom.

Some of those who took up the products in Ireland were people who, for other reasons, had problems obtaining regular mortgages and, therefore, went into the endowment side of things as a way to secure a mortgage. If I am not mistaken, the bulk of these mortgages tend to be of a shorter term than the traditional acquired mortgage. I think many of them were on a 15-year basis rather than running for the longer term with which people are familiar. In that sense, there is a very big difference between the United Kingdom and Ireland. We usually criticise journalists. In this instance, however, many financial journalists should be thanked for what they did.

Is the maladministration about which Mr. Meade talked the failure to keep customers informed on a regulator basis of the existing and likely future position of their endowment mortgages? Would he say endowment providers that fail to advise customers about their precise liabilities, now and in the future, are leaving themselves open — unless they beef up their act and give them the information — to serious risk and to claims from dissatisfied customers?

Mr. Meade

I take the Deputy's point which was very well made. Since the Consumer Credit Act 1995, customers had to be informed every five years and, from 2001, on an annual basis as to the projected shortfalls or how the product was performing. In any instance where that did not take place on the particular date, whether a month, four months or even a year, the consumer did not, therefore, have the options and the facilities available to him or her to decide whether he or she should stay with it, cash it in early or go for something else. Irrespective of companies stating it was for administrative purposes, computer purposes or whatever, in those instances I have always found in favour of the consumer because I reckon that the latter did not have the opportunity to take alternative action and I have awarded appropriate compensation.

Deputy Burton

Do I take it that if people who feel aggrieved about this product and the circumstances in which they acquired it were to look back — if they have kept files — at the communications they received from the provider, they may have a reasonably legitimate case to ask Mr. Meade to examine, provided they complain to the provider in the first instance?

Mr. Meade

Yes. There are two issues. First, one must, under the legislation, exhaust the internal complaints procedures of the provider. Since 1995 — we ask for the company files also — we ensure the information was sent out. We also ensure the person obtained it and was fully apprised of it and given it in fairly straightforward language. As I said, one of the cases where we did not find in favour of the complainant was where the individual involved indicated that the information had not been provided but where that proved not to be the case. Notifications were introduced in 1995. Where people did not get them — they should have been issued annually since 2001 — and where there was any delay in sending them out, we generally find in favour of the consumer and an appropriate amount is awarded. If, however, it is an allegation in respect of mis-selling that occurred in 1998, under statutory provision I cannot decide on this.

Deputy Burton

What is the position on the related life insurance products which normally accompanied this type of mortgage and which, in many ways, were at the heart of it? It always struck me that in many cases they were exceptionally excessive. This was part of what financial journalists commented on at the time. Does that fall to be regulated and will people be given advice? Obviously that element could be changed if the insurance package is essentially far too expensive or, in light of the rise in house prices to which Mr. Meade referred, if it is no longer appropriate in terms of the cost of a property. Can people opt out of such packages and either negotiate another package or state that their house value has risen so much and the value remaining on the mortgage liability is so low that they do not really need to buy a continuing expensive life insurance product?

Mr. Meade

This year we have already notified the Financial Regulator — action is being taken in this regard — about the early redemption of mortgages where people had mortgage protection policies. What was happening was that mortgages were being redeemed and the mortgage protection policies were being left in place. It is quite a cheap form of life insurance but a person should be given the option of whether to retain it.

In the case of complaints people may have regarding financial products in circumstances where they feel that they have not, on raising the issue, obtained satisfaction, they should first complain to the financial service provider and then come to me. We will examine their complaints. We will examine such complaints within the terms of our legislation. We bend over backwards to ensure consumers are facilitated.

Deputy Burton

I strongly welcome Mr. O'Reilly's statement on equity release products. This is one of the most difficult and important areas in the Irish financial services market. There are significant numbers of advertisements directed at very elderly people which indicate that these products are widely available and very attractive. Where there are significant numbers of elderly people who may be on the verge of entering nursing homes and contemplating using these products as a way to finance their stay, it is essential that the fullest possible information about these products be placed in the public domain. There are only a couple of providers of such products in the Irish market. The conditions attaching to these products — I have examined a number of them for different people — are extremely varied. Such products are difficult to understand. It is difficult, if not impossible, to work out the rate of interest involved.

The people to whom I refer are quite elderly — aged 75 years plus — and they own their homes. Perhaps they have not left the house but they are thinking that in three or four years' time they will enter a nursing home. Perhaps they are on the cusp of doing so. They are very interested in the products to which I refer and one would need to be a financial whizz to work out the exact cost and benefits attaching to them. It is also interesting to note that these products are only available in the private market. For example, it is not possible for someone who has purchased a local authority house to sell back his or her interest, or part thereof, in it to the local authority as a way of getting sheltered old person's accommodation. This is an extremely confusing area. I welcome the notion that hard information and comparisons will be made available on the products available.

On the day after the budget was introduced, the Tánaiste and Minister for Health and Children issued a statement in which she announced that for the purposes of nursing home subvention, both within and outside the Dublin area, the relevant applicable house property value in Dublin was to increase to €400,000. I do not wish to delay proceedings but this matter is important to many old people. No clarification or statement has yet been issued by the Health Service Executive or the Department. Following the Tánaiste's statement about subvention, cash balances, etc., and the value of house property, I would hope that a comprehensive document or statement might be made available for older people and their families so they can work out what all of this means.

The position in the case of the farming community is much better because there is a farm retirement scheme which often involves assets being transferred to a young farmer. People in the farming community will often qualify for subvention without difficulty, whereas someone in a town who owns a relatively modest house may not qualify. I was wondering if, in terms of these products forming part of an overall financial package, there is a way in which this committee could ask the Tánaiste to liaise with the Financial Regulator in order that the quality of information available to older people on this really difficult area, certainly in the Dublin area, will be improved. It is a significant issue for people in the greater Dublin area and there is total confusion about it. With the organisation of the new Health Service Executive, it is impossible to reach an identifiable person to get the information from one coherent source. Has there been any wider discussion about a comprehensive approach to this area?

Chairman

Some of that may be a little outside Mr. O'Reilly's remit.

Mr. O’Reilly

I thank the Chairman for that warning.

Chairman

The Deputy covered health, social welfare and agriculture all in one query.

Mr. O’Reilly

To return to the insurance and endowment policies issue first, it is a significant move that we are requiring, and are talking to the industry about providing information to the 46,000 endowment mortgage holders. It is important to say that one of the items of information with which we will be providing them would be the alternatives available — in other words, how to encash their policies.

The second point is that the legislation in 2001 changed the timeframe for the provision of information, from five yearly to annually, in the case of current information. We will ask the institutions, through the industry, to provide the consumers — each of the 46,000 — with information about the projected shortfall in order that they can make a rational decision as to what they want to do at that point. It is important that the consumers have the information to decide, for example, whether they want to encash a policy.

We could not agree more that this concerns information. There are two steps we need to take. One is that we must ensure the institutions involved in this are regulated. There are institutions here that are not regulated. Those are the institutions that are buying the properties. It can be narrowly——

Deputy Bruton

May I interject and ask the regulator why that is so? This is like the Chesterton Finance case last year, which was also partly outside the regulatory remit.

Mr. O’Reilly

It is argued that because they are not involved in a financial transaction but handing over the deeds of a house, a loan is not being provided. Otherwise they could not do it because a financial institution would be involved.

There are two types of products, namely, reversion products, which involve the sale of the house, and equity release. Both entail problems but we have no powers over the reversion product to regulate and place obligations on the entity to ensure information is provided to the consumer.

Deputy Burton

How many have taken up these products?

Mr. O’Reilly

We do not know. We do not regulate them, although we believe they should be regulated.

For those institutions that are regulated, our codes state the consequences of everything that happens must be explained to the consumer by the seller of the product. We also provide information separately and customers are strongly advised to get legal advice. We also ensure a warning statement is provided by the seller to the buyer about the risks of selling their future wealth and that they may find themselves with nothing in a few years. It is important that these products are suitable for individuals. As a financial regulator, we have been involved in information campaigns targeting over 50s in this regard.

Mr. Meade

Good work has been done by the financial regulator in getting proper consumer codes into place. Therefore, intermediaries must have fact sheets and a person must get information before carrying out a transaction. In cases I examine, I ensure that was done and the person was apprised of all relevant information under the consumer code. As I have already indicated, if I consider the product unsuitable, that factor will be taken into account when determining if a complaint should be upheld and the amount of compensation to be awarded if it is upheld.

In the new statutory scheme where there is liaison between the regulator and myself, if a pattern should crop up or I feel something is inappropriate, I will inform the regulator. It is then up to the regulator to act on it or to state if my feelings are worthy. There was historical baggage in the system but with the changes that have taken place since 2000, more information is available.

Ultimately, however, a consumer must take some responsibility, because no matter how much information a person is given — it is like the pyramid selling in west Cork — people still go ahead. An ombudsman or regulator cannot legislate for the gullibility of people who think they will make a fast buck and who then come crying to us when it has not worked out. There is a responsibility on everyone — consumer, provider, regulator and ombudsman.

Deputy Ó Caoláin

I also welcome Mr. O'Reilly, Mr. Meade and Ms O'Dea and thank them for being here this afternoon, where their contributions have been helpful and informative. I also record my thanks for the explanatory documentation provided during Christmas week.

Many were taken in by the endowment mortgage product, particularly when it was at its most popular. It was actively promoted and there are many who will yet experience financial difficulties when the maturity fails to meet the mortgage outstanding at that time. There will be a continuum of dissatisfaction and discontent for years to come.

There is a sense in dealing with endowment mortgages that we are trying to lock the stable door after the horse has bolted but there are other comparable areas. In reading up for this meeting, I noted a letter in The Irish Times in May 2005. It reads: “Having recently been stung by high cost, commission-driven endowment mortgages, we are now being asked to gamble our retirements on what appear to be remarkably similar products.” The author was referring to private pensions, a subject being debated at present. He continued: “One of the main reasons why many people refuse to invest in private pensions is that they just do not trust the financial services sector and consider its products rotten value.”

One of the most useful things that could arise from today's exchange is an examination of the similarities between endowment mortgages and other products that are linked to the investment market, with all the potential pitfalls we have already considered. The delegates have identified many of the shortfalls that can result from the performance of investment markets. Here is another product being actively promoted and citizens are reflecting real concerns based on previous experience in endowment mortgages. Are these market investment based pensions that are being promoted currently and endowment mortgages comparable? Can we learn lessons from the endowment mortgage experience that could be applied now to these products?

The endowment mortgages issue has passed its way through and while others will face pain in the future, I am concerned about current circumstances that may yet require serious address. Should we actively discourage people from taking up these products? It would be better from my outlook on life to encourage people to invest in State-led pension plans that can be invested in the development of our economy rather than in products based on stock market speculation.

There were many details in the material presented this afternoon. The letter we received in December stated the projected shortfall over the next 15 years is €89 million for endowment mortgages. How many customers does this cover? The letter also stated cases were upheld, a point on which Mr. Meade elaborated, as did Mr. O'Reilly in response to earlier questioning. The cases were upheld on the grounds of maladministration, not mis-selling. Will Mr. Meade clarify the difference between those two points? Can the ombudsman direct any other remedies apart from monetary compensation? If so, what remedies has he directed or could he direct when he has the opportunity?

What is the position on tax relief for endowment mortgages? In the past people were attracted to this product because it offered better tax relief than other mortgage products. Have tax changes impacted on the product or does tax relief still attract people to it?

Mr. O’Reilly

Of course, there are lessons to be learned from the past. As a result we drew up the codes of conduct by which we want institutions to operate. If they are statutory we can sanction institutions that do not adhere to them.

The watchword is that there is a product to suit every individual. The problem arises when an unsuitable product is sold. We have made it a requirement that institutions know their customers. They must ensure the products they sell are suitable and give reasons for selling them. This process is documented in order that if complaints arise in future, the customer can appeal against a certain set of standards.

There are certain questionable aspects of commissions. For example, the offer of a free holiday for selling the last product does not ensure the seller acts in the interest of the consumer. We are issuing guidance on what we expect of institutions in respect of rewarding and remunerating staff and will not tolerate an inappropriate reward that would result in mis-selling. That will be part of the code.

We do not advise customers which products they should buy but say what the products entail to ensure they check the list of risks and rewards of particular products. We have issued particular warnings about non-standard PRSAs which could cause trouble if customers do not understand what they involve. We have learned from legacy issues which will continue to arise and hopefully we will continue to learn.

The basic lesson we have learned is that it is necessary to fill an information gap between what the consumer knows and the financial institution knows. There are two ways to do so, the first being to ensure that through the codes of conduct institutions are obliged to provide information to individuals and the second is that we have a role in making sure people are more financially proficient. We have a long-term role in the education curriculum to ensure people are enabled to ask the right questions.

Mr. Meade

In response to Deputy Ó Caoláin's question, the allegations of mis-selling occurred between 1988 and 1992, six years before my statutory remit came into operation, therefore those complaints could not be upheld.

Maladministration arises when notification that should have been sent every one or five years from 2001 was not sent. The person was not given all the information necessary to decide whether to switch from that product. This would also arise where there was no proper dealing with the customer, the complaint was not resolved within a certain period and where discourtesy was shown to a complainant seeking action.

The tax relief was abolished in 1992 or 1993. As for penalties, I can ask for reasons the situation complained of has arisen and direct the financial service provider to rectify or change the conduct which provoked the complaint and its consequences. I can also oblige an institution to pay compensation of up to €250,000 or take any other lawful action.

There have been cases in which I have directed a financial service provider about which I received five or six complaints to review all of its book and all its customers. If others were similarly affected I have directed the institution to provide pro rata compensation as awarded to the initial five or six complainants.

Mr. O’Reilly

Deputy Ó Caoláin asked me about the numbers. The projected figure of €89 million over the next 15 years refers to 24,495 customers, with an average endowment value of €3,825 per mortgage.

Deputy Ó Caoláin

I thank both contributors for their responses. While they cannot take up certain points, they should note that this committee could consider pension products based on a speculative stock market approach with echoes of the endowment mortgage product. We should highlight this point.

Deputy Burton rightly praised journalists who brought to public attention the pitfalls and disadvantages of this approach. We have a public responsibility to further examine other products reflecting that type of approach. As Mr. O'Reilly said, it comes down to the maxim, "let the buyer beware". The buyer must inform him or herself but the information must be provided. This committee might play that role in the future. We should examine other products in surgical detail.

Deputy C. Murphy

Mr. Meade drew attention to the difference between the Financial Services Ombudsman and the Financial Regulator and described a situation in which a pattern or trend emerges. He said he has referred six matters. Will he tell us what those six items were? It would be useful for us to understand what issues are presenting a pattern that need regulation.

On the issue of endowment mortgages, even if people had evidence, it seems the bulk of these cases would have been outside the authority's remit. What constitutes evidence in these cases? I presume brochures, advertising and an affidavit would constitute evidence. I remember the discussions surrounding endowment mortgages when they were heavily promoted. It seemed like an attractive option where one could pay off a mortgage and have a few bob to go on holidays or reinvest. If it is outside the authority's remit, it is unlikely to be of any serious consequence.

I assume financial institutions will have learned lessons from more recent cases. The complaints the authority is seeing are older. The difficulty arises in cases where people have an endowment mortgage for a particular length of time and have the prospect of pursuing a maladministration case. They will have difficulties if they wish to sell their houses. Will they have to wait for the mortgage to mature before they can do so?

It is peculiarly Irish that we tend to be reactive rather than proactive, assuming every institution will operate to the highest possible standards. We then discover they do not do so and we must introduce a regulatory system. It seems to crop up over and over again. There is a lesson to be learned from this. It is useful for the authority to have drawn our attention to the issue of, for example, equity release. All advertising for equity release is aimed at retired people. It is not unusual for elderly people to have only one name on the deeds of a property. Difficulties could arise in such cases when the named individual goes into a nursing home. The second person could become homeless with a sizeable amount of money that is useless for purchasing a second property.

Will the consumer information the regulator intends publishing include both regulated and non-regulated equity release products? If it is not intended to publish information on non-regulated products, which is the appropriate body to publish that information? Will it come down to the media doing the job, as it did on the selling of endowment mortgages in the late 1980s?

Mr. Meade

The pattern of complaints and matters which we have referred to the Financial Regulator will be listed in more detail in the annual report of the bureau, to be published in April or May. The issue of mortgage protection policies, where mortgages were redeemed earlier and the person was not given the choice of keeping the mortgage protection was also raised. The issue of travel insurance being sold by travel agents, who are not regulated, was raised where the full amount was not honoured when claims were made. It was suggested that a code of practice should be developed between the travel insurance industry and the companies selling travel insurance in the United Kingdom. On the notification of variable interest rates on credit cards to customers by a particular organisation, we felt the procedures were not robust enough.

We had concerns about particular record keeping in a financial institution when we were dealing with a complaint. The evidence that was furnished was changing regularly. We felt there may be a problem with its overall record keeping which is a matter in which the Financial Regulator will be involved.

The question of where one may have paid off a credit card bill in cash but it did not reach the bank for three days was also raised. There were also concerns about the sale of a pension product and whether adequate information was given when the product was sold. This came about through discussions between the pensions ombudsman and myself. We felt there may be a need for some extra work on it. These are the general issues which will be listed in more detail in my annual report.

Evidence can be oral or written, such as the basis of contracts and promotional literature. It must be remembered that many years ago, people bought products from friends that were insurance agents. It was done after a football match, for example. In those circumstances, getting clear evidence of what was said could be difficult and time-consuming. What comes into play are the literature and the terms of contract. In most of the documents we have seen, the calculations were done for annuity and endowment purposes. In an investigation, we then assess this to see if the evidence was there.

Before selling a house, any outstanding charges on it, be it a mortgage or otherwise, must be cleared before the sale can be completed. In instances where there could be an average shortfall of €3,000 on the mortgage, it must be paid from the proceeds before the new buyer completes the sale. It is no different to an outstanding mortgage on a house on the normal basis.

Before a sale is closed, the mortgage or any other charges, such as bin charges or otherwise, must be written off or taken on board by the new purchaser. Speaking personally, the rise in property prices must be taken into account. In the late 1980s, the average house price was €80,000, where now it is €400,000 or more. I understand an outstanding balance of €2,000 is a serious amount of money to the person concerned. However, it will have to be resolved before a house sale is completed. If a person dies with such an outstanding balance, it will become part of the assets of the deceased. Before the assets can be administered, the mortgage will have to be satisfied.

New information is coming forward and, since 2000, the Financial Regulator has a more enhanced consumer role. When selling a financial product to an individual, a fact sheet must be filled out giving all options to him or her. In any investigation, this will be our starting point. We would inquire as to whether all of this was done. Was the person given the proper information? Was this a suitable product, even with all this information, for the person to have taken up? This enhanced role should prevent many people falling into such situations. It must be remembered, however, that any investment can rise or fall. A post office savings account had a 4% interest rate some years ago which went up to 8% at one point and back down again. The stock market can go up or down. Three years ago the national pension reserve fund showed an €8 billion loss but now it is showing a large surplus. People must be aware of this, and all the consequences that may arise, before they invest.

Mr. O'Reilly

As Mr. Meade said, matters have changed radically as a result of many factors, from the work of the Committee of Public Accounts to the overcharging issue. As a result, it was decided that we should have a single regulator to pull together the regulation of all financial institutions, and also that we would have an integrated comprehensive complaints system in terms of information between ourselves and the Financial Services Ombudsman. We work closely with Mr. Meade. He provides us with patterns and if we get complaints, we can pass them through to him. During the time he has held office, we have forwarded some 150 complaints to him. It is important, therefore, to know that this is a two-way working relationship. Mr. Meade has mentioned common trends, and Ms O'Dea will talk of how we have been dealing with the issues.

There will always be gaps. We have identified one today and spoken of it in public, namely, the one related to reversion products. With regard to information about these products, we warn consumers to ensure that when obtaining finance from whatever source, they check that the institution with which they are dealing is regulated, get legal advice about it, know the product suits them and are aware of the risks they take, such as the danger that in ten or 20 years' time they might find themselves with no money. We ensure we give all such information. Ms O'Dea will now deal with the patterns identified by Mr. Meade.

Ms Mary O’Dea

We strongly warn consumers to be very careful in terms of investment if there is no regulation involved. That applies equally to areas where there is potential fraud, such as a pyramid selling scheme, or unregulated areas. We have no prima facie evidence of fraud, but consumers must be extra careful. Nowadays one sees consumers putting a lot of money into property overseas, and there is no regulation in that area. We always urge consumers first to check certain areas for regulation. If we find firms operating in this jurisdiction which are not authorised and should be, we publish notices in the newspapers and tell people not to deal with those firms. In that way we try to heighten awareness.

Mr. Meade's office has raised certain issues with us. The PPI funds issue was on our radar as a result of our inspection process. Some €20 million, or perhaps more, is being refunded to the customers involved. There was one high-profile case involving the Bank of Ireland, with refunds having to be made to customers after the event. We continue to deal with such issues.

Regarding travel insurance, we have produced information on our website for consumers, indicating what they should look out for. We point out the policy catches and the questions to ask. The Office of the Financial Services Ombudsman sought clarification from us as to how such policies are regulated, and we discussed them with that office.

Mr. Meade noted a couple of cases which came to us regarding specific financial institutions. When such cases arise we investigate them, first with regard to the firm involved, but also to see if the issue involved arises across the industry, as Mr. Meade's office might suspect. We deal closely with him with regard to such cases. Some of them call for an information campaign. Issues related to credit cards and aspects of which consumers might not be aware are linked in by us to our cost surveys of credit cards in an effort to raise people's awareness regarding what they must watch out for in this area.

We also provide specific information in our consumer mortgage guide with regard to endowments or any interest-only mortgage. We indicate the pitfalls and point out consumer options if they find themselves with a shortfall. We indicate alternatives which might suit consumers better. People might need to take additional advice in such areas.

We have worked closely with the Financial Services Ombudsman on our codes, which set out how firms should handle complaints. The consumer cannot be passed from person to person and left for months with complaints unanswered. There would be a specific statutory requirement as to how complaints are to be dealt with. We have ensured that this fits in with the role of the Financial Services Ombudsman in order that such complaints can be dealt with in an orderly manner.

Deputy N. O’Keeffe

The advantage of being a Government backbencher is that one is always left until last. Mr. O'Reilly mentioned home reversions. Is his office looking at the shared ownership schemes of local authorities or county councils, whereby a person has half a share in the house, with the remainder provided by the local authority? That should fall into the remit of home reversions because it is the equivalent.

Mr. O'Reilly spoke of the difficulties arising with endowment mortgages, and of the client being kept informed on a regular or annual basis, for which most companies provide. If a shortfall appears on an endowment mortgage, what are the options for the client? Is Mr. O'Reilly recommending that the client take out a higher level of endowment mortgage or redeem the policy? The client bears a loss on redeeming the policy. Does Mr. O'Reilly's office view endowment mortgages as an out-of-date product in today's world? They were used in the 1980s, when we had high inflation and high interest rates, and were quite attractive at that time. People were paying marginally more on the interest rate than they would on a standard mortgage.

Has Mr. O'Reilly compared the Scottish life assurance companies which first introduced these endowment mortgages with the Irish life assurance companies? My information is that the Irish companies' products were not as attractive, and that many of those companies did not meet the overall payment in the way the Scottish companies did. It is not fair to name the latter companies but I understand that some of them are still successful and have been granting surpluses in the endowment area. We all know that insurance companies must make profit, which goes up and down.

Mr. Meade referred to stockbrokers. Recently in Cork there was a very serious issue involving W. and R. Morrogh Stockbrokers. That case was well documented. The firm was in existence for many decades and did a lot of good investment work for people. What protection can be offered in the future with regard to stockbrokers, so that such an incident will not recur? I do not think one can prevent such situations from arising.

Recently we saw a high profile case in the High Court involving two major companies. What was said during that case by some influential people made for shocking reading about documentation being exchanged and copied. What investigation will take place in that regard? Who is responsible for the operation of the Stock Exchange?

Mr. O’Reilly

I will try to answer Deputy O'Keeffe's questions and then pass on to Mr. Meade.

With regard to reversion and local authority houses, the same issue arises because the area is not regulated, and how it is to be handled is a matter for the Dáil. Our major current concentration is on unregulated entities and individuals being involved with them in the sale of private homes. However, that issue could be taken into account.

Regarding advice to those facing a shortfall, we never give investment advice. Investments can rise or fall. As soon as we urge people to get rid of their endowment mortgages, they will rise, that being Murphy's Law. Instead we try to provide customers with alternatives such as increasing one's contributions, cashing in one's policy, paying off the lump sum straightaway if one has the money, extending the term of the mortgage to allow more time, taking out a separate savings plan or in the case of the endowment policy, surrendering the policy.

Deputy N. O’Keeffe

A person who surrenders a policy is always at a much bigger disadvantage unless a really bad financial case is involved.

Mr. O’Reilly

Unless one feels the policy is not covering the risks that one wanted to have covered in the first place. We tell consumers they should make decisions based on what suits them rather than what we feel. We cannot tell them what will happen to investments. Scottish Provident, or whatever it was — I had better not advertise — was making more money. It must have had a——

Deputy N. O’Keeffe

The Scottish insurers have been much more successful than their Irish counterparts in the life and endowment areas. The two Irish ones established in the last 25 years were not there to meet the requirement, and one of them had a shortfall. One cannot blame them for this, but I would like to find out where they can be blamed. If I go to the bank to get an endowment and am presented with a form, how can I blame the person there if it goes wrong for me?

Mr. O’Reilly

I absolutely agree. The potential problem is if the consumer says, with hand on heart, that he or she was told that the policy would produce enough to pay off the mortgage, with documentary proof. As I said, we have no evidence of this, but that is where it all comes from. Of course, hindsight is great.

Deputy N. O’Keeffe

What if it were written down?

Mr. O’Reilly

At this stage, we have found no evidence of mis-selling and we would need to have such evidence before we could pursue the matter. That is really it.

Deputy N. O’Keeffe

Endowment mortgages are not as popular today as they were then.

Mr. O’Reilly

That is right and the Deputy has mentioned some of the reasons such as the returns. However, the point was that, at that stage, there was some prediction that the market could only go up. Many lessons have been learned since. There is no certainty in this world. Customers must always be warned that the value of investments can go down as well as up and he or she must decide rationally.

Deputy N. O’Keeffe

We live in a free market economy, which I support. The more regulation we have, the more we will affect the free market.

Mr. O’Reilly

Our major job as a regulator — we would love to be without it — is to ensure the information gap between what the consumer and the financial institution knows is closed. That would improve the market.

Mr. Meade

I refer to two questions. We are considering 19 complaints against stockbrokers of various kinds. Anyone who has a complaint against a stockbroker has been able, since 1 April, to come to me. Before that date, the Stock Exchange had its own internal complaints procedure. The Deputy mentioned W. and R. Morrogh in Cork. A large sum has been drawn from the insurance compensation fund to cover the matter. Any consumer, incorporated company worth €3 million, and any other charity, trust or whatever can complain to me if they have not secured satisfaction through appealing via the internal complaints procedure. The Stock Exchange is also now regulated by the Financial Regulator. Any complaints that may arise in that regard would also be considered by me.

Deputy N. O’Keeffe

What does Mr. Meade recommend to avoid recurrence of what happened with W. and R. Morrogh in Cork?

Mr. Meade

That was more the internal regulatory system. One cannot ever prevent a fraud if the person is devious enough, reasonably clever and controls everything alone. One enters an area of regulatory and compensatory controls and ensures there are robust systems to prevent it as far as is humanly possible. The world's best system will never prevent a person who puts his or her mind to cracking it. One must remember that, until relatively recently, the word of Cork stockbrokers was considered their bond. They were and are in a position of trust, as are all financial service providers. They should all remember that people put their trust in them. That trust has been well rewarded and where breaches have arisen, particularly in the mid to late 1990s, a regulatory framework was put in place with the Financial Regulator — the statutory ombudsman — joining all the schemes and so on. Ultimately, one cannot prevent fraud; it is like sin, in that everyone is into it.

Deputy N. O’Keeffe

We had Enron, Parmalat in Italy, the Leeson case, and now W. and R. Morrogh, all of them of a similar nature. There is much to be learned from what has happened.

Mr. Meade

Yes, but to be fair to the Legislature, when major issues have arisen, legislative action has been taken. For example, there is the Sarbanes-Oxley Act which some Irish companies, particularly those with US subsidiaries, claim is altogether too rigid, amounting to a restraint on trade. As I have seen in the United Kingdom, it has imposed extra costs on firms through auditing requirements. In Ireland, we have the new statutory Auditing Practices Board and many other regulations. One hopes one has all the gaps closed. However, when a major one appears that has not been legislated for, one should put appropriate remedies in place.

Deputy N. O’Keeffe

I do not want to interrogate Mr. Meade about this. My point is that many held nominee accounts. The issue is one of untouchability, and stockbrokers should not have the right to speculate with another person's money in foreign exchange; that loophole should be closed if possible. I am a legislator but not a lawman. I also asked regarding a recent high profile case about which I read in the newspaper. To my surprise, the committee did not investigate it. I am a member, but I have nothing there.

Mr. Meade

That is——

Mr. O’Reilly

The position has changed. The market abuse directive which entered force in July 2005 gave us the power to regulate and investigate insider dealing issues. Regarding W. and R. Morrogh, Enron and so on, the major issues concern corporate governance. There is an extra problem with a smaller company when it comes to operating the "four eyes" principle, whereby one has someone looking over every shoulder. Having said that, corporate governance rules regarding the likes of W. and R. Morrogh and stockbrokers have been strengthened, as has the way in which client money is sequestered. On top of this, there was an entire court case regarding nominee accounts and the ownership of shares. That whole legal area had to be straightened out. As a result there is a working group to finalise the matter. There is the question of which way one's money is safer — under one's mattress, in share certificates or on a computer. Naturally, from the perspective of market efficiency, it would be better in a nominee account, but there is then the question of ownership, and that must be settled.

Deputy N. O’Keeffe

In the more recent case before the High Court there were two major organisations. People have been asking questions. The courts have ruled, with which I have no problem. However, what will follow from this?

Mr. O’Reilly

Market abuse and insider dealing will be dealt with from now on. The market abuse provisions are now much more stringent under the 2005 directive.

Deputy N. O’Keeffe

Is that an EU directive?

Mr. O’Reilly

Yes, but it has been adapted for Ireland.

Deputy N. O’Keeffe

Did we legislate for it?

Mr. O’Reilly

Yes.

Senator Hanafin

First, I should declare my interest in that I am a qualified financial adviser, or QFA, with the LIA and ALIA diploma. I spent 17 years with a financial institution.

Deputy N. O’Keeffe

I had better declare my share-holding in Fyffe's.

Senator Hanafin

Perhaps we might return to the selling of endowments. I remember when they became popular. The Irish financial market was very different at the time, being very closed. It was a time when we had compulsory insurance. I do not know if members remember that, or even redemption fees. I am referring to redemption fees on an ordinary interest loan. If one wants to pay off a mortgage, one has to pay off a three month redemption fee.

There was also the sale of endowment mortgages. The sale of endowments was below the water line, as that was where the bulk of the iceberg was. Those who were selling the product had a belief in the product. The rate of margin companies made on these products was so high that there must have been question marks about them. I would like to refer to page 3 which states these endowment policies included not only those used to repay mortgages, but also those used for investment and savings purposes. It is unthinkable that having paid in the money, there is still a €3,810 shortfall on a savings product in light of the performance of the markets in the last 25 years. I would consider that to be quite serious.

When the tax relief is taken into account for the endowment policies, does that even out the situation? We often hear of situations where people offer to buy another's endowment and they are paying significantly more than the maturity value. If a person decides to sell to one of these bidders, will the shortfall be made up?

As Mr. O'Reilly has rightly said time and time again today, caveat emptor. People who took out SSIAs on an interest only basis are now behind those who took equity products. There is no set rule. I understand this, but we are just looking for balance. As we cannot go back on the six years, some of the answers to my questions are purely an academic exercise.

Mr. O’Reilly

With regard to tax reliefs, there were many incentives for buying the product. As a result, the margins on the product were very high. In a sense, it was an indirect incentive to selling the products. Commissions were being offered that encouraged the sale of the products. The costs set against the product in the initial period were very high. This might have been one of the reasons for the net loss today.

The Senator is right to think the shortfall would be less if it was sold off. We are not absolutely clear on the tax position. With regard to caveat emptor, one of our major problems is that we say that so long as the customer knows what he or she is being warned against.

Senator Mansergh

The problem with caveat emptor is that most consumers are not in a very good position to judge for themselves. Did any significant number substantially benefit from this product, or was the whole experience pretty negative?

Mr. Meade

I only become aware when people are not happy. There have been 290 cases, but if people are happy, they will not complain. We had one complaint where a person had redeemed his endowment mortgage having read an newspaper article or seen a television show. He maintained that if he had held on to it, he would be in a better position now and he wanted us to take action against the particular media outlet involved. That is the other side of the coin and some benefited. I do not have any figures as I only hear from people who are not happy.

Senator Mansergh

Would the Financial Regulator have an overall view or assessment of this scheme?

Mr. O’Reilly

By definition, there is a shortfall. Therefore, an average loss occurred of €3,800 on each policy.

Deputy N. O’Keeffe

Do the delegates know if one company performed better than any other?

Mr. O’Reilly

No.

Deputy N. O’Keeffe

What about outside companies and Irish based companies?

Mr. O’Reilly

This was a survey of Irish regulated companies.

Deputy N. O’Keeffe

What about Friends Provident?

Mr. O’Reilly

No.

Senator Hanafin

The figures show that it went from 0.3 % to 3.4%. I think we would find the answer not with the salesperson, but with the companies themselves that had a quota. It is not necessarily the best way to sell a product by telling sales people that they must sell so many endowments.

Mr. O’Reilly

We believe sales practices generally need to be tidied up. In selling the product, it must not be to the benefit of the salesman, but to the benefit of the customer.

Chairman

I wish to raise the issue of hire purchase companies. The endowment companies used to issue statements every five years, but now it occurs every year. There must be a very large number of hire purchase companies for cars, furniture, television sets and so on, yet I do not think any of these companies issue any annual statement to those with whom they have an agreement. When one signs on for 48 or 60 months, one signs a statement and gets a copy, but one never gets a statement from a hire purchase company. I know that this is not a regulatory matter but it is a consumer affairs matter. These companies never issue statements at the end of the first year informing the customer how much is paid, how much is left and so on. There seems to be a very bad flow of information back to the clients. Can the regulator do anything about this?

Ms O’Dea

I will have to come back to the Chairman on the specific matter of the statements. We believe consumers do not understand hire purchase agreements, on which we have produced a guide. Many of the advertisements lead people to believe they are getting a loan. In fact, they are entering into a hire purchase agreement which means that they do not actually own the goods. The problem is that all of this is disclosed in the small print and the person does not see it. The person is not aware of the extra conditions that are there when entering into a hire purchase agreement. We have highlighted that in our information.

Chairman

Let us take the industry practice. People do not know their level of debt. Most know they are paying so much a month on their car loan, but have no idea how much is left to pay. Does the Financial Services Ombudsman have jurisdiction over local authorities? They issue local authority loans, affordable housing, shared housing and so on.

Mr. Meade

They are not subject to my remit.

Chairman

I remember when the mortgage interest relief was coming in at source. Some of the local authority systems were not capable of processing that for quite a while. We have seen reports that they were still charging for loans after the loans had been repaid.

Mr. Meade

I deal with financial service providers that are regulated by the Financial Regulator or are subject to the terms of the Consumer Credit Act 1995. The local authorities are not covered by either.

Chairman

Is Mr. Meade saying the Consumer Credit Act 1995 does not cover consumers of loans by local authorities?

Mr. Meade

It is up to the legislators if they deem that such consumers should be covered by both the Financial Regulator and Financial Services Ombudsman.

Chairman

Has the regulator received complaints it has had to send back because they were outside its remit?

Mr. Meade

We receive complaints outside our remit which we send back.

Chairman

Do these complaints involve local authorities?

Mr. Meade

No, but I will check on the matter. I would be fairly confident that they do not.

Chairman

Where can customers go if they are not happy with how their loans are being administered by a local authority?

Mr. Meade

Ultimately, they can go to the local authority. Also, if they feel they are not getting satisfaction, they could bring the matter to the attention of the local government auditor. As the committee knows, under the local government audit system, a public inspection is carried out and any member of the public can make a complaint.

Chairman

There is a dreadful gap in the market from the consumer's point of view. There is a problem and it is a matter for the committee to address it.

Deputy N. O’Keeffe

The Ombudsman, Ms Emily O'Reilly, has a role to play with regard to local authorities.

Mr. Meade

We should be clear that all financial service providers should be subject to the same recourse and remedy. While an award of up to €250,000 can be made against a bank or building society, if a customer complains to the Ombudsman's office, the Ombudsman cannot award compensation. She could ask the local authority to change its practice but the local authority need not do so if it does not want to. Mr. O'Reilly, Ms O'Dea and I suggest that where there are financial services products which should be regulated, they should all be on the same footing, with the same level of compensation applying. However, as we are creatures of law, we will bring that to the attention of legislators but it is up to them to give us our riding instructions.

Mr. O’Reilly

Perhaps the matter could be considered in the same context as mortgage lenders, which are not regulated and come under the Consumer Credit Act.

Chairman

Therefore, hire purchase companies do not come under the Financial Regulator or Financial Services Ombudsman but come under the consumer protection legislation.

Mr. Meade

Yes. Hence, as they come under the Consumer Credit Act, I can deal with the complaints.

Chairman

We have exhausted the issue. I thank Mr. Meade, Mr. O'Reilly and Ms O'Dea for their attendance which was beneficial to all members. The joint committee will adjourn until 1 February when it will scrutinise COM (2005) 334, an amended proposal for a EU Council directive amending Directive 77/388 EEC as regards the place of supply of services.

The joint committee adjourned at 5.35 p.m. until 11 a.m. on Wednesday, 1 February 2006.