Joint Committee on Finance, Public Expenditure and Reform díospóireacht -
Thursday, 13 Nov 2014

Overview of Banking Sector: Ulster Bank

Chairman

I welcome Mr. Jim Brown, chief executive of Ulster Bank, who is accompanied by Mr. Stephen Bell, chief risk officer, and Ms Ellvena Graham, head of business banking. Mr. Brown will make an opening statement. Questions from members were collated in advance of the meeting and these were submitted to Ulster Bank. I thank Mr. Brown and his staff for responding in writing to these questions. The responses were received yesterday and have been distributed to members. Together with the input of the witnesses today, it is hoped that all the key topics will have been covered. None the less, a question and answer session will follow to clarify any matters.

I remind members, witnesses and those in the Gallery that all mobile phones must be switched off. I advise the witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or any official by name or in such a way as to make him or her identifiable.

Mr. Jim Brown

I thank members of the committee for the opportunity to provide an update on Ulster Bank's progress and to address the areas outlined in the invitation from the committee. I will make a brief statement and I will respond to any specific issues the committee wishes to address.

Ulster Bank is the third largest financial institution in the Republic of Ireland. We are unique as the only systemic bank operating across both the Republic and Northern Ireland that is owned by an international parent with a global network. We are an integral part of the financial and social economies in both jurisdictions and we believe that a healthy and functioning financial services sector is essential to a vibrant, competitive and sustainable economy. We recognise and greatly appreciate our role and responsibilities in this regard.

Ulster Bank has a significant presence across the island of Ireland. We employ more than 5,500 people in a network of 199 branches and serve almost 2 million customers. We have lending in excess of €27 billion in the Irish economy and hold approximately €25 billion in customer deposits. We also hold strong market positions across the business with improving trends in all areas. Over recent years we have had a clear strategy to manage our legacy issues while at the same time build a really good bank for our customers. On that point, I reiterate my comments yesterday in accepting the fine imposed by the Central Bank as a result of its findings following the IT incident. I am pleased to confirm that since then we have invested heavily in both our governance and systems to avoid any similar incident happening again.

Our strategy is working with a number of tangible results. First, early this year we returned to profit. Our most recent quarter 3 results continue to demonstrate this progress, with an adjusted operating profit of €569 million in the year to date. Most important, these results demonstrate our continued focus on the needs of our customers.

On business lending, our €1.2 billion Ahead for Business fund has provided almost €1.1 billion of credit into the market to the end of September. We have just launched a series of new fixed-rate mortgages and we expect to provide approximately €500 million in mortgage financing this year.

We are also making considerable progress on mortgage arrears and have achieved month-on-month reductions in arrears every month for the past 19 months. My team and I have constantly, consistently and publicly affirmed our core objective, which is that we want to keep co-operating customers in their homes. I am pleased to confirm that in excess of 8,000 customers who had been in arrears are now up to date with payments.

Second, the committee will be aware that Ulster Bank recently passed the comprehensive assessment undertaken by the European Central Bank. This demonstrates the progress we have made in recent years in strengthening our balance sheet, a process which has continued through 2014. Since the effective date of the review we have further increased our common equity tier 1 ratio to 17.3%, a figure which we believe to be the strongest capital position of all full-service banks in Ireland.

Looking to the future, the recent announcement by RBS confirming Ulster Bank's core status and good strategic fit with its retail and commercial banking businesses is a key development and proof of a commitment to Ulster Bank as an integral part of RBS. It is important to note that this decision was based on the assessment that Ulster Bank has strong potential and is capable of making an appropriate return. Following this commitment, we will continue with a dual strategy of strengthening our market-leading position in Northern Ireland through greater alignment with the United Kingdom while building a challenger bank in Ireland. Our ambition is to become the No. 1 bank for customer service throughout the island of Ireland.

Before I conclude and take questions, I wish to take this opportunity to reiterate our observations on the recent announcement of the Central Bank regarding new mortgage lending. A rebound in property prices following a crisis is not unusual and we recognise the need for the Central Bank to take steps to avoid overheating in the credit and property markets. However, the proposals as they stand will impact on the ability of many first-time buyers to acquire homes. In addition to this, other hopeful first-time buyers will struggle to save a high deposit while paying increasing rents. We estimate that 68% of the first-time buyer mortgages approved by Ulster Bank this year would have fallen outside the proposed loan-to-value or loan-to-income criteria. The economy and marketplace in a country such as Ireland are dependent on a fully functioning mortgage market, and we welcome the opportunity to contribute to the consultation on how best to achieve this.

Let me reiterate that Ulster Bank is and will remain an integral part of RBS and is fully committed to the island of Ireland. Following the comprehensive assessment by the European Central Bank, we believe we hold the strongest capital position of all the full-service banks in Ireland. We have a clear strategy. We have returned to profit and we are making strong progress towards becoming a simpler, more efficient and sustainable bank.

We actively support the mortgage and business markets by providing increased lending and specialist sector support. We look forward to continuing our progress in 2015 and to supporting the recovery in the economy as a challenger bank that provides much-needed competition to the market.

Chairman

I propose that we adhere to the same rules as for our meetings with the other banks. This will ensure that everyone has an opportunity to ask questions so that we can have the best meeting possible. I propose that the lead speakers for each group will speak for ten minutes, followed by other committee members, who will have five minutes. Then, anyone else who wishes to ask a question will have five minutes. The clerk and myself will be keeping an eye on the clock, and I will advise members when there is one minute to go to allow them to wrap up while, hopefully, keeping within their time. If members have further questions, I will be happy, time permitting, to allow them back in later once I have given others a fair opportunity to put their questions. It does not serve the purpose of the committee to use the time to make statements and it does not give the witnesses the opportunity to respond properly. Therefore, I ask members to keep their questions short and to the point. I am asking for their co-operation on this to help the smooth running of the meeting. Is that agreed? Agreed.

The speakers who have indicated are Deputy Michael McGrath, Deputy Kieran O'Donnell, Deputy Pearse Doherty, Senator Aideen Hayden and Deputy Paul Murphy, who will lead for the Technical Group. After that I will open it up to other members.

Deputy Michael McGrath

I welcome Mr. Brown and his colleagues and I thank him for his opening remarks. I was disappointed with the questionnaire Ulster Bank returned to us. The bank appears to have taken a minimalist approach in terms of the responses. The bank cited commercial sensitivity eight times as a reason for not answering the questions. It was the last response we received from any of the banks. I have to say, regrettably, that I regard it as being of the poorest quality. At times the bank provided web links instead of copying the information, forcing us to go and look up various web pages. That is disappointing, and I am unsure why the bank took that approach. Anyway, that is my honest observation.

I will start by asking Mr. Brown about the fine from the Central Bank of €3.5 million in respect of the information technology failure that occurred in the summer of 2012, which was obviously a major issue for the bank's customers. It was a damning finding by the Central Bank against Ulster Bank. It found that the bank failed to have robust governance arrangements in respect of IT systems and that this threatened confidence in the operation of the retail banking sector. The Central Bank said that outsourcing was no defence for regulatory failings. It saw fit to impose the highest fine it has ever imposed and it reprimanded the bank. Ulster Bank has accepted the findings. What steps have been taken since then by Ulster Bank and its parent company to address the underlying causes of the crisis?

Mr. Jim Brown

The key root cause of the incident related to a software failure that happened as a result of an upgrade to the system that processed the transactions. That was replaced quickly, but since then RBS has spent £750 million on upgrading the resilience of the systems overall and ensuring that a backup system is completely in place. Furthermore, we have the ability to run the Ulster Bank transactions completely separate from those of the rest of the group. A significant amount of investment has gone into this. The investment has been overseen by PricewaterhouseCoopers, which is tracking progress to ensure that it is in place as we have committed.

Separately, we have improved governance within Ulster Bank so that we have better oversight on the IT arrangements that exist in RBS. We have a specific IT person working for Ulster Bank who is heavily involved in determining the IT priorities for RBS as well as monitoring the performance of the systems and the backup plans, as I have commented previously. We have seen a considerable amount of work and significant investment, with improved governance in the bank too.

Deputy Michael McGrath

Is Mr. Brown confident that the likelihood of a repeat scenario is remote?

Mr. Jim Brown

I am confident, yes.

Deputy Michael McGrath

What was the overall cost of the episode to Ulster Bank? Was it €59 million in terms of redress for customers as well as the fine of €3.5 million?

Mr. Jim Brown

Yes. A total of €59 million was the cost to Ulster Bank customers in Ireland. We also had redress costs, since the bank had to provide redress to customers in Ireland. We had further compensation to pay to customers who were affected in Northern Ireland as well.

Deputy Michael McGrath

It was a costly lesson.

Mr. Jim Brown

Yes, very.

Deputy Michael McGrath

I will move on to the issue of standard variable interest rates. Let us compare the rates Ulster Bank is charging in Ireland with the offering it is making to customers in Northern Ireland. There is quite a difference. The bank has not disclosed its cost of funds in its response to us, but based on the information we have from the other banks I am assuming it is in the region of 1% to 1.5%. Why is there such a difference between the cost of variable-rate mortgages in Ireland and those in the North, particularly at low LTV ratios? With a scenario of 50% or 60% LTV, people seem to be able to get a far better deal in Northern Ireland than here.

Mr. Jim Brown

The standard variable rate that we charge in Northern Ireland reflects the market, our cost of funds and our costs of operating in that market. The rate is 4.0%. We also have a loan establishment fee for any new loans in Northern Ireland of £995. In Ireland our standard variable rate is 4.5% and we do not have any establishment fee. That said, the standard variable rate reflects the cost of providing variable rate mortgages in the market. It comprises our cost of funds, our operating costs, the costs of credit and the costs in terms of remediating customers who are non-performing as well. Our cost of funds is approximately the same as for the other banks in this market.

The cost of deposits in Northern Ireland is approximately half what it is in the South. There is a higher cost for funds paid to customers in the Republic of Ireland.

Deputy Michael McGrath

Mr. Brown will probably say that the bank is constantly keeping its rates under review. In view of the reduction in the rate by AIB, is Ulster Bank examining its rates currently?

Mr. Jim Brown

The Deputy is correct; we do keep them constantly under review. Having said that, we are mindful of competition in the market. We went to the market three or four weeks ago with what I would regard as very competitive three, five and seven-year fixed-rate mortgages, priced from 3.99%, that are available to new as well as existing customers. We keep our rates constantly under review.

Deputy Michael McGrath

Ulster Bank has a rate of 3.9% for customers who have a loan-to-value ratio of less than 60%. Is the UFirst account product open to switcher customers? If a person has a mortgage with another bank but meets the Ulster Bank criteria, is the bank actively seeking and marketing this product to people who are mortgage holders with other banks?

Mr. Jim Brown

We market that product to the market. The interest rates that we charge on our standard variable loans range from 3.7% to 4.5%, and that reflects the risk we are taking on in those particular lines. Customers that generally have a higher income or a lower loan-to-value ratio receive a lower rate than those with lower affordability and a higher loan-to-value ratio.

Deputy Michael McGrath

Is that product available to existing Ulster Bank customers who have mortgages with the bank and whose loan-to-value ratio has improved over time, or are they locked in at the same loan-to-value rate at which they entered the mortgage?

Mr. Jim Brown

They are locked into the rate at which the mortgage was taken out. Clearly, property prices have fluctuated quite widely, so it reflects the loan-to-value position at the time they took the mortgage.

Deputy Michael McGrath

With regard to Mr. Brown's answer to the question on mortgage arrears in the questionnaire, Ulster Bank has almost 4,700 customers whose principal dwelling houses are the legal area of voluntary surrender or assisted voluntary sale. That seems to be a high number of loans that the bank is pursuing, which will result in the loss of these homes in many cases.

Mr. Jim Brown

I will ask my colleague Mr. Stephen Bell to answer that specific question. We have seen a significant reduction in the number of cases that are going into the court system.

Mr. Stephen Bell

On the last occasion when we appeared before the committee, we said we expected that the bulk of the cases that went into the legal department would go in quite early, and that has been the case. Only approximately 500 additional cases have gone in this year - that is, as of the end of October 2014. We are seeing a very significant slowdown in cases in which we have to take that action. We remain committed to keeping people in their homes and I am pleased to say that we have seen an increase in engagement from customers. Perhaps it has taken the threat of legal action to stimulate that engagement, but we have seen between 45% and 50% of customers making contact or starting to make some level of payment as a result of our taking this action. While it is regrettable, we would not anticipate that number of cases flowing through into repossession. We hope the process will stimulate engagement contact and re-establishment of an appropriate payment.

Deputy Michael McGrath

My last question is about the proposed new rules from the Central Bank. Mr. Brown gave quite a stark statistic in his opening statement, stating that 68% of first-time buyer mortgages approved by Ulster Bank this year would have fallen outside the new rules. That means that almost seven out of ten people who were approved for a mortgage from Ulster Bank would have fallen foul of the new rules. Is that the essence of what he said?

Mr. Jim Brown

Yes, that is correct. That is before the override of the 15% deviation was applied.

Deputy Michael McGrath

Will Ulster Bank be making a submission in this regard?

Mr. Jim Brown

We will.

Deputy Michael McGrath

Thank you.

Deputy Kieran O'Donnell

I welcome Mr. Brown and his colleagues to the committee. I too was disappointed that of the 42 questions in the questionnaire, eight were effectively not replied to. I understand that the Irish taxpayer has not put money into Ulster Bank, unlike the other three banks, two of which have appeared before the committee to date. Nevertheless, Ulster Bank is regulated by the Central Bank. There are key questions such as the cost of funds, which would give us some indication of how the mortgage rate discharged to consumers is based on the cost of funds. People are entitled to know the cost of funds. No breakdown has been given of the profile of mortgage lending in terms of fixed-rate, variable rate and tracker mortgages. We have no indication of the bank's net interest margin, which the other banks have given to us. Would Mr. Brown consider, on mature reflection, providing the committee with the average cost of borrowing and the blended cost of borrowing, the breakdown of fixed-rate, tracker and variable rate mortgages and the net interest margin, so that we can get a view on it?

I understand the view that there is a lack of competition in the mortgage market in the Republic of Ireland. Mr. Brown said that most of Ulster Bank's new mortgage business this year would not have met the new restrictions proposed by the Central Bank, including the requirement for a 20% deposit, yet he states that Ulster Bank is the only bank with a structured presence in the North and in the South. We see a difference in the mortgage rates if the loan-to-value ratio is less than 60%: the rate in the Republic, at 3.9%, is two percentage points higher than the rate in Northern Ireland, at 1.89%. The bank is reacting to the market. I would appreciate if Mr. Brown would deal with these questions: first, the cost of borrowing; second, the breakdown between fixed-rate, variable rate and tracker mortgages; and third, the net interest margin.

Mr. Jim Brown

First, I will respond to the comment about our response to the questionnaire. Our intent was to be open and transparent, and we answered over 80% of the questions. There were a number that we did not answer due to commercial considerations.

Deputy Kieran O'Donnell

They were pertinent questions.

Mr. Jim Brown

I am happy to comment on those as well. As I mentioned just a moment ago, our cost of funds in the Republic is in and around what the other banks pay.

Deputy Kieran O'Donnell

Will Mr. Brown put a figure on it? What the other banks pay varies, with Permanent TSB paying 1.74%, Bank of Ireland paying 1.15%, and AIB, which will appear before us, paying a blended cost of 1.64%.

Mr. Jim Brown

As Deputy McGrath gave a range of 1% to 1.5%, I said that our cost of funds was in that range for the Republic but not for the North. The cost of funds for Northern Ireland is different in that market.

Deputy Kieran O'Donnell

Why would it be different?

Mr. Jim Brown

The currency in Northern Ireland is sterling and the interest rates we pay for deposits reflect the interest rates that are charged in that market. They are different for a euro currency.

Deputy Kieran O'Donnell

How much of the bank's funding would come from deposits at this point?

Mr. Jim Brown

As I mentioned in my opening statement, we have a balance sheet fund of €25 billion of deposits as against just under €28 billion of loans, but we have surplus funds available in Northern Ireland and we fund from the wholesale markets in the Republic as well, through securitisation and also through inter-group lines from RBS.

Deputy Kieran O'Donnell

That is against a background in which the ECB rate of funding is lower than the Bank of England rate.

Mr. Jim Brown

That is correct, but the ECB rate and the Bank of England rate are not the rates under which we raise our deposits.

Deputy Kieran O'Donnell

At this stage, does Ulster Bank have any ECB funding?

Mr. Jim Brown

A very small amount.

Deputy Kieran O'Donnell

At what level?

Mr. Jim Brown

It is very small, purely through some securitisations that were put back through to the-----

Deputy Kieran O'Donnell

With regard to the €28 billion in loans, is Ulster Bank funding that with the €25 billion of deposits? Is it virtually funded in its entirety by deposits at this point?

Mr. Jim Brown

As I mentioned, we have a surplus of deposits in Northern Ireland and therefore there is a percentage of this in the Republic.

Deputy Kieran O'Donnell

There is a higher percentage of deposits in the North?

Mr. Jim Brown

That is correct; there is a higher percentage of deposits in the North.

Deputy Kieran O'Donnell

The cost of funds is about 1.5%. Could Mr. Brown give a breakdown between variable rate, tracker and fixed-rate mortgages?

Mr. Jim Brown

I was going to answer the other questions. To clarify, the cost of funds is in the range of 1% to 1.5% in the Republic. Approximately 60% of our mortgage book in the Republic consists of tracker loans.

Deputy Kieran O'Donnell

That is similar to Bank of Ireland.

Mr. Jim Brown

The net interest margin is 2.32%, as was published in our quarterly results produced last week.

Deputy Kieran O'Donnell

The 2.32% figure is in the public domain. I assume these figures were probably freely available if we had dug for them.

Mr. Jim Brown

We were not asked in the questionnaire what the net interest margin was.

Deputy Kieran O'Donnell

The net interest margin is 2.32%.

Mr. Jim Brown

That is correct.

Deputy Kieran O'Donnell

We are told the net interest margin at Bank of Ireland is 2.08%, it is 1.6% at AIB while Ulster Bank's is 2.32%, based on the information we have received to date. The rate at Permanent TSB is below 1% at 0.88%. Ulster Bank's net interest margin is the highest of the banks in Ireland by a significant amount. Why are the rates the bank is offering to customers not more competitive?

Mr. Jim Brown

First, the net interest margin reflects the margin for Ulster Bank across the island of Ireland.

Deputy Kieran O'Donnell

Mr. Brown is able to break down the costs of borrowings in terms of giving an explanation as to why there is a lower charge in the North than in the Republic. By definition, therefore, Mr. Brown should be able to give us a breakdown of the difference in net interest margin between the North and the Republic. He is relying on a global composite picture for the net interest margin across the group, yet he is giving an explanation for why the bank is giving a lower rate in the North based on the cost of funds being less in the North than in the Republic. To be consistent, he might give us a breakdown of the net interest margin between the Republic and the North.

Mr. Jim Brown

That is commercially sensitive, so we will not publish it. It is not in the public domain, but we have published the net interest margin as 2.32% across Ulster Bank. As I mentioned, the cost of variable rate mortgages in Northern Ireland is 4% versus 4.5% in this market. There are fees that are charged in Northern Ireland as well. The cost of deposits is significantly higher in the Republic versus Northern Ireland as well. If one looks at the deposit rates versus the mortgage rates plus the fees that get charged, there is not much difference between the two.

Deputy Kieran O'Donnell

Mr. Brown is being a little selective. It is correct with regard to the standard variable rate, but when one looks at loan-to-value rates below 60%, there is a significant difference between the Republic and the Northern Ireland market. There is a 2% differential. My point is that Ulster Bank is reacting to competition in the market.

To make a general observation, what must be examined at Central Bank and Department of Finance level is whether there is sufficient competition in the Irish mortgage market. Even at 2.32%, with due respect to Mr. Brown, it is reasonable to make the assumption that Ulster Bank is making quite good margins relative to its competitors in the Republic of Ireland market. If that is the case, why are the bank's rates not more competitive?

Mr. Jim Brown

First, the margins that all banks, including ours, charge must improve. Even at 2.32%, the margins are not yet where they need to be.

Deputy Kieran O'Donnell

In the limited time I have, and this is the kernel of it, we are getting back to old style banking again, which is in effect the banks seeking to get the highest rate possible from the customer and the customer not having proper competition in the market. I have two questions. First, what rate would Mr. Brown like to reach for net interest margin? Second, in light of the fact that AIB is operating from a lower net interest margin, which it told the committee is 1.6%, will Ulster Bank consider providing some competition in the Irish market and reducing the rates?

Mr. Jim Brown

Our rates are constantly under review as I mentioned previously. The key point is that the standard variable rate reflects the costs of offering mortgages in this market, and the cost of funds is one-----

Deputy Kieran O'Donnell

What rate would Mr. Brown like to see?

Mr. Jim Brown

I will come to that. It also reflects differences in the cost of credit between Northern Ireland and the Republic, and the cost of bringing a resolution to non-performing loans is significantly higher in this market as well.

In terms of the net interest margin, I have told the committee previously that there must be in excess of 2.5% for all banks across the sector if the banking sector is to make a reasonable return in this market.

Deputy Kieran O'Donnell

What is interesting is that there appears to be a critical lack of competition in the market and the banks are exploiting that in the Republic of Ireland.

Chairman

The Deputy's time has concluded.

Deputy Pearse Doherty

I will not go over old ground but I agree with the questions that have been teased out regarding the cost of funds. The bank must deal with the variable interest rate mortgage holders as soon as possible.

I welcome the finding of the Central Bank. It imposed the heaviest penalty it could, although there are questions as to whether a penalty of €3.5 million is sufficient for a bank that deals with billions of euro. I have a question about the bank's compensation to its customers. At the heart of this were ordinary people who were left high and dry as a result of the inefficiencies in the bank. How many of them did not receive compensation from the bank?

Mr. Jim Brown

The compensation scheme offered a wide range of net compensation. First, we paid any customer who had to go to the branch more often as a result of not being able to access their account. We also paid-----

Deputy Pearse Doherty

We are under a time restriction and I am aware of the compensation. Mr. Brown has dealt with it previously. How many customers were affected in the first place? How many of them did not receive compensation or have all of them received compensation?

Mr. Jim Brown

We believe those who were impacted by the incident have received compensation.

Deputy Pearse Doherty

What was the total amount of the compensation paid?

Mr. Jim Brown

It was €59 million in the Republic. There was further compensation for Northern Ireland. It is approximately £100 million in total across the island.

Deputy Pearse Doherty

Mr. Brown said the issues have been resolved and that Ulster Bank is able to run its own systems in the island of Ireland. Is the Central Bank satisfied that the issues with Ulster Bank's IT have been resolved satisfactorily?

Mr. Jim Brown

Am I satisfied?

Deputy Pearse Doherty

No, has the Central Bank informed Ulster Bank that it is now satisfied with the procedures Ulster Bank has in place?

Mr. Jim Brown

Yes, it is satisfied with the actions we have taken. We have been very transparent with it and we meet monthly on it-----

Deputy Pearse Doherty

Has the Minister for Finance received from the Central Bank the report on what happened at that time? There were suggestions that there would be such a report.

Mr. Jim Brown

A review was undertaken as to the root cause of the incident. That has not yet been released because Northern Ireland and RBS are still under review. The enforcement in that part of the business is not completed yet. As soon as that is completed, the intent is to make the key findings of the incident known. In the announcements made this week-----

Deputy Pearse Doherty

Does that mean published?

Mr. Jim Brown

That is correct.

Deputy Pearse Doherty

Have the findings of the review that has been completed been submitted to the Minister for Finance here?

Mr. Jim Brown

No, not that I know of.

Deputy Pearse Doherty

The issue two years ago was huge and impacted on many customers, North and South. There have been other issues in the bank in respect of IT. This year the bank miscalculated tax relief for 7,500 customers and it is now imposing a penalty on them for that miscalculation by the bank. If Mr. Brown understands how stretched people are in terms of disposable income, the mistake the bank made and the benefit it conferred on them has more than likely been spent. Trying to claw that back, and it amounts to more than €300 in a year, is a sizeable burden. Given that it was the bank that made the error, why did it not take the hit?

Mr. Jim Brown

If I may, I will clarify the previous question and then I will respond to the second one. With regard to the review, I should clarify that the Central Bank has seen the review, but I am not sure whether the Central Bank has passed that on.

As regards the interest calculation, I acknowledge that there was an incident where we had not charged the full interest that we should have charged and we have charged customers subsequent to that. As to whether we should have absorbed it, it was interest that was owed to the bank and we have charged for it.

Deputy Pearse Doherty

In plain terms, the bank is making a mess of it. It screwed over - excuse my language - its customers, who still remain loyal to the bank, for months on end two years ago. It then miscalculated 7,500 people's mortgage interest tax relief. They got a benefit which the bank is now claiming back, something which it fails to understand. On top of that, it had to apologise to 1,300 customers because it miscalculated their repayments the year before. There is a trend of error after error being made in the bank, and the person who has to suck it up is the customer.

Mr. Jim Brown

I acknowledge the incidents to which the Deputy referred. As I mentioned, this was interest which was owed to the bank. On the broader picture, one of the key things we have done as a result of the IT incident which occurred two years ago is to spend £750 million on improving the capabilities and resilience of our systems into the future.

Deputy Pearse Doherty

Is the IT system now on the island of Ireland?

Mr. Jim Brown

Our systems are still with RBS in Edinburgh.

Deputy Pearse Doherty

There is no plan to take the system back under control on the island.

Mr. Jim Brown

We have improved our governance. We have better oversight of how RBS operates the systems on our behalf. Leveraging the systems which RBS has as a global organisation is a competitive advantage for us in this market. It enables us to provide products and services such as mobile banking for individual and business customers.

Deputy Pearse Doherty

I have raised the issue of the global restructuring group, and I welcome the fact it has been wound up. It was simply a means of liquidating sustainable Irish businesses to satisfy the parent group. As regards SME loans, does the bank intend to apply to the strategic banking corporation?

Mr. Jim Brown

I will hand over to Ms Ellvena Graham to answer the question.

Ms Ellvena Graham

Yes, we do. We have been in discussions with it and I understand we will meet it again next week. We have every intention of participating in the process. The details are not yet completely clear, and when they are, I do not see any reason we would not.

Deputy Pearse Doherty

Is there any timeframe as to when those type of loans can start flowing?

Ms Ellvena Graham

I believe it will be relatively early next year.

Deputy Pearse Doherty

I note Ulster Bank has appointed Ernst & Young as its auditors. Given that it audited Anglo Irish Bank and there were investigations and issues, is the bank satisfied about the appointment in terms of customer confidence at this point in time?

Mr. Jim Brown

We are very satisfied with Ernst & Young. It went through an RBS selection process.

Deputy Pearse Doherty

I refer to the figures on mortgages. Legal enforcement was mentioned. Some 4,690 family homes are going through the legal process. From what date do the figures begin?

Mr. Stephen Bell

They refer to anything that has been commenced, but the majority commenced after the Dunne ruling was corrected in July 2013.

Deputy Pearse Doherty

Ulster Bank has sent letters advising legal action to approximately 2,000 customers and some 2,330 court proceedings have been initiated. How many of those cases will progress to the stage of obtaining a court judgment?

Mr. Stephen Bell

We hope the minimum possible number. We ensure that one of our field agents attends court when there is a court hearing so that if a customer wishes to talk, even at that late stage, he or she can do so. As I mentioned, about 45% or 50% of customers re-engage on the steps of the court. We have told the committee that realistically we would expect to see between 1,500 and 2,000 repossessions through the cycle. We have see a few hundred so far, but we would not expect all 4,690 cases to end up in that position.

Deputy Pearse Doherty

I appreciate I am running out of time, but I have two final questions. We saw the figures on the numbers of staff who have been lost and branch closures. Can the delegation assure us that there will be no branch closures in 2015? Can it inform us of the highest loan-to-value mortgage it issues? What is the loan-to-income multiple? We know the Central Bank is proposing mortgages of 80% of a property's value and an income multiple of 3.5.

Mr. Jim Brown

On the last question, the highest loan-to-value ratio is 90%. On loan-to-income ratio, I understand we lend up to 4.5 times the income. Some 85% of our loans are for an income multiple of 3.5 or less. From our perspective, in terms of the Central Bank's recommendations, the loan-to-income rate is the key driver and we are quite comfortable with a rate of 3.5.

I cannot give a guarantee on branch closures. We continue to review our network based on changes in customer behaviour. We have invested heavily in alternative channels. For example, this year we have done 7,000 web chat calls a month. We have two banks on wheels in the Republic and will bring two more to Northern Ireland. Transactions going through branches have decreased by €10 million, or 36%, since 2011, and footfall has fallen significantly. The branch network reduced by 16% over that time.

On the other hand, we have seen digital banking increase by 140%. There is a major shift towards digital transactions. That said, branches are incredibly important to us and we conduct a lot of our more complex business in them, such as business and mortgage lending, investment advice and so on. They still play a critical role in the business, but we have to respond to the reality of the changing market.

Senator Aideen Hayden

I thank the delegation. I want to express my disappointment at how late we received the bank's information. I received the replies to our questions yesterday evening. For the purposes of comparison, we received information from Bank of Ireland, Permanent TSB and AIB. It is very disappointing to be given documentation so late in the day because we want to engage meaningfully with this process and it is very important for us to be able to review the questions we spend a lot of time putting together.

I will not go over the ground covered by my colleagues. On the variable rate the banks are charging customers, there is a perception, with which the bank needs to deal, that it is making variable rate customers pay for tracker mortgages handed out by the bank when times were good. From their point of view, the bank holds money belonging to ordinary people in current accounts on which, to the best of my knowledge, they are paid no interest. The bad debts are reducing and the cost of funds has fallen. From their point of view, there is no real excuse for continuing to, in effect, screw them. That is how people see it, and it is something the bank needs to address.

Deputy Doherty referred to the level of arrears in the principal dwellings mortgage book. It is utterly shocking that the bank is engaged in some 5,500 of what could be loosely termed "legal proceedings" out of a loan book of 12,723 mortgages in arrears of more than 90 days. In response to an earlier question it was said that people will not engage in the process until they are on the steps of a court. That is, in effect, telling people the bank is scaring them into participating in a process to resolve mortgage arrears, a scenario for which many people see the bank being as culpable as they are.

I spent years working as a solicitor. For every mortgage product I handled, the bank did an independent valuation, paid for by the customer. The customer paid for the cost of executing the mortgage deed and registering the bank's interest. The proportion of cases in which the bank is engaging in legal proceedings is inordinately high and is much higher than that of the other financial institutions which have come before the committee. The bank needs to examine its internal processes.

This committee prepared a report on mortgage arrears and resolution processes and the clerk will give Mr. Brown a copy of that. It made several good recommendations which Ulster Bank should take on board, not least the AIB initiative to have an independent group of advisers to facilitate the re-engagement of customers with the process. All lenders should consider that proposal and fund it as AIB does. Ulster Bank has a problem if it is using legal proceedings against 5,000 out of 12,000 customers.

Senator Fidelma Healy Eames

That is almost 50%.

Senator Aideen Hayden

Having been engaged with the law for many years I know how distressing it is for people to have to engage in legal proceedings.

Mr. Jim Brown

I understand that and we take this issue very seriously. We are not happy to see any mortgage customer in distress. As a consequence, we have put significant resources into helping alleviate that situation. We have approximately 500 people working with customers who have mortgage arrears which is a sizeable percentage of the bank’s staff. Those people make regular calls and send e-mails and letters, and we have people on the ground right through to the court process looking for customers to engage. The majority of the 4,500 who have gone to court are in arrears for more than a year and have not engaged with us at all, despite the calls and contacts. We have no choice if we want to resolve that situation but to go into the court process. As we get into the process, customers are prepared to engage. Every time we go to court we have someone there ready to talk to the customer to get him or her to re-engage.

Senator Aideen Hayden

I have dealt with Ulster Bank on behalf of clients and the individuals I have dealt with were very helpful. I represent people as a qualified solicitor but many people do not have access to that type of service. Ulster Bank is not independent. It is judge and jury over its own clients. Is it prepared to fund an independent process in which people can be advised by experts on how to engage?

Mr. Jim Brown

We do that.

Mr. Stephen Bell

We have said we will work with any third party the customer asks us to work with. We do not have exclusive arrangements with any individual agency but we regularly work with any agency or individual that the customer asks us to speak to. We have provided referrals to the personal insolvency service where customers will benefit from that and we have agreed to pay for that service for the customer.

Senator Aideen Hayden

If a broader service were put in place involving all banks, would Ulster Bank be prepared to part-fund that?

Mr. Stephen Bell

I did not say that. I said we support customers through our own direct efforts. We will work with any third party-----

Senator Aideen Hayden

Is Ulster Bank prepared to formalise that? Will it advise customers that service is available?

Mr. Stephen Bell

We do tell them. It is part of an extensive engagement programme. If the customer would prefer us to deal with a third party on his or her behalf, we are happy to do so. We have referred customers to the personal insolvency service and agreed to pay the cost of that service.

Senator Aideen Hayden

The customers I deal with who engage with Ulster Bank are not aware of that. Many are involved in family law actions. That is not their experience with Ulster Bank. Will Mr. Bell take this point on board?

Mr. Stephen Bell

The numbers the Senator refers to do not include the 8,000 who are no longer in arrears because of the efforts we have made directly and through working with them. We told the committee on the previous two occasions we met it that until the courts system works more effectively, there will be a bunching of cases in long arrears. This year we have seen a 36% reduction in the cases that are 90 to 720 days in arrears. That has been offset by the fact that those cases which the court cannot handle efficiently are rising. We are very much committed to maintaining our investments.

Senator Aideen Hayden

By Mr. Bell’s estimation 2,000 of these will result in repossessions.

Mr. Stephen Bell

That depends on the level of engagement we get.

Senator Aideen Hayden

I was quite horrified to see that out of the bank’s buy-to-let loan book it is has appointed rent receivers to 1,618 of its 2,700 properties in arrears of more than 90 days. I chair a voluntary organisation that deals with people in the rental sector and I can assure Mr. Bell that rent receivers appointed to rental properties constitute a massive problem. This committee recommended, and a recent report by DKM Economic Consultants for the Private Residential Tenancies Board also recommended, that rent receivers be obliged legally by a change in the law to step into the shoes of landlords. We find that rent receivers come in, take the money, do not do essential repairs, evict people and do not give them their legal rights. Would Ulster Bank be prepared to accept such a change in the law?

Mr. Stephen Bell

The last time we appeared here we stated that none of the rent receivers appointed over our assets evict anybody. We respect the rights of the tenants to receive their deposits if and when they move out and we do not in any way change the rights of the tenants as part of that process.

Senator Aideen Hayden

The answer is "yes", the bank has no problem doing that.

Mr. Stephen Bell

We have no problem because we are doing it.

Senator Aideen Hayden

Why does Ulster Bank have very few split mortgages, which is in complete contrast to all the other lending institutions? What does the bank mean by economic concession?

Mr. Stephen Bell

The economic concession is a product which lowers the interest rate to as low as 0.5% for a period as long as seven years to help customers reduce the amount they pay. This allows them to pay down the capital outstanding on the mortgage because most of the payment is going to capital reduction and not interest servicing. We have offered the split mortgage to all the customers who eventually took the economic concession option. In almost every case the customers prefer the economic benefit of the economic concession to the split mortgage. All of the 1,885 customers who have taken an economic concession would have been offered a split mortgage but have said "no". We told the committee at the previous meeting that the total cost of credit the customer pays for a split mortgage is higher than for an economic concession. This is a matter of fair choice from opportunities made available to the customer.

Deputy Paul Murphy

Ulster Bank had a bad day yesterday with the maximum fine in this country, while in Britain and the United States its parent company, RBS, faces fines of hundreds of millions of pounds because of foreign exchange manipulation, coming on top of significant fines for rigging the London interbank offered rate, LIBOR, which I understand is still under investigation. I am not sure whether the witnesses have read the chat transcripts from the traders talking about making free money and keeping numpties out of the market, which illustrate the kind of animal instincts and language of traders that supposedly had gone after the banking crisis, when there was a cultural change and an end to that kind of ethics. Does what has come out in recent days, or years if we include LIBOR, not illustrate that there is no change of culture and that RBS represents some of the worst elements of banking culture that continue?

Mr. Jim Brown

The foreign exchange and LIBOR issues are a matter for RBS, not Ulster Bank. We are not part of those discussions. We do not operate FX trading as such or LIBOR in this market. RBS has been very clear that it does not endorse that behaviour. There has been a huge focus within the bank on changing the company’s values in order that this sort of thing does not happen again.

Deputy Paul Murphy

That behaviour has happened repeatedly and there are many people who would maintain that the culture of Ulster Bank has changed since RBS took it over, that it went from being relatively conservative in terms of lending practice to reflecting the culture of its parent company.

Mr. Jim Brown

There is an issue around the culture of individual traders with RBS. As I said, these are not issues we have experienced in Ulster Bank.

On what happened through the boom period, there is no doubt that Ulster Bank lent in ways it should not have done. As a consequence, we have paid a significant price, namely, £15 billion.

Deputy Paul Murphy

Moving to the lessons Ulster Bank can take from the fine, as Deputy Pearse Doherty said, it is not the only IT failure. I understand there were others seven or eight years ago when over 1,000 mortgage customers were temporarily put on interest only mortgages and not taken off that arrangement. They were then liable for significant amounts of money. In Mr. Brown's response to Deputy Pearse Doherty he said the IT division was located in Scotland. Is that accurate?

Mr. Jim Brown

That is correct.

Deputy Paul Murphy

Is it not accurate to say some IT work is done in India?

Mr. Jim Brown

Some development work is done in India, but our systems are run from and transaction processing takes place in Edinburgh, Scotland.

Deputy Paul Murphy

How many jobs have been outsourced to India?

Mr. Jim Brown

I could not say, but all of the IT systems are run from Scotland.

Deputy Paul Murphy

The software developers and others employed in India had nothing to do with the IT problems we faced.

Mr. Jim Brown

All of the IT problems we dealt with in 2012 were the result of issues in our IT centre in Edinburgh.

Deputy Paul Murphy

Those within the bank involved in IT in Ireland would dispute that. There are plenty of reports on the Internet from those who worked inside the bank in Britain. Is Mr. Brown absolutely certain that all of the IT work related to this crisis was done in Scotland?

Mr. Jim Brown

That is correct. As has been commented, the root cause of the incident was a software upgrade failure in the transaction processing system which processed transactions for all banks, that is, RBS, NatWest and Ulster Bank. It operates out of Fettes Roe in Edinburgh.

Deputy Paul Murphy

What about the ending of IT support in Parkgate Street after integration with the RBS system? Did that have nothing to do with the problem? If we had a local team which was able to patch problems, as happened before, would that have had an impact?

Mr. Jim Brown

As the Central Bank reported, there was a failure of governance on behalf of Ulster Bank, which I accept. We should have had better governance and oversight of our IT outsourcing. In terms of the root cause of the incident, my view is that it could have happened, regardless of whether it was RBS, us or another party supplier.

Deputy Paul Murphy

There are definite lessons for Ulster Bank and other banks about outsourcing.

On the more general question of outsourcing, it is an illustration of how obstructive the bank's answers to the questions on outsourcing are. We asked whether it could provide details of the number of outsourced staff and the companies from which it outsourced staff and the reply referred us to the answer to question No. 13 which asked what functions had been outsourced in the past 12 months, to which the answer is that the bank has not outsourced any function.

Mr. Jim Brown

That is correct.

Deputy Paul Murphy

The bank did not answer these questions. Does it not feel the same obligation to answer the questions the other banks have because it was not bailed out by the Irish State but by the British State? It is absolutely obstructive. Will the bank provide the answers to the questions on the numbers of outsourced staff, what their functions are and where they are located?

Mr. Jim Brown

We were asked how many staff we had outsourced in the past 12 months and we answered that question. The answer was zero.

Deputy Paul Murphy

No, that was not the question. It was whether the bank could provide details of the number of staff at the bank, the number of staff outsourced and the corresponding figures for the years 2008 to 2013, inclusive. The bank did not answer that question; instead it referenced another question which had nothing to do with it.

Mr. Jim Brown

I cannot tell the Deputy how many staff are outsourced by the bank because I do not know how many from accounting or legal firms, advisers, cleaners or whoever else are employed. A number of functions are outsourced, but I cannot tell the committee the number of staff employed to do outsourced work for us, but I can tell it that Ulster Bank has 660 jobs offshore as part of the RBS Group. These jobs are not outsourced; rather, they are still within the RBS network.

Deputy Paul Murphy

The other banks have been able to answer the question on outsourced staff. They know how many staff they employ.

Mr. Jim Brown

I referred to cleaning and legal services and so on. I cannot tell the Deputy how many staff such firms hire.

Deputy Paul Murphy

What functions are outsourced?

Mr. Jim Brown

I have given some examples. The bank could receive advice from accounting firms. It could involve catering, cleaning and a wide range of other services. I can revert to the Deputy with more details.

Deputy Paul Murphy

The bank was not sprung with the questions just now; they were clear and the bank did not answer them. Does Mr. Brown accept that that is an oversight?

Mr. Jim Brown

The question was whether I could tell the committee how many staff had been outsourced and I cannot give an answer because I do not know how many staff these firms employ.

Deputy Paul Murphy

Will the bank provide details of each of the companies from which it outsources staff?

Mr. Jim Brown

We can share that information with the committee.

Deputy Paul Murphy

Why did the bank not share that information? The question was asked and the bank referred to another question which had nothing to do with it.

Mr. Jim Brown

I will follow up on that matter and clarify the position for the Deputy. We were not trying to confuse the issue.

Deputy Paul Murphy

Fair enough. The number of branches closed seems to be a higher percentage than that for other banks. How many more does the bank intend to close?

Mr. Jim Brown

We do not know; it will depend on customer behaviour. I have mentioned that when we put our strategy in place two or three years ago, we had 238 branches in our network across the island and expected the number to reduce to 170 or 175. I still think that will be the case. The changes are driven by the changes in customer behaviour.

Deputy Paul Murphy

How will the branches be selected? Will it be based on leases?

Mr. Jim Brown

It will be based on where the right place is for us locate a branch to best suit the needs of our customers in the region.

Deputy Paul Murphy

Does it reflect a lack of commitment to communities and staying in this country?

Mr. Jim Brown

It is the complete opposite. We have invested significant amounts in alternative distribution systems. The reality is that in the past three years we have had an increase of 140% in the number of people using mobile apps and the Internet. There has been a decrease of over 30% in the number of transactions through branches. Only 13% of our transactions overall are through the branch network.

Deputy Paul Murphy

With respect, if everything will be done through smartphones and computers, the bank might want to make sure its IT system works correctly. Does it want to be regulated from London, rather than Dublin and, if so, why? Does it not reflect a lack of commitment to staying in this country?

Mr. Jim Brown

The bank has four regulators - the Central Bank, the ECB, as part of the SSM, the FCA and the PRA. We are comfortable with regulation.

Deputy Paul Murphy

It has been reported that there has been an approach to the Irish Government by Ulster Bank to the effect that it wants to be regulated from Britain as part of its parent company. Is that correct?

Mr. Jim Brown

That was reported and came from our review a couple of years ago of our legal structure across the island. We examined the best way to structure the bank in terms of legal entities. Historically, we had one legal entity, namely, Ulster Bank Limited. We then changed to two ten or 15 years ago, to Ulster Bank (Ireland) Limited. We considered whether it would make sense to revisit our structure. From our perspective, it has nothing to do with the commitment to the Republic or regulation.

Chairman

I have a few questions. We met representatives of Permanent TSB yesterday. They said that, at the end of the process, when someone had to give up his or her house, it was repossessed or that he or she had tried to manage the debt and failed to do so, it wrote off up to 80% of any residual debt. It is not debt relief. Does Ulster Bank do something similar?

Mr. Stephen Bell

We consider everything on a case by case basis. Where a customer is eligible for social housing, we have said that at the end of the process we will not pursue any of the residual shortfall.

Chairman

The criterion is whether a customer is eligible for social housing.

Mr. Stephen Bell

The work we did earlier this year showed that the cost of private rented accommodation, in almost all cases, exceeded the cost of a restructured mortgaged. Therefore, if the customer cannot afford to repay the restructured mortgage, he or she cannot afford to pay for private rented accommodation either and should be eligible for some level of housing support. We will not seek to pursue customers who are already in need of State support for any shortfall.

Chairman

How does that work? The person fills in the application form and is accepted for social housing.

Mr. Stephen Bell

Yes, we then go for a voluntary assisted sale and will not pursue the shortfall.

Chairman

The bank writes it off there and then.

Another proposal discussed by Permanent TSB was assisting those on tracker mortgages to trade up. It has a tracker plus 1% product. Has Ulster Bank a similar scheme to assist those on tracker mortgages?

Mr. Jim Brown

Yes, this is to allow customers to port their tracker mortgage from one property to another where they are in negative equity. We have a similar product on which the rate depends on the current loan to value, LTV, ratio on the property. We will allow them to transfer the product with the tracker margin as it stands, but we will charge a higher percentage over and above it, depending on the LTV ratio.

Chairman

Will Mr. Brown give me ballpark figures?

Mr. Jim Brown

It ranges from 2% to 3.5%.

Chairman

Above the tracker margin?

Mr. Jim Brown

Yes.

Mr. Stephen Bell

It is on the amount added to the original tracker mortgage, not the entire amount.

Chairman

Effectively, the customer holds the original tracker mortgage and the increased charge is incurred on the additional loan.

Senator Fidelma Healy Eames

I welcome the delegation.

I was quite shocked by Senator Aideen Hayden’s point that the bank was taking 50% of those in arrears to court. From my experience of working with Mr. David Hall, director of the Irish Mortgage Holders Organisation, and a large number of people in arrears in Galway, I note that the bank is extremely slow in awarding restructuring. It is so slow that people actually go into arrears, even though they have given plenty of notice of problems. Customers are further disadvantaged by Ulster Bank in having its telephone operations based in Scotland. Does the delegation agree with this? A customer in difficulty tries to make a deal for a restructuring with the arrears support unit in the bank. However, because the restructuring is not agreed to quickly enough, the customer falls into arrears and is then hassled by another wing of the bank’s operation for a payment he or she cannot afford - never the two wings shall meet. The stress this heaps on people is unbelievable. Just in the past week I have had cases of Ulster Bank customers in mortgage difficulty getting four text messages and telephone calls every day. Is this acceptable? Does the bank believe it has a duty to have better internal communications to better assist those genuinely engaging and seeking restructuring?

Mr. Jim Brown

The number of our customers in the courts process is not 50%. We had 20,000 customers who were in arrears 18 months ago. That number has reduced significantly. Ours is the only bank that has had decreases in the number of customers in arrears for 19 months in a row. It is also the only bank that has had 8,000 customers who were in arrears but who are now up to date, current, in their repayments. Part of this has come about as a result of the fact that we hired 175 people in our Scottish operation to deal with arrears. The reason we had to do this was we could not find any experienced collector in the Irish market.

Senator Fidelma Healy Eames

Why did Ulster Bank take its arrears support unit out of Dublin? It was easier for Irish customers to engage with that unit when it was based here.

Mr. Jim Brown

There is still an arrears support unit in Dublin.

Senator Fidelma Healy Eames

A customer in mortgage difficulty receives telephone calls from Scotland.

Mr. Jim Brown

In Scotland there are 175 people who handle our calls to customers less than 90 days past due. Those 90 days past due are predominantly handled in the Republic.

Senator Fidelma Healy Eames

Is it the case that customers in arrears for less than 90 days are handled by staff in Scotland?

Mr. Jim Brown

Generally, yes.

Mr. Stephen Bell

I would not recognise the charge that we are slower than other institutions to reach agreement. We have invested significantly in simplifying and automating the standard financial statement, SFS, process. Now, when customers contact us, it takes them less than 25 minutes to complete the SFS process. When it was first launched, it took up to one hour. The last thing a customer in arrears wants to do after finally making contact with his or her bank is to spend one hour filling in the paperwork and looking for bills in the top drawer. We have taken much of this away and now run a voice-based telephony system which is based on trusting the customer to give the correct information. We rely on this information until such time as it may be proved to be incorrect. I do not recognise the charge that we are slow to offer solutions. As Mr. Brown said, we have taken 8,000 customers out of being in arrears and have 7,000 customers in long-term arrangements. Unfortunately, there are a number of customers with whom the legal process appears the only way to elicit the contact we need to make. There is-----

Senator Fidelma Healy Eames

My question is about people engaging with the bank.

Mr. Stephen Bell

If I could answer the question-----

Chairman

I will give the Sentor more time to ask another question.

Mr. Stephen Bell

Part of the arrears support unit is based in Edinburgh, while another part is based in Dublin. The unit is managed by the same people; they are not two separate units. It is under common management and control and there is absolute communication between the two parts of the team.

Senator Fidelma Healy Eames

I reject that. My experience is that the bank is slow and that there is poor communication between the two wings. I am highlighting the issue in order that the bank can address it. Does the bank believe its customers are disadvantaged by Ulster Bank having its telephone operation based in Scotland?

Mr. Stephen Bell

We believe they are very much advantaged because we were able to secure a larger number of more highly skilled staff with greater levels of experience in managing customers with repayment difficulties than we were in Dublin, but that is not to say we are not committed to our staff in Dublin.

Senator Fidelma Healy Eames

Mr. Bell has my point and I am listening to his. Does Ulster Bank offer split mortgages?

Mr. Stephen Bell

Yes.

Senator Fidelma Healy Eames

When a customer wants a split mortgage as a long-term sustainable solution, why does Ulster Bank refuse or not offer that option, even when there is a good case for it?

Mr. Jim Brown

We do offer it.

Senator Fidelma Healy Eames

I am aware of cases in which it was not offered.

Mr. Stephen Bell

If the Senator has any individual example, we will be happy to reaffirm a split mortgage is entirely available to any of our customers who meets the criteria.

Senator Fidelma Healy Eames

Will Mr. Bell describe the criteria?

Mr. Stephen Bell

Essentially, it is about the payment the customer can afford over the lifetime of the loan that can only be made with a more substantial restructuring. Then we show the options to achieve this outcome, the first of which is a split mortgage, while the other is an economic concession. The customer then has the choice of what suits his or her preference. It is very much a choice-based outcome for the customer.

Senator Fidelma Healy Eames

Is the economic concession 0.5% less than-----

Mr. Stephen Bell

No, it could be as low as 0.5%, not 0.5% less.

Senator Fidelma Healy Eames

Is this followed by a split mortgage offering?

Mr. Stephen Bell

No. We offer customers the choice between a split mortgage and an economic concession. We do not combine the two because there would be no point in doing so.

Senator Fidelma Healy Eames

Is Ulster Bank claiming that the economic concession is a better deal? How much of a better deal is it? To how much does the economic concession come for those on tracker mortgages?

Mr. Stephen Bell

The tracker mortgage rate is typically between 1% and 1.25% above the ECB rate. It could be as much as three quarters to a whole percentage point lower than interest rates. As a follow-up to our first appearance before the committee, we showed that the total cost of credit was lower to the customer where there was an economic concession. That does not mean we push one or the other. We simply say these are the choices.

Senator Fidelma Healy Eames

Up to 68% of first-time mortgages fall outside the new Central Bank 20% deposit rules. What does Ulster Bank consider to be a reasonable deposit percentage for first-time mortgage holders, given that it wants to have a sustainable arrangement with them?

Does Mr. Bell believe that we are either in or approaching a property bubble?

Mr. Stephen Bell

There is a key point which links into the Senator's previous questions. The lesson we all have to learn from the mortgage arrears difficulties is that affordability should drive borrowing capacity, not loans to value. There absolutely should be deposits, but the key is that we do not overstretch people from an income affordability point of view. We fully support the Central Bank's indications concerning loans to income, but we are concerned about the potential, unintended consequences of expecting higher deposits for first-time buyers.

Senator Fidelma Healy Eames

What would Mr. Bell consider a reasonable percentage?

Mr. Jim Brown

We will be making our submission to the Central Bank on that. What we have said is that there are potential consequences of the recommendations as they stand today. We think they need to be considered in any debate or discussion on the issue, hence the reason for highlighting the point. The recommendations, as they stand, do have a significant impact on first-time buyers.

The Senator's other point about being in the-----

Senator Fidelma Healy Eames

I take it that Mr. Brown thinks a 20% rate is too high.

Mr. Jim Brown

We are going to make a submission on that to the Central Bank. The key point here is that there is a broader issue around first-time buyers being able to buy a home. In addition, they will have to save longer to buy a house in what is a tight property market, including tight rentals with rising rent. Those factors need to be considered, but we will make our submission to the Central Bank on that.

As regards the Senator's point concerning a property bubble, no, we do not think that is the case. We have also said that it is not unusual to see a correction of the magnitude we have seen in response to the crisis we have just experienced. We have done some work on that and similar corrections have been seen in the UK, Denmark, Finland, Norway and other markets following a similar property downturn. Therefore a sharp correction is not unusual.

Chairman

Perhaps Mr. Brown might also give us his views on the Central Bank issues. We are going to do a report on that ourselves.

Mr. Jim Brown

No problem. I will do so.

Chairman

Mr. Brown talked about the economic concession. As a matter of interest, how many have been given out to those in arrears?

Mr. Stephen Bell

There are 1,885 at the moment within the existing 90 plus stock. However, there will be customers who availed of that economic concession who are now no longer in arrears because we have been able to help them to repay the balance of arrears as part of that solution. There are several thousand.

Chairman

I now call on Deputy Boyd Barrett, even though he turned up so late.

Deputy Richard Boyd Barrett

I apologise for being late. There was some confusion in my office about what was going on this morning.

Representatives of Permanent TSB were in here yesterday and spoke about the successful arrangements they have come to with people in mortgage arrears. However, they said there were still a lot of people with outstanding arrears with whom they had not made arrangements. My fear - and they seemed to indicate that there might be some basis for it - is that as we do deals with some people, we are likely to see a significant increase in repossessions for others. That is because we are probably dealing with a cohort that will have much more difficulty in coming to arrangements. How do things stand in that regard with Ulster Bank?

Mr. Jim Brown

As we have already shared with the committee, we take the mortgage arrears situation very seriously. We have put an enormous amount of resources into dealing with the issue, not just by talking to customers but also by putting solutions in place. As a consequence of that we have seen our arrears decrease 19 months in a row, month on month, from the peak in March 2013. We have seen more than 8,000 customers who were in arrears not being in arrears now. That said, there is still a problem out there and we are still actively engaging with customers.

Deputy Richard Boyd Barrett

What is outstanding?

Mr. Jim Brown

We have 12,000 customers who are still in arrears for 90 days or more.

Deputy Richard Boyd Barrett

How many of them are engaging with Ulster Bank?

Mr. Jim Brown

We have around 4,500 who are in the legal process. That has not gone up materially from this time last year.

Mr. Stephen Bell

About half of those have been engaging, so there are probably around 2,500 customers with whom we are still struggling to get meaningful engagement. Just to reiterate our flexibility, if a customer makes a payment - even without engaging with us - we will adjourn the court hearing. That is because we do not want to be perceived to be chasing a repossession if the customer is making some effort to make a payment or speak to us.

One figure does need to be borne in mind. We did some work on our own portfolio and the average amount that mortgage arrears customers are paying in repayments on unsecured credit is typically twice the amount of the shortfall that exists between what they should be paying on their mortgage and what they are paying on their mortgage.

Our contention always has been that if the unsecured debt bubble was dealt with more appropriately we would see a much less significant mortgage arrears crisis in front of us.

Deputy Richard Boyd Barrett

Are they often the same people?

Mr. Stephen Bell

Yes, the same customers. The average customer in arrears would have between €11,000 and €12,000 of unsecured debt. However, the nature of unsecured debt is that it is at a higher APR and over a shorter period, so the monthly payments can often be 60% or 70% of the mortgage payment, which is why we have been very supportive of debt relief notice and debt settlement arrangements through the personal insolvency service.

That is why we were happy to support the intra-bank arrangements that were made through the IBF whereby if one of the five principal banks is trying to settle a mortgage issue, but one of the other banks holds the unsecured debt, the other bank agrees to deprioritise the unsecured debt so that the focus could be made on the mortgage holder.

Deputy Richard Boyd Barrett

Is Mr. Bell saying that people who have significant arrears and who are not able to meet them, are trying to meet their unsecured debt?

Mr. Stephen Bell

I am, absolutely.

Deputy Richard Boyd Barrett

With his bank, so they are paying his bank?

Mr. Stephen Bell

No. We would never seek to prioritise unsecured debt over secured debt. What I am saying is that other institutions will still be seeking full repayment of unsecured loans whilst the customer is struggling to make the mortgage payment.

Deputy Richard Boyd Barrett

Is there a complete blank with the people who are not engaging?

Mr. Stephen Bell

Yes. That is despite letters, emails, calls and visits.

Deputy Richard Boyd Barrett

Does Ulster Bank anticipate it can come to arrangements with most of those who are engaging and thus avoid repossession?

Mr. Stephen Bell

We hope so. We sponsored some work earlier this year which showed that in all the counties of Ireland, across all property types, a restructured mortgage would be cheaper than private rental accommodation. Unless somebody has to move into social housing, we would expect to be able to find a suitable arrangement. Just before Deputy Boyd Barrett came into the room, we indicated to the Chairman that where a customer can show evidence that they are eligible for social housing, we would support them with a voluntary assisted sale and not chase the shortfall that may be left over after the property is sold. We are trying to offer everything we can to make this an accessible problem.

Deputy Richard Boyd Barrett

What about the mortgage-to-rent scheme?

Mr. Stephen Bell

It is a completely over-engineered bureaucratic disaster. We have done one, but we are working closely on what we call a mortgage-to-lease scheme, which we think might give the same outcome but with a lot fewer steps required to get from one to the other. We are working actively to come up with a similar solution, but the one that is in place now will simply never work.

Deputy Richard Boyd Barrett

Is that similar to what New Beginnings has been talking about in the last few days?

Mr. Stephen Bell

I am not aware of what it said in the last few days.

Deputy Richard Boyd Barrett

It is interesting. It has apparently got some investor backing to buy up very distressed mortgages. It is saying that it can keep pretty much everybody in their home, either through restructuring or in the really difficult cases in some sort of mortgage-to-lease scheme.

Mr. Jim Brown

We are aware that it is looking at a scheme. The point Mr. Bell touched on is that we do not want to repossess anybody's house. If customers engage with us we are absolutely certain we can find a solution to keep them in their home. That said, we are happy to look at all options that may be out there. In our view, if customers talk to us we can find a solution.

Deputy Richard Boyd Barrett

My last question concerns the whole property sector. Mr. Brown said he does not think that a bubble is developing, although I am a bit more concerned on that front. Is Ulster Bank doing much lending to people who are buying property in fairly big deals?

Mr. Jim Brown

Big developments?

Deputy Richard Boyd Barrett

Yes. Is Ulster Bank financing much of that kind of activity?

Mr. Jim Brown

We are not doing much on that. We are doing a very small amount. However, the issue for us is that we have had other commercial real estate issues to deal with as a result of the previous bubble, so we are very cautious at the moment about what we do in that space - so there is some, but it is very small.

Deputy Richard Boyd Barrett

Who is buying the property, to Mr. Brown's knowledge?

Are other banks financing that?

Mr. Jim Brown

I presume other banks are financing it. Our view is that we are doing some but it is very small.

Mr. Stephen Bell

We are aware of the issue. Many of the purchasers of the commercial real estate assets are not Irish and not banks which are coming in with overseas money. We are aware that some of the banks are providing what we consider to be fairly generous lending terms for commercial real estate. These are certainly not terms we are interested in matching at this stage in the cycle.

Deputy Richard Boyd Barrett

Ulster Bank is more cautious given what happened.

Mr. Stephen Bell

Absolutely.

Chairman

I thank Mr. Brown and Mr. Bell for attending the committee. I propose that we suspend the meeting until 2 p.m. and resume with witnesses from AIB. Is that agreed? Agreed.

Sitting suspended at 11.40 p.m. and resumed at 2 p.m.