The review of the mortgage rules will be based on an analysis of the evidence provided by data on the first year of the operation of these rules while taking into account other factors that may have influenced the mortgage market during this time period.
The rules-based framework is intended to promote the resilience of both banks and households and should be viewed as a permanent feature of the system. As I have previously indicated, the bank is open to tightening or loosening the calibration of these rules in response to the evidence. Nevertheless, the value of stability in a rules-based framework means that the evidence threshold to justify adjustments to these rules is significant. Tools such as mortgage rules and the recently introduced system of counter-cyclical capital buffers would have mitigated the costs of the boom-bust cycle in the mid-2000s. The Irish economy remains vulnerable to adverse shocks so that limits to household leverage offer protection to households and to the banking system.
Turning from macroeconomics to microeconomics, with regard to financial regulation supervision, the banking sector is in the middle of a multi-year transition to higher capital requirements, reduced leverage and increased liquidity on the balance sheet. The Single Supervisory Mechanism has been in place for just over a year. It is the first pillar of banking union, implementing a common, area-wide approach to its supervision with centralised responsibility for the supervision of approximately 130 of the largest banking groups, including the main Irish retail banks. The second pillar, the Single Resolution Mechanism, SRM, has come into effect now. By ensuring that financial institutions can be resolved in an orderly manner, the SRM should significantly reduce the adverse impact of an institution's failure on the financial system and the taxpayer. The third pillar of banking union is the European deposit insurance scheme. This is still under negotiation at a European level.
Regarding the banks, a major topic is the treatment of mortgage arrears. The latest data show that the number of accounts in arrears of more than 90 days was just below 66,000 at the end of September. That is a high number, but there is progress to report. The overall levels of arrears started to decrease three years ago, and we are now starting to see a decrease in the number of households in long-term arrears, that is arrears of more than 720 days, in the third quarter of 2015. At the same time, the economic recovery is gaining pace, and we see an increase in the number of legal proceedings against mortgage holders. The role of a central bank in this area is to ensure the banks adhere to the code of conduct of mortgage arrears, meet the criteria for sustainable solutions and continue to engage with their customers to find non-repossession solutions where possible. The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 is important legislation in this respect as it seeks to ensure that borrowers whose loans are sold to unregulated transferees maintain the regulatory protections they had prior to the sale.
It is imperative that lenders continue to work with over-indebted house consumers to try to resolve any arrears situation and achieve sustainable solutions with co-operating borrowers. There is no quick remedy or solution to long-term arrears in many cases, therefore careful, empathetic but realistic approaches are required. In this context, I welcome the new co-ordinated programme of assistance for those in long-term arrears, with the Money Advice & Budgeting Service, MABS, acting as a one-stop shop for borrowers in need of advice and support.
Another important part of the credit system are the credit unions. New credit union regulations came into effect at the start of this year.
These regulations will enhance soundness and provide for enhanced confidence in the sector and support its role in providing important financial services to the community. The bank will continue to work with credit unions to support appropriate restructuring measures, the embedding of the strengthened regulatory framework and will facilitate prudent and appropriate development.
This is a landmark year for the insurance sector, with the Solvency II framework going live. Solvency II involves a whole-balance-sheet approach to capital calculation combined with the strong emphasis on a firm's risk management and a supervisory review process which will result in a much-transformed regulatory and supervisory framework. This year, the supervised firms and the Central Bank supervisors will be putting this framework into operation.
In December, we released new regulations on SME lending. These aim to strengthen protections for SMEs while also facilitating access to credit. The regulations provide for greater transparency around the application process and the reasons for refusing credit applications, greater protections for guarantors and an expansion of the grounds for an internal appeal.
There is growing international recognition that financial regulators should be more proactive in protecting consumers, in view of the complexity, risks and costs of financial products. It is not our role, as a central bank, to run the firms we regulate or to determine their business models or strategies, including in the setting of prices and rates charged. Rather, our work on consumer protection is primarily focused on increasing transparency to enable people make informed decisions with full clarity about the risks, costs and long-term impact of financial products. This year, we will further enhance our engagement with boards of the larger retail firms to push for a more consumer-focused culture within firms and will carry out on-site consumer risk assessments across a number of retail firms.
Firms must be able to demonstrate that their products are fit for purpose. This means that firms must ensure that products are fully understood by customers and are suitable for their individual needs. We therefore expect firms to conduct consumer testing on their products, including their product literature, and to simplify them where necessary; to use plain language; and to go beyond disclosure and caveat emptor to ensure consumers have a good general understanding of products before launch and also during the sales process. Firms must be satisfied that products remain suitable for the target market and provide the best solution for existing as well as new customers.
We also plan to continue our supervisory work on particular products, including the tracker mortgage examination, and reviews of structured products and health insurance. Another important initiative is to increase our firm-specific engagement with low-impact firms, including intermediaries and debt management firms. We also plan further work to strengthen consumer protection code requirements, including for variable rate mortgage holders, as well as carrying out an examination of the impact on consumer outcomes of commission payments to insurance intermediaries.
On regulation, members will have seen a good deal of enforcement activity reported in the press in recent months. This reflects our philosophy where high quality supervision must be underpinned by a rigorous approach to enforcement.
A new activity in the bank is the establishment of the central credit register. The credit reporting obligations will apply to more than 500 lenders, including banks, credit unions, asset finance houses, local authorities and moneylenders. It is in process this year and will be fully operational from 2017.
Taken together the expansion in the scope of monetary policy, the adoption of a more intrusive approach to financial regulation, the introduction of new regulatory mandates, such as Solvency II and the single resolution mechanism, the continuing expansion of the investment funds sector in Ireland and the professionalisation of corporate services within the Central Bank mean that our staff numbers are growing. This year we expect to recruit an additional 150 staff, bringing the staff total to about 1,650.
I hope we will move to our new headquarters on North Wall Quay at the end of 2016.
The layout of the new building has been designed to promote a collaborative working environment, which will facilitate the teamwork that is so critical to the delivery of the bank’s multifaceted mandate. In parallel, we are working on the redesign of the organisational and reward models and we hope to complete them in the next few months.
A greater level of openness about how the bank conducts its activities can help improve the level of public trust in our organisation. We believe that people will be more confident that we act independently and in the public interest if they have greater insights and understanding about what is going on inside the bank. Last week, I announced plans to publish the minutes of the meetings of the Central Bank Commission. While information on the supervision of regulated firms and some market-sensitive financial operations activities cannot be disclosed, the publication of these minutes will contribute to greater understanding of our corporate governance, internal debates and the initiatives we take to deliver on our mission. We also put on the website last week details of our salary structures, pay scales and HR policies. In this way we aim to enhance understanding about the Central Bank as a public organisation and prospective employer.
In summary, during my tenure as Governor in the coming years, my aim is to build on the progress that has been achieved in recent years in recasting the Central Bank as an efficient and effective Central Bank and Financial Regulator. The staff of the Central Bank can be proud of the new reforms, which were recently recognised by our international peers through the Central Bank of the Year award from centralbanking.com and the Central Banking Journal. I wish to also mention a number of recent peer reviews from various external bodies. A summary of those was put on the website last week. By and large, the reviews recognise the Central Bank’s consistent adherence in recent years to the highest international standards.
