Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Tuesday, 29 May 2018

Resolution of Non-Performing Loans: Discussion (Resumed)

Chairman

The next item is further scrutiny of the EU legislative proposals COM (2018) 134, subsidiarity deadline, 5 June, regarding minimum loss coverage for non-performing exposures and COM (2018) 135, 11 June, on regulation of credit services, credit purchases and the recovery of collateral (resumed). Today, we are joined by officials from the Department of Finance and representatives from the Central Bank of Ireland. The committee agreed last week that the proposals related to non-performing exposures, including proposing a common definition for non-performing loans and the regulation of credit services, are significant and require further scrutiny. I welcome Ms Gráinne McEvoy and Mr. Adrian Varley from the Central Bank of Ireland and Mr. Gary Tobin, Mr. Brian Corr and Mr. Brian Fee from the Department of Finance.

I wish to 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 the committee. However, 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 a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and 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 parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I invite Ms Gráinne McEvoy to make her opening remarks.

Ms Gráinne McEvoy

I thank the Chairman and members for the invitation to discuss the proposed measures published by the European Commission in March 2018 aimed at addressing the resolution of non-performing loans, NPLs. I am joined by my colleague Mr. Adrian Varley, head of the banking supervision: analysis division.

I will provide an overview of the recently published Commission package on non-performing exposures, NPEs, which was released in March 2018. The proposals are a key aspect of the Commission’s commitment to delivering on the Council of the EU’s action plan on NPLs of July 2017. The package comprises two legislative proposals: first, a proposal for a regulation amending the capital requirements regulation, CRR, which introduces minimum coverage requirements for incurred and expected losses on future non-performing exposures arising from newly originated loans; and, second, a proposal for a directive on credit servicers, credit purchasers and the recovery of collateral. Discussions on the proposals in the context of the European policymaking process are at an early stage. The Central Bank of Ireland is evaluating the potential impact these proposals will have on the Irish market. The Central Bank is also providing technical advice to the Department of Finance as part of these political negotiations and will continue to engage as discussions progress.

The level of NPLs increased significantly following the onset of the economic and financial crisis in 2007. High levels of NPLs pose a significant threat to economic stability and to the orderly functioning of the banking system throughout the EU. High levels of NPLs also result in loss of confidence in banks, making it harder for them to raise capital, borrow, reduce interest rates and make new loans to businesses and households. Loan sales can play an important role in transferring risks from banks to other types of investors, which reduces vulnerability in the banking system.

The Central Bank engages both at the European level within the European Banking Authority, in its standard setting capacity, and European Central Bank, ECB, Single Supervisory Mechanism, SSM, in its supervisory capacity, and at a domestic level via direct supervisory engagement with the banks to assist in the proposed responses to NPEs. The specific proposals at hand will be subject to significant scrutiny as part of the European legislative process and are likely to be amended considerably in advance of their implementation into law.

The proposals aim to prevent the build-up of high levels of NPEs on banks' balance sheets, through the incentives produced by increased provisioning requirements, and to develop secondary markets for NPEs, with the aim of removing undue obstacles to loan servicing by third parties and to the transfer of loans to third parties. The package also aims to enhance the speed of recovery of collateral for business loans through the introduction of an accelerated extrajudicial enforcement procedure, AECE.

The Commission's proposal for a regulation establishes a minimum coverage requirement whereby banks must put aside certain amounts to cover incurred and expected losses caused by loans that turn non-performing. Where the bank does not meet the applicable minimum level, it will have to make a deduction from own funds. The minimum coverage requirement increases gradually depending on how long the exposure has been classified as non-performing.

The proposal sets out different coverage requirements for secured and unsecured exposures. When an NPE is secured, the required coverage levels for the secured part of the exposure can be phased in over a period of eight years, while unsecured exposures will be phased in over two years. The Commission's reasoning for this differentiation is that recovery rates are on average significantly higher for secured NPEs than for unsecured ones.

It is also proposed that there would be different levels of coverage required depending on the criteria under which the exposure is classified as non-performing, for example, whether it is past due or borrowers are considered unlikely to pay.

Concerning the minimum coverage requirement, the Central Bank is broadly supportive of the policy direction of the Commission's proposal. Without supervisory challenge, banks have been inclined to employ a wait-and-see approach with respect to provisioning, which means that new NPLs can build up to cause bank-specific or system-wide problems. The Commission's proposal, which would apply only to new loans originating after 14 March 2018 that become non-performing, would ensure that banks had suitable levels of provision. If the latter is not the case, they must hold appropriate capital in respect of this risk.

The second aspect of the package is a proposal from the Commission for a directive on credit servicers, credit purchasers and the recovery of collateral. The proposal standardises the regulatory regime by seeking to harmonise the definition, authorisation, supervision and conduct rules applicable to credit servicers and purchasers. This legislative initiative aims to develop secondary markets for NPLs further, with the aim of removing undue barriers to loan servicing by third parties and to the transfer of loans to third parties.

The standardisation of a regulatory regime for credit servicers and credit purchasers is broadly supported, as the proposal states that the assignment of creditors' rights under the credit agreement should not affect the level of protection to consumers in any way. To this end, the proposal provides that consumer protection rules will continue to apply in order to ensure the same level of protection irrespective of who owns or services the credit and irrespective of the legal regimes in force in the member states of the credit purchasers and credit servicers. This high-level principle mirrors the objectives of the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015, which sets out the regulatory regime in respect of credit servicing firms and brings them into the Central Bank's regulatory remit. Furthermore, the proposal does not require that credit purchasers must be directly authorised or regulated, but that they must appoint credit servicers or credit institutions that are regulated. This is in line with the current legislative regime in Ireland, which requires an unregulated loan owner to appoint a credit servicing firm that is authorised and regulated by the Central Bank. Credit servicing firms are subject to the Central Bank's statutory codes and regulations.

The second part of the proposal also aims to enhance the protection of secured creditors by introducing a more efficient method of realisation of security, called the accelerated extrajudicial collateral enforcement, AECE, procedure. The aim of the AECE procedure is to increase the efficiency of debt recovery through the availability of an accelerated mechanism for the recovery of collateral for creditors of business borrowers only. This procedure would be accessible when agreed upon in advance by both the lender and borrower. It is not available for consumer loans or real estate serving as the borrower's primary residence and may only be effected where it has been explicitly stipulated in the original loan contract. While banks can enforce collateral under national insolvency and debt recovery frameworks, the process can be slow and unpredictable in some countries. The proposed mechanism is intended to introduce a more efficient mechanism while balancing the interests of creditors and borrowers.

I thank members for their attention. We look forward to addressing their questions.

Chairman

I thank Ms McEvoy. I invite Mr. Tobin to contribute.

Mr. Gary Tobin

Given that we have two opening statements, I intend to be relatively brief so that the committee can have as much time as possible for questions. I thank it for the invitation to attend. I am joined by my colleagues, Mr. Brian Corr, Mr. Brian Fee, Mr. Timmy Hennessy and Mr. Eric Gargan.

As the committee will be aware, the European Commission published a package of proposals in March to address NPLs. This followed on the agreement by ECOFIN Ministers in July 2017 on an action plan to tackle NPLs in Europe. As with any complex proposal, detailed analysis is required to understand the implications for Ireland and to inform our advice on Ireland's approach to these proposals. Work is under way within the Department and the Central Bank on this. The proposals are likely to change shape during the months of negotiation that are ahead. We will engage constructively with that process, as we always do.

The Commission has put forward a package of proposals to accelerate the resolution of NPLs and prevent their renewed build-up. The package includes a proposal for a regulation amending the capital requirements regulation and one for a directive on credit servicers, credit purchasers and the recovery of collateral. The proposals follow on from the Council conclusions and the legislative processes are at an early stage, with only one working group meeting having occurred so far. The proposals are being prioritised, with the European Commission seeking completion before the end of the current Commission's term if possible, particularly of the regulation on minimum loss coverage. The proposals interact with other proposals, agreed by ECOFIN last Friday, on risk reduction as part of the completion of the banking union.

I will summarise the proposals and briefly outline our preliminary views on each of the three aspects in the two legislative proposals. The proposal for a regulation amending the capital requirements regulation would introduce common minimum coverage levels and require banks to put aside sufficient funds when new loans become non-performing. The proposals are designed to ensure that in future there is not an excessive build-up of NPLs without sufficient loss coverage on banks' balance sheets. Existing accounting rules and supervisory powers currently ensure that bank supervisors have several tools at their disposal to address NPLs in individual banks, and the existing regulations require banks to set aside capital to address NPLs. The new regulation aims to complement this prudential framework and ensure consistency across the EU by introducing a common definition for NPLs and a common minimum backstop coverage level for newly originated loans that become non-performing. The proposal will apply to new lending only and is designed to ensure that banks set aside sufficient resources when new loans become non-performing.

It is likely that, in the course of negotiation, there will be debate about a number of elements of the proposal. For example, the regulation as drafted would require banks to provision NPLs for loans issued after mid-March 2018 up to 100% of a secured exposure after eight years and an unsecured exposure after two years. It is the Commission's assessment that banks will move to address NPLs more efficiently, subject to appropriate safeguards for borrowers. This is because, should the regulation be implemented in the manner proposed, it would increase the cost of holding NPLs over an eight-year time horizon and could entail banks amending their NPL reduction strategies, possibly by way of restructuring, implementing collateral enforcement and-or earlier loan sales.

This in turn leads us to the directive on credit servicing, credit purchasers and recovery of collateral, which can be broken down into two core elements: credit servicing and recovery of collateral. The directive is intended to contribute to the development of secondary markets for NPLs by removing undue impediments to loan servicing by third parties and to the transfer of loans to loan purchasers while fully respecting existing civil law and member states' consumer protection rules. The proposal sets common standards to ensure proper conduct by and supervision of credit servicers while allowing more competition by harmonising market access rules. The directive provides that credit servicers authorised in a member state can provide their services across the EU, provided they are in compliance with the directive. The proposal has limited rules for credit purchasers, including that they have to employ an EU-regulated credit servicer, have an EU-based representative and notify regulators of enforcement action. The proposal, if implemented, would not allow any member state to impose additional rules on credit purchasers.

The proposal on recovery of collateral is intended to increase the efficiency of debt recovery procedures through the availability of a distinct common voluntary procedure, AECE, which is a tool to recover money from secured loans to business borrowers out of court. This extrajudicial procedure would be accessible only when agreed upon in advance by both the lender and the borrower. It will not be applicable to consumer loans or secured credit agreements concluded between creditors and business borrowers that are secured by the primary residence of the business borrower. The proposal is designed so as not to affect preventive restructuring or insolvency proceedings and not to change the hierarchy of creditors. We understand that the Irish legislative framework in this area is well functioning and, as a result, our priority is to ensure that the current framework is not negatively impacted upon.

Taken together, these legislative proposals comprise the core actions for the European Commission from the Council conclusions. They will have limited impact in the short term, given that they apply to new loans, and on the current stock of NPLs, but they are intended to impact positively on the resolution of new NPLs in the future.

We are happy to take questions.

Chairman

I thank Mr. Tobin.

Senator Rose Conway-Walsh

I thank the witnesses for their presentations. This Commission package did not come out of the blue. On the one hand, we have the ECB saying that it is up to banks to deal with NPLs and, on the other, the European Commission just happens to introduce proposals to facilitate the vultures and accelerate the enforcement of loans secured by collateral. What co-ordination has there been between the ECB and the Commission on this issue?

Mr. Adrian Varley

I thank Senator Conway-Walsh for her question. There are two aspects to my response, the first of which concerns process, governance and co-ordination. There was a timing difference, meaning the SSM was keen to act quickly, with a wider scope and supervisory measures which were based more on bank-specific judgments on banks working out their NPL strategies, as the Senator suggests. The Commission, some time after that process, came to the conclusion that change in the form of a regulatory response was required, which was narrower in scope. That opens up a discussion as to why it only applies to new lending and why it will be a few years before it takes effect. Essentially, that is a process answer.

In terms of substance, one of the issues is having a wide range of toolkits for transparency of risk. We want a change in regulation in order that all banks are abiding by the same rules and we want to signal that well in advance so there are no surprises. That is the Commission proposal but I reiterate that it is on new lending now that becomes non-performing in the future. It does not relate to the current stock of NPLs. The SSM measures are very much part of the supervisory toolkit which is now communicated better and more clearly to the industry. There are two different and complementary, rather than contradictory, aspects to this.

Senator Rose Conway-Walsh

What was the input of the Central Bank and the Department to those proposals?

Mr. Gary Tobin

The Commission has the right of initiative in terms of proposals for directives. The Commission decided to bring forward these proposals, which will be debated and discussed by the European Council. Because it is a co-decision procedure, the proposals will also be discussed by the European Parliament. The Commission, with these proposals, is trying to learn the lessons from the financial crisis, particularly given the fact that the banks were under-provisioned for the stock of NPLs on their books. It is also trying to ensure that banks deal with their future stocks of NPLs in a faster and more efficient manner, given that they did not deal with them quickly during the crisis.

Senator Rose Conway-Walsh

I understand all that but what was the input of the Central Bank and the Department into this?

Mr. Adrian Varley

To be clear, the SSM's supervisory expectations to which the Senator referred were a core part of that, with Ms Sharon Donnery, Deputy Governor of the Central Bank chairing the NPL task force. As the Senator correctly stated, our view remains that the banks need effective strategies with a range of solutions and a big focus on restructuring and borrowers and banks engaging to come up with sustainable solutions. That has been happening for the past five years in Ireland and we have been acting, through the SSM, on making that apply across the whole of Europe, while also adopting best practice from other countries. We have been driving that but from the Central Bank's point of view, it is early days for the Commission's proposal in the context of longer-term measures. As I understand it, there has only been one meeting on same. They are different strategies. One has five years behind it while the other has only just started.

Senator Rose Conway-Walsh

What input does the Central Bank plan to have in the future?

Mr. Brian Corr

As part of the working groups, all member states have an input into the legislative proposals. The Commission is in the room during meetings of those working groups, as are some observers from time to time. They are negotiations among member states, led by the Presidency with the Commission in the room. Subject to agreement, it then goes to a further stage with Council and Parliament.

Senator Rose Conway-Walsh

If we have a crash similar to that experienced recently or there is an economic slump, many people will lose their jobs and be unable to pay off their loans. How does a bank having additional reserves change any of that? What difference will it make? Is there anything in these proposals that will protect the homeowner or landowner?

Mr. Adrian Varley

The Senator is correct in suggesting that the focus is on avoiding or mitigating the effects of the next crisis. The key point is to recognise the risk earlier, which is similar to the IFRS 9 discussion recently on the new accounting rules, and to transparently differentiate between the activities of banks in order that they recognise the risks in advance and build up appropriate reserves. In that way, they can ensure that resources are available to deal with the initial problem, which can prevent a buildup. If we look back at what happened in Ireland, we had the economic crisis, with people not being able to pay off their loans. The sheer scale of the problem meant that banks were not dealing with it in terms of operations and good due diligence. They did not have processes in place to allow them to intervene early with the borrowers to turn the problem around. The idea of these measures is to make it punitive for the risk to build up. The aim is to change the dynamic of people holding on to problems and hoping the property market turns around or to mitigate that incentive so that banks are clear that the costs must be realised earlier and they need to deal with the problem and engage with borrowers at an early stage. The aim is to ensure lenders engage before borrowers even get into the later stages of arrears.

Senator Rose Conway-Walsh

Surely that would mean that homeowners or landowners would lose their assets more quickly. If banks are being told to deal with borrowers earlier, then people would not be given a chance to recover.

Mr. Adrian Varley

I must be careful with my language. What we found to be most effective is early intervention in the sense of determining what the borrower can afford, resizing debt and working out arrangements that will help in the short term while negotiating a longer-term solution. When I said that banks need to deal with it, I did not mean that in the sense of dealing with the collateral but rather in the sense of restructuring and working out the problem because the earlier banks intervene, the better.

Mr. Gary Tobin

I would add that our experience of the global financial crisis was that NPLs tended not to be resolved quickly and the stock of such loans grew. That had a significant impact on consumers because it locked up capital within the banks, which made it more difficult for banks to lend money to new customers. High levels of NPLs meant that banks had to keep so much of their capital bottled up-----

Senator Rose Conway-Walsh

I understand that. We do not need to engage in an exercise on how the system works. I am concerned that these proposals may result in additional pressure on the banks. I recognise their merits on a macro level but I am concerned about how we can ensure that the banks have proper and meaningful engagement with borrowers at an earlier stage. How do we make sure that is done rather than what happens at the moment in terms of avoidance and people being unable to contact their banks or have meaningful discussions?

Mr. Gary Tobin

That is a fair question. One interesting aspect of this proposal is the AECE provision, which primarily affects the business borrower. It will not impact consumers with loans on their principal private dwelling but business borrowers would-----

Senator Rose Conway-Walsh

Does that apply to land? Would it apply to farmers, for example, whose land is their main asset?

Mr. Gary Tobin

As I understand it, AECE would apply to businesses above a certain threshold, which might include large farms-----

Mr. Brian Corr

Only if the farmers are not categorised as consumers.

Mr. Gary Tobin

Farms valued at less than €3 million would be regarded-----

Mr. Brian Corr

I believe it is a turnover of €3 million.

Mr. Gary Tobin

My apologies. Farmers who have a turnover of less than €3 million would be regarded as consumers. There are thresholds beyond which-----

Senator Rose Conway-Walsh

Most farmers would not be affected at all in that case, given that there are not many farmers in the west of Ireland who can boast of a turnover of €3 million.

Mr. Gary Tobin

No, there are not. The AECE proposal is geared towards business borrowers. What is important about it is that business borrowers and banks would agree in advance on what would happen if the loan went bad. They agree upfront that certain collateral will be called upon.

Trying to provide more information and greater clarity could be a good thing so that everyone will be clear about what are the consequences when some of these loans go bad in the future.

Senator Rose Conway-Walsh

That would not affect the behaviour of the bank towards consumers.

Mr. Gary Tobin

It might in the sense that the banks are probably going to be more cautious because they know they are going to have to hold more capital.

Senator Rose Conway-Walsh

Given the stake that the people have in the banks, what would be the implications for the capital positions of the banks if this were to be implemented tomorrow? How will the new provision interact with the capital requirement rules that are already in place? I also want to know about the impact on interest rates.

Mr. Brian Corr

I will take that in summary and Mr. Varley can correct me if I am wrong. Broadly speaking because this deals with newly originated loans after 2018 which then have to turn bad and get provisioned over a period of up to eight years if their exposure is secured, the impact will not be immediate, particularly for the Irish banks because the rate of new non-performing loans is quite low. It would have an impact if there were worsening economic conditions after it is introduced.

Senator Rose Conway-Walsh

Therein lies the problem: an increase in interest rates could put people who have loans in a difficult situation again and the loans will go from performing to non-performing. As a committee we need to look ahead at what may happen and what restrictions will then be in place because of this directive.

Mr. Brian Corr

This has to do with new lending and much of that, particularly on the mortgage side, is also covered by the macroprudential limits so we are in a different position. The new lending is expected to be caught and better than it might otherwise have been.

Deputy Michael McGrath

I welcome our guests and thank Mr. Tobin and Ms McEvoy for their opening statements. Can the witnesses explain what sufficient loss coverage by banks for future NPLs means in practice? As we know banks already have to set aside capital for NPLs. What is sufficient loss coverage and what impact does it have?

Mr. Adrian Varley

The new measures introduce the capital side in respect of loss coverage but the Deputy is absolutely right in that our supervisors were examining how many accounting provisions were already in place, which is probably what he is referring to. Loans in arrears have to be assessed and the bank holds money for the accounting provisions. In the past in Ireland we have also done numerous assessments to see from a prudential view whether that is enough money, so factoring in more risk. We have imposed that directly by persuading the banks to hold more money to capture the uncertainty in that assessment. That is the local approach. The regulation sets out an approach which does exactly the same process but the final step is that now the bank has to explicitly remove that amount of money - the difference we view, the gap - from its own funds. That is the amount of capital it tells the market it has. The new feature, of which I am very supportive, is how the bank comes out and tells the market it is safe, that 15% or 17% is already factored in. In other approaches, when it is an add-on or supervisory measure, we do not see it in the market data. That is the only difference. The loss coverage is the same but it is a question of how it is applied.

Deputy Michael McGrath

I was not familiar with the term. When Mr. Varley talks about common minimum coverage levels for newly originated loans that become non-performing, he is talking about loss provisions.

Mr. Adrian Varley

In local language, the Deputy is absolutely right. We would call it provision coverage for loans. It is a wider term.

Deputy Michael McGrath

These would be specific provisions.

Mr. Adrian Varley

Yes.

Deputy Michael McGrath

How does this dovetail with accounting standards?

Mr. Adrian Varley

It explicitly goes beyond accounting standards but the phrase is "but does not contradict them". We have had a lot of experience recently of accounting standards changing, International Financial Reporting Standard, IFRS 9, and there are grey areas, for example, the view of house prices in the next two, three or five years and that is part of the provision assessment. That is the level we are at.

Deputy Michael McGrath

I understand now, thank you.

Mr. Varley has explained that the key provision on the accelerated out-of-court enforcement of loans secured by collateral does not apply to consumer loans. That is like an agreement upfront that if the loan goes wrong, this is how we will deal with it, the customer loses security and so on. I assume the borrowers do not lose any rights, that they still have the right to go to court if they want to. Do these proposals involve addressing the issue of any residual debt? If it is agreed that the collateral is forfeited by the borrower and the bank takes control of that but there is still a residual debt, is that issue dealt with as part of the detail of this directive?

Mr. Gary Tobin

There is certainly a right for the person who has participated in the accelerated extrajudicial collateral enforcement, AECE, scheme. While it is an extrajudicial agreement between the bank and the borrower, if the borrower is not happy with the proposal by the bank on how to deal with a non-performing loan they have the right to go to court.

Deputy Michael McGrath

Yes.

Mr. Gary Tobin

That answers the first question. I am not sure about the second one.

Mr. Adrian Varley

It does not address that from my reading of it, other than saying where there is a surplus there is no difference. The money still goes but the Deputy is asking the other way around and I do not see that in the current text.

Deputy Michael McGrath

Yes, that is more likely.

Mr. Brian Corr

I think it says that the member state could decide when the collateral falls short that it could be written off but it is not in the directive.

Deputy Michael McGrath

It is not binding.

Mr. Brian Corr

The member state could decide to add that as part of its bringing forward the AECE proposal.

Deputy Michael McGrath

I understand that any residual debt may be personal or be converted to personal debt. There is the potential for judgments or judgment mortgages against somebody's home and so on. We can tease that out.

There is one issue in the interaction between these proposals and the Private Member's Bill I introduced on behalf of Fianna Fáil, which was agreed unanimously in the House, that gives rise to concern. The directive provides that member states could not impose additional rules on credit purchasers beyond those provided for in the proposed directive in accordance with Article 15.2. How does that dovetail with the Private Member's Bill, which has not yet gone to Committee Stage where it will be subject to amendments that will likely become law relatively soon whereas this will not come into force in the next 12 months? Is there a conflict between these two or is that conflict dealt with by virtue of the fact that all of this applies only to loans originated after 14 March 2018?

Mr. Gary Tobin

As the Deputy is aware, the Government has committed to supporting the Private Member's Bill and we are working to implement that. It agreed at its recent meeting, the week before last, to appoint a draftsman and prepare Committee Stage amendments to the Bill. It has been given priority status.

The Deputy is right that the Commission proposal is for credit servicing. The best way I can describe it is that the Commission proposal more or less seeks to do what the Oireachtas did in 2015 when we introduced credit servicing legislation. The Commission considered the issue of loan owners but it did not really decide to go as far as the Private Member's Bill proposes to go. The view of the Minister for Finance and the intention of the Department is to seek, as this process of discussion on the directive moves forward, to ensure that the directive when it is adopted is consistent with the Private Member's Bill. In other words, the directive will also seek to regulate loan ownership as at the moment, it does not. We will certainly press for it to go further than it does. From my experience over the past 20 years of dealing with all kinds of directives I can honestly say that a directive never ends up where it starts, as I am sure the committee is aware. More likely than not this directive will change substantially before it is agreed.

Currently, the first priority for the Commission is to get the regulation over the line. Personally, I do not see the directive being agreed any time soon. The Commission would like it all to be agreed relatively quickly but I believe that the immediate priority for the Commission will be to try to get the regulation agreed. There is probably ample opportunity for us to try to ensure our domestic legislation with the Private Members' Bill will be consistent with the ultimate directive. Quite honestly, it is likely that issues around loan ownership will arise, particularly when this directive is discussed in the European Parliament. While they are not quite in sync at the moment, I believe there is a long way to travel yet and we will certainly press the case for the directive to include loan ownership in line with the Private Members' Bill.

Deputy Michael McGrath

On that issue, is there any risk that the directive would potentially strike down any pre-existing legislative requirements on the statute book of a member state, or is it entirely forward looking? Consider, for example, loans that originated prior to March 2018 that became non-performing loans and were sold on to funds. If a member state legislates for this type of situation in its own way and subsequently an EU directive becomes EU law, can the EU directive strike down a national law or does it apply only on a forward-looking basis?

Mr. Gary Tobin

That is a very good question. The Deputy is aware that in general EU law supersedes domestic law. The intention of this directive is to be prospective. I am open to correction but I am not sure that it is intended to come in until 2020 or 2021.

Mr. Brian Corr

The dates for the directive, which are written into the directive but which are not necessarily agreed, are that it is to be transposed by 31 December 2020 for implementation on 1 July 2021. The period between the two dates allows for the supervisors to authorise the credit servicers who might not be authorised in their own regimes. These dates are in the draft and are by no means fixed.

Mr. Gary Tobin

I would say that those dates are the earliest dates because, again it is difficult to know for sure, I believe the priority would be on implementing the regulation. The directive would come after that. It is probably more likely that the directive may be implemented later.

Chairman

I remind the officials that the committee has contacted the Department about the Central Bank (Amendment) Bill 2018, in the name of Deputy Pearse Doherty, and about the Consumer Protection (Regulation of Credit Servicing Firms) (Amendment) Bill 2018 in the name of Deputy Michael McGrath. The committee last wrote on 9 April seeking the assessment of Deputy McGrath's Bill in order that we could continue our work on it. To date, we have not received a reply. I ask that the witnesses from the Department here today would investigate this and make sure the committee gets a reply.

Mr. Gary Tobin

Yes. Certainly we have been engaging with the Office of the Attorney General on the Bill. We intend to reply to the committee as soon as we can. From our perspective it is a matter of trying to make sure we have our legal advice as correct as we can.

Chairman

Could Mr. Tobin get a general assessment done so the committee can continue with its scrutiny of the Bill? Perhaps he could expedite that, please.

Mr. Gary Tobin

Yes.

Senator Kieran O'Donnell

I have a number of questions for Ms McEvoy, Mr. Tobin and their colleagues. My first question is twofold. Is the directive as proposed by the EU Commission quite similar to what is in operation in Ireland at the moment?

Mr. Gary Tobin

Yes, with regard to the directive on credit servicing.

Senator Kieran O'Donnell

Who will regulate the funds if the directive is implemented through the whole EU? The EU Commission has stated:

The proposed Directive defines the activities of credit servicers, sets common standards for authorisation and supervision and imposes conduct rules across the EU. It means that operators respecting those rules can be active throughout the EU without separate national authorisation requirements.

The issue that comes up all the time with the committee, and on which members and the committee clerk have spent an inordinate amount of time, is trying to get representatives from the credit servicing firms to appear before the committee. I looked at the lists and see they are either on holidays or they are sick, and some of the other reasons they come up with are amazing. Sometimes no reason is given; one response was that some of the senior members of the team who focus on this area were unable to attend. Another stated that he was out of the country on business. It is just not good enough. The members of this committee have a representational role. We meet people who deal with the funds and the credit servicing firms. These people feel they are not being given due process. If a regulation comes in under an EU directive, what comfort can people get from it and how will it differ from what we have now? Who will regulate the funds and who will regulate the credit servicing providers? What form will this regulation take? How different is it to what is already in place in Ireland?

Mr. Gary Tobin

Before the Central Bank answers-----

Senator Kieran O'Donnell

I am aware that the Central Bank has written to the credit servicing providers to encourage them to come in to the committee, but the fact is that these credit servicing companies are giving the committee the proverbial two fingers. That is just not good enough.

Mr. Gary Tobin

From the Department's perspective we were asked last Thursday to appear before this committee today, which is two working days' notice, and we are here.

Senator Kieran O'Donnell

I am not saying that-----

Mr. Gary Tobin

I know the Senator is not but, from my point of view and answering in a personal capacity, if a finance committee asks us to attend, we attend. I would certainly encourage others to attend.

Senator Kieran O'Donnell

With due respect to Mr. Tobin, I would not give any gold star for attending with two days' notice; that is the way it should be. We appreciate that but Mr. Tobin is stating the obvious. The problem for the committee is that we deal with people on the ground whose loans are being sold to the funds, the shutters come down and they feel it. We are looking for better regulation. How will what is proposed differ from the legislation currently in operation? Who will regulate the funds and who will regulate the credit servicing providers? What form will the regulation take? Perhaps representatives from both the Central Bank and the Department of Finance will answer these questions.

Mr. Gary Tobin

I believe that anybody who is called before a finance committee should attend. That is my view. On the question of who will regulate the credit servicing firms, under the current regime it is the Central Bank and I imagine that it will continue to be the Central Bank under the new legislation.

Ms Gráinne McEvoy

The new regime proposes for the regulation of credit servicing firms and, as noted earlier by us and the Department of Finance, it is in the early stages. How the final regime will look and what shape it will take is anybody's guess as it is a couple of years down the line. The proposal is for a definition of a credit servicing firm, for the harmonisation of the authorisation supervision and for imposing conduct rules on credit servicing firms across the EU. Some member states have a regime for that activity but others do not. This directive would impose a level playing field across the board.

The proposals as currently outlined are not terribly dissimilar to the existing regime under the 2015 Act, where we already have a framework in place for authorising and supervising these firms in Ireland. Once the directive becomes final and fit for national transposition we will undertake a mapping exercise to see what is contained in the directive, how it differs from our current domestic regime and how that domestic regime will need to change or otherwise to address the provisions of the EU directive.

As noted earlier, the European Union directive would be superior and trump domestic legislation in that context. The directive, as currently drafted, does not provide for the regulation of credit purchasers. That addresses the Senator's question as regards the regulation of loan funds. It is not currently captured under the directive.

Senator Kieran O'Donnell

People hold loans in various institutions and although consumer protection rules still apply, the funds are able to operate at a remove. I am not a banker but if I look at the legislation, it seems the Central Bank has powers in this regard. I note the Governor, Ms McEvoy's boss, appeared before the committee recently and he stated that bank personnel were going to the premises of firms, which I welcome. The problem is there is a complete lack of knowledge as to how these credit servicing firms operate, the remit they take from the funds and who makes the decisions. From the Central Bank's interaction with these firms, why does Ms McEvoy think they will not send representatives before the finance committee? I suspect we have got on to approximately 20 of them and they all come back with the same story. We will take it these people are not ringing up one another and ensuring the stories stand up. If I am sitting with somebody for four or five hours - a husband and wife who have suddenly received a letter, for example, indicating bank account facilities for a family business are to be withdrawn - I must question what is going on. What has been described by the witness is all very well but, effectively, it is only doing what we do here. There is a lack of transparency around credit servicing firms. Has the Central Bank powers to ensure that credit servicing firm representatives will come before our committee?

Ms Gráinne McEvoy

As mentioned, we have written at the committee's request to the credit servicing firms and encouraged them, when asked, to appear before the committee. All credit servicing firms acknowledged receipt of the letters. I note we have a letter from the committee issuing a specific instruction to direct those firms to appear before the committee. We are looking into whether the powers exist to direct them to attend the committee. Normally our powers extend only to our role in regulating those firms and not in obliging them to attend or appear before Oireachtas committees. We are looking into that and we hope to have a response for the committee in the coming weeks.

Senator Kieran O'Donnell

We welcome that. Is it fair to say that up to now the provisioning system within banks was based on when the loan was realised, as distinct from provisioning as the bank went along? Am I correct in the analysis?

Mr. Adrian Varley

No. I will take the question. In short, the Senator's assessment is not correct but I understand where he is coming from. As I described earlier, the push now is for them to look at a range of scenarios in the future and bring back knowledge earlier. We have been pushing them to do that for years. We probably did change their mindsets a long time ago. It is essentially the background.

Senator Kieran O'Donnell

They were not legally required to do that.

Mr. Adrian Varley

They were legally required to look at all available information. Even before the realisation that someone stops paying, the firm must use its estimate for what it thinks it will get. A number would be put in. I was speaking earlier about the uncertainty around the number. In the past the firms were too optimistic and now we are saying they should be conservative.

Senator Kieran O'Donnell

I ask Ms McEvoy that everything should be done within the power of the Central Bank to ensure that no stone is left unturned to get representatives of credit servicing firms before us. There is currently a lacuna among people with loans in those funds. They are entitled to know precisely how they operate. I welcome the fact that the Central Bank is working with the committee. The bank should advise us if it has inadequate powers and what further powers would be required.

Chairman

Taking up from where Senator O'Donnell left off, the current arrangement, reflected in some of the proposals for the future, is not working. I make it clear to the Department of Finance and the Central Bank - I take the opportunity every time representatives are before us - that vulture funds are running rings around the legislation. The credit servicing firms are doing the same thing. The protection that should be there for the consumer does not really travel, as we can see in court cases. People are being bullied and shoved in a direction to get them out of the property or cause them to give up on their circumstances. There is no protection in that regard. These people are doing their best to negotiate with a bank and fulfil an obligation that they may have entered into with a bank. Nevertheless, they are not protected when the loan is sold on.

Representatives of AIB came before us a short time ago and told us they would not sell private homes of families and so on. According to the emails we have, recent portfolios include homes nonetheless. The question for the bank and the Department of Finance is what better transparency can we have? It is important that the Central Bank and the Department of Finance representatives come before the committee, and that is their job, but as an extension the representatives of vulture funds and credit servicing firms should also appear before the committee on request. It is fair. The Irish people caught in this mess are working in the dark. They believe they have cover and that the law is on their side in dealing with the banks. Once people go to a vulture fund, it is game over as they do as they like. As these bodies can overlook the Central Bank's influence, they are emboldened and look to resist even further.

How often do people from the Department or the Central Bank meet representatives of those funds? How often would they meet service agents?

Mr. Gary Tobin

We note what the Chairman is saying and that there is an ongoing exchange of correspondence between the committee and the Central Bank on credit servicing funds. I have had my current job for the past year and a quarter and I have not met any of the-----

Chairman

I am talking about people from the Department in general.

Mr. Gary Tobin

I would have to check that. I know neither I nor people from my team have met such people.

Chairman

You can check it and come back to us about engagement with service agents.

Mr. Gary Tobin

The engagement would primarily happen with the regulator and the Central Bank is the regulator of the credit servicing firms.

Chairman

You will check on that.

Mr. Gary Tobin

Yes.

Ms Gráinne McEvoy

There are two points. The Chairman asked what better elements of transparency could be put in place. The committee is aware that we have been asked by the Minister for Finance to undertake a review of the code of conduct on mortgage arrears, CCMA, as regards its effectiveness and particularly as that relates to the sale of loans. The work is under way and we must respond to the Minister over the next couple of months. Any evidence that could be provided, either by the committee or others, to feed into that process of changing or enhancing the CCMA with respect to transparency for consumers would be very welcome. We actively encourage evidence of cases that could feed into the process.

Our engagement is only with credit servicing firms directly. We have had a number of bilateral engagements with those firms this year.

It should be borne in mind that the regulatory regime and framework for these firms was only put in place in late 2015. Once that legislation was put in place, our focus was on setting up and ensuring we had a robust authorisation framework to allow us to authorise these firms. We had to put in place authorisation procedures and guidelines for firms seeking authorisation and approval. We have met a number of firms this year and we met a number in the past with a particular focus on their compliance with the consumer protection code. However, I do not have the specific number of engagements with me.

Chairman

I will be passing on correspondence to the Central Bank.

Ms Gráinne McEvoy

I note that.

Chairman

I ask Ms McEvoy to ensure it is acknowledged in some way in each case.

Ms Gráinne McEvoy

We have received that and are aware of that.

Chairman

I want to let people who have written to me to at least know that I have passed their correspondence on to the Central Bank. On the future and the EU proposals, whatever proposal is made must be based on the regulation of agents and funds. The central piece for me must be that whoever gets caught up in a difficulty like that is protected. The citizen must come first and not be blackguarded by the strong corporate arm of a well-funded vulture fund. That is my view on the future. We have come to the end of the first part of our meeting. I thank the witnesses for being present today.

The joint committee went into private session at 5.32 p.m., suspended at 5.36 p.m. and resumed in public session at 5.39 p.m.