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Financial Services Regulation.

Dáil Éireann Debate, Tuesday - 9 November 2004

Tuesday, 9 November 2004

Ceisteanna (127)

Emmet Stagg

Ceist:

184 Mr. Stagg asked the Minister for Finance the action he intends to take regarding the endowment mortgage scandal as detailed in a television programme (details attached); and if he will make a statement on the matter. [27751/04]

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Freagraí scríofa

The Irish Financial Services Regulatory Authority, IFSRA, is studying the situation with regard to endowment loan shortfalls, having commenced a survey earlier this year, to determine whether and to what extent there will be difficulties for customers. It would be inappropriate to reach any conclusions on this issue in advance of IFSRA's consideration of the outcome of the survey. I will continue to review the adequacy of the relevant legislative framework as information from IFSRA becomes available.

There are no reliable data on the overall number of cases where there may be a shortfall. However, endowment loan approvals in the last five years represent just 3% of the overall mortgage market, although it has been considerably higher in the past. Since 1989, a total of 90,000 endowment loans were approved, roughly 10% of total loan approvals since 1989.

These types of mortgages operate on the basis that instead of making capital payments on a mortgage, the client pays only the interest on the mortgage — therefore the capital amount owed does not decrease. However, the client also makes an investment with a life assurance company, the aim of which is to cover the mortgage and, possibly, provide some additional benefit beyond that. The products provided additional benefits, for example, in the form of higher tax relief, which were attractive to borrowers. These products inherently require customers to take some risk. They are exposed to market fluctuations, just like any market based life assurance investments. The fact that a person does not gain as much as expected is not in itself an indication of any inappropriate practices on the part of the bank or insurance company concerned.

The consumer director of IFSRA, Mary O'Dea, has encouraged people to come forward if they are worried about the possibility of having been mis-sold an endowment mortgage. They should complain in the first instance to the company from whom they bought the policy.

As regards the legal framework, there is already a substantial volume of legislation in place relating to these financial products. Following the enactment of the Insurance Act 1989, a code of conduct for insurance intermediaries and guidelines were drawn up by the industry in consultation with the then Department of Industry and Commerce. Key requirements of the code were that the intermediary should know the client and give best advice.

The Consumer Credit Act 1995, which commenced in May 1996, contains specific provisions relating to endowment loans and, in particular, prescribes certain information which must be included in any application form or information document issued to consumers applying for such loans. Since the commencement of the Act, for example, all endowment loan application forms must contain a prominent notice to the effect that: "There is no guarantee that the proceeds of the insurance policy will be sufficient to repay the loan in full when it becomes due for payment." The Act also obliges that in instances where the borrower may be required to increase premium payments on the insurance policy during the lifetime of the loan, any document approving the loan must contain a prominent statement of this possibility. Similarly, obligations apply where a policy is surrendered early resulting in a net loss to the consumer.

The Act also places an obligation upon insurers underwriting policies relating to endowment loans to issue a statement to the consumer every five years setting out not only the value of the policy at the time of issue but also a comparison of this valuation to the valuation at such date projected at the time the policy was first written and a revised estimate of the valuation at maturity.

In addition to the provisions of the Consumer Credit Act, the Life Assurance (Provision of Information) Regulations, which came into being in 2001, obliges insurers to provide policy holders, including holders of policies relating to endowment mortgages, with an annual written statement containing inter alia information on the current surrender or maturity value of the policy. More recently, this Government has already considerably enhanced the regulatory and supervisory regime governing the financial services industry, primarily through the enactment of the Central Bank and Financial Services Authority of Ireland Act 2003, which established the Irish Financial Services Regulatory Authority or IFSRA.

The Central Bank and Financial Services Authority of Ireland Act 2004 complements the Act passed last year and further enhances IFSRA's powers and strengthens the regulatory environment. This Act will provide for an enhanced structure for dealing with consumers who have complaints about financial institutions and also provides consumer and industry consultative panels for the financial regulator. The consumer panel will have an important role in ensuring that the regulator is correctly reflecting the interests of consumers in its protective — issue of codes of conduct — and educational-information pamphlets and so forth — roles.

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