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Wednesday, 18 May 2016

Priority Questions

Financial Services Regulation

Ceisteanna (1)

Michael McGrath

Ceist:

1. Deputy Michael McGrath asked the Minister for Finance to extend the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 to the owners of credit and to ensure that non-bank lenders and vulture funds are fully regulated in a manner that adequately protects mortgage holders, tenants and small and medium enterprises from unfair practices by entities with a short-term investment horizon; and if he will make a statement on the matter. [10761/16]

Amharc ar fhreagra

Freagraí ó Béal (5 píosaí cainte)

As the Deputy is aware, the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 deliberately did not include owners of credit within its remit. However, relevant borrowers, whose loans are sold to third parties, maintain the same regulatory protections they had prior to the sale, including under the various statutory codes, such as the consumer protection code, code of conduct on mortgage arrears, code of conduct for business lending to small and medium enterprises and the minimum competency code, issued by the Central Bank of Ireland and the Central Bank (Supervision and Enforcement) Act 2013, section 48, lending to small and medium sized enterprises regulations 2015, which comes into operation on 1 July 2016.

I introduced amendments on Committee Stage in the Dáil to ensure owners could not do anything which a regulated firm could not do. Those amendments ensure that a regulated credit servicing firm cannot do something, or fail to do something, which would be a prescribed contravention if performed, or not performed, by a retail credit firm. They also prevent the owner of credit from instructing a regulated credit firm to perform such an action.

Contravention of these provisions could lead to a fine not exceeding €250,000 or imprisonment for a term not exceeding five years, or both. Therefore the borrower is protected because the owner cannot give an instruction that would breach the rules. Also, the instruction cannot be implemented by the regulated credit servicer, over whom the Central Bank has oversight as a regulated entity. If the owner does not appoint a regulated credit servicing firm to service the credit or the owner wants to undertake some of the functions of credit servicing, then the owner himself or herself must be authorised and regulated.

Given that the owner is prevented from asking the credit servicing firm to do things which would be prohibited and the regulated credit servicing firm cannot perform the action in any case, it is not clear what additional benefit would accrue by imposing the regulatory requirements on the owner.

Additional information not given on the floor of the House

It is clear that the additional regulatory requirements would put additional costs on owners and could inhibit people from taking over ownership of loans or reduce the price that they are willing to pay for them. The legislation deliberately regulated the interface with the borrower. The sale of a loan from one entity to another does not change the terms of the contract or the borrower's rights and obligations under the original contract.

The programme for Government provided that, "We will provide greater protection for mortgage holders and tenants and SMEs whose loans have been transferred to non-regulated entities, vulture funds". This is a year one action in the programme. The detailed nature of exactly the greater protections to be provided to mortgage holders, tenants and SMEs whose loans have been transferred to non-regulated entities will be decided after further consideration of the issues. The nature of proposed changes will decide who in the Government will take the lead responsibility for the implementation of these protections. I do not consider that extending the scope of the credit servicing legislation to owners is the way to go.

I thank the Minister for his reply. The agreement which Fianna Fáil entered into with Fine Gael and the programme for Government Fine Gael has agreed with the Independents refers to the issue of providing greater protection for borrowers, including SMEs, mortgage holders and tenants who occupy properties, regarding loans that have been sold to unregulated entities or vulture funds. This is the key issue on which I want to focus. The 2015 legislation is not complete, in that the owner of the loan does not require to be regulated whereas the credit servicing firm and the intermediary does require to be regulated. The definition in the Act excludes, for example, the determination of the overall strategy for the management and administration of a portfolio of credit agreements. It is clear that potential consequences arise from the fact that the vulture fund or unregulated entity is outside the ambit of Central Bank regulation and protections and, in our view, this piece of legislation must be amended to take account fully of the issue.

When we were drafting the Bill, as the Deputy is aware, the legislation deliberately regulated the interface with the borrower. If the owner acts as his or her own agent, he or she is caught in the legislation. If the owner instructs the regulator to do anything contrary to law, penalties are applied. Since our last conversation some weeks ago, I have gone over it again and I cannot see the gap in the legislation which the Deputy has indicated exists. In the interests of the new procedures in the Dáil, I will ask my officials to talk to the Deputy and, if he can identify the gap, I am not averse to an amendment if it is required.

My central point is that the owner of the loan not being regulated exposes the borrower to potential risk in that all the important decisions around the restructuring and calling in of the loan and the initiating of enforcement proceedings are taken by the owner of the loan, which is typically a non-regulated entity or vulture fund. This is the case for tens of thousands of mortgages and SME loans which have been sold by way of portfolios. While the intermediary firm, the contact point the borrower has - in the case of residential loans it is typically Pepper, for example - is regulated, it is not making the final decisions and calling the shots. This exposes the borrower to potential risk. The Free Legal Advice Centres, FLAC, highlighted this very clearly in its submission on the legislation when it was passed. I will engage with the Minister's officials. There is an issue. The programme for Government commits to asking the central Bank and Oireachtas Committee on Housing and Homelessness to examine the legislation. I would welcome that.

The counter argument is that if the owner acts as his or her own agent, he or she is caught by the legislation. Given that the owner is hands off in terms of the interface with the borrower, he or she cannot act as the Deputy suggests he or she may. If the owner crosses the line and begins to act as the Deputy says he or she may act, he or she is caught by the legislation. If the Deputy is willing to talk to my officials, and if he can convince them it is necessary, I am willing to use an appropriate vehicle to amend the legislation along the lines he suggests.

Code of Conduct on Mortgage Arrears

Ceisteanna (2)

Pearse Doherty

Ceist:

2. Deputy Pearse Doherty asked the Minister for Finance further to the statement in the programme for Government regarding the intention to "work with the Central Bank to amend the code of conduct on mortgage arrears to include an obligation on providers of mortgage credit to provide a range of sustainable arrears solutions, this code of conduct will be put on a statutory basis", what these sustainable arrears solutions will consist of and when he envisages the obligation for sustainable arrears solutions will be put on a statutory footing. [10760/16]

Amharc ar fhreagra

Freagraí ó Béal (6 píosaí cainte)

The Central Bank's code of conduct on mortgage arrears, CCMA, provides a strong consumer protection framework to ensure that each borrower who is experiencing genuine difficulty in meeting the repayments on a mortgage secured on a primary home is treated in a timely, transparent and fair manner by lenders. The CCMA recognises that it is in the interests of borrowers and lenders to address financial difficulties as speedily, effectively and sympathetically as circumstances allow.

The CCMA applies to all regulated mortgage lenders operating in the State when dealing with borrowers facing, or in, arrears on a mortgage which is secured on a primary residence. Furthermore, the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 provides for the regulation of credit servicing firms and, accordingly, the CCMA also applies to such firms which are servicing primary home mortgages held by non-regulated entities. An addendum to the CCMA was published during 2015 to reflect this fact.

The CCMA was issued by the Central Bank pursuant to the provisions of section 117 of the Central Bank Act 1989 and regulated entities are required to comply with the provisions of the code as a matter of law. The CCMA is, therefore, issued under statute and, as stated by the Supreme Court, it forms part of the law.

The Central Bank has the power to administer sanctions for a contravention of this code under Part IIIC of the Central Bank Act 1942.

As recognised by the programme for Government it is important to keep the provisions of the code, and the wider statutory framework for the protection of consumers of financial services, under review to ensure they remain appropriate to the evolving position of the mortgage market. As the Deputy is aware, the code has already been reviewed and updated over time and the Government will continue to liaise and work with the Central Bank to ensure that the code of conduct on mortgage arrears, CCMA, continues to be monitored and further updated as necessary in a way that is fair to the legitimate interests of debtors and creditors and, taking account also of appropriate wider public policy considerations, that sustainable solutions will be available to address genuine mortgage difficulty.

Additional information not given on the floor of the House

In addition it is worth noting that my Department has been working with the key Government Departments and agencies to develop co-ordinated communications on mortgage arrears to make distressed borrowers aware of agencies which can offer help.

We definitely need political reform because the first minute and 50 seconds of the time allowed for this reply was spent by the Minister on not answering the question. Can we get to the details of this in the minute that I have available? David Hall, who has done sterling work on behalf of those in mortgage arrears and who was involved in the programme for Government negotiations, has spoken on national radio about this issue. It seems some positive elements are emerging from his work there. He mentioned on the Sean O'Rourke show the commitment in the programme for Government that the Government would work with the Central Bank to amend the code of conduct on mortgage arrears to include an obligation on providers of mortgage credit to provide a range of sustainable arrears solutions, and that is what appeared in the programme for Government. He went on to say that this means that all customers in arrears will be offered a split mortgage or a mortgage to rent. Can the Minister confirm that David Hall's interpretation of the outcome of those negotiations is that all those in mortgage arrears will be offered those two options which is a split mortgage and a mortgage to rent? If that is the case, it is a step in the right direction. We have been calling for a long time for all options to be offered to those who needed the solutions being offered by the State.

Also, when will the code of conduct on mortgage arrears be put on a statutory footing? The Minister will remember that this was an argument I put to him. It was contained in my Land and Conveyancing Law Reform (Amendment) Bill and the Minister gave me ample reasons as to why it should not happen. Can he advise when it will be on a statutory footing? Will the two solutions I mentioned be part of this and, if so, when is it expected they will be introduced?

The code of conduct, as it exists, is on a statutory basis. What we are talking about now is proposed amendments to the code of conduct. My commitment is that any amendment would naturally be covered by statute as well, so there would be a statutory basis to it. The code of conduct has been reviewed already and I am willing to review it again to make it mandatory on lenders to provide the more effective of the range of options that are now in the system to their borrowers. The two the Deputy mentioned are two that are likely to have a strong uptake but again I am prepared to take the Deputy's advice on that. The two he mentioned are not exclusive. If there are others, they may be included. I am commencing discussions with the Central Bank to see what way this will be formatted. I assume that when the new finance committee is put in place I will put any draft that we come up with before the Deputy for his consideration and suggestions at that time.

I welcome the idea that these two proposals would be put on a statutory basis and that lenders would have to offer them. It is David Hall's understanding that those were the two proposals agreed as part of the programme for Government talks. Can the Minister confirm that, at a minimum, these two proposals will be offered to all distressed borrowers? Can he also inform us of the advice he got from the Attorney General on this issue? He made a big play about the unconstitutionality of capping standard variable interest rates and how would that be addressed when property rights would be altered to ensure that lenders had to offer these products? Crucially, the Minister will know that different financial institutions offer different ranges or versions for split mortgages. Has he got a particular split mortgage in mind, one on which, for example, an interest rate would not be charged on the part element of it, so to speak? Are those final details worked out and, crucially, can the Minister outline a pathway as to how this will be introduced and implemented, together with a timeframe, to give borrowers an idea about this as they will be holding off because this is coming down the line? Can he indicate when this will be implemented?

I can confirm that in conversations around the time of the negotiation of the programme for Government there was an agreement that we would continue to have the code of conduct on a statutory basis and that it would be extended to cover certain options that borrowers are not statutorily bound to offer. The two the Deputy mentioned certainly were the principal ones that came up in conversation but there may be others as well. There is not a draft: it was an acceptance of an issue in principle and now that we have the programme for Government agreed and published we are commencing to work with the Central Bank to format this. I have had no discussion with the Attorney General about this because, as the Deputy is aware, the Central Bank has very strong powers. It was it that promulgated the code of conduct in the first instance and I do not see a constitutional difficulty arising.

Question No. 3 cannot be taken as Deputy Burton is not in the Chamber, therefore, we will move on to Question No. 4.

Question No. 3 replied to with Written Answers.

Flood Risk Insurance Cover Provision

Ceisteanna (4)

Michael McGrath

Ceist:

4. Deputy Michael McGrath asked the Minister for Finance his progress in ensuring flood insurance cover is available to households in areas where remedial works have been carried out by the Office of Public Works; and if he will make a statement on the matter. [10516/16]

Amharc ar fhreagra

Freagraí ó Béal (5 píosaí cainte)

The flooding crisis earlier this year has raised issues in relation to insurance and flooding and I am aware of the difficulties that the absence or withdrawal of flood insurance cover can cause to homeowners. One of my primary concerns in the area of insurance is that homeowners have access to insurance to cover unforeseen losses, including flooding. 

However, the provision of insurance cover and the price at which it is offered is a commercial matter for insurance companies and is based on an assessment of the risks they are willing to accept and adequate provisioning to meet those risks. In my role as Minister for Finance, I have responsibility for the development of the legal framework governing financial regulation. Neither I nor the Central Bank of Ireland can interfere in the provision or pricing of insurance products or have the power to direct insurance companies to provide flood cover to specific individuals or businesses.

Government policy on flooding is focused on the development of a sustainable, planned and risk-based approach to dealing with flooding problems, with a view to addressing the increased availability of flood insurance.

To achieve this aim the OPW is carrying out assessments of 300 areas under the catchment flood risk assessment and management, CFRAM, programme and each area will have a flood risk management plan, FRMP, by the end of 2016. Decisions on future investment in relation to flood risk management will be informed by the FRMPs.

This strategy is complemented by a memorandum of understanding between the OPW and Insurance Ireland which provides for the transfer by the OPW of data in relation to completed flood defence schemes to the insurance industry. 

In addition, my officials are undertaking research on alternative options with the potential to ensure greater availability of flood insurance. This will be in the form of a comparative analysis of the different approaches to flood insurance in other countries. This will then feed into a report to Government from the interdepartmental flood policy co-ordination group which is expected to be completed before the summer.

The focus of my question relates to areas where the OPW has completed flood relief schemes at great cost to the taxpayer and where insurance companies have refused to reinstate flood cover, both for homes and businesses. I know the Government met with the insurance companies in January. I understand there is an interdepartmental group due to report this month. The Minister might confirm if that is expected to happen in May. The key issue that will have to be resolved is the view that the insurance industry is taking with regard to demountable defences. We are about to spend hundreds of millions of euro as a country rolling out flood relief schemes around the country over the next number of years, which involve demountable defences that are commonly used across Europe that meet the required standard under the European Commission but which are not recognised by the insurance industry as being of the same standard as permanent fixed defences. That issue will have to be resolved. I hope the Minister can give an update to the House on that.

I think that once flood defences are put in at taxpayers' expense and they are seen to be effective, insurance cover should follow immediately.

The note I have says the insurance industry claims demountable defences and floodgates do not meet the desired one-in-100-years standard. It has highlighted that the construction of demountable defences will not increase flood coverage in these areas but rather minimise any further reduction in coverage. The OPW has advised that there is no European Union standard for flood defence systems and that the OPW has developed the effective national standard. All OPW major schemes are now built to protect against the one-in-100 fluvial event and, where applicable, the one-in-200-years tidal flood event with additional allowances being made for climate change. The OPW has also advised that while it looks critically at every design solution to minimise the use of demountable systems, virtually every scheme in a town will have some type of access point for safety reasons, maintenance, recreation or amenity. This access will usually involve a gate. This is the situation with any flood defence scheme in any country. Demountable defences are now an internationally accepted and established measure for providing flood protection as part of publicly funded flood relief schemes.

This issue will have to be resolved because we are going to be spending hundreds of millions of euro on flood relief schemes over the next number of years which will include demountable defences. Demountable defences have proven to be successful in the towns across Ireland where they have been employed, yet they are not recognised by the insurance industry as being of the same standard as permanent defences. While there is merit in implementing flood defence schemes and protecting towns from flooding, the value of that is diminished if households and businesses in those towns are unable to access flood insurance. What we need from the Minister is a commitment that if the industry continues to dig its heels in on the issue, the Government is prepared to act. The Minister will find support across the House if he is prepared to take action to deal with this issue. As far as I can see, there is a stand off. I have seen what the insurance industry is saying about demountables, but the net effect is that homes and businesses will remain without flood cover even where we have spent huge sums of money to implement schemes which actually work.

I thank the Deputy for his promised support. In my view, the attitude of the insurance industry to the provision of insurance where demountable defences have been put in place is now bordering on the ridiculous and cannot be allowed to continue. Demountable defences are an internationally accepted and established measure for providing flood protection as part of publicly funded flood relief schemes. They form a critical part of the Bradley and Shrewsbury schemes on the River Severn in the UK and are used in the Netherlands, France, Germany and the USA. In Austria, demountable defences successfully provided protection to at least 14 cities and towns during the extreme floods along the Danube and Elbe rivers in 2013. Demountable schemes there were up to 3 km in length and up to 4.6 m in height. As such, I do not understand the position of insurance companies in Ireland when the international experience shows that demountable defences are very effective and meet the one-in-100 river protection criteria and one-in-200 tidal protection criteria.

Ireland Strategic Investment Fund Investments

Ceisteanna (5)

Michael McGrath

Ceist:

5. Deputy Michael McGrath asked the Minister for Finance the level of draw-down of loans to developers for residential housing related projects from the fund for house building established in 2015 by the Ireland Strategic Investment Fund; his views on the operation of this fund; and if he will make a statement on the matter. [10763/16]

Amharc ar fhreagra

Freagraí ó Béal (5 píosaí cainte)

I presume the Deputy is referring to Activate Capital, Activate, which is a non-bank financing platform established by the Ireland Strategic Investment Fund, ISIF, and the global investment group KKR to invest on a commercial basis in residential development projects in Ireland to help address the current supply shortages in the main urban centres. Activate is focused exclusively on lending for Irish residential projects and will target, in particular, new residential development in Dublin, the greater Dublin area, Cork, Limerick and Galway which have been identified as the areas of greatest demand. Activate is a €500 million fund, which is financed through a €325 million loan note provided from ISIF and a €175 million loan note provided from KKR. The €500 million fund represents the peak funding outlay at any one time. As borrowings are repaid, additional lending capacity over and above the original €500 million will be created.

Activate will provide up to 90% of project funding and will provide funding for both the acquisition of land and to bring projects through the planning process. The Activate base lending rate is approximately 10% and, as would be expected for projects of this nature, there is participation in equity upside if projects are successful so that the fund shares in any gains alongside the project promoter. The pricing for Activate facilities reflects the provision of up to 90% of overall development cost and the fact that it is, in effect, taking a combination of debt and equity risk. Activate also offers the advantages of deliverability and speed of execution. The Activate model is capable of substantially quicker credit turnaround times than current average timeframes in the market on foot of the requirement, typically, for project promoters to deal with more than one lender and sometimes multiple lenders. It is estimated that Activate will, in this way, be capable of financing the construction of over 11,000 new homes in Ireland.

Activate has been operationally up and running since January 2016 and in that time has created a significant pipeline of investments. Activate recently announced the completion of three transactions that will deliver approximately 800 new residential units in the Dublin area.

Additional information not given on the floor of the House

Activate has stated that a number of other transactions are progressing. In terms of disclosing the commercial detail around the draw-down or pricing of loans, this is commercially sensitive information and therefore not appropriate for release.

Most Members of the House will agree that the single most important issue facing the country is the housing crisis. It has many facets, but one essential ingredient in resolving the crisis is the boosting of supply, including private supply. One of the barriers to increased housing supply by the private sector is access to finance. I welcomed the fund last year notwithstanding that it had real limitations and I welcome the fact that it has announced its first three projects. It has been very slow to come on stream and the uptake has not been great so far to say the least. Hopefully, it will move on from here.

At a time when the State can borrow ten-year money at less than 1% and given that finance is a key barrier to private housing supply coming on stream at the volume required, there must be a more ambitious way to tackle the issue. We need to get a new funding model in place so that construction projects can proceed. The traditional banks are now giving 60% to 70% of the cost of a development by way of a loan and developers and builders are having to access the remainder at very high cost from funds. The Minister knows that himself. The fund that is there, welcome as it is, is extremely limited, narrow in focus and not ambitious enough. I ask the Minister to look at it again, hopefully to redesign it and make it more ambitious.

I thank the Deputy. The fund is only up and running since 1 January 2016 and as such is only five months in operation. Already, it has funded 800 new homes with a potential to fund 11,000. There is a roll-over effect as money is repaid and can be lent again. One can argue about the interest rate, but equity is always dearer than normal lending. The banks do perhaps 65% after which money gets dearer for the equity piece. However, the interest rate is being suppressed by arrangements whereby the investor can share in the upside as well as the promoter or building developer. I see it as only one option. The new housing committee is considering all aspects of the supply shortage in housing and is also looking at new financial models. The NTMA is doing some work on possible new models also. I will keep the Deputy informed if those come to fruition.

I welcome the fact that the NTMA is looking at the option of new funding models. That work is badly needed. We are all well aware of the mistakes made in the banking system overextending itself to the construction industry up to 2007 or 2008 and nobody is advocating a repeat of that history. However, we now have the opposite problem that access to finance is a huge issue. If we are going to bring private housing supply to the level we need it to be at, we must tackle this issue. I welcome the suppressing of the interest rate under the Activate Capital fund albeit it is still high. However, that is only part of the overall funding mix for any particular development.

We need a new and more ambitious model. People looking in on us will point out that the State can avail of historically low interest rates on its borrowings. Given the fact this is the most important issue facing us, more can be done. I would support any initiative that helps to provide credit for viable and credit-worthy projects.

The new Minister for housing is dealing with these issues with all expedition. As the Deputy rightly stated, the model for building houses is broken. Many of the small builders in the supply stream went bust and have not returned to the business since the economy's recovery. The finance model is also gone. As such, we must find new ways. As can be seen in Dublin, most current construction involves a developer as an organiser, with subcontractors carrying out the work. Units of subcontractors are coming on stream when their input is required. There has been a major shake-up but the industry is getting there and a number of good, sound builders are back in business. Some of the larger builders are also involved, for example, Cairn Homes and Hines in Cherrywood, where there are 4,800 units. They have a different financing model, as they can raise money on the markets quite cheaply.

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