Civil Society Roundtable

When 29 November 2019 11:45 AM
Where Central Bank of Ireland, North Wall Quay, Dublin 1

The Central Bank held a roundtable with representatives from a range of civil society organisations on Friday 29th of November 2019.  The roundtable is part of the Central Bank’s engagement strategy, which is one of the key themes of the strategic plan._¹ The meeting was chaired by Governor Gabriel Makhlouf, and attended by members of the Governor’s Committee and other Central Bank staff. The civil society organisations present work in a range of areas including social justice, housing and homelessness, gender, environment, human and legal rights, rural issues, the rights of older people, and workers’ rights. The discussion was held under Chatham House rules. A wide range of topics were discussed and the meeting was divided into three sessions. The first covered the Irish economy, the second covered the housing market and building resilience in Ireland, and the final session covered consumer protection issues.

Civil Society Roundtable - Opening Remarks by Governor Makhlouf.docx

Presentations were given by Terry Quinn – Deputy Head, Irish Economic Analysis; Thomas Conefrey – Senior Economist, Irish Economic Analysis.

Discussion amongst attendees and the Central Bank

The discussion raised the issue of overheating in the Irish economy and the question of what policy levers are available to overcome the risk of overheating. The discussion also touched on the interaction of Brexit and overheating risks.

The role of fiscal policy in helping to ease overheating pressures was discussed. It was noted that a prudent fiscal stance would have benefits beyond helping to alleviate overheating pressures.  A contained fiscal stance during periods of strong growth would help to build fiscal buffers and thereby facilitate a counter-cyclical fiscal response during any future downturn. The importance of fiscal buffers was highlighted given Ireland’s elevated debt burden as captured by the Debt/GNI* ratio.

The presence and size of the non-bank finance sector in Ireland was raised by participants. Research work (completed and forthcoming) that provides insights into the sector was discussed. The direct linkages between market-based finance and the wider economy were discussed, with the commercial real estate sector being highlighted as one of the areas where research is ongoing.

The issue of interpreting headline figures of economic activity in Ireland was discussed as well as the importance of looking at the detail behind aggregate data and statistics to gain a deeper understanding of important issues. The measures of inequality published in the CSO’s SILC release earlier in the week were highlighted. Participants suggested that more research would be beneficial on issues such as the gender pay gap, the impact of demographic ageing and climate change.

There was a wide-ranging discussion of labour market issues including wage developments, marginalised workers and others outside the labour force and migration. The recent pick-up in wage inflation was discussed and the extent to which this signals a tightening in the labour market. It was noted that while wage inflation has picked up, overall price inflation remains muted.

Presentations were given by Vasileios Madouros, Director of Financial Stability.

Discussion amongst attendees and the Central Bank

A focus of the discussion was on the mortgage rules and their vital role in protecting both banks and customers against the dangers of imprudent lending practices. It was suggested that the Central Bank should resist pressures to remove the macro prudential rules. Evidence of more sustainable lending practices by banks was reflected in the 2018 data which show a concentration of new mortgage lending in the 3.0 to 3.5 LTI range which contrasts with the prevalence of much higher LTIs seen in 2003, at the height of the pre-crisis boom. It was noted that exemptions facilitating borrowing in excess of the LTI rules were granted predominantly where the lending rules have become more binding, such as in the Dublin area where house prices are highest or for younger or single-income borrowers.

The need to prevent bank bonuses for mortgage sales was discussed. The Central Bank said that it understood and was conscious of what incentives can do, and said that it will continue to ensure that banks price risk appropriately rather than chasing return.

While discussants agreed that banks need to be made more resilient going forward, concerns surrounding high interest rates  for both personal and SME lending were discussed at length. It was outlined that legacy issues and non-performing loans remain an issue for bank’s balance sheets, which have kept interest rates high in Ireland relative to other EU countries. It was noted that comparing interest rates across the EU may not be comparing like with like due to different mortgage market structures, for example, some other EU countries charge lending fees which are not evident in the upfront interest rate. The Central Bank also outlined that one effective way to reduce rates is to encourage mortgage switching, while acknowledging that the amount of switching that actually takes place is not as high as it could be.

With regards to SME lending, it was noted that demand for lending is currently quite low – capacity for SME lending across credit unions in Ireland is approximately €900 million however, current drawdown is close to 10 per cent. It was also mentioned that the pricing of risk varies across sectors, and that even within the market itself, large differences between small and medium enterprises exist. 

The issue of mortgage add-ons and cash back offers was discussed. It was suggested by participants that removing cash back offers on drawdown could reduce interest rates on mortgage loans. The Central Bank outlined that they cannot force banks to sell certain products.  Instead, as a result of enhanced mortgage switching measures introduced into the Central Bank’s Consumer Protection Code with effect from 1 January 2019, all mortgage holders (i.e. both new and existing) must now be provided with information by their lender to ensure that they have sufficient clarity about the precise nature and scale of the benefit of any incentive offered to them, including the potential impact of an associated incentive on the cost of their mortgage. 

It was noted that cash backs can benefit some customers and not others and that they must be sold appropriately. The profile of customers who avail of cashbacks was raised. The Central Bank highlighted its reviews of advertising carried out by banks. In relation to the advertising of incentives, it was noted that the Code already contains an extensive suite of advertising rules with which regulated firms must comply. The Central Bank undertook a review of advertisements by mortgage lenders in 2018, specifically in the context of incentives. On foot of this review, and following instruction from the Central Bank, 75% of advertisements reviewed were required to be withdrawn or amended.

The presence of private equity firms in Ireland’s housing market was discussed. It was suggested that the Central Bank should not be passive about the presence of private equity firms, particularly in the high end of the market. It was also suggested that the Central Bank should explore available tools and policies that may provide a more targeted supply of housing for lower and middle income deciles. 

The final discussion of this session was on the issue of financial literacy. It was acknowledged that further investment in financial literacy is required and may be helpful in addressing some of the earlier concerns raised. It was noted that even with the best regulations in place, people will still make mistakes if the adequate financial literacy is not in place. Participants largely agreed with the need for greater financial literacy and highlighted that such learning should be incorporated into mainstream education. Participants also agreed that financial literacy is more important now than ever, given the quantity and complexity of financial products that are now available.   

The session began by participants commending the fines issued by the Central Bank in relation to the tracker mortgage examination. They highlighted the importance of the Central Bank’s investigative role both in terms of setting a strong precedent and holding banks to account.

In a discussion on enforcement fines and fitness and probity issues, it was noted that in considering enforcement outcomes, proportionality is always applied across large and small firms. The Central Bank explained that it adopts a transparent approach in all cases, with detailed public statements on the outcome of Enforcement Action published on its website.

The issue of digital literacy was raised where concerns were expressed that people without bank accounts or digital access could be left behind. It was noted that certain demographics were being targeted by false cyber firms offering financial products. It was also noted that it is difficult for people without digital literacy to understand if the products being offered are legitimate. The Central Bank noted these concerns. The Central Bank advised that further consideration of digitalisation would be incorporated into a review it is undertaking of its Consumer Protection Code.  While its current approach is “digital neutral”, i.e. the rules apply irrespective of the distribution channel, the review will consider if further enhancements to the Code are required on this topic.

There was a discussion surrounding the narrative of non-banks operating in Ireland. It was mentioned that many borrowers in arrears are being informed that if their loan is sold to a non-bank, it would be unlikely for them to face repossessions under such circumstances. As such, this narrative may be discouraging people from engaging with their creditors. 

There was a discussion about distressed borrowers and the issue of legal representation. It was suggested that some distressed borrowers signed mortgages not knowing or fully understanding what they were signing. The Central Bank noted the importance of customers getting enough information to make informed decisions, especially given that for many people it is the largest purchase of their lives. It was mentioned that it is difficult to differentiate between what people cannot understand and what is fair. A participant suggested that giving examples of unfair terms could be of benefit to customers. The Central Bank noted the suggestion and noted that the Courts ultimately determine if the terms of the unfair contract act have been breached by firms.

The session closed with the Central Bank thanking attendees for their contributions and looking forward to ongoing engagement.

¹ https://www.centralbank.ie/publication/corporate-reports/strategic-plan