Address by Bernard Sheridan, Assistant Director General, Consumer Protection, to the Law Reform Commission

16 December 2010 Speech

Good morning everyone and I would like to thank the Law Reform Commission and its Commissioner, Patricia Rickard-Clarke for inviting me along this morning to speak on this very important topic of personal debt.

The Central Bank of Ireland plays an important role in not only regulating the providers of credit but also in ensuring that all lenders treat their customers fairly throughout the term of the relationship. The Central Bank also has a key role in establishing the legal framework within which the provision of credit operates through the authorisation and supervision of all lenders and by putting in place statutory codes of conduct which set out the rules under which lenders must operate.

The nature of the relationship between lenders and consumers has changed completely over the last couple of years. During the boom in the economy where we had almost full employment with low interest rates and credit was widely available, credit became a commodity, the more the better from both the lenders’ and borrowers’ perspectives. Why save and earn very little interest when you can borrow to buy an asset or fund a lifestyle with little or no risk as many people thought. The relationship was defined by having only limited contact at the point of sale and this relationship was to be renewed when the loan matured and maybe rolled over for a greater amount than before. All has changed. We all now realise the relationship between borrower and lender is a long term one and both sides are dependent on the other in terms of meeting obligations and managing to pay off existing loans. Terms of loans can range from a number of months to 30 or 40 years. Circumstances for both lender and borrower can change significantly during this period and therefore the need for an ongoing closer relationship is necessary in order to be able to deal with unexpected events.

We have recently undertaken a number of new initiatives in relation to personal debt which I will speak about in more detail and which we believe will help protect indebted consumers including:

  • Regular publication of data.
  • A revised Code of Conduct for Moneylenders.
  • Introduction of a revised Code of Conduct on Mortgage Arrears.
  • Consultation paper on a revised Consumer Protection Code.
  • Review of the credit union sector.
  • Review of the operations of credit referencing agencies.

Over indebtedness is becoming an increasing problem. As at end September 2010, 40,472 mortgage accounts, or 5.1%, were in arrears for more than 90 days of which 28,049, or 3.6% of the total mortgage accounts, were more than 180 days in arrears. In value terms, €7.8 billion was owed in relation to all accounts more than 90 days in arrears, of which €5.5 billion was owed for accounts more than 180 days in arrears. Mortgage accounts in arrears for more than 90 days increased by 11.1% since the end of June 2010. While these figures are broadly in line with expectations considering the level of unemployment those in arrears are in a very challenging and difficult position.

The recent Survey on Income and Living Conditions published for 2009 shows almost one quarter of households were in arrears on at least one occasion. This was a significant increase on the position one year earlier when just over 10% were in arrears on at least one item. The same survey showed that more than 11% of households had to go into debt in 2009 to meet ordinary living expenses. This figure was up from just over 9% in 2008. This gap can only be met by increasing indebtedness unless the household can cut back on living expenses.

In 2009, almost 48% of households stated that they would be unable to meet an expense of €1,085 without borrowing. In 2008, just over 41% of households were unable to meet an expense of €985 without borrowing. This is a worrying figure in that it highlights the lack of a savings buffer available to many consumers which increases the likelihood of them becoming more indebted. It is important to bear in mind these figures relate to 2009 and it is highly likely due to the rise in unemployment and decreases in income levels that the downward trends will have continued.

Publication of Mortgage Arrears Data

Since September 2009 we have been publishing data in respect of the level of mortgage arrears which is available on our website. The data covers mortgage arrears of over 90 days in respect of private residential mortgages and also includes information on Court proceedings issued and concluded during the period as well as data on the level of repossessions. We are currently planning to expand the information published to include information on accounts which have been restructured analysed by the type of restructuring arrangement and also to include the level of interest being paid. This information will provide transparency about what exactly is happening to customers across the whole sector in respect of mortgages.

Consumer Credit Directive (CCD)

The most significant piece of new legislation governing the provision of retail credit has been the introduction of the CCD which was transposed into law on 11 June 2010. The Consumer Credit Regulations apply to creditors engaging in the provision of credit agreements to consumers for amounts between €200 and €75,000. The Regulations contain provisions that cover:

  • pre-contractual information;
  • advertising requirements;
  • information to be contained in the credit agreement;
  • an obligation to carry out creditworthiness checks;
  • a requirement to explain the pre-contractual information and characteristics of the product, to the consumer;
  • a cooling off period of 14 days, and
  • the right to early repayment of fixed rate loans.

Due to the maximum harmonisation principle contained in the CCD, Member States cannot go beyond the requirements as laid down in the Directive. At a European level this represents a major step forward in standardising the protections available. However in Ireland the Consumer Credit Act has been in place since 1995 and the challenge has been to deal with any overlapping between the Act and the Directive.


There are 47 licensed moneylenders in Ireland (as at 30 November 2010). While we are all concerned about the cost of these loans they provide a service which many consumers are using. Moneylender loans tend to be very short-term and consequently the interest cost as measured by APR can be extremely high. The Consumer Credit Act provides for the licensing of moneylenders by the Central Bank. Following a review of the licensed moneylender sector we strengthened our Moneylenders Code following a consultation process. Some of the additional measures we introduced were:

  • Prominent warning to disclose that the loan is a high-cost loan;
  • Written statement to be provided to consumers explaining why the loan is suitable for them;
  • Limited circumstances under which unsolicited contact can be made including a referral from an existing customer;
  • A binding agreement cannot be reached on the basis of this contact alone;
  • Unsolicited contact must end if the consumer does not wish it to proceed;
  • Unsolicited pre-approved credit may not be offered.

We also introduced a requirement that where there were six missed payments the moneylender is obliged to inform the consumer of the contact details of a credit counselling service. There are many reasons why consumers use moneylenders, but we believe if they make contact with MABS this could provide them with information on other available options for example, cheaper forms of credit. We also made it clear in the Code that the moneylender is responsible for ensuring that where they outsource any activity e.g. debt collection, the third party must comply with the Code.

Consumer Protection Code (CPC)

When the CPC came into full effect in the middle of 2007 it was the first time that the concept of suitability was applied to provision of credit. Prior to that, suitability was associated primarily with investment decisions rather than where a customer was availing of credit from a lender. Some may argue that the CPC was ineffective in protecting some consumers from becoming over-indebted. Certainly it would have been better if the CPC had been in force a number of years earlier to give it time to become effective prior to the economic crisis.

Also the CPC was based largely on principles backed up by rules. We have found that where specific rules were introduced which were clear and unambiguous this approach was more effective. For example the CPC banned the offering of unsolicited pre-approved credit facilities and also prohibited an increase in a consumer’s credit card limit unless requested by the consumer. At that time they were practices which were coming into the market which encouraged consumers to become over-indebted. Consolidation of a number of short term loans into a mortgage was also a concern at the time. The CPC requires lenders to give a written comparison of the cost of the alternatives to the consumer before the consumer commits to the new loan.

One other practice which was prevalent at the time was in relation to the sale of payment protection insurance with a loan. The CPC requires that any repayment estimates quoted to the consumer must be exclusive of the insurance premium and the application form must have a clear statement saying the insurance is optional. However the CPC was less specific when it came to determining the basis on which a loan could be considered suitable/unsuitable for a consumer. It was up to each lender to determine how to assess suitability and within that affordability.

Code of Conduct on Mortgage Arrears (CCMA)

The CPC contained only one provision in relation to mortgage arrears which was a sign of the times. The CCMA was introduced in February 2009 as a statutory code and built on the provisions of the Irish Banking Federation voluntary Code of Practice on Mortgage Arrears. All internal changes in institutions had to be completed by 30 April 2009. The CCMA was introduced in response to the deteriorating situation for mortgage holders and aims to ensure that consumers are treated fairly and are given some time to try to resolve the arrears situation.

The provisions of the CCMA apply to all mortgage lenders and not only banks, but credit unions are excluded as our statutory powers in this area do not extend to that sector. Its main provisions include communicating promptly and clearly with the borrower as soon as an arrears situation develops, handling genuine arrears cases positively and sympathetically, and exploring various alternative repayment measures with the borrower. The most significant variation from the IBF’s Code required that mortgage lenders could only apply to the courts to commence enforcement of legal action for repossession six months from the time arrears first arose. A lender could not seek repossession until every reasonable effort had been made to agree an alternative repayment schedule with the borrower. In February 2010 the six month timeframe was increased to 12 months.

Following its introduction, we conducted an onsite themed inspection of compliance by mortgage lenders with certain provisions of the CCMA. Five mortgage lenders including credit institutions and other types of mortgage lenders were inspected and good levels of compliance with the provisions examined were found. The inspection showed that lenders are willing to work with borrowers facing mortgage difficulties. The areas that were examined included:

  • The issuance of formal demand letters;
  • Applications to the courts to commence enforcement of legal action on repossession; and
  • Entering arrangements with consumers over various time periods.

The main findings from the cases reviewed during the inspection were:

  • All were compliant with the above mentioned timeframes before applying to the courts to commence enforcement of legal action for repossession;
  • All endeavoured to obtain customers income and expenditure details and to explore alternative repayment arrangements (and generally provided details of such arrangements in writing and monitored the arrangement in place);
  • Generally lenders did not issue a formal demand until a third repayment was missed, as required, and also provided the necessary information in advance of the formal demand; however
  • Some shortcomings were identified relating to maintaining records of advising customers to take independence advice on arrangements and referrals to MABS. Lenders were reminded of their obligations in this regard.

The main changes from the previous CCMA are:

  • Lenders must have in place a Mortgage Arrears Resolution Process (MARP) as a framework for handling arrears and pre-arrears cases. The CCMA sets out the steps and processes that lenders must include in the MARP. The major elements of the MARP include:

1. A centralised and dedicated Arrears Support Unit (ASU) to manage and access cases under MARP;
2. A standard financial statement must be used by all lenders to obtain financial information from borrowers and to make an assessment in relation to alternative repayment measures; and
3. Lenders must establish an appeals process to consider any appeals submitted by borrowers.

  • Pre-arrears borrowers must be treated under the MARP.
  • Specific information must be provided to borrowers in a clear and customer friendly manner.
  • Borrowers in arrears must not be required to change from a tracker mortgage to another mortgage type.
  • Where borrowers are co-operating with lenders, lenders must wait at least twelve months before applying to the courts to commence enforcement of any legal action on repossession of a primary residence. The twelve-month period switches on and off depending on whether the borrower is meeting the agreed repayments either under the original mortgage contract or under a revised repayment arrangement. In the previous version of the CCMA, the lender was required to wait at least twelve months from the time the arrears first arose.
  • Lenders may only attempt to make unsolicited contact to arrears customers three times in a calendar month, regardless if the attempted contact is successful or not. Contacts required by the CCMA are excluded from this limit.

In addition to strengthening the CCMA we have also examined the issue of mortgage arrears charges which lenders can impose on consumers in arrears. Some of these charges can be significant including the charging of surcharge interest on top of the normal interest charge. This could typically be in the range of 0.5% to 1% per month on the arrears amount. Other charges arise if direct debits are unpaid or cheques are returned unpaid or if the lender has to issue a reminder letter. Again these charges vary but could be up to €10 or €12 per item. We have now advised all lenders that these charges may no longer be imposed in respect of mortgage arrears where borrowers are co-operating reasonably and honestly with their lender under the MARP process. We plan to devote resources to monitoring compliance with the new CCMA as soon as it becomes effective and we will be reporting publicly on our findings in late 2011.

Proposals to enhance the CPC

At the end of October we published a consultation paper (CP 47) on the review of the CPC. The consultation paper includes a revised draft code outlining the specific new provisions and revisions to existing provisions which we are proposing. There are a number of key proposals in relation to personal debt.

Mortgage suitability

We are proposing additional provisions aimed at promoting a greater level of responsible lending which focus on assessing the consumer’s ability to repay borrowings including:

  • Before offering, arranging or recommending credit, a regulated entity must fully assess the consumer’s ability to service the repayments.
  • A regulated entity must, when assessing the consumer’s ability to repay, calculate the impact on the repayment amount of a 2% interest rate increase above the interest rate offered to the consumer. Where the consumer is availing of an introductory interest rate, the calculation must be based on the lender’s standard variable rate or fixed rate, whichever is to be applied after the introductory period. This information must be provided to the consumer.
  • Regulated entities are prohibited from accepting a self-certified declaration of income from a consumer as evidence of his/her ability to repay a mortgage.
  • In the case of interest-only mortgages, a regulated entity must be satisfied that the consumer will be able to repay the principal at the end of the mortgage term.
  • Where a mortgage is interest-only for a limited duration, a regulated entity must be satisfied that the consumer will be able to meet the increased mortgage repayments at the end of the interest-only period.
  • When carrying out the know the consumer and suitability assessment for a mortgage, a regulated entity must use a standard financial statement required under the Code of Conduct on Mortgage Arrears to obtain financial data from a consumer and use this information to assess whether any mortgage is affordable for a consumer.

Arrears handling – personal debt other than mortgages

Chapter 4 of the current Code contains a provision that requires regulated entities to have in place a procedure for the handling of arrears cases. It is proposed to expand this provision in the revised Code to include details of specific steps that must be followed by regulated entities when dealing with consumers experiencing arrears on loans and credit facilities, excluding residential mortgages that fall within the scope of the Code of Conduct on Mortgage Arrears. Underlying these specific steps we are proposing that lenders must give consumers reasonable time to resolve an arrears problem and that they must endeavour to agree an approach that will assist the consumer in resolving the problem.

The steps, set out in Chapter 9, include the following obligations:

  • As soon as a regulated entity becomes aware of the arrears situation it must contact the consumer and provide information on the status of the account and contact details for MABS.
  • If relevant, a regulated entity must remind the consumer that he/she purchased payment protection insurance from the regulated entity, and the procedure for making a claim under that policy.
  • Unsolicited contacts concerning the arrears situation are limited to three communications per month.
  • Rejections by the regulated entity of revised payment amounts or schedules must be documented with accompanying reasons and communicated to the consumer.
  • Regulated entities will be required to give a consumer three months notice where it intends to offset credit balances in other accounts that are in credit in order to repay debts arising on loan accounts.
  • Where a consumer is in arrears in respect of an overdraft facility but is otherwise operating the current account within the terms and conditions, a credit institution will be prohibited from closing that account without the customer’s consent.

The provisions of Chapter 9 must also be complied with by any entity to which a regulated entity outsources its debt management functions.

Credit card statements

We have also assessed the adequacy of the information on credit card statements with consideration given to the accuracy, simplicity, clarity, fairness, relevance and comparability of information. Following that assessment we developed recommendations for improving the transparency of, and for the mandatory inclusion of some important additional information on, credit card statements. We have now included these recommendations in the revised Code.

Our proposals require the inclusion of the following information on credit card statements:

  • a summary box presenting important information on final payment dates, interest rates and charges applied to the account.
  • a notice on the method for charging interest, a minimum payment warning and a statement concerning transactions outside the normal spending pattern.

Credit Unions

Credit unions play an important role in the provision of credit at a local and community level and the importance of credit unions helping members in financial stress is not in doubt. However, we also understand that it is equally important that any decisions on reforming members’ personal debt are made in the context of ensuring there is no risk to members’ savings. While credit unions will be expected to help their members, we realise that they must be cautious. In the current economic and financial environment it must be expected that credit unions will find balancing these decisions challenging.

A strategic review of the credit union sector is currently being undertaken by the Registrar of Credit Unions. Phase 1 of the Strategic Review is currently being undertaken by independent consultants, Grant Thornton, and is due for completion by the end of December. The scope of Phase 1 is to undertake a detailed review of the sector which will include specific proposals to strengthen the prudential soundness of credit unions and advise and inform an assessment of the future strategic direction of credit unions.

Phase 2 of the Strategic Review is due to commence early next year and is planned to take a number of months. The scope of Phase 2 is to develop proposals for a modern and appropriate credit union operational model that is:

  • supported by an appropriate and enabling legislative and regulatory framework;
  • based on needs and requirements of credit unions and their members;
  • to support the movement for the next 10-15 years.

Credit registers

In the strategy paper we published in June, Banking supervision: our new approach, we identified measures for ensuring that lenders have more accurate and informative data for credit decisions as a key priority. From a consumer perspective, credit information and credit ratings should really be viewed from a positive perspective. A strong credit rating is a valuable asset for a consumer, as it gives access to credit at better interest rates and terms. Equally, where a consumer has experienced a decline in the credit standing a good system will allow them to understand how to improve their situation. Moreover, a properly specified system should not operate as some form of blacklist, but should allow borrowers with poor credit history to rehabilitate their credit rating over time.

We have been engaged for some months now in a review of the collection and use of credit information in Ireland and overseas. This has taken the form of structured interviews with the users of credit information, the providers and collectors of credit information, consumer representative bodies, the data protection authorities and other state agencies. This has given us a clearer understanding of what a better credit data infrastructure might involve.

The following key points have emerged from this process:

  • Strengthening the means by which borrowers can be clearly identified would make an improvement to the quality of credit reference information, in relation to individuals and the connections between individuals and companies.
  • Credit information databases are at their most useful when they are complete. In Ireland not all credit institutions provide data to the existing credit reference agencies. This needs to change.
  • There may be a case for setting down standards for the range of data that should be collected and disseminated. Such standards would also define the key features of this data, for example classification of late payments, treatment of defaults etc.
  • It is important that there are clear rules as to the treatment of default events and how such information would remain on the database.
  • It is vital that there are clear mechanisms by which borrowers can quickly check their status and have it corrected where necessary. Data providers need to be incentivised to ensure that records are correct.
  • Appropriate incentives are vital to the functioning of credit registers and credit bureaux, whereby they must be in a position to enforce the rules of the system. There must be some sanction for data providers who do not play by the rules.
  • There is a clear balance that needs to be drawn between the individual’s right to privacy and the benefits to the individual and society more generally from the more intensive use of credit information.

Our strong preference remains that the private sector provides the solutions here and we look forward to working with the various stakeholders to enhance the credit information system in Ireland.

What difference will any of these measures make?

I believe that yes, they will make a difference. While the various codes will not solve all of the problems we have shown they are a useful tool in enabling a speedy and effective response to issues. We introduced the CCMA in early 2009 in response to the deteriorating situation and later extended the timeframe for lenders to apply to the courts to 12 months. Most of the recommendations of the Mortgage Arrears and Personal Debt Group are being speedily implemented through an update of the CCMA which will take effect at the start of 2011. The measures themselves enable both consumers and lenders more time to sort out arrears problems and also set the resolution framework in the context of supporting the consumer. Practices which emerge which may be to the detriment of consumers have been specifically dealt with, for example increasing credit card limits. Improving transparency for consumers enables them to see the important elements of the credit being offered.

Can more be done to protect consumers? Of course. We are always looking to see how we can improve things. We need to be alert to emerging issues. We are currently consulting on our new proposed measures and it is important we get feedback and input to help inform our thinking. We look forward to receiving your submissions and thank you for your time this morning.