The Central Bank's Role in the National Consumer Protection Framework - Director General Derville Rowland

30 September 2020 Speech

Speech at the MABS Autumn Seminar

Good afternoon, ladies and gentlemen. It’s a pleasure to be here with you virtually today, and I’d like to thank Angela Black for the invitation.

MABS and the Central Bank share a critical mission: we are both component parts of the national consumer protection framework.

Today, I’d like to explain what the Bank does in terms of consumer protection, and why. I’ll speak to our current priorities – particularly the issue of distressed debt. And I’ll touch upon how our work interacts with other parts of the framework, such as the Financial Services and Pensions Ombudsman (FSPO) and the courts.

But first I want to say a word of thanks, and admiration.

MABS has been to the forefront of supporting people who are working through problems with debt for more than 25 years. In the first half of this year alone, your Helpline Advisors fielded more than 10,600 calls.¹ And given the ongoing economic impact of Covid on families and individuals, it is an unfortunate reality that demand on your services will no doubt remain very high.

In preparing for today, I was greatly struck by a video online of MABS staff speaking about the work you do.² One of your colleagues noted the difference that such help can make for a person’s mental health. “Because you can get a result for them, you can get a resolution for them, and they can move on with their lives,” she said.

It’s a perfect encapsulation of the difference MABS makes.

In the Central Bank, we try on a daily basis to make a difference too. We serve the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider community.

Whereas MABS works at an individual level, we work at a systemic level. Our aim is to ensure that the financial system can provide services that households and business require, both in good times and in bad, and that they do so fairly.³

Today I want to focus on the “fairness” element of that mission - our work to protect consumers. But it’s first necessary to say a few words about how this task is actually delivered across the entirety of the Central Bank. The breadth of our mandate enables us to harness our collective wide-ranging policy, economic, financial stability and regulatory expertise in working to protect consumers. In short, consumer and investor protection is embedded in every area of our work.

Stability and the soundness of firms:

The stability of the system, and the resilience of firms within it, are as essential in protecting consumers and investors as our statutory codes of conduct, assertive supervision and robust enforcement powers.

A stable and well-functioning financial system is essential to society. Think of what would happen, for example, if banks stopped lending to support firms and households. Or if the payments system wasn’t working and you could not access cash from your account. The 2008 financial crisis is the most obvious example of what happens when the system doesn’t work as intended. It had catastrophic effects on many families, individuals and firms. It spurred a necessary and deep-rooted global overhaul of financial regulation.

While Covid is a very different type of crisis, so far the system has held up well to the initial shock. At national and European level, as part of the Eurosystem and Single Supervisory Mechanism, the Central Bank has taken action seeking to ensure that the financial system absorbs the shock and is better placed to support households and businesses through the crisis. As the ECB has noted, “it is of utmost importance that the system remains resilient to ensure that financial markets continue to function well and lending to firms and households is safeguarded."⁴ This chimes with the founding legislation of the Central Bank which echoed a phrase from Article 45 of the Constitution, stipulating that “in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole”.⁵

That work continues, and complacency cannot be afforded. As my colleague Ed Sibley has previously noted, it is worth remembering that financial crises recur.⁶ Resilience of the system, against current and future risk, is an essential part of our work.

Within a well-functioning system, it is also essential that financial service providers are well regulated, well run, and have appropriate cultures, with effective risk management and control arrangements in place. Strong regulatory and supervisory frameworks are therefore essential, which the Central Bank seeks to deliver by working with our national and international counterparts.

Just as essential is a strong culture of compliance by firms and the individuals working within them. Firms, their management and staff should always be focused on the best interests of their customers. Of course, we know from experience this is not always the case - we do not live in an ideal world. Hence, in addition to focusing on the stability of the system and the soundness of firms within it, there is a need for strong rules to protect consumers and investors – financial conduct regulation.

The onus on firms:

There is, as my former colleague Philip Lane noted, a significant empirical literature showing that consumers don’t always make good financial choices, taking on too much debt, misunderstanding investment risk or choosing financial products that do not match their needs. There is also a growing body of evidence from the field of behavioural economics that consumers are subject to behavioural biases when making decisions.⁷

But as Philip went on to say, the pace of financial innovation has accelerated and its complexity has deepened. Financial products – especially major ones such as mortgages, for example – are a relatively infrequent purchase. As our counterparts in the UK’s Financial Conduct Authority have noted, mortgages and pensions “are typically ‘one-shot decisions’ which don’t give consumers many opportunities to learn from experience. Furthermore, they can be much more consequential."⁸ Previous research we have published, for example, shows that a significant number of mortgage holders fear switching would be too complex, and this can cost them significant amounts of money in the long-term.⁹

Even if they had more experience of purchasing major financial products, consumers make their purchases from financial services providers who are professionals. While financial education is vitally important, for most consumers it will never ensure parity of experience or knowledge with these professionals. When we go to the doctor or dentist, we are not expected to have their expertise - rather we place our trust in their duty of care to us. In the same way, there is a duty of care on financial services firms to design and provide suitable products and, where advice is sought, to recommend the most suitable from their range.

This is why we say that consumer and investor protection begins with the financial services providers themselves. Firms are responsible for selling their customers products that meet their needs both now and into the future. There is, therefore, an onus on firms to have effective cultures and set the right standards.

These standards must be reflected in every business area, from corporate governance structures to individual accountability; from strategy-setting to product development; from risk management to people management; and from internal challenge to how whistle-blowers are treated.

Many firms meet those standards and put their expertise to good use for their customers. But others, of course, don’t. And so conscious of the devastating consequences that misconduct can have, the Central Bank regulates financial conduct with the aim of ensuring that the best interests of consumers and investors are protected and that markets operate in a fair, orderly and transparent manner.

Let me give a brief overview of how we undertake that work.

The component parts of financial conduct regulation:

I see financial conduct regulation as having three component parts, and will give an example to illustrate how these component parts interlock and form part of the national consumer protection framework as a whole.

The first is the regulatory framework – the rules we set to protect consumers and investors.

As the financial services landscape evolves and becomes more complex, so too must the regulatory framework evolve to anticipate risk and deal with emerging issues.¹⁰ We set statutory codes of conduct for financial services firms, such as codes setting out requirements on how products should be sold, the information that should be provided and how complaints should be dealt with. We have, for example, Minimum Competency rules aimed at ensuring that customer-facing staff in firms hold a minimum level of competency to sell or advise on financial products. To give another example, earlier this year, we introduced new rules to strengthen protections for consumers of moneylending services, including the introduction of warnings on the high-cost nature of this credit.

We don’t work alone in setting these rules. Internationally, we work as part of the three supervisory bodies - the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) – which together shape the consumer and investor protection framework. Domestically, the Oireachtas sets legislation which can change our mandate and expand our powers. And we consult with relevant stakeholders. Think of the Code of Conduct on Mortgage Arrears, for example, and the requirement to complete a Standard Financial Statement, the structure of which MABS was instrumental in helping to develop.

The second component is supervision – checking to ensure that firms comply with the rules. We take a risk-based approach to supervision, focusing our energies on the firms and products according to the level of risk they pose to consumers and investors, while leaving some flexibility to deal with emerging issues that may surface during the course of any given year. As with the rulebooks, we consistently evolve our system of supervision for the financial sector. A good example here would be the Business Interruption Insurance Supervisory Framework we published in August.¹¹ The framework sets out how we expect firms to handle Covid-related business interruption insurance claims, and how we are supervising firms to see that they meet our expectations.

The third component is enforcement – holding regulated firms and the people who run them accountable where there are serious or significant breaches of regulatory requirements and standards. One of the aims of our enforcement actions is to drive firms to change the culture in financial services for the better. The pessimists might say this is a Sisyphean task. I’m more of a realist, and see enforcement as a key way of ensuring that firms get the message – not just the firms at the centre of enforcement actions, but the sector as a whole when they see the outcomes of these actions.

We don’t just take action against firms or individuals who breach the rules, however.

We also act to keep unfit firms and individuals out of the sector, through our rigorous authorisations process and fitness and probity regime. In terms of authorisations, we are constantly enhancing how we discharge our role as a gatekeeper to be ever-more risk-based, devoting more scrutiny to applications from firms of particular concern. Our fitness and probity regime aims to ensure that only people who are fit and proper occupy senior roles at the financial firms we regulate and supervise. In 2019, 25 applications were withdrawn by firms following involvement of the Central Bank.

Finally, financial conduct regulation forms a core part of the wider national consumer protection framework. Unlike MABS, we don’t deal with individual customer cases. Our role is to set the rules for the sector as a whole, monitor compliance, and pursue enforcement actions when misconduct occurs – a systemic level of consumer protection, as such. Another part of the national framework, the FSPO, is available to individuals who wish to pursue complaints against regulated entities. And of course, it is also open to individuals – and firms – to pursue action against financial services providers through the courts.

To give an example of how all these parts come together, take the Tracker Mortgage Examination. Starting with regulation – we set the rules, including a number of statutory codes, and lenders breached them. In so doing, they caused distressing – and in some cases devastating – consequences for consumers. From a supervisory perspective, we launched the Examination, and set out a framework for conducting it with which lenders were required to comply. As a result of sustained supervisory engagement under the framework, lenders have now paid more than €700m in redress and compensation to more than 40,500 affected customers. Just last week, you saw the latest outcome of our enforcement actions, where we fined KBC more than €18.3m for its tracker failings.¹² This brings to more than €123m the fines we have imposed since 2006 on financial services firms for regulatory breaches and misconduct.

Finally, the Examination illustrates how we cooperate with other parts of the national framework. When we published our Tracker Mortgage Examination Report last year, we said that if any new information came to light we would continue to investigate, and that if any individual outcomes arose from the FSPO or court processes that had the potential to impact customers more widely, we would require lenders to address this broader impact. In line with these commitments, and arising from an FSPO decision earlier this year, the Central Bank intervened as appropriate with AIB. The result is that AIB paid additional payments to affected customers.

Covid and distressed debt:

That then is how we work. I’d like now to give a sense of what we are currently working on. Not surprisingly, Covid-related issues feature heavily. But they are not the only issues. The spectre of a no-trade deal Brexit looms large. And while dealing with Covid has necessarily meant the Bank has had to reprioritise, we remain focused on strengthening our system of consumer and investor protection as a whole. But I’ll focus today on a critical issue for the Bank, MABS, and the national framework as a whole – distressed debt.

From a regulatory perspective, we have supported the provision of payment breaks by lenders because we recognise they provide vital breathing space amid the disorienting shock of Covid. While a public health emergency in the first instance, the pandemic has had a profound economic effect on many households and business. Approximately half a million private sector workers were reliant on government financial support at the end of August. As outlined earlier, we are focused on doing all that we can, across our entire mandate, to minimise the effects of this economic shock.

System-wide payment breaks will come to an end over the coming months, as take-up by borrowers occurred at different times. Recent Central Bank analysis shows that about 10 per cent of Irish mortgage holders availed of payment breaks, and although close to half of those have since returned to making full payment, the full extent of any repayment difficulties won’t be clear until their expiration.¹³

Importantly, while it will take some time for the full picture to emerge, strong consumer protections remain in place, and lenders have clear guidance on how they must treat borrowers who continue to struggle with payments.

This is important to stress, given that some borrowers may continue to experience difficulties in returning to loan repayments and require individually tailored supports. In those cases, the Central Bank expects lenders to engage constructively with their customers to ensure appropriate solutions - which can include further forbearance if appropriate to the borrower circumstance - are available.

This is critical, given that distressed debt – and particularly mortgage debt – can be very difficult to work through.

We saw this from the financial crisis. On the one hand, the statutory protections for borrowers worked effectively to keep many people in their homes, and to work through their debt issues over time.

More than 120,000 owner-occupier mortgage accounts benefited from restructures by 2016, with a shift in composition away from short-term forbearance measures such as interest-only, towards longer-term or more permanent restructuring arrangements, including split mortgages and term extensions. This shift followed a heightened emphasis from the Central Bank on the need for sustainable solutions, suited to individual borrower circumstances.¹⁴

Despite these significant numbers, however, a relatively large group of more than 26,000 owner-occupier mortgages remained with unresolved long-term arrears at the onset of the Covid crisis.

Among the potential explanations for the existence of this number include the low-take up of Mortgage-to-Rent solutions, relatively low case numbers in the Personal Insolvency Arrangement (PIA) system, and, in some cases, a lack of engagement from borrowers who have continued to accumulate arrears balances over the course of the decade. I say this not to single out those borrowers in any way, shape or form – recognising the very distressing effects that arrears can have – but to emphasise, as MABS would know well, that effective engagement is critical to putting sustainable solutions in place.

Previous Central Bank analysis – using 2016 data on the retail banks – found that of those borrowers who exited arrears, 90 per cent had a restructure arrangement in place, with very few borrowers exiting arrears through ‘self-curing’ or without a restructure.¹⁵ Along with the importance of engagement, this highlights the challenge of exiting arrears for the circa 4,400 accounts now in arrears for more than ten years with no restructure in place, whether engaging with their lender or not.

I note your own research from the summer suggesting that people very understandably “freeze in a time of crisis”.¹⁶ Which is why I greatly welcome MABS’ key advice to those worried about debt – to speak to your lender and, if you find this difficult, to reach out to MABS or other debt support agencies for help.

From our perspective, the importance of engagement is why we expect lenders to engage with borrowers well in advance of the expiry of payment breaks to support customers. Our existing arrears handling frameworks, including the Code of Conduct on Mortgage Arrears (CCMA), will apply in the normal manner.

Those frameworks are designed to protect the interests of borrowers, particularly in times where they are experiencing financial difficulties because of illness or loss of income. They require all lenders to engage sympathetically and positively with the customers, with the objective at all times of supporting them through this time.

For some borrowers temporary additional supports may be the answer initially, while for others the more appropriate and sustainable option will be deeper restructuring. It is worth noting that there is no regulatory impediment to lenders offering further payment breaks to borrowers, providing they are appropriate for the individual borrower circumstance.

It is also important to note a lesson from the financial crisis: while individual lenders may be tempted to rely excessively on temporary forbearance measures, they are not in the borrowers’ best interests over the longer term.

Therefore, we expect that, over the longer term, lenders put in place restructuring arrangements that are appropriate and sustainable in the customers’ long-term interests.

We are assertively supervising this process to ensure our expectations are being met.

Looking ahead:

What Covid has brought home to us yet again is that nobody knows what is around the corner. Nonetheless, we must seek to manage uncertainty and safeguard against risk to the best of our ability.

As mentioned earlier, we are constantly evolving our rulebooks to account for the increasingly complex financial sector and to protect consumers and investors.

We cannot be complacent. Nor can we think that we can do it alone, assume our expertise is sufficient or that we know all the answers. We recognise that we are one part of the national consumer protection framework, and not all of it.

In that respect, I will conclude on two important aspects of future-looking work.

Firstly, and from a general perspective, we have begun a review of the Consumer Protection Code, the cornerstone of our consumer protection framework, to ensure that it reflects the changing financial services landscape. This is a complex project which will require extensive consultation and deliberation of policy and legislative issues.

We cannot do it in isolation. Which is why we will be undertaking a public consultation in due course, and I know MABS will respond to that consultation and I look forward to hearing your expert views.

Secondly, on distressed debt, as mentioned, it will take time before the full picture emerges. But I think we can say at this point that for a number of families and individuals, distressed debt and mortgage arrears will be a significant worry for the foreseeable future. They will need every possible support, and borrower-lender engagement will be vital in terms of putting in place appropriate and sustainable solutions for them.

We are continuing to push all lenders to deliver sustainable restructuring where possible, and – recognising that different approaches may be required – we are engaging with relevant stakeholders to explore whether there are other options or system-wide initiatives which will help. We must do all that we can to prevent the further build-up of this long term distress from the current crisis – I know the Central Bank and MABS share this priority.

Thank you.

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1 https://www.mabs.ie/downloads/statistics/Mabs_National_Stats_Report_2020_Q2.pdf

2 https://www.youtube.com/watch?v=0q4gHTztfu0

3 https://www.centralbank.ie/news/article/speech-the-decade-ahead-governor-makhlouf-12-february-2020

4 See: https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200622~422531a969.en.html

5 Central Bank Act, 1942. See https://www.centralbank.ie/docs/default-source/publications/the-history-of-the-central-bank-1943-2013.pdf?sfvrsn=6

6 https://www.centralbank.ie/news-media/press-releases/safety-and-soundness----deputy-governor-ed-sibley18Jan2019

7 https://www.centralbank.ie/news-media/press-releases/financial-regulation-protecting-consumers-governor-lane

8 https://www.fca.org.uk/insight/learning-experience-financial-services

9 https://www.centralbank.ie/news/article/central-bank-publishes-further-research-on-mortgage-switching

10 For a summary of how financial conduct regulation was strengthened since the financial crisis, see Section 3 of this report: https://www.centralbank.ie/docs/default-source/publications/corporate-reports/behaviour-and-culture-of-the-irish-retail-banks.pdf?sfvrsn=2