I thank all the speakers for their educational and informative presentations on the integration of EU mortgage credit markets. I wish to ask Ms Mary O’Dea about the work of the Irish Financial Services Regulatory Authority. IFSRA will be critical in terms of dealing with any European Commission proposals to create an EU-wide mortgage credit market. Ms O’Dea mentioned that the job of the authority is to help consumers to make informed financial decisions in a safe and fair market and to foster sound, dynamic financial institutions in Ireland. The recent sub-prime mortgage crisis has engendered a lot of nervousness among consumers. They are very concerned about the proper regulation of financial services and so forth. It was reassuring to hear a number of speakers refer to the fact that Ireland is seen as having some of the most stringent consumer protection requirements relating to these kinds of services.   

Ms O’Dea also mentioned that one of the roles of the authority is to foster personal finance education through the formulation of policy and key development tools. I note that the authority has developed teaching materials for schools, which is very important. Taking out a mortgage for most people is quite a challenge and if they are to move across borders and conduct such transactions in other EU states with different cultures, languages, regulatory systems and so forth, they must be well informed and confident. Personal financial education will be important, as will the consumer research being conducted by the Financial Regulator to assess the financial capabilities of consumers in Ireland. It will be useful to know exactly the kind of education and support Irish consumers need. 

Ms O’Dea concurs with the European Commission’s assessment that improving the quality and comparability of information is necessary to enable consumers to shop around the European market for the most appropriate mortgage product. How difficult will it be to provide information that allows services to be compared? Problems arise in terms of language, differing regulatory systems and data protection. Over the past year consumers have become aware that information held on them by financial institutions had been mislaid. The Financial Regulator supports access to credit registers for EU mortgage lenders but how will the issue of date protection be addressed?  I imagine that consumers would be very nervous if they felt a strong system was not in place to control access to confidential information by mortgage lenders throughout the European Union. 

I agree that the Land Registry needs to provide greater transparency and reliability. As a former county councillor, I am aware that many gaps exist in the system and we need to focus on improving it. 

In regard to the Financial Services Ireland presentation, it was interesting to hear that 16 different mortgage providers are operating in Ireland alone. According to the Commission’s research, the present level of consumer demand for cross-border mortgages is negligible, with only 3% of consumers indicating an interest in purchasing such a product. In Mr. Kelly’s opinion, what is the reason for that and what is deterring consumers? I cannot decide from the presentations I have heard whether the problem in creating an EU-wide mortgage credit market arises from the difficulty in enticing suppliers or consumers to move across borders.  Perhaps Mr. Kelly can address that issue. 

I am intrigued by his reservations on the need for EU legislation to create an EU-wide market in financial services, and mortgage credit in particular, rather than leaving the matter to member states. I ask him to elaborate on how it could be managed by member states. 

Reply by Ms Mary O’Dea ■ Consumer Director | Irish Financial Services Regulatory Authority -IFSRA-

I thank the Chairman, Deputies and Senators for their interesting and informative questions. I would like to address some points made on one issue, namely, responsible lending. While that term does not feature in our legislation we believe that lenders are responsible. The issue has arisen whereby in lending money or doing their business, generally speaking, banks and mortgage providers are operating for the benefit of their shareholders. That is true, and it is true of most businesses that provide goods and services to consumers. They operate to produce profits for their shareholders. However, banks and financial institutions are different because they are regulated. Not only do they have responsibilities to their shareholders but they have responsibilities under law, and they must comply with those legal responsibilities.  Some of those include detailed responsibilities to their customers. 

In terms of responsible lending, the financial regulator’s office has included provisions that are now legally enforceable to define what we mean by “responsible lending”. That covers the issue of suitability, which members will have heard us discuss. That concept came about in respect of investment products. When somebody was being sold an investment product, the idea was that the person might not be able to fully understand the product and there was an onus on the firm to sell them a product that was suitable for them and be able to demonstrate that after the event. That is still the case. We have taken that concept and extended it into the lending area which, on the face of it, appears a little more straightforward when somebody is taking out a loan, but it is not because we do not want people extending loans they cannot afford to pay back. 

In keeping with the suitability requirements that came into force last year, we require lenders to gather information on their clients – including on their loans – in order to determine whether products are suitable to their needs. That is one aspect of responsible lending. 

The second aspect relates to competence. One member referred to endowment mortgages in this regard. Some of our requirements relate to the competence of those selling products in the context of whether they understand the nature of what they are selling. How can a person selling a product possibly engage in a conversation with the individual who intends to buy it unless he or she fully understands the workings of what he or she is selling? We introduced statutory requirements to the effect that front-line sales staff must study for and obtain particular qualifications in order that they might sell certain products to customers. 

The third aspect of responsible lending, in which we are particularly interested, relates to information provision. There are a number of provisions in primary legislation and the consumer code which stipulate that consumers must be told various things and made aware of certain information. There are also voluntary codes which state information must be provided in a particular way and that such information must be clear. Within the code we have introduced a requirement to the effect that information must be given to consumers in a way that seeks to inform them. This might sound somewhat odd but what it means is that most of the interventions in providing information for consumers have developed in such a way that they legally protect financial firms. As a result, if, at some stage, a firm is sued, there will be legal protection in place which will indicate that a particular disclosure was made. It is our view that matters must move forward and that financial institutions should provide information in a way which will ensure customers will understand it and be aware of the nature of the risk relating to the type of loan they are seeking. 

Members may ask how this might be achieved. One of the best ways is to ask consumers.  Financial institutions conduct a great deal of market research aimed at discovering whether products are profitable and whether people will buy them. Such research should include questions regarding whether consumers understand the risks relating to the products financial institutions are trying to sell and whether those institutions are providing information in a way that seeks to inform. We are working with the industry – we will have the opportunity to review our code next year – to ensure information is provided in a way that seeks to inform consumers. This will move matters to a different level. We encourage the industry to ensure information is produced in the way to which I refer. 

We published our headline results in respect of consumer research. They showed that 65% of the people surveyed shopped around for their mortgages. This means that 35% did not do so, which is amazing, particularly when one considers the amount a person is likely to spend over the lifetime of his or her mortgage. We advise consumers that when they are purchasing their homes, they are emotionally caught up in the decisions relating thereto and do not tend to identify the purchase of a mortgage as a separate decision. We inform them that if they did not shop around for their mortgage in the first instance, it is not too late to do so. They can still review the position. 

We also publish information – some of it in conjunction with the Central Bank and Financial Services Authority of Ireland – on comparisons across the eurozone. In our experience there is a need to work extremely hard to make it easy for consumers here to switch among domestic providers before they begin to consider switching to providers outside this jurisdiction. I would make a distinction between depositing and borrowing in this regard. One member commented that when a person was going to borrow money, he or she was not really concerned about whether he or she knew the name of the financial institution involved because he or she was getting the money he or she required. When a person is depositing or saving money, the position is different and the trust factor is very much to the fore. When borrowing money, people tend to seek the best deal. If an institution from overseas offers such a deal, people will be happy to do business with it. 

On customer mobility, there is a need for us to work extremely hard in order that the demand side might be allowed to operate. The supply side is very competitive. Many European institutions are operating in that area of the market here. There is excellent competition and supply. The mortgage market has been extremely competitive. The phenomenon of Irish consumers shopping around for their mortgages is quite recent. 

We would like to encourage the shop-around message for all sorts of products. We hope we make it easy for people by publishing costs on our website, because it is a pain for people to have to go around comparing costs. 

We need to watch carefully to ensure consumers’ rights on early repayment enshrined in our legislation are maintained, which is the reason we have tried to get in early with our European interventions. While maximum harmonisation of European directives is good for competition because it prevents us from keeping competitors out by overlaying regulation here, there is a danger that those jurisdictions that do not have the same consumer protection measures we have could drag us down to the lowest common level. We need to be careful in this regard, though I see no danger of this happening at the moment. 

Issues were raised with regard to the Land Registry. We support more being done on this issue.  Anything that allows security be improved is good, not just for borrowers but also for depositors, whom we are trying to protect from the point of view of solvency. 

In terms of having breathing space to deal with issues relating to the banking system, now is the time to deal with those issues.  Regulators are now reflecting on what happened and considering how things could have been done differently. We did not have the same sub-prime market here as in the United States. Even when we talk about sub-prime lending here, it is of a completely different order and scale to the type of sub-prime lending in the States.  What we mean by sub-prime lending here is more expensive lending for those who have defaulted at some point. We do not have the kind of cases where people will clearly default very quickly, but we do have cases where more expensive lending is involved. There are lessons to be learned for all regulators from what happened. On liquidity issues, we have a very different structure here, whereby the ECB is in a position to provide liquidity support to Irish financial institutions. This support is provided on a different basis and the system proved to be robust during the subsequent turmoil within the market. 

With regard to the importance of education, this is something about which we are passionate.  We would like to see education move up the agenda in Europe. We are working with our European colleagues to ensure education takes place and that people acquire a life-skill so that whatever age they are or whatever level they are at, they will be able to understand financial products, the seriousness of the decisions to be made and how they affect their everyday lives. This would mean that people would be aware of and understand what products they should have, such as pensions, and be aware how they affect their lives. 

On the difficulty of getting information and shopping around, consumers are not stupid and if we make things easy for them to understand, they will act on the information, as we have seen in the past. However, we cannot expect people to plough through very complicated information.  We must, therefore, work hard to make things much easier for people who lead busy day to day lives. 

With regard to credit registers, I hope the data protection issue will not be a problem. Most consumers do not know credit registers exist. Sometimes they sign an agreement allowing a lender do a credit check, without any notion that this is done. We have been working with consumers on this issue and ask them to check and ensure their details are correct. Details can be wrong, but people do not understand they have the right to check them and have them corrected. I do not expect the data protection issue will be a problem for consumers. 

My colleague may wish to add further comment on whether a European regulator will be needed for these initiatives. Most European integration has taken place within the national regulatory framework, which provides for cross-border operations. Some products work well across borders, but others, because of the Land Registry and other issues, do not work so well. However, I do not think this will lead to the need for a European regulator, but it creates a need for harmonised regulation, which is what Commissioner McCreevy continues to promote. 

On whether we need the directive, we believe there is a need to examine the regulatory impact analysis. We must be careful, however, when we consider the cost of implementing directives. 

We do not necessarily look at the cost of implementing these things or at what is the starting point. For example, within Ireland, there is already a cost to the system for complying with the existing requirements. We should perhaps be focusing on the additional cost when doing a regulatory impact analysis rather than on the initial cost as if we had nothing because that is not where we are going to be. We need to look very carefully at the benefits. We can see the benefits for Irish consumers of the initiatives we have undertaken and we would like to see how those benefits might be measured across Europe. We are all agreed that we need to look carefully at regulatory impact assessment. 

In terms of whether competition can be dangerous, I think it always works to the benefit of the consumer, provided it is done within a clear regulatory framework and provided an institution does not act in any way to risk the solvency of an institution by its competitive behaviour. I do not think there is any evidence of this behaviour – rather there is evidence that strong competition in the mortgage market is on the basis of various offerings. 

This leads me into the area related to 100% mortgages. There was a consumer demand for these mortgages in particular sectors. For instance, a person paying rent for the previous ten years who took out a 100% mortgage would have been required to pay the same amount as repayment of that mortgage and they could clearly demonstrate the affordability of that mortgage. The issue with 100% mortgages is all about affordability, whether the person could afford to repay the money. It is probably not correct to look at this mortgage in terms of the value of the house. If somebody takes out a mortgage of only 40% or 60% and cannot afford to repay it, this is a far worse situation. The amount being lent to that person does not matter because the clear issue is whether they can afford to make the repayments. 

Filed under:
European Affairs, Joint Committee on European Affairs by Deirdre