The Central Bank of Ireland has today issued its 2019 Annual Report and Annual Performance Statement. The Annual Report provides an overview of the key activities and work undertaken by the Central Bank to safeguard monetary and financial stability and to ensure that Ireland's financial system operates in the best interests of consumers and the wider economy.
In the midst of the current pandemic, the role of the Central Bank is vital in containing the economic effects of the crisis and protecting cunsumers in this uncertain time.
During 2019, the Central Bank continued to work across all aspects of strengthening consumer protection with the aim of protecting the best interest of consumers and enhancing confidence and trust in the financial system through effective regulation of firms and markets.
Some of the key areas of interest of the Central Bank's Annual Report and Performance Statement, which are considered below, include the tracker mortgage examination, enforcement actions, errors and consumer restitution, supervision and protected disclosures.
Tracker Mortgage Examination ("TME")
Following a decade-long tracker mortgage examination, the Central Bank published its final report on 16 July 2019, which marked the close out of the supervisory phase of the TME. The report outlines the robust challenge and assurance work undertaken to ensure lenders identified those affected by tracker mortgage-related failings.
The TME Framework required lenders to establish an independent appeals process to deal with customers who were dissatisfied with any aspect of the redress and compensation offer made to them by their lender. The Central Bank’s final TME Report states that as of 31 May 2019 approximately 3,300 customers had appealed to their lenders the original compensation offer they received, which represents almost 10% of customers who had received payments. As of 31 May 2019, the various appeals panels have awarded approximately €7 million additional compensation to affected customers.
Affected customers who have complained to their lender but remain dissatisfied with the outcome of their complaint, and do not accept the findings of the appeals panels, have the option to bring a complaint to the Financial Services Pensions Ombudsman (the "FSPO"). In the TME report, the Central Bank has clearly communicated to lenders its expectation that if any individual outcomes arise from the FSPO or court processes that have the potential to impact customers more widely, they must then address this broader impact and inform the Central Bank accordingly. The Central Bank will investigate any outcomes that may give rise to a systemic or wider customer impact, and take appropriate action with lenders as required.
As at the end of December 2019, one enforcement investigation has concluded and enforcement investigations continue against the remaining five prominent lenders.
Following robust investigations, the Central Bank delivered a number of notable enforcement outcomes in 2019, completing eight enforcement actions under the Administrative Sanctions Procedure (ASP) and imposing fines totalling €30,262,689.
A significant enforcement action was the imposition of a fine of €21m on Permanent TSB plc following an investigation where Permanent TSB admitted 42 regulatory breaches of the consumer protection codes affecting 2,007 of its tracker mortgage customer accounts. This was the largest fine ever imposed by the Central Bank and marked the completion of the first in a series of ongoing industry investigations arising from the Central Bank’s TME.
Throughout 2019, the Central Bank continued to focus on individual accountability. Since 2006, the Central Bank has disqualified 14 individuals from holding positions as persons concerned in the management of regulated firms under the ASP. Since, 2011, under its fitness and probity regime, the Central Bank has prohibited eight individuals from holding any role in the financial services industry for a definite or an indefinite period. More notably in 2019, the Central Bank secured its first High Court order under section 45 of the Central Bank Reform Act 2010 which confirmed a prohibition notice preventing an individual from performing any controlled function in Ireland for ten years.
The Central Bank also continued its engagement with the Department of Finance to develop the proposed Individual Accountability Framework, which includes the Senior Executive Accountability Regime (SEAR). SEAR will bring Ireland's financial regulatory regime in line with international standards by focusing on improved individual accountability through a sound risk culture, effective corporate governance and holding individual senior managers to account when regulatory breaches and other failures do occur. The Government agreed on 18 June 2019 to the drafting of the Central Bank (Amendment) Bill 2019 to enact various recommendations of the Central Bank under the proposed Individual Accountability Framework. Placing this accountability regime on a legislative footing will be a key driver in the Central Bank's mandate in achieving the objective of cultural change across the financial services sector.
On 14 November 2019, the Central Bank launched its ASP Sanctions Guidance. The guidance provides further clarity on the approach the Central Bank undertakes when determining the appropriate sanction to be imposed on regulated financial services firms and individuals for certain regulatory breaches. It provides guidance on the application of a variety of factors relevant to sanctioning, including co-operation, self-reporting and remediation. The guidance complements the Central Bank’s Outline of the Administrative Sanctions Procedure and Inquiry Guidelines prescribed pursuant to section 33BD of the Central Bank Act 1942 (as amended). The financial services industry has welcomed the publication of the guidance as it helps to promote an improved culture of compliance in financial firms by clarifying the behaviours, which may aggravate or mitigate a breach of financial services law.
Errors and Consumer Restitution
The Consumer Protection Code 2012 requires that firms resolve errors, notify consumers and arrange prompt refunds, as well as correcting systems failures and implementing controls to prevent a recurrence of the error. The Central Bank monitors the resolution of such errors to ensure firms resolve them within the required timeframes and treat consumers fairly. In 2019, the Central Bank reports that €74 million was returned to consumers arising from errors across multiple sectors, primarily the banking sector.
Financial regulation focuses on ensuring that regulated firms are financially sound, have sustainable business models and effective risk management and controls in place. These outcomes are achieved through assertive and risk-based supervision appropriate enforcement and the development of an effective regulatory policy and supervisory framework.
Of particular note, especially during the current rapidly evolving crisis, is the Central Bank's focus on appropriate recovery planning. During 2019, the sustainable resolution of non-performing loans (NPLs) and the protection of borrowers in mortgage arrears remained a key priority for the Central Bank and considerable progress has been made in resolving NPLs. The work of the Central Bank included extensive engagement with individual banks, detailed analysis, and robust on-site investigations.
The Annual Performance Statement outlines that while Private Dwelling Home (PDH) NPLs continued to decline in 2019, supervisory work has shown that:
The reduction in NPLs arises from loan sales. The prevalence of mortgage NPL portfolio sales has increased substantially in the last 18-24 months.
Long-term sustainable solutions for individual borrowers in these cases have not necessarily been put in place.
The Central Bank’s overall aim is to reduce NPLs sustainably across the system. There are multiple tools available to lenders to achieve this, ranging from restructures to debt write-down, engaging with insolvency processes, engaging with mortgage-to-rent schemes and loan sales. As a result of the large volume of portfolio sales, the issue of PDH mortgage arrears now extends beyond retail banks into the non-banking sector. The Annual Performance Statement demonstrates that the percentage of all PDH mortgages in arrears held by non-bank entities as at the end of September 2019 was 36% (23% twelve months earlier). Non-bank entities held 48% of PDH mortgages in arrears over 720 days as at the end of September 2019 (28% twelve months earlier).
It is clear that even more than ten years since the financial crisis, NPLs in Ireland remain significant therefore further work is required by banks to develop their overall recovery capacity.
The Central Bank will continue to focus on the sustainable resolution of NPLs and the fair treatment of borrowers in arrears across existing banks in 2020 however, given the anticipated impact of COVID-19, NPL levels are likely to increase for both personal customers and businesses.
Examples of other industry-wide supervisory actions undertaken by the Central Bank during 2019 include the following:
A review of the effectiveness of the Code of Conduct on Mortgage Arrears
In October 2018, the Central Bank published a report on the effectiveness of the Code of Conduct on Mortgage Arrears in the context of the sale of loans by regulated entities. As a follow-up, the Central Bank wrote to industry in March 2019 setting out expectations of firms to provide additional information to borrowers on the assessment of their arrears, effective no later than 1 January 2020.
Clarification of Supervisory Expectations for all firms in respect to loan sales
In the context of loan sales and the potential for customer detriment, the Central Bank wrote to industry in August 2019 setting out its expectations in respect of loan sales in an effort to ensure consumers’ interests are protected. These expectations include due diligence, information sharing, protection where a borrower is complying with the terms of a restructure, timelines for review and how to deal with changes in borrowers’ circumstances.
Expectations in relation to the charging of costs associated with the legal process and other third party charges to borrowers in mortgage arrears
The Central Bank has made it clear that applying the costs prior to the conclusion of repossession proceedings and prior to the decision by a Court to award the costs to the regulated entity is not in a borrower's best interests. Additionally, it is not in a borrower’s best interests to apply the costs prior to settlement between the parties concerned or prior to a borrower being in a position to redeem the mortgage and requesting to do so.
The Central Bank asserts that protected disclosure reports are an important tool to assist in discharging its supervision and enforcement mandate. Protected disclosures aid in extending the Central Bank’s supervisory reach and enhance its overall regulatory insight by providing a valuable source of information regarding sectors and regulated firms. The establishment of a protected disclosures regime promotes high standards within regulated firms and helps in positively influencing behaviours.
In 2019, 200 protected disclosures were received which represents a 56% increase in 12 months (128 protected disclosures were received in 2018). Actions taken on foot of information received as a protected disclosure include undertaking additional supervisory work such as on-site inspections, requiring a firm to fix issues, putting firms under higher supervisory focus, and taking enforcement action.
A full copy of the Central Bank's Annual Report and Annual Performance Statement 2019 can be viewed here.
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