Response of: The Professional Insurance Brokers Association (PIBA) Unit 14B, Cashel Business Centre Cashel Road, Crumlin Dublin 12 Ireland

Transcription

1 Response of: The Professional Insurance Brokers Association (PIBA) Unit 14B, Cashel Business Centre Cashel Road, Crumlin Dublin 12 Ireland Interest Representative Register ID number To the European Commission On The Public consultation on responsible lending and borrowing in the EU August 2009

2 The Professional Insurance Brokers Association (PIBA) is the largest representative body for Insurance and Mortgage Brokers with nearly 900 member firms throughout Ireland. PIBA welcomes the opportunity to take part in the consultation on responsible Lending & Borrowing in the EU. We respond to the questions raised in the consultation paper on an individual basis, our answers are framed around existing regulations in Ireland. Mortgage Intermediaries and Credit Intermediaries fall under the remit of the Consumer Credit Act with Mortgage Intermediaries authorised by the Financial Regulator and Credit Intermediaries authorised by the National Consumer Agency. It is clear that the housing market in Ireland was grossly overheated and there was an explosion in the availability of credit in the market. The financial crisis that followed was exacerbated by the withdrawal of credit as a result of excessively tight bank lending criteria. This prevents first-time buyers in particular from entering the market which inevitably prolongs the recovery in the housing market. PIBA believes that this is the time when we need measured and responsible bank lending. It is now that Governments should design measures to promote anti-cyclical lending i.e. Banks should be encouraged to lend during recessions and discourage excessive lending during booms. Question 1. Do you have evidence of misleading or unfair advertising or marketing practices with regard to consumer credit? PIBA is not aware of any misleading or unfair advertising or marketing practices in Ireland. The Consumer Protection Code mandatory requirements for the content of Advertisements and the various warnings which must be included on all advertisements. The Financial Regulator monitors compliance with these requirements. The Consumer Credit Act also sets out guidelines on the content of advertisements. The National Consumer Agency is the supervisory body for credit intermediaries, legislation empowers the National Consumer Agency to work closely with sectoral regulators i.e. the Financial Regulator/Financial Services Ombudsman Question 2. What are your views on the development of risk guidelines? In Ireland, the Consumer Protection Code and the Consumer Credit Act outline statutory warning statements which are required to be on all advertisements which outline the risks that consumers may face if they cannot meet their repayments. Intermediaries are also required to assess client s financial needs in the form of a Factfind and make their recommendations accordingly. Loan documents are issued to borrowers and contain warning statements.

3 Question 3. In your view, are there certain (categories of) credit products that are inherently unsuitable for sale to retail borrowers? PIBA is unaware of any product on the market which is inherently unsuitable for sale to retail borrowers. Would you welcome a set of standardized or certified credit products to be offered to consumers? No, PIBA believes that this should be left to market forces to determine. However, there may be some merit in looking at regulating discounted variable rate mortgages with a discounted rate for a period of less than 5 years. The discounted rates attract people at an artificially low interest rate and often once this rate expires borrowers are unable to meet the new repayments. Question 4 Do you consider that mortgage lenders and credit intermediaries should always perform creditworthiness and/or suitability assessments before granting consumer and mortgage loans? Yes, PIBA believes it is necessary for Mortgage Lenders, Mortgage Intermediaries and Credit Intermediaries to assess the suitability of products to their client s needs. Taking out a mortgage or loan is an important financial decision for a consumer and it is crucial that the product meets the client s needs. Currently the Financial Regulator Consumer Protection Code requires all financial service providers, which includes mortgage intermediaries but excludes credit intermediaries, before selling a product or service to a consumer to prepare a written statement of suitability. This statement is required to outline clearly: 1. Reasons why the product is suitable for the consumer. 2. Reasons why each of a selection of product options to the consumer are considered to be suitable to the consumer. 3. Reasons why that product is more suitable than any other product on the market. PIBA would therefore be in favour of Credit intermediaries been brought under the remit of the Consumer Protection Code in order to ensure that all consumers are assessed correctly in order to get the best product for their needs. For mortgage credit, what are your views on the criteria to be used in assessing suitability such as loan-to-income ratios or loan-to-value ratios? In Ireland, The Financial Regulator requires all Lenders to carry out stress testing on all mortgages applicants to ensure the borrower can afford repayments if the rate they are charged increased to 2.75 per cent above the European Central Bank. Most Lenders in the market stress at a higher rate than this minimum and then access the borrower s Net Disposable Income (NDI) and their Debt Service Ratio (DSR) i.e. the % of debt compared to the borrowers income. PIBA

4 feels that this stress testing is the correct way to assess affordability to ensure that borrowers will be able to make the necessary repayments. PIBA believes that measures should now be designed to promote anti-cyclical lending i.e. Banks should be encouraged to lend during recessions and discourage excessive lending during booms. Question 5. How should the lender or credit intermediary demonstrate or document the adequacy of the creditworthiness and suitability assessment? The Consumer Protection Code requires that before providing a product or service to a consumer, a regulated entity must gather and record sufficient information from the consumer to enable it to provide a recommendation or a product or service appropriate to that consumer. The level of information gathered should be appropriate to the nature and complexity of the product or service being sought by the consumer, but must be to a level that allows the regulated entity to provide a professional service. PIBA feels that the Factfind and Statements of suitability are suitable documents to capture the necessary information to assess the suitability of the product for clients needs. Credit Intermediaries do not fall under the remit of the Consumer Protection Code and therefore are not required to comply with the Knowing the Customer and Suitability Requirements PIBA feels that it would be appropriate for Credit Intermediaries to be brought under the remit of the Consumer Protection Code. Lenders also require Credit checks on mortgage applicants through the Irish Credit Bureau. Mortgage Brokers have access to Lender calculators and are able to input client details and print off what loan amounts are available and what interest rates apply. Many Mortgage Brokers use impartial IT systems to compare all Lenders rates and terms. Question 6: Do you think that these advice standards would be appropriate in an EU context? Are there others that should be considered? No, PIBA feels that each individual government/regulator is best placed to draw up the laws and regulations which best suits the Member states needs. What would be the most appropriate means to introduce and enforce the application of advice standards? Please explain. PIBA believes that the completion of Factfinds and Reasons Why by Mortgage and Credit Intermediaries along with credit assessment by Lenders and minimum competency standards are the most appropriate means to enforce the application of advice standards. In Ireland the Minimum Competency Requirements were introduced by the Financial Regulator in The purpose of these requirements are to establish minimum standards across all financial services providers from which consumers seek advice on, or seek to purchase, retail financial products (except licensed Money Lenders).

5 Question 7: Apart from a focus on financial education, are there any measures that could be taken to encourage responsible borrowing? PIBA feels that a balanced and informative Media and PR campaign could encourage a more responsible approach to borrowing in the Public. Question 8: Do you consider that the scope of the definition of Credit Intermediary as set out in the Consumer Credit Directive could also be applied to the mediation of credit not covered by that directive? In Ireland, the Consumer Credit Act applies to Mortgage Intermediaries under the Financial Regulator and Credit Intermediaries under the National Consumer Agency. PIBA would welcome a unified authorisation and regulatory approach. Would it be appropriate to differentiate between full-time credit intermediaries and persons who offer credit intermediation on an incidental basis? No, PIBA believes that it is not appropriate to differentiate between full-time credit intermediaries and persons who offer credit intermediation on an incidental basis. Despite the fact that a person offers credit intermediation on an incidental basis it can still represent a high volume of income. The absence of the same level of regulation eliminates the benefits of being a full time professional and if part-timers are allowed enter the industry on an unequal basis, fulltimer s integrity is undermined. PIBA believes that statutory regulation sets the standard that all firms should abide by. Question 9: Do you think policymakers should make distinctions between credit intermediaries in terms of the products they sell (mortgage, consumer credit, 'point of sale' credit)? Should credit intermediaries be treated differently in terms of the status of their relationship with lenders (tied versus untied intermediaries)? Please explain your answer. Yes, PIBA feels that the framework of regulations should be the same but should be tailored to the complexity of the product and the distribution status i.e. Tied/Untied intermediaries Question 10: Could you give examples of cases of misconduct, mis-selling or any other instances of consumer detriment linked to credit intermediaries in your country? Dual-Lending, currently credit institutions offer different interest rates to their Broker channels and Direct channels. This is an issue of concern to PIBA and its members. This is clearly a conflict of interest as consumers are at a commercial disadvantage when they go through a Broker, despite the fact that a Broker is providing independent advice, assessing the whole market

6 in order that the client gets the most suitable product to their needs. Lenders are using price to disadvantage Broker distribution despite the savings to the Lender of using Brokers. This practice is particularly apparent with credit rationing in Ireland. PIBA believes that some form of regulatory requirement should be introduced to ensure that all applications, whether through mortgage intermediaries or bank client-facing staff,be subject to identical underwriting criteria and scrutiny to avoid bias and unsuitable lending practices in favour of direct channels over intermediaries that have been prevalent in Ireland heretofore. Question 11: Does the regulatory patchwork for credit intermediaries present a problem, in your view? Yes, currently credit intermediaries are authorised by the National Consumer Agency. PIBA believes the authorisation process for all credit intermediaries, mortgage intermediaries should be aligned and fall under the remit of the Financial Regulator. PIBA feels that many consumers are unaware of the different forms of authorisation. Question 12: What would be the most appropriate way to address potential conflicts of interest, particularly with regard to fee/ bonus/ commission structures? PIBA believes that the issue of commission rates should remain a commercial decision between the lending institution and the Intermediary. In Ireland, Intermediaries are required to disclose in their Terms of Business the commission that they earn in general terms and full disclosure is required on request of client. PIBA would suggest that in order to facilitate clients who wish to pay for advice by fees or a mixture of fees/commissions and avoid possible conflicts of interests lenders could be required to provide on loan offers an option for borrowers to instruct lenders that any clawback of commission due to early settlement of the loan be charged to their account rather than that of the credit intermediary. (b) Should any measures in this regard apply to bank client-facing staff as well as intermediaries? Clients should receive the same information from a bank client facing staff regarding what commissions they receive as they would from an independent intermediary. PIBA believes that additional requirements should apply to ensure that clients are aware that the advice they are receiving is not independent but only in regard to that particular institutions products. PIBA suggests that a Warning Note be shown on all Loan Offers/AIPs generated from bank clientfacing staff recommending that You should seek both independent legal and financial advice prior to accepting a loan offer

7 Question 13: What are your views on the registration and supervision of credit intermediaries? PIBA feel that credit intermediaries should be authorised and supervised by the Financial Regulator thereby aligning the authorisation and supervision process of all intermediaries, Insurance/Mortgage & Credit Intermediaries. Question 14: What are your views on prudential and professional requirements for credit intermediaries (such as minimum capital, professional indemnity insurance, educational or professional qualifications)? PIBA feels that there should be mandatory Professional Indemnity requirements and Minimum Competency standards in place for all credit intermediaries. Question 15: How do you think the activities of credit intermediaries could be brought within existing complaints and out-of-court redress mechanisms? The Financial Services Ombudsman can investigate complaints by consumers against credit intermediaries. Where the Financial Services Ombudsman makes a decision on a complaint the only avenue for the intermediary (including credit/mortgage/insurance) to seek redress is by making an appeal to the High Court. This is an extremely expensive process with many intermediaries choosing to accept the FSO s decision rather than to take legal action. PIBA believes that there should be an out of court appeal system put in place for intermediaries to appeal decisions of the Financial Services Ombudsman.