The Irish competition watchdog has called for a more efficient use of suspended repossession orders by courts to resolve deep-in-arrears mortgage cases that have gone down the litigation route.
This is one of a number of recommendations the Competition and Consumer Protection Commission (CCPC) has made in a submission to the Department of Finance as part of a review of State’s banking system following the decisions by overseas-owned lenders Ulster Bank and KBC Bank Ireland to quit the market.
The CCPC said difficulties faced by banks in the Irish market in enforcing security on mortgage debt “have been cited as a potential barrier to entry”. They have also contributed to Irish banks having to hold higher levels of expensive capital against their loans — resulting in higher average mortgage rates in the State compared with the wider European Union.
As of the end of last year, more than a third of the 6,257 problem owner-occupier home loans that were part of the legal process had been stuck in the system for more than five years, according to Central Bank data, even as overall arrears levels have fallen sharply over the past decade.
“Non-performing loans reduce bank profits because they require higher provisions of capital, lead to lower interest income, generate expenses in their management and lead to an increase in funding costs due to the higher credit risks of such banks,” the CCPC said.
The CCPC noted that there is a long-standing practice in the UK to use suspended repossession orders at an early stage of court proceedings, subject to borrowers complying with conditions set out in an order relating to payment of any sum secured by the mortgage or the remedy of any default.
Irish laws introduced in 2009 allowed for courts to issue suspended repossession orders. However, the CCPC noted that Irish courts tend to adjourn proceedings in the expectation that borrowers and lenders would agree to some form of settlement — rather than reaching a court-mandated solution as part of a suspension.
“The CCPC submits that if suspended possession orders were used more widely in Ireland at the initial stages of proceedings this could reduce delays by avoiding the need to have repeated adjournments to allow the borrower and the lender reach an agreement,” it said.
Elsewhere, the CCPC submission called for an amendment to Central Bank’s mandate to give it a role in promoting competition in financial services, alongside its current regulatory focus on prudential and conduct supervision and consumer protection.
Brian McHugh, a member of the CCPC, told The Irish Times that this did not mean that the commission was calling for a return of the explicit mandate that Irish financial regulators had between 2003 and 2010 to help lure overseas firms to Dublin’s International Financial Services Centre.
“The CCPC believes not only that competition and appropriate macroprudential regulation can coexist comfortably, but further that active competition among firms in the banking sector, within the framework of appropriate macroprudential regulation, is in the best interests of society, promoting a stable banking system that works in the best interests of consumers and MSMEs,” the submission said. MSMEs refers to micro, small and medium-sized enterprises.
While the CCPC said it was “concerned by the impending increase in the concentration levels” of the Irish retail banking sector as a result of the departures of KBC and Ulster Bank, it has had little alternative but to approve moves by the State’s remaining three banks to buy most of their loan books.
“The CCPC notes that these exits will leave only three ‘full service’ or ‘universal’ banks in the market for consumers, and just two for businesses,” it said. “This compares poorly as against other EU member states and Ireland will be unique in having such a low level of choice. It will therefore be vital that public policy and regulation can ensure that new entry into Ireland is facilitated and competition is effective.”
Meanwhile, the CCPC also said the Central Bank should examine the “loyalty costs” arising from consumers rolling over on to higher mortgage interest rates at the expiry of a fixed term and identify measures to address them.
