To: Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach.
Leinster House
Re: Investment Funds in the Irish Property Market
Dear Chairman,
Thank you for the opportunity to present to the Committee on the above matter. This paper draws on my experience of over 20 years in investment and retail banking and 3 years with Kennedy Wilson. Since 2015, I have been working with distressed mortgage holders, assisting consumers in filing complaints with the Financial Services and Pension Ombudsman (FSPO).
While the focus of this presentation is on Vulture Funds[1], I also deal with the entire process from origination of the mortgage, and further, describe the general protections available to consumers of financial services in Ireland.
Vultures Funds invest in distressed assets. They form part of the unregulated world of shadow banking. They all have one thing in common; to seek above average returns on their capital. They are accountable only to their Managing Directors and investors.
Vulture Funds provide liquidity to the banking system by purchasing illiquid distressed debt at a discount in troubled times.
In this paper, I will address the following:
- How is the residential mortgage market different to other banking sectors?
- What protections exist for consumers in this market?
- Enforcement of Consumer Protections and potential conflicts of interest.
- Why did the banks delay sales of their distressed Home Loans?
- What caused the banks to eventually sell?
- Who are Debt Servicers?
- How do the Vultures manage distressed family Home Loans?
- How do Vultures fund their portfolios?
- How is the residential mortgage market different to other banking sectors?
This market is different because “the laissez-faire rules which might apply in the case of the borrowing and lending on the international capital markets cannot be applied in exactly the same way in the case of the domestic mortgage market, given that these are matters which gravely affect the long term welfare of most members of the general public”, as recognised by the Courts[2].
The Central Bank reinforced this view where they noted[3] in 2005 that “Consumers are far less well informed about financial products than the providers of those products………many potential buyers of retail financial products may not even know what it is that they do not know.”
Both statements clearly indicate that the authorities believe that consumers of financial services need protection, as products such as Home Loans can gravely impact the long term welfare of our society.
- What protections exist for consumers in this market?
The Central Bank issued the first Code in 2001, in the form of a Code of Practice. This Code sets out the principles of consumer protection and has placed a marker down that the concept of “Buyer Beware” is no longer appropriate for this sector. A more expanded version of this Code followed with the publication of the Consumer Protection Code 2006. These Codes placed obligations on banks selling Home Loans to follow mandated rules. The Codes were supplemented by instructions on best practice issued directly to the lenders by the Central Bank, as noted in its Annual Report and Accounts.
- Enforcement of Consumer Protections and potential conflicts of interest.
While all the protections required for the consumer are in place when purchasing a mortgage, there is an apparent conflict of interest when it comes to enforcement. Namely, the Central Bank is responsible for both Consumer Protection and Prudential Supervision. This structure is out of line with both the UK and the US, who have similar banking models to Ireland.
That is, there is no one dedicated independent body in Ireland enforcing Consumer Protection with respect to financial services.
Appendix A sets out the State bodies involved in Consumer Protection and deals with conflict of interest in more detail.
- Why did the banks delay sales of their distressed Home Loans.
The liquidity crisis had passed with the creation of NAMA and other Troika initiatives. Banks had no desire to sell their non-performing Home Loans, as the necessary disclosures in a sale would expose issues such as the absence of documentation, security of title, and misconduct. To gain an understanding of the pressure on banks’ administrative functions, the table below sets out the number of Home Loans originated at the height of the Celtic Tiger compared to a more normalised 2018.
| Years | No. issued |
| 2005 | 102,965 |
| 2006 | 105,313 |
| 2007 | 93,414 |
| 2018 | 24,422 |
- What caused the banks to eventually sell?
The European Central Bank called time on this retention policy by implementing changes to regulatory capital rules. The ECB was preparing for the next crisis and needed to ensure the loans, even if fully provided for, did not continue to distract their regulated banks. The regulatory charges were prohibitive and the banks had no choice but to meet the new target levels for distressed loans.
As a result of regulatory changes, and the need of certain foreign banks to withdraw from the Irish market, 113,000 Home Loans, secured on family homes, transferred from the heavily regulated banking environment to the world of shadow banking.
- Who are Debt Servicers?
The Vulture Funds are not in the day-to-day business of administering loans and have delegated this function to licensed Debt Servicers. These Debt Servicers meet the local legal requirements and their SPVs[4] are often the legal owner of the loans. The Vulture Fund, who takes all the risk and reward of the purchased portfolio, has the status of beneficial owner. Local rules will dictate how the responsibilities are allocated. The Debt Servicer is the equivalent of the operations department within a bank.
- How do the Vultures manage distressed family Home Loans?
It is important to note that Vultures only purchase Home Loans where a default, or arrears, exist. When a consumer defaults or goes into arrears (including voluntary rearrangements), the contract is broken and they effectively lose most of their contractual rights.
The rights of the borrower do transfer on sale but these rights are now significantly diminished to that of “Principles” contained within the various consumer protection codes. In a shadow banking world with no principles, “General Principles” defined in the Codes of Consumer Protection, can become highly subjective.
The Vulture always ensures it purchases a valid and enforceable legal claim.
In terms of the day-to-day management of distressed Home Loans:
- Loans are not written down and permanent restructures involve deferring some or all of the capital repayment to a later date. No write downs are given as that would entail the Vulture giving up value in the form of house price appreciation, access to next of kin, access to equity on death and pension assets.
- There are no deals to be done in this market, as there is no refinancing available in Ireland for retail borrowers who have defaulted and aged.
- Payment terms are continually assessed and redefined/changed, depending upon affordability to the home owner – death by a thousand cuts.
- Interest rate increases are applied even though the maximum cash is being extracted. When applied, the increased charges have the effect of reducing the family’s equity in the asset.
- There are no options available to consumers to fix their interest rate as the Vulture is not a functioning bank and any use of derivatives to deliver fixed rates would eat into their profitability.
- The Vulture purchases portfolios of “Financial Claims”. They need the right/the threat to commence legal proceedings to obtain leverage to negotiate maximum cash extraction from the family.
- The threat of legal proceedings is crucial to the business model and ensures the Vulture can maximise cashflow from the assets. Most possession orders granted are never acted upon but continuously used as leverage to extract more cash.
- Collective yield from the portfolio drives the purchase price. Price is also negatively impacted if documentation, title and the conduct of the underwriting bank are weak. There is no commercial purchase price for individual loans.
- Licensed Debt Servicers are employed to administer and maximise the cash flow from each individual loan and meet the legal requirements for ownership. The Debt Servicer records loans on their system at the full amount outstanding, including accrued arrears; they do not necessarily need to know the price paid for the portfolio. The Vulture Funds have the status of beneficial owners of the loans and are located overseas.
- Loans are packaged to maximise sale price, for example, a building society’s entire Home Loan book was packaged as four distinct portfolios.
- Consumers credit records are never really expunged and they are truly “mortgage prisoners”.
Appendix B contains an extract from a Rating Agency’s commentary on how particular debt servicers manage individual Home Loans in a RMBS[5] structure which perfectly describes the strategic approach taken to maximise cash extraction.
- How do Vultures fund their portfolios?
Similar to banks, Vultures employ various methods to fund distressed mortgage books, however, the RMBS[6] market, in particular, is extremely attractive given its pricing. The structure provides long term funding and allows Vulture Funds to play the long game on their Irish Home Loan portfolios.
Distressed Family Home Loans are very different to other distressed asset categories. There are effectively two assets purchased – (1) the home and (2) the cash that can be extracted from the family. There is nothing to negotiate; no asset/property to sell. For commercial loans and BTLs[7], the negotiation is based upon whether the debtor can pay more for the asset than a market sale can achieve. If the asset generates cash, refinancing may be available. That is not the case with a Home Loan; the consumers are in penury for the remainder of their lives.
We have effectively transferred 113,000 families to an unregulated world of banking dedicated to self-interest, where the only objective is to make money. To quote a Managing Director of a global debt servicer, an Irishman, at an investors’ conference in London “Irish Distressed Residential Mortgages; the gift that just keeps giving.”
What can be done to help your constituents?
First, individuals who are not coping with their mortgage need to establish what the underlying issues are. There are two primary reasons for Home Loan mortgage distress:
- The borrower’s circumstances changed after they drew down the funds, typically due to permanent job loss, ill health, divorce, etc., or,
- The mortgage was unsuitable at the time of drawdown, i.e., mis-sold.
When faced with the circumstances in 1 above, the consumer needs to work with MABS and explore all the options that are available such as Mortgage to Rent, insolvency, etc.
If the borrower’s circumstances have not changed since drawdown or they have recovered after a temporary blip in their ability to repay as per the original contract, then they need to establish if their mortgage was mis-sold, i.e., they were originally sold an unsuitable financial product.
If the mortgage was mis-sold, they need to file a complaint to the Financial Services and Pensions Ombudsman (FSPO). There is a set process that complainants need to follow and this is set out on the FSPO website. Your constituents need to phrase the complaint very carefully, as 49% of all complaints last year were unilaterally rejected/closed by the FSPO before reaching Mediation or Investigation stages. More details are provided in appendix C.
What can you do systemically to assist the consumer?
- Create an unconflicted, properly resourced, body to independently enforce the rights of consumers of financial services and bring Ireland in line with international standards and best practice.
- To review the role, approach and resources of the FSPO to ensure it is fit for purpose and is adequately resourced to match the number of complaints it receives. See appendix C.
- To ensure that the FSPO takes a “common-sense” approach in its application to Time Limits for complaints, as instructed by the Courts in Baynes V FSPO 2022. See appendix D.
- Review the current access to justice available to the consumer. Parties to consumer complaints should have the right to appeal decisions of the FSPO to the Circuit Court or an independent quasi-judicial appeal body. The Circuit Court is now deals with possession orders. See appendix E.
Appendix A
Conflict of Interest in the Irish system
The Central Bank is responsible for Consumer Protection, issuing and ensuring adherence to Codes. When it comes to enforcement – if the consumer has been wronged, any redress must be paid by a bank. A gain to the consumer is a loss to the bank.
The European Central Bank (ECB) is responsible only for Prudential matters and has no responsibility for Consumer Protection.
It follows that the same body cannot be responsible for supervision of both Consumer Protection and Prudential matters and Ireland is out of line with both the UK and the US who have similar banking models.
The following examples show differences in approach taken in resolving matters:
- Payment Protection Insurance (PPI) – In the UK, no time limit placed on the period of look back while in Ireland the banks limited their look back period to July 2007.
- In June 2020, the UK’s FCA[8] brought a test case in the High Court against eight insurers to clarify whether certain business interruption insurance policies should cover losses related to the COVID-19 pandemic. There was no equivalent action in Ireland by any State body or consumer representative body.
Competition and Consumer Protection Commission (CCPC) is restricted to consumer educational matters and Government advisory role under its legislation. It has refused to raise awareness of mortgage mis-selling and is still considering the decision in Baynes V the FSPO, issued in December 2nd 2022. It refers financial services consumer protection matters to the Central Bank.
The Central Bank of Ireland will not deal with any complaints regarding their actions in any structured manner. The appeal process is a Judicial Review application to the High Court.
MABS, the money advisory and budgeting service focuses on the future by assisting the consumer with budgeting, helping with restructures, Mortgage-to-Rent scheme and insolvency matters.
The Financial Services and Pensions Ombudsman (FSPO) is an Alternative Dispute Resolution (ADR) forum which acts as mediator and adjudicator between consumers and lenders. It treats both parties equally except with respect to Time Limits – see appendix D.
Appendix B
Rating Agency Report on Debt Servicers on RMBS
“Changes to interest-only to restructure loans is typically not as a permanent restructuring
solution and tend to be used temporary. Typically, the servicers would prioritize part-and-part repayment when there is enough affordability to bring down the LTV ratio by the end of the life of the mortgage loan. Borrowers’ affordability is assessed going into retirement age and the ability of the borrower to pay the balance of the loan through a repayment vehicle, including but not limited to a pension lump sum, the sale of assets, or assistance from next of kin.
For split loans, 12.8% of the preliminary pool have had a split restructuring applied. The interest-only arrangement is reviewed regularly (typically every three years) where step-ups in repayment are sought as a means of achieving full repayment without relying on the sale of the underlying collateral at maturity.
Most
of each sub portfolio have already undergone a permanent restructure
considering borrowers’ circumstances. Should these restructure
agreements fail, the servicing strategy for both servicers aims to
realize the real estate value in the most efficient manner available.”
Appendix C
The Financial Services and Pensions Ombudsman (FSPO)
The purpose of the establishment of the statutory complaints procedure was to afford complainants an informal, expeditious and independent mechanism for the resolution of complaints. It is an Alternative Dispute Resolution forum which deals with consumers complaints against Financial Service companies.
The role of the FSPO is restricted to Mediation, Investigation and Adjudication and treats each party equally, with the notable exception of Jurisdictional matters – see appendix D
It can award compensation for both misconduct and breaches of law, however, there is no award of legal fees; the consumer is on their own. As a result, the legal profession cannot financially justify representation at this forum and the consumer is left to argue against a financial services company, with all the resources that it has available to it.
The FSPO upheld 96 complaints in 2022 in favour of the consumer.
The FSPO annual report for 2021 records “Legal Fees” at €3.1 million (€1.8 million in 2020) which represents 73% of the amount expended on ‘Salaries and Staff Costs” at €4.3 million. It would appear that the FSPO expends as much defending itself and its decisions, as it does on investigating and closing consumer complaints. There is no clear explanation or breakdown of the €3.1 million of legal fees in the annual report and accounts.
The 96 legally binding decisions delivered €616,686 of compensation to consumers in 2022.
The 2022 mission statement, outlined in the FSPO annual report and accounts, is “to provide an impartial, accessible, and responsive complaint resolution service that delivers fair, transparent and timely outcomes for all our customers…….”
2022 recorded 4,647 complaints closed, down 25% on 2020 numbers of 6,193.
Only 2% of all complaints closed were upheld in favour of the consumer in 2022.
49%, or 2,296 of total complaints dealt with in 2022, were closed within a short period, not reaching Mediation or Investigation stages.
With respect to timeliness,
40% of the complaints closed in Investigation Stage, were ongoing for more than
3 years. No details were provided beyond the 3 years.
Appendix D
Jurisdiction to Investigate and the FSPO Act 2017
The Oireachtas amended the FSPO Act in 2017 to recognise, amongst other things, that problems may only arise at the later stages of long term products such as mortgages. The extension of the period available to the consumer to take complaints brought Ireland in line with international standards. The discretion to investigate complaints, relating to long term products, was granted by way of Sections 51(2)(b)(ii) and (iii). Under Section 51(2)(b)(iii) the Ombudsman’s discretionary powers where significantly widened to reflect the need to examine long term products such as mortgages:
“(iii) such longer period as the Ombudsman may allow where it appears to him or her
that there are reasonable grounds for requiring a longer period and that it would
be just and equitable, ……………..”
The following paragraph was included in the amendments to the 2017 Act:
“Where a question arises as to whether the Ombudsman has jurisdiction……………. to investigate a complaint, the question shall be determined by the Ombudsman whose decision shall be final.”
Due Process surrounding Statute of Limitations, normally dictates that it is the responsibility of the respondent or defendant to raise such matters and provide support to their claim. It is not the role of a “mediation and adjudication” service, to raise such issues unless the complaints are clearly outside the remit of the FSPO. Those clearly outside the remit of the FSPO are defined in Section 52 of the FSPO Act. Section 52 permits the FSPO to gather more information on the complaint but does not permit it to investigate periods after the date of the complaint with the purpose of identifying when the consumer became aware of the mis-sale or the unsuitability of the mortgage. The FSPO carries out these investigations on Jurisdiction on a bilateral with the consumer only.
By any reasonable standards, it is most improper for a “Mediator or Adjudicator” to action the following steps – (1) raise the issue, in the first instance, (2) make the case for the complaint being statute barred, (3) investigate bilaterally with an inexperienced consumer, without a proper understanding (or an investigation) of the complaint, and (4) subsequently unilaterally make the decision, and (5) declare that decision final.
In this process, the FSPO issues “Preliminary Opinions”, which can run to 22 pages, referencing legislation. The consumer cannot possibly engage with this Preliminary Opinion without legal representation. Expressed as an “Opinion” it misleads the consumer, as well as intimidates, given its style and depth; what consumer would argue with an “Opinion” from the Legal Department and, as a result, most Preliminary Opinions are not challenged and the complaint closes.
A staggering 49% of complaints, dealt with by the FSPO in 2022, were closed before reaching Mediation or Investigation. This would appear contrary to how the Courts view the role of the Ombudsman:
“…. purpose of the establishment of the statutory complaints procedure was to afford complainants an informal, expeditious and independent mechanism for the resolution of complaints against a financial service or product provider………..”.
If the consumer does challenge the Preliminary Opinion and it becomes a final determination, the only recourse available to the consumer is an application to the High Court for Judicial Review of the FSPO practices.
As part of your deliberations on this matter, the Committee should assess if the conduct of the FSPO regarding Jurisdiction is in line with the intentions of the Oireachtas when drafting the 2017 Act.
The Office of the FSPO has
never undergone an independent review of its approach, interpretation of its
Act, processes and performance. The
FSPO has never been challenged by a consumer on the issue of Time
Limits until Baynes V FSPO, 2022, where
the Court concluded that the FSPO’s lack of proper engagement with Section
51(2)(b)(iii) was unlawful.
Appendix E
Access to Justice for the consumer of financial products
The Competition and Consumer Protection Commission (CCPC) establishing legislation, restricts the body to consumer educational matters and Government advisory. It has refused to raise awareness of mortgage mis-selling and is still considering the decision in Baynes V the FSPO, issued in December 2nd 2022. It refers all financial consumer protection questions to the Central Bank.
MABS, the money advisory and budgeting service is forward looking and limited to budgeting, helping with restructures, general advice, Mortgage-to-Rent scheme and insolvency matters.
The Central Bank will not entertain, in any structured manner, any complaint that relates to their conduct. They do not follow their own procedures and do not advise of any appeal process.
If a consumer is dissatisfied with any decision of the above public bodies, appeal is limited to the High Court.
The costs of appealing decisions is prohibitive and may result in costs against the consumer. There is no funding available for legal fees (for and against the consumer) due to the laws of Maintenance and Champerty.
Direct access to the Courts is prevented due to the Statute of Limitations (six years since conduct occurred) as well as prohibitive legal fees (for and against) for a consumer.
Appeals against a decision of the FSPO is to the High Court only and must be executed within 28 days. High Court fees are disproportionate to any compensation sought by a consumer of financial products and, as expected, consumer appeals are rare.
The FSPO also advise/warn consumers in writing, that if they appeal to the High Court, the FSPO may seek their costs, if the consumer’s action is not successful.
On the other hand, financial services companies have significant resources available to appeal to the High Court, and it is very much in their interests as a single lost case may create a precedent costing the industry millions.
The FSPO is naturally
conscious when making decisions in favour of the consumer of potential High
Court appeals by the bank, which might place a spot light on its decision
making. This is further complicated, in that many more cases are conceded
and settled by the banks in the investigation stage before the decision is
upheld and published.
[1] defined as the beneficial owners of Irish consumers’ distressed Home Loans, namely the Global Investment Funds. They employ licensed Debt Servicers in Ireland for servicing and legal requirements.
[2] Hogan J. Irish Life and Permanent PLC v. Financial Services Ombudsman and Thomas, 2012.
[3] Extract from the Central Bank Consumer Protection Impact Analysis 2005.
[4] Special Purpose Vehicle.
[5] Residential Mortgage Backed Security.
[6] Residential Mortgage Backed Security.
[7] Buy-to-Lets, house purchased by consumers to let on a long term basis.
[8] Financial Conduct Authority