Seanad Éireann - Volume 115 - 11 December, 1986

Building Societies (Amendment) Bill, 1986: Committee Stage.

Sections 1 to 3, inclusive, agreed to.

SECTION 4.

Mr. O'Leary: I move amendment No. 1:

In page 3, to delete lines 33 to 35.

The purpose of this amendment is to delete the definition of “loan” contained in section 4. I may be incorrect in my interpretation but it appears that the loan definition in section 4 is so designed as to limit the prohibition on the charging of a tiered interest rate to loans made to a member on the security of a dwelling. It is a little wider than that but just for the sake of simplicity I put it like that. When it is placed in the context of the power given to the Minister in section 3 — which is the societies to grant people the authority to make loans other than loans on dwellings — can the Minister tell me if that is a deliberate decision? Arising out of my amendment, is he satisfied that the definition of “loan” will mean that any interest charged on bridging finance will not be the subject of a tiered interest rate application? It may be anticipated that the definition “of a mortgatge of a freehold [810] or leasehold estate or interest in a dwelling” is sufficiently wide to cover that but the purpose of this is to tease out from the Minister the reason behind the definition of a loan.

Minister for the Environment (Mr. Boland): The definition of a loan as defined in section 4 (3) is to prevent the societies from charging tiered interest rates on loans for the purchase of dwellings. The societies occasionally advanced loans for other purposes and, as they are not part of the primary purpose for which the societies were established, it was not considered necessary to prohibit the societies from charging tiered rates for loans which might be of a commercial nature. In the interests of the generality of society members, if societies advanced loans for commercial purposes it seems reasonable that they might be allowed to charge higher rates than those prevailing in relation to loans for home purchase which is, of course, still the primary purpose for building societies being in existence.

In so far as bridging finance is concerned, this section would not necessarily prohibit the charging of higher rates in the advancing of money for bridging finance with the intention of house purchase. I should, however, remind the House of my speech on Second Stage in which I mentioned that in a submission from the Irish Building Societies Association to me earlier this year with regard to bridging finance they said: “There is no reason why this finance should not be offered within the building society system and at a substantial cost saving to the house buyer.” I have indicated several times that it is my intention to allow the societies to make this type of finance available and, dependent upon the performance of societies in exercising that new responsibility, I would be influenced in making decisions as to the further types of new loans which the societies might be permitted to advance under section 3.

It is accepted that bridging finance is what might be termed finance of a risk nature and consequently it is reasonable that it should carry with it some rate of [811] interest higher than the interest which might be charged on a loan secured by way of a mortgage. On the other hand, if societies who intend to advance a loan on foot of a mortgage secured on property, are extending bridging finance to a member so as to arrive at that arrangement, they should be prepared to do so at a rate less than that which is currently being charged by other financial institutions for bridging finance purposes.

Mr. O'Leary: I am quite happy with what the Minister said concerning the non-application of the restriction on tiered interest rates to commercial or quasi-commercial loans from a building society. I am a little unhappy that it appears clear that tiered interest rates will be possible on bridging finance arranged by a society because of the combined effect of the definition “loan” plus, of course, what the Minister said and section 3, which we have already considered. Loans may be advanced with or without security. A typical security in the case of a bridging loan would be a letter of undertaking from somebody. I note that under section 3 the Minister can make conditions “other than conditions in relation to the rate of interest chargeable on a loan”. Therefore, it is not open to him under section 3 to say: “I will give you permission to give bridging finance provided you do not charge more than X per cent.”

This is not a fatal flaw to the whole scheme of things but the Minister should keep an eye on it because, as he quite rightly pointed out in his Second Stage speech, the whole purpose of the exercise with regard to briding finance is to reduce the cost to people. A close watch should be kept on how this actually works in practice and also in the context of further building society legislation to which the Minister referred to in his Second Stage speech and to which Members of the House are obviously committed. In those circumstances, I ask the Minister to keep a close watch on this because I am not sure that it is tightly enough drawn to meet the ideal situation.

[812] Mr. Boland: I understand the point the Senator is making but I have been relying on the general regulatory power of the Minister under section 3 and the new areas of lending which may be made available to the societies are dependent on the Minister making regulations empowering them to do so. I indicated from the outset that bridging finance was the first of those areas. Four of the societies in their submission indicated that they believed they could make bridging finance available at a cheaper rate than is currently available from the financial institutions. It would be reasonable for the Minister to decide, based on the experience of seeing the societies operate that new responsibility, what other areas of lending to allow them to enter into.

I sometimes wonder whether some of the societies have given full consideration to some of the areas which they suggest they would like to become involved in. Once the societies are allowed to enter into some of these new areas, they will find themselves in an appreciably more competitive marketplace and competing with institutions who have developed very sophisticated marketing and financial skills. For example, the societies have suggested that they would like to get into the business of operating checking accounts but my understanding is that checking accounts are not a profitable operation for many of the institutions who have literally centuries of experience in their operation. First, they will have to be careful in designating the areas in which the societies can operate and, secondly, the societies will have to show that they are able to provide a service as good as, if not better than, that being provided by those who presently operate those services. If, for example, in the case outlined by the Senator, the societies were to operate bridging finance in a way which appeared to be more punitive than the existing arrangements, clearly the Minister would not be very disposed to invite them to participate in other new areas of lending, nor might he be disposed to allow them to continue to operate bridging finance if, as a result of their intervention into that market, became a more [813] expensive rather than a less expensive venture from the point of view of the borrower as they have suggested it will.

Bridging finance is, by its nature, risk finance and consequently in any market conditions there will be a premium charge for bridging finance. It is not secured in the way a mortgage loan is, and it is intended to be advanced for a relatively short period of time. One of the points made to me was that, if the society who is considering advancing mortgage finance is also the lending institution for bridging finance, it might well be that that society would not be overly disposed towards having the mortgage deed executed as speedily as it otherwise might because it would show additional profit for so long as the bridging finance was extended. I do not believe the societies will operate in that way. If they do, they will quickly discover that they are not making a sizeable intervention into the bridging finance market. It would also become evident very quickly and it would not impress from the point of view of further regulations or powers being conferred on them on foot of section 3.

The situation to which the Senator is adverting is more than reasonably covered through the general control provisions contained in section 3 and the definitions of section 4. Section 4 is primarily intended to eliminate the charging of tiered interest rates in respect of mortgages advanced on homes and for that reason the definition in section 4 (3) is cast in the way it is.

Amendment, by leave, withdrawn.

Question proposed: “That section 4 stand part of the Bill.”

Mr. Ross: I would like to ask the Minister a general question on the ground which we have just covered. He has just been talking about the possibilities of the building societies entering the bridging finance market and this is a very good thing. He promised in his Second Stage speech, and has been mentioning now, that it is the intention to introduce new building society legislation and this is only the first of a series of Bills. I would like [814] an indication of into what areas he thinks building societies should or could expand. If he sees difficulties in the building societies going into other areas, as he obviously does from what he has just said, into what areas does he feel they can now expand because the building societies feel their hands are tied behind their back and this is a restrictive Bill.

The Minister mentioned home improvement loans and it is my understanding that building societies are already giving home improvement loans. People can go to building societies and say: “I want to top up my loan and spend that money on improving my home”. It is bogus to talk about this as something new because it is going on already.

Mr. Boland: Would that not be more appropriate to section 3?

Mr. Ross: The Minister has just been talking about it under section 4.

Mr. Boland: I was talking about it in relation to the amendment which is proposed to section 4.

Mr. Ross: Is it anticipated that cheque book accounts should be issued by building societies?

Mr. Boland: Cheque book accounts would not apply in relation to the question of tiered interest rates.

Mr. Lanigan: I am a little bit puzzled by the Minister's attitude to the question asked by Senator Ross because he drifted between section 3 and section 4 in his reply to the amendment and he raised matters which should be questioned. He mentioned that bridging finance is risk finance because it is not guaranteed by anything. I do not know any financial group who would give bridging finance unless it was against a guaranteed loan already offered by another financial institution. The bridging finance is given against a letter of guarantee from some other institution that a loan is being granted. Could I have an answer to this [815] question about bridging finance?

Question put and agreed to.

Section 5 agreed to.

SECTION 6.

Mr. O'Leary: I move amendment No. 2:

In page 4, subsection (1) (e), line 32, to delete “the arranging by a society” and substitute “the prohibition of a society directly or indirectly earning commission by arranging”.

Section 6 seeks to give the Minister additional powers. In order to explain what I think might improve subsection (1) (e) it is necessary to consider the way in which the subsection is drafted. It seems to be drafted in a very peculiar way because section 1 (a) says the Minister may prescribe rules in respect of “the prohibiting or restricting of the charging of redemption fees”. In other words the Minister can prescribe rules to prohibit or restrict the charging of redemption fees. He cannot prescribe rules allowing the charging of redemption fees so he is correctly limited to changing the present situation where redemption fees are restricted or prohibited.

The same thing applies to subsection (1) (b), (c) and (d). In all cases it is quite clear from the context what the Minister wants to do. In the case of subsection (1) (b) he can make the loan available; in the case of subsection (1) (c) he can restrict the right to require a member to effect insurance; in subsection (1) (d) he can preclude the question of additional costs; and in subsection (1) (e) the Minister may prescribe such rules as he considers appropriate concerning the “arranging by a society through an insurer or an intermediary nominated by it for the purpose of mortgage protection insurance”. Under that he could make rules which would make it legal and would double the commission. In my opinion there is nothing which indicates, what I presume is the Minister's intention, that the society should not be able to benefit by [816] reason of being involved in the provision of a mortgage protection insurance policy for the purpose of its member.

The purpose of my amendment is to substitute for the words “the arranging by a society” the words “the prohibition of a society directly or indirectly earning commission by arranging” so that it is made clear what power the Minister has and what he intends to do with it. He will have the power to restrict the earning by a society of commission by being involved in mortgage protection insurance business.

Arising, therefore, out of the amendment there are two things I want to ask the Minister. Is my interpretation of what he wants to achieve correct? In other words, does he want to avoid a situation where the societies are getting commission as a result of being involved in mortgage protection insurance? If my interpretation of that is correct, would he agree that my amendment makes it much clearer than the way in which the thing is drafted at present? Therefore, would he agree to my amendment?

Mr. Boland: This is a somewhat complicated situation. If the Senators consider the five paragraphs set out in section 6(1) they will quickly realise that in each of the first four paragraphs (a) to (d) the section is dealing with the changing of existing practices: the prohibition of charging redemption fees in paragraph (a), the making available of valuation reports in paragraph (b), the barring of the right of a society to earn commission in relation to home insurance in paragraph (c) and the precluding of a charge of legal fees in paragraph (d).

Paragraph (e) is different in that it relates to something which in general the societies do not operate at present. It is included because of a particular personal desire of my own to see home mortgages or loans advanced for the purchase of the family home being secured through some form of insurance protection. In July of this year I changed the arrangements in relation to SDA loans so as to ensure that automatically incorporated into the loan [817] repayment is the price of mortgage protection insurance. This means that, in the event of the death of the mortgage holder before the terms of the mortgage has expired, the insurance automatically meets the outstanding liability so that the other spouse or dependants have no further liability and have clear title to the family home. That has proved to be extraordinarily popular with the borrower and it is run on a group basis without, for example, the requirement for any medical examination being carried out or medical tests being passed.

The societies, of course, naturally and correctly, require their borrowers to have adequate insurance protection on the family home but, in the main, they do not require that the borrower should have mortgage protection insurance. It would be my hope, if regulations are made under this paragraph, that the mortgage protection insurance would be arranged similarily to the arrangements which I have introduced for the SDA loans, on a group basis and hopefully, on the basis that there would not be a necessity for individual medicals to be met and passed. For that reason, I felt that, different from the home loans where obviously medicals are not required, in this particular case if it were found possible to achieve the objective of general mortgage protection insurance it would best be achieved on a group basis. In that regard it would be reasonable to allow the societies to arrange the insurance and earn whatever commission were necessary but on the basis that the mortgage protection insurance charge would be incorporated into the overall loan repayment on the mortgage rather than being charged out as a separate item.

If it is found possible to see a workable system devised under paragraph (e) of subsection (1) of section 6, it would be my intention that it would be approached in this way. Because of the aspiration to have a general mortgage protection insurance regime prevail, I consider that it would be easiest or best achievable on the group basis that I have outlined and with the obligation for a medical to be obviated. If I were to place that obligation [818] upon the societies to carry out that function, it would be reasonable that the societies ought to be allowed to have an income deriving to them through the operation of what I believe to be a sociably desirable insurance protection system from the point of view of the spouses or dependants of mortgage holders.

The Senator is somewhat incorrect in his assumption that it was my intention to prohibit the charging of commissions by the societies in relation to this type of insurance. In fact, just a minority of the societies make that type of insurance available but not on a mandatory basis at present. What I would aspire to do, if it were found possible, would be to introduce a system which would be mandatory in relation to all mortgages and incorporate it into the mortgage repayments. Consequently that would be achievable only by the society advancing the loan.

It has always been a source of puzzlement to me that very many people who take out what are, in the context of their income, substantial loans repayable over an extended period of their working life and often with a heavy repayment profile, do not take what I would regard as the basic step of protecting their spouses or dependants by implementing a mortgage protection insurance policy. I have now introduced that as a mandatory feature of the local authority SDA loan schemes and if it is found achievable — and I have indicated to the societies that I would like them to put forward some proposals to me as to how it might be achievable and built into the mortage repayments — I would like to see it being extended to this type of home loan finance as well.

Mr. O'Leary: I am grateful to the Minister for explaining what he means. It is fair to say that the Second Stage speech which was, indeed, an excellent speech did not make clear the details of what the Minister has now said. It is important that the Minister put on the record of the House what he intends there.

I agree with the Minister that the mortgage [819] protection insurance is a very valuable insurance and should normally form part of any prudent person's arrangements when taking out a mortgage. What I do not understand at all is that the Minister on the one hand says he would not in these circumstances prohibit the society from earning commission in respect of arranging this insurance. At precisely the same time, what he is effectively doing under paragraph (c) in respect of fire insurance on the property, is saying: “You may not earn commission on it”. It is equally prudent and necessary for persons to have fire insurance on their property and to have mortgage protection on their property. From the point of view of the societies they have, if anything, a greater interest in having fire insurance on the property because in the absence of fire insurance, if a fire should occur, they have no security at all.

In the other case where a person falls upon hard times and the breadwinner dies, at least there is the security of the property there and a negotiated settlement can be reached between the parties. But in both cases insurance is necessary. The Minister in one case is saying: “You are having nothing to do with that insurance and you may not be involved in that insurance”. On the other hand he is virtually encouraging them to get involved in insurance. I do not understand that logic. It does not make any sense to me whatsoever. For that reason I am puzzled, not by the Minister's determination to have mortgage protection insurance but by the suggestion that mortgage protection insurance should be a different category of insurance from ordinary fire insurance, that in one case the arrangement should be made to positively encourage the society to provide it themselves as part of their package and obviously to earn commission on it and, in the other case, the structures are being put into place whereby the societies will not be able to earn commission. I do not see the logic of those provisions at all.

Mr. Boland: May I try to explain it by the simplest of analogies. Any insurance [820] company will offer fire cover, to take the example the Senator gave, on any property even if it has a knock in the central heating; no insurance company will offer mortgage protection cover on a mortgage upholder if he has a knock in his heart. The only way in which that risk person can get mortgage protection insurance is by virtue of having a group policy operating which will cover automatically the bad and the good risks. In addition to that, there is a greater interest on the part of the societies in seeing adequate fire and protection cover on the property on which they have the mortgage extended.

While the individual under paragraph (c) is now being given the right to arrange that insurance themselves or with the building society which is allowed to continue to compete for the placing of that fire or risk cover with other insurance brokers or intermediaries — paragraph (c) does not debar them from doing that — there will be continuing interest on the society's part in ensuring that cover is maintained whether it is through them as brokers or through some other broker because they will want evidence that their interest in the property is adequately covered. On the other hand, the only real interest in seeing mortgage protection insurance continue is the interest of the spouse or the dependants and in most cases those people will not even be aware of whether or not the mortgage holder has mortgage protection insurance in place.

The more fundamental thing is the example I gave at the outset. The mortgage holder in poor health would find it just impossible to arrange mortgage protection insurance. He or she will find it possible to arrange fire cover on their homes. There is a distinct difference in the two types of insurance in that a catgory and, indeed, perhaps the category whose dependants most need the mortgage protection insurance will find themselves debarred from that insurance. It was for that reason, in relation to the local authority loans system, that we arranged that the mortgage protection would be on a group basis and would [821] automatically be built into the repayments. If it is found possible to secure it in relation to building society loans the intention in paragraph (e) would be that it should be operated similarly.

I accept the point the Senator is making that there is a difference in approach between paragraph (c) and paragraph (e) but that is because it is a different type of insurance and for a different purpose and to protect the interests of the different category of people, namely, the dependants rather than the mortgage holders or indeed the society's interest in the property which is what paragraph (c) is about.

Amendment, by leave, withdrawn.

Question proposed: “That section 6 stand part of the Bill.”

Mr. FitzGerald: I have two matters to raise on the section. One is the Minister's intention and I very much welcome all of what is included in this section by way of the necessity to do something for the prospective mortgagee, indeed the mortgagee of the future. The first thing I would like to deal with is subsection 1 (a) — the prohibiting or restricting of the charging of redemption fees. I would like to ask the Minister whether he is aware of the fact that the associated banks do provide mortgages; they have mortgage departments. In order to gain access to their facilities, in fact, they charge an entrance fee. Whatever about the redemption fee that the building society may charge a mortgagee who is departing from that building society, there is an entrance fee charged by the associated banks, certainly by one of the associated banks, in relation to entering into their particular facilities. Has the Minister had an opportunity to consider the position of bridging finance as it applies to prospective purchasers of houses in the HFA and SDA loan area?

Mr. Boland: That is something to which we have been giving some consideration and I hope it may be possible next year to do something in that connection. [822] It is not as far away as it may sound.

Mr. FitzGerald: In relation to the other matter, and this does not properly fall within the brief of the Building Societies (Amendment) Bill and I accept that but it might be an opportunity for the Minister to at least say in a response to my question that he will take up with the Minister for Finance for ongoing discussions with the banks or with the Central Bank the fact that there is an entrance fee charged by the associated banks. It would seem to me to be the same kind of charge as the redemption fee charged by the building societies. I think they fall, roughly speaking, into the same area of quite unacceptable charges by financial institutions.

Mr. Boland: There are several things that arise here. Senator Ross, in fact, made an analogous reference in his contribution on Second Stage. He wondered why similar legislation was not being introduced for financial institutions. The fact of the matter is that the control of financial institutions falls within the remit of another office holder. Anyway it is not normal to endeavour to deal with or regulate different branches of society in one sort of omnibus Bill. I was struck in the past few weeks in this House by some of Senator Ross's contributions. It seems to me that what he would ideally like to see is an annual single piece, the Single Irish Act, in which all legislative proposals would be contained in this one omnibus blockbuster. They would relate one to the other and the House could then debate them presumably for the year.

Perhaps it would be a way of doing business. It certainly would make life interesting and perhaps less pressurised for some Ministers. The responsibility of individual office holders is to deal with the areas within their remit. While I know and I welcome the fact that the banks have again become more interested in the question of home loan finance, they do not fall within the description of building [823] societies, nor are they friendly societies. From that point of view, it is not appropriate for me to deal with the banks' activities in this legislation.

In relation to an application fee which the banks might charge, one would need to know the composition of the fee of what items of service it might or might not cover in connection with the application, before one would be in a position to make an adequate or fair comment on it. I think that if the application fee is merely a fee which the banks feel they can charge and derive profit from in the interests of their shareholders, that situation, like so many situations, should best be dealt with through the marketplace. If the Senator would consider the powers of the Minister under section 6 (1) (a), the prohibitions on charging redemption fees, that I hope will bring about a situation where if mortgage holders feel they are being charged punitive rates and realise there are more attractive home loan finances available in other parts of the market, they may consider rearranging their home loan facilities.

If that develops and the banks discover they are debarring themselves or restricting their opportunities to participate in that switching market through the charging of application fees, I suspect that bank application fees will evaporate rather quickly. This is the situation, of course, that I adverted to which has happened in other countries when the more institutions who became involved in offering home loan finance the less the restrictive practices which traditionally had pertained managed to survive in the conditions of the real and extended marketplace. I believe that is what will happen in this country in the next three to five years and, indeed, as I said on Second Stage, I regret that I have had to introduce section 6 as part of this Bill. I had hoped that the marketplace and the winds of change that are already making their presence felt in a very real and, from the point of view of perhaps some operators, chilling way in the marketplace would have brought about the changes which unfortunately I have now [824] had to invite the House to see implemented through Statute on a voluntary basis by the societies.

I suspect the application fee the Senator refers to being charged by the banks will similarly be blown away on the winds of change and competition. If it is not and if it is found to be an unfair and unnecessary charge and if the banks continue, as I hope they do, to express their increasing interest in the home loan market, then it would, of course, be appropriate for my colleague, the Minister for Finance, to deal with that matter either by encouraging the banks to adopt voluntarily the code of practice or if he finds, as I did in relation to the societies, that they are not prepared to adopt that code of practice, unfortunately perhaps some piece of legislation similar to section 6 might be felt necessary. I would not like that to be taken as an indication that I feel it to be necessary.

I have heard previously, but only on a small number of occasions, the complaint made by the Senator in relation to the banks charging application fees. I have no knowledge of and I would need to have knowledge of what the application fee actually covers, what services being provided by the bank in connection with the applications are to be covered by the fee before it would be appropriate for me to pass judgment, as it were.

Mr. Ross: I understand fully what the Minister says in relation to the fact that he should stick to his own Department and I congratulate him on his conscientiousness in this regard. I think it is a little absurd that he should come to us and say that the building societies are the brief which he carries and that the banks come under another officeholder. The world in which the building societies operate is not a world of isolation. The world, as the Minister seems to recognise in some parts of his contribution, in which the building societies operate is a large financial world which is becoming more competitive all the time. It would be absurd — I hope I do not understand the Minister correctly — for the Minister to [825] say that he has introduced this Bill without talking to the Department of Finance, the Minister for Finance and without considering the spin-off effects this Bill will have on the general financial world.

It is ridiculous for him not to have looked at this in the context of the banks and the way in which the banks are operating as well because the building societies and banks are operating in the same world. When a Bill like this is being considered, the rules which apply to these societies should also be looked at in the context of the banks. I should like the Minister to say whether the banks will be looked at by the Department of Finance.

Mr. FitzGerald: I would just ask the Minister if, following the passing of this legislation, he could bring to the notice of the Minister for Finance the question of what I regard not as application fees but as acceptance fees. I know what happens is that the fee arrives on your statement following your acceptance into that mortgage arrangement with the bank rather than as an application fee for something that may or may not be accepted.

The banks should be congratulated, certainly one of the major banking groups in this country should be congratulated, on the way they have maintained the interest rate in recent weeks and months rather than going down the road of the 3 per cent and the rather heavy additional interest that has been charged on mortgages generally, particularly bearing in mind that they are less profitable than the building societies and that they had less scope to do what they did than the building societies had.

I want to deal with the question of the issue by the societies of the valuation report to the prospective mortgagee. Given that this debate is about to conclude, would it not be better to wait until 2 o'clock and deal with it then because we probably have about ten minutes to deal with this section.

Mr. Boland: May I try to cover a few of the points that have been made? Senator [826] FitzGerald may rest assured that I regularly make a number of points to the Minister for Finance and we have had some discussions about other institutions making home loans available. In relation to some of those discussions, may I refer to a reference which he made to the societies recently increasing their mortgage rate by 3 per cent? The analogous increase for SDA loan purposes announced by the Government last week was 1 per cent and we may, perhaps, have some opportunity later in the debate to ascertain the realistic level which might have been charged by either group.

The whole question of regulation or deregulation of the financial institutions and those who provide financial services is of extreme interest and I suspect will be addressed by Governments here as in other countries. It is not appropriate for me to introduce legislation which controls the banks. That is a question for another office holder and I am quite satisfied that, if that legislation is necessary, he will address it. In the United States there is a new method of financing home loans, where blocks of mortgages, after they have been extended, are then placed on the financial markets and sold off. If that were to be introduced here, if the Minister for the Environment dealing with the building societies had to deal with banks to extend loans he could find himself dealing with the stock market and having to deal with whatever the Irish equivalent of the big bang is — the little bang or perhaps in the Dublin context, more appropriately bang, bang.

Progress reported; Committee to sit again.