Regulation of Financial Institutions
Irish retail lenders are regulated by the Central Bank. Regulation was extended to retail credit firms, which formerly fell outside regulation, in 2008. This includes most so-called “sub-prime” lenders. The Financial Regulator was merged back into the Central Bank in 2010.
The Consumer Protection (Regulation of Credit Servicing) Act 2015 to provide for a regulatory regime in respect of Credit Servicing Firms, bringing such firms within the Central Bank’s regulatory remit. Credit Servicing Firms are typically firms that manage or administer credit agreements such as mortgages or other loans on behalf of unregulated entities. This legislative amendment ensures that relevant borrowers whose loans are sold to unregulated third parties maintain the regulatory protections they had prior to the sale including the protections provided by the Central Bank’s statutory Codes of Conduct.
The Central Bank effectively acts as a policeman to the financial services industry. Regulated lenders have obligations to comply with all its regulations and codes and to ensure that there are structures and systems in place to ensure compliance throughout the organisation.
The Central Bank has powers to conduct enquiries and impose sanctions for breach of legal rules and codes of conduct. Regulatory sanctions can be imposed for “prescribed contraventions” which include breaches of law, breaches of codes and breach of other obligations imposed under the regulatory scheme. The sanctions are potentially severe, ranging from a caution or reprimand to orders to repay the money, a penalty / fine of up to €5,000,000 and disqualification of management personnel and other orders.
Decisions may be appealed to the Financial Services Appeals Tribunal or Court. Individuals managing the regulated lender can themselves be subject to personal sanctions.
The Financial Services Ombudsman
The Financial Services Ombudsman is an office to which consumers can make complaints in relation to dealings with regulated lenders (and financial service providers, generally). Compensation may be awarded without the formality, costs, risk or expense of Court proceedings.
A consumer, for the purpose of making a complaint to the Ombudsman, includes both an individual acting outside his business and companies and businesses with a turnover of less than €3,000,000 per annum.
The Ombudsman can make findings based on its investigations. It can make orders to remedy complaints which are upheld. It can make awards of compensation up to €250,000.
The Financial Service Ombudsman can uphold complaints, take action and award compensation not only for breach of legal rules and codes but also on the basis of wider criteria. An Ombudsman complaint can be upheld on the basis that the conduct was:
- contrary to law;
- unreasonable, unjust, oppressive or improperly discriminatory (even if lawful);
- the conduct was based on an improper motive or irrelevant considerations;
- the conduct was based on a mistake of law or fact;
- a proper explanation for the conduct complained of was not given when it should have been given;
- the conduct was otherwise improper.
Consumer Protection Code
The principal rules encountered in dealings with borrowers are set out in the conduct of business rules made by the Central Bank. The Consumer Protection Code, which was introduced in August 2006 provided common specific rules in relation to banking products, loans, insurance and investments products.
A revised Consumer Protection Code took effect in January 2012. Proceedings, investigations and enforcement in respect of the code prior to that date continue under the older code. Certain key aspects of the new code are dealt with it in detail in the next sections.
The Code introduced suitability and “know your customer” requirements for mortgage and bank services. The code does not apply to “basic banking product or services”; a current account, overdraft, ordinary deposit account or a term deposit account with a term of less than one year. It does not apply where the customer has specified the product, product provider and has not received any advice.
The Consumer Protection Code embodies certain general principles and specific requirements for credit institutions and other lenders in their dealings with customers and consumers. The Code has the force of law and can be enforced by penalties and sanctions by the Central Bank or by way of financial compensation in claims by consumers to the Financial Services Ombudsman.
There are certain, high-level principles which apply to regulated lenders in their dealings with all “customers.” There are other more specific rules which apply to dealings with “consumers.” A customer is any person or company to which a regulated lender provides or offers to provide services covered by the Code.
Consumer (incudes Certain Traders)
A consumer under the Code, to whom more onerous obligations are owed, is defined in a much broader way than under most other consumer protection legislation. A “consumer” under the code is defined to include businesses (with the possible exception of sole traders) with turnover less than €3 million. A consumer is any of the following:
- a person acting outside his business, trade or profession;
- a group of persons including a partnership with turnover less than €3 million annually;
- a company with a turnover of less than €3 million not being part of a group of companies with turnover greater than this amount; or
- a member of a credit union.
The general obligations in the Code apply throughout the loan period, including during the loan management and enforcement stage. Most of the more specific obligations in the Code are relevant to the “front end” aspects of lending, rather than enforcement. However, they may be relevant in the context of a variation agreement or similar arrangements.
The Code’s general principles make the following requirements of regulated lenders in dealings with all customers (and not just consumers);
- that its acts honest, fairly and professionally in the customer’s best interests;
- that it uses due skill care and diligence in the best interest of customers;
- that it does not recklessly, negligently or deliberately mislead a customer as to the real or perceived advantages or disadvantages of a product or service;
- that it seeks relevant information from customers in relation to products or services requested;
- that it makes full disclosure of all material information, including charges;
- that it avoids conflicts of interest;
- that it corrects errors and handles complaints speedily and efficiently and fairly;
- that it does not exert undue pressure or undue influence on a customer;
- that it complies with the spirit and letter of the Code.
Suitability / Knowing the Consumer I
A regulated lender is obliged to gather and record sufficient information to enable it to make a proper recommendation for a product or service. This does not apply where the consumer specifies the product and product provider and has not received advice.
The regulated lender must gather details of material changes to the consumer’s circumstances before it provides a subsequent product or service. A regulated lender must endeavour to have the consumer verify the accuracy of information provided.
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 and must include details of the consumer’s:
- needs and objectives including, where relevant: the length of time for which the consumer wishes to hold a product, need for access to funds (including emergency funds); and need for accumulation of funds
- personal circumstances including, where relevant: age, health, knowledge and experience of financial products, dependents, employment status, known future changes to his/her circumstances.
- financial situation including, where relevant: income, savings, financial products and other assets, debts and financial commitments.
- where relevant, attitude to risk, in particular, the importance of capital security to the consumer.
Suitability / Knowing the Consumer II
A regulated lender must ensure that on the facts disclosed by the consumer and all the relevant facts available, that the product or service is suitable for the consumer. If it offers a selection of product and service options, the most suitable for the range available must be offered. Where it recommends a product, the recommended product must be the most suitable. These requirements do not apply where the consumer has specified the product and product provider and not received advice.
Before providing a service or product, a regulated lender must prepare a written statement setting out the reasons it is considered suitable. The regulated lender must give a copy to the consumer and retain a copy in writing. This does not apply to “execution only” consumers, who have specified the product and provider and not received any advice.
Where a consumer refuses to provide, the information sought above, the regulated entity must inform the consumer that, as it does not have the relevant information necessary to assess suitability, it cannot offer the consumer the product or service sought. A regulated entity must endeavour to have the consumer certify the accuracy of the information it has provided to the regulated entity.
Prior to providing a mortgage to a personal consumer, a mortgage lender must either:
- have had sight of all original supporting documentation evidencing the personal consumer’s identity and ability to repay, or
- receive from a mortgage intermediary a signed declaration that such mortgage intermediary has had sight of all original supporting documentation evidencing the personal consumer’s identity and ability to repay.
A declaration signed by the personal consumer, (or his or her representative), certifying income and/or ability to repay is not sufficient evidence for these purposes. A regulated entity must assess the reasonableness of the information contained in the documentation submitted by a personal consumer in support of a mortgage application and take all reasonable steps to ensure that the documentation submitted is legitimate and authentic. A regulated entity must ensure that it has had sight of an original valuation report for the property which will act as security for the mortgage, prior to providing a mortgage.
Assessing Affordability of Credit I
Prior to offering, recommending, arranging or providing a credit product to a personal consumer, a lender must carry out an assessment of affordability to ascertain the personal consumer’s likely ability to repay the debt, over the duration of the agreement.
An affordability assessment must include consideration of the information gathered above and in the case of all mortgage products provided to personal consumers, the results of a test on the personal consumer’s ability to repay the instalments, over the duration of the agreement, on the basis of a 2% interest rate increase, at a minimum, above the interest rate offered to the personal consumer. This test does not apply to mortgages where the interest rate is fixed for a period of five years or more.
Where the lender offers an introductory interest rate, it must carry out the 2% interest rate test on the variable interest rate to be applied after the introductory period has ended if known at the time of the offer of the introductory interest rate, or on the current variable interest rate, if the variable interest rate to be applied after the introductory period has ended is not yet known.
Assessing Affordability of Credit II
The lender must notify the relevant intermediary, if any, of the results of the assessment of affordability. A mortgage intermediary must submit the information obtained from a personal consumer to the relevant lender to enable the affordability assessment(s) to be carried out.
In the case of an interest only mortgage, the lender must carry out an assessment to ascertain the personal consumer’s likely ability to repay the principal at the end of the mortgage term. In the case of a mortgage provided on an interest-only basis for a duration less than the term of the mortgage, a lender must carry out an assessment to ascertain the personal consumer’s likely ability to repay the capital and interest instalment amount that will apply at the end of the interest-only period.
This assessment must be on the basis of a 2% interest rate increase, at a minimum, above the interest rate that will apply at the end of the interest-only period if known at the time of the offer of the interest-only mortgage, or on the current variable interest rate if the variable interest rate to be applied after the ending of the interest-only period is not yet known.
Assessing Affordability of Credit III
A regulated entity must take account of the result of the affordability assessment when deciding whether a personal consumer is likely to be able to repay the debt for that amount and duration in the manner required under the credit agreement.
When offering, or recommending a variable interest rate mortgage, a regulated entity must provide a personal consumer, on paper or on another durable medium, with figures reflecting the revised instalment amount following a 2% interest rate increase above the variable interest rate offered.
Where the lender is offering an introductory interest rate, the revised instalment amounts must reflect an increase of 2% on the variable interest rate to be applied after the introductory period has ended if known at the time of the offer of the introductory interest rate or the current variable interest rate, if the variable interest rate to be applied after the introductory period has ended is not yet known.
A lender must carry out a further affordability and suitability assessment prior to advancing additional credit to a personal consumer, whether by way of a top-up on an existing loan or by a new agreement to provide credit.
Statement of Suitability I
Prior to providing or arranging a product or service, a regulated entity must prepare a written statement setting out:
- the reasons why a product or service offered to a consumer is considered to be suitable to that consumer; or
- the reasons why the product options contained in a selection of product options offered to a consumer are considered to be the most suitable to that consumer; or
- the reasons why a recommended product is considered to be the most suitable product for that consumer.
The reasons set out in the statement must reflect the information gathered to assist the consumer in understanding how the product(s) or service(s) offered or recommended meets, where relevant, the consumer’s: needs and objectives; personal circumstances; and financial situation.
Statement of Suitability II
The written statement must also include an outline of the following, where relevant: how the risk profile of the product is aligned with the consumer’s attitude to risk; and how the nature, extent, and limitations of any guarantee attached to the product is aligned with the consumer’s attitude to risk.
The regulated entity must sign the statement and provide a copy of this statement on paper or on another durable medium, dated on the day on which it is completed, to the consumer prior to providing or arranging a product or service, and retain a copy.
A regulated entity must include the following notice at the beginning of the statement of suitability:
Important Notice – Statement of Suitability
This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances.
Where a regulated entity has provided an oral explanation to the consumer of the product(s) or service(s) offered or recommended, a regulated entity must include a record of such explanation in or with the statement of suitability.
Exemption from KYC and Suitability
Provisions on Knowing the Consumer and Suitability do not apply where:
- the consumer has specified both the product and the product producer by name and has not received any assistance from the regulated entity in the choice of that product and/or product producer; or
- the regulated entity has established that the consumer is seeking a term deposit of less than one year or a notice deposit account and has alerted the consumer to any restrictions on the account.
The first exemption does not apply where a personal consumer is seeking: a credit amount above €75,000; a mortgage; or a home reversion agreement. In this case, prior to providing an investment product to a consumer, a regulated entity must warn the consumer, on paper or on another durable medium, that the regulated entity does not have the information necessary to determine the suitability of that product for the consumer.
The CPC provides for a number of warnings, which must appear on the loan agreement and associated documents. Some of these are specific to particular types of financial products, such as lifetime mortgages. Others are in more general terms.
Prior to credit being approved, a financial institution must explain to a personal consumer the effect of missing any of the scheduled repayments. The implications and effects of missing the scheduled repayments must be highlighted in all credit agreement documentation provided to the personal consumer, and the following warning statement must also appear in the documentation:
Warning: If you do not meet the repayments on your credit agreement, your account will go into arrears. This may affect your credit rating, which may limit your ability to access credit in the future.
Where credit is being offered to a personal consumer subject to a guarantee, the guarantee documentation must outline the obligations of the guarantor and must contain the following warning statement:
Warning: As a guarantor of this credit, you will have to pay off the debt amount, the interest and all associated charges up to the level of your guarantee if the borrower(s) do(es) not. Before you sign this guarantee, you should get independent legal advice.
Information on Charges
There are requirements that a consumer be advised of charges including third-party charges prior to a product or service or product being provided. Increases in charges must be advised thirty days in advance. A statement must be provided to consumers of all charges in a period. Where charges are accumulated and applied periodically to accounts, 10 days’ business notice must be given before deduction.
There must be an internal procedure for handling complaints. Complaints must be dealt with, within certain periods. Complainants must be advised of the outcome of the complaint within five business days explaining, if applicable, any offer of settlement. The right to refer to the Financial Services Ombudsman must be notified. A record must be kept of complaints
Certain customer records and documents must be kept for at least six years. This includes identity documents, product details, correspondence, applications, original legal documents and certain other required information.
References and Sources
Breslin Banking law + Supplement 3rd Ed 2013
Mortgages Law & Practice Maddox 2nd Ed 2017
NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan
Money Laundering & Anti-Terrorist Financing Act 2010
Financial & Emergency Provision Legislation Annotated 2011
Shelley & McGrath National Asset Management Agency Act Annotated 2011
Dodd & Carroll Law Relating to NAMA 2012 0
Ashe & Reid Anti-Money Laundering: Risks, Governance & Compliance 2013
Johnston & Ors Arthur Cox Banking Law Handbook 2007
Dr Mary Donnelly The Law of Credit and Security, 2nd Ed, 2015
A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)
Veil (Ed) European capital markets law (Hart Publishing 2013)
IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)
E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)
Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).
MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)
McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)
G McCormack Secured credit under English and American law (CUP Cambridge 2004)
L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)
D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)
Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018
E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011
Andrew Haynes The Law Relating to International Banking Bloomsbury Professional 2009
Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012
Charles Proctor The Law and Practice of International Banking 2nd Ed 2015
Sheelagh McCracken The Banker’s Remedy of Set-Off 2010 Bloomsbury Professional
Louise Gullifer, Jennifer Payne Banking & Financial Law 2018
Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed 2006 5th Ed 2019
Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed Sweet & Maxwell 2017