Credit unions are paying a hefty price

With one credit union declaring losses of close to €5m on subordinated bank bonds, many more will be admitting to similar losses at their annual general meetings (AGM’s).

Understandably, the Irish League of Credit Unions (ILCU) has been reluctant to admit to scale of losses in bonds it once heavily promoted to its member credit unions. Estimates earlier this year put the scale of losses at €200m.

Including consumer loan write-downs, the sector is facing total losses of upwards of €1.5bn. While some of this will be covered by operating income, state bail-out funding will be needed to rebuild capital buffers.

The Government’s recent budget earmarked €500m in bail-out assistance -credit unions are to be advanced €250m in 2011 and €250m in 2012.

Just how taxpayer’s funds are to be made available is unclear. Presumably the state will not take an ownership stake as this would sunder the credit union co-operative structure.

It is probably the case that loan funding will be provided to support viable credit union balance sheets as non-viable operations are closed down and others are merged into better governed operations.

One question that looms large is why were Irish credit unions investing at all in long dated and perpetual subordinated bank bonds?

The root of the answer lies in 1998 when finance minister Charlie McCreevy relaxed the type of investments trustees were permitted to make. As credit union investments were also governed by these rules, McCreevy’s move had the effect of permitting them to invest in riskier assets. This was entirely out of kilter with other countries that insist credit unions invest in the safest of assets, principally government stock and top-rated senior bank bonds.

As consumer credit boomed from 2000 onwards, credit unions were left behind, causing a fundamental distortion in their balance sheets as loans shrank and investments grew.

Anxious to maintain high dividend pay-out rates to savers, boards placed excess funds in riskier investments, chasing higher yields.

Many credit unions unwittingly behaved as commercial for-profit enterprises, sweating their balance sheets to maximise dividends to savers. The irony was that they were funding both the cash and capital used by banks to finance the property bubble.

Realising the growing balance sheet distortion and inherent investment risk, the credit union regulator looked to have the law amended to reign in risk taking.

This was rebuffed by government officials as ILCU and its then investment partner Davy, aggressively lobbied against the change.

Eventually after two years of consultations, the regulator was able to publish non-binding guidelines in late 2006. While these limited risk taking, it was too late and many credit unions lost money from 2007 onwards. Indeed, many failed to unwind their holdings of subordinated bank bonds and suffered the consequences this year.

To date, there has been no official investigation or report on credit union investment activity during the boom years.

Hundreds of millions were invested in imprudent products and tens of millions lost in what has all the hallmarks of a mis-selling scandal. 

Easy targets, far too many credit union boards of directors and managers, were persuaded to invest in products their financial advisors barely understood themselves.

A small number of credit unions have sued their advisors with varying degrees of success. In some cases advisors have had to make good losses, in others they have not. Some credit unions are deemed to be “consumers”.

Whether a credit union is a consumer or not is defined by its turnover, which is hard to define for a credit institution. The problem is this: If a credit union is marginally under the threshold it is covered under consumer protection regulations. If it’s over the threshold, it is not.

But it’s not a matter of defining a credit union as a consumer or not a consumer.

A credit union board is charged with responsibility and accountability for prudent governance which means making safe and sound investment decisions.

As it is a responsibility that cannot be outsourced to a third party, it should be within the competence of a credit union’s board and management to understand balance sheet risks, including investment risk.

Competence, responsibility, accountability and fiduciary care are at the heart of good governance of all credit institutions. Fitness and probity means having the competence and experience to understand and control for all risks the enterprise faces. Bond losses are symptomatic of poor standards of care and indicator of why the credit union sector needs to be reformed.

As credit union members attend AGMs this year, they should be aware of one fact. Credit union bond losses arise from an ill-advised boom-time strategy to chase higher yields.

They might be mindful to ask searching questions and demand that their credit union insists that its regulatory authority investigates and reports on just how so much money was needlessly lost.

A version of this article appeared in the Irish Examiner, Business Section, Monday 19^th December 2011.

Vested interests stand in way of bank reforms

Has Government’s banking policy created a reformed regulatory system captive of banks vested interests? 

With its focus on just two dominant commercial banks, not only has its pillar banking strategy amplified the too- big- to- fail dilemma, it has also created an uncompetitive, anti-consumer banking environment.

If major banks are far too important to be allowed to fail, then is it not the case that executive government, public servants and the central bank become captive of banks vested interests? If so then we may have shifted from one form of political and regulatory capture to another.

The boom-time relationship between central banking, commercial banking, civil service bureaucracy and executive government was partially addressed in reports into the banking crisis. At best the reports hint at how mutually reinforcing vested interests literally brought the house down. Politician’s economic policy, public servants ideology and banking’s vested interest combined with regulatory captivity to cause both the banking and economic crisis.

In theory, banks should be regulated by independent authorities whose governing technocrats, guided by public interest considerations, should act free from political interference. While the reformed Central Bank addresses what was wrong with the previous regulatory system through its new structures and risk control approach, just who defines what’s in the public interest?

It appears at one level the bank’s new approach to banking regulation and supervision should act as an early warning system, allowing it to take prompt corrective action to head off problems. But it could be the case that intrusive engagement could result in even greater captivity as both banker and central banker focus on building functioning banks. Both will want to see a return to sustainable profitability. 

If the central bank’s consumer protection activity does not include product level regulation or price controls then how will banker’s marketplace behaviours be controlled for?

Is it in the public interest that banks exploit competition dynamics and engage in anti-consumer loan pricing behaviours? Is it in the public interest that so many people in debt are left on their own to negotiate with powerful institutions without any financial safety net?

Yet it could be the case that current banking policy may be embedding a different form of political and regulatory capture of vested interests. It’s clearly in the public interest that commercial banking functions again. But there’s a conflict within the wider public interest, as consumers are being asked to pay for banking rehabilitation costs in two ways. The first is explicit within the enormity of the taxpayer bail-out funding of banks. Billions in consumer derived tax revenues are being used to pay the interest cost of bank bail-out funding. The second is implicit within higher rates and fees being charged by banks. Not only have banks increased loan rates, they are also increasing fees on their utility banking services.

It’s fair to say that Government’s response has fallen well short of appreciating and responding to the impact of its own policy. It seems that it has quite deliberately rendered consumer protection absolutely subservient to banking profitability. In effect its banking policy is a shield protecting banks from competition and consumer interests. As the banking system has shrunk, consumers have become captive of remaining bank’s pricing behaviours. 

For example consumer mortgage captivity is particularly acute. People can no longer shop around as no one is open for business. Those that are open are rationing credit and cherry picking.

As Government has done nothing to balance vested interests, its banking policy is inherently anti-consumer by design. For example both the Cooney and Keane expert groups comprised bankers, regulators and public servants – three sets of vested interests. The groups did not include for consumer advocates with the reputational standing and professional competence to insist the consumer interest be accommodated.

Is it the case that both political and regulatory system capture has become more and not less embedded in the post-boom environment?

The evidence so far compels a closer examination and understanding of the relationship between banks, regulatory and executive government vested interests which have become a mutual re-enforcing survival compact. Insisting banks pass on interest rate reductions is simply a political reaction to public concern. 

All too often politician’s focus on near term gains comes at the expense of longer term sustainability of their social and economic policies. Recognising how large, dominant banks operating in an anti-competitive environment can exploit their “too big to fail status” will take more that political insistence on rate reductions.

How can a central bank technocracy effectively balance bankers and consumers vested interests when there is no consumer protection representation? 

A version of this article appeared in the Irish Examiner, Business Section, Monday 12th December2011

We need a National Debt Advice Service

The brutal reality of the impact of fiscal austerity measures means that thousands of households will slide into long term financial distress, joining over 100,000 others who have no hope of ever repaying what they owe in full.  

The consumer debt crisis is a unique event requiring a unique response that can only be provided by the Government. With over 150,000 people needing help, resolving billions in unaffordable debt will require hundreds of thousands of debt settlement agreements with multiple creditors such as  banks, credit unions, revenue, local authorities and utility companies.

No one existing service provider has the resources or operational competencies to do this and leaving it to the private sector is not a realistic option.

With no consumer protection regulations governing the provision of debt advice, resolution negotiation and settlement, current service offerings fragment across a state funded agent, not- for- profit services and a host of differing commercial operations.

 

MABS, through its national network of independent self-governing autonomous offices, is doing its best to respond. The demand for advice has spawned a plethora of commercial debt advisers. Some are charging fees of people in debt. Others are using free advice as a lead generation tool to sell life insurance and credit products.

Many are using exploitative tactics, baiting people with emotional marketing and misleading promises. Some are deliberately playing on people’s fears by falsely claiming they will instantly relieve psychological stress. Fabricating client testimonials to sell their services, they use suicide and clinical depression statistics to market free financial advice.

Debt advice, resolution and settlement services are regarded as high risk consumer protection activities as there is a heightened risk of exploitative business practices, including the provision of bad advice and predatory selling of unsuitable products and services.

Yet, exploitative marketing claims and misleading statements are being made by regulated financial intermediaries who are subject to consumer protection codes of conduct when selling financial service products. The very people who became quite skilled at getting people into unaffordable debt are now claiming they are skilled at getting them out of it. 

The provision of debt advice/resolution services is an expensive, inherently unprofitable business unless it’s paid for by creditors. No operator has the financial resources or capacity to deliver on the scale and scope of services required to deliver a comprehensive service.

Even if a private commercial operation could charge enough, it would need well over 50,000 customers to break-even. The likelihood of any private company having the resources to invest in achieving this scale is non-existent. Furthermore private operations cannot provide the scope of professional debt resolution services required.

It is also the case that the sheer scale of the need for advice and resolution is the result of a one off, non-recurring event. Any service response will have to have the capacity to deal with large numbers of customers and their multiple creditors using standardised, efficient and effective processes. Achieving this will need improved codes of conduct and protocols governing debt enforcement and resolution.

The principal of the “All Debt” approach has been widely accepted as the appropriate service model. All debt includes mediating resolution agreements with the full range of principal creditors-credit institutions, revenue, local authorities and utilities. The service should provide advice, financial affordability assessment, recommend solutions, draft multi-creditor settlement proposals, make representations and negotiate realistic settlements with creditors.

The only realistic solution is for the Government to establish an independent, all debt advisory and resolution service.

Designed to fit with whatever non-judicial mechanism and process is finally legislated for it should be governed and operated on a not-for-profit, commercial basis and should include for two components - secured home mortgage debt and other debt.  How the unaffordable element of mortgage debt is resolved is not really an issue. The key is that all debts are dealt with, through an integrated approach.

Working with other stakeholders, the debt resolution service should be empowered to improve the existing consumer protection framework, ensuring that people are afforded the professional representation they need, protection from abusive enforcement tactics and standardisation of creditor collection and settlement approaches.

The current situation with hundreds of debt advisors, offering varying degrees of service, in an unregulated market, is a recipe for consumer exploitation. 

As the scale of the crisis and scope of services required by people means that only one agent has the power and resources to respond to their needs, will Government act to create a national debt advice and resolution service and allocate the funding needed in the budget ?

A version of this article appeared in the Irish Examiner, Business Section, Monday 5th December 2011.

It's all about the debt, stupid.

With German taxpayers being asked to fund Irish civil servants salary increments, no wonder they are pissed off with us.

Once again the surreal world of bland consensus forecasting has caught up with reality. And guess what, the ESRI has confirmed what we all know to be the case – we cannot slash and burn this economy and society back to recovery status.

Austerity is an economic Verdun, consuming the futures of the brightest and the best. 70,000 people will leave for futures elsewhere next year. To make matters worse, 30,000 will come here to take up skilled jobs we are not qualified to fill.

Economist’s use of benign language to ease the pain, is like using a hug and a kiss to treat serious illness. All the headline targets are heading in the wrong direction. Things have moved from being a slowing down in the pace of decline, to a quickening in the pace. National domestic income, the stuff Government relies on to generate its revenue, is heading into negative territory while the Croke Park agreement remains intact.

Let’s face facts here. The agreement was struck using an optimistic anticipation of recovery by a bunch of discredited politicians, who have since lost their jobs. The biggest bunch of bluffers in the history of this state, were blind to their collective hubris. They labelled economic banditry a “boom”.

Some of these bandits were the public service trade unions, which is why the Croke Park agreement cannot stand and Kenny & Co better come clean before year end.

Public sector wage rates have to be slashed again with cuts this time targeted at the medium to higher paid ranks and higher paid pensioners.

The obscenity of the partnership approach resulted in unproductive swathes leveraging enormous income benefits for no return. The senior civil service were delighted to see lower ranks pay increased as their rising tide lifted their boats. And they were very good at benchmarking their salaries to private sector correlates. But theirs is an aberrant version. Upward only salary reviews are unique to the public sector. In the private sector, wages are slashed rates when profits decline.

It’s frankly obscene to argue for increments when the money to pay for them has to be borrowed by a Government with no credit rating. With German tax payers being asked to fund Irish public sector wage increments, no wonder they are so pissed off with us. And no wonder they are so unwilling to let the ECB fund our sovereign debt given so much of it results from banditry.

While none will admit to it, we are once again using the traditional default jobs strategy – exporting people. Do we think because we have a sovereign boundary, that the geographic reality of being a small island within the shadow of a larger one and off the cost of mainland Europe someway meant we could ever economically succeed in generating jobs for all the people, all of the time.

We managed to generate jobs for all of the people some of the time, only because we built houses for them to live in. And to do this we borrowed billions from abroad, much of which will just have to be written off.

The brutal reality is we have too many people living on this island for it to work as anything more than a small, specialist regional economy. National sovereignty means nothing when you cannot afford it.      

We might get to sustainable sovereign independence, where we generate jobs for most of the people most of the time and accept that some will leave to go somewhere else. But we can only do this when the debt we used to give a job to everyone has been slashed – and as we cannot generate enough income to rebuild and repay – we have two choices. Either we starve to pay the mortgage or feed ourselves and pay what we can off our debts.

Someone better tell the well paid cohorts within the protected public sector that “it’s all about the debt, stupid”. We cannot afford to pay you what you think you are entitled to.      

Bruton must take a leaf out of business

Why are our political and permanent governmental systems grossly ineffective in responding in real time to real time crisis? 

Last week, ISME lambasted the Government’s latest announcement of a small business loan guarantee scheme, calling for more action and less waffle. 

“Less waffle” reflects private sector anger and frustration at Governmental lassitude and inability to deliver. 

Should we expect better of what is a centralised machine bureaucracy? The design of bureaucratic organisational systems creates a culture of obedience, deference to authority, silo behaviours and inward looking political managerial systems that organise around task-driven dimensions. 

Frequently rewarding tenure and rigid adherence to rules and procedures, such systems are incapable of change or innovation. Skilled at incompetence, their managers zealously defend the status quo when threatened with change. When it does happen, change is far too slow to matter. Such systems appear to exist in a parallel universe where time moves far more slowly.

We have one of the most centralised of public sector machine bureaucracies. Designed to ensure that all power rests with executive government, its enabling self-perpetuating, self-governing, permanent civil service administration is incapable of innovation and change. Promoting change means rocking the boat. And as innovators know their careers will be shortened if they stick their heads up over the parapet, no one kicks up the dust. Instead they knuckle down or leave.

Politics itself is a transformation show-stopper. Transformational leadership competencies are not part of the successful politician’s CV as they hinder the attainment and retention of power. Politicians deliver compromises that are almost always mere shadows of what should be delivered. 

Recent history is littered with politician’s appeasement, compromise and disastrous policy decisions influenced by permanent public administrators who have never worked in the real world. In the real world time is a precious commodity. In business anything that wastes time is a value destroyer. 

A prime example of value destruction wrought by the political and public administration’s parallel universe is seen in the recent announcement of a “Temporary Partial Loan Guarantee” scheme for small business. 

It’s been 39 months since the full blown collapse of the banking system during which thousands of viable small businesses have needlessly failed with tens of thousands of jobs lost. In this time, two elected political administrations and the permanent administration system have done absolutely nothing to respond. Despite tens of millions spent on staffing job creation organisations little of any relevance has been achieved. Previous enterprise minister, Mary Coughlan said she was “looking into it”. Her successor Batt O’Keefe announced “detailed planning” was in train 14 months ago for a loan guarantee scheme.

No matter how well intentioned people are , no matter how intellectually committed to creating jobs, they will be stifled, inhibited and de-motivated by the very system they work in. The culture, values and “how things are done around here” along with managerial behaviours frustrate initiatives, sucking the energy from those who would lead and implement initiatives in real time. 

While serious about facilitating job creation, Richard Bruton may founder in achieving stretching jobs goals using the organisational systems he has at his disposal. Instead of leaving it to administrators, he should consider taking a leaf from the world of business where good things get done in real time. 

In the private sector, business leaders realise that frequently new initiatives are best build on green field sites. They create the space allowing innovators to develop and launch new businesses. To prevent existing business systems and cultures contaminating innovation, they physically locate their innovators in a separate location. They bring together the brightest and best, equip them with resources and then get out of their way. Riding shotgun, business leaders prevent their line managers from interfering with progress.

The public service is different – because it can never go out of business if it fails to deliver, it can never deliver fast enough when faced with real world challenges. 

Instead of leaving new initiatives to slowly grind through the cogs of a machine bureaucracy, Minister Bruton could take a leaf from business and set up an enterprise innovation system –staffed with and led by the very best people from both the private and public sector. It should have the money, resources and power to cut through red tape, force the pace of change, build innovative solutions and ensure they are implemented. It should have the capacity to cut across silo behaviours and the skilled incompetence of the machine bureaucracy.  

It’s disappointing that things that could have and should have been done in the first 100 days of this Government have not been done. A loan guarantee scheme is but one of the many immediate deliverables that will take far too long to get over the line. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 28th November 2011

National loan 'blue flu' may just work

As the consumer debt crisis escalates, unless it acts to protect consumers soon Government is acutely exposed to a very real threat of a borrower’s run on the banks.

During twelve weeks of this summer, another 5,630 householders technically defaulted on their mortgages. With about 63,000 troubled loans - allowing for secondary top up loans - according to Central Bank estimates, close 55,000 households are in technical default. It says the problem is not confined to those in negative equity, as many distressed homeowners have some equity remaining.

By including restructured “performing” loans together with those yet to reach the critical 90-day default threshold, the number of distressed householders increases to over 115,000. The bank says it’s trying to work out how many more households are vulnerable. But as its published data only covers home mortgages, no one has any idea how bad other consumer loans, buy- to-let loans and personally guaranteed business loans are.

Once again worsening mortgage arrears news was positively spun. Politicians and bankers said that 90% of loans are performing. Imagine responding to news that road deaths trebled in two years, by saying that it’s okay as everyone else is still alive. Their positive spin on “low” repossessions is like saying its okay to keep clinically dead accident victims on life support systems to keep the numbers of deaths down. 

By insisting on keeping dead loans alive on banks’ balance sheets, thousands of people are needlessly suffering. In a properly working debt resolution system, repossessions would number over 9,000 a year. What we are seeing in the data is the outcome of a surreal, fabricated scenario as we all know banking won’t work again until unsustainable loans have been written off.

Yet some banking commentary implies arrears are worsening because people are deliberately defaulting on their mortgages in anticipation of a debt settlement deal. What’s called strategic default happens when people who can’t pay, lose their willingness to repay once they realise their situation is hopeless.

With German parliamentarians better informed on our taxation policy then we are, it seems that Government is no more fiscally empowered than a local county council. But is it powerless to direct banks get down to the business of debt settlement and control their oligopolistic loan pricing behaviour? 

Apart from those struggling with distressed debt, tens of thousands more are paying through the nose for variable mortgages. They are captive of their lenders price gouging as the mortgage market is no longer functioning. 

In the third quarter of 2006 lenders made 54,603 loans totalling €10.9bn. In same quarter this year they made only 3,607 new loans totalling €623m. In normal times, this level of mortgage lending would just about keep one medium sized mortgage bank ticking over. As competitive market forces that should cause a fair market for mortgage rates are non-existent and will be for some time to come, banks are free to charge what they can get away with.

Politician’s excuses for non-intervention in what is a broken market don’t cut the mustard and hinting at passing the buck to the competition authority is a cop out as is the banking regulator’s position on not wanting to control prices. Should a banking regulator not want powers to set prices, surely some other body should be empowered to ensure fair prices are set.

Given the numbers struggling with declining incomes, negative equity, joblessness and increasing taxes, a highly educated and increasingly vocal cohort of concerned citizens realise how disenfranchised they have become. They know banks have been pump primed with billions to get them working again. They know that these funds are not being used to either generate new loans or write down unsustainable ones. They know the money is being invested in Government bonds whose yields give a better return than loans. Yet while banks are profiting from a massive infusion of tax-payer funds, they are unwilling to pass through ECB rate reductions.

Under its "twin pillar bank" strategy, Government policy has consigned competition and consumer protection to third rate status. Disillusioned and angry, reform-driven leaders are beginning to emerge. Using real life stories, theirs is a powerful narrative evidencing the undignified treatment of people who through no fault of their own cannot pay what they owe. They are demanding laws that allow people earn a fresh start and force bankers to treat people fairly.   

While they may not be able to influence the political process, they know that collectively people have the power to reform banking’s relationship with society. Should they get enough people to threaten to take a loan payment holiday, then banking behaviour would have to be rapidly altered. Such a national loan “blue flu” would strike at the heart of the EU/ECB/IMF programme and could threaten to become a European wide phenomenon.

Will over a quarter of a million beleaguered mortgage holders remain silent? Unless Government comes up with meaningful response it risks spawning a grass roots movement that could succeed where it is currently seen to be failing. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 21st November 2011

We need an integrated approach to solve debt crisis

Leaving debt resolution to individual creditors and 'case by case' arrangements is a recipe for disaster, writes Bill Hobbs

Most people have no idea of how to plan a way out of unaffordable debt. Even where they access information and advice, they will not have the expertise and skill to negotiate with their many lenders.

Convened last week to consider the Keane report on mortgage arrears, Social Protection Minister Joan Burton’s stakeholder forum heard from consumer protection advocates of the urgent need to adopt an integrated approach to resolving the consumer debt crisis. 

They maintain that as mortgage debt cannot be dealt with in isolation, any consumer protection response must deal with all debts. Participants also highlighted how, despite the Central Bank’s mortgage arrears resolution process and improved consumer protection codes, lenders are treating indebted consumers as wallets to be sweated to maximise loan repayments. If the intention is to ensure fair treatment, it seems that regulatory codes and supervision are not having the desired effect.

Government’s response to the consumer debt crisis needs to appreciate the totality of consumer protection solutions needed. While the Keane report recommended the establishment of an “independent mortgage advice function” which would “advise and support mortgage holders in assessing their options”, its response falls far short of the protection supports required. Critically it failed to frame its solutions within a properly constructed debt mediation approach through which people are ensured fair treatment and proper standards of customer care by their lenders. 

This is to be expected as one of the problems experts have is they cannot know what ordinary people don’t know. Because financial and legal experts know too much they cannot put themselves in a position of knowing nothing and will always assume people are more skilled than they are. Most people do not have the experience or competence to assess their financial situation. Nor do they have the skills to propose the solutions needed and they do not have the bargaining power or status to negotiate agreements with their many lenders. They are, in effect, powerless and acutely exposed to lenders' exploitative behaviour within a non-transparent system that accommodates bankers’ insistence on a “case by case” approach.

Can all bankers be trusted to treat people fairly and equitably and not to favour some over others? There are indications that some banks would welcome a “total debt” mediation and settlement system that they can themselves can rely on.

It makes absolute sense that mortgage affordability cannot be dealt with without also dealing with all other debts.  The scale of debt settlements and scope of solutions needed to work out billions in unaffordable debt and unsustainable mortgages is seen in what little data is being made publically available. With banking and credit union consumer expected loan losses amounting to over €13bn, chances are that close to 100,000 people will need to arrange over well over 300,000 debt settlement agreements with dozens of creditors that include not only banks and credit unions but revenue, utility companies and local authorities.

Leaving debt resolution to individual creditors and their “case by case” arrangements is a recipe for a social and economic crisis. It’s in Government’s, lenders, other creditors and consumers best interests that a transparent system is established through which people can arrange to settle their debts and creditors can face up to the business of debt settlement.

Consumers will be best protected by a dedicated, expert debt advice and resolution system that proposes and achieves debt settlement arrangements and agreements on their behalf. Such a system would see competent, experience, qualified advisors proposing and agreeing realistic mortgage solutions and other personal debt settlement arrangements with a consumer’s creditors. Properly structured this approach would ensure fair treatment and high standards of customer care. It would also integrate with the state’s new insolvency regime which will see a legally enforceable non-court based debt settlement regime through which people will earn a fresh start after a short period of time. Indications are this regime will include for mortgage debt and allow a fresh start after three years.

The focus of a debt advisory and resolution service should be on establishing and mediating sustainable agreements and getting lender’s agreement on these. It should also be a consumer protection advocate with the status and muscle to get banks and others to treat people fairly and ensure best practice in consumer protection. 

But such a system cannot be shoe-horned into existing state supports as they are not designed to provide the scale and depth of expert based service required. Many observers consider existing services have become captive of banker’s interests.

Any new national debt advice and settlement mediation service will have to be built as a new service and not a bolt-on to existing service providers. It should also have the reputational standing and status of a senior stakeholder with powers to ensure fair treatment. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 14th November 2011.

Reform of business practices is essential

Revelations over the weekend that civil service managers are unable or unwilling to implement a performance  management system designed to ensure higher standards of employee performance come as no surprise.

Illustrating a twin culture of entitlement and subservient acquiesce to preserving a carefully constructed status quo, it’s an admission of leadership failure. As turkeys don’t vote for Christmas, it’s unlikely that civil service managers would ever act to reign in their own salaries, least of all within a system designed to ensure its own sustainability no matter what political administration is in power.

Crafted through years of “partnership” agreements that prevented real change, this state’s largest employer, Government is stuck in a rut of its own making as the latest partnership manifestation, the Croke Park agreement, ensures that undeserved entitlements are ring fenced and protected. 

If this is the case, then there cannot be any real transformative change. We are stuck with funding a dysfunctional civil service unless real transformative leaders emerge. 

These are the people who change the way people act by using narrative intelligence to ensure others are enthusiastically engaged. They get people to change by getting them to imagine and act out a better future. But who is responsible for crafting a fit for purpose civil service?

Politicians should admit to a fact of life, they cannot be transformative leaders. Theirs is the business of compromise, the consensus agreed to ensure re-election. Characterised by the acquisition and retention of power, successful politicians are the ones who are elected and re-elected. They make flexible, generalised campaign promises, to appeal to the broadest electorate and then renege on them. If a politician tries to persuade people to do something different, to show transformational leadership, they guarantee their own demise.

Should we expect politicians to be leaders when we elect them to preside over the body politic? After all what is a minister other than the political head of an administrative department? A Taoiseach, a “prime” minister, who administratively heads the government?

The parable of the boiled frog which remains in the water as the heat is being turned up to be boiled alive is apt. Are we being boiled alive to protect bond holders’ wealth base or is it a case of a collectively hoping a regressive economic cycle will end and people once again feel confident enough to go out and spend money?

As the citizens of Berlin don’t elect Dublin politicians, their narrative differs. In Berlin it’s all about getting errant states to pay their way to protect the might of core EU engine, the German economic model. In Dublin it’s all about regaining economic sovereignty by agreeing to what Berliner’s want: Both hope that we will start spending again. Both act as if economic activity strong enough to pay off borrowings and fund recovery is possible. Both are unwilling to make the decisions needed to re-craft the euro project.

Economist Constantin Gurdgiev says we owe too far too much to have any hope of economic recovery. It seems we will be unable to grow fast enough to fund recovery and fund debt repayments. Translating this to families means the burden of state and personal debt repayments will stifle recovery and government’s austerity programme will snuff out ability to repay. 

The bigger picture is one of some nation states who have excess money and those that don’t have enough. Rebalancing this equation means that as creditor states are as captured as debtors states, debt settlement will have to be shared equally.

Rarely has business, politics and family collided as they have in the past three years. We are living with what happens when business is used by others to achieve their instrumental objectives – wealth and status within a political economy designed to further these business objectives. But it seems this is about to change – not because of transformational leadership – but caused by the social and economic consequence of un-repayable debt.

Government’s muted new insolvency regime indicates a decision that people are to be allowed to fail and get back on their feet again. If a measure of an entrepreneurial society is its capacity to forgive personal failure and allow people to rebuild their lives then it’s a move that shows some responsiveness to a dilemma posed.

That dilemma is encapsulated by a sovereignty status largely dictated by external political forces we have no control over but also framed within our own willingness and capacity to encourage transformational change where we can.

For that to happen ways have to be found to ensure that not only is the civil service reformed but that the society and economic model it’s designed to support is also defined. So far all focus has been on austerity with little or no thought applied to what will be the outcome of years of austerity.  

A version of this article appeared in the Irish Examiner, Business Section, Monday 7th November 2011

We need to build business we can trust

The presidential campaign surfaced a need to reconnect the economy with society and ethics.

President elect Michael D Higgins believes there is a need to “recognise the need for a reflection on those values and assumptions, that had brought us to such a sorry pass in social and economic terms, for which such a high price has been paid and is being paid”

In reminding us of what goes so badly wrong when individualism married to a facilitating political elite pursues wealth creation without consideration for wider society, Higgins believes we need to reconnect the economy, society and ethics.

Never again should small groups of influential insiders be allowed to garner wealth at the expense of society. The powerful influence of business people seeking to exploit position to further their own aims must be tempered for the greater good. After all the freedom afforded business to operate within a system that advances and facilitates ease of enterprise-creation exists only as citizens through elected representatives permit it. When public representatives become captive of sectional interests and are influenced by cheque book lobbying, democracy is usurped to benefit the few and disenfranchise the many.  

Recasting the legitimate and ethical role of business and crafting a new economic model will take more than talking up the national advantage of a young educated population, the best of who are once again emigrating. Any new economic model must exist within a society that exposes values of decency, integrity, egalitarianism and equality. And it must be a society where ethical business behaviour does not simply mean mere legal compliance.

The shallow narrative and imagery promoted by some presidential candidates failed to grasp that authentic leadership requires messages rooted in the values Higgins and those who elected him espouse. Riven with deliberately ambiguous messages, spun to garner votes from as broad a population as possible, other candidates’ leadership aspirations were rejected.

Sean Gallagher’s hope inspiring narrative threatened to become a triumph of style over substance until this time last week when his carefully crafted independent status was undone, largely by his own hand. Best described as a motivational brand image, his message was cleverly communicated to win votes. A disingenuous melange of enticing promises that no president could ever have delivered on also contained a leadership blind spot.    

Gallagher’s blind spot was his failure to respond to the powerful imagery created by his use of the word “envelope”, faltering recollection, his subsequent “bagman” denial and obfuscation in explaining business accounting transactions.  

Once the thin veneer of motivational wallpaper was stripped back, people saw an unreconstructed, unrepentant businessman and member of the Fianna Fail’s boom time elite. Gallagher was caught in that grey area between politics and business. People sensed he was an unrepentant boom-time journeyman and promoter of materialistic individualism.

During his interview with Mike Murphy last week, journeyman-in-chief Bertie Ahern enunciated his own unrepentant construct that Ireland’s economic collapse wasn’t down to his leadership failings but others inability to open his mind to what was going so badly wrong. Hubris, that belief in self-image and vision are the hallmarks of poor leadership, as is a lack of humility in accepting responsibility and accountability for things when they go wrong. 

Unfortunately for Gallagher, he seemed to represent the same unquestioning commitment to individualism that was so responsible for the destruction of national wealth.

Perhaps we should be thankful to Gallagher as he unwittingly shone a light on a dark place others would prefer to keep hidden. We should also be thankful that the media forced into the open a past that must never again be repeated.

The lingering concern is that wealthy people continue to have greater access to politicians based on the value of their bank accounts. If this is so, then all talk of reform is meaningless unless the lessons starkly illustrated by Gallagher’s undoing are learned by this Government.

Higgins’ election represents a triumph of substance over style, deep wisdom over shallow individualism. It illustrates how ordinary people realise that out of the chaos of an economic collapse we must craft a better society. One built on what we are good at and one intolerant of unfettered individualism and political clientelism.

The ability of business to be a force for the good requires that trust be rebuilt in business. The same is true for politics. This means honest, open repentant acknowledgement of what went so badly wrong and a demonstrable commitment to achieving higher ethical standards today. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 31st October 2011.

'Muddle through 'approach must cease

Anyone interested in appreciating how the Government needs to urgently come up with a national strategic response to the consumer debt crisis should read an important contribution made last week in a statement on “Personal and Mortgage Debt” published by a group of legitimate, expert consumer representative organisations, New Beginning and leading academics.  

Available on www.flac.ie, the FLAC (Free Legal Aid Centres) website, the statement “urgently calls for a national strategy to be put in place to resolve over-indebtedness and to foster a responsible credit market that would prevent a similar crisis from occurring for future generations”.

Correctly arguing for an “All Debt” approach, FLAC and others set out nine important principles. They want to see a national Debt Resolution Agency and nationwide network of expert consumer advocates who will work with people to arrange debt settlement solutions for all their debts. 

By including for mortgage and other debts, they say that people should be provided with a legally robust mechanism to establish sustainable mortgages and pay what they can afford off other debt for a defined period of time, after which the balance would be written off.  Pragmatically, the group recognises that for unsustainable mortgages, people may need to become tenants rather than owners.

The statement leaves no wriggle room for moral hazard hawks - those who hold that decent, honest people will deliberately render themselves insolvent to benefit from debt settlement writedowns. 

The group says that Government’s “muddling along in the hope that things will get better” is no longer acceptable as the social costs are “potentially enormous as families and communities disintegrate under the weight of financial pressure and the uncertainty of what the future will bring”. From an economic perspective “the lack of a plan of action and a sense of the state assuming responsibility hampers consumer spending and fresh lending”

By adopting the same minimalist “muddle through” approach as the last administration, this Government has so far failed to appreciate and meaningfully respond to magnitude of the consumer debt crisis.  

The penny appears to have dropped somewhat once the Keane mortgage arrears report was seen as being as ineffective as its predecessor the Cooney report. But by inviting other solutions, Taoiseach Enda Kenny seems not to have understood the scope and depth of what is a long term unaffordability crisis and not just a temporary mortgage arrears problem.

Government’s response can no longer rely on a conveniently packaged bundle of “extend and pretend” sticky plaster solutions to be supervised by the Central Bank. 

The bank’s primary mandate to ensure banking system stability and regulate and prudentially supervise individual banks conflicts with its mandate to protect consumers. No matter how many consumer protection codes of conduct it publishes and polices, it will always be captive of its primary mandate. The bigger issue is that the bank cannot impose solutions and cannot cover non-bank consumer debts such as rent, utility and revenues arrears.

It is clear from Oireachtas committee testimony last week that the Cooney and Keane reports failed to accommodate the views of legitimate consumer representatives. 

Consumerists’ language and narrative is all about affording people a fresh start earned over time through an organised just and fair debt settlement process. They see this as providing for two alternative pathways. 

The first allows for non-judicial, legally binding debt settlement agreements organised through expert consumer advocate advisors; the second, a quick bankruptcy process for hopelessly insolvent people and complex high value cases. 

These pathways are also recommended by the Law Reform Commission in its report on personal debt management and enforcement.  

While new insolvency laws are in the works, if Government is serious about responding it shouldn't wait for legislation to slowly wind through the political system. It can respond today by establishing an interim Debt Resolution Agency. Using existing regulatory and legal frameworks and working with all consumer protection regulators it could oversee, direct and synergise an inter-agency focus on consumer debt resolution. It could also start building the national network of expert advocates so urgently needed to provide people with the professional representation they deserve.

A good starting point would be to appoint people with the credibility and expertise to design and deliver on such a just and fair national debt resolution strategy. People like FLAC’s Paul Joyce and Noeleen Blackwell, experienced consumer advocates and others like them who are likewise committed to consumer representation, simply must be involved from now on. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 24th October 2011

No credit due to the credit union sector

The publication of the interim report of the Commission on Credit Unions is the first phase of a major effort to transform the viability of the sector.

The credit union regulator is finally about to get the powers it needs to properly regulate and supervise credit unions. Recommendations contained in the credit union commission’s interim report if implemented in full will establish the type of modern regulatory framework that ensured credit unions elsewhere evolved as robust financial service firms.

Comprising academics, the credit union regulator, trade association representatives and other individual expertise, the commission’s recommendations should create an effective modern credit union regulatory system and improve credit union governance and risk management capabilities. It is the first phase in what will be a major transformation programme to transition credit unions to a new operating model and network structure.

With over 200 operating under regulatory direction restricting lending - over 100 of which are no longer fully functioning credit institutions as they cannot pay a dividend- can credit unions ever become efficient mobilisers of household savings using their existing business model?

The commission is silent on this key question, as it will consider a strategy for the future of the sector in its next instalment. However, its interim report includes financial performance data, publically made available for the first time, confirming analysts’ predictions that significant consolidation will be required if credit unions are to fulfil their function as savings and loans institutions.

While the aggregate data indicates reasonable levels of capital reserves which the commission puts down to regulatory leadership, the outcome of Central Bank’s PCAR stress tests and Grant Thornton’s review is not given. It’s likely the state recapitalisation requirement of €500m-€1b recently announced by Minister Noonan is derived from these tests, as financial performance continues to trend downwards across all sizes of credit unions.

In this instalment, the commission’s recommendations are focussed on the immediate and urgent need to resolve non-viable credit unions, stabilise troubled but viable ones, strengthen the regulatory stabilisation and resolution framework and make significant improvements in credit union governance and risk management capabilities.

While it says its report “does not impact on the independence of the Central Bank in the performance of its statutory functions” and is “without prejudice to the performance by the Central Bank of its statutory functions”, the authors confirm the effectiveness of the regulatory interventions pursued to date, and support the strategy proposed by the bank in its recent communications and seen in recent amendments to banking resolution legislation.

Conscious of the need for urgent remedial action, it wants the Central Bank’s new resolution powers to be applied to non-viable credit unions. These powers include appointment of special managers, enforced mergers and liquidation. It also wants the bank to set up and manage a stabilisation mechanism and fund for viable credit unions and wants credit unions to pay into the fund. It’s likely that this will be the mechanism through which up to €1bn in state recapitalisation funding could be made available.

The report however is silent on what happens to the controversial ILCU stabilisation scheme and current stabilisation assistance.

In what is a watershed recommendation, in keeping with robust regulatory systems elsewhere, the commission says the bank should introduce a prudential rule book which would set out in detail what is required of credit unions with rules derived from its new regulation making powers.

Other recommendations include a fitness and probity regime, risk management framework, new internal audit functions and minimum competency requirements. These are clearly designed to improve governance and management capacities.

As credit union trade bodies have strenuously resisted the widening of regulatory powers and insisted that the setting of regulatory rules be a matter for the Oireachtas and not their regulator, it remains to be seen if they are fully supportive of these recommendations.  

ILCU’s more recent denial of credit union financial fragility and its accusations that the Central Bank is driving people into the arms of moneylenders only serve to undermine public confidence. The Taoiseach’s and Minister for Finance forthright rebuttal of these accusations and support for the Central Bank along with the commission’s position mean the era of light touch credit union regulation is over.

When implemented in full, the commission’s recommendations will bring to an end a decade of governmental ambiguity and indifference to the credit union sector and in particular its regulation and supervision. 

In comparison to their international peers, Irish credit unionists were quite reckless during the boom. For nearly a decade most they engaged in imprudent decision making and exposed balance sheets to increasing risks. When appointed in 2003, the credit union registrar, emasculated by inadequate legal powers, civil servant indifference and trade body political lobbying did what he could to reign in credit union risk taking.

While banking regulators were asleep at the wheel, he was trying to get then Finance Minister, Brian Cowen and his officials to wake up to systemic risks. Efforts to reign in investment risk were frustrated by trade body lobbying against their regulators proposed investment code.

When they were eventually published, the registrar’s voluntary investment guidelines came too late and credit unions lost tens of millions when their high risk investments plummeted in value in 2008.

Similarly in 2006, the registrars’ promotion of a deposit guarantee and stabilisation system which would have provided the wherewithal to minimise lending risks, was rebuffed by Cowen and his officials and he was told to talk to ILCU about approving its self-regulatory system.

Had Cowen supported his regulator and acted on others warnings, including mine, credit unions may not have destroyed so much community capital.

Such is the background and context for government and Central Bank intervention and reason why so much public money will be made available to recapitalise them.

A public policy response in recognising the importance of credit unions may finally provide the wherewithal to the credit union regulator to ensure the right thing is done. It’s a pity it’s taken an economic crisis to do so. 

A version of this article appeared in the Sunday Business Post, Markets Section, Sunday 16th October 2011

Temporary Debt Solutions Not Enough

The Government needs to realistically respond to the biggest economic and social issue facing the country – the consumer debt crisis.

Banks are dragging their heels on dealing with it, the central bank hasn’t the powers to get them to behave themselves, and the mortgage modification programme is no more than an “extend and pretend” mechanism to protect bank capital. The Central Bank’s threat to look for powers to cap interest rates on variable rate mortgages was reported on as a consumer protection initiative. It could equally be considered a bank capital protection measure.

Mortgage lenders loan pricing behaviour is just one of many anti-consumer issues that have been conveniently ignored within a process carefully calibrated and designed to protect bank balance sheets. Both the “Cooney” and “Keane” mortgage arrears groups, which the central bank participated in, did not raise mortgage pricing behaviour as a policy issue.

There are other “kick the can” examples. In response to a MABS’ proposal on the voluntary surrender of family homes, the central bank said that as it had given the banks an undertaking not to review the mortgage arrears consumer protection code for a year and a half, it would not consult on the MABS recommendation until 2012. It seems consumer protection clocks in Dame Street tick as slow as they always have done. 

The Government’s policy response in insisting that mortgages are repaid in full totally conflicts with its policy on insisting that homeowners are not turfed out of their homes. That conflict can only be resolved by either permitting wholesale repossessions or implementing a proper loan modification programme including debt forgiveness solutions.

But modifying mortgages is a solution to one half of the consumer debt problem – the other half includes personal loans, investment property loans, personally guaranteed small business and commercial property loans, revenue and utility debt. 

If the Central Banks’ stress test is applied to all categories of consumer lending then under benign economic conditions, lender’s loan losses could amount to €5.5bn in home owner mortgages and €7.7bn in other loans of about €175bn in total consumer debt. While excluding other personally guaranteed loans that morph into personal debts once called in, the numbers are useful as they illustrate the size of a problem that no one has overarching responsibility for. Dealing with it piecemeal by focussing solely on home owner mortgages won’t work.

The Keane mortgage group report was not disappointing if what you were expecting was a five humped camel – a camel of course being a horse designed by a committee. The earlier Cooney report on mortgage arrears, a cousin of the Keane five humped camel, completely ignored personal loans which are just as distressing for indebted householders and just as toxic on bank balance sheets.

The most glaring omission of the Government’s “Cooney/Keane” approach has been the concept of debt forgiveness. Cooney/Keane harps on about moral hazard. Yet the Law Reform Commissions proposals which are built on the debt forgiveness concept, clearly and unambiguously set out how moral hazard can be minimised.

Why is organised debt forgiveness being ruled out? The problem for bankers is once the concept of debt forgiveness is introduced then they will have to deal with the loan losses they are hiding within their forbearance programmes. It seems that insolvency legislation is another can being kicked down the road to protect bank balance sheets.

Last Thursday, at the Central Bank’s conference on mortgage arrears, Blackrock Solutions presented on international mortgage modification programmes. It believes that certain types of loan modifications seem to work better than others and that U.S. experience suggests that principal forgiveness is more effective that other types of loan modifications. It also maintains that house prices are significant driver of defaults in “non-recourse” and recourse markets and that negative equity matters in all the markets it’s studied. It also observed that European loan modifications seem to be driven by accounting or capital preservation.

Called debt forgiveness here, principal forgiveness is an inevitable consequence of loan unaffordability and negative equity. While Blackrock leans towards negative equity as the key driver of loan defaults, the central bank leans towards affordability. Given the scale of distressed, unaffordable mortgages, impact of negative equity and negative long term impact on affordability it’s as clear as a pikestaff that principal forgiveness will have to be factored into loan modification programmes here.

How this is done is also important as any mortgage modification programme cannot be considered in isolation to other distressed consumer debt. Principal forgiveness and not capital preservation simply has to become a policy response to dealing with the consumer debt crisis. What’s more responding to mortgages on their own without dealing with other loans at the same time won’t work. It will take a complete solution including non-judicial debt settlement agreements and empowered consumer protector to oversee the totality of consumer debt – not just bank debt. 

A version f this article appeared in the Irish Examiner, Business Section, Monday 17th October 2011

Credit union restriction was warranted

Had credit unions been regulated, governed and managed to standards found elsewhere they would not need to be bailed out by the state. Recent criticism of the Central Bank’s intervention to stabilise credit unions is both unfounded and unwarranted.

About one hundred credit unions - one in every four- are no longer fully functioning credit institution as they are unable to pay dividends. Along with two hundred others they have had their lending restricted by their regulator.

When credit unions can no longer function they are either closed down or their business is transferred to viable operations.  And as it costs money to do this, if credit unions don’t have it, the state typically funds the costs.

For some reason the Irish League of Credit Unions (ILCU), a trade body considered by many partly responsible for the distressed financial fragility of so many credit unions, maintains that no credit unions at present are in financial difficulty or trouble. 

About this time last year I wrote that state support of about €650m would be needed. Last week Minister Michael Noonan confirmed this analysis when he referred to a taxpayer bail-out fund of between €500m and €1bn. Taking to the airwaves, ILCU said there are “no credit unions at present who are in financial difficulty” and the bailout is a restructuring fund.

Maybe it’s concerned that despite a guarantee of €100,000 should savers lose confidence in their credit union they may move their money elsewhere en-mass and cause local runs. But this hardly squares with accusing the Central Bank of driving people to moneylenders as it only serves to undermine public confidence in their credit union.

It could have been different had regulatory attempts to reign in risk taking not been emasculated by civil servant indifference and trade body political lobbying.

Since established in 2003, the registrar of credit unions has struggled with limited powers to reign in risk taking. Between 2005 and 2007, concerns raised by the regulator and others to then finance minister, Brian Cowen, and his senior civil servants were discounted and ignored.

The Central Bank, which considers only 46 credit unions “low risk”, is finally to be given the powers it needs to properly regulate and supervise credit unions. 

Initially, close to 90 non-viable credit unions will have their business transferred to viable operations. Using new resolution powers, the bank will manage state funding to stabilise post-merger balance sheets.  In time consolidation may see the network consolidate down to less than 100 larger, sustainable credit unions, while maintaining most of the existing branch footprint. Wisely used, state funding could restructure credit unions into a modern credit co-operative system and be repaid in time.

In recent weeks there has been a concerted campaign to portray the Central Bank’s lending restriction imposed on three out of four credit unions as a primary cause of their problems.

Local politicians have accused Mathew Elderfield of driving people into the arms of loan sharks.  Perhaps they should consider why lending has been restricted.  It is important to distinguish between a credit union and the people who govern and manage them.

If all credit unions face the same challenges what are the other one- in- four doing that they haven’t been restricted?  Addressing this, in a recent speech, the credit union regulator said “it might be convenient to put stresses now evident in many credit unions down to difficult macro-economic environment we are now experiencing and there is much truth in that. However, this is only partly the reason.

For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by their supervisory committees has been non-existent”

Credit union activists here would have people believe they are heavily regulated. The truth is they are not regulated anything like credit unions in other advanced countries where they are subject to regulations and supervision every bit as robust as banks.

Were it not for regulatory leadership and intervention since 2008, hundreds of credit unions would have been forced to close their doors by now. Had the regulator the powers it is now getting, it could and would have prevented credit union boards and management imprudent risk taking and prevented the destruction of so much community capital.

Before local politicians criticise the Central Bank for doing its job maybe they should consider why so many credit unions are in financial trouble and why others are not.

A version of this article appeared in the Irish Examiner, Business Section, Monday 10th October, 2011

Time to regulate commercial debt management firms

The collapse of Home Payments Ltd highlighted the urgent need to regulate commercial fee-charging debt management firms.

Highly controversial, these firms sell products called debt management plans to distressed, vulnerable consumers. Like Home Payments, they provide a payment service in handling and distributing people’s money to their creditors.

Since 2009, any firm making payment services available to consumers has to be authorised and regulated by the Central Bank under the European Payment Services Directive. Regulations require firms to establish whether or not they should be authorised.

Should the Central Bank hold that debt managers must be authorised firms, they could be instructed to cease making payments on behalf of consumers. It’s a move that would undermine their profit model which is entirely dependent on hefty fees deducted from money handled for consumers. Firms operating from Britain would also have to cease handling money, unless authorised by the British Financial Services Authority.

Asked of its position, the Irish Bankers Federation, which is on record for some time in calling for the regulation of commercial debt management companies, said it believes they “should be regulated as payment institutions under the Payment Services Directive where appropriate and this position was made known to the Central Bank in the past.”

The sector is heavily populated by British/Irish joint venture firms and firms operating directly from Britain where they have come in for stinging criticism from the OFT (Office of Fair Trading) which licenses them as high risk consumer protection operations.

Since the Home Payments scandal broke, the Central Bank has sought to clarify the debt manager business model. It says it “has written to banks and insurers seeking details on firms that may be acting as payment agents for customers and to advise their customers that any money held by such firms are not covered by the Deposit Protection Scheme.”  Having identified a list of “approximately a dozen companies” that appear to be offering debt management/debt advice type services to consumers, it is writing to inform them “that they need to establish whether their activities require authorisation under the PSD, and if such activities are undertaken by the firms they will have to cease immediately.”

When contacted, Moneyvillage Ltd, a domestic joint venture operation set up in January last year, said that it has responded to the bank saying its position is that it does not have to be authorised. The company which  handles and distributes consumer’s money, is a founding member the Debt Managers Association of Ireland, a trade body set up last year to advocate for regulation.

A spokesman for Irish Mortgage Corporation, which recently closed down its stand alone debt management firm Credycare, believes that debt managers should be regulated and people’s money protected.

He explained Credycare closed as it found it couldn’t charge the level of fees required to become profitable. It’s a move that begs questions of the viability of other operations. If it’s the case that these firms cannot achieve commercial viability then they may not pass muster with the Central Bank’s stringent authorisation criteria.

MABS also wants to see commercial debt managers regulated. As they only deal with unsecured debt and not the totality of consumer indebtedness, it believes they risk making problems worse and not better for people. The Consumer Affairs Association, seriously concerned at the lack of consumer protection said “the way is clear for struggling consumers to be burned severely and yet the danger is being ignored” 

The Central Bank may have a quite effective mechanism to respond to calls for regulation without the need for new legislation or regulations. By requiring commercial debt managers to be authorised payment service agents, they would be regulated and supervised for solvency, fitness and probity and commercial viability. Working with the National Consumer Agency, the bank could issue strict guidelines on other consumer protection aspects such as misleading advertising and unfair terms. This approach was brought to the attention of both bodies by me in February 2010.

It seems that with a little bit of lateral thinking, fee-charging commercial debt mangers could be regulated and a glaring gap in consumer protection closed off.  

A version of this article appeared in the Irish Examiner, Business Section, Monday 3rd October 2011