1. Minister for Finance, Jack Chambers publishes the report of the Interdepartmental Mortgage Arrears Review Group
On 3 September 2024, Minister for Finance, Jack Chambers TD, published the report (“Report”) of the Interdepartmental Mortgage Arrears Review Group (“Group”). The Group was convened in October 2023 against a background of a rapid rise in interest rates, with the aim of identifying improvements to the mortgage arrears framework to address mortgage arrears on private homes in Ireland.
Group’s observations
Long-term mortgage arrears - the Report highlights that over the past ten years, long-term mortgage arrears have continued to decline, demonstrating the positive impact of the mortgage arrears framework. At the end of 2013, nearly 18% of all mortgage accounts were in arrears, with 7.9% in arrears of more than one year. This has reduced greatly, such that at the end March 2024, 6.8% of all private dwelling house (“PDH”) mortgage accounts were in arrears, with just 3% in arrears of more than one year. However, as outlined in the International Monetary Fund’s 2022 Financial Sector Assessment Program Review, very long-term mortgage arrears persist, some more than a decade and there are many borrowers with projected shortfalls at the end of their term. The Report notes that failure to resolve these arrears in full has the potential to undermine credit growth and affordability in Ireland, given the impact on credit risk of the uncertainty of enforcing security. In this regard, the Report found that there is a significant issue of non-engagement with the framework by a particular cohort of borrowers in long-term arrears. The Report acknowledged that addressing this issue will be a challenging task requiring close monitoring of the impact of several reforms to elements of the framework that are already underway.
Early mortgage arrears - the Report emphasises the importance of close monitoring with borrowers directed towards the available solutions through the arrears framework. Further, the Report highlights the fact that such early intervention will assist mortgage borrowers in difficulty to address their situation, remain engaged with their lender and, potentially, remain in their family home, preventing progression into long-term arrears cases.
Recommendations of the Report
The Group made a number of key recommendations in the Report as follows:
- The establishment of a forum of senior representatives from relevant departments and bodies, meeting half yearly, in order to maintain collaboration, coordination and information-sharing with a view to further reducing mortgage arrears;
- The adoption of a coordinated communications strategy targeted at defined groups of mortgage arrears account holders, with such a strategy outlining the various options that those in mortgage arrears can avail of in order to address their situation, and the supports and organisations that exist to help them;
- An exploration of the data gaps on mortgage arrears and resolution through the financial system and the Courts service with the aim of facilitating the optimal exchange of information between the proposed mortgage arrears forum and financial services providers as appropriate;
- Mortgage holders whose arrears continue for more than five or ten years should continue to be prioritised within the Abhaile Scheme;
- Improved engagement between Personal Insolvency Practitioners (“PIPS”) and Money Advice and Budgeting staff dealing with borrowers in mortgage arrears;
- Regulated entities must ensure their customer service standards are appropriate and effective, having specific regard to the services required to support the needs of distressed mortgage borrowers and to foster constructive borrower engagement. The Central Bank of Ireland (“Central Bank”) will continue to monitor the application of the relevant mortgage arrears customer services and supports to ensure they meet with supervisory expectations. Regulated entities should ensure that they make the Standard Financial Statement as accessible as possible and follow and implement the Central Bank’s good practices and recommendations in the Dear CEO letter of April 2024;
- The Mortgage to Rent (“MTR”) Scheme should be widely promoted in order to help meet the agreed targets under the Government’s Housing for All plan;
- Personal insolvency legislation should be enhanced by way of appropriate amendments as per the specific recommendations of the Group, some of which are as follows:
- removal of the €3 million limit on secured debt for borrowers seeking a Personal Insolvency Arrangement (“PIA”), thereby increasing access to a statutory debt solution for a broader cohort of borrowers with unsustainable debt; and
- the strengthening of the powers of the Irish Insolvency Service providing for the authorisation, regulation and supervision of PIPs. This would provide greater protection for debtors and creditors who are or may become parties to a PIA, as well as increasing public confidence in the operation of such arrangements.
- The undertaking of a further survey by the Central Bank of lenders as regards the legal process;
The Report notes that the recommendations to review the personal insolvency framework, to examine the success of the MTR scheme and to work with the legal system to ensure fair treatment will be important contributory factors to a robust mortgage arrears and consumer protection framework.
In the foreword of the Report, Minister Chambers stated the following:
“It is my view that we need to prioritise the reduction of mortgage arrears over the coming years to normalise our mortgage credit market and reduce the consequential financial burden imposed on all mortgage borrowers. These actions will only succeed if they are complemented by a concerted and innovative response from the Financial Services industry.
I strongly urge firms to review the resourcing of their mortgage arrears units, their range of restructure options and their borrower engagement strategies. The relevant public service bodies are prepared to work closely with the industry on this.”
2. Eurogroup President, Paschal Donohoe delivers keynote speech to the City of London Corporation on “Financing Our Future”
On 3 September 2024, Paschal Donohoe, President of the Eurogroup, delivered a keynote speech to the City of London Corporation on “Financing out Future”.
Mr Donohoe highlighted what he identifies as a key issue for economies into the future, encompassing Europe, the UK and the global economy, namely how to pay for and meet the very large investment needs which societies face in the years to come, and to manage to do this in such a way that reduces inequalities within countries.
Referencing the seismic events the world has experienced over the last number of years such as the pandemic, wars, and indeed new technologies changing how we live, Mr Donohoe pointed to the fact that any one of these changes alone would have reshaped societies and economies, and considered the fact that all of these have occurred at once and against a background of climate change.
In his speech, Mr Donohoe addressed three main areas as follows:
1. The case for market based economies
Mr Donohoe commented that the market economy is under intense scrutiny with “the needle of public opinion” being quite fragile, noting further the dissatisfaction in how market economies are delivering in democracies, ultimately affecting political outcomes. However, Mr Donohoe stated that we are not faced with a choice between state dominance and laissez – faire economics only. He acknowledges that faith in the economy’s ability to deliver for households has been eroded over the recent past. However, he contrasts this against his contention that in times of turbulence such as market failures, it has been the State that has stepped in to offer support. However, Mr Donohoe goes on to make the point that such State action is not sustainable and significant funds are needed in order to address future needs relating to health care, the climate transition and security.
Mr Donohoe emphasised the need “to harness private savings and investment and to rekindle faith in the private sector’s capacity to effectively respond to public demand for societal transformations.” Further, he explained that the success of the market economy depends on public support and in that regard underlines the importance of communication of decisions to the public such that public opinion does not become “a victim of false narratives and misinformation.”
2. How a market based economy fits the rationale for the European Union
Under this heading, Mr Donohoe addressed the Capital Markets Union (“CMU”) and confirmed why it is of fundamental importance to financing our future. He cited the fact that free movement of capital is one of the fundamental pillars of the EU single market, yet we have not realised a truly single market in respect of capital. He stressed the need to move businesses and entrepreneurs away from a reliance on bank funding and how imperative it is that the conditions are created whereby European companies find the financing they need to grow, innovate and become more competitive in Europe. To illustrate the success of EU policies, in terms of being beneficial to EU citizens and the common good together with the communication of such policies, Mr Donohoe used the euro as an example, stating that 79% of citizens living in the euro area believe that having the euro is a good thing for the EU, while 69% believe that it is a good thing for their own country.
3. Why a complete change in CMU in Europe is underway leaving grounds for optimism
Acknowledging that we are at a time of significant change as regards public finances and investment needs, with debt levels remaining high and high demands for spending, Mr Donohoe stated that the answer to the questions lies in the CMU, but that further progress is essential.
Mr Donohoe explained that capital markets are vital to unlock funding sources, thereby closing the gap between demand and supply and addressing the needs of citizens, communities and society. On an optimistic note, Mr Donohoe pointed to what he described as a recent “sea change in attitudes and political determination”. Mr Donohoe referenced the recent work of the Eurogroup, and its engagement with industry, which resulted in agreement on a set of proposals on the future of the CMU in March. For more detail on these proposals, please see theFIG Top 5 at 5 dated 14 March 2024.
Next Steps
Mr Donohoe explained that at the Eurogroup, Ministers agreed a high-level work programme which will ensure that the implementation of its agreement remains at the top of the political agenda over the course of the next year. He stated that there is political consensus that he is determined to maintain momentum on and ensure implementation. In order to maintain this momentum, Mr Donohoe reiterates that the Eurogroup will hold regular follow-up sessions at technical and Ministerial level to monitor progress on national initiatives to deepen capital markets.
Finally, Mr Donohoe welcomed the UK - EU Memorandum of Understanding on Financial Services that was signed last year, paving the way for the first two meetings of the Joint EU-UK Financial Regulatory Forum (“Forum”) nothing that the Forum provides an opportunity to exchange views on key issues of importance for both jurisdictions, with the aim of preserving financial stability, market integrity and the protection of investors and consumers. He acknowledged that it is for the UK and the EU to make their own decisions as regards how to progress but reiterated the importance of the Forum, noting that “financial instability does not respect borders, so we have to work closely together in partnership to build resilience and safeguard stability.”
3. Report of Mario Draghi on the future of EU competitiveness is published
On 9 September 2024, the European Commission (“Commission”) published a specially commissioned report (“Report”) produced by Mario Draghi, former Chair of the European Central Bank, at the request of Commission President von der Leyen, on the future of European competitiveness. The Report considers the challenges faced by industry and companies in the European Single Market and puts forward strategic recommendations on how to make the EU’s economy more competitive.
The Report calls for the increase of the flow of investments and savings across the EU, the ensuring that Europe’s ambitious decarbonisation plans are part of a larger coherent plan, and the reduction of regulatory burdens. It is a comprehensive and voluminous Report addressing areas such as investments, competition rules, EU decision making, trade, skills and innovations, however, for the purposes of this update, the focus is on the Report’s recommendations on the Capital Markets Union (“CMU”) and the Banking Union.
The Report notes that Europe is faced with an unprecedented need to raise investment on a very large scale and at a rapid pace. Further the Report states that, currently, the European financial system is unlikely to succeed in meeting these investment needs owing to the following:
- Excessive dependence on banks;
- Regulatory burdens on bank finance; and
- A lack of equity and bond financing.
- In its current state, the EU budget is less effective than it could be both at financing public investment directly and at leveraging private investment through risk sharing.
With the forgoing in mind, the Report sets out the following high – level key objectives for the EU:
- Reduce fragmentation of the Single Market by removing barriers for innovation, company growth and large infrastructure projects in Europe which will have the effect of increasing demand for risk capital and for higher volumes of finance through capital markets;
- Reduce dependence on bank financing in Europe by accelerating the development of the CMU, as well as increasing flows into capital markets by encouraging increased enrolment in private pension plans;
- Expand bank finance, overcoming excessively restrictive regulation on securitisation, and where necessary revisit prudential regulation to have a strong and competitive banking system;
- Make more effective use of the EU budget by focusing funding on strategic priorities, simplifying the administrative burden, improving the leverage of the EU budget and of the overall EU financial architecture to support investment; and
- Introduce regular and sizable issuance by the EU of a common safe and liquid asset to enable joint investment projects among Member States and help integrate capital markets.
The Report then goes onto further consider the forgoing objectives and sets out concrete policy proposals as regards each one, in particular the following should be noted:
Reduce capital market fragmentation
- The introduction of a European Security Exchange Commission;
- Reduce regulatory fragmentation to deepen the CMU;
- Encourage retail investors through the offer of second pillar pension schemes; and
- Assess whether further changes to the capital requirements under Solvency II are warranted by further reducing the capital charges on equity investments held for the long term.
Increase the financing capacity of the banking sector
- Enable the European securitisation market;
- Assess whether the current prudential regulation, also in light of the possible upcoming implementation of Basel III, is adequate in order to have a strong and international competitive banking system in the EU; and
- Complete the Banking Union, noting that a minimal step in this direction would be to create a separate jurisdiction for European banks with substantial cross-border operations that would be ‘country blind’ from the regulatory, supervisory and crisis management viewpoints.
4. Insurance Updates
1. EIOPA publishes article on leveraging insurance to shore up Europe’s climate resilience
On 3 September 2024, the European Insurance and Occupational Pensions Authority (“EIOPA”) published an article regarding the leveraging of insurance to shore up Europe’s climate resilience.
In the article EIOPA welcomed the report of the Climate Resilience Dialogue (“Report”) which was published in July, stating that it is closely aligned with EIOPA’s own sustainable finance priorities.
The article set out statistics relating to extreme weather events, noting that over the past four decades, the frequency of such weather events had tripled, resulting in economic losses in 2023 of €270 billion. EIOPA notes that the evidence shows that without decisive action, such losses are only set to increase into the future.
EIOPA detailed that their research shows that only about 25% of weather and climate related losses in Europe have been insured. This is despite the fact that insurance is a known vital component in absorbing some of the negative macroeconomic, financial stability and financial implications of such catastrophes, helping limit losses and helping economies bounce back quicker with the effect that fiscal pressure on countries with high physical risks are reduced. Bearing in mind that losses are set to increase going forward, this will only serve to widen the insurance protection gap that currently exists.
The article considered the possibility of reducing the cost of insurance by way of burden sharing. Indeed, EIOPA points to the Report and its advocacy of the need to explore potential for new public -private collaborations schemes, whether at EU or national level, a position that EIOPA supports. EIOPA stated that it is working on concrete recommendations in relation to the key features of public - private initiatives that can improve the affordability of insurance and reduce the burden on national governments, noting that it is in a position to inform the development of a possible EU – wide solution via its analysis of existing private – public schemes.
In particular, EIOPA focused on three of the Report’s goals as follows:
Improving risk identification
EIOPA pointed to the existence of its dashboard on the insurance protection gap which offers insights into individual EU member states’ exposures to various risks, thus providing insurers and supervisors with valuable tools in order to assess climate risks. The Climate Resilience Dialogue supports the work of EIOPA in this regard as it serves a better understanding of future protection gaps in Europe. EIOPA stated that EU authorities may wish to develop a public data hub for natural catastrophes which would improve access to relevant data for effective risk assessment.
Raising risk awareness and Encouraging adaptation and prevention
The article stated that an understanding as to how consumers go about the risks is as important as understanding the risks themselves. EIOPA has developed and tested solutions to promote greater take – up of natural catastrophe insurance as follows:
- raising awareness about climate risks at teachable moments;
- promoting standardised and comparable insurance products; and
- offering incentives such as premium discounts for implementing risk mitigation measures.
Additionally, EIOPA has been developing the concept of “impact underwriting”. EIOPA sees this as a key component of a successful climate strategy in insurance, with the concept consisting of motivating clients to reduce their risk exposure ultimately leading to better outcomes for insurers and consumers.
Next Steps
In order to reduce insured losses and to support the take – up of insurance coverage, EIOPA stated that it is developing a blueprint for a practical tool in order to:
- enhance risk awareness; and
- improve society’s and the insurance industry’s grasp of related prevention measures.
2. Petra Hielkema, EIOPA Chairperson, delivers speech on the role of reinsurance in promoting healthy markets
On 5 September 2024, Petra Hielkema, Chairperson of the European Insurance and Occupational Pensions Authority (“EIOPA”) delivered a speech titled “The role of reinsurance in promoting healthy markets”.
In her speech Ms Hilekema reflected on EIOPA’s view of the opportunities and risks associated with reinsurance. In particular she highlighted the following:
- given the global dimension of reinsurance, reinsurers provide significant capital and expertise thereby enabling insurers to underwrite larger and more varied policies, with the effect of promoting market innovation and stability;
- recent statistics have highlighted how the EU integrates with global markets to manage risk and ensure financial stability across borders, further underscoring the importance of international cooperation;
- by virtue of the fact that reinsurers diversify risk across borders, the impact of localised disasters are mitigated, acknowledging that a coordinated financial response to global catastrophes, such as those stemming from climate change, relies in part on reinsurance;
- as regards pension gaps and longevity risks, reinsurance also has a role to play in terms of transferring risk away from those unwilling or unable to manage it to those who can;
- there is a growing concern about the dependency on non – EU markets due to the increasing reliance on third country reinsurance in Europe, leading to concerns about implications for future competitiveness in the reinsurance sector; and
- there is a growing prevalence of complex reinsurance structures, such as profit sharing, asset intensive reinsurance, and mass-lapse reinsurance. Ms. Hielkema notes that such structures are increasingly drawing the attention of EU supervisors.
With respect to the risks highlighted, Ms Hielkema explained that she does not purport to diminish the value that EIOPA attaches to reinsurance creativity but rather sounds a note of caution that such creative measures must be well done and not at the expense of introducing risks. She links this to the need to foster high quality and consistent approaches to supervision of third country reinsurance, stressing the importance of collaboration between supervisors and reinsurers.
For more detail on EIOPA’s supervisory statement on supervision of third country reinsurance, please the FIG Top 5 at 5 dated 11 April 2024.
5. ECB publishes opinion on proposed FIDA Regulation
On 3 September 2024, the European Central Bank (“ECB”) published an own initiative opinion (“Opinion”) on the proposed regulation on a framework for Financial Data Access and amending Regulations (EU) No 1093/2010, (EU) No 1094/2010, (EU) No 1095/2010 and (EU) 2022/2554 (CON/2024/29) (“FIDA Regulation”).
The ECB welcomes the proposed FIDA Regulation and recognises it as important in terms of introducing a framework for access to and use of customer data. Further, the ECB states that it has the potential to contribute to the development of the Capital Markets Union in that it encourages providers to offer a broader range of services that are better tailored to customers’ needs and to lower fees as the marketplace becomes more competitive.
However, in its Opinion, the ECB highlighted concerns as regards its role under the proposed FIDA Regulation. In particular, the following should be noted:
- the proposed FIDA Regulation provides that the ECB will supervise significant credit institutions' compliance with it. The ECB is identified as a competent authority by virtue of the fact that the proposed FIDA Regulation identifies as competent authorities those specified in Article 46 of Regulation (EU) 2022/2554 of the European Parliament and of the Council (“DORA”). The ECB emphasises that DORA focuses on operational resilience, while the primary focus of the proposed FIDA Regulation is consumer protection, a difference that may necessitate different competencies. The ECB is concerned that the proposed FIDA Regulation thereby assigns supervisory tasks to the ECB which are not prudential in nature, but rather relate to consumer protection. Accordingly, the ECB is seeking clarification as to its role, as regards prudential supervisory competence. The ECB explains that the proposed FIDA Regulation should unambiguously clarify that the ECB is not designated as competent authority entrusted with any consumer protection tasks;
- building on the above, the ECB adds that supervising significant credit institutions’ compliance with the requirements set out in the proposed FIDA Rgulation falls outside the scope of the ECB’s prudential supervisory competences under the Treaty on the Functioning of the European Union (“Treaty”) and the Single Supervisory Mechanism (“SSM Regulation”). The ECB states that this conclusion aligns with recital 28 of the SSM Regulation, which clarifies that consumer protection is not among the supervisory tasks conferred on the ECB and remains within the remit of national authorities;
- The ECB proposes four amendments to ensure that the ECB’s competences under the proposed FIDA Regulation reflect the tasks conferred on it by the Treaty and the SSM Regulation;
- Amendments 1 and 2 are proposed to avoid deviating from the prudential supervisory competences conferred on the ECB by the Treaty and the SSM Regulation. The ECB proposes to refer to the ‘competent authorities designated by the Member States’ instead of the ‘competent authorities specified in Article 46 of DORA’, which would include the ECB;
- Amendment 3 is proposed to address the fact that the ECB could be the consolidating supervisor but has no mandate for consumer protection. Therefore, the ECB has proposed that it should be specified that the consolidating supervisor must be notified only; and
- Amendment 4 is proposed in order to emphasise the need to provide a clear legal basis to ensure cooperation, including facilitating relevant information exchanges, between the competent authorities designated for supervising financial institutions’ compliance with their obligations under the proposed FIDA Regulation and the authorities responsible for the prudential supervision of credit institutions, including the ECB. The ECB maintains that this is in line with the objective of the proposed FIDA Regulation and with the ECB’s prudential supervisory competence under Article 127(6) of the Treaty and under the SSM Regulation.