MEETING OF THE JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE. 18 January Opening Statement by Liam O Reilly,Chief Executive

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1 MEETING OF THE JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE 18 January 2006 Opening Statement by Liam O Reilly,Chief Executive Thank you for the opportunity to meet with you today to discuss our recent survey on endowment mortgages. Chairman, you will already have received the details of this in my letter to you at the end of December. In my opening statement I would like to summarise that for the Committee. I know that you are also interested in hearing from us on the issue of equity release products, and I will briefly outline our position on this to you. Background The popularity of endowment mortgages hit their peak during the late 1980s and early 1990s. At the time, there were a number of advantages associated with these products, in particular those related to mortgage interest relief and tax relief. Of course, another perceived advantage was the possibility that a surplus sum could accrue to the customer at the end of the loan term. Between 1989 and 1992 endowment mortgages accounted for over one third of total mortgages approved in Ireland but dropped significantly in popularity from 1993 onwards. In 2003 the number of endowment mortgages approved as a percentage of total mortgages was only 3.4 per cent.

2 In recent years, there have been public and media concerns expressed about the potential repercussions from the sale of these products for consumers here. This has been an echo of public concerns within the UK on the same issue. However, in the UK the level of sales of these products was much greater on a per capita basis than here, they commenced earlier and continued at a more significant level and over a longer timeframe than was the case in Ireland. Financial Regulator Survey In order to get a picture as to the extent of the potential shortfalls here, the Financial Regulator undertook a survey of financial institutions. The survey found that 47,759 endowment policies, which were originally linked to interest-only mortgages, remained outstanding. Of these, 23,264 still retained the related mortgage. This means that 24,495 policyholders appear to have repaid the related mortgage while retaining their endowment policy as a pure savings product. Mortgage lenders estimate that the outstanding endowment related mortgage loan amount owed to them is approximately 1.2 billion. This represents 1.46% of the billion residential mortgages of Irish residents as at 30 June Using assumed investment returns, the projected aggregate shortfall on outstanding mortgage loans, in respect of the responses received, is estimated to be of the order of 89 million over the next 15 years, - an average of 3,825 per endowment mortgage. On a wider issue, the total potential shortfall on all the endowment policies written by the insurance companies who responded to the survey could be in excess of 182 million, or an average of 3,810 per policy. These endowment policies, however, include not only those used to repay mortgages but also those used for investment and savings purposes.

3 Regulatory Background It is important here to note that the legal and regulatory framework in the Irish market was substantially different to that in the UK at the time most of these products were sold. The major difference was that, while a voluntary code did exist, there was no comprehensive statutory code in place in Ireland covering the sale of these products at the time they were sold. When the risks associated with the product were highlighted here in the 1990s, specific provisions were incorporated into the Consumer Credit Act, 1995 which required warnings to the effect that the proceeds of a policy may not be sufficient to repay a mortgage. It also imposed an obligation on insurance companies to issue a policyholder statement every five years stating the current and projected maturity value of the policy, while the Life Regulations, 2001 placed an obligation on insurance companies to issue an annual statement in respect of policies issued after that date. Role of the Financial Regulator In terms of our own role, we are assisting endowment mortgage holders in three ways; through the provision of information directly to consumers, through our new Consumer Protection Code and through our work with the industry. The information that we are providing to consumers includes information in relation to what they should do if concerned about a potential shortfall in their endowment policy and how to make a complaint. The principles and rules contained in our new Consumer Protection Code, which will be published in July of this year, are designed to protect consumers in their dealings with firms and also to clarify for firms the standards that they are expected to follow when dealing with consumers.

4 Finally, we have been working with industry in order to ensure that policyholders are alerted to possible shortfalls as early as possible and are provided with appropriate and clear information. All life insurance companies, through the Irish Insurance Federation, have now committed to us that they will undertake annual communications to all of their endowment mortgage customers with effect from April of this year. This is a significant development in that it will give all those customers a clear picture of their projected position on a much more frequent basis than has been the case this will apply to all policies, irrespective of the outstanding policy term. In addition to this, we are also working with the industry to ensure this communication which, of course will be targeted directly at all customers involved - also contains essential information on issues such as the options available to those customers in relation to potential shortfalls. Endowment mortgage holders, who believe that they were mis-sold, or who feel that their issues were not properly dealt with, should, in the first instance, contact their financial services provider without delay and seek a formal response to their complaints. If not satisfied with the explanation or response made by the financial service provider, the person may then refer the matter to the Ombudsman for consideration, in accordance with the procedure set out by his office - I know that Joe Meade will now describe to you the role of his office and his powers in more detail. Equity Release Finally, Chairman, if I can turn briefly to the issue of equity release products. There are basically two schemes aimed directly at elderly and retired consumers in the Irish market commonly referred to as equity release. The first scheme is known as a lifetime mortgage this is a loan secured on the consumer s home where no repayments need to be made until the property is sold, the owner of the property dies or permanently

5 leaves the home. The second scheme is known as a home reversion scheme, where a consumer sells part of their home in return for cash. This is not a financial product it is the sale of property and therefore is not regulated by us. We have concerns about the potential for mis-selling of home reversion products on the market due to the fact that they are unregulated. We would support the introduction of legislative amendments that would require these products and their providers to be regulated. We are also very conscious of the need to increase consumers awareness of the various schemes and products available and the differences between them. We raised this issue in our consultation document on codes and are publishing specific consumer information in relation to this matter. In addition to our general principles, we have also included specific provisions in our new Consumer Protection Code relating to equity release. The main thrust of these provisions is to ensure that consumers are advised of the consequences of releasing equity from their home, the need for them to seek legal advice and the implications it may have on the funding of their potential future needs. -ends-