Scepticism over new IBF debt protocol

18 February 2013

**Article published in the Irish Examiner, 4 February 2013. Reprinted here by kind permission.**

With the provision of the long-awaited personal insolvency legislation just around the corner, the timing of a new protocol from the Irish Banking Federation, ostensibly designed to help distressed borrowers maintain home loans, is curious indeed, writes Paul Joyce, senior policy analyst with Free Legal Advice Centres (Flac)

FIRST published at the end of June 2012 and following a fairly swift passage through the Oireachtas, the Personal Insolvency Bill was signed into law just after Christmas. A month later, however, we still await the commencement of the act, with the newly-minted

Insolvency Service set to licence personal insolvency practitioners and to issue guidelines on minimum income standards for debtors, amongst other matters, so that the roll-out of the legislation might begin.

More than four years into a full -scale personal debt crisis and well over a decade since the genesis of that crisis, in Flac's view, these measures have been far too long in coming. And, from the consumer perspective, the scheme as currently devised is not without its flaws (see www.flac.ie for more detail). However, many people mired in chronic over-indebtedness can now at least seek a potential resolution to their problems that is on a hard-won, IegaIly binding statutory basis.

Encouragingly, Justice Minister Alan Shatter has assured us that the system will be improved if it is not working effectively. On top of this, the Central Bank is soon to publish a Consultation Paper that may lead to further measures being stitched into the Code of Conduct on Mortgage Arrears to oblige lenders to consider more long-term accommodations for borrowers in mortgage distress.

Why, then, did the Irish Banking Federation suddenly announce last Wednesday (30 January) that its members, comprising the main banks, had agreed a "protocol" to help keep people in their homes?

Described as an initiative designed to support distressed borrowers in maintaining their home loans by restructuring additional unsecured debt, it appears on the face of it to be a positive development.

However, closer inspection reveals that it contains some worrying features.

The IBF has admitted it did not' consult with other creditors, such as credit unions, utility companies, finance houses, or licensed moneylenders, before announcing it will get them on board in making voluntary settlements. We wonder how exactly does the federation propose to win over these unsecured creditors in order to ensure all debts are dealt with in one sustainable arrangement? What incentive is there for creditors not in the IBF and who do not provide mortgage loans to voluntarily agree such writedowns?
The customer's consent must be obtained to "permit creditors to liaise with each other in order to arrive at appropriate arrangements". However, there is no mention of independent advice for the debtor to protect their best interests.
Critically, the protocol does not mention a right for debtors to retain adequate income to ensure a reasonable standard of living while debt is being repaid and written down. Contrast this with Section 23 of the Personal Insolvency Act 2012. This obliges the insolvency service to issue guidelines as to what constitutes a reasonable standard of living and living expenses, having regard to poverty indicators and other criteria. Personal insolvency practitioners proposing arrangements under the legislation will have to take account of these guidelines.
The protocol suggests that "to support a payment to unsecured creditors, the mortgage payment may be reduced for up to five years as part of a sustainable long-term treatment". This looks very like the type of debt settlement arrangement envisaged under the personal insolvency legislation for a debtor who has a mortgage on a family home that is in distress and who has other unsecured debts in difficulty.

On the bright side, the announcement may at least indicate that the banks have started to get into negotiation mode, acknowledging that systematic writedown of debts is necessary for a recovery of both consumers and the economy. However, borrowers in arrears should be wary of a protocol that might be seen as an attempt to bypass the personal insolvency legislation and undermine the independence of personal insolvency practitioners and Mabs money advisors alike.

In Flac's view, insolvent debtors need sustainable, legally binding arrangements that deal with all of a person's debts to ultimately release them from further liability. At least to some degree, this is built into the personal insolvency scheme.

However, this banking initiative would seem to herald another unregulated, largely one-sided process that will depend on trusting the banking sector's ability to deal fairly with debtors and other creditors. Flac would have very serious concerns about that, as should all debtors and policy-makers.