Regulator underlines concerns over debt

The Irish Financial Services Regulatory Authority (Ifsra) defended its approach to regulating the financial services industry yesterday, as it echoed the Central Bank's concerns about the rapid rise in the levels of indebtedness among consumers.

Chief executive Liam O'Reilly said it was not the regulator's job to approve or reject any particular financial product, including 100 per cent mortgages, which some industry figures say target the most vulnerable borrowers.

"We accept that innovation is the sign of a healthy and competitive market," Mr O'Reilly said at the launch of the financial regulator's first annual report. He added that increasingly widespread unsolicited offers of credit and the growth in credit card borrowing were high on the regulator's list of concerns.

Mr O'Reilly said the regulator was stress-testing financial institutions' lending books at regular intervals.

"Institutions should only advance loans where they are confident that their customers will have the ability to repay. They have a responsibility to inform their customers about the risks they are taking in borrowing large amounts of money and to ensure that they retain some flexibility to cope with changes in their personal circumstances, like unemployment, and higher interest rates."

Patrick Neary, the financial regulator's prudential director, said it believed the ability of borrowers to repay should be central to any lending policies. Mr Neary said the regulator wouldn't rule out raising the capital ratio requirements for lenders if it felt their credit risk was reaching unacceptable levels.

Consumer director Mary O'Dea said the regulator was working closely with the Garda in its investigations into the use of fraudulent documentation to secure mortgages for which borrowers might not otherwise qualify.

One mortgage intermediary's authorisation has not been renewed as a result of an inspection by the regulator.

Responding to criticism that the regulator is too heavily focused on protecting the solvency of financial institutions at the expense of consumers, the financial regulator's chairman, Brian Patterson, said solvency regulation was a basic consumer protection.

"This is a point that is not often recognised, although if you were a customer of Morrogh or Independent Insurance in the UK you would know that prudential regulation is consumer protection," said Mr Patterson.

Stockbroking firm W & R Morrogh and Independent Insurance both went into liquidation before the establishment of the financial regulator, resulting in the loss of thousands of euro for customers.

Mr Patterson, who is also chairman of the Irish Times Ltd, said the financial regulator's principles-based approach to regulation was the most efficient kind.

"With a rules-based approach, you would have yards and yards of questionnaires and boxes to be ticked. Rules-based regulation didn't do much for the shareholders of Enron."

Mr O'Reilly said the regulator would only publicise overcharging matters or other regulatory breaches in cases where it was appropriate for the matter to be put into the public domain.