In the wake of the crisis that has hit the US sub-prime housing market and the ensuing credit crunch rippling across international financial markets, financial institutions across the world have been grappling with their exposure to unstable mortgage loans. Even those financial institutions with limited exposure to the sub-prime market have failed to escape the fallout, as liquidity in the capital markets diminishes and they struggle to service their loan books.

Evidence of the gravity of these difficulties abounds, with the English market witnessing its first bank run in over 140 years. The highly publicised case of Northern Rock provoked hundreds of Irish customers to queue outside the Dublin branch of the bank to withdraw their savings. Only intervention by the Bank of England, in the form of emergency funding, saved the bank from collapse. This case highlighted the direct pressure that global market conditions can apply to our own domestic market.

While it is too premature to speculate whether we have seen the worst of the credit crunch, we can cautiously surmise that Irish institutions have escaped relatively unscathed. While their share prices have tumbled in the wake of declining confidence in the banking sector, they have not had to suffer the substantial write-downs of some of their global competitors.

It is against this background that we welcome new legislation to regulate sub-prime lenders and non-bank lenders in Ireland. The current climate has spurred the Oireachtas into examining the previously unregulated activity of money lending and catalysed the enactment of certain legislative reforms contained in the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 on 1 November 2007. Section 19 of the 2007 Act creates a new regulatory regime for non-deposit-taking lenders, known as 'retail credit firms' and 'home reversion firms'.

Section 19 provides that all non-deposit-taking lenders engaged in retail lending will be subject to the Financial Regulator's authorisation and ongoing supervision. It allows the Financial Regulator to impose conditions and requirements on authorised firms to further strengthen consumer protection. The new regulatory regime requires firms to provide specific information about consumer credit and home reversion agreements. In addition, the new regime extends the Consumer Protection Code to retail credit and home reversion firms.

Once authorised, retail credit firms and home reversion firms will become regulated financial service providers for the purposes of both the Financial Regulator's Consumer Protection Code and the Financial Services Ombudsman Scheme. Under the Consumer Protection Code, regulated entities must ensure that in all dealings with customers, they act fairly, honestly, professionally and in the best interests of the customer.

Firms will have to move quickly to ensure that they comply with the new regulatory regime, as it is an offence under Part V of the Central Bank Act 1997 for a person to carry on a regulated business, unless it is authorised to do so. A person found guilty of this offence is liable on conviction to a fine not exceeding €2,000, or, if tried on indictment, a fine not exceeding €100,000. Alternatively, the Financial Regulator may impose administrative sanctions in relation to prescribed contraventions and has a broad power to impose sanctions, ranging from a caution to a reprimand to a monetary penalty of up to €5,000,000.

While the changes introduced by the 2007 Act are to be welcomed for increasing consumer protection, they do little to address the difficulties currently facing financial institutions. Institutions will still be free to adopt business models that rely heavily on the capital markets to fund their lending. Consideration must be given as to how best to insulate the Irish consumer from future ripples in the credit markets.

For further information please contact David Williams.

Spring 2008.