ANALYSIS:Central Bank rules, if adopted, will put more fiscal responsibility on the country's banks, writes CONOR POPE,PriceWatch Editor

THERE IS much that is commendable in the Central Bank’s proposed changes to the Consumer Protection Code. The new rules are aimed at reining in financial institutions, but cynics might ask where these rules were when the banks were throwing money around like so much confetti at a wedding during the boom years.

The proposals announced yesterday will include enhanced stress-testing for loans and protection for vulnerable consumers and will, if adopted, impose more fiscal responsibility on the State’s banks.

They will also significantly toughen up a Consumer Protection Code that was introduced just four years ago. That code was based on a series of principles rather than rules, and the proposed changes must be seen as an acknowledgement that the first stab at protecting consumers from mis-selling was inherently flawed.

The Central Bank conceded as much yesterday.

Speaking to The Irish Times, Bernard Sheridan, assistant director general at the consumer protection division, admitted that the existing code had not succeeded in halting the exploitation of vulnerable people, particularly the elderly.

He said regulators were now moving “towards a more rules-based system because we believe it will be more effective. We want to strengthen consumer protection and in this area we need tighter rules.”

Sheridan said the review of the code was the most significant strengthening of consumer protection requirements for financial firms since the code was first introduced four years ago.

The range of proposals published in yesterday’s consultation paper will offer greater protection, particularly to vulnerable consumers, and it outlines the steps the Central Bank believes need to be taken by financial institutions to ensure people are not ripped off or sold products that are unsuitable to their needs.

For the first time, vulnerable consumers have been clearly identified. The new definition includes consumers on low incomes or those with a high level of indebtedness. People who have a poor credit history, low educational attainment or who do not have English as their fist language are also now classified as vulnerable.

Others in the vulnerable category are people with long-term illnesses, near or over the retirement age, recently bereaved, or those with a lump sum to invest but with little or no investment experience.

“If it emerges that a consumer is particularly vulnerable, we expect firms to take greater care,” Sheridan said.

Under the measures proposed, financial institutions will have to carry out a rigorous assessment of whether or not a product or service is suitable for a particular customer and they will be expected to gather information about customers’ personal circumstances, financial situation and attitude to risk.

They must, at an absolute minimum, consider and document whether a product or service meets the consumer’s needs and objectives and if the consumer can meet the financial commitment associated with the product on an ongoing basis and/or is financially able to bear any related risks.

The financial institutions will also have to establish if a consumer has the necessary experience and knowledge to understand the risks involved, whether they are vulnerable and, as such, have particular needs and circumstances that require due consideration.

The proposed measures to beef up the code are unlikely to be greeted with joy by the financial institutions, as it places greater responsibility on them to ensure that the products and services sold to consumers are appropriate to them.

“I am sure that the industry will not welcome the new code and there is going to be some pushback from it and they will say that collecting all that information is too onerous,” said Sheridan.

“But we believe it is necessary and will have the support of consumers.”

If the proposed code is adopted, lenders will also have to impose considerably stricter financial stress tests on mortgage applicants.

They will have to assess a consumer’s ability to repay borrowings in forensic detail before approving loans and will be required to assess the impact of a two-percentage-point interest rate rise on a consumer’s ability to repay any credit.

Sheridan accepts this rule may make the already challenging process of getting a mortgage even more difficult. “Whether or not it should be higher than 2 per cent is open to debate. The higher you go the less likely a mortgage is going to be affordable. We are pitching it at 2 per cent because we believe it would be imprudent not to ask lenders to factor in potential ECB rate rises over the next two years.”

Other stress-testing measures in the new code include a rule that, if a consumer is availing of an introductory interest rate, the financial institution’s calculations will have to be based on the lender’s standard variable rate or fixed rate, whichever is to apply after the introductory period.

In the case of interest-only mortgages, the financial institutions will have to be satisfied that an applicant will be able to repay the principal at the end of the mortgage term.

If a mortgage is interest-only for a limited duration, they must be satisfied that the consumer will be able to meet the increased mortgage repayments at the end of the interest-only period.

The Central Bank said yesterday that consumers placed a great deal of reliance and trust in what they are told during a financial sales pitch and added that this was particularly true with “verbal assurances and promises concerning the safety and performance of a product or service”.

In order to ensure consumers are not misled or promised returns that are unrealistic, it says a “contemporaneous record of the verbal interactions” must be maintained by financial institution so they can verify that interactions took place and document the exact nature of the information provided during a sales pitch.

It has also issued clear guidelines on how companies must deal with errors and will insist companies who have made errors will have to resolve them within six months.

A consultation process has now begun and the Central Bank is seeking views on its proposals with a view to publishing the revised code next year.