Banks to have veto powers weakened as part of insolvency overhaul

Banks who stand in the way of “sensible” deals being struck with distressed borrowers could see

their controversial veto – granted to them when a new insolvency service was set up two years ago – severely weakened before the summer.

The Government's Economic Management Council (EMC), made up of Enda Kenny, Joan Burton, Michael Noonan and Brendan Howlin, met last week. It is understood to be pushing the Department of Justice hard for a radical overhaul of insolvency rules as the mortgage arrears crisis continues to be a political problem.

Specifically, the EMC wants greater oversight of the banks operating in the insolvency sphere and it is now looking at whether the Insolvency Service of Ireland (ISI) could be granted the authority to act as an overseer in negotiations between Personal Insolvency Practitioners (PIPS).

It is also considering if another mechanism similar to the Credit Review Office could be established to act as a watchdog during the process.

The EMC believes the fresh measures need to be introduced to make the insolvency system more transparent.

Among the proposals under discussion within the Department of Justice are the establishment of an independent review panel to assess cases where distressed borrowers or lenders dispute settlement terms proposed by the ISI. This could then make recommendations back to the ISI.

Despite warnings about the dangers of giving banks a veto, the Department of Justice insisted when setting up the ISI nearly two years ago that the largest creditors would be able to block personal insolvency applications without offering any substantial reason.

Applications rejected

The ISI has struggled to make an impact on the personal debt crisis and one of its key obstacles is the banking sector. Nearly a third of all applications brought to creditors were rejected through vetoes exercised by the principal lenders – a rejection rate almost six times higher than the UK.

Earlier this year, the ISI began collecting more details on which banks rejected applications by PIPs with a view to “naming and shaming” banks which irrationally reject deals.

The Government believes more needs to be done, however and the EMC is now pushing for a new set of measures to tackle it. They are set to be unveiled later this month, probably in advance of the spring statement.