Financial Regulation in Ireland: Past, Present and Future Post author By Philip Lane Post date December 2, 2009 Governor Honohan made a speech last night on this topic: the text is here. Categories In Banking Crisis, Economic Performance Tags financial regulation 18 Comments on Financial Regulation in Ireland: Past, Present and Future ← First Birthday → Willem Buiter’s New Job 18 replies on “Financial Regulation in Ireland: Past, Present and Future” All – I posted the below on one of Karl’s threads before Philip’s thread appeared on the specific topic. So am just repeating the same comments under this more relevant thread. Patrick Honohan (or the “Governator” given his threats of enforcement upon banks and others) addressed NAMA, Basel 2, failures at the regulator, the banking crisis and other topics in a speech last night (Tuesday 1 December) to the annual Financial Services Ireland dinner. I have uploaded a copy of the speech at http://www.complianceireland.com/documents/CI_Newsletter_Dec09_11_web.pdf in which I have inserted comments on some points raised by the Governator. My comments are mainly on the governance and regulatory compliance issues. However on pages 4 and 8 of the newsletter I reproduce his comments on NAMA. At page 8, the Governator states ‘The State will now be servicing a heavy – though manageable – burden of debt in the years to come’. Is this debt indeed manageable?”. Any comments from the economists on this point? I am struggling to understand whether his comments about Basel 2 (see page 1) are meant as a defence of regulator or rather simply trying to explain why the regulator and central bank were effectively asleep on the job without excusing this misfeasance (or malfeasance?). Part of me thinks Patrick should have delivered a more hard-hitting speech to set the tone for the way forward. Perhaps he did not want to usurp anything planned by the incoming head of the Financial Regulator, Matthew Elderfield. But as the head of the unitary Central Bank, he should committed to supporting an inquiry into his predecessors (including the regulatory board(s)), current staff and colleagues at the Department of Finance to fairly determine their accountability (if any) and punishment. If these people were not fit for purpose or were negligent they should be identified and not ride of into the sunset with hundreds of thousands of taxpayers money in pay-offs and pensions. Furthermore, any of them still in office need to hit with An Bord Broom. Otherwise such incompetence will revisit us again. @ Peter If the governor puts in place an accountable and a respected regulatory system, then he will merit much credit. As to “an inquiry into his predecessors,” what more do we need to know about a public governance system of limited accountability; where the buck appears to stop nowhere and where change only generally comes after a crisis…sorry – – a dire crisis? The CB was just one pawn in this game. An inquiry into planning corruption was established in Nov 1997; lawyers have become multimillionaires and has the system of rezoning, which makes land scarce in a country that is 4% urbanised, been reformed? — ZERO. The comments on enforcement were picked up by the Irish Times. Tough talk on enforcement is important, but only a partial element of what the new regulator should be doing. Stringent enforcement is actually likely to be ineffective or counterproductive by itself, but the credible capacity for stringent enforcement is an important part of a broader strategy for promoting compliance and even ‘beyond compliance’. As Theodore Roosevelt had it, ‘Speak softly and carry a big stick’. What any regulator has to recognise is that their capacity to deliver compliance is limited. The Governor is right to place emphasis on corporate governance and here the regulator’s role is arguably less important than that of regulated businesses themselves and of other market actors. In Ireland a central capacity for overseeing and enforcing corporate governance principles is the Irish Association of Investment Managers. The IAIM has shown a certain tolerance of corporate governance problems, for example in the new board structure at AIB, though it has struck occasionally, as when it published a press release in May 2008 indicating that the Executive Chairman of DCC could not stay in office. One presumes that the exercise of the stick enhances the capacity of IAIM to speak softly on other occasions. These thoughts suggest that the new regulator should pay close attention to the wide variety of mechanisms through which monitoring can be carried out and compliance can be promoted. An important factor is ensuring that formal and informal sanctions available to the regulator are well-gradated. In this respect the Consumer Protection Act 2007 provides a model which includes undertakings and compliance orders in between the advisory and warning stages at the bottom of the scale and criminal enforcement and license revocation at the top. A second and related point is that there is strong experience of enforcement and compliance promotion in a number of agencies such as the Environmental Protection Agency, The Competition Authority, the Office of the Director of Corporate Enforcement and the National Consumer Agency. There is considerable scope for the sharing of expertise which might also involve other enforcement agencies. I think something of this kind is envisaged in the recent Government Statement on Economic Regulation which refers to the establishment of a network of regulators. Patrick Honohan’s speech should be welcomed by all interested in the regulatory debate. It is reflective as we would expect, but also forthright and clearly lays down some very important markers as to how financial regulation will be conducted in the future. The speech certainly indicates a distinctly more robust relationship with the key regulatory stakeholders. First, the comments about pay structures and the realisation that we must sometimes be “realistic price takers”, while not as forthright as his reported comments in the interview with the Irish Independent a couple of weeks ago, do indicate a significant difference with the government’s policy on salary caps . Second, and more importantly, the emphasis on enforcement and the willingness to use legal action is a very direct signal to financial institutions about expectations of future behaviour. Irish regulators, and not just financial regulators, have had an unhappy relationship with the legal system over the past decade, so the Governor’s statement is a very transparent message of intent. The final emphasis in the speech upon the responsibility of senior management and boards to ensure that both business models and organisational culture must be “renewed and reformed” also leaves no room for ambiguity . The comments about how supervision will be carried out in future are also important. “Challenging and assertive” are appropriate aspirations and the acceptance that the supervisory model must be “calibrated to the risks posed by different firms” is surely the right way to go. His forthright comment about the focus on consumer protection not playing a part in the failure of prudential regulation is direct and again lays down a clear message of intent as to regulatory objectives. Of course, making speeches is one thing and creating a new regulatory regime is a task of a very different order of magnitude. There does, however, appear a very clear intent. @ ALL Governor Honohan can start his tenure by having a look at what is happening with Anglos investment arm. My info is that Green Property are taking over for nothing without going to tender. Seems like nothing has changed in the ff and crony investors circle. @ Michael. I hear what you say. As a non-Irish born resident I cannot believe the loss of time represented by Irish tribunals. I draw comfort in the fact that I did not design the system directly nor directly by not using my vote. I promote an inquiry through the Dail, name and shame (under privilege) the culprits to such an extent that no Irish entity will pick them up for a NED role or hire them as a consultant. That is what upsets these people. They might get the pension but what they really crave is ‘social and business acceptance’ post their government jobs. So let’s simply deny this to them. Piece of cake. Then move on. Could all be done in less than 6 months if there is conviction. I would not propose spending anymore time on the matter. The more important thing is restoring trust in the domestic and IFSC industries. @ Colin – ‘provides a model which includes undertakings and compliance orders in between the advisory and warning stages at the bottom of the scale and criminal enforcement and license revocation at the top’. Sounds like my homeland Australian model. I fully endorse such a practical approach. Australia did such a good job sanctioning the executive and non-executive directors of the James Hardie Group for public offering misstatements that the entity is now considering moving its headquarters from Australia to Ireland. In the words of one Australian commentator, this will improve the corporate governance standards of both countries. Perhaps harsh, but fair? @ All – I like Patrick. Don’t get me wrong. But there was nothing new in what he said. Everything he stated (except on Basel 2) has been floating around in a myriad of Financial Regulator papers and codes for years. The difference is that a new man said made a fresh statement and with conviction. At the end of the day the real enforcer, upon his arrival, will be Matthew Elderfield. It is his maiden speech that I wish to hear. Having worked in regulator in Australian and the UK, and then representing clients dealing with the Irish regulator there is one thing I have first hand experience of – if you do something wrong, better to do it wrong in Ireland. Little to no chance (based on history) that you will be punished, either because Ireland does not do ‘justice’ or because you will be dead before the complaint hits the arbitrator’s desk. @All I really do question whether our massive regulatory failure was due to principles based regulation. Patrick Neary had a lot of experience of banks getting into trouble due to overlending. http://www.irishtimes.com/newspaper/finance/2009/0110/1231515468442.html “Mr Neary also knows all about excessive lending to the property sector, having worked on two of only three Irish bank collapses, both due in no small part to overexuberant property investment. They were the 1976 collapse of Irish Trust Bank, the Dublin bank set up by London businessman Ken Bates, and Merchant Banking, owned by the late developer Patrick Gallagher, which went bust in 1982. He worked on the salvage job that was First New Hampshire Bank, the US bank purchased by Bank of Ireland in 1988, which suffered a heavy exposure to a declining property market. It cost the Irish bank hundreds of millions.” I would be very surprised if someone who had so much practical experience of how “overexuberant property investment” could destroy banks did not realise the dangers of our property boom. Yes, he spouted guff about principles based regulation. But for me that is not an adequate explanation. @All Neary was, “head of securities and exchanges supervision before he left in 2003 to join the newly established office of the financial regulator as prudential director ….before taking over as financial regulator in 2006”. So before 2006 Neary, a man with a wealth of experience of the dangers of property lending, was answerable to a superior and through him to the board. The property bubble began to deflate in early 2007. Yes, I know he had a strangely shaped head but could he really have done so much damage in such a short period of time? At the time of his retirement Richard Bruton said the following: “This may be the first tangible signal that the people in Irish banking, both at a commercial and regulatory level, that brought our banking system to this low ebb will not and cannot be the people that bring us out of this mess,” Mr Bruton said. Fair enough. But when Eugene Sheehy of AIB turned up to address the Oireachtas the other week, still the chief executive one year and two months after the bank collapsed, Neary may have had a wry smile. Neary looks to me much more like a scapegoat then the prime villain. @All Take for instance Neary’s immediate boss up until 2006, Liam O’Reilly. http://www.independent.ie/business/irish/exregulator-redfaced-as-bank-hit-by-8364275m-fine-1923992.html Or take his boss from 2006, the chairman of the authority, Jim Farrell. “Jim was the boss of Citibank in Dublin for many, many years.” http://www.irishtimes.com/newspaper/finance/2009/0110/1231515468459.html Who appointed Jim Farrell? Who sanctioned the appointment of Liam O’Reilly? Surely then Minister for Finance, Brian Cowen. What priorities did he give them when he appointed them? What supervision did he exercise over them? The min job of an Irish public servant, this writer excepted, was to never contradict the lies of superiors. Laws matter not. Who you know ……. The official reason why Neary left was due to irreconcilable different versions of events between his story and those of his underlings. This related to Anglo Irish. Thus the board of the regulator could not decide who was telling the truth internally at the regulator regardless of a deliberate cover up or honest error. Transparancy is a hallmark of governance. I have my own view on what transpired. @Peter Oakes That is the official story. But Brian Lenihan’s spinners told everyone at the time that Neary had grossly failed to regulate bank lending. Neary took over in 2006 at the bubble started to deflate in early 2007. How much of a difference could he have made? Presumably his predecessor bears a huge amount of blame. So explain this: “Merrill Lynch International isn’t the only bank with Liam O’Reilly on its board to stumble into crisis. The former financial regulator also sits on the board of the beleaguered Irish Life & Permanent, which lost its boss Denis Casey and other top executives following the Anglo loan deposit revelations earlier this year. Recently it emerged that Mr O’Reilly was sitting on the accountancy body that was investigating the fall-out from the deposits scandal. He subsequently stepped down from the Chartered Accountants Regulatory Body several months into the probe. Earlier this year, former AIB internal auditor Eugene McErlean suggested that Mr O’Reilly, as regulator, had failed to act against overcharging at AIB in the years leading up to 2001.” And this below is very disquieting too. Did O’Reilly recommend Merrill Lynch to devise a plan for our banks? “Merrill Lynch was a key adviser to the Government as it concocted Nama and the bank bail out scheme. Merrill Lynch received close to €6m in fees from the state.” I notice there has been very little comment about the proposed 400k per annum salary for the new regulator (Sunday Business Post). Apparently this is merited on the basis of his international experience; however, that experience (assuming we accept his experience in Britain as ‘domestic’ in his case) appears to be limited to a couple of years in Bermuda (Irish Times). As I understand it, that’s a lot more than his boss (Honahan) is being paid and a lot more than the Taoiseach is paid and only 100k less than the proposed cap on the salaries for CEOs of the commercial banks….and this for someone who didn’t make it to the top of the pile in Britain – top of the pile Bermuda (even if it does pay more) is not quite the same and is, of course, much further from home. Maybe Honahan’s reference to ‘price taking’ is a fig leaf to cover the fact that as he (and his political masters) preach pay restraint, he has presided over a new high in public service recompense (with maybe one or two exceptions). So the theoretically held position/principle is jettisoned when it suits…will this be the first of many ‘real’ world slips for the g’uvnor. And another thing…I’m assuming that this largesse was sanctioned by the CB board in which case the D/Finance seems to operating in a very strange place when it comes to regulating public sector pay – not to mention one D. Begg. It’s a very strange little country we’re living in and it’s getting stranger every day. @ E43Bn & no extra lending – in my Newsletter I wrote that the predecessors of both Honohan and Elderfield be looked at and not just the last predecessor (as well as some staff remaining in place at the organisation). The question is whether there is sufficient conviction to look that far back? When O’Reilly left IFSRA I remarked to a guy who worked at IFSRA that O’Reilly would be on the NED circuit soon enough. I was told I was very wrong to make that assumption and that O’Reilly had told IFSRA staff that he had no such intention. Funny what changes over time. Around town, many joke about the O’Reilly curse – the unfortunate likelihood, based on statistics, that if he joins your board you will get sanctioned, I mean no disrepect to Liam O’Reilly. I would have loved to have been at the IL&P meeting at which (reportedly) Mary O’Dea (then acting head of IFSRA) tore strips off the board. @ Tom Douglas – I understand that Honohan is loosing a big slice of € compared to Hurley. Separately I read a great guesstimate that said every $1 spent on regulatory compliance saves $5.21 in remedial action down the line. May be the IFSRA CEO will be good value for money regardless if he costs €400K or €1m . @ Tom Oakes – I also read about the potential down the line savings on the basis of current/early investment (this applies in may areas, most dramatically perhaps in terms of investment in early childhood education – but that’s a different matter). However, on a crude calculation basis, subtracting Neary’s former salary (280k) from the salary proposed for the new regulator (400k) and multiplying by 5.21, it looks like we’ll save about 625k per annum if the proposition holds….not exactly getting us out of the woods! My earlier point however was to do with consistency – how can you on the one hand preach wage constraint and then when you have the discretion and the power (rather than the theoretical posture) award a salary that is about 43% higher than that enjoyed by the previous incumbent? Of course they’ll say that we had to go international and get the best (and, of course, the politicians had already decided that it would be someone from ‘outside’ prior to any competition for the job) but what sort of message is that to send out? We’re incapable of sorting our own problems? And how much, following that logic, is it going to cost to replace all of the senior officials in D/Finance who appear to have been in suspended animation while the storm brewed, the senior officials at D/Taoiseach who seemed to nod yes (and mean it!) to Bertie’s every whim, all of the learned professors of economics who failed to put pen to paper or stick their collective heads above the parapet (no collective letters to the IT in 2006/07?) to call a halt, all of the local authority planners who agreed to allow building on flood plains and the architects whose professional standards and codes must surely have been breached in colluding in that madness , almost the entire of the D/Health and much of the HSE for obvious reasons and so on, and on, and on….. On the other hand maybe its just a subtle way of softening us up for the real international take-over IMF-style? Maybe after that we’ll say what we mean and do what we say. We need to build the capacity and capabilities of the regulatory system but we also need to rein in public sector pay. That requires long-term strategy, collective effort, real determination and will – not a parachuted, would-be Messiah who is probably only stopping off here on his way back to more lucrative pickings at home. @ Tom – (para 1) I think the point about 1/5.20 was lost in translation; (para 2) see http://www.complianceireland.com/documents/Mathhew-Elderfield-head-financial-regualtor-October-2009-Sunday-Tribubne.pdf I make the point about not being able to find someone locally to head IFSRA; (para 3) Should any of them have to go, it is obvious that it will cost a fraction of what we are paying for NAMA (which could have been avoided had people done their jobs properly). Look at Australia – the regulator and civil servants really do operate in the best interest of the country. The have vision, value and strategic direction. Albeit the Oz banking system caught a sneeze but that is all it was compared to the black plague sweeping Ireland due incompetence and a complete lack of respect to understand that they (the banks, government and civil service) were responsible for other people’s money. A similar point made by Joe Meade just this week when he released his recent FSO findings; (para 4 & 5) I thoroughly agree. But we need to recognise that some working in the public sector are as good as their counterparts in private industry. In pulling back on gross public pay, we cannot overlook offering a credible package to those who can make a difference. @ Peter Oakes – good article in the Tribune that I seem to have missed – thks. Re. your piece above however I think we have to recognise that some in both the private and public sectors are ‘good’ (noting this can be variously defined) and that some in both the public and private sectors are not so good or even incompetent, dishonest and fundamentally destructive. The private sector is hardly a paragon or exemplar at this stage (Andersen Accounting, Enron, Lehman’s, Anglo Irish Bank….) and not just in the banks. The best should be paid accordingly, agreed. The dross should be swept away, agreed. But the point about the 400k salary for Elderfield is that we were forced to recruit outside because the Minister for Finance ordained, from way out, that the new regulator would be an ‘outsider’ and in effect opened the door for an exorbitant package by removing real competition. If we were able to get a govenor of the CB from within our own ranks on the cheap (presumably he’s committed as a concerned and expert citizen) then what was to stop us doing the same on the regulatory front? The answer to that is politics, not expertise, nor suitability, commitment, integrity or capacity. There have been huge failures on the part of all sorts of organisations and professionals (regulators, bankers, economists, valuers, planners, journalists, financial advisers….) that have been cruelly exposed by the still unfolding catastrophe. These are general failures that apply internationally that are not uniquely built into Irish genes. In Ireland we seem to have decided that in all cases bar one (the regulator) that it is business as usual and that the same people both politically and administratively who walked us into this remain in situ. In the one case we have looked outside we’ve paid way over the odds at a time when we’re asking everyone else to take a serious hit – still makes no sense to me and I still can’t understand how the inherent hypocrisy hasn’t hit home to more people yet…then again, maybe there’s only so much hypocisy one can digest at any one time. @Peter Oakes That is an interesting point about Liam O’Reilly. I wonder do you believe though that Honohan should have waited for an inquiry with real teeth to investigate the failures of the regulator or insisted on same before taking the job. Like Obama when he appointed the “Clinton Retreads” he seems to be saying that he is the change. Also, I saw a newspaper report that aside from Neary there was one other retirement from the regulators office. I haven’t heard of anyone else leaving. If the regulator was a bank we would be slating the lack of accountability. Say as a thought experiment: Would Anglo have been allowed to quote the philosophy defence? “We went wrong because we were Nietzcheans. Now everything is fine because we have become Rawlsians.” I am not sure if that would have been accepted. Ireland has had it’s worst bank collapse….ever? I would have expected a lot more. Comments are closed.