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Head office of Central Bank of Ireland and Financial Regulator, Dame Street, Dublin
The Irish Financial Regulator’s failure to control property bubble contributed to the economic crash and consumer wealth losses, according to a new report.
The Financial Services Consultative Consumer Panel, which is appointed by the Minister for Finance, to monitor the performance of the Financial Regulator from a consumer viewpoint, said in a report issued late Monday, that most consumers have lost “significant amounts of money” due to the inadequacies of the financial regulatory structure. It also slammed the “deficient” response of the Regulator to threats to consumers, including the domestic property bubble.
“We are unclear as to why the regulator did not move to dampen the bubble at an earlier stage, for instance by requiring banks to set aside more capital for riskier products,”the report said, highlighting products such as interest-only loans.
In 2007, Finfacts contacted the Central Bank of Ireland seeking data on interest-only loans. We naively expected that the bank would have collected such pertinent data from the lending institutions as part of its normal data collecting function on credit activity. The bank did not have any data on interest-only loans even though beyond the sheltered workshop on Dublin's Dame Street, anyone with a clue of the buy-to-let market in particular, knew that the standard financing was a 5-year interest-only loan. For big values, it was generally sufficient for an accountant to supply a statement of new worth.
One of the most striking illustrations of the dysfunctional nature of the office of the Financial Regulator, was that for most of 2008, the Chief Executive Patrick Neary was unaware of the discovery by his staff, that Irish Nationwide provided loans of up to €122 million to Anglo Irish Bank's Seán Fitzpatrick, over an eight-year period, enabling him to move his director loans at Anglo Irish, off the bank’s books at each September 30th year end, to avoid disclosing them publicly.What amount would have triggered some office gossip or a whisper in a pub?
Up the chain of "command," the other two individuals who were guilty of monumental mismanagement, were Minister for Finance Brian Cowen and Central Bank Governor John Hurley.
“This product enabled consumers to buy property that they couldn’t actually afford and may have contributed to the house price bubble,” the Panel's report said on interest-only loans.“This shows the indispensable need to scrutinise new products in financial markets.”
“It is not good enough for the Financial Regulator to ignore products or players it feels are not within its remit,” it added.
The Panel recommended that any wrongdoing the Financial Regulator, should be investigated by an external authority. It said the next chief executive should be a person with a strong track record of “independent thinking” and “facing down vested interests.” The selectors should draw on a wide range of candidates, including those from the private sector and from overseas.
The report welcomed the Government’s commitment to reform the Central Bank, it says it is “concerned about where the consumer fits into the new framework”.
The report stressed the need for those involved in the regulatory process to have an understanding of sophisticated financial products. “The Regulator should not need to consult external experts before taking action to deal with problems arising from such products,” it said.
A special unit should be established within the Regulator to scrutinise all new financial players and products entering the domestic market for “systemic risk”, it advised.
It also recommended that there should be a consumer expert on the boards of both the Regulator and the Central Bank and said retail banks should be reorganised to resemble the traditional building society model, and should be regulated to prevent them from becoming “closeted investment banks”, it said.
On the Government’s proposals to merge the consumer functions of the Financial Regulator and the Financial Services Ombudsman, the Panel said the ombudsman maintain its independent role.
The report was prepared by a sub-group of the consumer panel which was chaired by Sean O’Sullivan, managing director of Cork technology firm Seabrook Research. The other members were Kathleen Barrington, John Maher, Prof Noel Mulcahy and Raymond O’Rourke.
The Financial Regulator said in a statement: " The Financial Regulator notes the report by the Consumer Panel on the current financial regulatory framework. As we have already stated the Financial Regulator and the Central Bank have also offered views to the Minister for Finance on the future structure of regulation. At present we are actively engaged in intensifying and reorganising our approach to regulation.
It has been acknowledged by the Consumer Panel in its report of September 2008 that the consumer directorate has worked well for consumers and we agree that it is crucial that the level of consumer protection that has been established is maintained and further developed as part of the new regulatory regime. "
Members of the Consumer Panel
Profiles of the Consumer Panel Members:
Raymond O'Rourke is the Chair of the Panel. He is a food and consumer lawyer.
Kathleen Barrington is a freelance business journalist with special interest in personal finance issues.
Frances Byrne is the Director of One Parent Exchange and Network (OPEN). OPEN is the national network of lone parent self-help groups that have joined together to represent the interests of lone parents living in poverty and social exclusion.
Michael Culloty is Social Policy and Communications Officer with the Money Advice and Budgeting Service.
James Doorley is the nominee of the Consumers' Association of Ireland (CAI) and a member of the CAI Council. He is currently Assistant Director of the National Youth Council of Ireland.
John Maher is a chartered accountant, and is a senior lecturer in Accounting and Finance at the Waterford Institute of Technology.
Professor Noel Mulcahy is former Executive Vice President of the University of Limerick. He is a former member of Seanad Eireann and is an alternate in the National Forum on Europe, Co-director of National Centre for Work- Based Learning.
Fidele Mutwarasibo is Research & Integration Officer with the Immigrant Council of Ireland.
Sean O'Sullivan is Chairman of the Centre for Financial Services Innovation and is also the Managing Director of Seabrook Research Limited, a software development company, based in Cork.
Fiona Reynolds is a solicitor in private practice.
Eileen Walsh is a senior volunteer member of the Society of St. Vincent de Paul with a particular interest in national social policy and justice issues. She is Chair of the Policy Analysis Group of the Society.
"Irish banks are resilient and have good shock absorption capacity to cope with the current situation" - - Patrick Neary, Chief Executive, Irish Financial Regulator, September 19, 2008: - two days after the collapse of US investment bank Lehman Brothers.
Two weeks later, the Irish Government guaranteed all the deposits and liabilities of six Irish financial institutions. On October 02, 2008, Neary appeared on RTÉ's Prime Time television programme, and in possibly the most bizarre performance by a public official on Irish television, since its launch in 1961, said that bad lending by Irish banks had nothing to do with the current international crisis which was all about liquidity. He said the banks had plenty of capital to absorb any losses on property loans and he did not believe that over-exposure to the property market was a weakness of the Irish banking sector.
DKM Economic Consultants' 2007 estimate was that Irish construction output represented 22.6% of GNP and 19% of GDP, when measured in gross output terms. The construction to GDP ratio was the second highest proportion (after Spain) in the European Union and ranged from less than 8% in Sweden to over 21% in Spain and with an average ratio of around 12% in Western Europe and less than 11% in the UK.
As Neary, the Central Bank governor and Brian Cowen, slept at the switch, property-related lending amounted to almost two-thirds of total outstanding private sector debt, according to their own data. By March 2009, the amount had fallen to 61% and a "bad bank" was being planned to assume responsibility for €90 billion in loans due from developers - - equivalent to 60% of Ireland's annual Gross National Product.
Finfacts Comment: We commented earlier: "The office of the Financial Regulator remains dysfunctional if it and not the Department of Finance decided to issue the Panel's report after normal business hours on Monday.
Here we have a body, with a remit to provide information to consumers but it publishes a key report without making it available online.
So on Monday evening, a member of the public prompted by for example broadcast news to check for the report, would not have found it online.
It has done a disservice to the Panel."
However, the Panel has done the disservice to itself!
Finfacts has been informed that the Chairman of the Panel "does not have any immediate plans to publish the report online."
It is a bizarre decision and if the Panel members want a change in the mindset that has brought about the crash, they should embrace a new modern approach.
You cannot have your cake and eat it!
The first chief executive of the Financial Regulator Liam O'Reilly, retired at 60 and joined the board of Irish Life & Permanent Plc. He became the first Chairman of the Chartered Accountants Regulatory Board (CARB) in April 2007. He is also a director of Merrill Lynch International Bank based at the IFSC. Last February, CARB appointed the former Irish Comptroller & Auditor General, John Purcell, to undertake an investigation into the issue of directors' loans at Anglo Irish Bank. Seán Fitzpatrick is a chartered accountant.
Patrick Neary was appointed to the position of chief executive in February 2006. Prior to this, he held the position of prudential director of the Financial Regulator from 2003. In this role, his responsibilities included the protection of consumers’ deposits, funds and policies. He is a fellow of the Chartered Association of Certified Accountants (FCCA) and was previously Head of Securities and Exchanges Supervision and Deputy Head of Banking Supervision in the Central Bank of Ireland.
Neary was ousted in early 2009 with a golden handshake of €630,000 - - he received a special €202,000 pay-off and a €428,000 retirement lump sum, in accordance with the British 1909 Superannuation Act, and subsequent regulations, entitling retiring civil servants to a lump sum payment of 3/80th per year of service up to a limit of 40 years of service. Employees who joined the civil service prior to April 5, 1995, are entitled to receive their public service pensions on top of their State pensions.
In addition to the initial bonanza, Neary is entitled to an annual pension of €142,670 and every time the incumbent chief executive gets a pay increase, Neary's pension will rise.