I thank the Chairman and members for the invitation to come before the joint committee. I am joined by Mr. Dermot Quigley and Mr. John Dunne, authority members; Mr. Patrick Neary, chief executive; Ms Mary O'Dea, consumer director and acting chief executive; and Con Horan, prudential director.
As members are aware, on Friday last the authority issued a statement accepting, with regret, the decision of Mr. Neary to retire as chief executive. On behalf of the authority, I take the opportunity to thank him for the contribution he has made during the years. We have appointed Ms O'Dea as acting chief executive. I will assume enhanced executive responsibilities until the appointment of a new chief executive.
I wish to cover three main issues in my initial contribution. As the committee will be aware, on Friday last the committee established by the authority to undertake an urgent review of directors' loans at Anglo Irish Bank delivered its report. I will discuss the report with the committee. I will update the committee, since we last appeared before it in October, on some of the new regulatory measures we have put in place, in particular in regard to the banks covered by the Government guarantee scheme. I will detail some of the issues the authority is examining in regard to the system of financial regulation here and the lessons that are emerging from the events of the past 18 months. I assure the committee that the authority has already made changes to the way it goes about its business and is fully committed to taking the necessary steps, working with our colleagues in the Central Bank and in co-operation with Government, to ensure the Irish financial system operates to the highest of standards.
The Authority first became aware on 17 December last of issues that had emerged around directors' loans in Anglo Irish Bank. We appointed a committee, comprising authority members who are present, Mr. Dermot Quigley and Mr. John Dunne, to examine the regulatory response. It is important to point out that this was a review of our internal practices and processes relating to this issue. A separate investigation into the matter of directors' loans is ongoing and it is not possible, therefore, to discuss that investigation here today.
The committee worked over the Christmas and new year period to complete its work within the three-week deadline we had set. It delivered its report to the authority on Friday last, 9 January, and the authority accepted the findings and recommendations of the report. The authority was legally advised that it may not publish the committee's report. However, in the interests of transparency and in the public interest, we published a summary of its findings on the day. The essential task of the committee was to look within the Financial Regulator organisation at two issues: when the information about these loans was obtained by the organisation and how the information was communicated and followed up by way of response. In summary, with regard to dealing with the issue of directors' loans in Anglo Irish Bank, the committee concluded there was a breakdown in terms of internal communications and process and in the regulatory follow-up and response of the organisation. This resulted in failure to take appropriate and timely actions in regard to what was a serious matter and to escalate the matter to the authority.
With regard to the issue of whether this matter had been mentioned to the prudential director and chief executive after a wider meeting had concluded in January 2008, the committee was impressed with the coherence, clarity and belief in their stated recollections of the people concerned and also with their integrity. Nevertheless, the evidence presented to the committee on this issue could not be reconciled by the committee. There is no suggestion from any party that any communication — verbal or written — on this issue was made to either the prudential director or chief executive in the period January to December 2008. The committee noted that it had been greatly impressed by the quality, dedication, commitment and strong work ethic as well as the integrity of the officials with whom they engaged. The committee also noted the pressures the staff had faced since the onset of the crisis in the global financial system in August 2007 and noted issues with staffing requirements. Following on from this, the adequacy of existing resources would need to be kept under review particularly where modification of the approach to regulation and more intensive supervision would require more staff. The committee observed that the system of regulation that operated in Ireland was highly regarded internationally. The events of 2007 and 2008 in the financial environment globally pointed to serious inadequacies in systems of regulation operating across the world. Ireland is no exception and a much more intensive type of regulation has been introduced here under the Government guarantee scheme. This position is developing all the time.
The authority noted and accepted the recommendations of the committee and is committed to implementing them in full. These will include the review of our strategic regulatory approach in light of developments in 2007 and 2008, to which the authority is already committed, and this will be advanced as quickly as possible. The review should ensure that the organisation meets its statutory mandate and responds to the changed regulatory environment and to EU and international developments in financial regulation.
The staffing requirements for the organisation are being reviewed on the basis of the strategy review and of the outcome of the work being undertaken by external consultants for the authority, specifically the business process review and benchmarking against comparator financial regulators and other similar businesses, which is expected to be concluded shortly. Any changes recommended by these consultants in the organisational structure and reporting lines within the Financial Regulator's office will be examined and, if considered appropriate, acted upon by the authority as a matter of urgency.
While no process can eliminate the need for the exercise of good judgment by officials, existing internal communication and escalation procedures and procedural manuals are being reviewed, taking into account the lessons to be learned from the report and the ongoing separate review of directors' loans initiated by the authority.
Filing and document management and tracking arrangements are also being improved.
The review instigated by the authority to determine the treatment of directors' loans in all institutions covered by the Government guarantee scheme will be completed at an early date. Loans to directors will be examined in greater detail, especially to ensure that loans to any business in which a director has a major interest — defined as 10% or more of the shares or voting rights — are being included in returns to the Financial Regulator. Arrangements will be made to ensure more effective monitoring of prudential returns, including those for loans to directors, with on-line submission and built-in data validation and checking processes.
I will turn now to new regulatory measures and our regulatory approach. I would like to detail for the committee some of the new measures we have put in place, particularly with regard to the institutions covered by the Government guarantee, since we last appeared before the committee in October.
The legislation underpinning the Government guarantee scheme has a number of objectives. These include the need to maintain financial stability in the best interests of the public and the economy of the State, to safeguard the financial system and economy of the State from the threat caused by the unprecedented turmoil in the international financial markets, to provide lasting systemic stability in the banking system and to minimise the potential cost to the Exchequer and taxpayers.
Under the scheme, the Financial Regulator has a number of specific new responsibilities, which we must carry out in consultation with the Minister for Finance. These are to impose conditions regulating the commercial conduct of a covered institution's business, having regard to capital ratios, market share and balance sheet growth, in order to minimise any potential competitive distortion that may otherwise arise and to avoid any abuse of the guarantee. In particular, the Financial Regulator, in consultation with the Minister, has responsibility to monitor and review the expansion of the activities of covered institutions benefiting from the guarantee in order to ensure that their aggregate growth in balance sheet volume is not excessive.
To meet these responsibilities, we have established a new supervisory unit whose role is to define, impose and monitor conditions and targets under the Government guarantee scheme. Our interaction with the institutions covered by the scheme is intensive, including a permanent on-site presence. The level of interaction with the boards has also increased. We are implementing a closer monitoring of internal committees, such as credit, audit, and risk, which will include our attendance at committee meetings. We are monitoring liquidity and funding on a daily basis and we will ensure that there will be strict adherence by institutions to agreed action plans.
The key areas we are addressing are the performance of existing loans, ensuring that the institutions are making progress in achieving the targets set out in their business plans, ensuring that the institutions have a robust process for credit risk management and actively monitoring compliance with liquidity requirements. Assessing the ability of the institutions to fund their business without undue reliance on ECB operations is also part of this process. We are also reviewing the governance structures of the institutions to ensure that there are proper systems of internal control.
We have requested and received detailed business plans from the institutions. These plans focus on the need to reduce the risk profile of the institution and to outline how their models are sustainable. We have examined these plans and have commenced a series of engagements with the institutions at the most senior level to determine the soundness of the plans. As part of that process, we are working with the banks on clarifying, for the Minister for Finance, their plans to grow lending to small and medium-sized enterprises in the economy. We will report to the Minister on the levels of lending the banks are applying to this sector.
The chief executive and chairman of each institution must report quarterly to the Financial Regulator, on behalf of the Minister for Finance, regarding the institution's overall compliance with the scheme. These are very significant oversight measures. They are necessary because of the changed environment we are in. It is a priority for us to ensure that the covered institutions are subject to the highest form of scrutiny.
I will now turn to the system of financial regulation. The developments in the financial markets of the past 18 months have rightly brought a focus on to the system of regulation. This is the case not only in Ireland, but also internationally. There are different and competing regulatory and supervisory models internationally. For example, more prescriptive rules-based models versus more principles-led models aimed at delivering the required regulatory outcomes. In light of the changed financial services environment in which we operate, there is much debate here and abroad about how regulation should be structured for the future.
For our own part, the authority is embarking immediately on a review of the system that operates here. Since the establishment of the Financial Regulator in 2003, in consultation with and with the agreement of all the key stakeholders in the economy, a system of principles-led supervision was adopted. This system was regarded well internationally. A number of reports from bodies such as the IMF and the OECD recognised this explicitly. However, the need to revisit this is very clear against the background of the international crisis — the depth and rapidity of which no regulator, central bank or government anywhere was able to foresee — the domestic economic downturn and the implications of this for our financial system.
A more intensive form of regulation is required. As I detailed for the committee earlier, we have already begun to put this in place for the covered institutions. Among the areas the authority will now examine as a matter of urgency are: an assessment of the effectiveness of our regulatory approach in the context of EU and international developments; whether a differentiated approach is needed for different financial sectors; our risk appetite, including an evaluation of our risk rating system; our inspection framework; and the adequacy of the information supplied by financial services providers under the current reporting structures. More intensive supervision requires not only more resources, but an efficient and effective deployment of those resources. This will be a priority for the authority in the coming period. We will need to examine the roles of oversight of the stability of the overall financial system and day-to-day supervision of individual institutions. It is clear, internationally, that the interaction between these two areas is of critical importance. We will need to do this in conjunction with the Central Bank.
On a European level, ECOFIN called last year for the introduction of a European dimension to the mandates of national supervisory authorities. On a more global scale, the G20 member states agreed to enhance co-operation and work together to restore global growth. It is clear that international standards of regulation have been inadequate to deal with the unprecedented turmoil in the last year. There is an acceptance that change is required. We fully accept that substantial change to regulation is required in this jurisdiction. While we will be informed by international factors, we must ultimately have a system of regulation that, above all else, will ensure financial institutions in our jurisdiction operate to the highest standards. If they do not, there must be serious repercussions. The behaviour of people at the top of our financial institutions must be fully appropriate to their responsible positions. Some of the behaviour we have witnessed of late is totally unacceptable. The international financial system has suffered a loss of confidence among customers and investors. It is vitally important, for the good of this country's economy, that there is a high level of confidence in the Irish financial system. We assure the joint committee that we are fully committed to playing our part by making whatever changes are necessary to achieve this. Our work in this regard is under way.
I thank the committee for its time. We will be happy to take any questions it may have.