JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate

Anglo Irish Bank: Discussion with Financial Regulator.

Chairman

The first item on the agenda is a discussion with the Financial Regulator. From the Irish Financial Services Regulatory Authority I welcome Mr. Jim Farrell, chairman; Mr. Patrick Neary, chief executive; Ms Mary O'Dea, consumer director; Mr. Con Horan, prudential director; Mr. Dermot Quigley and Mr. John Dunne. I draw attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before it. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I propose that Mr. Farrell make a short presentation which will be followed by a question and answer session. Is that agreed? Agreed.

Mr. Jim Farrell

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.

Chairman

I thank Mr. Farrell. We will take questions from five members before we revert to the delegates. Mr. Farrell has outlined the difficulties that have emerged in the past 18 months. I would like to ask about the manner in which financial houses and banks report to the Financial Regulator. Have reports been sought from the financial institutions on a regular basis? Are reports submitted to the Financial Regulator at the end of the year only? Are regulations, based on the principles of good governance of the banks, available to guide the directors of the various financial institutions? I agree with Mr. Farrell that what has happened is totally unacceptable. Were sufficient regulations in place to cover this? It should not have taken place.

Senator Paul Coghlan

I welcome Mr. Farrell and accept what he has said. I am pleased that the committee has an opportunity to exchange views with the Financial Regulator. I welcome Mr. Farrell's statement that he fully accepts that substantial change to the system of financial regulation is required. Has regulatory capture happened in Ireland? Perhaps Mr. Farrell has already answered that question. I hope things will change in the regulator's office. Mr. Farrell has indicated that it is incapable of monitoring the financial system with its current principles-based, light touch approach which is unsuited to the culture of Irish banking. I suggest the office has made as much impression on the banks as the proverbial bee on the back of the Giolla Deacair. Mr. Farrell has answered the question I intended to ask in this regard.

We are all aware of the concealment and the fact that the office was not fit for purpose. I refer, in particular, to the concealment by two institutions which were in close liaison. If I may say so, it was akin to the skiting of cheques in the old days. I thought, in light of the Fogarty report, the DIRT inquiry and much else, that Ireland had advanced in respect of the banking system but sadly we have been set almost at naught. While I accept Mr. Farrell's comments, I would like to have it confirmed and openly admitted that the office of the Financial Services Regulatory Authority was not fit for purpose or up to the job. Too many things were able to take place under the noses of its staff. Mr. Farrell indicated that the internal matter may not be discussed in detail. I hope we will hear more about it shortly.

Everything was far too cosy and, as Mr. Farrell admitted, substantial change will be required. The Financial Regulator may not have noticed but relationships between the banks and their auditors also appear to have been very cosy. Will the office of the Financial Services Regulatory Authority take steps to communicate with auditors and the Director of Corporate Enforcement about some of the recent issues as well as other matters the office is about to discover? I look forward to the witnesses' answers.

Deputy Michael McGrath

I welcome the delegation and thank Mr. Farrell for his opening contribution. The Financial Regulator's handling of the issue of loans involving Mr. Seán FitzPatrick at Anglo Irish Bank has had a devastating impact on the confidence of members of the general public in the regulation of the banking system. It will take time and some serious measures to restore this confidence.

Serious questions must be answered today. Who in the office of the Financial Regulator became aware last January of the loan arrangement Mr. Fitzpatrick had in place between two institutions? Effectively, a game of ping pong involving €87 million was being played with this sum being paid back and forth between two institutions to keep it out of the books and accounts. The statement of retirement of 10 January of the chief executive of the authority indicated that he resigned in response to a report and that he was unaware for most of 2008 that his staff had discovered in January 2008 that Anglo Irish Bank chairman, Mr. Seán FitzPatrick, had concealed director loans amounting to €87 million made to him from the bank. While staff at the authority were aware of this concealment in January 2008, Mr. Farrell stated the authority first became aware on 17 January last of issues that emerged around directors' loans in Anglo Irish Bank. It is farcical that staff at the authority were aware of this matter while the authority was not aware of it. This case has smashed any confidence the ordinary man in the street had in the regulation of the banking system.

Mr. Farrell must clearly state what was the meeting he described as a wider meeting which took place in January 2008, who was in attendance, including which staff in the regulator's office, and the reason these staff did not inform Mr. Neary that they had discovered the concealment of directors' loans. Was the matter not deemed sufficiently significant? Have the staff in question been reprimanded for not doing their job?

Mr. Farrell almost stated that the issue was one of staff resources and people being under pressure. It is an issue of common sense and doing one's job. To consider as insignificant the hiding of loans of €87 million from the books and accounts for the period in question is unacceptable and the office must take full responsibility for it. Mr. Farrell's statement does not include an admission that practices in the office are not up to scratch. He must be honest in this regard.

As an auditor, I find that it beggars belief that the substance over form of the transaction in question was not picked up by the auditors or Financial Regulator. Why were the post-balance sheet events not examined? Why were significant transactions which were material in the context of the books and accounts not identified and dealt with accordingly? These questions must be answered clearly if we are to have any hope of restoring confidence in the regulation of the banking system.

Mr. Farrell, in commenting on the flow of credit, indicated that the Financial Regulator will submit a report to the Minister on the levels of lending the banks are applying to small and medium size enterprises. Can Mr. Farrell tell us when that report will be sent to the Minister because the flow of credit to small and medium businesses is probably the most critical issue in the banking system in Ireland today? It should be our priority to get to grips with the flow of credit and give the Minister the information required so that he can take decisions in association with the regulator and the Central Bank to get credit flowing through the system again. I would appreciate a response to those points.

Deputy Richard Bruton

I thank Mr. Farrell for his presentation and the Chairman for facilitating the question. Following on from Deputy McGrath's point, how important does the regulatory authority regard this breach? For the ordinary public this would seem to be a red-alert issue of huge significance. Does the authority view it as such?

Mr. Farrell mentioned there was a disputed conversation after a meeting. What is his conclusion about what happened? Was there a failure to follow procedure? Was there a clear procedure in place that was not followed or was there no procedure and it was left to chance discussions on the fringes of a meeting? Has Mr. Farrell identified whether it was a human failure — and as Deputy McGrath inquired, who were the humans involved — or was it a procedural failure, that no system had been set up for adequately reporting red alert issues of this nature?

Members referred to reviews of all the other institutions in terms of such practices. Is the review process complete or have other irregularities been uncovered? Similar to Deputy McGrath, I am interested in the data from small and medium enterprises, as the published data appears to indicate there has been a huge collapse in lending to viable businesses with bankable projects and that it is much worse than the aggregate data.

Regarding the new areas where the performance of loans is being examined, are we now at a point where there is a clear system for valuing and handling impaired loans? There seems to be a world of difference between the view of the markets in respect of how our banks are handling and valuing impaired loans and how the banks present themselves as handling them. Has the extent of impaired loans been identified at this stage and the adequacy of provisions being made for them? Are we now on a firm footing in respect of how impaired loans are being dealt with?

To return to the bigger picture, in the stability reports we received from the Financial Services Regulatory Authority and the Central Bank, the authority warned of excessive credit growth, of a widening funding gap, of too much reliance on property and of the frailty of risk models that were being applied. The authority barked but the question is why it never bit. Did the authority ever assess the asset bubble as being a systemic risk to the system?

The authority is charged with examining the prudential risk of banks. Was that ever considered, or did the authority operate within a realm of comfort where everyone applied the same models and as long as the models said everything was fine no one adverted to the fact that we had credit at 250% of GNP, the highest in the western world? We were growing credit at 30% per year, which was unprecedented. Was it that the authority's dog failed to bark or would the authority assert it never got proper, accurate information to allow it to bark and bite? What is the regulatory failure at this point? The authority has talked about the future. I would like to know its view of the past mistakes so that at least we can make some evaluation as to whether the proposals are adequate.

Deputy Arthur Morgan

In page 2, Mr. Farrell states that the authority's responsibility was to ensure that the Irish financial system operates to the highest standard. Would Mr. Farrell accept that this is not the case and that the authority did not meet that objective? On page 5, Mr. Farrell mentions the new regulatory measures needed to safeguard the financial system, which is a reference to the legislation underpinning the Government guarantee scheme to the banks. He states that the responsibility to safeguard the system and the economy of the State is there to provide "lasting systemic stability in the banking system". Was this responsibility not in place before the Government guarantee scheme to the banks? Would this not have been one of the authority's key objectives before the bank guarantee scheme was put in place?

In October 2008, the Quinn Group was fined €3.25 million for a loan which was made without notification to the authorities. Was that not an early warning sign? Should the Financial Regulator not have seen that as a major warning and should it have caused the regulator to look at further activities at Anglo Irish Bank, especially regarding unauthorised loans or loans of an inappropriate nature? Why did that event not trigger further inquiries at Anglo Irish Bank? Does Mr. Farrell think the €87 million loan to Seán FitzPatrick was a stand alone event? Does he suspect that there may be other irregularities at the bank or at any other banking institution? Does he accept that the board failed in its responsibilities to find out what was going on here? Surely they should have seen these early warnings in advance.

On the concept of 100% and 120% mortgages, lending to purchase a property with the only guarantee being the property itself, did Mr. Farrell find that suspicious in any way? Did he feel that the Financial Regulator had sufficient authority to intervene? If he did, why did it not do so to check on what many of us believe were very bad practices?

Mr. Jim Farrell

I will answer the specific questions first, and then comment on the more general questions.

There is currently a review being carried out across the institutions to investigate what is going on with directors' loans. That review will be completed in the coming weeks, so committee members can be assured that we are looking at what all the other banks are doing under this heading, to ensure that proper procedures are being followed and that there is none of the carry on that was discovered in Anglo Irish Bank.

With regard to the SMEs, we will report on the lending issue to the Minister later this month. A question was also raised about impairment provisions. I have the prudential people with me and it is something that is closely monitored, so I would like to ask Mr. Con Horan to go into the detail of how these provisions are monitored.

Mr. Con Horan

The issue of impairment provisions has been one of the most difficult things over the past 18 months, as the markets have moved along and the economy has slowed down. The most notable event involved the PricewaterhouseCoopers, PwC, reports, with which members may be familiar. We asked PwC to focus on large exposures, to the property sector in particular, in each of the covered institutions. The analysis has provided us with the banks' opinions of their possible impairments and some independent assurance in that respect. A number of different stress tests were conducted to determine potential impairments were there to be a further deterioration in the economy.

The question was asked if we barked. Yes, we barked but we also bit. I refer committee members to 100% mortgages. In 2006, we increased the capital weighting for 100% mortgages. It went from over 80% to 100%. We also increased the risk weighting for development land from 100% to 150%. In retrospect, it could be argued that those were not sufficient but if we could have forecast what has happened, we would have taken stronger measures. There is not a regulator in the western world that has not had problems. I refer committee members to the fact that in the European Economic Area, 17 countries have had to resort to government guarantees and 14 have had to resort to government equity injections.

I am not excusing what we are doing but I am trying to explain the fact that what has happened is clearly unprecedented, to put it mildly. The scale of this has been unbelievable. Since September, following the Lehman Brothers debacle, the scale of the downturn has been such that everybody has had to make contingency plans. We need look no further than the US, the biggest and most liquid capital market in the world, and see the extent of what has been done there. It will be a $2 trillion job before they are finished, 14% of that country's GNP.

Members are right to criticise and ask questions of us as regulators and are entitled to ask about any regulator in the world but I refer to how difficult it is to anticipate what happens in these markets. That is not to excuse what banks have been doing. There has clearly been too much balance sheet growth and a concentration of risk in certain areas beyond what is prudent, to put it mildly. This took place in a different scene, in a different era. Times have changed and have changed for our lifetimes.

Deputy Arthur Morgan

When did the regulator change the mortgage weighting and the risk weighting for land?

Mr. Jim Farrell

The mortgage weighting was changed in 2006 and the risk weighting for land was changed in 2007.

Deputy Arthur Morgan

It must have been very late in 2006.

Mr. Jim Farrell

We talk about solvency but liquidity is the key. If one looks at banks that have gone bust in the US and elsewhere, it is because they did not have liquidity. One must step back and examine what is going on here. While we have major difficulties, I ask the members to consider that point in the context of their comments. We will work our way through this. We are making major efforts to ensure that, in this new environment, we as the regulators will continue to ensure that people who do business in financial services can feel safe and sound in the business they do. I thank the Chairman for allowing me to say that. Mr. Quigley chaired the committee on the Anglo Irish Bank affair and will take up questions on that issue.

Mr. Dermot Quigley

In direct response to the questions raised by the Deputies and Senators, Deputies Bruton and Michael McGrath in particular, the authority regards what happened with the director's loans as a very serious matter, as we indicated in the statement released by the authority. It is a serious matter. There was a serious problem in that there was a breakdown in communications and procedures. It was a serious matter in terms of public confidence in our work and what the banks do. It was also serious in the sense that major strategic discussions on the banks and banking system took place in the autumn of last year and this information would have been relevant to all the authorities, including the Government. As a result of the breakdown that occurred, this was not communicated in all the directions it should have been. The authority views this matter very seriously.

We have made decisions, based on the committee's recommendations, that we will take further measures to ensure this will not recur. There are procedures within the authority, but like all procedures in any institution they bear examination from time to time. The authority's procedures on communication and escalation of matters appropriate to be escalated bear examination. As our report recognised, there is a judgmental issue that has to be allowed for. One cannot lay down the A to Z of judgment. This was a serious matter which has been viewed very seriously in the way the authority has handled it. Deputies and Senators will appreciate that to be balanced and fair about it one must take account of the period during which this happened. It was a uniquely difficult period in the Irish financial system and financial systems worldwide. Our excellent, highly professional staff in the Irish Financial Services Regulatory Authority performed way beyond the normal range of work in that period. That is not an excuse for the breakdown that arose, but to any fair-minded person it is part of the context we should take into account.

The authority has accepted the committee's recommendations. Early last year, long before any of this broke, we had already put in train a review by external consultants to look at all our business processes and procedures and make recommendations. Because of comments made by the Comptroller and Auditor General about the level of inspections required in the Irish system we had asked the consultants to benchmark our processes and procedures against those of comparable regulators elsewhere in the world, to tell us if we were doing enough and rate us on it. That work is to be completed shortly and will form a very strong basis for the further consideration by the authority of what we want to do.

I want to return to the specifics of the director's loans as best I can, given the confidentiality constraints. Let me make a brief comment on the principles-based approach which has been the subject of comments around the table. It is important we know what it is and is not. The Chairman has outlined the genesis of the approach and the fact that it was endorsed by all the stakeholders in the country. "Principles-based" did not mean carte blanche to do what one liked. The regulatory principles we expect financial service providers to follow were clearly set out. The first is for such institutions to conduct their functions in a transparent and accountable manner. The second is to act with prudence and integrity in the best interest of customers at all times. The third is to maintain at all times sufficient financial resources to meet all commitments. The fourth is to have in place sound corporate governance procedures. The fifth is to have oversight and reporting systems which allow the board of management to monitor and control all operations. The sixth is to have in place adequate internal controls for the nature, scale and complexity of the operations.

The seventh principle is to have risk management policies and risk control systems appropriate to the nature, scale and complexity of the operations. The eighth is to comply with any rules set down by the Financial Regulator — for example, those relating to solvency and capital adequacy, segregation of client funds and consumer protection codes. The ninth is, when required to do so, to produce accurate, complete and timely information.

To say this is principles-based is wrong; it is led by principles that have been established here in Ireland as most of our regulatory regime derives from Brussels — a multiplicity of directives on banking supervision, insurance supervision and the supervision of all the funds established in Ireland. There are umpteen detailed rules in the banking system regarding capital adequacy and requirements. At the core of the system is a principles basis which throws a heavy burden on corporate governance and the way business is done.

To say it is principles-led means we do not set out to inspect every contract or transaction undertaken in a bank. How could we or any regulator do so? If it is going to come down to us monitoring specific transactions right across the financial system, in my mind we can forget about it. That is not what supervision is about and it never purported to be under the principles-based system.

What is of issue is the observance of the core principles of the system and an appropriate degree of regulation and supervision by the regulator. When we come down to it we certainly have learned something, both from the events in the Irish system but also from the complexity of the financial world we are living in and the problems that have arisen around the world. We have learned that regulators all over the world will be looking again at how they regulate. A more intensive form of regulation is likely, although it is still under discussion. It has already happened in this country, as has been mentioned in the case of the institutions covered under the Government guarantee scheme. As we have indicated, we are committed to looking at the system more generally.

The world has changed and more supervision and inspection will be needed. This has occurred up to now but we are talking about a more intense form of supervision. I thank the Chairman for allowing me to say this as it is part of the context we are discussing.

If I could go back to the transaction, specific questions were asked which I will try to pick up while dealing with the limitations on me. The Chairman started by asking about reports as mentioned by Mr. Con Horan. One of the reports at issue here is the large exposure report, which comes in from the banks on a quarterly basis. There are various schedules attaching to that report. One deals with the normal large exposures, where an institution has loaned 10% of its funds to a particular client. In addition, the top 50 exposures and the top 30 exposures for some smaller institutions are listed in that. Another schedule accompanies that return, loans to directors.

In the first schedule, that with large exposures, the first time loans to directors was picked up as an issue was as a result of a return of end of September 2007. It came into the Financial Regulator and there was a period for processing, examination and pulling data together. This found its way to the examiner dealing with Irish Nationwide, who spotted the transaction because it was listed in the top 30 exposures.

We stated in our press statement that, as an organisation, we might have identified the issues sooner. We must be open and honest in that regard. Had one looked at schedule 5, which relates to loans to directors, it would have been apparent that there were certain patterns of movement within the year which might have been discernible. However, we did not do this and there is a lesson to be learned regarding the importance that should be attached to the examination of all prudential returns and not just those which, understandably, are high priority in many respects.

From the point to which I refer, appropriate action was taken within the organisation in the sense that the people dealing with this issue at Anglo Irish Bank were brought into the picture and a number of meetings took place. The matter was raised as a serious issue. There was no further action at that time in respect of Irish Nationwide. However, it is now being pursued as part of the separate review to which the chairman, Mr. Farrell, referred.

To take up the point made by Deputy Michael McGrath, there were no contacts with external auditors or the chair of the audit committee at that time. That is an issue we have picked up on in our recommendations. It needs to be highlighted as a matter of importance for the future.

While concerns relating to this matter persisted within the banking supervision department, it was not pursued. Why was that the case? It was partly due to something that can happen within any organisation, namely, a letter went missing and the chain of continuity was broken. It was also not pursued because our officials were under heavy pressure during the period in question in the context of carrying out their normal work — such as overseeing the implementation of the capital requirements directive — and the abnormal work arising from the unfolding and serious problems relating to liquidity, etc., in the financial markets. While the committee, in examining this matter, was of the view that these pressures were part of the context, it was not trying to explain away the importance of it as a result.

While pursued at the meetings to which I refer, this issue did not resurface internally until it was raised in December. It went off the radar screen and a breakdown occurred. We have previously stated that this was a serious breakdown. As a result of questions being raised in December, the matter obviously came to the fore again and the appropriate follow-up action has taken place.

I cannot elaborate further on the part of our statement which refers to the conflict on the particular issue of whether this matter had been mentioned to the prudential director and the chief executive. As we have stated, the committee was impressed with the "coherence, clarity and belief in their stated recollections of the people concerned". Nevertheless, the evidence presented to the committee in respect of this issue could not be reconciled by it. However, there was no suggestion by any party that any communication — verbal or written — on this issue was made to either the prudential director or the chief executive in the period subsequent to January up to December 2008. The committee based that on its process, which was comprehensive and with which it received full co-operation from all the parties involved. Nonetheless, that was the conclusion of the committee.

The fact is that there was a serious breakdown in our processes and internal communications. As a result, we did not follow up in the way that might have been expected. I hope my comments will be of assistance to Deputies in understanding the sequence of events that took place.

On the other questions that were raised, there has been an appropriate follow up, a review of loans to directors is taking place across the institutions covered under the guarantee scheme and there has been contact with the Office of the Director of Corporate Enforcement, which is seeking certain information. Any subsequent actions regarding that information are a matter for the Director of Corporate Enforcement. I will not comment further on that issue.

Deputy Arthur Morgan

When will the review of loans to directors be completed and when will the information relating to it be available to the Financial Regulator?

Mr. Con Horan

It is expected that the review will be completed by the end of the month.

Senator Shane Ross

I thank our guests for coming before the committee. The picture with which we have been presented is very different from that which was painted when representatives from the Financial Regulator appeared before us in October.

I listened to what our guests have had to say on this occasion and I must state that their promises about the future are less convincing to me as a result of the cloud that hangs over past events and the lack of clarity relating to those events. It is clear that those who are representing the Financial Regulator at this meeting — who are all very distinguished people in their own right — do not know what happened. There is no one present who is aware of what took place. The committee of which Mr. Dunne and Mr. Quigley are members has stated that it cannot reconcile the evidence with which it has been presented. This means that we do not know the precise details relating to the fiasco under discussion, which has become a cataclysmic event for the Irish financial system.

International newspapers such as the Financial Times and The New York Times have zoned in on what is happening here and have referred to the Irish financial system as the “wild west” of Europe. The Financial Times also stated that what occurred represents “cosy Irish capitalism at its worst”.

Our guests have failed to enlighten us with regard to what happened in this instance. It is important that we should be informed in this regard. The protestations relating to confidentiality, while reasonable, are not particularly convincing. Our guests provided a summary but did not outline any details. I would have thought it would have been more convincing if they had stated that they could not provide us with any information regarding what happened because they have not been provided with the details they required.

I am surprised by two aspects of this matter. First, when our guests last came before use, the dogs in the street were barking about Anglo Irish Bank and the fact that it was a different type of financial institution than the other banks that operate here. Anglo Irish Bank occupied a different niche, did different things and loaned money to different people. However, at that time we were assured that all these banks were solvent and that there was really nothing about which we should be concerned. Subsequent events have indicated that the position was extremely different.

There was a macro situation whereby Anglo Irish Bank and other banks were lending to developers and running amok, and the Financial Regulator did not intervene. Mr. Farrell quite rightly used the phrase "too much concentration of risk". However, I would call what occurred absolute lending madness. The Financial Regulator presided over what was taking place and stated that all was well. All was not well and in the interim the Government has been obliged to pump money into the banks. Perhaps our guests can inform us as to whether it is right or wrong to do so. In the case of Anglo Irish Bank the Government has been obliged to invest €1.5 billion. That is a terrible indictment not only of the bank but also of the Financial Regulator, which allowed it to make itself so vulnerable. It is vulnerable and that is why what we are discussing happened.

The second and more detailed issue that arises — about which I hope we will receive further information — relates to the story of Anglo Irish Bank, which is a shambles. Mr. Quigley's assertion that the Financial Regulator cannot examine every detail, contract, etc., is absolutely correct. Nobody expects the Financial Regulator to do so. In a principles-led system, it cannot be done either. However, this was happening for eight years, for which a sum of €87 million was provided. When everybody in the media and the banking system was screaming about Anglo Irish Bank being difficult, did anybody say, "We better have a look at what is happening there in more detail"? Mr. Farrell is telling the committee that for eight years one director borrowed €87 million and nobody knew anything about it, which is extraordinary. Were there no spot checks? Were no systems in place to examine director's loans and the bank's returns? When all reputable auditors go into a company, they demand a log of directors' loans, which is not restricted to year end. Mr. Quigley can correct me on this but that applies to loans made to directors at any stage.

This is a catalogue of extraordinary disasters. What did the letter from Anglo Irish Bank that was lost state? That is important. What was the line of communication that broke down? Why is the evidence of those who discovered what was happening in Irish Nationwide Society not before the committee? Why was the INS not pursued? It is very important that we are provided with the detail on the questions I have asked relating to Anglo Irish Bank.

I am sick and tired, as others are, of people saying this was a global problem, that things were happening around the world, that this is why it happened and that we are not on our own. The chairman mentioned Lehman Brothers. Ireland is not on its own but it is a special case because of the absolute rampant lending to developers. We excelled but the Financial Regulator and IFSRA did not cry, "Halt". Why did he not say Ireland was a special case and that the authority would have to stop this and not come to the committee now pleading that Ireland was in the same position as everybody else? The authority was seen by many critics as being far too close to the banks and the evidence is before us. The principles-led system is code for the authority letting the banks do what they liked because it was too close to them. The evidence is clear and it was raised on the previous occasion the regulator appeared before the committee when I asked how often up to that date banks had been fined. Not a single bank had been fined up to October last year. Meanwhile the Financial Services Authority in the United Kingdom had fined British financial institutions Stg£20 million. Why had the regulator not fined an Irish bank up to that date? I do not want to know what happened after that date because once the question was asked, it was an invitation to fine. Why were the financial institutions not fined before that date, given there were plenty of reasons for so doing? A catalogue of misdemeanours perpetrated the banks such as overcharging and non-payment of DIRT emerged and they got away with them scot-free apart from paying money back.

Senator Geraldine Feeney

I welcome the delegation and thank Mr. Farrell for his presentation. I would like to borrow a phrase uttered by Deputy Rabbitte a number of years ago. The FitzPatrick loan issue was enough to rock the very foundations of the State. I acknowledge Mr. Quigley's comment that any fair-minded person would see that he was trying to do his best in the circumstances, as he was busy doing other things. However, there must not be fair-minded people because huge damage has been done to public confidence. His office and the wider banking community are significantly damaged. He was blindfolded, he was sitting on his hands, his mouth was gagged and his ears were covered. It is pathetic that he would appear before the committee and tell us he was busy doing other things when this issue was raised with staff in his office in January 2008 but the regulator only heard about it in December. That does not wash with anybody and we are all being polite in not interrupting and keeping our voices down. I do not believe one ounce of what has emerged from the delegation's presentation.

Mr. Farrell said he would work his way through this and hoped people would feel safe and sound again. He has a long, hard road to travel because nobody has confidence in him. What we have heard today is laughable and people will laugh at us for sitting here listening to it.

Does Mr. Neary have a view on why the treatment of the FitzPatrick loans was not highlighted by Ernst & Young, the external auditor?

Deputy Edward O’Keeffe

I welcome the delegation, particularly Mr. Neary, a man of courage in appearing before the committee. Much has been said about him in the past five years. I worked with him as a member of the Joint Committee on Finance and the Public Service when the biggest issue was the small charges the banks imposed on people. I wish him well in his retirement. While he has received a great deal of criticism, including from me, I wish him well and hope we meet elsewhere, perhaps at Leopardstown.

Anglo Irish Bank is a mess. This is a big issue. More corrective action and Government intervention are needed to provide funding. The dogs in the street and the birds in the air knew what was happening in this institution and about the reckless lending mentioned by Senator Ross. It was stated around this table but we were nervous and no action was taken. What happened when Northern Rock went bust in the United Kingdom? That was the first crisis in the global banking system and it was followed last spring by the collapse of Bear Stearns, a major influential American institution, and Lehman Brothers, as mentioned by the Chairman, as well as many other issues. However, these major companies in the financial world went belly up. We were tied into all of them but had tentacles and, therefore, should have known. What investigations into the banking system were undertaken by the authority? The Financial Regulator legislation enacted in 2003 probably did not give enough teeth to the regulatory system. In the old days, when the Central Bank governed the system, there was much better regulation and tighter control. New legislation is needed.

Anglo Irish Bank has been in the news for a long time. There was a row over the appointment of a chief executive and another fellow set up a bank out of it. Where did the money go? Many lost money and there was not much of an investigation into it. Perhaps the investigation has not been concluded.

I refer to the auditing system and the case of Enron in America and Parmalat in Italy. The Internal Revenue Service in America failed come to grips with the Enron case. Arthur Andersen, the finest auditing company in the world, to which we all looked up, was taken out. Who was the chairman of the internal audit committee in Anglo Irish Bank? Such a committee's function is to pick up on the money set aside for directors and other areas. The members of the bank's board are a prestigious group of people but boards go for lunch, drink red wine and eat smoked salmon and fall asleep afterwards. I have served on boards and know how they operate.

Internal auditors are appointed, usually at the behest of the chief executive. While fees payable to internal auditors are often restricted, what happens is that the auditors come into line for consultancies and investigations into different matters in the organisation. Auditors who behave well are offered those consultancies and extra additions to their fees, which is where the problem arises. There is, therefore, a need for legislation in many areas, apart from the ones we are investigating with the regulator with regard to it not doing its business. Auditing is a function that comes under the Companies Act. Therefore, when a chief executive has influence in the appointment of an auditor, this causes trouble. The function of an auditor should be to protect the shareholders, but the shareholders in the companies in question are now the main sufferers. I am interested in hearing more about the internal audit procedures in Anglo Irish Bank. How many times did the internal audit committee meet and how often did it report back to the board? Were its meetings documented? Did it raise any questions and, if so, what did it do with regard to them?

Much has been made about loans to directors. The problem is that the directors of all banks are business people. We look for the best when looking for directors for banks and State organisations. Recently, the Government sought good directors and politicians for banks. I do not know how they scored the people concerned, but they found them. What terms of reference are used by banks in the appointment of directors? If the people appointed are businessmen — most are selected on that basis — they will continue to run their business and as a bank director, may obtain a better concession with regard to loan terms or interest rates. How is this policed? What has gone on is a scandal in the eyes of the public who do not really understand it. We must be prudent in our judgment with regard to the appointment of directors because otherwise people will not want to act as directors. It will be like politics and not being able to get good politicians.

In 2006 the world started to turn upside down, beginning in Spain, as pointed out by Deputy Bruton on several occasions, and people began to ask questions and things closed down in northern and southern Spain. The Financial Regulator is charged with responsibility for regulating this area. Rumours and reports began appearing in the newspapers. Senator Ross mentioned The New York Times, the Financial Times and The Daily Telegraph, newspapers that all made noises about what was happening throughout the world. As Ireland is such a small open economy, these rumours should have made us aware of the need for questioning.

Anglo Irish Bank had an appetite for lending money recklessly. We know it recklessly offered loans and have seen more evidence of this in newspapers. Not alone did it make these loans in Ireland but throughout the world. This has had a major influence on our banking system. In my five years as a member this committee met time and again and hammered at the Bank of Ireland and AIB about what they were doing right or wrong. They were our core banks and were doing a good job for society, but they were pushed around and now also have difficulties.

In recent days we have seen what has happened in the British banking system, in which LLoyds TSB has taken over Bank of Scotland. It is now almost 45% owned by the British Government. I do not disagree that there is a worldwide problem. However, as a small country, we should be more vigilant with regard to our banking system. We were in the past. In the past there were significant questions with regard to contracts for difference and Quinn Direct. Directors' loans are one thing, but what is the up-to-date position on contracts for difference and Quinn Direct. Where is that money? The shares were probably bought at a substantial price at the time but are now valued only in cent. Who will recover that debt within Anglo Irish Bank? Is it the Government, the taxpayer or the shareholder who must pay? How many more bad business transactions are there in Anglo Irish Bank?

Since 2006 the dogs in the street have been asking questions. We have been asking them at this committee. The Financial Regulator put a lot of emphasis on stress testing. Stress testing happens on the day. Many a man who went in for a cardiac stress test did not get out the door. The same applies to stress testing of the banks. The regulator must look at what will happen in the long term. Perhaps it is easy for those of us on this side of the table to say what we have been saying. It is a different story when the horse has bolted and the door has been closed, but I want to get the point across that we need vigilance.

I agree with Mr. Quigley that every transaction cannot be examined. However, if an internal audit committee is in place, it should take responsibility. We must introduce legislation to tighten this area. Who were the members of the audit committee and who was its chairman? How many reports were received from the committee?

Deputy Leo Varadkar

I thank the delegates for attending. I will not make a speech but will put a few questions and, I hope, get some answers.

With regard to the FitzPatrick loan, in his statement Mr. Farrell states the authority first became aware of the issue on 17 December last. I understand somebody in the organisation became aware of it in December. Will he clarify for me that when he states the authority became aware of the issue on 17 December this means none of the board members or directors were aware of it prior to that date?

With regard to the investigation, Mr. Farrell stated the committee was impressed by the coherence, clarity and belief in their stated recollections of the people concerned and their integrity. I am not impressed by that because somebody was not telling the truth. Instead of being impressed, he should get the lie detector out and find out who within the organisation is either dishonest or whose mental capacity does not allow them to remember their own actions on serious matters. Rather than being impressed, he should be unimpressed.

Moving on to other matters, Mr. Farrell spoke about the quality, dedication, commitment and strong work ethic of the officials and went on to ask for more resources. With regard to officials within the authority, is he happy he has the quality of officials he needs? In comparison with other authorities, does he have the number of people he needs with appropriate PhD and Masters qualifications in finance, economics, law and risk analysis? Will he make a comparison with other authorities to ensure the staff he has are qualified for the job they are expected to do?

With regard to staff, is there a system of monitoring or an ethics system that ensures they do not move from jobs within the office of the Financial Regulator to jobs within Anglo Irish Bank, Irish Nationwide or any other bank? Should there not be a period between such positions or some restrictions in allowing staff to move from being gamekeeper to poacher overnight?

Mr. Farrell mentioned the international position. I acknowledge the truth of much of what he said. Some of us predicted there would be a recession this year, but none of us anticipated the scale or rapidity of what has happened. There are other countries affected by a recession and the international financial crisis and others which have had a property boom. Deputy Edward O'Keeffe mentioned the obvious example, Spain. The situation with the banks in Spain is not perfect, but it is a lot better than it is here. I am aware, for example, that Banco Santander is buying banks. Our banks have been recapitalised, yet Spanish banks, in a country affected by the international recession and financial crisis and which had a property boom, are in a much better position than ours. That is because in Spain banks were required to maintain proper tier 1 capital ratios, much higher than here. Why was a policy decision taken in Ireland to allow tier 1 capital ratios to be much lower than in the best comparator economy, Spain? Who made that decision?

With regard to the prudential director, Mr. Horan, somebody has informed me that he is not a member of the board of IFSRA. Is that correct?

Mr. Con Horan

Correct.

Deputy Leo Varadkar

Why is that? It seems the core competence of the Irish Financial Services Regulatory Authority should be to ensure prudence in the banking system. I do not mean any disrespect to Ms O'Dea, the consumer director, who is on the board, but it is really odd that the prudential director is not a member of the board. That makes no sense. It is like having a school board where the principal is not a member but the representative of the catering department is. I do not mean any disrespect to Ms O'Dea. She is by far the most impressive person in IFSRA. However, I do not understand why the potential director is not on the board, which is really odd.

Deputy Damien English

I thank the delegation for the presentation. I have a question for Mr. Quigley on the letter that went missing, which concerns me greatly. When I was in primary school, leaving my homework at home was a great excuse. It was possible to get away with it at the age of eight or nine. By the time I got to secondary school that excuse did not work anymore. It does not work anymore to say that a letter goes missing. We expect the best from public service and regulatory bodies etc. We expect that letters will not go missing. I also assume that most letters are typed up by somebody and photocopied or recorded on a computer. In most cases a letter is only a summary of what was already discussed in a conversation. If this letter was crucial, I am sure a copy exists somewhere, or are we overestimating the importance of the letter going missing? It always seems to be something going missing or a letter not being read. That day is over in this country. We expect much better than that from now on. That excuse just will not work anymore.

The Chairman said that we must accept the times we are in and all that is going on. As one who studied accountancy and business studies in school and college, I understand that prudence, common sense, the principles of finance and economics never change. Those rules are there. It does not matter how well things are going, how much money there is or what is the current climate. The rules of how we do our business should not change. I do not think it is good enough to offer these excuses. Maybe I am quoting the Chairman wrongly to allude to the times in which we live. I do not accept that. It is a pity that in the past ten or 15 years many people lost their way, got excited and got carried away with the climate of making money, greed, sales and so on. However, one would expect somebody — the Government, Ministers, regulatory bodies or whoever — to keep their head, not get carried away, do business properly and use proper accounting principles. That seems to have failed and that is what has really failed the country in general. I hope we might learn from that and move on. However, we should not be referring to the times we are in, which is not an adequate excuse for people who are highly trained — much better trained than I am when it comes to finance.

I would like to hear more about the issue of a shortage of staff that seems to have come up here. Hopefully that can be fixed in the future. I would like the witnesses to elaborate on the matter. If it is not an important issue, why mention it? Therefore it must be an important issue. Whenever representatives of bodies appear before our various committees I will always ask that question as I have done for the past three or four years. Does IFSRA have sufficient staff to do its job? I repeatedly ask that and get a smile but never get an answer. Everybody seems to be afraid to put up their hands and tell the Opposition they have insufficient staff in case the Government gives out to them. That day must also end here today. If a body like IFSRA needs more staff or cannot do its job, it should say so. Let us know so that it can be fixed. They cannot continue to come in here to committee meetings, smile and say that everything is grand when everything is not grand especially if it is to lead to problems like this. Hopefully other bodies will learn from that and put their hands up to say they have not got enough. They should not just tell the Minister but should also tell the Opposition. They need to tell us all so that we can do something about it and try to force change when it is needed.

I understand that IFSRA cannot check and watch everything. I accept that trust and respect was abused. Those people who did so must have had no fear of being caught at any stage. Even though we cannot check everybody, we must not have had procedures in place that scared anybody if this happened in the first place. I must really question the quality of auditors in certain cases. They are paid considerable sums of money and should answer to somebody on this serious issue.

Mr. Farrell stated, "the system of regulation that operated in Ireland was highly regarded internationally". That kind of comment was made here last October by Mr. Neary. It was suggested that people nearly looked at Ireland in awe of our regulatory system. Back then I asked who said we were the best or highly regarded. Obviously people do not believe it if people who have the money to invest do not want to invest here. Comments suggesting that we are highly regarded cannot be substantiated and should not be used. We must not have been highly regarded if people do not trust us to invest their money or chose to pull it out. I question why that was mentioned in October and again today.

Does IFSRA accept that the failure to highlight or communicate the existence of a pattern of loan concealments at Anglo Irish Bank by Sean Fitzpatrick and others to the Office of Corporate Enforcement, the board of the Irish Stock Exchange or to the Anglo Irish Bank shareholders contributed to the material loss suffered by many shareholders in the past year? That has been a very serious consequence. I want to know whether the witnesses accept that the failure of IFSRA to do its job has contributed to that outcome.

We discussed other issues last October that I thought we would get a chance to follow up today. Last October we were told that the issue related to liquidity and that there were no capital problems in banks. I presume that has changed now. Do any of the witnesses have any comments on that? Many of us on this side really questioned those comments on that day. On the last occasion we asked about the guarantees for loans. We were advised that there were backup guarantees and there was not really a problem with loans. On that day I asked about the actual assets that were used to guarantee all these mortgages and loans. I believe some €39 billion in development loans exist. Have we the report showing the breakdown of the assets used to guarantee these loans? I pointed out on the day that many of these assets could include share portfolios or other assets that are no longer worth what they were. I would like an update on how secure many of these so-called assets guaranteeing loans were at the time.

In October when we discussed with Mr. Neary money being made available to individuals and banks coming after them over their mortgages and loans, he suggested the rules might change and that he might elaborate at a later stage. IFSRA can help people who are now in financial trouble by asking the banks to change their rules or the way they do their business in that regard. Is there any update on that matter? People are under serious pressure and we need a blanket change across the board. Individual changes with people requesting six months out might no longer work. If anybody requests a delay in payments or a six-month reprieve, that detail goes on their credit rating as a serious black mark. With so many people likely to be in that position we might need to change what happens. I would like to hear the witnesses' opinion or advice on the matter. While it might not be a matter for today, we need to discuss it at some stage.

Approximately 700,000 people are employed in small and medium-sized businesses. There are many people who are under pressure from all sectors. They are not getting the help or finance they need from anybody — not just the banks. We are in a different climate. What will IFSRA recommend the Government or banks should do to help with this problem? An overdraft is a tool of business. It is not possible to do business without it — certainly for those involved in buying or selling. It is disgraceful for banks to write to customers stating that in two months or even in two weeks time they will cut the overdrafts to 80% of what they were. That is no way to do business, but it is happening. Many others who would have always got an overdraft in January, February and March to get them through cannot get them now. I would like IFSRA to recognise that that is happening and outline what we can do about it.

Would the witnesses accept that many of our small businesses need extra professional help from financial people, solicitors, accountants etc. to help them formulate business plans to get them through the next few years? They also need help in getting finance from banks and other investors. Would the witnesses agree that the Government has a role in providing that financial, legal and employment expertise and so on that our businesses need? The British Government recognised this last August and put in place health checks for businesses. We do not seem to have done that. IFSRA has a role in ensuring that is done to give our businesses a chance to survive. We have a great chance of getting through all this, provided we take some serious action. People like the officials from the Financial Regulator have a role to play in ensuring that happens. Action needs to be taken now, rather than in 12 months' time. This country has to get through the five key months of January, February, March, April and May. I would like to hear the witnesses' comments on that.

Chairman

I will call two more members before I revert to the delegates.

Deputy Joe Behan

I will be brief because many of my points have already been made by members of the committee. I will focus on three areas.

I am not impressed with the arguments made by the delegation. I do not agree that the difficulties associated with the financial crisis in the banks arose because people took their eye off the ball. The man who was busiest at that time was the Minister for Finance, Deputy Brian Lenihan. He had the greatest responsibility at the time. He discovered the situation regarding Anglo Irish Bank. That has not been sufficiently highlighted. He trusted the Financial Regulator to ensure that facts like this would be discovered and information brought to him, but he discovered it himself. He has every reason to feel seriously let down by that lapse.

I am not impressed with the report of the members of the authority on the conflict of evidence. I completely agree with what Deputy Varadkar has said in this regard. The delegates have said they were impressed with the coherence, clarity and belief of the stated recollections of the people concerned, but they admit that they have been unable to reconcile the evidence. In plain language, that means someone is telling lies. The delegates seem to be telling the committee that the matter ends there. They are saying that while they have every faith in the integrity of all these people, whoever they are, they do not propose to take further action. It gives me grave cause for concern that the delegates continue to be so complacent about something so serious, given what we all know and what we have all gone through over recent months.

I am thinking of the hundreds of thousands of people who may see excerpts from this meeting on the news tonight. Many of them have lost their pension funds as a result of what has happened to bank shares, in particular. Many of them are unemployed or are about to become unemployed. They may be about to go on short-term working or have their pay cut, and so on. The Government has decided to invest scarce public funds to support the banks into the future. The Government gave the Financial Regulator the task of overseeing the banking and financial sector on behalf of the nation. While the sector may not have collapsed, it is causing grave difficulties for the Exchequer. Yesterday, a leading representative of the small business sector called for the resignation or dismissal of the entire authority. I ask the three representatives of the authority to tell the people why they have not resigned, or why they should not be dismissed.

Deputy Seamus Kirk

Much of the ground in this whole saga has been covered at this stage. Most members' questions have focused on what happened in the past. I have two questions. I appreciate that many of the questions posed have yet to be answered. Before I proceed further, I welcome and thank the delegates for coming to meet the joint committee. I would like to ask about the adequacy of existing legislation to give the authority sufficient empowerment to deal with the problems that have manifested themselves over recent years. Looking to the future, will the chairman or the director tell the committee whether they feel the legislative framework can adequately deal with the sort of problems we have had to deal with over recent months? It was suggested earlier in this meeting that a more intensive form of regulation is needed. What is meant by "a more intensive form of regulation"?

Chairman

I would like to pick up on what Mr. Farrell and some of the members of the committee have said. We are constantly told that we are in uncharted waters, that this has not happened before and that this is new territory. If one speaks to people from the agricultural community, however, they will say that there was reckless lending by the financial institutions to the agricultural sector in the late 1970s, in particular, and the early 1980s. Such practices inflated the price of agricultural land. Many farm families went under during the credit crunch of 1979 and the subsequent period of 22% interest rates. These are not uncharted waters. In recent years, the financial institutions have been repeating their lending practices of the late 1970s and early 1980s. The Financial Regulator and the Members of the Oireachtas must do what needs to be done, such as introducing new rules and regulations, to ensure a crisis like this does not recur. I do not accept that recent developments have been unprecedented. Reckless lending took place previously, for example in 1991 when money was given freely. We have to ensure the regulations that are needed are put in place. As custodians of the economy, we have to ensure that what happened recently, and also happened in the past, does not happen again in five, ten or 15 years' time.

Mr. Jim Farrell

I thank the Chairman and the other members of the committee. I will answer the specific questions that were asked before returning to the broader points made. I was asked whether the directors are qualified. The fit and proper test for directors is looked after by the prudential sector of the regulator. It is not as if they just pop in. I would say a couple of things in that regard. Many sensible comments have been made about many of the matters under discussion. The roles of the directors, the managers of banks and the fund managers who represent their clients have been mentioned. It is clear that we have to do our job. We have been criticised. It is clear that there are things we have to correct. Many things need to be done if the system is to work properly. I have referred to the boards and management structures within banks. Reference has been made to the closeness of the financial community. As Ireland is a small country, it is to be expected that many bank directors know each other. We have our own issues to deal with. They have been clearly and graphically pointed out today. We are not shirking our responsibilities in this respect.

I have spent more than 30 years in the banking sector. I fully agree with the Chairman's comments about reckless real estate lending. It has happened in the past. When I worked for an international bank, people got very excited about lending for real estate every ten or 15 years, albeit not in this country. When those guys got into trouble, they got fired. At that point, governments came in and wrote off all the loans. The whole thing started all over again ten or 15 years later. Things like this have happened before. I am probably the oldest guy in this room, so I can say that has not previously happened with the severity that is a feature of the current crisis. We are not making excuses — we are telling it as we see it. We are dedicated to doing our job. I have been the chairman of this authority since May of last year. I had served on it before then. I had a career in international banking before I joined the Irish public service 13 years ago. Like my colleagues, I am committed to sorting these issues out. That is where we are coming from. That being said, I will deal with some of the issues that have been raised today.

Senator Ross mentioned that he is quite rightly frustrated about the fact that we cannot disclose everything to the committee. I would like to do this. We have taken legal advice and gone to the bounds permitted to allow us to do so. We must observe the law. We are not hiding behind it but abiding by it. I ask the joint committee to take that point. While we have nothing to hide, there are certain things we can and cannot do in that regard.

I have dealt with directors. Senator Ross referred to fines and suggested the authority has a rather benign approach to them. By way of background, prior to 2005 the Financial Services Regulatory Authority did not have powers to fine. The issues with regard to overcharging and so on occurred prior to 2005 and over the period prior to that year we recovered, I believe, €167 million for consumers. In 2007 — Ms O'Dea will correct me if the date is wrong — we introduced the consumer code which ties in banks to a suitability test for the products they sell. If they breach that code we can fine them up to €5 million. What we have done in this regard is a matter of public record. The largest fine was, I believe, €3.25 million.

Our approach——

Senator Shane Ross

That fine was imposed on an insurance company rather than a bank.

Mr. Jim Farrell

That is correct. There was one smaller fine on a bank of late, with which, I am sure, the Senator is familiar.

As I indicated in my statement, there should be no doubt, and if there is a doubt the word can go out from this committee today, that bankers or banks who do not behave properly will be put through the full rigours of the law. It is very important that we do this. It is also our job. We are not seeking plaudits but doing our job.

Senator Feeney raised several issues and referred to our pathetic approach. I must state, on behalf of the staff of the authority, that I do not accept that, although the Senator is entitled to her opinion. On the Anglo Irish Bank issue——

Mr. Patrick Neary

I wish to answer Senator Feeney's question regarding whether I have a view on the auditors, Ernst & Young. The report of Ernst & Young into the accounts of Anglo Irish Bank is part of the review being carried out. I do not want to anticipate what the review will produce. Discussions with Ernst and Young and its audit of the year end results of Anglo Irish Bank are part of that review.

Senator Geraldine Feeney

I thank Mr. Neary for answering my question directly. I did not know if he would be allowed to speak today. Is he surprised that this issue was not picked up by Ernst & Young and that it was not highlighted?

Mr. Patrick Neary

I am not familiar enough with the procedures and processes followed by auditors under the Companies Act. While there is a specific requirement in company law, I do not hold myself up as an expert in company law. A lay person would, I believe, expect that issues of this magnitude and nature would be picked up. However, I do not want to prejudge the issue until I am in full possession of all the facts and until we see exactly what were the responsibilities and to what extent these issues were followed up. It would be unfair of me to jump to any conclusions.

Senator Geraldine Feeney

I thank Mr. Neary.

Mr. Jim Farrell

Deputy Varadkar mentioned Banco Santander, one of the better banks in the world. While the bank had a €10 billion rights issue to make its acquisitions, at least it was able to do this. The Deputy is absolutely right.

On the system for reserving in banking in Spain, it is important to refer to provisioning because until recently the accounting laws on provisioning were different in Ireland. Mr. Horan may wish to address this issue. It is important that it is explained.

Mr. Con Horan

While I am not particularly familiar with the detail, I understand the Spanish regulatory authority also has responsibility for some of the accounting rules and is, therefore, in a position to make some interpretations on the accounts. There has been some debate at international level on whether the old form of general provisions could be available. The Spanish seem to have been able to do something in this respect.

Deputy Kirk referred to moving forward. One of the areas that is undoubtedly coming under scrutiny is the capital regime under Basle II which has applied to banks. One of the evident flaws in this regime is that it did not encourage banks to put away money for rainy days in the good times. The accounting and capital rules did not do enough in that regard and more may need to be done in future. From a regulatory perspective, this is one of the areas that needs to be examined.

Deputy Leo Varadkar

At what level was the decision made to allow banks to have markedly lower capital ratios in Ireland than in Spain? Was this decision made by the Financial Services Regulatory Authority, Central Bank or Government? When was it made? Without these lower ratios, we probably would not have to recapitalise the banks, certainly not the larger ones.

Mr. Con Horan

The regulatory approach is that banks must adhere to certain regulatory minima set out in directives. These serve as the minimum the authority would seek and we would be clear if banks moved towards those minima that we wanted them to take action to address the matter. In more recent times internationally, in order to lend to Irish banks foreign investors are demanding market levels of capital which are higher than the regulatory minima. This has created a gap between what is legally required at a regulatory level and what the markets are demanding to lend money to the banks. This accounts for some of the gap. The authority did not make a decision to push banks down to minimum levels and many Irish banks had capital well in excess of the regulatory minimum. They opted to do this for rating agency and other purposes.

Deputy Leo Varadkar

Who decides the regulatory minimum?

Mr. Con Horan

It is set down in European legislation. We imposed levels above the regulatory minimum on some of the banking institutions.

Mr. Jim Farrell

Mr. Dermot Quigley

I can reply to that question, if the chairman is agreeable. There are various references to staffing levels which have had to be increased due to implementation of the bank guarantee arrangments.

Deputy Kirk inquired about the more intensive form of regulation. In the case of the guaranteed institutions, we have people on site, which is a much more intensive form of regulation than we have had up to now.

The point being made about the previous staffing level was that there had been a difficulty. Even though the authority authorised a staffing level of 380, there has been a difficulty in filling that complement. At any particular time one area in the bank more than another might be affected. I think that was the reference in regard to the pre-existing level. What we are saying for the future is that we have had to increase the staffing level to deal with the guarantee arrangements and operate a more intensive form of oversight and prudential regulation in the six covered institutions.

For the future we are saying two things will influence the level of staffing. First, we have a review of our entire approach to prudential supervision and regulation and how we do our business. This will involve a look inside the organisation to assess whether we are focusing existing resources in the right areas. Depending on the outcome of the review, if a decision is taken that we require a more intensive form of regulation, as a corollary, it seems to follow that having become as efficient and effective as we can with the existing staff we will have to look for more resources. They are issues for future decision.

Ms O'Dea referred to the consultant's report which I mentioned. It is certainly going to give us useful information. It was initiated early last year and will examine how we are using the existing resource. It will look also at regulators in other countries and what they are doing. Deputy Varadkar's point about skills is relevant also. Part of the issue in regulation is that the risk models and the risk assessment in institutions were not good enough to deal with the complexity of the instruments that developed in the international arena. There is a much stronger focus on risk and valuation issues. For example, how does one evaluate the assets in banks in a market that is not operating properly? We must consider the mix of skills. There are very professional people in the organisation but we may need additional skills and may have to divide them between the different teams.

Deputy Damien English

Therefore, the issue was not the capping of staff numbers but that the authority could not get staff to fill the positions?

Mr. Dermot Quigley

Yes, that was a specific problem at the time.

I will pick up on some of the points made previously to the extent that I can. First, Senator Feeney took us to task for not having acknowledged the importance of the issue. I said the issue was very serious and we treated it as such. I also said we had work to do in order to re-establish confidence in the system and the work we were doing.

We brought in the emerging international pressures on our staff and other countries because it seemed to us that it was part of the context in which we should make a report. Obviously, we reached a conclusion. Others may take a different view. We went through a process. One has to have a fair process for a review of this nature. We looked at the papers and interviewed people involved. We reached conclusions based on that work and the procedures we were advised to follow. We are reporting to this committee of the Oireachtas the conclusions we reached in that committee having done the work in the way we had to go about it. We reached a conclusion that there was a problem with the letter, a point to which I will return. We also considered that a significant factor in not pursuing the issue of the director's loans from January to December 2008 and the reason it did not surface again was the pressures resulting from the international crises. That was our view and the conclusion we reached and we are reporting it to the committee. That is as far as I can go in that regard.

Senator Geraldine Feeney

I am quite exercised and cross about the issue because throughout the Christmas period everywhere I went the only thing people were talking about was the fallout as regards the Financial Regulator. They are still talking about it. What I heard from the regulator today did not sit easy with me. Unlike the delegates, I am not a banker, but what the public is asking me as a politician is who knew about it. I am not looking for anybody to lose his or her job but I am telling the delegates what has been said to me. People are asking me whether it is right that somebody be allowed to continue to work in an office if he or she knew about this for 11 months before the Minister picked up on it. What people are asking is whether somebody is being protected. We might as well be fair in the committee and state what the public is asking. That is where I am coming from and that is what has made me cross.

What I am hearing is like milk and water. I have not received answers to any of the questions asked of me. Some members asked about the meetings, who knew and when. We did not receive details on any of this from Mr. Quigley.

Deputy Joe Behan

Mr. Quigley is a man with a great reputation as a public servant. He has said he understands people lack confidence because of what has happened. By the same token, he is saying we cannot reconcile evidence and that we are going to leave it at that. He is implying that is enough and that we should move on. That is not good enough and I cannot understand why he keeps saying it. Until it is addressed properly, people will continue to lack confidence in the administration of this body.

Deputy Seamus Kirk

On the adequacy or otherwise of the legislation to deal with the problems that have manifested themselves in the past year or two, will the authority make recommendations to the Government for legislative changes that will give greater empowerment to the authority?

Mr. Dermot Quigley

I would like to take up some other points. I emphasise that this matter was taken seriously. What I am reporting here today, which is what I reported to the authority, is the conclusion reached in the committee and the assessment of the information we got. I have done that now. Other people may say that we should have reached a different conclusion. We followed a certain procedure and this was a review of the procedural breakdown which undoubtedly took place. We put our hands up and said that happened. As an organisation, we did not communicate this properly and did not follow it up properly.

The issue is that there was no follow up.

Mr. Jim Farrell

Ms Mary O’Dea

I can give that answer now. As we intended the last time we appeared before the committee, we have carried out work in respect of arrears and repossession. We had introduced a code and requirements that institutions are now obliged to follow. We examined the level of compliance in regard to that. One of the issues in the code is that people must be informed immediately if they miss a payment, the minute they fall into arrears. That enables the person to take action straight away. The unfortunate situation is that the key to whether people fall into arrears is employment. That is not related to suitable lending because it may have been a suitable loan when it was first given out. In writing to institutions following that review, several recommendations were made in addition to the code. These included that the institutions should examine how it gave the loan in the first place and whether it was an appropriate loan and have regard to that in dealings with customers. In any event, the institutions should look closely at a method of engaging with customers where the property is the person's principle residence. All the evidence is that financial institutions are doing that and are seeking to engage with customers. The key matter for customers is to contact the institution the minute there is any suggestion of arrears. That prevents the situation where someone is dealing with six months' arrears rather than one or two months. There are ways to work that out by extending the mortgage or paying interest only for a period while a person is seeking further employment.

The Irish Bankers Federation, in a voluntary code, had a further elaboration of some of the issues in our code. While that had been operating on a voluntary basis, given the circumstances in which we are and the increasing levels of arrears and repossession, we decided that it might be better to put that on a statutory footing. We have written to financial institutions to propose to do that. In addition, that code did not apply to the so-called subprime lenders, those who lend and who are not deposit takers. We propose to apply that code as well as our statutory code to those lenders. Within that, we propose to change the three-month period before the institution takes action. We have changed that to six months but that does not obviate the need to notify the person immediately that he or she has fallen into arrears. In a stressful situation where someone loses a job, the last thing one thinks of doing is contacting the financial institution. In fact, it is the first thing one should do.

Regarding business lending, within the terms of the recapitalisation program, the Government has announced a credit package. There are various measures within that package. One of those is a code for business lending and working with businesses and extending loans to businesses where there is a good proposition. We are actively working on that and hope to have proposals before the end of this month to present to the Department of Finance.

Chairman

Deputy Behan asked a question about other members of the board. Do the witnesses wish to comment on it?

Mr. Dermot Quigley

Is the question whether we intended to resign as members of the board? No, I do not intend to resign as a member of the board. I have made a contribution in the work of the Financial Regulator since its establishment. The easy thing is to resign. There is much work to be done, all the more so in the light of the financial crisis that has overtaken us over the past year and a half. I am prepared to do that work. The Minister for Finance appoints the members of the authority. One never assumes anything about continuing in any position but the straight answer is that I do not intend to resign.

Mr. John Dunne

One could take the view that membership of such an authority is prestigious in good times. Some people might argue that the real challenge is when things get tough and there are challenges to be dealt with. The ethic in the authority during the years I have been in it is that we should do our best in these circumstances. I am not prepared to take the easy option. As my colleague Mr. Dermot Quigley says — if the Minister has other plans sin ceist eile.

Deputy Joe Behan

My point is not whether the members of the delegation feel up to the challenge in the future. My point is that they were put in to do a job and obviously they have failed. Do they not feel that they should offer their resignations to the Minister?

Mr. John Dunne

While I do not want to be didactic, our report shows that there were shortcomings and failures. To deduce from it that the whole authority has failed in its remit is something I do not accept.

Deputy Joe Behan

Mr. Dunne is far from reality because that is not what the people believe.

Chairman

We expect the next report towards the end of January. Is that correct? That was said at the outset.

Mr. Dermot Quigley

Yes, the second review.

Chairman

We will revisit that when it comes in. I thank the delegation for its co-operation and the committee members.

The joint committee adjourned at 4.40 p.m. until 4 p.m. on Tuesday, 27 January 2009.

JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate - Tuesday, 13 Jan 2009

Anglo Irish Bank: Discussion with Financial Regulator.

Mr. Jim Farrell

Mr. Jim Farrell

Mr. Con Horan

Mr. Jim Farrell

Mr. Con Horan

Mr. Jim Farrell

Mr. Con Horan

Mr. Jim Farrell

Mr. Jim Farrell

Mr. Jim Farrell

Mr. Dermot Quigley

Mr. Con Horan

Mr. Con Horan

Mr. Jim Farrell

Mr. Jim Farrell

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Jim Farrell

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. Jim Farrell

Mr. Jim Farrell

Mr. Jim Farrell

Mr. Jim Farrell

A Witness

Mr. Jim Farrell

Mr. Jim Farrell

Mr. Jim Farrell

Ms Mary O’Dea

Ms Mary O’Dea

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Jim Farrell

Mr. Dermot Quigley

Mr. Dermot Quigley

Mr. Patrick Neary

Mr. Patrick Neary

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. Con Horan

Mr. John Dunne

Mr. Con Horan

Mr. Jim Farrell

JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate -
Tuesday, 13 Jan 2009