JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate -
Wednesday, 14 Apr 2010

Financial Regulatory Framework: Discussion with Financial Regulator.

Chairman

The Financial Regulator is before us to discuss a number of issues relating to the regulation of the financial sector. On behalf of the committee, I welcome Mr. Matthew Elderfield, head of financial regulation, Mr. Martin Moloney, head of markets supervision, and Ms Sharon Donnery, head of consumer protection. I draw your attention to the fact that members of the committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official, by name or in such a way as to make him or her identifiable.

I ask Mr. Elderfield to proceed with his presentation.

Mr. Matthew Elderfield

Thank you, Chairman, for the invitation to address the joint committee. I am accompanied by my colleagues, Mr. Martin Moloney, head of market supervision and Ms Sharon Donnery, head of consumer protection.

I will take some time to talk about our continuing work to protect consumers, explain our approach to overhauling the financial regulatory framework and discuss our recent actions to strengthen the banking system. I will also touch on some issues relating to stockbroking and credit unions, which the committee particularly asked me to cover.

I would like to ask the committee's agreement to discuss matters relating the Quinn Insurance on a separate occasion. This issue is shortly to appear again before the courts and sensitive discussions are taking place with various parties. As a result, it would be inappropriate to comment or to answer questions at this time. I will state that we are faced with a serious and persistent breach of the solvency requirements of a major insurance company and that we are determined to take action to protect the interests of its policyholders. I would be very glad to return to the committee to discuss this issue in the future when matters are more settled. Thank you for your understanding on this matter.

Consumer protection remains a top priority in our new regulatory structure. We are building on the successful work in this area that was previously carried out by the Financial Regulator, so I will be brief about the agenda here. In the coming year we are reviewing our consumer protection code and minimum competency requirements. We have also moved to ensure the backlog of overcharging cases is resolved more quickly.

A key priority is the question of consumer indebtedness. I think it is important to be frank and to acknowledge that there are no easy, and few low cost, answers to the indebtedness problem. We have recently amended the code on mortgage arrears to provide more time — now 12 months — before a bank can take action in arrears cases. We are conducting thematic reviews to assess the compliance of banks and sub-prime lenders with that code. I am also a member of the Government's recently formed working group on consumer indebtedness which is seeking to develop other solutions to this difficult issue. For our part, we will seek to use our powers to ensure that consumers are treated fairly and will work to develop solutions that help to manage the indebtedness problem.

It is also important to be frank and to acknowledge that the coming months are likely to see a continuation of the process of the banks re-pricing their mortgage books. Ireland had very low mortgage rates in the recent past but that era is now clearly ending. Part of the reason for such favourable rates was that the banks' business models were, as we now know, fundamentally flawed, chasing unsustainable profits through risky property and development lending, profits which effectively subsidised aggressive campaigns for mortgage market share and unsustainably low interest rates. That skewed business model now needs to be fundamentally recalibrated, and at a time when banks' costs of funding are significantly higher, interest rate increases for borrowers are an unfortunate but inevitable consequence of that new world.

Let me now turn to the subject of our proposed overall strategy for financial regulation. It is clear to me that we need to undertake a fundamental overhaul of the regulatory model for financial services in Ireland. We need to address the weaknesses in regulation that contributed to the scale of the financial crisis and keep pace with the strengthening of regulation that is occurring internationally.

Our new approach requires assertive risk-based regulation underpinned by a credible threat of enforcement. A risk-based regulatory system is one where we focus our resources and regulatory intensity in proportion to the risk posed by any particular firm or sector. This is a balanced and proportionate approach. Generally speaking, our resources are far below what is required to supervise the number of firms within our responsibility and we need to see a general improvement in the level of engagement with regulated firms across the board. However, this is not a one size fits all approach to regulation. The biggest and riskiest firms can and should expect a more intrusive approach than those entities with a lower risk profile. I stated that we need to take an assertive approach. It is important that supervision is about more than merely identifying risks. It needs to ensure risks are properly managed and mitigated. We need to develop an approach that is more challenging of firms and to ensure the actions proposed by senior management do deliver less risk. If we have doubts about the course of action proposed we need to be prepared to have a challenging and open dialogue with the firm involved. Where the stakes are high, owing to the size of the firm, we need to be prepared to insist on a course of action if we are unpersuaded by plans of senior management. This approach needs to be underpinned by a credible threat of enforcement to ensure that firms and their management are more accountable for their actions. This will take some time to achieve. We need to grow an enforcement capability from what is now a small base, pretty much from scratch in terms of establishing an investigative capability. This will take some time as will the development of a pipeline of appropriate cases.

Equally important is that we have in place the correct powers to do our job. I am grateful to the Government for proposing new powers in the recently published Central Bank Reform Bill concerning the fitness and probity of the senior management of financial services firms. This is a big step in the right direction. We are studying the proposals closely. However, more work is needed to reform the legislative framework for financial regulation. I would welcome the support of Members of this committee and, more generally, of the Oireachtas as proposals for further legislation are forthcoming later this year.

I will now turn to the banking system. As Members will be aware we recently published the results of our review of the capital requirements of a number of credit institutions. Our methodology started with the NAMA haircuts for each individual bank and then required the banks to take full account of any projected loan losses for the period through to 2012. We assessed these forecasts closely and required bank specific add-ons where we believed it was prudent to do so in light of the uncertainty of these forecasts. We have requested that the banks come up with by the end of this year a capital plan to meet our new target requirements. In addition to this exercise to establish the base capital requirements of the banks, we also conducted a rigorous stress test to ensure the banks have adequate capital even in a severe economic downturn. We believe this approach has a number of important benefits. It requires banks to face up to their NAMA and non-NAMA losses now and in a manner that commands market confidence. It means the banks will be in a stronger position to support economic recovery and to recommence lending. It also means the banks will be able more quickly to stand on their own feet in terms of their funding than otherwise would be the case and that they are well on the path towards being ready for the new Basel regulatory capital rules and can travel the remaining distance on their own. By including a stress test in our approach, we are prepared for a severe downside scenario and know that the banks can withstand a significant spike in mortgage rates. Also, there is now certainty about the maximum costs to the public debt as a result of the banking crisis. This provides important reassurance to the international capital markets.

I should acknowledge that some but not all of the banks involved in the process asked for more time to meet our new requirements. It was our judgment that decisive action was needed to draw a line under the banking crisis, to restore international market confidence, to avoid a long drawn out process and to recognise that by acting swiftly banks will have some time to prepare for the further changes likely to be required under international standards. Our capital review process remains in some cases to be completed, most notably for Anglo Irish Bank. I should explain that this is because the final restructuring arrangements for the bank are not yet settled. It is likely that the bulk of Anglo Irish Bank which remains after NAMA will be transformed into an asset management company to manage the bad assets of the bank. A small new bank is likely to be carved out and it is on this entity that we will apply our process.

I am aware that there is a strong debate about the best future for Anglo Irish Bank and whether some alternative makes better sense. The cost of a rapid wind-up of the bank would be prohibitively expensive and the structure being developed is a reasonable way to minimise the cost to the taxpayer.

A recapitalisation exercise is not the end of our work for the banking sector. I anticipate the implementation of more stringent liquidity standards over time, the introduction of tougher standards to limit concentrated exposure to individual sectors and the development of proposals to address corporate governance standards, fitness and probity requirements and remuneration guidelines. The latter proposals will have wider applicability across parts of the financial services sector. I will also spend a few minutes at the end explaining our forthcoming corporate governance standards.

I have been asked to address some issues in the stockbroking and credit union areas. Since I took up this job in January, I have become aware of a number of claims being pursued against stockbrokers with regard to purchases of investment products during the period 2004-06. Some investors who have lost significant amounts of money on such investments believe they did not understand the risks properly when they purchased the product and should have been better advised. Before 1 November 2007 these complaints could have been referred to the Stock Exchange, but subsequent changes to the Stock Exchange's rule book mean no one can raise a new concern about a pre-November 2007 transaction with the exchange. The issues in this regard are technical and I sent a note to the committee yesterday spelling them out in detail. It is clear that the transition between the different regulatory regimes could have been handled better by all the parties involved. I should note that senior management of the Stock Exchange previously represented to the Financial Regulator that it would be in a position to deal with significant pre-November 2007 breaches, but that is no longer the situation. It is unacceptable for such a regulatory gap to persist. If we can, we will seek a legislative route for the Financial Regulator to close the gap, but the advice I have received is not encouraging in this regard. If it is impossible to close this gap through legislative or regulatory mechanisms, it is clear only one solution remains — the Stock Exchange should turn its rules back on and take responsibility for this gap, legal risks notwithstanding. I appeal to senior management of the Stock Exchange to step up to the plate on this issue if all other avenues are closed.

The committee has asked me to address the regulation of credit unions and future developments in this area. As members know, the Minister for Finance has requested us to arrange for a strategic review of the credit union sector to be carried out. The tender process for this work is under way and the scope of the review has been agreed with the Department of Finance and discussed with the main credit union representative bodies. The outcome of the review will inform an assessment of the future strategic direction of the credit union sector. The key focus of the work will be on how to protect the strengths of the movement, while developing an enabling legislative and regulatory system that will allow credit unions to expand services to their members in a prudent manner. In specific recognition of the unique nature of credit unions and their place in society, the regulation of the credit union sector will continue to be carried out within the Central Bank in a separate regulatory stream from that of other financial institutions. Credit unions need not be fearful that a regulatory response to failure in other financial sectors will automatically apply to them. It will not. Our risk-based regulatory approach will mean applying regulatory oversight and standards that are appropriate, balanced and proportionate. However, credit unions can expect that as their business model becomes more complex, regulatory requirements will increase commensurate with their risk profile.

I would like to take a few minutes to advise the committee on our forthcoming initiative on corporate governance. In the next week or two we will publish a consultative paper on new corporate governance standards for banks and insurance companies. It is clear there have been serious failures of corporate governance standards in a number of financial institutions and that the regulatory standards in this area must be reassessed. The proposals we will publish shortly will set more exacting standards for the boards of directors of banks and insurers and include requirements relating to board composition and impose restrictions on the number of directorships that can be held at any one time. Recent history shows many boards need to raise their game. The new proposals will set a clearer standard for their performance. Breaches of the standards will be sanctionable under the administrative sanctions framework. In line with our risk-based framework the standards will, however, recognise the need for a proportionate application, depending on the size and risk profile of the firm, and that a one-size-fits-all approach is not appropriate for all sectors.

I thank the Chairman and members of the committee for allowing me to set out my thoughts on such a wide range of issues in my first appearance before them. My concluding message is that the work of rebuilding financial regulation has begun. We have taken an important step in helping to draw a line under the banking crisis by putting the capital position of the banks on a clearer and sounder footing. We have shown we are determined to tackle serious and persistent cases of regulatory non-compliance if these put the interests of consumers or policyholders at risk. By building an assertive risk-based approach to regulation which is properly resourced, based on adequate powers and underpinned by a credible threat of enforcement, we will have a regulatory framework that will ensure the lessons of the past have been learned in order to support Ireland's future economic prosperity. This process will, however, take time in the months and years ahead before the new framework will be in place. I look forward very much to working with members of the committee in that process.

Chairman

I invite Mr. Elderfield to respond directly to each member's questions.

Senator Paul Coghlan

I am delighted to welcome Mr. Elderfield and his colleagues. I had planned to ask in my first question what steps Mr. Elderfield envisaged to ensure the independence of his regulatory function and respect for it. However, he has set out very clearly and assertively the steps he intends to take to get a grip on matters, even if that will take time, which is understandable. I had in mind, in particular, political or external influences which might seek a specific direction or outcome that would be politically more palatable. I was planning on asking Mr. Elderfield how he would deal with such a situation. It is probable he has already had a flavour of such an approach. I refer to his outlook with regard to the banking sector. Will State-controlled banks be the only banks operating in Ireland? What steps does he envisage in having a more diverse and competitive marketplace in banking? He has laid out his stall clearly and the steps he envisages to improve matters in Ireland. What more specific actions does he envisage to ensure the mistakes of the past will not be repeated? In particular, how will he avoid regulatory capture by the entities he is regulating? I compliment him on some of his remarks on steps that might be taken in that sense.

Mr. Elderfield referred to the credit union movement. As the Chairman outlined, the committee asked him to deal with this matter. It is obvious that strong regulation is necessary, but he realises that because of the strength of the credit union movement in this country and its voluntary nature and input, it is important not to lose any of these qualities because of regulatory actions. Credit unions are different entities from banks.

Is corporate white collar crime taken seriously? We have our own views on the matter. Until custodial sentences are imposed, there will be a certain lack of regard for the law in corporate Ireland. Mr. Elderfield might give us a response to that question. Since he took office, has he seen any instances of corporate wrongdoing? Have any such cases caused him real concern about the levels of compliance in the banking sector?

Mr. Matthew Elderfield

The current statute gives me the capacity to act independently. My colleagues and I are examining the comments and questions of the European Central Bank in that regard. Perhaps we will have to consult the Government on whether adjustments to the primary legislation may be needed. My approach is that one needs to be open to dialogue and conversation with various parties. In the past two weeks I have been happy to engage in discussions with those who have differing views on my actions. Financial regulators need to be open-minded, listen to others and, at the end of the day, make their own calls. It is possible to be independent. I have not received directions to the contrary from the Government. I am comfortable about my capacity to act independently.

A number of issues need to be considered when speaking about the mistakes of the past. They may be listed under three headings — problems with rules, problems with resources and problems with approach. Some of the rules that were found wanting were at international level. With hindsight, the Basel rules for the quality of capital, for example, posed real problems for banking. We have to honestly admit that the banking crisis in Ireland had a home-grown element. It was not simply a case of everyone being swept up by an international tidal wave. Some of the particularly Irish aspects of the crisis need to be addressed. Not only must we implement the international agenda from Basel as the European Union adopts it, but we also need to fine-tune some of our domestic rules. It is clear that there have been some corporate governance failures. Some of the problems in financial institutions were caused by over-dominant chief executives. The fact that banks can have such enormous concentrations on the property sector means we need to fine-tune our credit concentration rules. There are lessons to be drawn on the spectrum of principles versus rules. We need to tighten the rules in some areas.

Since I started this job, my biggest surprise is how poorly resourced the Financial Regulator is, compared with the benchmarks with which I am familiar — Bermuda, the authority which I considered to be lightly resourced, or the UK Financial Services Authority. It is clear that before the crisis, there were two regulators in two large banks. That is miles away from the resource levels needed. In this context, I would like to refer to what might be called the supervisory coverage ratio. While it might sound rather cumbersome, it refers to the number of supervisors per regulated firm, particularly the high impact entities. The lesson we need to learn is that the regulator needs to be better resourced, as resourcing affects enforcement. As I mentioned in my opening statement, we do not have a proper enforcement team. When an enforcement case comes up, the supervisor has to decide whether he or she wants to pursue it and stop engaging in supervision. We do not have a dedicated investigation team to which such cases can be handed. That means enforcement cases are not being pursued with the maximum vigour required.

The third big area is attitude and approach. In the debate about principles versus rules Ireland probably went too far into the principles-based end of the spectrum. One of the lessons of the financial crisis is that markets are not as efficient as everyone thought they were. They can act with a herd mentality when there are pay incentives. Regulators were cowed into not intervening because it was considered an efficient market would sort everything out. The crisis has taught us that there needs to be a slightly greater bias in favour of intervention. There are important lessons to be drawn in that regard.

I am not sure whether I picked up on all the questions asked. I have not seen particular instances of corporate white collar crime, but it is clear that our enforcement capability needs to be better. Having the stronger fitness and probity standards in the first Bill will help in that respect, but we need to build up our enforcement capacity so that we can take action more effectively as we identify problems.

Senator Paul Coghlan

Does Mr. Elderfield think corporate Ireland will be properly responsive in view of what happened in the past or does he expect it will take time?

Mr. Matthew Elderfield

From our point of view, we will sympathetically work through problems as we identify them, according as we are told by whistleblowers, as we identify them on-site or as they are brought to our attention by external stakeholders. We will tackle the problems as we find them.

It is important to be realistic about expectations for actions against individuals. When one is trying to take a case against an individual, he or she will fight tooth and nail and it will take a long time to conclude. One tends to have a higher success rate and a faster success rate in actions against firms. That pipeline will probably be longer with actions against individuals on fitness and probity grounds because one has to prepare one's case a little more thoroughly.

Senator Paul Coghlan

Does Mr. Elderfield envisage custodial sentences in the case of individuals, despite the shocking cases we have witnessed?

Mr. Matthew Elderfield

There is a clear difference in terms of responsibility between the Garda and the Financial Regulator. The Garda has criminal enforcement powers, while we have administrative sanctions. We do not wish to queer the pitch of the Garda in any of the cases involving alleged improprieties at Anglo Irish Bank, for example. It is best that we hang back on these and let the Garda have the first shot because its sanctions are stronger. We will impose administrative sanctions as need be.

Deputy Seán Sherlock

I welcome Mr. Elderfield to the committee in his role as Financial Regulator. He will be aware that he has been dubbed the "sheriff of Dodge city". I was expecting him to come wearing a Stetson and star. I am delighted to see that clear, unequivocal language is developing in the regulatory regime between the regulator and Professor Honohan. There is no room for ambiguity. We are getting a clear message that the so-called Dodge city needs to be cleaned up. There is an acceptance among the general public in that regard.

This is a broad ranging discussion in which I wish to raise a number of issues. I would like to focus directly on Mr. Elderfield's submission on Anglo Irish Bank. There is a school of thought that suggests it should be wound down. Mr. Elderfield's view is that the cost of winding down the bank would be prohibitive. How did he come to that conclusion and what is the basis of his logic in that regard?

Mr. Elderfield stated a small new bank was likely to be carved out and that he would apply his process on that entity. Will he elaborate on what he means by the process? I presume that once all of the bad assets are transferred to NAMA he will be left with an entity. Does he believe a new entity will be created from this? What is the vision from his perspective?

I appreciate that Mr. Elderfield would prefer to deal with the Quinn issue on a separate occasion and realise that matters are before the courts. However, this is the first opportunity for the tribune of the people to ask questions of the regulator about Quinn Insurance. Will Mr. Elderfield give us an insight into the motivation for his actions up to the point at which a legal process started? For instance, did he have a mandate to tackle the solvency issues? The reason I ask that question is that 5,000 workers feel the regulator's approach was perhaps heavy-handed. Perhaps there was a lack of clarity as to what his motivation was and the mandate for the actions he took. Will the regulator give us some insight into the process and the reasons behind the action he adopted?

Is it technically possible for Anglo Irish Bank to take a stake in Quinn Insurance? Some claim it is not and that this is all just optics so Anglo Irish Bank can start a bidding war among other insurance companies for Quinn Insurance. What are the regulator's views on this, if it is possible for him to give them to the committee at this stage?

The committee is examining the regulatory regime for credit unions. There is broad consensus on section 35 of the Credit Union Act 1997 which will be addressed in the new Central Bank Reform Bill.

However, there is no consensus among the representative bodies on the regulatory framework. Some credit union representative organisations argue regulation in the past was overly stringent due to a lack of knowledge as to how the credit union model worked. It is argued that to achieve more efficiency in this regard a separate regulatory board for credit unions compromising credit union managers and members should be established under the Financial Regulator's framework. What are the regulator's views on this?

Financial markets being what they are, there will always be some financial wizard to design an elaborate mechanism for making money. Accordingly, those who regulate the markets must be almost ahead of them. Will the cream of the financial services workforce need to be working in the Financial Regulator's office to ensure the banks do not sidestep any regulatory regime by creating elaborate mechanisms? Does a recruitment embargo apply to Mr. Elderfield's office? Does his office need more staff?

Mr. Matthew Elderfield

On Anglo Irish Bank and the alternative costs, I have seen an analysis prepared by the new management team which seems reasonable. The rapid wind down cost, rather than the good bank/bad bank — it is not really a good bank, but an asset management company — would be cheaper for a number of reasons, but first, I will explain what is likely to happen. Certain assets for transfer will be taken into NAMA, and Anglo Irish Bank will shrink, perhaps, in half. Then one splits what is left. The question is what the split of that balance sheet will be. One takes the bad assets, which effectively are going to wind down, into an asset management company. An asset management company does not need to meet bank regulatory capital standards, so this is a cheaper option and it could be wound down over time. There could be a rump of a carved out entity that could continue as a bank. The open question is what the split between the two will be, which assets stay in one and which stay in the other and how the funding will work between the two sides. That may seem to be very complicated and innovative, but it is not. It is what the UK has done with respect to Northern Rock. That has been approved by the European Commission via the split into a bad asset management company and a good bank.

Why does that seem cheaper? This is the analysis. By doing that and keeping a bank, one does not panic all the existing people who have their funds with Anglo Irish Bank, who would run and then we would have to trigger costs under the State guarantee. That is one aspect. The other aspect is that there is the good entity rump one hopes will make some money so that something might be claimed back on the big eye-watering number that was announced as regards the cost. That seems a reasonable analysis. When we get the rump entity identified and the balance sheet split, and we will know exactly what assets are in there, then we can do our analysis to set the target capital levels for that.

I am loath to get into Quinn. Perhaps I shall just say that our motivation is to protect the policy holders and we have a clear mandate for solvency standards for insurance companies. That mandate applies to all insurance companies.

As regards credit unions, I am pleased that changes have been made to section 35, which gives more flexibility, I believe. We recognise that credit union borrowers are under pressure and need to reschedule their loans beyond the three and five year term limits. In terms of our approach, I know that various credit union associations have thought of different structures. I am not an enthusiast as regards separate boards. We do not have boards of bankers giving us guidance on banking supervision. I do not believe that is a good idea. We do not have that for insurers either. Ultimately, we will have some consultative bodies. I have met the different credit union trade associations. I am going to the annual meeting of one of these in a couple of weeks, so there is definitely dialogue in a consultative sense. They will have their own track, their own units and a distinctive credit union legislative framework. That is very clear in the Bill the Minister has introduced, and as I have tried to emphasise, the risk-based approach means we are not going to take the rules for the systemically important Bank of Irelands and AIBs of the world and "Xerox" them onto credit unions. That does not make sense. The credit unions need their own approach.

However, some credit unions aspire to be more bank-like and offer more services as they move up the complexity spectrum, when the level of regulation has to be adapted accordingly. Our knowledge of the credit union sector is quite good, but we need to build up our resources across the board.

The point about staffing levels is a good one and I believe the Deputy is trying to tease out a number of points in this regard, in relation to the absolute levels of staffing. My board has approved a complement of 532, which is now before the Minister for his approval. This is an improvement over last year's complement of 371. We really need to have a significant improvement in the resources. However, the point has been made that it is not just about numbers but skill sets. One can be outgunned by all the quants on the other side of the issue. I will say a few things in that regard. We have some very good people now in the Office of the Financial Regulator, but we need somewhat more front office experience and commercial understanding. We need to invest more in training, and we need our own quants. We are not going to have as many as the institutions, so we must ensure we have a process for taking decisions that escalates issues up to the people with the right skills. For instance, I have initiated a weekly risk committee, which I chair, that deals with the escalation of issues that have occurred during the week. Any decisions about model approval or quant issues need to be escalated to the right forum so senior management experience may be brought to bear as well as the regulator's own quants. That can be done through effective organisation.

I chaired the model approval panel at the FSA, and I know we do not want a total free-for-all as we need some rules of the game. Before firms come to us with their complex structures or models, there are certain things that must be ruled out completely. The principles versus rules debate applies to models or quants as well, because we must say that we are not happy to contemplate some things about correlation or diversification of complexity. By providing well qualified people, having a good process and setting the rules of the game, there is a more level playing field and this allows us as supervisors to do our job.

Deputy Kieran O’Donnell

Mr. Elderfield stated there is a healthy debate on whether some insurance companies pose a systemic risk and require enhanced regulation on a par with systemic banks. I do not wish to veer into the debate on Quinn Direct, but it is a huge issue. Does Mr. Elderfield regard Quinn Direct as such an insurance company? What is his view on a bank like Anglo Irish Bank becoming involved in a group like Quinn Direct and the Quinn Group? What kind of expertise would a banking institution have in this area?

Mr. Elderfield mentioned the reasons for the banking crisis in Ireland, and said that some of them were domestic. How much of the crisis was domestically driven? He spoke about Basel rules and so on, but is it not the case that the Financial Regulator needed to take particular views on the situation in Ireland? An example would be to impose higher capital ratios on property lending. If such ratios had been imposed, would we be in the current situation? Does Mr. Elderfield think the laws in this country are sufficiently strong to impose custodial sentences for breaches by heads of the banks? The Financial Regulator can only implement administrative sanctions, but has no role in custodial sanctions.

Can Mr. Elderfield comment on the recapitalisation of the banks? There is now certainty on the maximum cost to the public as a result of the banking crisis. What level of losses does Mr. Elderfield expect the banks to incur on the assets that have not been transferred to NAMA, by which I mean those that are worth less than €5 million? Does he believe that all development loans will come over to NAMA? Will the banks continue to be left with distressed assets? My understanding is that the banks are providing the list of eligible assets to NAMA, rather than NAMA officials doing a thorough due diligence at the start. What level of losses are being forecast by the Financial Regulator on mortgage lending and credit card debt? How does Mr. Elderfield think the crisis in the mortgage sector can be dealt with? What level of interest rates did the Financial Regulator factor into its stress testing?

The Financial Regulator is providing a core tier one capital ratio of 8% by the end of the year and a 7% equity. In the UK, the core tier one capital ratio is about 9.6%. Does he feel the ratios he is imposing are adequate? The bottom line question is whether this is the end of it with the banks. The regulator has brought out €7.4 billion for AIB, €2.7 billion for Bank of Ireland, €2.7 billion for Irish Nationwide Building Society and he is talking about just short of €1 billion for EBS. With Anglo Irish Bank, it is a case of how long is a piece of string, and the regulator is talking of €22 billion in terms of recapitalisation. Is that it? Can the Irish people feel the pill they have swallowed is the last pill? Mr. Elderfield might deal with those points.

Chairman

Before we go back to Mr. Elderfield, with regard to Anglo Irish Bank and Quinn Insurance, I understand this is a matter of huge public concern across the country and I would dearly love that we could discuss it completely on the floor of the committee today. However, it is before the courts on Monday. We have a commitment from the Financial Regulator that he will come back to the committee on this issue after Monday next but, unfortunately, we cannot go any further than that. I wish we could but we cannot. I accept the general point.

Deputy Kieran O’Donnell

I just want to get an understanding of where Mr. Elderfield is going in terms of regulation of the insurance sector and how he views it in terms of banks becoming involved in that sector and area of expertise. Obviously, we are conscious there are 5,500 people employed in the Quinn Group. We ask Mr. Elderfield to deal with this in a general way so we get an overview. We welcome the tone he has set since his appointment in terms of regulation. We want to get an understanding and a flavour of how he wishes to proceed.

Deputy Seán Sherlock

On that, there is the process that led up to the instigation of judicial proceedings, and the idea of a State owned bank taking a stake in an insurance company was mooted in the public domain. We have the regulator before us. It is completely legitimate for us to ask questions about the process by which that could come about and whether that is a legal process, whether it is in compliance with any rules of the European Union and whether we are not setting up a potentially monopolistic position because the VHI is already in existence. These are completely legitimate questions which are being asked by people outside these walls in any case. I do not understand why they cannot be answered.

Chairman

I accept it is of huge public interest. However, we have to be very general on it and, unfortunately, we cannot get into the specifics.

Deputy Kieran O’Donnell

I hope Mr. Elderfield will deal with it.

Mr. Matthew Elderfield

I will deal with it in general terms. I recognise it is a frustrating position for the members of the committee, and it is somewhat frustrating for me. We hoped to have a resolution in the court case on Monday but it has been held over for a week.

Deputy Kieran O’Donnell

Does Mr. Elderfield expect a final resolution on Monday next?

Mr. Matthew Elderfield

I hope so, on the question of the appointment of a permanent administrator.

Deputy Kieran O’Donnell

Is he proceeding in that regard?

Mr. Matthew Elderfield

There is this debate about insurance companies and systemic risk. To take a step backwards, there has been a debate at G20 Financial Stability Board level about where the systemic risks stem from. Everybody realised that banks have generated a lot of systemic risk and there is a question about insurance companies. For a while, people thought insurance companies were in a completely different category and did not pose systemic risk. Then, the AIG issue occurred, it received a massive government bailout and this raised questions about systemic risk. There is this discussion around that.

I have said publicly that I am a little sceptical about reading across the bank problems into the insurance companies. Insurers experience their difficulties in a very different way from banks because of their funding structure. However, there is an issue for debate in Ireland, namely, how the compensation scheme works. It is not a pre-funded scheme and there is potential exposure in the first instance to the Government about a compensation scheme, which is something to consider as Ireland becomes a hub for people undertaking insurance activity.

In terms of solvency requirements for insurance companies, we have a clear standard of a 150% solvency requirement that applies to everybody. In recent months, two other companies breached the 150% point and both put that right within days. Two companies breached the 100% point and both went into administration. We have a clear framework and we will implement the new EU standard, Solvency II.

Regarding banks being involved in insurance, we must reassure ourselves that the solvency requirements of the insurer and the bank are assured. We must also make sure there is the correct expertise and governance structure in place. I will stray too far from the abstract to the specific if I say more than that.

I wish to address the banking recapitalisation questions, which are important. It is difficult to put a percentage on the amount of international blame as opposed to the amount of local blame. We cannot say it was entirely an international issue. With 20/20 hindsight the quality of capital was too low and, in terms of equity versus hybrid instruments and tier 2, the outright level of capital was too low. We must learn the lessons and have tried to do so in the bank recapitalisation exercise.

There are also Irish elements. I referred to governance but I also want to talk about credit concentration. It is disturbing that the banks could have such major concentrations in particular sectors, such as the property lending area. It is disturbing that this could get so large, that connected exposures could grow so large and that the banks could walk through whatever internal lending limits they had in search of more profit.

Deputy Kieran O’Donnell

During that period, should the regulator have imposed higher capital ratio requirements for lending and consequently had more control over that area? Does the regulator have to take decisions specific to Ireland, outside what is going on in an international context?

Mr. Matthew Elderfield

That is a fair point. International standards are minimum standards. Sometimes one needs to operate superequivalent or tougher standards and one needs to use individual supervisory judgment for a particular case.

Deputy Kieran O’Donnell

That did not happen in the past ten years.

Mr. Matthew Elderfield

It is acknowledged there were regulatory failures and I am sure the Governor will be explicit on this point. Capital add-ons were provided but they were so marginal that they did not create enough of a drag on the system. Some banks should have been told they were there at their limit. It was not a question of paying extra capital to lend more when they had outright reached their limit on how much they should lend to a particular sector.

Deputy Kieran O’Donnell

If those controls were put in place, what type of banking sector would we have in Ireland today?

Mr. Matthew Elderfield

The tidal wave that happened after the collapse of Lehman Brothers would have left damage but the damage would not have been as great.

Deputy Kieran O’Donnell

Does Mr. Elderfield believe we would have no banks nationalised or potentially to be nationalised?

Mr. Matthew Elderfield

I am not that good with a crystal ball or whatever one does when looking backwards to figure that out. The key point is the forward-looking element of bank recapitalisation. I provided an abbreviated version of what we did. With the permission of the Chairman, I will explain a little more because it gets to a point of whether we examined the losses and whether we are happy enough about the downside risks.

Deputy Kieran O’Donnell

Is it the end of it?

Mr. Matthew Elderfield

Our definite objective is to have a definitive view of the capital needs of the banks so there is no second act. This is it in terms of the capital support provided by the Government. We try to be as rigorous in the process as we can. The NAMA haircuts are the starting point. Then we asked the banks the projected loan losses for the next three years for everything else. This includes property loans of less than €5 million that were not transferred to NAMA, mortgage portfolios and unsecured lending. We asked for their forecasts and examined them in detail, portfolio by portfolio. We examined third-party work the banks had done, our experience of sitting on their credit committees, the Standard & Poor's credit rating and we challenged the banks on this. Banks do not have a good track record on forecasting. We did not just accept the forecast; we had a bank specific add-on for each bank. For some banks there was a pretty tough add-on; for others it was more moderate, depending on our judgment of how good their job of forecasting was.

Deputy Kieran O’Donnell

Was there due diligence? Did staff of the Office of Financial Regulator go into the banks?

Mr. Matthew Elderfield

Exactly. There was a mix in getting the banks to present information, obtaining third party information and benchmarking it against their portfolios. In the end it was a prudential judgment which was not hugely popular, but we imposed the add-ons. We also examined their funding costs and told them they must have a more stressed view of them. We also set the target capital level at 7% or 8%. I will speak more about targets later. We also required the banks to do a stress test. In the United States the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency have done a stress test, as has the Financial Services Authority in the United Kingdom. Our stress test requirement is tougher than the British and US standards. The level of capital one must hold after the stress test is the same as in the United Kingdom but the severity of the stress is tougher because we know the economic situation in Ireland is difficult. The Central Bank is forecasting an improvement in the second half of the year, but it is prudent to look at the half empty glass and the downside risks. We gave them a macro-economic scenario to model. We also looked at the stress test scenarios of Standard & Poor's and Moody's. On top of this, we were particularly concerned about a couple of portfolios, one being mortgages. As we knew a mortgage arrears issue might be developing, we had a very tough mortgage loss rate.

Deputy Kieran O’Donnell

What is that loss rate?

Mr. Matthew Elderfield

We require the banks to have a 6% loss rate. Based on their experience, they predict they might have a rate of 2%. The position varies from bank to bank. We also examined non-NAMA portfolios, which were mentioned. In the base scenario they are well recapitalised. Even if the base scenario gets much worse, we know there is enough capital in place.

The comparison made with the current capital levels for British banks does not quite work. We state the banks must stay above a rate of 8% after all of the losses I explained. By the end of the year, when there is recapitalisation, they will be significantly above that rate and will have a buffer, into which they will able to eat as losses occur in the next two years. If our add-ons are too prudent — let us hope that is the case — they will have a little extra spare capacity. On whether they will have to do more in terms of capital, when the Basel III rules are brought forward in a couple of years time, they will have to have a leverage ratio and perhaps a little more, but we have got them far enough along that the distance to travel is not that great.

Deputy Kieran O’Donnell

Therefore, the rate of 8% cannot be breached at any point.

Mr. Matthew Elderfield

It is guidance. If they bounce around it a little, they could speak to us about it, to be pragmatic about it.

Deputy Kieran O’Donnell

Does Mr. Elderfield see any situation in which extra money will have to be put into the Irish banking system?

Mr. Matthew Elderfield

It is impossible to state there will be no such situation. I do not think a responsible regulator would ever state this. However, we have looked at some dire situations and even they would not require it. The international market reaction has been interesting, from investment analysts, Standard & Poor's and Moody's. The bond spread immediately for Government debt. The reaction is that the Government's regulator and the Irish political system have looked at the matter squarely in the face and bitten the bullet and that we have an outer bound on the cost. There is no sovereign debt overhang. We have achieved a strongly recapitalised banking sector and clarity on the cost to the Government. Added together, this means stronger economic prospects and lower borrowing costs.

Deputy Kieran O’Donnell

What percentage shareholding does Mr. Elderfield envisage the taxpayer taking in Bank of Ireland and AIB? He will agree that 70% of the recapitalisation figure has gone into Anglo Irish Bank which has not lent money in new loans since it was nationalised. What is his view of professional creditors or investors taking a share of the pain ahead of the taxpayer? There is a feeling this has not happened in the resolution of the Irish banking crisis to date.

Mr. Matthew Elderfield

On the shareholding point, we will have to wait and see. Bank of Ireland has sent a strong signal that it is confident it will be able to secure private capital and keep the Government stake significantly under 50%. There is a strong prospect that it will be successful. AIB continues to work on its proposal and we are waiting to see what its capital plan contains.

Deputy Kieran O’Donnell

Does Mr. Elderfield envisage that the State will have a majority stake in AIB?

Mr. Matthew Elderfield

We will have to see how it pans out. Much will depend on the value it achieves for the asset disposals and what will happen in subsequent haircuts.

In regard to Anglo Irish Bank and cost sharing, it is important for someone in my position to be cautious in speaking too specifically about particular banks because of the legal proceedings that might be pursued. Answering in the abstract, we need to think about introducing resolution powers, with cost sharing mechanisms for failed banks, similar to the FDIC or the UK Banking Act 2009, in order that different levels of the capital structure feel varying degrees of pain the further away they are from retail investors. That issue should come before the Oireachtas for debate. Issues also arise in regard to insolvency law, creditor preference, property rights and the Constitution.

Deputy Kieran O’Donnell

Should we put in a place a regime which involves sharing?

Mr. Matthew Elderfield

That is right but a finely balanced argument can be made as regards how much pain should be shared and at what point in the capital structure. We need a regime which does this.

Deputy Kieran O’Donnell

Does Mr. Elderfield regard Anglo Irish Bank as being of systemic importance at this point?

Mr. Matthew Elderfield

It was certainly of systemic importance when the guarantee was introduced. The key issue now is less about systemic importance and more about the cheapest way to deal with it.

Deputy Fergus O’Dowd

I welcome Mr. Elderfield and his team. I am impressed by his approach to his business, the clarity of his thoughts and the decisiveness he brings to the affairs of State for which he is responsible. The committee previously heard from Mr. Eugene McErlean, a whistleblower from one of our banks who had failed to get a former regulator to act on significant bank overcharging. Perhaps if someone like Mr. Elderfield was in office at the time, Mr. McErlean would have been protected and thousands of people would have been spared the trauma of overcharging. I welcome the fresh approach being taken.

Mr. Elderfield referred to the shortage of staff available to him to police effectively the companies for which he has oversight responsibility. He stated:

We need to take an assertive approach. It is important that supervision is about more than merely identifying risks. It needs to ensure risks are properly managed and mitigated.

How will he ensure he will get the qualified staff he requires? He used the clear language in regard to clearing up the mess that members on this side of the table have used regularly. What resources does he require and has he requested them?

It is welcome Mr. Elderfield is placing consumer protection at the top of his agenda. He highlighted the problems the banking structure had created. There were lower interest rates because profits were used for the wrong reasons. To summarise his position, things will get much tougher, particularly for consumers in debt. What new strategies can be developed in this regard? While I acknowledge that Mr. Elderfield sits on several Government committees, if I am 12 months in arrears on my mortgage, I may have a stay of execution but I am heading into my second year. If interest rates are going to rise and employment levels will not improve significantly, there will be growing numbers who will not be able to pay their debts. How does Mr. Elderfield see them being protected?

Mr. Matthew Elderfield

I do not know about what happened in the past, but I understand there is a gap in the legal protection for whistleblowers. That is something about which the Governor spoke and it should feature in the inventory we are creating of measures we need to see in the second Bill. I do not know enough about the details of the specific case to which the Deputy refers.

The track record on overcharging is disappointing. It worries me how long it takes for the two phases, namely, how quickly communication occurs to the customer and how long it takes for payments to take place. We have tried to raise our game in this space by saying to firms that we are doing this under powers, we are setting them a deadline as to how quickly they have to communicate to the consumer and how quickly they must make the payment. We are trying to do this in a risk-based sense. If an overcharging bank or insurance company has a handful of consumers, it should be attacked much more swiftly than another that has tens of thousands and a lot of money. However, even for the one with tens of thousands and a lot of money, there should be a deadline for taking action. I have said publicly and say again now that I encourage banks to come to us, get cracking on the overcharging and start to get the payments going.

In terms of staffing levels, I have asked for an extra 150 staff for my board which has been approved. That gets to the target level I mentioned to the Deputy's colleague, namely, 532.

Deputy Fergus O’Dowd

Mr. Elderfield asked for 150.

Mr. Matthew Elderfield

I asked for 150 extra staff for this year.

Deputy Fergus O’Dowd

Right. Did I understand Mr. Elderfield to say 32 just now?

Mr. Matthew Elderfield

No, our target is to get to 532. I have said publicly we probably need about a couple of hundred more staff. We need to do a benchmarking exercise to look more specifically at our research levels for the types of firms we supervise. We also need to look at the cost in terms of the fee impact on industry and have a consultation around that. The board will have to sign off on that, as will the Minister for Finance. I believe 150 is a good start. I accept it is a lot of people to hire. We are accelerating our hiring process, have talked to the professional services firms about a secondment programme and are trying to act quickly on that.

I have a few comments on mortgage arrears because I knew it would be an important topic to talk about today. It is a difficult subject. There are no silver bullets and there are many stakeholders involved. The Law Reform Commission is dealing with some aspects, there is the credit review group set up by the Government, and the Department of Social and Family Affairs is doing some work. As members know, I am not a member of the new group examining consumer indebtedness. We have a mandate to co-ordinate all efforts by these different bodies and come up with recommendations in different areas. Hugh Cooney is the chairman of the group and he is doing a great job. He has us well-organised and moving quickly and there are various workstreams.

Ultimately, there are some difficult choices for the Government and the Oireachtas. If there are new schemes, what will be their cost? Who will benefit from them? How much outright relief does one give to people in mortgage arrears when the cost will be borne ultimately by the taxpayer? There is the difficult issue of moral hazard about which we must be open. Taxpayers who manage their debts well may be reluctant to fund those who did not manage theirs so well. I recognise that for many people who are in debt, the situation went out of control because of the economy but some people overstretched themselves. One has this difficult moral hazard question that must be worked through as well.

It is very tempting to say the cost should simply be borne by the banks, that they should write off part of the costs. Going back to the conversation with Deputy O'Donnell, we must be very honest and realise that in this environment costs borne by the banks come back to the taxpayer because the taxpayer is providing the funding to get the banks up to the capital levels. We must be realistic about that. If one likes, there is an outer limit to how much the banks can bring to bear on the mortgage arrears problem before they have to come back to the Government. It becomes circular and comes back to the taxpayer.

That is the big picture on mortgage arrears. However, there are things we, as the Financial Regulator, can do and have done. We recently amended the code on mortgage arrears to extend to 12 months the period before action can be taken. That has provided real advantages. There is much clearer communication to customers, with the spelling out of the different options. Each case must be handled individually. Creating that breathing space is very valuable. It gives the borrowers time to work things out if they need to seek a new job or something of that nature.

We have done a couple of other things. We went on site to look at how banks and sub-prime lenders are complying with the code. In particular, we carried out some work last year on arrears charges and policies and procedures. We are starting a new assessment of the code. The results of that initial work on arrears charges will be available in a couple of weeks' time. It is already clear to us that the frequency and level of arrears charges are an issue. We wrote to mortgage lenders late last year to try to discourage the excessive and frequent imposition of arrears charges. It is clear that has not worked in all cases and we will need to consider the question of arrears charges under our formal powers and take some action in that space.

Deputy Fergus O’Dowd

I refer to another part of the problem. Unfortunately, many of the people in mortgage arrears who have come to me borrowed beyond their income at that time or were not prudent enough to accept that their wife, husband or partner would not always have a job. Many such people have gone to sub-prime lenders and are paying well in excess of the going rate.

I detect from the regulator's answer that some organisations are taking a different line from others. Sub-prime lenders are especially callous in dealing with these issues at times. They gave loans to people who probably could never pay them back, even in good times. This creates a terrible crisis for the individual families concerned. Does Mr. Elderfield see any difference in this regard? Is he suggesting the regulator will apply more pressure on sub-primers or those who are being unreasonable in their approach? This could include either those who gave too much money such that people could never pay it back or who charge too much interest such that it might be cheaper for the borrowers to get a credit card from the Bank of Ireland or someone else. This is how bad the position is for some people. They are in a really despairing, awful place and see no way out of it.

Mr. Matthew Elderfield

I am very sympathetic to that point. Our code applies to banks and sub-prime lenders and our on-site work covers both. I do not wish to preview too much what we will come out with in several week's time but we are finding somewhat different stories based on whether a firm is a sub-prime lender or a bank. The committee should watch this space.

Deputy Fergus O’Dowd

I assure Mr. Elderfield we are watching it too. The sub-primers have got away with murder. Some of the things they have done are absolutely appalling. One problem we face is that people who borrowed more than they should have cannot even get the mortgage subsidy from the HSE because it deems such people were given money recklessly and recklessly borrowed it. This is where such people are caught now and they face very significant, severe and adverse penalties. I thank Mr. Elderfield for his reply.

Deputy Arthur Morgan

I welcome the regulator and his team and offer sincere thanks for the clarity of the presentation at the beginning and the frankness of the replies to the questions put, which was very welcome. I do not characterise those in the regulator's office as the guys with the Stetsons. People are looking for someone who is here to do the job required and to do so with honesty and openness. Let us hope that will continue.

Yesterday, representatives from NAMA appeared before the Joint Committee on Finance and the Public Service. They informed or admitted to us that the banks had not co-operated sufficiently with that organisation, one of the reasons the first tranche of transfers to NAMA was delayed. Has the regulator a role in this regard or must it be asked by NAMA before it could intervene to require these banks to waken up to the reality of where matters stand now? They are dragging their feet which they have done with both the Minister and the Department of Finance for several years now and it is no longer acceptable. Must the regulator be asked by NAMA before it can intervene? Does it have a role in examining the role of the auditors who signed off on some of the very dubious accounts of these banks? Some of these people are currently working for NAMA or engaged by them. Does the regulator have a view on this matter? When will the new code be introduced? How far away is that development?

I refer to staffing. The regulator has set out the matter very frankly for all of us, which we appreciate very much. Has the Government said "Yes" or "No" to the request for additional staff? The regulator requires an additional 160 staff in total. Is it confirmed that it will get approximately 150 in the near future? What has been the Government attitude to the requests in this regard? On the staffing issue, will the Financial Regulator continue to need significant numbers of staff? Is it likely that when things are straightened out, fewer numbers of staff would operate in its office?

On household mortgages, as Deputy O'Dowd said we are dealing with the issue at constituency level. The lenders were at least as culpable in giving substantially greater sums to borrowers than they could reasonably meet by any stretch of the imagination. Does Mr. Elderfield have a view on the culpability of the lenders in such circumstances? They are at least as culpable, perhaps, as the borrowers in the difficulties which are arising. In view of such cases, will the Financial Regulator consider that a moratorium of more than 12 months might be appropriate in genuine cases? At all times I refer to what we consider to be genuine cases.

Given the nature of this State, has Mr. Elderfield, in his relatively short tenure in office, received any political overtures regarding his activities and how he might conduct himself? What would his response be in the event of any political overtures, whether from Government or wherever else?

Mr. Matthew Elderfield

I will take the last question. The Government has not attempted to interfere in my approaches to any issue. We discuss questions of policy, such as the Bill. I received a delegation of politicians from all sides of the Dáil who represented their Cavan-Monaghan constituents. It made sense for me to do that and hear their perspective. They were very respectful and sensitive to the independence of the Office of the Financial Regulator.

Deputy Arthur Morgan

I totally accept that. It was in the public domain and was not one my concerns.

Mr. Matthew Elderfield

I understand it got into the press. To return to the Deputy's questions, we can play an encouraging role with NAMA in our dialogue with the firms who are taking part in the process, which is clearly set out. Mr. Brendan McDonagh and his team are very capable of giving some tough messages to the banks and telling them to take part in the process. It has worked okay.

On examining the role of the auditors, I understand an investigation is being conducted by the professional standards body, the Chartered Accounting Regulatory Board, with respect to particular cases. The Deputy asked how soon the new code will be introduced. I am not sure to which code he referred.

Deputy Arthur Morgan

Before Mr. Elderfield leaves the issue of auditors, will it be left to their respective governing bodies? Is there no role for regulation or the Financial Regulator?

Mr. Matthew Elderfield

I am not a great expert on the boundary lines of how the law works in Ireland. As in the United Kingdom, a professional body has a disciplinary procedure whereby an independent individual is set up to investigate a case. It is a very serious process. We have had discussions with the individual conducting that enquiry. The investigation is in addition to any criminal charges which might be laid against particular individuals who happen to be professional auditors or accountants.

Senator Shane Ross

May I stop Mr. Elderfield there for a second? Is he referring to a self-regulating body?

Mr. Matthew Elderfield

I am not sure; I believe so. There are overlapping jurisdictions. There are some areas in which we administer sanctions, some in which the Garda deal with criminal matters and some in which the auditing and accounting profession administer themselves. The Senator is correct.

Deputy Arthur Morgan

The Financial Regulator is back at this point regarding auditors.

Mr. Matthew Elderfield

I will look for some help from my colleagues because I am not very well cited or exact on auditors.

Mr. Martin Moloney

What the Deputy said is correct. We do not have a direct role in regulating auditors. We have come across instances where there are problems and have referred such cases to a professional body to investigate them.

Deputy Arthur Morgan

Are there cases where it is clear accounts were signed off on which have transpired to be extremely dubious? Notwithstanding all that, does Mr. Elderfield still not believe there is an issue for his office to examine, despite the fact that the requisite body appears to be ignoring it, which is the impression we are getting?

Mr. Matthew Elderfield

There is an issue in that regard but, frankly, we have got enough to supervise right now and I am not sure I would want to take on the auditors as well.

Coming back to the Deputy's questions on resources, the Minister for Finance made a statement at the time of the creation of the Central Bank Commission and was very clear about the fact that significant additional resources would be required. The exact process step that the board approved is pending before the Minister. I do not want to prejudice the Minister's choice in that regard but he has made a commitment that there will be additional resources. The Deputy can read into that——

Deputy Arthur Morgan

Sometimes it takes a very long time to get those and I do not believe Mr. Elderfield has that time. Is he satisfied with what has been said?

Mr. Matthew Elderfield

It is fine because we are hiring in the meantime and getting going with it. I am not worried about that.

On significant numbers for the future, we will perhaps need fewer numbers. That is why I said approximately 200. We will see how it goes. We will do our benchmarking exercise and try to develop a system where we can flex our numbers over time. I believe the Deputy had another question.

Deputy Arthur Morgan

On the mortgages.

Mr. Matthew Elderfield

Yes. I will make a few comments. In terms of the culpability, complaints can be made to the Financial Services Ombudsman about particular institutions. There is a route to do that. That is the complaint route.

In terms of giving the 12 months' extension or not, that is in the mix for discussion in Hugh Cooney's group on the mortgage arrears. It is definitely one to look at. I am aware this committee's sister committee, the Joint Committee on Social and Family Affairs, made a recommendation to go to 24 months. That is something we should examine closely.

There is one potential downside which is if we wait for 24 months, there is less revenue coming into the banks. They are funding themselves by securitised debt that depends on that revenue stream. It hurts them, and we know there is a funding issue. We do not want to commit to that immediately. We need to look at the trade-offs. I have explained that there is a banking trade-off that ultimately comes back to the consumer, but that is one aspect we are examining closely.

Senator Shane Ross

I, too, welcome Mr. Elderfield. If he could have seen the atmosphere in which we were talking to his predecessors in recent times he would know how welcome he is here.

Deputy Arthur Morgan

That is an understatement.

Senator Shane Ross

In the view of most people here he has made a very refreshing start and it is very good to see him doing that.

I would agree with much of what Mr. Elderfield said, especially about too much power being in the hand of one individual in the past, the credit concentration on property and the lack of resources. That is right, but I would like to ask Mr. Elderfield about one issue which I do not believe he touched upon, although he touched upon it in an interview with Simon Carswell in The Irish Times, when he said that the regulator should have the power to remove staff of banks in various positions. What concerns me in particular about the current position, and Mr. Elderfield has given me a good deal of reassurance about the principles and the structures he is setting up, which are laudable, is the fact that insiders have been appointed to chief executive posts in the three major banks he will be regulating. I would be interested to hear his comments on that. I refer specifically to the Bank of Ireland, where Mr. Richie Boucher was appointed, and he was the heir apparent and an insider; Allied Irish Banks, where Mr. Colm Doherty was appointed, and he was the heir apparent and an insider; and Irish Life and Permanent, where Mr. Kevin Murphy was appointed, and he was also the heir apparent and an insider.

One of the tests about those appointments, and I have seen it written, should be to ask whether those guys, when things were so wrong, which Mr. Elderfield so eloquently described, put their hands up and said there was too much power in the hands of one man, too much credit going into property and the regulator was under-resourced. If they do not pass that test, they are part of that culture which Mr. Elderfield is supposed to be changing. I would like to hear his comments on those people——

Deputy Fergus O’Dowd

In general.

Senator Shane Ross

No, specifically——-

Senator Paul Coghlan

The group of three.

Deputy Fergus O’Dowd

On what day are they to be fired?

Senator Shane Ross

——on whether these people are suitable to be in charge of those banks because they are part of that old regime and culture that we are trying to change. Specifically, I would like to ask him about the boards of those organisations. In AIB and also in Bank of Ireland and Irish Life and Permanent the same people — very few people were toppled at the top — are in place drawing the same salaries and the same culture prevails. These are the same people who made those appointments we talked about. How does that sit with the statement Mr. Elderfield made, with which I agree, that he should have the right to remove staff? He should have that right and he is the right person to have it. It should not a matter for politicians to do that. Mr. Elderfield is the best person to have that right at present. However, will he exercise it or will he restrict himself to structural and credit changes and ratios, or will he say we do not want Mr. Doherty, Mr. Boucher or Mr. Kevin Murphy because they are part of that regime and they did not say there is too much money going into property, or perhaps Mr. Elderfield should find that out? As long as that culture is still there and all the same people are still on the boards and on the executives, we will not have that fundamental change because they will work within the structures but they will still be part of the old culture. I would like to know whether Mr. Elderfield stands by that, and whether he will change or push to change the composition of the boards and the executives who bear a heavy responsibility for what happened and are still in situ.

I know we are not meant to talk about the Quinn situation and I am not going to do so, but perhaps Mr. Elderfeild, who met the TDs who came to see him, could tell us what he said to them. Has he talked to them? I would be doubtful about difficulties he might have in this respect; I admire him for doing that. That may have created difficulties in the past, but if he told them a certain amount behind closed doors, I assume that is something he can also say in public. He can tell us what he said to those TDs about the Quinn Group. Is there anything he told them that he cannot tell us? It might be better if he told us about that as well simply because they will tell other people what he said and they might misinterpret what he actually had to say.

What is the position regarding his staff in the office of the Financial Regulator? Deputy O'Dowd mentioned the case, with which Mr. Elderfield is obviously not familiar, of Mr. Eugene McErlean. I believe most people here would be of the view that a terrible injustice was done to this person by a former regulator and that person came before this committee and was very convincing. I am not asking for a judgment on the case but Mr. Elderfield might ask someone to have a look at the file to ascertain if he could review it and if there are any issues to answer. I believe there are serious issues to answer. The person who was involved is no longer the regulator but there will be people who were involved at that time who are still in Mr. Elderfield's organisation. That case raises the subject of what Mr. Elderfield will do about his staff. In attributing blame for what happened in the past, and nobody wants to indulge in any witch-hunting, there is no doubt that many people blame not only the banks but Mr. Elderfield's predecessors. One cannot only blame his predecessors, one cannot simply say it was the fault of Paddy Neary or Liam O'Reilly. In his organisation there are people who were part of that very loose regulation who believed in it and who presumably are continuing to be part of it. Will Mr. Elderfield clean out the office of the Financial Regulator as well? Is he reviewing his staff, moving people around and removing those people who made such serious misjudgments? I do not want to name them but Mr. Elderfield will be aware of what I am talking about. They were very high profile misjudgments. Are those people still in situ? In other words, is something going to change in Mr. Elderfield’s own backyard as well?

Senator Paul Coghlan

May I briefly mention one thing that is allied to that?

Chairman

Yes.

Senator Paul Coghlan

As Mr. Elderfield knows, public interest directors have been appointed to the banks because of the State shareholding. That was why I asked him if he envisaged State-controlled banks. Mr. Elderfield, however, answered Deputy Kieran O'Donnell after that. There are senior executives in charge of the NAMA teams in the banks, dealing with the portfolios going to NAMA on an agency basis with the banks. They are responsible for sanctioning or signing off on all the dodgy portfolios that NAMA has had to take over. There are conflict situations arising. Senator Ross referred to perhaps more serious or similar conflict situations with people in certain positions. As happened with the appointment of public interest directors, with further recapitalisation there may be more. However, does Mr. Elderfield see it as tenable that these or any people, whether at board or senior executive level, should still be allowed to remain in the positions they are currently occupying? Perhaps he will comment on that because it is very important vis-à-vis what Senator Ross asked.

Mr. Matthew Elderfield

Regarding the existing management of the banks in place, I fear l do need to answer in the abstract rather than concerning specific individuals. We do need to have stronger fitness and probity standards. I think we have common agreement between us. One of the surprises I had when I came in was that I was briefed by the staff who told me the fitness and probity regime for banks is not on a statutory footing. Therefore it has been very difficult to take action. Irrespective of that, I wanted to start interviewing new directors and senior management coming into the covered institutions — not all of them, but on a selected basis — to provide a greater challenge around those appointments. As a result of what we have done, we have acquired some adjustments to the roles of some people and have better balance in terms of the governance around those individuals.

Senator Shane Ross

Is Mr. Elderfield interviewing them now?

Mr. Matthew Elderfield

Not me personally.

Senator Shane Ross

No, but somebody is interviewing them.

Mr. Matthew Elderfield

Some of my staff, yes. We have done a few of those and we want to built that up over time to get better capacity. We have very few resources, which is a constraint so we are doing it on a select basis. We can do that. I will come back to the Senator's point about who is in situ. We can improve the gate-keeper role. In that mix, one has to spend more time on the fitness half as well as on the probity half. It is almost easier on the probity half. One can talk to the Garda — does the person have a criminal record? One can do one’s World-com check or compliance check on the Internet. One can go on Google and find all this stuff out. The more difficult and subtle judgment is about the competence bit of fitness. It is right that the regulator should be more into that space than in the past. Where one says one is trying to take on a senior role at a systemically important institution, we are not just going to check whether one has a criminal background, we are going to check whether one is up to doing this particular role and has the experience to do that. We are going to interview one about it and ask one’s views on regulation, culture, risk management and the rest of it. We should do that for the boards as well, and I have said that to couple of the chairpersons here. It does not mean we want all the boards to be full of bankers and risk management experts, but we want a few at least on there. We want to challenge them to do that.

The entry level process can be bolstered. We need to do a few things for that. We need to get the powers from the Oireachtas and Members have a helpful role to play to vote those through. We need to develop our interview capacity. We need to flesh out our guidelines on the competence side, and we need to be wiling to have our enforcement capability. That is the entry point. It is the best bet for dealing with it because one has not let somebody into the system. We do need to have the powers to be able to ban people and kick people out as well. That is a much harder proposition because people will fight tooth and nail, and one is stuck for months and years dealing with this thing. We have to be realistic about that prospect but, frankly, we need to have the capacity. We need to try some of those cases. Maybe we are going to lose some of them, but we need to take them on. That is one thing we have to do for the future. For the current banks, we have an agenda around culture with some of them and quality risk management and we need to use our new risk-based framework to assess them systematically on those points. I did not get into it too much in the opening statement but I will explain what I mean. For the risk-based framework, one needs to do two things. One needs to have a better ability to rank firms by impact so the biggest firms have a lot of resource but I will not get into that. However, one must also have a better way to score or assess institutions systematically. In the past, we have tended to do audits on particular subjects but we really have not systematically looked at a firm. What one should be doing is going on-site and scoring quality of governance, quality of the board and quality of management. A long time before one gets to kicking people out, one should put them under some pressure and put the spotlight on them. One should deliver a message to the board saying one has concerns over management capability and one believes it needs to strengthen its management capability in that it is overstretched, it is not well enough experienced and that one has problems about culture. One needs to have that conversation directly with the boards of directors if one has those concerns and try to raise them to a better standard.

Senator Shane Ross

What happens if one has that problem with the boards of directors?

Mr. Matthew Elderfield

One must take them on as well. One must have that conversation directly with them. If the chairman is not up to it, one must talk to the senior independent director and have a conversation with him or her. One must be willing to use one's powers if needs be.

Senator Shane Ross

Has Mr. Elderfield done that with anyone?

Mr. Matthew Elderfield

We have not got to that yet.

Having the governance standards, which I mentioned earlier, coming out, we will have a benchmark. They will be enforceable. That is a key point. We will have enforceable requirements about numbers of independent directors, term limits for some roles, maximum number of boards one can have simultaneously and about other corporate governance areas. We are putting the rules in place to get the building blocks. Then we need to get our supervisory model in place and get the people in place to have some of the difficult conversations. I think we are heading in the right direction to do that.

In terms of what I said to Deputies on Quinn, a private meeting is different from a public one on television and with the press. We have this court case on Monday. At high level terms, I set out the history, which is in the affidavit that is in the public domain, as to the engagement on solvency. I emphasised that our responsibility was to protect the 1.3 million policyholders of the Quinn Insurance Group. We also talked about the UK business.

In terms of my own staff, I have found some very good dedicated high quality people. The Governor will be doing an assessment of lessons learned that might flush out concerns, if there are some there. Frankly, my attitude is to give people an opportunity to prove themselves. I have set out the approach I want — to be more assertive and to be more challenging — and people are rising to the occasion. If they do, there will be a place of responsibility for them in the authority. If they do not, there will be alternatives. I will also mix it up. My first appointment was an external one, so there will be a mixture of internal and external appointments. I feel confident we will build a team that will be able to deliver the agenda.

Senator Shane Ross

Mr. Elderfield did not really answer my question as to whether he is satisfied with the current chief executives and boards of our banks. I would like to ask about individuals but I know he will not respond. Will he tell me if he is satisfied with the individuals on the boards of, say, our three major banks?

Mr. Matthew Elderfield

I will not comment on individuals even in aggregate because the Senator is talking about quite a small pool. I think there are challenges about risk management and culture in a number of the institutions and we must press them on that.

Deputy Kieran O’Donnell

Is Mr. Elderfield happy with the way the appointments to the top posts took place over the past——

Mr. Matthew Elderfield

That was prior to me being here. I was not around.

Senator Shane Ross

On the staff, Mr. Elderfield said he will appoint the people who rise to the occasion on merit etc. Are there any restrictions on or any difficulties about him doing that? Can he promote people in the Central Bank if he so decides or are there union problems or all sorts of restrictive practices which would stop him doing that? Can Mr. Elderfield do as he likes?

Mr. Matthew Elderfield

There is a proper process. We have an interview process. I tend to have a panel, with two other persons, and we tend to bring external persons in there. I would not say it is my personal fiefdom to do exactly what I want, but there are no restrictions on me.

Senator Shane Ross

Is Mr. Elderfield still on a 32-hour week?

Mr. Matthew Elderfield

We have a variety of different contracts for different levels. I am not on a 32-hour week.

Senator Paul Coghlan

There is one question that Mr. Elderfield simply overlooked. I take it he cannot be happy that there are senior executives in charge of the NAMA portfolios on the agency's behalf within the banks who were responsible for sanctioning such an extent of impaired loans.

Mr. Matthew Elderfield

The way we would tackle that is by looking at the credit risk management processes and procedures and governance of the banks. I accept we need to achieve improvements in that regard. We have already started to do that. Basically, we sit in on the credit committees of the banks and we have been requiring them to raise their game during this period. That was valuable for us when we did the recapitalisation exercise because we had a good insight into which banks were stronger and which were not.

Senator Paul Coghlan

Does Mr. Elderfield see the need for any weeding out?

Mr. Matthew Elderfield

Making management changes is what the Senator is thinking about. There are three routes into that: one, do you have an enforcement case against persons; two, in the context of one's risk assessment, are you pressing for particular changes; and three, generally, are you happy with culture management and resources. In some, we may have enforcement cases — Anglo Irish Bank is an obvious one. We have yet to do the systematic assessment of the banks but, certainly, we have been putting down a marker about the need for improved risk management practices.

Deputy Peter Kelly

I welcome Mr. Elderfield, Mr. Moloney and Ms Donnery. I welcome the good news Mr. Elderfield gave us about the extra 150 jobs.

There is a case re allegations against a bank of overcharging, forged P60s and forged signatures which is with the DPP and has been brought to my attention. What role has the Financial Regulator in investigating these allegations against that bank?

The media have reported allegations of forged documents and legal charges put in place on properties with the assistance of solicitors acting in consort with banks. Does the Financial Regulator see a role for himself in investigating these cases? Such investigation did not happen in the past. Will this change?

Does Mr. Elderfield's office keep a record of court cases where banks are defendants in proceedings and does it intervene and investigate? If staff of banks take proceedings against banks, does his office keep a record of those cases?

Allegations of overcharging of customers by banks have been reported on numerous occasions. Would it be true to state that systematic overcharging of customers took place?

How does the public go about raising allegations of bad practice in banks with the Financial Regulator? Does he follow-up what he reads in the newspapers?

Mr. Matthew Elderfield

Let me work backwards through the questions, if I may. We do look at numerous sources of intelligence, of which the newspapers are one. Others are whistle-blowing and correspondence from Members of the Oireachtas and from other financial institutions. Getting as much market intelligence as we can is an important and valuable way to act as a supervisor. Our risk model, if you like, must try to include a mechanism to bring that to bear and consumer complaints are valuable in that respect.

The slightly frustrating aspect for consumers, which I saw in Bermuda and at the FSA, is that one tends to have two routes for consumer complaint. One is where it goes to the Ombudsman, who can come back to the person specifically and state that he or she agrees or disagrees with the person and the person has got some extra money or not. The second is where it goes to the regulator. In such circumstances and as a result of confidentiality provisions, we tend to indicate that the information is interesting but that we cannot outline what we intend to do with it. That has been the case in respect of every regulator for which I have worked. On the staff side, this can be extremely frustrating. What we tend to do is examine information to discover whether it is plausible or whether a pattern exists. The supervisory team considers it and factors it in.

If we have a better risk assessment model in the context of considering firms in circumstances where we are systemically scoring different aspects of the activity, obtaining that trail of consumer complaints is valuable. I would like to establish greater contact with the Financial Services Ombudsman, FSO, so that as it is building up a picture of where it perceives problems to exist, we can feed that information into our system and it can influence how we carry out thematic visits or obtain intelligence regarding particular firms. Now that our consumer information activity is transferred to the National Consumer Agency, NCA, that is another important source of intelligence we can obtain. We want to talk to Ann Fitzgerald, chief executive of the NCA, and work out a memorandum of understanding in order that we might achieve this. It is important to use intelligence through a number of different mechanisms. However, it can be somewhat frustrating in the context of feedback, particularly if details of what we are doing might not emerge until an enforcement case is pursued some months later.

On overcharging, it is obvious that some bad practices have prevailed. My concern is that the speed of response was not as good as it could have been. In some cases, errors do happen. For example, large institutions are often complicated to run and it is difficult to ensure that all the moving parts work well at all times. It is important to recognise that. However, when there is a track record of multiple overcharging cases, questions arise as to the focus of the institution involved.

In terms of our consumer code, one matter at which we will look will be track records on overcharging. In that context, we will focus not just on the speed of the response. We already have the ability to consider the systems and controls aspects. As already stated, the Financial Regulator needs to raise its game in order to exert further pressure on firms to respond more quickly in overcharging cases. We must also bring to bear much earlier enforcement as a threat in the process.

We have a backlog of overcharging cases on hands at present. We are writing to the firms involved telling them that, under powers, they must inform their customers promptly. If they do not do so, we will take enforcement measures. In addition, we want them to take prompt remediation action with their customers. Again, if they do not do so, we will take enforcement action. That will take some time to emerge into the public domain.

I am not sure of the position with regard to the record of court cases. I have heard about cases where solicitors acted in concert with the banks. That matter has arisen to some degree in the context of NAMA. I am aware that we have engaged in some discussions with valuers in the past. However, I am not very close to the matter. We can examine it further for the committee.

With regard to the DPP case to which the Deputy referred, if forged documents were used then it is a criminal matter. Our interests would lie in identifying where overcharging occurred and ensuring that the financial institution involved is prompt in providing restitution. If we are of the view that the matter has not been handled properly, we must take enforcement action.

Senator Diarmuid Wilson

I welcome Mr. Elderfield and his colleagues. I congratulate Mr. Elderfield on his appointment and I wish to indicate that I respect his independence and that of his office. I welcome his indication that he is open-minded and I acknowledge that he is open to dialogue.

I wish to clarify that the all-party delegation Mr. Elderfield agreed to meet was not, as Senator Ross indicated, exclusively comprised of Deputies. I was one of three Senators on the delegation. I confirm that what Mr. Elderfield relayed to the delegation was contained in his affidavit and that it is part of the public record. The matter was widely reported on in the newspapers. I make no apology for — along with colleagues from the Dáil and Seanad — seeking that meeting with Mr. Elderfield to air the views of the 5,500 people employed by the Quinn Group, who are, quite rightly, concerned about their future and the future of their families. There is a perception, particularly in the region from which I come, which we relayed to Mr. Elderfield on the night, that he was heavy handed and he acted with haste and without notice in seeking the appointment of provisional administrators to Quinn Insurance.

With regard to strengthening the banking system, he acknowledged that some, but not all, banks involved in the process asked for more time to meet his new requirements. He then said banks would be given time to prepare for further changes. That conflicts with his apparent unwillingness to allow a particular insurance company time to rectify its liquidity problems. I respectfully request, given his open-mindedness, that he bears that in mind because I am slightly concerned by his reply to an Opposition colleague earlier when he said he hoped the matter would come to finality on Monday next in the High Court and he went on to reiterate that meant the appointment in full of the administration team to Quinn Insurance. I would welcome clarification on this given the understandable constraints associated with the High Court hearing on Monday. I am concerned about his apparent unwillingness to allow an insurance company time to put its liquidity in order in the context of financial institutions being given time to strengthen.

Mr. Matthew Elderfield

We did not act with haste nor were we heavy-handed. We had a serious and persistent breach, as I explained, over the years. I do not feel I can get into the detail without prejudicing the position on Monday but there is a great deal in the public space in terms of the affidavit. An important distinction to make with the banks is that we are setting a new capital requirement for them, which is higher than what they have already. With the insurance company in question, the solvency requirement has been there a long time.

Senator Diarmuid Wilson

My understanding is that there can be a run on a bank but there cannot be on an insurance company. I respect that Mr. Elderfield has a job to do and he is independent in doing so. I am concerned by his comments.

Mr. Matthew Elderfield

These are long-standing solvency rules designed to protect the 1.3 million policyholders.

Senator Diarmuid Wilson

I accept that and that is a concern of all of us but surely, given his statement that he is open-minded, his remark that he hopes to have the administration team's appointment approved in full on Monday is unfortunate. That has given me the impression — I am an ordinary public representative, not an economist or banker — that regardless of what solution is put before him, he has his mind made up to go before the High Court and seek the appointment in full of the administration team to Quinn Insurance.

Mr. Matthew Elderfield

If somebody comes up with the money to fill the solvency breach, we will change our approach. My commitment is to make sure those 1.3 million policyholders are operating in a safe and sound environment and I have said all along in all the discussions with the company, "Show me the money and we will take a different approach", but no one has been forthcoming and, therefore, we think the appointment of an administrator is in the best interest of the policyholders.

Senator Diarmuid Wilson

In the absence of the money being provided; that clarifies it.

Deputy Leo Varadkar

I support the work Mr. Elderfield has done to date. His arrival in the position represents a visible change of culture in financial regulation in this State and I am only sorry he was not appointed three or four years ago because we might be in a better position today. On my own behalf and that of my party I accept what Mr. Elderfield says about resources. If we want to rebuild our economy, given the size of our financial system, we will need to resource more strongly the Financial Regulator, the Office of the Director of Corporate Enforcement and the Comptroller and Auditor General. If the Financial Regulator seeks more office space he might consider moving into the Anglo Irish Bank building when it is finished. He would be well positioned to keep a close eye on what happens at the Irish Financial Service Centre, IFSC.

I have four questions for Mr. Elderfield who referred to consumer indebtedness and mentioned that he is a member of the working group but only touched on the issue of arrears and people who are defaulting on their mortgages. An equally important issue in the economy now is that of the burden of debt deflation in regard to people with relatively good incomes who now find themselves in the position whereby an ever increasing share of their ever decreasing income is being taken up with mortgage and debt repayments. This will worsen over the next year or two as interest rates rise and incomes fall owing either to pay cuts or tax increases. This will become a huge drag on our economy because people will not be able to spend, invest or even move house to get employment elsewhere. Will the working group of which Mr. Elderfield is a member deal with that aspect of debt deflation and will it examine mechanisms which would allow individuals to restructure their personal debt over a longer period, as has been done in other countries?

On the €3 million threshold in respect of consumers or business, I am interested to hear whether Mr. Elderfield believes that threshold is appropriate and whether it is being reviewed. The issue of legislative tools was dealt with, although not fully. We are legislators. Are there any particular legislative tools, for example, those in place in Bermuda or Britain, that should be enacted by the Houses of the Oireachtas?

I am conscious of the description today by Mr. Willie Slattery of State Street of NAMA as being a crazy option and of his joining the view of the Opposition parties that there is a viable alternative to the current banking regime. Why in Mr. Elderfield's view do we not have a proper banking resolution regime in this State? As mentioned, the UK has in place legislation in this regard. The OECD country report for Ireland for 2009 recommended as long as six or seven months ago that we put in place a proper system of banking resolution. It appears to me that the purpose of the bank guarantee scheme — for which I voted — was to give us a two year period to sort out the system. One of the first actions that should have been taken as part of this process was to introduce a proper resolution regime that clearly set out how costs and risks would be shared by shareholders, bond holders and Government. This has not yet been sorted out.

Mr. Elderfield referred to what may happen to Anglo Irish Bank in terms of a good bank-bad bank, the bad bank being an asset management agency. If we had a proper bank resolution regime in place now we could for example have a debt equity swap as part of that process and bond holders could take part ownership of the bad bank. All of this could be done prior to recapitalisation. In the absence of a proper resolution regime we are hamstrung by the guarantee. I am interested to hear Mr. Elderfield's comments in that regard. Perhaps also he will explain why we do not have a bank resolution regime in place almost two years after the introduction of the guarantee.

Mr. Matthew Elderfield

The Deputy made a fair point on consumer indebtedness. I did speak only about arrears. There is a broader concern in regard to those consumers who are not in arrears but are facing constrained circumstances. The focus of the group is broader than arrears although that is our starting point. We are examining all aspects of consumer indebtedness and moving beyond mortgage arrears. Deputy Varadkar referred to the availability in other jurisdictions of other options for restructuring. We are doing an inventory of the approaches in the US and UK. Spain and Scandinavia also have some good approaches. I am not sure if the option mentioned by the Deputy is on the list but if not we can add it to the mix. Each of the options requires a cost benefit analysis, which is a bit of a zero-sum game in terms of which approach will give the best bang for our buck in terms of the bank, individual or taxpayer. The Government programme on mortgage interest support already provides significant benefit in that regard. We must consider the trade offs and work through the issue.

With regard to the €3 million threshold for consumers, I understand that it is a regulation of the FSO rather than a matter of statute as to whether one is a consumer for a complaint being treated. It is a very good question because it is quite topical in the context of the gap in investment firm coverage I mentioned earlier. Prior to 1 November 2007, the Stock Exchange would cover not just complaints under business rules, but all complaints. However, since 1 November 2007, only retail consumers are covered by complaints. This is a real issue and interlinks with the two issues we have talked about for credit unions. Some credit unions above the threshold that cannot get into the FSO may want to raise a complaint. This is something that should, perhaps, be explored in the context of the FSO. Do we want, temporarily or permanently, to elevate the threshold to allow more complaint handling to go through? That is an interesting issue.

Deputy Leo Varadkar

Does Mr. Elderfield mean the Financial Services Ombudsman?

Mr. Matthew Elderfield

Yes.

Deputy Leo Varadkar

Does he know if this is under review? Has he had any contact with the ombudsman?

Mr. Matthew Elderfield

No, the new Financial Services Ombudsman was only appointed a couple of weeks ago and I have yet to have a meeting with him. This is something we should discuss and I apologise for raising the matter before the committee before raising it with him.

We are getting an inventory of legislative tools together. I already mentioned some of these, such as the ability to appoint experts promptly to do work and examine parts of the institutions. This ability varies in different legislation. The €5 million cap on fines also needs to be examined as I am not sure this is sufficiently tough for large institutions. We are putting a long inventory together in this regard.

On the questions on NAMA and good and bad banks and the resolution legislation, NAMA seems a reasonable approach. Different countries take different approaches. Germany has taken a good bank, bad bank approach and the US has developed the Tort programme. NAMA seems to be doing what it has been required to do and is identifying toxic loans. That the haircuts were much higher than expected, 47% average compared to the 30% estimate, shows there is a serious process going on that is identifying the real market value, even with the uplift. NAMA is taking the toxic loans off the balance sheets to clean up the banks and providing the banks with bonds they can use for funding. That is working reasonably well.

The resolution legislation is a difficult issue. Many countries have been found not to have resolution legislation. The UK had to rush through or very speedily adopt the Banking Act 2009 following the Northern Rock experience. That Act is a massive statute the size of a telephone directory.

Deputy Leo Varadkar

It is something we could adapt. It might be quite appropriate.

Mr. Matthew Elderfield

The question is whether one would do it exactly the same way. The UK is having what it terms "teething pains". In Bermuda, we did not have any resolution legislation, but we were starting a big project for it. Many countries are discussing the issue. There have been discussions at EU level about setting a standard. The Federal Deposit Insurance Corporation, FDIC, has a great regime, but it involves pages and pages of complicated legislation. It is a difficult subject matter because it basically empowers one's banking regulator to cherry-pick creditor rights in an insolvency. One must consider whether one should allow that. It is a sensitive subject and must be approached with great care. That there has been NAMA legislation to write, Central Bank legislation to write and bank recapitalisation to organise means resolution legislation has not been the priority, but it is on the list to be done.

Deputy Leo Varadkar

The difficulty now is that in the absence of legislation, the Minister is arbitrarily creating a hierarchy which puts bond holders at the top and taxpayers at the bottom. That is not something we, as a legislature, ever agreed to do.

Mr. Matthew Elderfield

The guarantee, which was scoped to some degree, was adopted by the Oireachtas. That provided support for certain sub-debt holders. I would like to be somewhat cautious about the Anglo situation because the lawyers will get agitated about comments made in that regard. The Deputy is making a fair point and Ireland needs a special resolution regime for the future that will give clarity.

Deputy Leo Varadkar

We need it before the guarantee expires.

Mr. Matthew Elderfield

I am not sure that is feasible. Even if it was set up before the guarantee expired, that could create some potential risks about bond holder claims. One would want to approach that very cautiously with the lawyers to see what can be introduced and when. I have not considered the matter in great detail.

Deputy Joe Behan

I will be as brief as possible. I join the other members of the committee in welcoming the regulator and his colleagues to the meeting. I look forward to further engagement with him in the months and years to come.

Two aspects in particular have not been covered in Mr. Elderfield's replies to questions. I refer to the question of the Irish Stock Exchange and the gap in regulation. People may claim against what they regard as wrong advice. In the letter sent to the Chairman of the committee, Mr. Elderfield stated that the Financial Regulator was advised in 2007 by the Irish Stock Exchange that it would implement these new rules and regulations and that the regulator at the time expressed no objection. This seems to be another shocking example of the previous regime failing the people it was supposed to protect. Why was no objection raised? Has Mr. Elderfield researched this issue? Is there any cause for concern that there might have been anything sinister in the fact that neither the Irish Stock Exchange nor the regulator seemed to see this massive gap appearing by which people would be unprotected?

Mr. Elderfield issued a heartfelt plea today and has asked the Irish Stock Exchange to step up to the plate. Is this not a weak position for him to adopt? It is a case of relying on the goodwill of the Irish Stock Exchange. In his statement he said that at one stage they said they might do it and now they say they will not. I suggest he has been given his answer. He has been advised that there does not seem to be a legal remedy which means these people will be left swinging in the wind and the new regulator seems to be willing to accept this situation. I would like him to elaborate on this point.

Bank of Scotland Ireland was one of the new entrants into the banking system. It had an impact but is now preparing to leave. What is Mr. Elderfield's assessment of the effect of its entry into the Irish banking system? Did that bank have any impact on the problems we have since experienced? What will be the impact of that bank leaving the system, in particular for those people, many of whom are young couples who borrowed large amounts of money and took on large mortgages? I am not sure how their rights will be protected by the Financial Regulator when that bank leaves the jurisdiction.

Mr. Matthew Elderfield

On the position of the pre-MIFiD directive cases, it is not a happy situation and not one I am pleased to inherit. The e-directive, MIFiD — markets and financial instruments directive — was introduced on 1 November 2007. There is a cut-across point from the old regime to the new regime. Under the old regime it was the responsibility of the Irish Stock Exchange and under the new regime it is our responsibility. When it came to the cut-across point, all parties did not do a great job to check this key point of what happens to cases from the old time period. The different parties were under the impression that the other person assumed the same approach as them, in terms of who was to take responsibility. This is not a great piece of history but these things happen from time to time. Immediately afterwards, there was correspondence from the Irish Stock Exchange, following intervention by my predecessor, to say, "you are dealing with these pre-2007 cases." The initial response from the Irish Stock Exchange was, "Yes", so we took comfort from that. Then when two or three senior counsel entered the picture, the Irish Stock Exchange changed its mind and which I am not very happy about. It was a question of how to deal with this situation. If we had a way of closing this gap by means of regulation or legislation, off our own bat, we would do it. We have looked at that and taken counsel advice on it. We have asked the Minister for Finance to write to the Attorney General to advise us on the matter. The problem is that at the time there were member rules — that is how the Stock Exchange works — and binding member firms. If we were to apply legislation to them retrospectively, it would cause serious legal problems. Having said that, we will push the possibility as hard as we can. If we can do it — if there is a gap we can go for — we will take control of the situation. The advice we have received on the proposal — that we should approach a class of parties to say we will apply laws to them retrospectively — is not very encouraging. We are left in a situation in which the only way to address the connective business aspect of this matter is for the Stock Exchange to turn back on its rules. It may incur some legal risks in that regard. It can ask the responsible firms which are part of the exchange to volunteer to be bound by our rules for these cases. It is unsatisfactory that this gap exists and we are relying on the only likely route. I am by no means content about the situation.

That deals with the connective business enforcement aspect, but we also need to consider the complaints aspect of it. Retail consumers can contact the Financial Services Ombudsman. As Deputy Varadkar mentioned, there is an issue about the €3 million threshold above which one cannot avail of the services of the Financial Services Ombudsman. Small credit unions that are just above the threshold, but do not have the deep pockets to go to court to pursue their cases, are getting squeezed. There is a need to explore whether the threshold can be adjusted. It is not a happy situation. There is a very narrow path. As I said in my opening statement, if there is no other way to deal with this — if all other avenues cannot be pursued — the Stock Exchange will need to step up to the plate.

I was also asked about Bank of Scotland Ireland. I have no more than anecdotal knowledge of the mortgage lending practices of that time. I was not the regulator at the time, so it probably does not make sense for me to comment on the matter. Under our consumer protection code, the bank is required to do certain things in the context of its exit from the market. It needs to manage the process and communicate clearly with consumers. It cannot leave consumers in the lurch as regards their lending position. It cannot require them to repay loans early. It has made commitments to us about the transitional arrangements that will be provided for consumers.

Deputy Joe Behan

What protection will the Financial Regulator provide to the bank's mortgage holders who get into difficulties?

Mr. Matthew Elderfield

I think it is bound by the code. Perhaps my colleague, Ms Donnery, can confirm that.

Ms Sharon Donnery

It is important to clarify that the mortgage book is being retained. Therefore, consumers will continue to be able to engage with the bank. The code of conduct on mortgage arrears will continue to apply. There are ongoing discussions with the firm on the mechanics of, for example, how customers can deal with it after its branches are closed and how current accounts will be closed. The mortgage book is being retained.

Deputy Joe Behan

Will the Financial Regulator continue to retain supervision of that aspect of the business?

Ms Sharon Donnery

Yes.

Deputy Mattie McGrath

I welcome Mr. Elderfield and his colleagues. I am delighted to be allowed to ask a few questions at this forum. It has been reported that ACC Rabobank has lost the documents of up to 47 customers. This was apparently disclosed in an internal report. What sanctions can the Financial Regulator take against banks in such cases? Are customers compensated in such circumstances? Does Mr. Elderfield know whether the Financial Regulator supervises this process? Like many Members of the Oireachtas, I have been referring constituents to Friends of Banking Ireland because I do not have anywhere else to send them. When customers make complaints to various agencies of this nature, they are often sent away because the agencies are unable to deal with them. As most of these people do not have the money to pursue these cases in court, their allegations against financial institutions are unanswered. Does the Financial Regulator agree that many people fall between the various agencies and are not dealt with? What is Mr. Elderfield's view on this very real problem? On the Irish Credit Bureau, does Mr. Elderfield consider it acceptable that banks have the ability to blacklist people? That is happening on a regular basis with the Irish Credit Bureau which blacklists people for minor infringements. That damages the credit ratings of business people and others concerned even if they have had a good credit rating for many years, in some cases for generations. Because of their ratings those people are then forced to pay higher levels of interest on loans. Does Mr. Elderfield have a view on credit ratings and does his remit allow him to investigate the actions of the Irish Credit Bureau?

Does Mr. Elderfield consider he has sufficient power to sanction banks where they overcharge and make serious errors to the disadvantage of customers? Will he publicly name those banks in future?

A client of mine who fell into arrears but was in a position to pay was taken to court. The client was happy to go to court as he felt he could prove his case. He was able to meet his payments and he had a good credit record. Ten days before the court case was due to be heard the bank put in a receiver without any notice and avoided the court process. What right did the customer have in that regard? Did the bank have a right to do that? If the bank threatened to take him to court for his indiscretions in the eyes of the bank, had it the right then to just sideline the court process?

Mr. Matthew Elderfield

I am not familiar with the case concerning the loss of documents. Our interest would be in whether there was a systems and control breach by the firm, which would raise concerns. We would decide whether to remedy that through supervisory measures or take enforcement action. In the United Kingdom the loss of sensitive data led to a large fine for the Nationwide Building Society. If one has a persistent problem that is an option for the regulator to consider. The question of whether compensation should be provided would depend on there being a loss for the customer as a result.

I am sure we publish guidance on complaints. There is a requirement in our code of consumer protection about complaint handling. I am sure we have guidance on the website of the National Consumer Agency. The best advice to Deputy McGrath's constituent is to complain in writing, in the first instance to the bank, and in the case of not getting satisfaction then he or she should go to the Financial Services Ombudsman. That is the route to take. One needs to have a clear track record. It is not a question of contacting the Irish Banking Federation, the Financial Regulator or other agencies. First, one must complain to the institution that has caused the problem and then if one does not get satisfaction one should go to the Financial Services Ombudsman.

The Irish Credit Bureau does not come within our remit. On the question of whether the Irish Credit Bureau is working as well as it could, I suspect improvements need to be made. A well functioning credit bureau would have helped with some of the credit lending problems that have occurred. That would be something to assist.

On overcharging, we have powers to impose sanctions. We will examine our inventory of powers and consider whether we need to amplify it. The key question is the triggers for sanctions. When we consider our code of consumer protection we must consider whether we need to amend the framework to make it easier to take enforcement actions. The sanctions are there but we need to consider whether the framework is clear enough. That is something we will examine in the context of the code of consumer protection during the course of the summer.

In terms of publicly naming banks, a sanction would come with a fine and it would be public so that would be part and parcel of the process. The issue of the courts process is not within our remit. Questions have been asked about the court proceedings for mortgage arrears. The Law Reform Commission is working on that. It is to present a preliminary report next month and a final report at the end of the summer. That subject is being considered very closely.

Deputy Kieran O’Donnell

At the time, the Government's main argument for the State bank guarantee was that it would secure cash flow for the economy. What assurance can the Financial Regulator give to the small and medium-sized enterprise sector that credit will flow? Are there ongoing discussions between the regulator and the Quinn group to reach a possible resolution to its difficulties?

Deputy Seán Sherlock

Are the solvency ratios for all insurance companies adequate? I may have misheard Mr. Elderfield earlier but I thought he said two insurance companies were under investigation. Will he clarify whether he has investigated or begun proceedings against other companies? If that is the case, will he elaborate on which companies are involved, if possible?

Chairman

Mr. Elderfield referred to the risk-sharing for different aspects of the loans and so forth. In the current situation, will losses be imposed on bondholders?

Mr. Matthew Elderfield

The guarantee is quite clear about the scope of protection provided to the various different people in the capital structure. The issue for the future is what the loss-sharing should be and whether it should be set out in advance or given to an agency such as the Federal Deposit Insurance Corporation to make a judgment in particular cases at speed. This needs to be examined because it is a complicated issue with many pages of law involved.

On the solvency issues, I cannot name the individual institutions. What I was trying to explain, however, was how we are consistent in our approach and do not give favours to any particular institution.

Apart from Quinn Insurance, we have had two institutions over recent months that have breached the 150% rule. We raised it with their management and in days they addressed their capital position. It was not a drawn-out process. We had another two institutions, which is a matter of public record, which breached the 100% rule and were both put into administration. We have been completely consistent in our approach on this matter.

I have had discussions with a number of parties on Quinn. I have not turned down any meeting about the company with anyone who has asked me for one.

Deputy Kieran O’Donnell

Are there ongoing discussions with the Quinn group?

Mr. Matthew Elderfield

I will not say specifically as to when, but we are open to dialogue and have talked to an employee group, a group of Senators and Deputies, and various other parties.

Deputy Kieran O’Donnell

Mr. Elderfield is open to dialogue.

Mr. Matthew Elderfield

Yes. There is much noise around this matter but at the core is a very simple issue, that is, the serious and persistent breach of solvency requirements which must be filled. We believe the best way to achieve this is for the company to go into administration and pursue all options to fill that.

Having a well-capitalised banking system now rather than one that slowly gets there or the banks having to hoard their money to reach a certain level of capitalisation will improve the banks' lending position. There is a problem with credit because of the economic climate but lending will not get going unless the banks are in a strong capital position. There are some gaps in statistics when it comes to lending to the SMEs even with three Mazars reports and the Central Bank collating statistics on it. There is probably some better data analysis we can do to get things going.

Deputy Kieran O’Donnell

Does Mr. Elderfield intend to carry out a review within the Office of the Financial Regulator in terms of SME lending?

Mr. Matthew Elderfield

The idea is that we shall try to get better statistics there.

Deputy Kieran O’Donnell

Is there a timeframe in that regard? When does Mr. Elderfield expect to do that work?

Mr. Matthew Elderfield

I believe we are starting our next statistics run in the middle of next month.

Deputy Kieran O’Donnell

When will it be completed?

Mr. Matthew Elderfield

I am not sure when it will be published. There is the review process that the Government is doing and there is the commitment for the two big banks of €3 billion net extra lending. Interestingly, that is available for working capital as well, which is what many companies need. We recognise that it is certainly a difficult environment. That is the view of the Central Bank as well as the Financial Regulator. However, getting the banks recapitalised is creating the conditions to help the economic situation and get that lending going again.

Deputy Kieran O’Donnell

The main reason we raised the Quinn issue is that so many people are working there and this, obviously, is an enormous consideration. There is a real aspect in so far as it affects people's lives as well. Obviously, the regulator is conscious of that, but it is an enormous factor for people.

Mr. Matthew Elderfield

I am very sympathetic to that. I have met not just the Deputies and Senators, but also a group of the employees to whom I spoke very directly about their concerns about their employment and their families. I tried to explain very clearly the protracted history of non-compliance here, that this is a very serious situation and my statutory responsibility is to those 1.3 million policyholders. We have to be very focused on getting the right result for them and problems that have arisen must be laid at a different door. We have to take action to solve this situation, and I was prepared to say that directly to the employees. I believe they understood where I was coming from. I recognise it is a very difficult situation for them and I have an enormous amount of sympathy. However, my responsibility has to be to those policyholders.

Chairman

I thank Mr. Elderfield very much for this afternoon's deliberations. It was an extremely beneficial meeting and we look forward to further meetings with the regulator in the not too distant future.

The joint committee adjourned at 5.05 p.m. until 2.30 p.m. on Tuesday, 20 April 2010.