JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Tuesday, 1 Jun 2004

Banking Services: Presentation.

Acting Chairman

The main business of today's meeting is a discussion with the Governor and other representatives of the Central Bank and Financial Services Authority of Ireland on issues arising from the recent events at AIB. The committee is joined by Mr. John Hurley, Governor of the Central Bank; Mr. Liam Barron, director general; Mr. Brian Halpin, deputy director general; and Mr. Joe Doherty, head of legal services. I welcome you all to the committee.

The committee's interest in this matter arises from our concerns for the strength and structure of the systems for the regulation of the banks and the protection and promotion of the rights of consumers. The committee does not wish to pre-empt the outcome of other investigations taking place. However, we believe it is important to examine the consequences of the recent events sooner rather than later, especially as the committee will soon finalise a report on banks' customer charges and interest rates and as the Houses are in the process of finalising the Central Bank and Financial Services Authority of Ireland Bill 2003. Before the discussion begins, I should advise that while the comments of committee members are protected by parliamentary privilege, those of visitors are not. I remind the committee that members should not comment on, criticise, or make charges against anyone outside the committee or the Houses. We will commence with a presentation on behalf of the Central Bank, and this will be followed by an open discussion with members of the committee.

Mr. John Hurley

Thank you, Chairman, for the opportunity to address the committee. My colleagues and I are very happy to discuss with the committee the general issues arising from over-charging by AIB of certain foreign exchange transactions. I appreciate that the committee noted in its invitation to us that an examination of specific issues regarding AIB is ongoing. Other serious issues have emerged since the committee's invitation and, as the committee knows, work on all these matters is now the responsibility of the Irish Financial Services Regulatory Authority rather than the Central Bank.

In my opening remarks I will deal with the following: The role of the Central Bank in financial regulation following the restructuring that took place last year; the Central Bank's role in regard to financial stability; the profile of the banking system in Ireland; the former responsibilities of the Central Bank in regard to foreign exchange charges; the current issues being considered by the financial services regulator and the compliance environment.

I start by briefly putting the role of the Central Bank in context by describing the new regulatory structures that are now in place following the establishment of the new financial services regulator and our own restructuring in 2003. In 1 May 2003 the Central Bank and Financial Services Authority of Ireland was established, and this body carries out all of the activities formerly carried out by the Central Bank of Ireland as well as several additional regulatory functions, including those previously discharged by other regulatory bodies.

The regulatory departments of the Central Bank, that is, the staff and the records, were transferred to the regulatory authority. Accordingly, the Central Bank and Financial Services Authority of Ireland has two distinct components or entities, the first being the Central Bank. In addition to being the corporate entity responsible for central services, the Central Bank also has extensive other functions, including euro area related functions. Our main functions are monetary policy operations, financial stability, economic analysis, currency and payments systems and the investment of foreign and domestic assets.

The Irish Financial Services Regulatory Authority, as the committee knows, is the body responsible for the regulation of all financial entities, including banking, securities and insurance, and for consumer protection and information matters. The financial services regulator has clearly defined responsibilities and decision making powers of its own. It is now responsible for the regulation of all financial service firms in Ireland. It also has greatly enhanced functions when it comes to consumer protection and education. These regulatory powers and functions are exercised independently of the Central Bank.

A wide range of additional enforcement powers are being assigned to the financial services regulator under the Central Bank and Financial Services Authority of Ireland Act 2003. These additional powers are very much welcomed by the financial services regulator, and they are both appropriate and timely. There is now a new focus on financial regulation, and this includes in particular more emphasis on the consumer. There is also a growing recognition internationally of the desirability of all financial institutions being supervised by a single regulator, as is now the case here.

The financial services regulator has as its focus the protection of consumers by helping them to make more informed decisions in a safe and fair market and to foster sound, dynamic financial institutions. The Central Bank's statutory responsibility in this regard relates to the stability of the overall financial system and not individual institutions. We have a common interest in the stability and solvency of the financial sector and the protection of the interests of consumers. In discharging this function we aim to promote a vibrant financial services industry that can continue to prosper in a very competitive international environment.

I wish to say something about financial stability. Some concerns were expressed before the current arrangements were put in place that somehow the financial services regulator might not be fully independent of the Central Bank. I assure the committee that this is not the case. The Central Bank's role relates only to the stability of the overall financial system. This year we will probably issue a stand alone financial stability report outlining the extensive work being undertaken by the bank on financial stability.

Financial stability work includes the development of various early warning indicators of systemic risks. These are events that could spread from one institution to another, giving rise to serious problems in the financial system and the economy more generally. The work also includes the procedures required in the event of a systemic emergency. The reason for the strong focus on financial stability is that financial crises are very costly not only in financial terms but in economic terms.

Many countries have experienced crises that have seriously impacted on economic growth, in some cases by 10% or more of GNP. On an international comparison, Ireland's financial stability records have been very good. It is worth noting that in discharging its financial stability role in the public interest the Central Bank is also protecting the consumers of financial services. I stress that while the events currently under investigation carry very serious reputational risks, they have not given rise to any adverse implications for financial stability.

On the profile of the banking system, an unfortunate fall-out from the problems that have arisen is tarnishing of the image of the Irish banking system, which has an excellent reputation internationally. This is most regrettable as we have a sound and successful banking system that compares very well with international peers. The banks are one of our largest employers, with a work force of nearly 40,000, and the banking sector accounts for 4% to 5% of GNP and is major contributor to Government revenue. Pensions and other types of savings hold significant shareholdings in banks so that the performance of banks is important to them. The banking industry is vital to this country.

I should not pass without a brief reference to the International Financial Services Centre. As the committee knows, this has been one of our great success stories. The centre has a solid record of success, even during the global downturn of the 1990s. There are now nearly 12,000 people employed directly in the IFSC, making a significant contribution to the economy. In a large industry like the financial services, problems and improper practices inevitably arise from time to time, and this is true of all countries. The most important point is that procedures and processes are in place to deal with them in a timely and expeditious manner as the financial services regulator is now doing.

Despite the serious problems that have arisen, there has been a marked improvement in corporate governance standards in the industry in recent years. Any recommendations emanating from the current investigation that suggests further improvements are necessary should be implemented without delay. I emphasise that no regulatory system, no matter how extensive or expensive, can guarantee that mistakes or inappropriate practices of behaviour will never happen.

However, it is essential that when such events occur, despite a comprehensive regulatory system being in place, the regulatory machinery is capable of dealing with them effectively and speedily. The measures put in place since the mid-1990s, together with the forthcoming enactment of the new legislation currently on Report Stage in the Dáil, will provide such a system.

On the foreign exchange charges issue discussed here some days ago, there was no statutory control over bank charges prior to the enactment of the Central Bank Act 1989. Section 28 of that Act placed a statutory requirement on banks to notify the Central Bank of every proposal to change any charge or associated term and condition. The Central Bank had power to direct the bank to refrain from changing the charge, term or condition. This power was frequently exercised. In addition to the legislative requirements, the Central Bank also required banks to advertise all changes to charge in the national press before they came into effect. In having a statutory underpinning for the control of bank charges, the Irish system was much more stringent than that of most other countries. In 1994 the Government formally announced its intention to transfer responsibility for bank charges from the Central Bank to the Director of Consumer Affairs. From that time, the Central Bank decided that it would not consider any further applications for increases in charges. It did not wish to pre-empt the future role of the director.

Some exceptions were made to this, such as the introduction of new services such as the laser, with the agreement of the Director of Consumer Affairs. When the legislation came into effect, the director considered all proposals independently and it was advised under the legislation by all institutions of the charges applied by them. Responsibility for approving bank charges is now vested in the financial services regulator since 1 May 2003. As I indicated already, the issue of overcharging by AIB is the subject of an independent investigation which will report to the financial services regulator and AIB.

Regarding recent developments, when Liam O'Reilly and his team were before the committee in recent days they gave the committee information on the background to their investigation into foreign exchange charging issues within AIB. An independent investigation, which I understand will be funded by AIB, into foreign exchange charges has been established with the direct involvement of the financial services regulator. It is being carried out by an external firm of forensic accountants and is overseen by an independent assurer, Mr. Lauri McDonnell.

I understand a full report on these issues will be issued. The financial services regulator is also engaged with another investigation relating to matters concerning AIB Investment Managers Limited, AIBIM, during the period 1989 to 1996. All of the issues raised by the investigations will be considered by the regulator comprehensively and in detail. It will then decide what further actions need to be taken in this regard. I fully share the concerns already expressed by Liam O'Reilly regarding recent revelations, and any improper practices within the financial services industry are totally unacceptable. I fully support the approach now being taken to these issues by the financial services regulator.

I offer a few words on the compliance environment. It is important to recognise that there has been a fundamental change in the way client funds are handled by investment firms such as AIBIM since the passage of the Investment Intermediaries Act 1995 and the Stock Exchange Act 1995. Since that time codes of conduct and client money rules have been issued and investment managers have been required to invest substantially in compliance functions. The systems of control are now more transparent than they would have been in the period 1989 to 1996. It is likely that anything like what happened then could happen now. If it did, it would be unlikely to go undetected.

With regard to tax matters generally, we have gone through a similar cultural change since the Committee of Public Accounts DIRT investigations and the development during the late 1990s of the money laundering regime, which includes tax evasion and which now applies to banks. Banks are required to heavily invest in compliance. Money laundering is a special focus of the financial services regulator inspections programme, and there is now detailed guidance in place for the banks in this regard. There is no similarity in the way tax issues are treated now and the way they were treated in the early 1990s, either in the banks or among the public generally. The approach to all taxation matters is now much more rigorous.

In regard to the remaining issues, it is best to wait to hear the outcome of the financial services regulator's investigation. Only then will the regulator be in a position to give a full report on all the issues relating to AIB. Many of the matters of concern here have had their roots in an earlier period when the compliance environment was much weaker than at present. There is a danger that by generalising on the basis of events, many of which occurred several years ago, we will miss the improvements which have taken place and the significant changes in both the regulatory and compliance framework within which banks operate. Problems and improper behaviour will inevitably occur, but generally speaking, the attitude to compliance among banks has improved in recent years, and I still have no doubt that following these events the standards will be further strengthened.

In summary, I regard the events about which we are speaking to be both very serious and deeply disappointing. The matters are being fully investigated by the financial services regulator. It has gone about its task in a comprehensive, detailed and pro-active manner. I have full confidence that it will reach the appropriate conclusions and take any necessary further remedial action. I thank you, Chairman, for permitting me to make this opening statement. My colleagues and I will be very happy to answer any questions the committee wish to put.

Acting Chairman

Can I have the agreement of the committee that we allow five minutes each for the main Opposition parties, followed by five minutes for the Government side, and then a question and answer session? Agreed.

I extend a warm welcome to two members of the New Zealand Parliament, Mr. Brian Donnelly and Mr. Martin Gallagher, who are with us in the public gallery. I hope you have fruitful meetings and that you enjoy your stay with us.

Deputy R. Bruton

I do not intend to make a statement. I would prefer to use my five minutes addressing some questions to the Governor of the Central Bank. I thank the Governor for coming in and for his very interesting submission. I know he is saying IFSRA is an independent body, but I know also that the Governor has a role in regard to the budgeting of IFSRA. Does he believe we have best practice in regulation here? Many would say, for example, that if the SEC were in place in Ireland they would go through AIB with a much harsher approach than has been evident to date. I would like the Governor to comment on that.

Does he believe IFSRA has the necessary forensic skills to examine and find the hidden corpses or whatever in large financial institutions? Can he give us confidence that it has the capacity to unearth any issues that may be problematic? We have seen that there clearly are.

He was Governor of the Central Bank at the time the Rusnak affair broke out. I understand that at that time the Central Bank intervened to insist that strong systems of internal control and risk management would be put in place in all financial institutions. Why have they not addressed this issue? It seems that there are very serious compliance issues remaining in the financial institutions. This is the second major alarm bell that has gone off within the bank structure in a very short time. It does not seem that there were proper compliance procedures or escalation procedures to bring non-compliance problems to a high level within the bank so that senior executives would take control and responsibility.

Why did the Rusnak affair not result in a system of compliance being put in place and being demanded by the Central Bank which was then in control, that would have proofed us against the sort of problems we now have? The Governor has made very heavy play, and rightly so, of the fact that the environment has changed, but do these new compliance requirements not require also the vetting of vehicles like Faldor or these other systems that appear to have been there? Why did the compliance systems that are all new and shiny and bright, and which we were led to believe would protect us from these things, not uncover this? I would have thought compliance had an internal work programme and involved many principles being driven through the system and vetting so that there was compliance with all sorts of law, including consumer law. They do not seem to have stood up. It is like an ivy root, where the more one pulls the more that comes up, and it does not seem to be coming from the new compliance arrangements.

Much has changed since the Ansbacher report but the Central Bank, in the extent to which it was taking seriously its duty to see that institutions were tax compliant, was certainly cast in a very poor light in that report. I know there were not the arrangements to hand over information to Revenue, but why was the Central Bank apparently quite laid back in those times about practices that were unacceptable? Arising out of that, there is a sense that there has been a somewhat unhealthy relationship between the Central Bank and the banks it regulates in that one sees the same people crop up as employees in the banks or members of the board of the Central Bank. Is there an unhealthy inter-relationship there which ought to be addressed and should we try to have more watertight separation systems in place?

Mr. Hurley

Deputy Bruton's first point was on the budget. The Minister has the significant role in the budget. He consults me. There is really no difficulty about proper funding for the new financial regulator. Great care has been taken, there is a significant ministerial involvement, and that is not a problem.

In terms of the issue of best practice, I mentioned in my opening statement that since the Government last year enacted the new legislation, which is formidable legislation, an extraordinary level of reorganisation has been taking place as between the regulation side and Central Bank side, with staff coming from the Department of Enterprise, Trade and Employment, the consumer area and so on. The financial regulator would be best equipped to answer this, but part of that reorganisation is to examine our practices and benchmark them against practices internationally, and the people involved in the financial regulator area have been looking at those practices internationally.

My feeling is that our practices stand up fairly well. A couple of years ago, for example, the International Monetary Fund looked at the practices employed here and regarded the supervisory arrangements at the time as standing up well in comparison to what was happening internationally. However, the regulator is looking at this, the benchmarking process is taking place and the intention is to have a regulatory system here that is at the leading edge in terms of best practice.

The forensic skills to which the Deputy referred are part and parcel of what I have been speaking about. We are stock-taking the skills in both parts of the organisation. A great deal of work is being done to ensure that we have people at the leading edge to do the jobs, particularly as the financial sector is becoming far more complex and financial instruments are becoming far more complex and sometimes difficult to follow and trace. We need people at the leading edge and that is uppermost in the mind of the chief executive of the financial regulatory authority, and in my mind in the case of the Central Bank.

The Deputy mentioned the Rusnak affair. I was Governor when this serious issue for AIB broke. We contacted all financial institutions at that time and asked them to ensure that their internal controls and risk management practices were audited independently. The Deputy will recall that there was some criticism of the Central Bank at the time because this was felt to be very intrusive, but we insisted that this was done right across the financial sector. The reports of that process came back to the financial services regulator and were examined, and dialogue was opened with the different financial institutions.

Deputy R. Bruton

They are not picking up non-compliance.

Mr. Hurley

The point I wanted to make there is that all of these matters have their roots in the 1980s and 1990s. The charges issue continued on, but we will have to wait and see whether that was actually a mistake or what happened. That is being investigated. The compliance environment has improved enormously. As a result of the Rusnak affair the internal controls and the risk issues have been dealt with. We have seen the measures that have been taken in that regard.

Deputy R. Bruton

Are some of these issues coming, not from better internal practices but quite by accident because one person reported to the Revenue? That seems to have triggered the apparent flurry of compliance activity rather than a structure that was audited and in place.

Mr. Hurley

That is true. Dr. Liam O'Reilly, when he was here, referred to the different ways in which the regulator does his job. The regulator does his job on the principled basis of an approach to regulation to which he referred. He also does it by ensuring that the compliance environment within financial institutions is at the leading edge. One should remember that it was AIB itself which brought the Faldor issue to the financial regulator in accordance with that new compliance environment. It is instructive to look at AIB's statement. In the statement, AIB was able to state that its practices since that time — about the mid 1990s — were totally changed. The reason is that in 1996 the Investment Intermediaries Act 1995 was in place. Prior to that we did not have regulation of an investment intermediary. AIBIM was not a regulated entity. The process by which AIB came forward in accordance with the changed compliance environment, is a good development. I know from the financial regulator, for example, that the chairman, board and management of AIB are totally co-operative in the investigations going on in accordance with that new compliance environment.

It is a different world since 1996. The Oireachtas has played its part here. Umpteen Bills have come through the Oireachtas since that time: the Investment Intermediaries Act 1995, the Stock Exchange Act 1995 and the very significant Bill last year to restructure regulation here and to restructure the Central Bank in line with international developments. It is all very welcome. I worked on some of these issues when I was in the Department of Finance and the direction in which we are going is right.

The new legislation, which is on Report Stage before the Dáil, will complete the existing suite of legislation. If other issues emerge in the investigations taking place currently and if we need other legislative changes to cope with some of the issues that emerge, they will have to be put in place also. That will be a matter for the Oireachtas but we will have to wait to see the outcome of those examinations. It is important to recognise the very significant progress made. The Oireachtas has been at the leading edge of this since 1995.

The Deputy mentioned the Central Bank's role in regulation in previous times. An important point — this is a vital ingredient in the legislation enacted last year — is that the Central Bank, in accordance with EU law, could not reveal confidential information received in the course of regulation. To do so would have been an offence for a staff member of the Central Bank. In the new legislation various ways have been developed within the Attorney General's office, which while not being inconsistent with EU law, give us a much greater opportunity to speak to the Revenue Commissioners about tax issues. The lever is money laundering. An amendment to the Act introduced in 2003 allows the financial services regulator to speak to Revenue directly in regard to money laundering and tax issues which flow from that. That is a sea change. It is a huge development and removes a great deal of frustration from staff at the Central Bank.

We do not know whether it is sufficient yet. As a result of what has been happening, two avenues of communication are opened up with Revenue. On general issues, I and the chief executive of the financial services regulatory authority can speak to the chairman of the Revenue Commissioners. We also now have the opportunity under this provision to speak on detailed issues which emerge. That is very different. It is a very positive dialogue which is taking place between the organisations.

It may well be that some other requirements will emerge in the course of that dialogue. If they do we will deal with that, but that change has made a substantial difference to the environment and is very much in keeping with the change taking place in regard to taxation in recent years. The view within this country at all levels has totally changed.

In regard to the last question on the staffing of the institutions, all of the people appointed to senior positions in financial institutions have to respond to a detailed set of questions by the financial services regulator. The way this operates means that there is no unhealthy relationship in the way that was described. I am concerned with financial stability, not detailed regulatory issues, but legislation in place now is very robust. It is at the leading edge. We can never say that it is complete or cannot be improved upon, but it is a very good framework to deal with a financial industry that is complex. It shows us in a good light internationally because people now know we have a very good regulatory environment.

Even before the latest legislation, the International Monetary Fund examined our regulation and said it compared very well internationally. That is very important in terms of the reputation of our financial services the IFSC and the investment this country requires going forward. Maybe there are other things I could say but I hope I have responded to the questions.

Deputy Burton

I thank Mr. Hurley and his colleagues for coming to the committee. To follow on from Deputy Richard Bruton's questions, the first thing I would like Mr. Hurley to elaborate on further is how or why the Central Bank appears not to have had a system of supervision in place which would have signalled the existence of operations like Faldor and the foreign exchange overcharging.

I understood Mr. Hurley to say in response to Deputy Bruton that because of the absence of the Investment Intermediaries Act up until 1995, AIBIM was in fact an unregulated entity. In the context of what Mr. Hurley has said about the Central Bank's central supervisory role in regard to stability, I find that extraordinary. AIBIM, as with other investment vehicles associated with all of our major banks, are major holders and actors in terms of pension fund management and so on.

It would also have been a very significant subsidiary of Allied Irish Bank, so I do not understand how, if what I heard Mr. Hurley say is correct, AIBIM, until after the passing of the Investment Intermediaries Act 1995, was in the view of the Central Bank an unregulated entity. I would have thought our major banks in particular were subject to regulation both in whole and in part, whether as a consolidated group or as broken up into different parts. Critically in this regard, if, in Mr. Hurley's view, AIBIM was an unregulated entity, that means senior executives could apparently be involved in vehicles like Faldor in the British Virgin Islands. This clearly had tax implications, yet, it seems, it entirely escaped a regulatory framework.

I also have a question in regard to the internal audit function and audit committee structure which most financial institutions and stock exchange companies have, and the external audit function. My general understanding is that there were quite a number of people in the Central Bank who would have been recipients of a flow of information in regard to the ongoing oversight in the context of its prudential role of the accounts audit function and the external audit function. Did the Central Bank routinely receive what are often called management letters or internal control comments or notes arising from the internal audit review process, the bank's audit committee process and the external audit process?

Did the Central Bank have full access to the audit committee processes of the major commercial banks such as AIB? My understanding is that they would be the interaction point between the on-going, continuous, 365 days per year work of the internal audit function of the bank and the work of the external auditor, which might I suppose, take place over a three or fourth month period. Were any of the matters now in the public domain, particularly those relating to Forex and Faldor-type operations, red-flagged as areas of concern in that review oversight process which the Central Bank had? Are there further issues and practices not yet publicly revealed which give rise to concern?

I wish to follow up on a point made by Deputy Bruton. Tax compliance by the banks and by senior executives in banking, including former board members of the Central Bank itself, have been a matter of public concern since the evidence given to the McCracken Inquiry as far back as 1997. From that time, was any examination carried out by the Central Bank in regard to tax compliance at every level within the commercial banks, particularly at senior management and director level?

I am aware of what Mr. Hurley said in regard to confidentiality and the Central Bank being apparently powerless to formally contact the Revenue Commissioners. Aside from this lack of power, surely the compliance issue in terms of the prudential risk must have been a concern following the McCracken revelations, DIRT and so on. Surely it must have been a concern to the Central Bank that senior management and people at board level should be tax compliant. Did the Central Bank monitor and assess the use of off-shore vehicles for investment purposes and tax purposes by Irish banks? That also would seem to be important from a prudential point of view. Operations like Faldor could only be maintained if the beneficiaries were confident that neither the Revenue nor the Central Bank were probing deep enough to expose its existence and operation.

I accept Mr. Hurley's point that the area of compliance and examination has been significantly upgraded over the past eight years, but has the Central Bank carried out a risk assessment of its own deficiencies in the past decades in order that IFSRA is in a position to carry out its mandate more effectively in the future.

On Mr. Hurley's statement, I will make one riposte. He states that there is a danger in generalising on the basis of events which occurred several years ago. Does he not share the concerns of the compliant taxpayer or business? Banks are powerful institutions. The ordinary customers, and most business customers are not powerful. Following Ansbacher, AIB, NIB, the off-shore Jersey trust, Faldor, etc., people feel the banks are not compliant based on bitter experience of what we have heard.

Mr. Hurley

To take the last question first, in my statement I talked about the very significant change that has taken place. Many of the issues to which Deputy Burton refers go back over a long period. What has happened since the mid 1990s would make many of these occurrences very unlikely to occur now. One can never say never but the framework is much stronger. However, we need to bear in mind those changes when we are looking at problems that we now discover emerged many years ago.

The other point I would make here, in terms of the Deputy's comments generally, is that regulatory authorities and the Central Bank must operate and regulate within the laws in place at the time. The Investment Intermediaries Act 1995 enabled a whole new area of regulation to be opened up which was not there previously. Even in that regard, as we now know, the current management of AIB, so far as we understand it, did not know about the existence of Faldor.

Deputy Burton

Can Mr. Hurley expand on that? He is stating that AIBIM, until the passage of the 1995 Act, was an unregulated entity and everything that happened in AIBIM was unregulated. Does this also cut across to capital markets? Surely in terms of the prudential element, he could not have no element of oversight of the whole consolidated AIB operation?

Mr. Hurley

There is a responsibility for the regulation of the group as a whole, but the detailed regulation, to which we refer, to uncover the issues that have emerged here simply was not there.

Deputy C. Lenihan

Mr. Nick Leeson, who spoke recently at a dinner I attended, stated there was no regulation covering subsidiaries, in other words, that, from a prudential point of view, if there were large amounts of money building up in a subsidiary company, because of the failure to introduce an intermediaries Act they could not be supervised by the Governor or his officials.

Mr. Hurley

Investment business was not regulated before that time. That is the critical aspect when one looks at the issues which emerged here.

Deputy C. Lenihan

Does that mean large amounts of money could be allocated by the parent, that is, AIB, the main company, to an off-shore subsidiary, in other words, as happened in the Nick Leeson affair with the off-shore subsidiary in Hong Kong? Does that mean AIB could allocate considerable amounts of resources to the investment subsidiary and the effect of that on the balance sheet of the main bank could not be examined by the Governor and his officials?

Mr. Hurley

I may ask some of my colleagues to comment on this. The way I would see it is that the allocation practices prior to that time were not at the leading edge, but then we were not different from other countries. We were not behind the curve in this matter. When the 1996 Act was put in place, it was an enormous amount of work for the Central Bank to take on, and the bank took it on. Consequently, we have seen the emergence within that new culture of the issues about which we are talking.

We need to understand that this country moved quickly in the international context in terms of regulation. We were up with the best and the international agencies that were looking at us said so at the time. It is important to realise that there was a gear shift in the mid 1990s and that gear shift has now given us the present regulatory environment.

Problems have emerged. One can never say whether other problems will emerge. The regulator is looking at this. If they do emerge, however, our institutions must be able to deal with these efficiently, effectively and speedily.

The responsibility of the Central Bank was stability since the new arrangement came into place. This issue is a reputational risk issue, a very significant issue for a financial institution. The critical points in dealing with reputational damage, the scale and good international reputation of which I explained earlier, and particularly as this is an issue which is important for the world-wide credibility of our industry, is that we can immediately respond to problems as they arise, that the investigations are carried out, that the reports are available and come into the public domain, and that committees like this can take stock of the outcome of these examinations and decide whether our framework is adequate or whether it needs changing.

My advice to this committee would be as follows. The examinations currently being made by the enforcement agencies of the State are being carried out in a comprehensive way. There is communication within the new law between the agencies involved. Perhaps we could improve that but there is much better communication now. The people involved are going about this with a certain amount of energy, and that is obvious. Therefore we need to wait until we see the outcome. It will not be that long. Dr. Liam O'Reilly referred before this committee, and publicly since, to some of the issues the committee was considering a month or two ago. There are other issues being looked at which have emerged since Dr. O'Reilly was here, but the committee can see that a great deal of work was done on these issues in recent months by the regulator before they came into the public domain. As that machinery gets a grip on this issue and deals with the various matters emerging, the reports of the enforcement organs of the State will come here and will be made available. Dr. O'Reilly indicated that certain information would have to come into the public domain when this examination was finished. This committee will be in a very good position to take stock of the progress made since the mid-1990s, led by the Oireachtas, and to identify any gaps in that framework emerging from the new reports. I am much more confident than I was years ago in trying to cope with the complexity of the financial situation. Financial instruments all over the world have become extremely complex and the business of regulation has become difficult and more complex.

We have put in place a suite of legislation to cope with this. We have done this because we have a very important industry that contributes enormously to our economy. When I referred earlier to financial stability, I said that if we had a financial stability problem we could lose 10% of our GNP. The issues we are talking about are not stability issues, but just think of Finland and its banking crisis within the past ten years. In the first year, 15% of gross national product disappeared and unemployment soared. In a situation like that all citizens are customers — the depositors, businesses, large industry and everyone who is employed.

Thus, the task within the new legislation is twofold — to try to warn about risks to that financial stability and, if there is a financial stability problem, to have the mechanisms to deal with it quickly. That is what I have to think about in the Central Bank. The regulatory environment in terms of dealing with other issues which are not stability issues, and with which I am not involved, have to be examined thoroughly and speedily and dealt with for reputational reasons for our industry.

In order to do these two jobs there must be a very quick flow of information between regulators and central banks. We piggy-back on the IFSRA inspectorate, which is out there inspecting banks. We have to stress test banks and assess what their loan books are like, whether they are capable of dealing with the level of credit currently out there or whether there is a systemic risk. Our economic people would put forward various options in terms of interest rates and other developments which could affect those risks, and the banks are stress tested against that framework to see what would happen in terms of a particular development.

We need the financial flow from the financial regulator to enable us to do that job, which is the reason for the link between the two parts of the organisation. When I was just appointed Governor, a moment I will not forget was during my first visit to Basle, when I was being introduced as the new boy on the block. One of the leading governors asked about the new reorganisation in Ireland, and I told him we are trying to get a balance between stability and regulation. He said that if information in regard to a problem in a bank is more than 20 minutes old it is historic. In terms of financial information to enable us to do a stability job, that is the flow that is dealt with in the legislation enacted by the Oireachtas in 2003. It means I do not have to get involved with detailed regulation but that I quickly have the information to enable me to deal with emerging issues in regard to stability and to be able to put in place the mechanism to deal with such issues as they arise.

The implications for a modern economy, if these issues were ever to unfold, would be something like what was experienced in Finland. If one looks at Japan, for example, it has had a decade of recession primarily because of its banking sector. The issues we are talking about are fundamental for stability and reputation. The financial regulator and the other enforcement agencies of the State will deal with those reputational issues and investigate these matters. They will bring forward the findings of those investigations, and this committee, and the Oireachtas generally will have an opportunity to view those and then decide whether we need more regulation, further changes and better avenues of communication between those institutions.

I feel very confident we are at the leading edge of regulation as a consequence of the legislation that has been put through. That does not mean the type of issues we have been experiencing and that have emerged will not emerge again. What is vital is that we are able to deal with these issues quickly. I was very disappointed about what had emerged in recent weeks, and I knew about this before members of the committee, so I have been disappointed for longer and my disappointment has not reduced. The vital thing, however, is that these matters are fully investigated, brought to a conclusion and dealt with for the sake of the reputation of our industry.

We have a huge industry employing 40,000 people and contributing enormously to the economy and the Exchequer. When I listened earlier in the public gallery, one of the committee members asked about how all of the employees in the banking sector feel about what has emerged in recent weeks. These are the people who have built this sector. It is a very important sector for this economy and has a huge reputation internationally, so I am sure they are as disappointed as I am about the recent developments.

I have not answered many questions, but there were important issues and things I needed to say. In terms of the offshore point mentioned by Deputy Burton, regulators in those areas have the responsibility to regulate those entities. We, for example, do not regulate banks in those areas——

Deputy Burton

Subsidiaries of Irish banks which are offshore or vehicles of Irish banks which are offshore?

Mr. Hurley

Yes, we regulate here the overall institution where the parent company is in our country. However, quite a number of the other areas could be covered by regulator entities in the different countries. I think I have made clear that I am not involved in that detailed regulation, but the financial regulator will conduct that regulation in the light of the legislation. Where the regulator is not involved with particular institutions, very often it will have a memoranda of understanding going forward with the regulators in those countries.

Internationally, the climate of regulation has improved. What is going into those memoranda is improving as we go forward. None of this takes from our disappointment in regard to these issues. It is very disappointing and we must complete these examinations. My advice to the committee when considering these matters is that, when it looks at what emerges from these examinations by the various enforcement agencies — and a strong array of agencies dealing with these issues have been newly put in place — it can then determine whether something further is needed.

Deputy Ó Caoláin

I extend a welcome to Mr. Hurley and his colleagues from the Central Bank. It should be noted that the abuses on the part of AIB that have been recently revealed took place, in the main, under the watch of the Central Bank, not since the establishment of the Irish Financial Services Regulatory Authority. It should also be noted that the revelations have come not as a result of investigations by either the Central Bank or IFSRA, but as a result of whistle blowing, most likely from within AIB itself.

In his introductory address to the committee, Mr. Hurley referred to the regulatory system and stated that mistakes or inappropriate practices or behaviour will happen despite a comprehensive regulatory system being in place. In the context of what I have just said, that these revelations are not as a result of any comprehensive regulatory system being in place but as a result of whistleblowing in the main, would Mr. Hurley describe the current system as a comprehensive regulatory system? I read from what he said that he does not refer to what has been in place in the past as a comprehensive regulatory system and we would be in agreement on that. Is it now a comprehensive regulatory system, if it is the case that these practices are continuing and the only reason they are before public attention and before this committee in terms of address is because of whistleblowing? Does it not question the description of what is now in place as being comprehensive? I want Mr. Hurley's comments in that regard.

There are many unanswered questions on the foreign exchange transactions. The sum involved is estimated currently at _25 million and we have no idea where it might end. That estimate may prove conservative. I note that since 2000, between 500 and 600 mortgage holders have been paying an extra _50 per month for mortgage insurance without their approval.

Then there is the matter of Faldor, to which a number of Deputies referred, where as it happens senior AIB executives were evading tax through special off-shore accounts. It appears that AIB executives ran these themselves as part of the normal internal business of the bank. While there has been exposure of those who may have benefited, there has not been exposure of those responsible for administering this tax evasion. I refer to Mr. Hurley's statement, where he commented that the approach to all taxation matters is now much more rigorous, both in the banks and among the public generally. That does not hold up in the context of the conduct of the AIB. There clearly is not a much more rigorous approach to taxation matters on the part of AIB and this galls people.

The AIB, in 1984, was significantly baled out with public money following the Insurance Corporation of Ireland fiasco, yet a couple of years later AIB was centrally involved in the DIRT scandal, which deprived the public purse of massive amounts of money. This money was needed for significant investment, in both health and education, and in those years there were budgetary cuts in spending on health and education. The AIB was happy to benefit from a public investment in 1984 but also quite happy to defraud the public purse in a concerted way, and it seems not to have changed. People are still asking if anything has really changed. Despite the assurances Mr. Hurley has given, or indeed the views he has expressed, the culture seems not to have changed at all.

I have a number of specific questions. The Committee of Public Accounts, in the report on DIRT, said of the Central Bank:

The Central Bank had an inappropriate and outmoded approach to supervision given the growing sophistication of banking and the changing role of banks in society.

It further stated:

There was an insufficient concern with ethics and supervision other than from the standpoint of a traditional and narrow concern with prudential supervision in the Central Bank.

Is any of this current? How would Mr. Hurley now respond to these charges, which were made by my colleagues in the Dáil? What assurance have we got that the culture, where there was an insufficient concern about ethics and supervision, is not a continuum? From the commercial banks' point of view, it seems to be a continuum, despite the establishment of IFSRA.

Does the Governor believe that the powers given to the Central Bank, either as they stand or indeed under the new legislation, are sufficient to address this culture within the financial services sector? I note Mr. Hurley stated that the forthcoming enactment of the new powers, currently on Report Stage in the Dáil, will provide such a system, that is, one that is effective and speedy, but in the light of all the latest revelations we are addressing today, would he think that perhaps it is not because nothing has happened so far to suggest that the new regulatory authority is any more efficient or effective than the one that preceded it? With all respect to the Central Bank, it has already been stated in the report of the DIRT inquiry that the Central Bank did not concern itself with ethics and supervision, except from a standpoint of prudential supervision.

How can Mr. Hurley explain to this committee and the wider public how AIB could operate with such impunity for so many years and without any serious intervention or interference on the part of the Central Bank? Why has there never been a single prosecution? Who will carry the can? Who will come forward and take responsibility? Does the Governor agree that it must not only be the bank as an institution, but those employed within it, who must ultimately come forward, be identified and give account of themselves?

The banking sector is so well financed that if fines are all that will apply, who will pay them? For instance, the _25 million being set aside and lodged with the Central Bank in the case of the excess charges for foreign exchange transactions will be paid by the unfortunate AIB customers who have already been fleeced. That is my view of it and it is a view held by many. The only way this can be stopped is by prosecuting those who ordered, arranged and conduced these abuses should be prosecuted.

I want to know the Governor's view on that because fining the financial institutions is clearly no impediment to these practices. It has not worked heretofore. It will not work again because that is their business. They will reap it from the unsuspecting public in some shape or guise. The only way this can be stopped is by ensuring that those who are employed within these institutions find it is no longer tenable for them to operate as they have done so far with impunity. The impunity must be removed. They must become openly and publicly accountable and no longer hide behind the corporate image.

Deputy Boyle

I will be as brief as I can because I am conscious of the time constraints. There are three or four areas about which I wish to ask Mr. Hurley. I am also conscious that the Ceann Comhairle has allowed the Minister for Finance to take a Private Notice Question on this general area in the House later.

As regards the changes in legislation outlined by Mr. Hurley, is it fair to say that the Central Bank directly influenced the type of legislative approach we have seen both in the Central Bank/IFSRA Bill last year, and the one currently before the House? The legislation did not incorporate the main recommendation of the expert group, which decided there should be a stand-alone independent group. It instead provided for a group operating under the Central Bank's own umbrella. To some degree that must compromise its independence, especially concerning budget control that determines how it operates on a day-by-day basis. The general tenor of the first Bill outlined IFSRA's role, but we are still waiting for the second Bill to grant IFSRA effective powers. Therefore, we are in a strange twilight zone whereby IFSRA can identify problems that exist but cannot do anything about them.

The philosophy that is informing IFSRA is most unusual. The Central Bank has always been concerned with the prudential role and IFSRA seems to be structured in such a way that it, too, must be concerned with the prudential role. Many of us in the Opposition have argued that the consumer protection role has not been allowed to take as much precedence, or an even greater role, in performing its functions.

As regards foreign exchange charges, the specific function about which the committee has expressed its concerns, Mr. Hurley said that since the enactment of the Central Bank Act 1989, the Central Bank frequently exercised the power it was given under that legislation. Can he indicate how often charges were sought since 1989, and how often they were refused? Even in general terms, that might give us an indication as to the validity of that particular statement.

While it may be unfair, I think Mr. Hurley would accept that a perception exists that the Irish banking world is incestuous and that the gene pool for those at executive level is excessively shallow. As Governor of the Central Bank, is Mr. Hurley satisfied that there is sufficient distance between those who have worked in the commercial banking sector and have then come into the Central Bank, and those who have worked in the Central Bank who subsequently work in the commercial banking sector, so that neither is compromised in either situation? Perhaps that has been an influential factor in the past.

As regards the compliance environment, I refer to page eight of Mr. Hurley's speech, where he said that because of the changes since 1995, in particular, it is less likely that anything similar to what happened then could happen now. What confidence can we have, however, that what has been discovered in one financial institution, does not exist in any other one for the period in question? Surely, we do not have that knowledge.

Deputy Twomey

Mr. Hurley mentioned that the banking crisis in Japan was due to a lack of attention to stability, which in the long term led to losses for consumers. Terms such as "robust" and "leading edge legislation" and "we follow best international standards" have been used. Mr. Hurley said the EU hindered our regulation of financial services prior to 1996. He said that the EU had some negative effect on regulating markets, but will he clarify that?

Mr. Hurley also mentioned the Investment Intermediaries Act, which, he said, seems to have changed the whole culture of things since 1996. Will he indicate — as we asked IFSRA last week — the number of hits he has got from the legislation that are due to the supervisory role played by the Central Bank since the Act was passed in 1996, as opposed to the whistle-blowing role that seems to bring forth most of the crises we have heard about recently?

Mr. Hurley has given a good performance by demonstrating that the stability of the banking system is important to prevent a crisis. He said the customer is better protected by regulations, but that regulations do not necessarily improve the stability of the banking system. He seemed to indicate that the Central Bank will give much more priority to the stability of the whole system in total because in the long term that is much better for the customer. Perhaps some of the things about which we are now reading are not considered to be significant in an overall context from the Central Bank's point of view, no matter what this committee may think. Will Mr. Hurley indicate how effective the Investment Intermediaries Act has been since 1996? Perhaps he can also provide some detail on how the EU somehow hinders the Central Bank's regulatory role.

Mr. Hurley

I will try to answer as many of those questions as I can. I did not say the EU hindered regulation in this country. I said that there is an EU directive which requires that confidential information cannot be passed outside the Central Bank in certain circumstances. I said that as a consequence of the dialogue that took place in the Dáil on the last Bill, significant developments have taken place concerning that, with the advice of the Attorney General, has enabled further information to be exchanged between the financial regulator and Revenue concerning money laundering arrangements. I am sorry if I did not express myself properly. It is not that the EU was hindering regulation, but in terms of our effectiveness in exchanging information between different regulators, there was an issue of confidentiality concerning tax affairs. It has not gone away, but it has been improved.

The various codes, rules and practices that have been put in place since the introduction of the Investment Intermediaries Act must be adhered to. The bar has been lifted significantly, which is the main impact of regulation, as a consequence of the requirements of that legislation. Those requirements, particularly concerning investment, were not available before 1996, and that is a sea change.

I will group together a number of other points that were raised. Deputy Ó Caoláin and Deputy Boyle raised the prudential issue and the issue of tax. Both in the past and now, when regulators are regulating, they do so not for the purpose of examining taxation issues, but to do a particular job concerning the institutions involved. Taxation questions are the responsibility of the Revenue Commissioners but if they come across serious tax problems, such as money laundering, there is an avenue whereby they can be reported to the Garda Síochána under legislation against money laundering and also under the provisions of last year's amended legislation. A significant change has taken place in that respect.

Deputy Ó Caoláin also mentioned another issue where change has occurred. It concerns recent legislative developments in the interest of consumers. These issues have now come before the financial services regulator, but they had not been subject to regulation up to now. That has enabled a part of the organisation of the financial regulator and the Director of Consumer Affairs to devote themselves entirely to this issue. Currently, there is a very different focus on the consumer that was not there before now when it was not the responsibility of the Central Bank, but of a different organisation.

The chairman of IFSRA has commented on the point that has been raised, as regards whether consumer and prudential issues should be dealt with by the same regulatory system. I share his view that these are different sides of the same coin. When I was speaking about the stability role of the Central Bank subsequently, I stated that the consumer becomes even larger in the context of a stability problem. Therefore the consumer is at the heart of everything, whether on the side of the financial services regulator or in the Central Bank, because when it really becomes a problem the consumers are the public interest which we must protect.

On the regulation in the past, the fact is that the tax provisions I mentioned did not exist. Those people who were assessing the Central Bank's regulation from an international perspective were satisfied that we had a good system of regulation within the law at the time within which we had to operate.

On the issue of the influence of the Central Bank on the structure of the legislation that has emerged, the committee will recall that there was a commission on this issue chaired by the Minister for Justice, Equality and Law Reform, Deputy McDowell, which did a significant analysis of this particular area and came to conclusions. That was debated at Government and between different Ministers. Much consideration went into this issue and into the balance, which I mentioned during my presentation, between stability and regulation. They considered the question of the right balance at length and came to the conclusion that one needed a quick flow of information to deal with stability issues coming to the Central Bank.

One could probably have done something else. One could probably have set up a new inspectorate for the Central Bank so that there would be two inspectorates, one within the regulator and another within the Central Bank to enable us to assess financial stability, at enormous cost to the taxpayer and the Exchequer. Similarly, on support services for the organisations, one could have set up for the regulator new finance, information technology, personnel and communications functions, and we would have had similar functions in the Central Bank. The view the Government took was that that was not the best use of taxpayers' money. The best use of taxpayers' money was to make sure that the financial services regulator is independent in its role, that it has a relationship with the Central Bank on financial stability and that it has an information flow, and that these services I mentioned support both sides of the organisation and are conducted efficiently and effectively at the least cost to the taxpayer. Those are the issues. This is a political matter, not a matter for me, and the Government came to a particular conclusion.

I suppose one of the views I would have is that in a small country we need to give the world a unified view of how we deal with the financial industry. We have a very good international reputation. Internationally, the linkage between the two parts of the institution is being commented upon and looked upon, and how that evolves is being watched because it is a novel way of linking stability with regulation at least cost.

This is a matter for the Government and the Oireachtas. What I, as Governor, can say is we will work the current legislation. It is effective legislation and the financial services regulator would have the same view. However, it is much more comprehensive because the points made by Deputies Ó Caoláin and Boyle have to do with bringing together in one place the consumer issues and regulatory issues which were not in one place until then and, as a consequence, power and information flows from that. I hope I have not missed a question.

Deputy Boyle

I asked three specific questions which probably require detailed information. I was going to suggest that Mr. Hurley might go over the record and come back with written information.

Mr. Hurley

I would be delighted to do so. I thank the committee for the questions. I am pleased to have the opportunity to deal with these issues.

Deputy C. Lenihan

I welcome the Governor's presence here. I take heart from his assertion that what happened between 1989 and 1996 could not happen today. I also take heart from the fact that he stated that the compliance environment has improved and from the praise he has heaped on the Oireachtas for bringing in these new forms of regulation that place Ireland at the cutting edge of regulation of banking and financial services.

There is one simple question I want to put to the Governor if the Chairman will give me some latitude to develop this point. The Governor will be aware that the DIRT inquiry had a voluntary phase as opposed to a compellability phase and that in the voluntary phase AIB's most senior executive, namely Mr. Tom Mulcahy, to his credit, came before the committee even though at that particular time, because of the revelation of AIB's exposure on DIRT, the bank was under investigation and in active discussions with an arm of the State, namely the Revenue Commissions. Can Governor understand the committee's frustration, given that AIB, when far more exposed due to the amounts of money involved, was prepared to go before a Dáil committee while today this committee has received letters stating the bank is not willing to come before us?

Acting Chairman

We have already discussed this.

Deputy C. Lenihan

I am putting this question to the Governor of the Central Bank, who is in a sense the supreme prudential regulator of this industry. Does he not believe that appearing before Dáil committees is part of the improvement of the culture of compliance within the banking sector? Given that the bank's earlier compliance under Mr. Mulcahy was better at a more difficult time, that it came before a committee even though there was an outstanding issue of compliance and liability, and that before the committee they contested that there was any liability to the Revenue Commissioners but accepted it was in discussions with them, what prevents members of the bank from being good corporate citizens and appearing before a committee even if, as Mr. Hurley's own subsidiary financial regulator, Dr. O'Reilly, stated, the matter is ongoing? Is it good for the culture of an organisation to be both transparent and responsive to a Dáil committee?

The following is a technical question. We all heard the phrase "improper deal allocation practices" in the past week. It was used by AIB, in particular, when it made the voluntary disclosure on Faldor. What is meant by it? It sounds like financial jargon. We want to know, not what is behind it that the regulator is currently investigating but what it means in everyday language.

I ask Mr. Hurley to address the other issue of whether it is a good idea that a large institution should make itself available to the Dáil and, in his role as a central banker who also attends European Central Bank meetings, whether he regards it as a matter of good compliance practice that senior executives would make themselves available to the ultimate regulator, the Oireachtas?

Senator Mansergh

The Governor's point was well made, that the soundness and stability of the banking system interests every citizen and resident of this State. I can understand his concern today to project the reasons for confidence in the banking system and in the system of regulation. No doubt the economy was rather more vulnerable before we entered the euro zone and sometimes stability took precedent over other considerations like combating flows of money in and out of the economy, some of which may have been tax evasion.

If, like most of the citizens, I asked myself do I have confidence today in my bank, the answer would probably be "Yes" to the extent that it does provide a good service in many respects. It does not alter the fact that we are dissatisfied and sore about some of the problems that have emerged. They come down to about four. One is the attitude to tax evasion, the encouragement of people to get themselves into false situations which many people, some of them elderly, are now having to cope with as best they can, and where inadequate responsibility has been taken by the financial institutions.

There have been instances — one hopes they are isolated — of deliberate overcharging. I understand what Deputy Conor Lenihan referred to as improper deal allocation practices, which are much more serious. There is deep concern that there should be a level playing field. Banks sell all kinds of investment schemes to customers who would be at some disadvantage to people who are on the inside. When products are being sold, the issue arises of whether is it done on the basis of caveat emptor or that advice can be trusted. I have to admit I am very disappointed. I am of a certain age and I know that 40 or 50 years ago bank managers were like priests — they might be a bit conservative but one had absolute faith in their integrity. Unfortunately, perhaps in both cases, that no longer seems to be so. It is vital to get back to a situation where banking is not conducted by cutting corners at the expense of integrity and shareholders interests. On the whole, in the main banks, shareholders are very well rewarded, as are the directors.

I take the Governor's point about balance — that when problems arise there is a danger that people become over zealous on the regulation front. Our success in the financial services sector has been because we have not become over regulatory.

My final point relates to the resolutions we need to make with regard to the future and, in particular, that lax and unethical practices will not be tolerated at any level in the banking system. If it is happening at the top, we should not be surprised if there are problems at the middle and lower levels. As was rightly pointed out by Deputy Ó Caoláin, some of these matters have come to light not because of the fantastic system of regulation we have, but because people of middle rank — who should not have to do this — feel they have to engage in whistleblowing because they are concerned about the integrity of the system. If a regulatory system is good then whistleblowing should not be necessary.

Senator White

I thank the Governor for his excellent presentation. The reputation of our financial services centre at home and abroad, and the continuing economic stability of the country are what matters. Mr. Hurley referred to the tremendous economic contribution of the financial services centre. Deputy Ó Caoláin and Senator Mansergh referred to whistleblowers, but I do not know if Mr. Hurley answered that point. If one looks at the Enron situation, one can see that it arose because a lady had the courage to go against the extraordinarily powerful friends of the current US Administration. Mr. Kenneth Ley of Enron was a personal friend of George Bush senior, and had been a contributor to his presidential campaign and his library to the tune of about $50 million. I want to get Mr. Hurley's opinion, although I do not mean it in an adversarial way, about the issue of whistleblowers. I do not think he answered the point fully.

Mr. Hurley

I will deal with that question first. It has already been raised. I spoke earlier about the new model of regulation that is being put in place. Dr. Liam O'Reilly spoke at length about the principles of regulation and how one can encourage a good compliance culture within organisations, including internal audit units and external auditors. One can also carry out investigations, sample checks and surprise checks. All of that is a part of good regulation, but I would have to say that maybe whistleblowing is, too. Why not?

Senator White

Yes.

Mr. Hurley

If there is a problem that has not been discovered and it is a serious issue, why not? At the end of the day, one must have a good system of regulation in place but there may be issues that the sampling mechanism misses.

Senator White

Yes, true.

Mr. Hurley

Although this is not a matter for me — it is a matter for the financial services regulator — I think Dr. Liam O'Reilly would say the same thing.

The allocation issue, mentioned by Deputy Conor Lenihan, is an important one. Under the Investment Intermediaries Act, a codified system of rules on allocations is laid down. It was not laid down before that legislation. We must wait and see what the investigation throws up about this issue.

Deputy C. Lenihan

Will Mr. Hurley explain what is meant by the phrase "an improper deal allocation practice"? If something is improperly allocated, typically what kind of a deal would one be talking about? I am not dealing with the specifics of AIB.

Mr. Hurley

I will ask Mr. Liam Barron to explain it.

Mr. Liam Barron

A financial institution may carry out 300 deals in a day. Before the Investment Intermediaries Act was put in place, these deals were typically allocated in the afternoon to the individual funds, which left some scope for allocating favourably. There was no law against that. It was unacceptable and wrong, but not illegal. Under the Investment Intermediaries Act, however, it is a crime.

Deputy C. Lenihan

It is illegal to show favouritism in one's allocation?

Mr. Barron

In the allocation, yes.

Deputy C. Lenihan

In the allocation of valuable funds that are acquiring value?

Mr. Barron

Yes and because the deal was allocated a bit later on, the price may have changed, so one would know where one was putting that particular deal. Now, however, under the Investment Intermediaries Act there are very strict rules about this. One has to allocate simultaneously, so one does not know——

Deputy C. Lenihan

Who the beneficiary is?

Mr. Barron

There is not any lapse of time.

Deputy C. Lenihan

Are there also disclosure requirements about accounts into which these allocations go? The allocations must be made transparently to accounts that are known?

Mr. Barron

They would be put into numbered accounts, yes.

Deputy C. Lenihan

However, the numbered accounts would be available, is that not the key point?

Mr. Barron

Absolutely. The regulator can now look at these accounts. As the Governor said, there has been a sea change.

Deputy C. Lenihan

So an improper deal allocation practice might include an allocation of funds to an account which was not disclosed to the regulator?

Mr. Barron

Not really, no.

Deputy C. Lenihan

That would not qualify as improper?

Mr. Barron

No. Some of these can be non-resident accounts, for example, an account held here by a resident of the United States. Therefore, we just allocate the amount. One does not necessarily know who is behind the account when the deals are allocated.

Deputy C. Lenihan

Is there no requirement to do so?

Mr. Barron

The people undertaking the dealing do not but the institution must be satisfied and know the clients.

Mr. Hurley

When I spoke earlier about the change which is taking place, the Deputy can see that it is unlikely such events could happen now because the rules under the Investment Intermediaries Act have changed the scene in regard to the issue.

Deputy C. Lenihan

The Governor did not answer the substantial question about whether it is an indicator of good practice for the banks and their organisations——

Mr. Hurley

I have no difficulty in answering that question. The committee system is a very important instrument of democracy in this country and its development in recent years is to be welcomed. I share the view expressed recently by Dr. Liam O'Reilly that there is no impediment to AIB coming before this committee as long as the committee does not prejudice the investigations. I note that, in its letter to me, the committee stated that it is conscious an examination is taking place into specific issues. However, this is a matter for the committee and AIB.

Deputy C. Lenihan

In Mr. Hurley's view, as Governor of the Central Bank, is there any impediment to AIB appearing before the committee?

Mr. Hurley

Not as long as the issues currently being examined are not prejudiced.

Deputy C. Lenihan

I thank the Governor and appreciate his honesty.

Acting Chairman

On behalf of the committee, I thank Mr. Hurley and his colleagues for attending the committee. Their views and comments were well noted.

Mr. Hurley

I thank the Acting Chairman and the committee for its members' questions. The exchange of views was most useful.