JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Tuesday, 19 Oct 2004

AIB Group: Presentation.

Chairman

The next item on our agenda is a discussion of issues arising from recent events at AIB. On behalf of the committee, I welcome Mr. Dermot Gleeson, chairman of AIB Group, and Mr. Michael Buckley, the group's chief executive. For some time the committee has been considering a series of revelations at AIB that tend to indicate the rights and legitimate interests of the bank's customers have been subordinated to the short-term profit margins of the bank.

The committee appreciates that the Irish Financial Services Regulatory Authority, IFSRA, the bank and others have a particular role in dealing with specific issues that have arisen. It is not our role or intention to involve ourselves in these matters. However, the committee has a specific role in overseeing the way in which IFSRA fulfils its remit and a general role in monitoring the policies of the Department of Finance with regard to oversight of the banking sector. As part of this role, it is proper for it to consider the adequacy of the oversight in regulatory structures established by legislation and develop views as to whether these structures should be altered in any way.

As public representatives, members of the committee are concerned the correct balance is struck between the entitlements of the bank's customers and the expectations of shareholders. Central to ensuring there is this balance is the attitude of individual banks to customers, as evidenced by the prevailing culture, ethics and practices within an organisation.

Mr. Gleeson and Mr. Buckley are not obliged to attend this meeting. They are doing so voluntarily. While the timing of the meeting has been the subject of correspondence, we appreciate their presence and acknowledge the constraints on them regarding certain topics. This is referred to in the letter I circulated to committee members.

I propose that following the presentations, we allow each of the parties 15 minutes for questions and answers. We will then have a general wrap-up if members have other issues to raise. This will give everybody an opportunity to have some time in the first hour or so.

While comments of members of the committee are protected by parliamentary privilege, those of visitors are not so protected. Members are also reminded that they should not comment on or criticise or make charges against a person outside the committee or the Houses.

Mr. Dermot Gleeson

I am the chairman of Allied Irish Banks plc and I am accompanied by Mr. Michael Buckley, the bank's chief executive. As the Chairman of the committee has indicated, we are here in response to an invitation to discuss matters relating to foreign exchange charges at AIB which have recently given rise to public concern.

I will start by repeating what we said in our public statements in July. AIB is sorry for the serious lapse in our responsibilities towards the regulator in the matter of foreign exchange charges. We failed to operate the statutory system of invigilation under the 1996 Act in the way intended and thereby failed in our obligations to the regulator. We failed to comply with the law, which is a serious matter.

When these matters originally came to public attention, they were characterised as overcharging. It is important to understand the July IFSRA report has established that that is not what happened. That confirmation is provided on page 12 of the report. The terms in which this was rendered are important:

It is important to note that had AIB complied with the notification requirement in relation to foreign exchange charges, and notified the charges it was actually levying, it would have been notifying rates which generally appear to be comparable to the rates notified by its competitors. In this context, customers of AIB did not appear to suffer in financial terms compared with customers dealing with competitors.

In other words, the rates we charged were approximately the same as everyone else charged — lower in some cases — and it is likely that if we had simply notified these rates to the regulator, they would have been approved.

We have decided to go back over all the transactions in question, make refunds to customers and treat the transactions as if they were bound by the notified prices to the regulator, rather than the prices advertised to customers. In effect, our customers are now getting the last eight years of foreign exchange transactions at half price.

I do not want to try to minimise our failing. To date, we have identified about 1.1 million transactions eligible for refunds and about 173,000 accounts. Therefore, repayment is a large and costly project. We have repaid about €12.7 million of the figure of €26.1 million which arose over an eight year period. About one third of the repayments are under €10, two thirds under €20 while 96% are under €250.

The first phase of the refund process was conducted by automatic processes, effectively by computer programmes specially written for the purpose. We are now in the second phase which adds a manual process to identify customers. We have an active contact programme and invited customers to identify themselves in order that refunds can be made.

We are putting in place arrangements which will result in one identified person in AIB being responsible for ensuring our prices are in line with our regulatory filings and approvals. There are approximately 625 regulated prices and charges.

At the time this matter came to light it seemed appropriate to take stock on a wider front, lest there were other instances where charges had not been properly applied or promised benefits fully delivered. This was extended to areas where there was no statutory control on prices, that is, beyond the 625 regulated prices. We then went back over all products to all customers in the retail area over eight years and discovered a small number of cases where errors in our processes had led to customers not receiving the full range of benefits promised on some products. For example, someone might have been promised, say, free banking for three years on signing up for a particular product and only received it for 18 months because the appropriate manual intervention, which extended for 36 months, had not been made.

Upon review of a very large number of products, involving approximately €8.2 billion of revenue, over a considerable number of years we found discrepancies which showed that we owed €8.1 million by way of refunds to customers on non-foreign exchange products. We expect to have refunds made to the majority of customers by the end of the year. We also discovered a range of instances where customers had been undercharged. However, we have not requested repayment in these instances.

The main weaknesses we found were that in a period of substantial product innovation the processes had not been automated enough to deliver reliably every one of the product features. We had relied too much on manual intervention which always has a higher rate of error which is not acceptable. We are embarking on a programme to simplify many of our product offerings and invest in the processes and technology which will ensure the product features we offer are given effect accurately and consistently.

The investigations which were very extensive did not uncover a culture of overcharging. What we found was a degree of error in the dependability with which we had delivered a small number of products to our customers which is not acceptable. We have been trying in recent years to simplify our pricing and products and make them more transparent. In 1994 AIB was the first bank to introduce pre-notification of fees and charges to business customers. In 1995 this was repeated for personal customers. We abolished the charge for management time in 2001.

I would like to deal with a couple of issues, the first of which comes broadly under the heading of "culture". The investigation showed that the failure to notify the correct charges became known within AIB in September 2002. The failure to resolve the issue then is a matter of serious concern. It was clearly a management failure. We have made it clear that any such failure is regarded very seriously.

Some have raised the question of whether the culture in AIB creates an environment which leads to problems of the sort we are discussing today. This is an issue that the board and management of the company take very seriously. We commissioned a well known international expert, Dr. Peter Scott-Morgan of the Concours Group, who has done this type of work for a number of very large companies in the world. He is the world expert on corporate culture. The overall conclusion reached from his research is that AIB has a sound culture. While it is not fundamentally flawed, some work needs to be done to ensure it is fully in line with best standards.

We have reviewed the avenues open to staff to raise concerns about ethical issues, issues to do with bad practice or the failure of the bank to live up to best standards in any area. To this end, we have reviewed and renovated these systems and processes which are now in accordance with best practice. They include a range of options for staff to go directly to senior management, including the group chief executive or me as chairman. Staff can use confidential helplines to contact the compliance section of the bank. We have added another completely new layer — I do not know who else uses it in this country — whereby, if they wish, staff can go to an external service provider in the United Kingdom, Public Concern at Work, which does nothing except this sort of work. It acts as a completely segregated avenue for registering concerns. This body will have direct access at various levels within the bank, including me. I need hardly say it remains an option for staff who have concerns that they believe are not being addressed by any of these mechanisms to go directly to the regulator.

We have undertaken a major programme of action since 2002 to transform our control and risk management structures across the group. There were significant external hirings from North America. As announced in July, we are working on a number of fronts to achieve the necessary balance between business goals and front-line control and compliance responsibilities. We are also reviewing reward and performance management systems — bonus pay in effect — to ensure business growth is always achieved in an ethical and compliant manner. We recently launched a board-approved code of leadership behaviours for senior executives. It was launched jointly by Mr. Buckley and me. We keep IFSRA informed on all aspects of these matters.

The next item on which I want to touch is disciplinary action. On 15 September 2004 we announced that the inquiry undertaken by Deloitte, at the behest of the bank and the financial services regulator, which was independently assured by the former Comptroller and Auditor General, Mr. McDonnell, had been completed. At the time we announced that the board had established a sub-committee, comprised of three directors, to consider the report and determine whether disciplinary procedures should be recommended in respect of individuals. The sub-committee will shortly make these determinations and communicate with the individuals concerned who are entitled to fair procedures. As I indicated in my prior correspondence which the Chairman was kind enough to mention, I am obliged to speak with circumspection because if I do not, I run the risk of subverting any disciplinary process. I ask the committee to understand this, as I believe it does.

I want to refer to what has become known as the Faldor matter, specifically in regard to tax compliance issues and some deal allocation practices in regard to the investment vehicle known as Faldor which functioned in the late 1980s and early 1990s. When they came to light in September 2003, they were reported by AIB to IFSRA and other relevant authorities, including the Revenue Commissioners. A process of investigation was agreed, the investigation completed and the results made available to IFSRA and other relevant authorities. The investigation found, inter alia, that there had been no similar vehicle to Faldor which functioned between 1989 and 1996. Second, the Faldor investment vehicle did not receive any advantage in deal allocation to the disadvantage of other customers. Third, high quality deal allocation practices and standards have been in place in AIBIM since 1997. Disciplinary action was taken in respect of persons still in our employment. The Revenue Commissioners conducted an examination of AIB in regard to tax issues arising, which process is nearing completion.

It is my intention and that of Mr. Buckley and the board that any issues which have surfaced will be properly and fully dealt with. As I have tried to explain, we have this summer gone searching for other issues in regard to our products and where we have found them, we have brought them out into the open. An analyst observed recently that AIB had had its soul more thoroughly searched than almost any other bank.

I apologise again for the failures that have occurred. It is my firm intention, which Mr. Buckley shares, that all of the issues raised will be dealt with properly and promptly. I thank the Chairman for giving me this opportunity to speak to the committee.

Chairman

I wish to make a few observations before calling on members of the committee. We invited a delegation from AIB group because, in the normal course of events, the committee was examining the issue of bank charges. Earlier this year, foreign exchange overcharging over an eight year period came to light. It has been confirmed that the bank was aware of this issue since September 2002 and €26 million has been identified to be repaid which, with interest, will probably reach more than €30 million. Soon afterwards, there was further information in the media concerning mortgage protection insurance policies charged to customers who did not ask for such policies. I understand these people had top-up mortgages. Immediately after that, AIB admitted overcharging on trusts and announced that €3.4 million had been paid back to customers. It was also announced over the summer that, as a result of inquiries, a figure of €8.1 million has been refunded to customers in respect of non-foreign exchange products. In June 2004, it came to light that five executives had invested in Faldor in the Virgin Islands, the bank's offshore investment company. I understand these matters are being examined by the Director of Corporate Enforcement in regard to corporate governance and the Revenue Commissioners. It was stated during the summer that this issue may have breached taxation laws. At the end of last week, an international survey indicated that AIB appears to be making double the profit from its customers compared to any other bank in Europe.

It aggravates the public to see the bank making such huge profits while all these problems with overcharging exist. It is important for the Irish economy that AIB and other Irish banks continue to be strong and profitable. They are big employers and have a big input into the economy but profits should be earned honourably and without charging customers for services for which they should not be charged. As public representatives, our sympathies lie with the front-line staff, who bear the brunt of what has been happening. I spoke two hours ago to front-line staff in the AIB who had to bear the brunt of senior management difficulties which came to light during the summer.

Mr. Gleeson, given that you were a member of the board of the AIB since 2000 and chairman of the board for approximately one year, when did the events which emerged in the public domain over the summer come to your attention?

Mr. Gleeson

On the overcharging issue, which the Chairman outlined incorrectly, I do not think overcharging took place.

Chairman

I understand the point.

Mr. Gleeson

Our customers were charged the same prices as customers of any other bank. People ask why was this not detected for eight years. One of the reasons it was not detected for so long is that customers knew our prices were comparable to those in other banks. I first learned of these events on a Friday in May, in London, when the matter became public. I had no prior knowledge, which I assume is the purpose of the Chairman's question.

I would like to respond to one other important matter. I agree that our front-line staff are very much my concern. They are very important to us and do great work. You said, Chairman, that public representatives find these things aggravate the average customer. No doubt Deputies and Senators have much exposure to our average customers. However, I would like to make a general point. At times I think policy-makers do not sufficiently appreciate the degree of connectivity we have with our customers. If the most assiduous constituency worker in the Dáil worked flat out the whole year listening to bank customers, he or she would not get as much information from these customers as we get in one day. If one takes the crowd of almost 80,000 who attended the All-Ireland Final, and the 46,000 who attended the Compromise Rules match last Sunday, that is approximately the number of people who go into AIB branches each day — approximately 130,000. These people do not take vows of silence on the way in, and some are more valuable than others.

There is enormous feedback from customers in regard to our products, matters which are of concern to them. They are not slow to tell us if they find particular products are not competitive with the bank up the road, or they feel some of the terms are unfair. Among any 1,000 customers, some will speak more loudly and some will never speak. If one distributes a product to 10,000 people, one will get a lot of feedback. Some percentage of customers will read every piece of paper and go to every other bank on the street.

I disagree with the notion that we are isolated from our customers. Every eight working days, one million people cross our threshold, and this does not include the tens of thousands of electronic banking transactions, e-mail transactions and so on. We have huge contact with customers and huge feedback. Customers are well able to speak their minds, which they do. On occasions, if they are dissatisfied, they know they can walk, and if we cannot keep them happy, they will walk. Forgive me for going on for so long, but this is an important aspect.

Chairman

The essence of my comments is the various issues which emerged over the summer. Mr. Gleeson, you said you only became aware of the foreign exchange issue in May. When did you become aware of the other issues?

Mr. Gleeson

I think my statement answered the first question. I became aware of the Faldor matter when it was raised with the board in September 2003.

Chairman

There is the issue of the public's perception of the culture in the bank. There was the DIRT tax issue, ICI and Allfirst. In your letter to me of 1 June, you specifically mentioned in the last paragraph that one of the key objectives Michael Buckley has been working on since he became CEO in mid-2001 is to make whatever changes are needed to the culture and organisational practices of AIB. It is clear that from 2001, AIB considered that it was important to make cultural and organisational changes. In his update No. 34 to all staff on 27 May, the chief executive, Mr. Buckley, said that whatever changes are needed in culture, people, organisation and practices will be made to ensure the achievement of vital objectives. Three years later we are still talking about it. It creates a public perception that nothing much has happened in that time.

Mr. Gleeson

I would like to bring Mr. Buckley in on this.

Chairman

I have one other question for Mr. Gleeson.

Mr. Michael Buckley

It is a legitimate point to put to me. It is not fair to draw the conclusion that, just because I said we had more to do, nothing was done.

Chairman

I am very familiar with the phrase "A lot done and more to do". It is a good slogan.

Mr. Buckley

I am happy to outline to the committee what we have been doing since 2001, and I will respond to any detailed questions. I put huge effort and investment into improving the controls, risk management and compliance systems in the bank. To give the committee a crude measure of it, the number of people working in these areas in the bank has increased by just under 40%. We have put an enterprise-wide structure in place for our internal audit, risk management, compliance and finance function. This is just one aspect. Second, the strategy I laid out for the bank in 2001, and everything I have done since as CEO, is built around the objective of providing a distinctive and distinctively good proposition to our customers and to be dependable, engaging and pioneering with them. While things have emerged in the past six months which tell me we are not there yet, we have learned valuable lessons, for instance, in terms of how supportive are our processes and technologies with regard to the amount of product innovation we have been doing.

I acknowledge we are on a journey. We have done a lot and I am happy to speak more about it. I am honest in my communications with our staff, and have said that we have more to do. In July, the chairman announced a series of further measures we are taking, and he alluded to some of them today. They will take us further down the road. However, it is about being dependable and moving towards 100% dependability with our customers.

Chairman

I would like to raise an issue with Mr. Gleeson. You mentioned that you became aware of the Faldor situation in September 2003. You became aware of the foreign exchange overcharging issue in May 2004. You have been a member of the AIB audit committee during this period. Apart from your responsibility as chairman, the audit committee should have been aware of these issues much sooner if they were happening within the bank. You joined the board of AIB in mid-2000. As I understand, you joined the audit committee afterwards. You were a member of the AIB audit committee until you became chairman in October 2003. Of all the directors in AIB, yourself and the other members of the audit committee were in a position to know what was happening. You should have known.

I refer to a document, with which you will be familiar, but perhaps members of the committee and the public will not. It refers to the Allied Irish Bank plc audit committee, and lays out the high-level mission and detailed working guidelines. I am quoting from your audit committee reference. With regard to the high-level mission, item one refers to the quality and integrity of the accounting policies, financial statements and disclosure of practices. Item two refers to compliance with relevant laws and regulations, taxation obligations and relevant codes of conduct and conduct of business rules.

It is clear, during the years under review, there were breaches with regard to laws and regulations, taxation obligations over a previous period in the bank and conduct of business rules. As a member of the audit committee, what extra work did you do to ensure these breaches did not happen? The board has a greater responsibility to its shareholders and the public at large. It employs the senior executives, and there were issues at executive level. However, the board surely needs comfort from its own audit committee. Perhaps you might outline your role in that regard.

Mr. Gleeson

Which tax issues are you saying occurred when I was on the audit committee?

Chairman

I referred to taxation issues which happened earlier. I was referring to DIRT, before you were a member of the board. You said you became aware of the Faldor situation in September 2003.

Mr. Gleeson

We have agreed we are not talking about tax issues which occurred when I was a member of the audit committee.

Chairman

The Faldor situation should have been uncovered before September 2003.

Mr. Gleeson

The audit committee will shortly become a statutory committee. Its purpose is to oversee, on behalf of the board, the internal audit processes.

Internal audit has been a feature of AIB for a long time. A serious upgrading of internal audit occurred in 2002. For the first time we recruited externally on the international market to find the best heads of internal audit and risk. We hired two well-known and well-regarded people from North America, who came into AIB and took up the positions as head of internal audit and head of risk. Progressively, they have been renovating and upgrading the internal audit and risk management systems over the past three years.

The audit committee works with the internal and external auditors. However, the organisation employs 25,000 people and business is distributed over three continents. It is an enormous task. Audit committees sometimes learn about matters later than they would wish. That is a feature of every audit committee.

On a previous occasion before this committee, I was incorrectly described as the chairman of the audit committee. I never occupied that position. However, I was on the audit committee for approximately three years, and during that period the quality of the internal audit was substantially upgraded and the process is ongoing since I left the committee. There has been further external hiring in the past 12 months in that important component of our control mechanisms.

Chairman

Which of the directors are current members of the audit committee?

Mr. Gleeson

I do know, but I must check first.

Chairman

I understand what you say. However, the audit committee's terms of reference is to assist the board in fulfilling its oversight responsibility. I am somewhat critical of the audit committee.

Mr. Gleeson

Can the Chairman explain in what respect he is critical, so that I can respond?

Chairman

Some of these issues should have come to light internally. Perhaps the audit committee should have brought them to the attention of the board at an earlier date.

Mr. Gleeson

We are talking about failures of our systems. If everything ticked over like the proverbial mouse's heart, one would not need an audit committee. We are talking about failure. I do not want to prevaricate on that.

In defence of the audit committee, of which I am no longer a member, it works well and is well staffed. The directors on the committee are persons of probity and insight. There are a couple of chartered accountants who spend a great deal of time on it. It is an onerous business. It is important to have highly-skilled staff, who have learned internal audit as a professional discipline as opposed to being converted to it from another discipline.

Chairman

You must appreciate there is a lack of confidence on the part of customers, shareholders, the public, as well as the Government and Oireachtas. The board must oversee the management and the committees of the board.

Mr. Gleeson

I do not underestimate the rate of those responsibilities, and I do not mean to convey anything that would suggest I do not regard them as onerous.

Deputy R. Bruton

I agree we are talking about failures. We are talking about a long string of failures. It seems the internal audit is not picking up any of them. The foreign exchange issue was raised by a whistleblower who telephoned an agent of the regulator, having first telephoned RTE. That is how it started. The DIRT issue was flagged by the person responsible for the internal audit at that time, but nothing was done about it. In the case of Faldor, it seems the internal audit did not pick it up. It did not appear to pick up on the issue of deed allocations, which seems to have been a problem prior to 1997. The establishment of Faldor is a questionable process, and it appears the internal audit did not pick that up either. There are allegations of misselling. Again, the internal audit does not seem to be picking up on the issue regarding excessive emphasis on short-term profitability versus what the customer really needs.

I do not know how the system of audit committees works. Whatever the bank is putting in and whatever improvements it makes, it does not seem to be turning up the goods on failures occurring within AIB. What is going wrong with this? Are there cases in which the internal audit has turned up things, and nothing has been done about them, as appeared to have happened with regard to foreign exchange? We understand the matter escalated only to a certain point within the organisation. Why did that happen? Why did the compliance system not require the issue to escalate further, if this was a question of a breach of consumer law? The bank may not use the term "overcharging" but it was applying charges without notifying those concerned, as it is obliged to do. Why is the audit system not turning up problems? If it does turn them up, why are they not reaching management and why is appropriate action not being taken? In the case of the DIRT issue, although it escalated to management level it was not acted on. There seems to be a consistent pattern in this regard, which is a matter of great concern.

Mr. Gleeson

I ask Michael Buckley to answer the first question.

Mr. Buckley

To answer the Deputy's core question, our internal audit organisation turns up many issues and the audit committee deals with them. They are remedied in a professional manner. As the chairman has stated, we have greatly increased and improved the range of resources available to our internal audit function in recent years.

The issues mentioned by the Deputy are all significant and serious and each draws attention to significant and serious failures on our part. The Deputy's question is concerned with why our internal audit and compliance processes cannot pick up 100% of the problems that arise. This is the aim of the organisation but an aim that pretty much every organisation fails to meet. The audit committees of banks, particularly AIB, get very comprehensive reports from the compliance system as well as from the internal audit system. Each issue raised in our bank is graded and put on an agenda which rolls every quarter. Each item on that agenda is reviewed by the audit committee to make sure management is taking appropriate action thereon.

It is awful and embarrassing that the issues mentioned by the Deputy, which have been the subject of all the controversy, did not escalate to the management line in a way that enabled them to be put on the audit committee agenda. This is a failing and I would not like to see it happen again. I can say no more on it than that. However, to infer from these circumstances that our compliance and internal audit systems are not working would be wrong. To use an analogy, there is a bit of the iceberg above the water and more that cannot be seen. A great many issues reach the audit committee and it is true of any complex organisation that things will go wrong in different parts thereof. It is a question of catching as many as possible.

The first responsibility in all these matters is always with the line management of the organisation and not with the internal audit or compliance units. These are the full backs and centre backs on the second line. It is with the front-line organisation that responsibility lies in the first instance in terms of being dependable, delivering what needs to be delivered and being compliant with the law in every respect.

Mr. Gleeson

The internal audit system examines not just where things have gone wrong but also potential weaknesses. If one sits on the audit committee, one gets a substantial sheaf of papers in which the internal auditor identifies certain areas that could be improved, areas that represent a potential danger to which nobody has adverted or a computer system that should have certain listed security layers, for example. As soon as an issue is placed on the committee's list it never leaves it until it is signed off by the internal auditor as having been resolved satisfactorily.

As Mr. Buckley explained, there is a rolling booklet stating potential weaknesses or areas in which we should improve. These are graded according to seriousness. Every month, the audit committee lists the issues that have been resolved and the age and seriousness of those issues that have not been resolved. I fully accept the systems of the past were not of the standard of the present one, but under the contemporary system it is extremely difficult for something detected at audit level to fall out of the basket until it is sorted. The other point I wanted to make is that we do one million transactions per day.

Deputy R. Bruton

These issues are not like little grains that slipped through the sieve, they are big boulders that do not seem to have been spotted, such as the DIRT issue. Compliance with the Consumer Credit Act is a significant issue for any organisation in the consumer credit business. The formation of offshore companies by a bank that depends on its reputation is not a trivial issue. I can understand that a mistake can be made in a particular transaction or that something can slip through the sieve, but the issues in question are of such a scale that it seems there is something wrong with the sieve.

Mr. Buckley

Again, that is a very fair point. We have been continuously improving those control systems over a long period. Some of the issues mentioned by the Deputy, such as the Faldor issue, date to around 1989 in terms of setting up the company. I am not making excuses regarding the DIRT issue but many problems are remedied and we are trying to improve in this regard. We are making available the necessary resources and, in particular, we are trying to ensure consistent standards are applied across all our businesses. In this regard, it is very important to remember that AIB is not just a company operating in the Republic of Ireland. It may be unfair to apply to the manner in which we do our business a comment on the fact that certain problems may not have been identified 15 or 16 years ago. There will always be failures to identify problems.

Deputy R. Bruton

The delegates stated the bank has a strong culture, quoted a study and stated there are legacy issues to be overcome. However, the IBOA, which represents the bank's own employees, has spoken in terms of continuing deep and serious issues. I believe the term "rotten to the core" was used of the Irish banking system. Therefore, two groups are looking at the same thing through different ends of the binoculars. Mr. Buckley sees only a few legacy issues but those representing his front-line staff seem to see many more larger ones.

Mr. Buckley

I welcome the opportunity to say a few words. I dispute absolutely the phrase used by Larry Broderick in our interview a few weeks ago. One important point in this regard is that there have been attempts to drive a wedge between front-line staff and management of the bank. There are 24,000 people working for AIB, 10,000 of whom work in Ireland. They are honest, intelligent, decent, hard-working people. Every year for the past 15 years we have had a detailed independent survey carried out on all our staff by an international organisation that specialises in this area. Some 86% reply to the survey and we compare the results with those from many other companies across the world. Under many headings, all of which I do not have time to discuss, we come out above global financial services norms and are above leading companies across the world.

Let us consider two headings, the first of which is culture. The answers our staff are giving when asked about the level of respect with which they are treated, their ability to challenge, their level of involvement, the opportunities open to them, the bank's openness to contrary views and the fairness they experience are such that we are 7% ahead of the global financial services norm and a couple of per cent ahead in terms of the global high-performing companies measure the surveyor uses. Our rating under the surveyor's headings has improved by 10% in the past three years. The same is true in terms of leadership. Our staff believe they are working in a company run by human beings that does not correspond to the description by Mr. Larry Broderick that I will not repeat. That description was a slur on the 10,000 people concerned, many of whom are members of the organisation he represents. That is why we undertook the other research and sought external validation of the robustness of the culture. We are confident it is robust and both our staff and independent research agree.

We still have work to do. We are not in a situation where the 10,000 people who work for AIB believe its culture is flawed while the two people at the top believe it is not. That information contained in those surveys that cover a 15 year period is available if the committee wants it. This is what our own people say and they should know because they are given the opportunity to answer anonymously the survey in whatever detail they want and make whatever comments they want.

Mr. Gleeson

That accords with communications I receive from staff. I receive all sorts of communications from staff, some of them complaining about certain matters, but the overwhelming view is that this is a good organisation for which to work and that such comments are not fair. The scientific survey of the attitude of frontline staff to their own organisation is of some importance.

I agree that some of the matters referred to are not trivial and do not treat them as such. I am here to emphasise that we do not treat such matters in a trivial way. I am not speaking in defence of DIRT or Faldor, that is not why I am here. Neither am I speaking in defence of the failure to notify the regulator in these matters.

There is a lesson in the fact that we carried out all of these foreign exchange transactions and, in one sense, the reason it did not surface until 2002 is customers who write to us to say they check foreign exchange prices every week or month recognised that they were market prices.

Deputy Burton

Like other members of the committee, I thank Mr. Buckley and Mr. Gleeson for finally making it here.

Mr. Gleeson

We are delighted to be here.

Deputy Burton

For a bank, matters of compliance with the law must always rank as highly significant. Therefore, the representatives of AIB must be shocked at the failure of internal audit, the various management control systems and the external auditors who receive handsome annual payments to highlight these events. It is astonishing that no part of this triple lock system of assessment highlighted at any stage any of these high risk issues, given that they were matters of law. Normally, people have check lists to ensure laws are being complied with. Was there an opportunity to discuss this matter with the external auditors?

Although the regulatory framework has changed in recent times with the development of IFSRA, the Central Bank has always had a crucial relationship with banks such as AIB. The sum of the work of the internal and external auditors and the audit committee would wend its way to the Director of Consumer Affairs on pricing issues and the Central Bank as the ultimate overseer of the security of our banking institutions. Did the Central Bank just call in Mr. Buckley and Mr. Gleeson for a cosy chat from time to time and say there was a list and that they replied that, as far as they knew, it was all right?

Mr. Gleeson

That is a misdescription of our relationship.

Deputy Burton

We all know bankers have lots of dining rooms and nice pictures. In the corporate culture how does one get down to brass tacks and discuss the fact that something was found to be wrong? I know everyone involved is very polite but from the theatre of the sector, how does one cut to the chase?

Mr. Gleeson

I will ask Mr. Buckley to come in on this. The Deputy can conjure up any images she likes of how we meet the Central Bank but in the last three or four months the regulator has brought about a situation that will cost us €50 million. That is a serious amount from our annual accounts by any standards. It is possible to say we failed to notify properly every year for eight years in a row. If one was trying to decide what would be a fair fine for this for a big bank in Irish terms, anyone doing such adjudicating work must then ask how much the customers suffered. In truth, they did not suffer. If we had been compliant and done what we should have, there would not have been cheaper prices for consumers. If we had sent in the prices up on the board in the bank, they would have been approved and customers would have paid them, as they did. There was no disadvantage for customers. That might affect the fine but I do not know what the appropriate fine for failure to notify without a customer impact assessment for eight years in a row would be. Would €1 million a year be appropriate? For us it is €50 million for eight years. That does not imply a cosy relationship. If that is cosy, I would hate to see nasty.

Deputy Burton

Is Mr. Gleeson implying that it is only since the very late arrival of IFSRA on the scene that the regulatory relationship between the bank and the regulator has toughened up?

Mr. Gleeson

I am not implying that and did not suggest it. As the Chairman pointed out, I have been chairman of the bank for a year. Therefore, my relations are with IFSRA. While I have some relations with the Central Bank, I was not directly involved with the previous regime. I certainly did not mean to imply that there had been a huge change; I am simply saying that in my experience this bank did not get off lightly in this particular instance. I will bring in Mr. Buckley because his experience is longer than mine.

Mr. Buckley

My experience goes back 14 years to 1991 when I joined AIB. I have always found the relationship with the Central Bank and now the financial regulator to be challenging. It receives the minutes of the audit committee while the internal auditor has direct access to it and uses it regularly. The whole system is designed to ensure any bad news does not age because as we all know, it does not age well.

As I said to Deputy Bruton, I do not believe any of these matters relate to the failure of internal audit or compliance functions. When something goes wrong, it is in the first instance the responsibility of the person on the front line under whose watch it went wrong. One cannot expect those functions to pick up absolutely everything. If it goes wrong in the front-line, there will be a possibility that the second line will not catch it. Our audit and compliance functions have improved greatly and the people manning them are encouraged to keep open that relationship with the Central Bank and with the financial regulator.

On the mixture of items concerned, clearly in a couple of cases the issue is that something was done, or something went wrong, and the matter was not properly escalated up the management chain. That is the core issue, somebody failed to take their responsibility and escalate the matter.

The other matters that have gone wrong, which we have uncovered in what I described in July as the lifting of the floorboards exercise, are fundamentally to do with process deficiencies and with the fact that in certain product areas, where we have introduced many product amendments, our procedures were such that we did not make absolutely sure the product amendment was supported adequately by technology or that the processes were resilient, and therefore human error came into the delivery of some of those products. There is no excuse for that either and I am not excusing it. Little, if any, of what we are talking about has to do with audit or compliance failures. Some of it has to do with process failures and that which is not due to process failures has to do largely with information being available to somebody that something was wrong not being escalated.

Deputy Burton

Does that not make the situation in the case of AIBIM much more serious? Do the AIBIM and Faldor cases not raise the most serious questions about the culture at the most senior levels of the bank? This happened in the context of what was occurring in the case of bogus non-resident accounts, etc. While I will not go over that territory, it seems astonishing that the people at the top of AIBIM and the people who were identified as potentially benefiting from the Faldor scheme, and for whom the Faldor scheme was established, were the ones at the very top of the corporate tree in AIB. Did AIBIM's subsidiary status change the scenario, in other words, was it a regulated entity? Given all of the history, it seems astonishing that a group of people at the most senior level could have been involved in a scheme which lacked tax legitimacy.

Mr. Buckley

First, we are in territory which is still under review by the regulator and on which the regulator has stated he will report in public. I must be very careful.

The Deputy first made a connection between Faldor and the prevailing culture. It is important to remember in that context that the investigation showed there was only one Faldor. There was no other similar vehicle used for any executive of AIB and a very thorough trawl was undertaken to prove that.

As the Deputy rightly described, the issue about Faldor is that it lacked tax legitimacy. In that context, I suppose all I can say is I heave a sigh of relief that there was only one Faldor and therefore this was not a matter that contaminated the culture of AIB. There were not mini-Faldors all over the place.

Whatever issues arose in the investigation about deal allocation, the investigation also found that Faldor did not receive any benefit to the disadvantage of other customers. The Deputy asked, in that context, was this subsidiary a regulated entity. The fact that it was a subsidiary did not mean it was parked with no oversight. In terms of the particular areas of deal allocation practices, it was fairly unregulated in the sense that the Investment Intermediaries Act 1995 was the first Act to lay down in great detail a legislated code of conduct in matters including deal allocation.

What we have proven is that this was a once-off situation. Much thorough investigation has validated that. We have also proven that the looseness, which was evident in the wider investigations that went around Faldor in deal allocation in some limited instances, did not persist beyond the period when the Investment Intermediaries Act 1995 was introduced. Those are my instant thoughts.

Mr. Gleeson

If I may respond briefly on that, I do not seek to defend what went on in Faldor nor, to state the obvious nine years later, is there much I can do to change what happened then. However, I am obliged to aggressively inquire as to whether anything like that is happening on my watch. I have made those aggressive inquiries and I have satisfied myself in so far as one can that those behaviours terminated just after the middle of the 1990s.

Deputy Ó Caoláin

To put it mildly, this opportunity is long overdue. While I join with colleagues in welcoming the representatives of AIB, this is an opportunity that they should have facilitated earlier. It would appear from Mr. Gleeson's letter to the committee on 12 October that they view themselves no less constrained today than they did when the committee first extended an invitation to them to appear before it. I hope the text of his letter is openly available. The delay in coming before the committee has served no valuable purpose.

I wish to first ask a couple of broad questions. Do the representatives of AIB accept that all the revelations of abuse by the bank and by senior executives have undermined public confidence in the entire banking industry? Do they accept that the abuses to which we refer occurred on the watch of the Central Bank, that the Central Bank clearly failed to take action and that it was whistleblowers from within the organisation who revealed the abuse? Do the AIB representatives acknowledge that the Committee of Public Accounts found most of the senior management in AIB were well aware of the bogus non-resident accounts? How do they respond to that committee's findings?

I am a former member of the IBOA. I did not work for AIB but I would be concerned that the only safeguard for ordinary staff in the commercial banking sector is that those responsible at the highest level should be accountable for whatever abuses or crimes are proven, and that the real danger, reflected by IBOA representatives, is that the minnows who carried out the orders are the ones who will be targeted.

Where does the buck stop? On what do the disciplinary procedures referred to in Mr. Gleeson's letter of 12 October focus? Do they focus on ordinary branch officials when they should focus on the highest level within the organisation? Is it not ultimately by that application that one can provide the safeguards for ordinary staff to refuse to carry out miscreant acts that are clearly abuses at the direction of senior management? Are we going to react to the situation or are we going to root it out? The only way to do that is not by a Macbeth-like washing of hands of responsibility at the most senior level and looking for those at other levels in the organisation, but by having an impact at the highest level and that must be seen to be the case.

In 2003, alone of all the big banks and building societies, AIB did not pass on the full 0.5% reduction in the European Central Bank rate. Why was this? That happened in a year when AIB recorded record profits for an Irish company of €1.375 billion. AIB opposed vociferously the modest banking levy introduced by the former Minister for Finance, Deputy McCreevy. Would it not consider €100 million over a three year period from the financial sector a small contribution? It is my opinion that should not be time limited but on a continual basis. All of this comes against a background where 20 years ago the public purse bailed out AIB over the Insurance Corporation of Ireland fiasco in 1984. Mr. Buckley is shaking his head but that is how I recall matters and he can correct me if I am wrong. All of these facts feed into an undoubted view that AIB operates on a take, take, take basis.

On my proposal and that of other committee members, we conducted an investigation into exorbitant bank charges. In 2002, inflation in the financial services sector was 23%, against the EU average of 4%, as detailed in the Forfás consumer pricing report of 2003. What action is AIB taking at the highest level, as represented by the witnesses, to reduce widespread overcharging of customers? That was the critical focus of the committee at the outset and we still want to see progress on that front.

The Office of the Director of Consumer Affairs stated last year that AIB and Bank of Ireland were "operating like a club", effectively running a cartel and restricting public choice. This point has been made by delegations appearing before the committee before. What response would the witnesses give to that? What are they going to do about it?

Mr. Gleeson

There are enough questions to keep me going until 6 p.m. and then Mr. Buckley might have something to add. As to the constraints under which I operate, if the Deputy had read the letters of 24 May from Mr. Buckley and from me on 1 June, the constraints were different. I had not spoken to the board because we were still trying to get a grip on the facts and the situation is different now. The constraint I mentioned when I wrote to the Chairman last week relates to the disciplinary processes that are in train and it is not profitable to go into that. There were different constraints then and I judged that I should not talk to the committee. I feel that talking to the committee is important, both as chairman of a bank and as a citizen, but I felt I had an obligation to speak to the board first. Rightly or wrongly, I made that call and it is not fruitful to dwell on that.

I am not washing my hands of anything. I am taking responsibility by coming here. The committee did not ask me to come in, it asked Mr. Buckley and whatever executives he wanted to bring but I volunteered to come without being invited. I hope I am not crashing the party.

Deputy Ó Caoláin

It is a welcome surprise.

Mr. Gleeson

I am not washing my hands, whatever else I am doing. The Deputy tempted me with his Shakespearean reference but we might go on too long if I got into that. He said that the public has lost confidence in the bank but I absolutely disagree. I refer again to the 130,000 who do business with us. They know the addresses of the other banks in their towns. The customers are sophisticated and well educated, they are well capable of comparing bank products, but the Deputy says there is no competition. If any committee members have children at third level, they might be treated to stories of the effort that banks make to compete for their business.

Senator O’Toole

That is too much for me.

Deputy Ó Caoláin

"When you start making money, so do we," is how the advertisement goes on television. The bank is being magnanimous.

Mr. Gleeson

That is valuable business. Senator O'Toole laughs but he is laughing at the customers.

Deputy Ó Caoláin

Mr. Gleeson might address my questions and let Senator O'Toole laugh when he asks his own.

Senator O’Toole

I will tell a story about that in a while.

Mr. Gleeson

Although there are humorous aspects, this is important. The people who take out commercial loans from us, businessmen big and small, are well able to speak up and criticise us if we do give them value and service and they do so. That is why it is entirely unrealistic to suggest customers are incapable of making discriminating choices when it comes to banking. We fight every day for their business and we are quickly told if one of our products is not competitive compared with the bank next door. That goes on between us and the other banks day in and day out. The idea that there is a cosy arrangement that allows the business to flow in the door without any effort is entirely mistaken.

The Chairman referred to the publicity surrounding the profits per customer. I make no apology for saying that AIB is profitable. It would be a shame if a good Irish company had to apologise for making healthy profits. The best companies around the world are those that give good value and make good profits, the two are not inconsistent. Producers outside banking, such as Dell, IKEA or Southwest Airlines, who invented low cost air travel, a culture from which we benefit, all give great value and earn great profits. Many of the national flag airline carriers in continental Europe have gone to the wall because they had high prices, no value and no profits. The best companies, of which Microsoft is another example, have great products, good value and great profits. That is an important point to get across. This economy is enormously successful and, as someone said last week, the banks are the central nervous system of the economy. We have an enormous engagement with the success of the economy and it would be an absurdity if we were not experiencing good times as well.

I will say something about profits and then I will ask Mr. Buckley to speak. I do not know how long we have to speak but we can stay until midnight if the committee needs us. People speak of profits as if they all were being sucked in to be kept in some safe in a bank centre. If one takes €1 million profit, in broad terms about 40% goes back to reward our shareholders, who at present get a dividend yield of about 4%. They leave their money with us, we lend it to the customers and they get rewarded by the dividend. Many of those shareholders are Irish pension funds. American pension funds are shareholders as well. Approximately 67% of our shareholding is institutional and approximately 67% of our shareholders do not live in Ireland.

Approximately 31% of the profit goes to Merrion Street or to the Revenue Commissioners in Dublin Castle in the form of taxation. That does not include the tax that people would also pay on dividends, but in simple terms 31%——

Chairman

With the current corporation tax rate, will you clarify how you pay 31% of profits in tax?

Mr. Gleeson

It is across all our——

Chairman

Are you talking about VAT, PAYE and PRSI? What do you mean by tax?

Mr. Buckley

No. We are talking about that and the fact that we pay tax on profits at different rates——

Mr. Gleeson

In other countries.

Mr. Buckley

——in other countries.

Deputy Burton

It is hardly Ireland's fault if more tax is paid in other countries.

Mr. Gleeson

I am not blaming anyone. I am trying to tell the committee where the profits go.

Chairman

I apologise for interrupting.

Mr. Gleeson

To complete the answer, approximately 20% is ploughed back into the business to be lent in the next wave. I had two points on the Deputy's criticism of profits, the first of which is that profits are a good thing.

Deputy Ó Caoláin

We did not criticise profits.

Mr. Gleeson

I am delighted to hear the Deputy is now persuaded that profit is a good thing.

Deputy Ó Caoláin

No. If he listened to the points, what I asked him to address was the fact that in 2003 AIB alone failed to pass on the reduction of 0.5% in the European Central Bank rate. Why was AIB alone among all the banking institutions in failing to pass on the full reduction in the rate? That is a simple question. It was not dealing with profitability. Although Mr. Gleeson would see it as feeding into profitability, I would see it as feeding into the continued effort on the part of the bank to take and take in every respect, and that AIB failed to pass on that which should have been to the benefit of every citizen and all AIB's customers.

On the point Mr. Gleeson made earlier that customers can walk, as if they had lost confidence in AIB alone, the point I put to him was that the efforts, or rather the abuses, of AIB and those who are culpable have undermined confidence in the banking sector, not only in AIB but across the board. Following on National Irish Bank's painful journey in recent times, it is a case of people having a view that the entire sector is seriously questionable at present.

Mr. Gleeson

I will ask Mr. Buckley to answer.

Mr. Buckley

Taking the wide range of issues that we are here to discuss, I absolutely dispute that one can describe——

Chairman

I am sorry, gentlemen. There are many members offering.

Deputy N. O’Keeffe

Chairman, you are allowing Deputies to dominate the meeting.

Mr. Buckley

I will just be two or three minutes.

Deputy N. O’Keeffe

We object to all the Opposition Deputies getting the floor at the expense of Government Deputies.

Mr. Buckley

I would dispute that one can broad-brush and describe all we have been discussing as abuse of customers by higher management or anybody else. To get down to the Deputy's last point, however, the Irish Financial Services Regulatory Authority conducted a study, Interest Rate Pass Through, which was published last July. IFSRA stated that variable rate mortgage holders here have benefited from interest rate reductions and Irish mortgages offer good value compared with the euro area.

The Central Bank carried out a study from January to September of last year and carried out another study in spring of this year. The study in spring, Benchmarking Irish Private-Sector Credit, concluded that average mortgage rates here are among the lowest in the euro area and well below the euro area average, and average non-mortgage consumer lending rates here are below the euro area in two of the three categories compared. Overall the analysis showed average Irish rates in the personal sector are below the euro area average in categories that account for 94.4% of household lending. I refer not to an AIB book but to what the Central Bank and the financial services regulator stated.

In the particular case the Deputy mentioned, we did not reduce our mortgage rate by the amount of the reduction that one time but we reduced many other margins by more than the ECB reduction. The reason we did not reduce it in the mortgage rate was that ours was already, by a sight, the lowest variable rate mortgage in the market. Even at the end of all the adjustments other banks made, our mortgage rate was still the cheapest.

One must look at all of these matters on the basis of the facts. I have gone through a great deal of the research on all of this and I can tell the Deputy that is what the research, none of which was commissioned by AIB, states about pricing. In the SME sector, I can list four or five other pieces of research which have equally shown that the charges and interest rates AIB charges its SME customers are very competitive and significantly below comparable rates charged by banks in Britain — 30% of Irish SME's trade is with Britain and that is the main comparator.

If you want me to deal with some of the other issues the Deputy raised, Chairman, I am happy to do so but I do not want to hog the floor.

Deputy Ó Caoláin

May I make one final point?

Chairman

No, it is not fair to your colleagues.

Deputy Ó Caoláin

I appreciate that. It was not the interest rate that we were addressing, it was the bank charges. That is very important.

Mr. Buckley

The ECB does not set bank charges.

Deputy Ó Caoláin

No. The Fórfas Consumer Pricing Report 2003 showed the reality of the situation in the State compared to other European member states, that is, the discrepancy was 23% to 4% in that year.

Chairman

We will return to that. Most of the time allocated to Deputy McHugh, as a member of Technical Group, has been eaten up. Following Deputy McHugh, I will rotate to the Government members and then we will alternate among everyone who has not spoken.

Deputy McHugh

To facilitate the Government party, I will be brief. I want to raise one of the most recent issues of overcharging to emerge. It was covered in a Sunday newspaper and I presume it is true because I do not think the newspaper has been sued. Do both gentlemen feel miserable in the knowledge that their institution overcharged a charity, Kerry Parents and Friends of the Mentally Handicapped, to the tune of €210,000 knowing its only function is to look after people who are less well off than ourselves?

Mr. Buckley

I will read out the statement issued by that charity last week. It stated:

Kerry Parents & Friends Association wishes to categorically refute the allegations made in relation to AIB in an article written by Nick Webb in the Business Section of the Sunday Independent on October 10th 2004.

Furthermore, the Association wishes to state clearly that it was not forced to close any of its services as a result of any dealings with AIB and that it did not and has not at any time sold off any assets in order to meet its financial commitments.

AIB has been the Association's Bankers since 1973 and as such has always supported and facilitated the Association in its development of services ...

AIB continue to act as the Association's Bankers and enjoy the complete confidence of the Association.

Deputy McHugh

Is it denying the story or certain elements or details?

Mr. Buckley

It states the "Association wishes to categorically refute the allegations ...".

Deputy McHugh

No, I am putting the question to Mr. Buckley, as chief executive of AIB. Is he denying the story or only certain details?

Mr. Buckley

First, I am denying that there was overcharging and, second, our customer issued a categorical statement which I have just read out.

Deputy McHugh

Did AIB pay out €210,000 to the organisation in question?

Senator Ross

That is the question and why?

Mr. Buckley

The bank paid over that money.

Senator Ross

Thank you, Mr. Buckley. Why?

Mr. Buckley

All the other newspapers have reported this issue accurately——

Senator Ross

Why did AIB pay out €210,000?

Mr. Buckley

It was reported differently.

Chairman

We will come back to this topic.

Mr. Gleeson

In which capacity is Senator Ross addressing us?

Senator Ross

I am a Member of the Oireachtas.

Chairman

Senator Ross is a Member of the Oireachtas. Members were questioning the representatives in sequence. Senator Ross may put his question.

Senator Ross

I will come back to this point.

Mr. Buckley

I am happy to answer the Senator's question.

Chairman

In the interests of the committee, we will come back to it. Members will be called in sequence, rotating between Government and Opposition Members who have not spoken. Deputy Finneran is next, followed by Deputy O'Keeffe.

Deputy Finneran

I welcome Mr. Gleeson and Mr. Buckley. It is highly unlikely that either the chairman or senior executives of AIB would travel on a low cost airline. Mr. Gleeson indicated that he had not used that facility.

Mr. Gleeson

The Deputy might be surprised.

Deputy Finneran

It is highly unlikely. It is important to establish at the start, as Mr. Gleeson stated on a number of occasions, that the events under discussion did not happen during his watch. However, Mr. Gleeson is representing AIB and must speak on these matters.

Mr. Gleeson

I accept that point.

Deputy Finneran

I will concentrate on the presentation Mr. Gleeson made to the committee. In his opening remarks he clearly stated: "AIB is sorry for the serious lapse in our responsibilities towards the regulator..."

Mr. Gleeson

Yes.

Deputy Finneran

That is a clear and definite statement. However, he does not express regret for the lapse in responsibility to the bank's customers. While he stated, "I do not want to try to minimise our failing," he attempted in a number of instances to excuse the bank and minimise what had happened. Mr. Gleeson first quotes from the IFSRA report and then states, "it is likely that if we had simply notified these rates to the regulator, they would have been approved." The bank does not know this. Mr. Gleeson further stated: "Our customers are now getting the last eight years of foreign exchange transactions at half price." It needs to be stated AIB broke the law, pocketed money illegally from 173,000 customers and was forced to pay it back.

Mr. Gleeson

No, Deputy, that is——

Chairman

I will give Mr. Gleeson an opportunity to respond.

Deputy Finneran

The other point Mr. Gleeson makes is that "about one third of the repayments are under €10, two thirds under €20 while 96% are under €250." The simple fact is that AIB took €26.1 million, to which it was not entitled, from people and now has to pay it back. Mr. Gleeson did not state whether this sum plus interest would be paid. He states he believes the bank did not get off lightly, but let me put this to him. I have a constituent who drew unemployment assistance for six weeks and received €800 from the Department of Social, Community and Family Affairs which he repaid within two months but he was up in court recently and was fined €800. Mr. Gleeson seems to be making excuses for AIB and trying to minimise what has happened. I do not think he has given a clear and unequivocal apology to the customers involved. He stated: "We are putting in place arrangements which will result in one identified person in AIB being responsible for ensuring our prices are in line with our regulatory filings and approvals." Should that not have happened already?

I appreciate that Mr. Gleeson has answered questions, but there is an attempt to minimise the seriousness of what has happened and portray in some way that AIB is now okay because the money has been repaid and the bank has been penalised to the tune of €50 million. I do not know what disciplinary action has been taken because of constraints on both Mr. Buckley and Mr. Gleeson regarding certain topics. However, bank staff must have known for eight or nine years that there was a serious deficiency in what was happening and that people were being charged when they should not have been. This deficiency was not identified in the audits but came to light as a result of a whistleblower As I see it, the public has not received a clear and unequivocal apology from AIB. I sincerely hope that before the meeting is over Mr. Gleeson will be in a position to do this.

Mr. Gleeson

I thank the Deputy for his questions. AIB has certainly apologised and if there is a deficit in the contributions here today, I repeat the apology to customers. Customers received an apology with the refund. That was part of the process. We certainly made an apology to customers in July.

I understand the remit of the committee relates to regulatory matters. For that reason, our relationship with the regulator seemed to be the matter upon which we should focus. The Deputy is right to draw my attention to the fact that our customers are entitled to be disappointed that we did not observe our regulatory obligations. However, I disagree with his assertion that we pocketed money illegally — that did not happen. The scheme of section 149 of the Consumer Credit Act 1995 requires notification, but does not make the notified price enforceable except in certain circumstances when other matters arise which did not arise in this instance. There was nothing illegal about what was done. The foreign exchange transactions were in a legal sense simply sale of goods transactions, with the price displayed on the wall. Somebody buys it at that price.

Deputy Finneran

Is it that the bank did not comply with the law or did not break it?

Mr. Gleeson

I do not understand the distinction that the Deputy seeks to draw. We did not comply. That is a breach of the law. They are mirror images of the same thing. I am not trying to engage in a semantic separation. I am simply saying the money was acquired under contract law, something we were not obliged to return because the customer had been told the price and paid the market price for it. I suspect that the intricacies of the operation of section 149 are not of great interest to the committee, although I can go into them, if the Deputy so wants.

The most important point is that we have apologised to customers and received replies which suggest that some of them, at least, do not believe they were overcharged. I believe that is still the correct description of what happened. One is overcharged when one buys something and goes down the street to see it much cheaper in a couple of other shops or when one sees a price in a window or on a menu and is charged more. That never happened in this circumstance. As I stated, there are a number of instances of customers writing to us to state the only reason they dealt with us was that we were the cheapest. That is the context in which I make those observations. Our customers are entitled to expect, regardless of the legal status of the transaction over the counter, that we will be fully compliant with regulatory requirements. It is for that reason that we stated we would not stand on the strict legalities but give the money back to customers. I hope this clarifies the matter somewhat.

Deputy Finneran

Did AIB pay interest on it?

Mr. Gleeson

Yes.

Deputy Finneran

My final question had to do with Mr. Gleeson's statement, "We are putting in place arrangements which will result in one identified person in AIB being responsible..."

Mr. Gleeson

I will ask Mr. Buckley to answer that.

Mr. Buckley

That is the case. The individual concerned is pulling together a complete review of all these charges and a complete new submission to the regulator. The phrasing in Mr. Gleeson's introductory statement was related to the fact that there was to be a reorganisation in the company in which the individual concerned would have a particular designation which he has not yet been given. He is putting together a complete new submission on all these matters to ensure our filing will be absolutely right and will stay right. I hope this clarifies the matter.

Mr. Gleeson

It is happening.

Senator O’Toole

I welcome Mr. Gleeson and Mr. Buckley. I agree with Deputy Ó Caoláin that it is regrettable they did not come to us earlier. In all the criticisms made around this table their personal integrity was never impugned or touched on at any time. It is held in the highest regard and without question. However, it would have been helpful if they had come here to share their views with us, even within the constraints imposed on them, with which we could have dealt. The reason I say this is that while it may well be correct to say individual customers may not have lost confidence in their bank, there is a huge loss of trust and confidence in banking.

There are a number of issues covered in the presentation which worry me greatly. Mr. Gleeson's focus on the word "overcharging" is incorrect. It is okay to say it was not dearer than a bank down the road and that, therefore, it was not overcharging, but it is a little like a hotel sending its price list to Bord Fáilte and then charging more, although I accept the point that such a charge is not above the market rate. The reason we are here is that this was one of the regulations and if it is still attitudinally Mr. Gleeson's view that it does not constitute overcharging, I have a problem with it, although I certainly accept he is entitled to make the point that it may not be more than the market rate.

In the light of the list the Chairman read out, it beggars belief that AIB paid good money to Dr. Peter Scott-Morgan of the Concours Group who came up with the conclusion that AIB had a sound culture. I would say that guy was looking for a great deal more work from AIB. Even if he did say this, I would be slow to come and say it. I certainly want to hear a comprehensive response on the issue.

Mr. Buckley stated there was more to be done. What are the matters on which there is work to be done? If the IBOA has a problem and, as Mr. Buckley states, got it wrong, where is the communication? Somebody is not telling someone something. Is the IBOA involved in these culture change activities or initiatives? How would it be involved? That is an issue.

Although it did not happen on the representatives' watch, looking back all those years, the bank has had an unfortunate experience with internal audit. I assume that the audit committee has meetings, without senior management, with the internal and external auditors——

Mr. Gleeson

Yes, I can confirm that happens regularly.

Senator O’Toole

——and that these are the independent directors who will do this.

Can Mr. Buckley explain this to me? He brought in two North Americans. If we have learned anything in the past ten years about North America it is that its rules based approach to governance does not work on this side of the Atlantic where we are looking for a principles based governance system, which we are trying to implement. I cannot see how we have anything to learn from North America and it would be the last place I would go to get somebody to put on an audit committee. The rules it is introducing are so defined that they still would not have stopped some of the major scandals in North American companies in recent times. I would like to know what AIB hopes to gain that cannot be gained on this side of the Atlantic.

There is a related foreign exchange issue. I do not understand why there is not a European bank clearing system. I firmly believe — the representatives can correct me if I am wrong — that the present foreign exchange costing system, with its €30, €20 and 75c arrangements, is something on which we will look back in five years' time and say customers were screwed. Why is there not a Europe-wide bank clearing system?

On a related issue, will we have the same question to ask in five years' time about credit cards? Why must I pay a higher rate of interest on a credit card in Ireland than I would if I lived in other parts of the so-called Single Market within the euro zone? Why am I not able to shop around? Why have the banks tied it down to that extent?

These are the issues which arise but I would certainly like to hear about the cultural changes, the involvement of the union in such changes and how it is getting it so wrong if Mr. Buckley is getting it so right. These are reasonable questions.

Mr. Buckley

I thank Senator O'Toole for raising the four or five issues he has raised and I am happy to respond to him. On our failure to appear earlier, I felt at the time that we did not know enough about the circumstances involved. Perhaps that was a bad judgment call. When I came, I wanted to be able to talk as freely as possible. As the Senator will be aware, I spent many years as a public servant and have a good appreciation of the role that committees like this play in the public enterprise system. There was no disrespect intended.

If he does not mind me saying so, the Senator went a little over the top in his references to the man who conducted the research for us on the issue of culture.

Senator O’Toole

I do not know the man concerned.

Mr. Buckley

If he was looking for more business, rather than saying it was fundamentally sound, surely he would have said the whole place was absolutely in bits because that would have earned him more business.

The IBOA is an important part of how we do things. I made a reference to comments that had been made by its head, which comments were exaggerated, lurid and not supported by the facts. AIB as a company and I have a very strong relationship with its main trade union and that will continue to be the case. It has facilitated a great many of the important productivity changes we have made in the past seven or eight years which have enabled us to remain as profitable as we have been. It is the case that we have communicated with it about the cultural issues involved which we have discussed and debated. I have discussed them personally with Larry Broderick and will continue to do so.

Senator O’Toole

Will it be drawn into their implementation, delivery and monitoring?

Mr. Buckley

It will be drawn into a process, a dialogue about things we are doing that will have an impact. I will come back to what we are actually doing.

The Senator took on what the Chairman had stated about our definition of overcharging. This debate would not be taking place if overcharging had not been equated with customer rip-off. However one might describe what was happening in the foreign exchange area, it was not a customer rip-off. That is the point I make.

Senator O’Toole

That is an acceptable point but in terms of——

Mr. Buckley

Let us park the word "overcharging".

The Senator raised the issue of internal audit and referred to two very valued colleagues whom we have brought in, one in internal audit and the other as head of risk management. They have both brought immense qualities into our company by virtue of the breadth of their experience and the quality of their work for other international banks. I would not agree with the point made by the Senator that banking in America is rules based and that we have a principles based system. He should read the audit and accounting Act——

Senator O’Toole

I have read it three times. It is rules based. The Federal Trade Commission documentation is rules based — it is a set of rules.

Mr. Buckley

That is the ultimate in rules based legislation.

Senator O’Toole

Mr. Buckley has brought staff over from America.

Mr. Buckley

I am saying the audit and accounting Act is both rules and principles based.

Senator O’Toole

It is not rules based. It is principles based.

Mr. Buckley

There are many involved in the accounting industry and many other aspects of commercial life who would disagree with the Senator. We will be happy to have that debate on another day.

Senator O’Toole

There are no rules laid down in the Act.

Mr. Buckley

We have gained immense value and will continue to get value from those senior personnel who have worked not only in North America but have also spent considerable periods in Europe, the Middle East and various other places. They bring true international experience to the bank.

In respect of the euro based clearing system and payment costs, there is an active working party at European level and a timescale established for the introduction of a euro based integrated payment system. The reason it is not in place is there are between 15 and 20 countries all with different clearing systems, giving rise to technology and definition issues. However, the train is now moving on the issue. By 2008 — according to the deadlines agreed — everything will have changed on that front.

In regard to credit cards which are similar to any other aspect of financial services, if there is competition, there will be price differences. There are significant price differences both here and across Europe. In a recent survey by the financial regulator the pricing of AIB credit cards was very competitive.

Senator O’Toole

In Ireland but not within Europe.

Mr. Buckley

I have read out the results of the broader references to pricing in Ireland versus the position everywhere else.

I will now deal with a point raised to which I did not reply, namely, the extra things AIB is doing. I have personally taken responsibility for upping our game in the way in which we manage customer complaints. We have a very serious project under way which will involve AIB installing new measurement systems and new standards for dealing with customer complaints. We will be producing a half yearly report for the board on the top five and top ten issues emerging from the complaints received. We will also provide an annual summary for inclusion in our annual report. I am trying to ensure that, based on what I regard as the highest standards for complaints handling in the countries in which AIB operates, those of the Financial Services Authority in the United Kingdom, we apply these standards across the group. We have said that each year we will select a random selection of customers in each of the geographic areas in which we operate and have their fees and charges independently audited and that we will give the results to the regulator. We will be starting this process in the Republic of Ireland division in the first half of next year.

I have said our objective is to ensure all of our pricing is automated and that where there is manual intervention at present because of technological deficiencies, we will deal with this in a major programme. The infrastructure to enable this to happen in a comprehensive way will cost approximately €70 million, an investment in a new technology platform for branch banking business.

There are two or three other areas that I think are important. I have said we have undertaken a complete review of our Republic of Ireland product range in order to streamline the number of products. We will ensure the gatekeeper role on regulated pricing is completely separated from the marketing and product development area. Up until now, responsibility for liaising with the regulator on regulated pricing lay in the same area of the bank as that for product development, market research and marketing. We will take it into a separate area in order that the gatekeeping role will be seen to be completely independent from the area of product development.

These are examples of what we are doing and it is significant work. I hope it will bring benefits.

Senator O’Toole

I will write directly to Mr. Gleeson to explain to him why I laughed. It is a good story.

Chairman

I will call members in the following order: Deputy O'Keeffe, Senator Ross, Senator While and Deputy Boyle.

Senator White

There is a parliamentary party meeting.

Chairman

I am aware of that.

Deputy N. O’Keeffe

I welcome Mr. Gleeson and Mr. Buckley. Mr. Gleeson, being a good solid Cork man, is especially welcome in my eyes. The representatives from AIB have taken a bit of a bashing this afternoon, much of which is unjust.

What is the total cost of the refunds made to shareholders as a result of these problems? How many visits did the Director of Consumer Affairs make before IFSRA was put in place? The bank was not in compliance with the provisions of the 1996 Act. More people on the State side were neglectful and the Director of Consumer Affairs had a major role to play.

What role did the external auditor play in the examination of the books? The external auditors usually pick up on issues and write letters to the chief executive which are made available to the board after the audit has been completed. I know the bank changed its auditors for another reason. Were the auditors aware of the problems on the charges side?

We hear a great deal about corporate governance, but it is a bit of a joke when one considers what happens across the world. The board makes the policy decisions and the chief executive carries them out. Do the representatives believe deregulation would lead to more competitive pricing? Mr. Gleeson states AIB has the most competitive charges but it is very obvious that the consumer is being ripped off because of regulation rather than deregulation.

How many customers did AIB lose as a result of the criticism of its role in this issue? I presume the bank has a database showing the movement of customers. This would give us an idea of the number of customers who left the bank as a result of this debacle. To be fair, the share price is the barometer of success and the AIB share price held fairly rigid during the crisis. That is a sign investors were confident that there were no great errors of judgment on their part.

I also want to comment on Mr. Larry Broderick of the IBOA.

Senator O’Toole

He is not on the payroll.

Deputy N. O’Keeffe

He has done damage to our economy. I listened attentively one morning recently to the representatives of another banking group who replied to him, and rightly so. His people are making the mistakes as well as anyone else and, therefore, he has a role in seeing that matters are put right. He has not done any good for the financial services sector. There is so much financial activity in Ireland. The most successful financial services area in the world is located on the other side of Dublin. There is a message in this. I greatly regret that I was not here the day he came to the committee because I would have asked him a few questions. Mr. Gleeson might answer a few of the questions I posed and I might ask a few more later.

Mr. Gleeson

I want to say something about the deregulation issue the Deputy raised but I will ask Mr. Buckley to address the questions first.

Mr. Buckley

The Deputy's first question was about the cost to shareholders of the refunds. If one takes the refunds to the customers relating to the foreign exchange charges and adds the other items thrown up by our own raising of the floorboards, the total figure, as we stated in July, was €34 million. We stated that we would make a provision in our accounts of 2004 for that amount plus the costs and that all of that would come to €50 million. In our first half accounts, we made a provision of €45 million. The other €5 million will arise in the second half accounts.

The Deputy mentioned the role of the Director of Consumer Affairs. To be honest, our attitude is that we are to blame on this and I would not blame a regulator for a deficiency on our part.

Deputy N. O’Keeffe

AIB advertises its charges in the public press on a regular basis and I take it that a regulator would have access to the newspaper. I am a little taken aback.

Mr. Buckley

I may have misunderstood the Deputy. Yes, we have always advertised the actual charges that we have been charging for inspection in newspapers and branches.

Our external auditors did not pick these issues up. Customers lost do not show up on the register. In the first half of the year we grew our lending, whether one is talking about mortgage or non-mortgage lending, personal or business lending, ahead of the market here. Our deposits were up in the first half of the year by a greater percentage than in the first half of last year. There is no sign of any depletion in our customer base, whether through customer numbers or through the volumes of business.

Before Mr. Gleeson addresses deregulation I will quickly return to one matter Deputy Ó Caoláin mentioned. The sub-committee does not have any riding instructions stating that disciplinary action stops at a particular grade. Wherever the issues arise, they will be dealt with by the committee.

Mr. Gleeson

Perhaps I may pick up on that as well. There was a reference to getting the minnows. I stated during the summer that there was no information available to me that junior staff were involved in this. Therefore, there is no question of going after the minnows in the sense that Deputy Ó Caoláin stated.

I wanted to respond to Deputy O'Keeffe on the question of the deregulation of bank charges. Clearly we have run into trouble with regulated bank charges. Therefore, perhaps one could say we are not the best advocates of deregulation. There is a wider philosophical or economic theory argument. Deputy Bruton would be more skilled than I in debating this. As a matter of fact, Ireland, among OECD countries, is very unusual in having regulated bank charges.

The question of whether regulated bank charges is good for consumers — forget the banks for a moment — has been well debated in other advanced economies. The strong, overwhelming consensus is that it is not any good for consumers and that, in fact, it may be bad. It obviously adds a regulatory cost on both sides of the equation as the regulator must employ people and so must we, that is, quite apart from a particular slip-up.

As to whether it is good for consumers, there is an OECD paper entitled Enhancing the Role of Competition in the Regulation of Banks, published in September 1998, which concluded that regulation of prices in banking services were, at best, unnecessary and, at worst, damaging to the citizens interests. The Australian Government held an inquiry into its financial system and the final report, issued in March 1997, reached a similar conclusion, that regulation was more likely to impede than encourage competition. The Treasury Select Committee of the United Kingdom Parliament in 2002 reached the same conclusion, that regulation would probably damage the interests of small businesses. There is economic writing, which I confess I have not read but of which I am aware. Professor Alfred Kahn is the guru from MIT on the economics of regulation. His work in the United States would confirm that view. On another occasion there is an important debate to be had about whether regulation is just an extra cost and competition is the better answer.

Deputy N. O’Keeffe

Are ATMs subject to charges? Interest rates are not regulated. The market dictates interest rates on which the bank takes its margin, and different banks take different margins.

Mr. Gleeson

Sure.

Deputy N. O’Keeffe

In fact, the regulation is anti-consumer rather than pro-consumer in the charges area. That came across loud and clear in Mr. Gleeson's script today. We in the committee should look at this.

Mr. Gleeson

We all would be in favour of that.

Deputy N. O’Keeffe

I wish AIB well and further success.

Senator O’Toole

The Deputy has waited six months to say that.

Deputy Ó Caoláin

Is it a requirement of members to declare any personal interest in any particular business or entity that is the subject of discussion here in committee? If so, Chairman, would you remind the committee members? If anyone has failed to so declare, it is appropriate that they should.

Chairman

Deputies indicated it in their annual register of interests.

Deputy N. O’Keeffe

If the question was directed at me, I have declared my legal activities with the banking groups.

Deputy Ó Caoláin

I assure the Deputy, so are mine.

Chairman

There is an annual register.

Senator O’Toole

There is an issue. Apart from declaring interests, people are also supposed, when speaking in the Chambers, to declare specifically their interests in an issue if they have any vested interest in the matter being discussed. I do not know if that applies to committees but it applies in the Chamber.

Chairman

That is if one has not declared it in the annual return.

Senator O’Toole

No. Even if it is in the annual report, the Member must state each time that he or she has an interest in this area.

Chairman

Point taken. Senator Ross, will you cede the floor to Senator White who must leave shortly?

Senator White

The parliamentary party meeting with the Taoiseach is taking place and we do not want to miss it.

Senator Ross

As long as the Senator is brief. I must be out of here at 5.55 p.m.

Senator White

Mr. Gleeson, in his previous career, served a distinguished term as Attorney General and Mr. Buckley had a tremendous reputation as a public servant. I am sure if we were living in the UK they would be Sir Dermot Gleeson and Sir Michael Buckley and the whole country would know how distinguished they were.

Deputy Burton

I would have thought one of them at least would be a Lord.

Senator O’Toole

Lord save us.

Senator White

Or Lord Buckley or Lord Gleeson.

Senator Ross

I am sorry. Can I retract this arrangement?

Deputy Ó Caoláin

Let her off to the Taoiseach.

Senator White

I agree with Senator O'Toole on the section of Mr. Gleeson's presentation on culture. I found that a bit over the top. He stated that the overall conclusion from the Concours "research is that AIB has a sound culture. While it is not fundamentally flawed, some work needs to be done ..." That sounds like tweaking.

At this stage of my life I know that the true story never comes out, for example, the true story of John De Lorean was not in Ivan Fallon's book on the matter. Was there something in the bonus system that drove senior executives to generate extra revenue at the expense of customers? I refer to the hidden technical aspects of the work of senior management. In its earlier discussions on this issue the committee stated it was not fair that all 10,000 AIB employees should feel guilty and embarrassed, nor was it fair that junior, front line staff were taking abuse. Over the period of eight years, how were senior executives influenced by the bonus system?

Mr. Gleeson

I will ask Mr. Buckley to reply to that question but I will briefly comment on the culture of the bank. Culture is a very elusive thing about which to speak. We use the word "culture" but what precisely are we talking about?

Senator White

Mr. Buckley's culture would be of the highest integrity.

Mr. Gleeson

Absolutely.

Senator White

Mr. Gleeson does not need to comment further because I know exactly what culture in a company is about. However, I refer to the nitty gritty of a mechanism Mr. Buckley did not know was in the system from which people generated financial reward.

Mr. Buckley

The Senator is very perceptive because one must always look at these matters for the triggers. Bonus schemes were not particularly widespread for most of the period, 1996 to 2004, up to senior levels. They were introduced on the basis that there would be three dimensions to them — financial performance, customer satisfaction and the results of a staff survey where people outlined what they thought of those under whom they worked. Customer surveys are conducted many times each year while staff surveys are conducted once a year.

There was always a triangulation in the bonus schemes. To that extent, there was no obvious incentive in their structure to drive people towards extra money at the expense of customers. The bonus system needs to be reviewed in the light of all the experiences of the past six months as the chairman said in his opening statement. One of the issues at which we are looking is how best to build the broad compliance obligations into the bonus schemes, whether to build them in as a prequalification factor or as an extra leg to the stool in order that X% will depend on the overall compliance of the unit for which one is responsible. Our preference is to build them in as a prequalification in order that if there are significant compliance issues, it will be clear no bonuses will be paid in that area or to the individuals involved.

There was nothing jumping out of bonus schemes that would have predisposed people to look for extra money at the expense of customers. As the chairman's statement outlined, at the end of the day — I am not trying to minimise or diminish anything — the revenue base of the bank from the mid-90s to today was between €8 billion and €8.5 billion. The issues that have arisen must be placed in that context for materiality in the overall scheme of things but, in the detail, we are saying to ourselves we want to have a bonus scheme that clearly starts with the concept of a well run and managed business and well managed growth.

Senator Ross

I join in the general welcome for Mr. Buckley and Mr. Gleeson but this is an unreal experience. From the point of view of the average punter on the street, AIB has sent in its brightest and best to defend the indefensible in a situation where the two representatives are not culpable of anything. However, under them there is a culture which may be rotten but is certainly badly flawed. What I find so disheartening about what happened in AIB is there has been a series of extraordinary incidents — DIRT, Ruznak, foreign exchange and Faldor — which cumulatively make up something extremely rotten. The public would not like what we have witnessed this afternoon. We are not on a witch hunt but the question is continuously asked as to why nobody is ever to blame in the banking system.

I do not seek the heads of Mr. Buckley and Mr. Gleeson but throughout the DIRT inquiry, which Mr. Gleeson will acknowledge was a poor experience for AIB, no individual in the bank was blamed, yet ordinary people who have broken the law in a minor way have been pilloried, outed, fined and been given a criminal record. Staff who encouraged colleagues in the bank to do this have got away with it. Nobody is ever to blame within this banking culture.

Throughout this period, board members who are ultimately responsible for all these difficulties have escaped. I cannot think of an occasion, except in the case of Ruznak which was a US operation, where individually or collectively board members took responsibility and the action that should have been expected of them. The board and senior executives are not responsible for what has happened under them. That is completely unacceptable. There should be accountability, not only in the form of the representatives appearing before this committee, which we welcome, and saying they are not responsible. Mr. Gleeson was not on the board for much of the period involved while Mr. Buckley could not be expected to know what is happening at the bottom of the company all the time, no more than a Minister could of his civil servants. However, nobody seems to be accountable or takes the rap.

I agree with Senator O'Toole that the continuous reliance on the reports of outsiders who continuously report favourably to the bank is unsatisfactory. With regard to Ruznak, Mr. Ludwig was put up front and virtually gave the bank a clean bill of health. The foreign exchange issue came to light and the same person who had been paid $1 million for his first report reported again that this was a one-off and the bank was sound. Now, in view of the criticisms of culture, we are getting another person coming in and saying, "It is all right, the culture is sound as well." Nobody in the country believes this. That is what I find disturbing. The public believes the culture is flawed, as do I, and the evidence is available. It beggars belief that the representatives would tell the committee that Mr. Peter Scott-Morgan said the culture was sound. It also beggars belief that Mr. Ludwig could come forward twice and say the incidents were isolated and not to worry because basically things were sound.

I do not seek a purge but I had hoped the AIB delegation would tell us why a process of cleansing, in terms of individual and collective responsibility, had not been undertaken within the bank in order that the public would see something was being done. The delegation appears to have apologised, which is welcome, and to be taking measures to ensure this will not happen again. Although we do not want a witch hunt and have to name people, in order to make these claims credible AIB ought to state certain people were to blame and have been disciplined and that measures have been taken in every section of the bank to ensure it will not happen again by removing the individuals involved. I do not understand why this does not happen.

It is very easy for AIB to do what it has done in such situations. For example, as a result of the DIRT inquiry, it paid €90 million in penalties and interest but this was shareholders' money. It is very easy to admit wrongdoing and pay up because no one suffers as a result. Everyone in the bank still gets paid. In such circumstances, it also pays large sums of money to consultants who will give it the result it wants. We need to see concrete and credible expressions of what actually happened. How many customers were undercharged rather than overcharged, a phenomenon referred to by the delegation?

Mr. Gleeson

I thank the Senator for his questions. We will share the answers if we may. I stated I was not here to defend what had happened in respect of DIRT. The Senator mentioned three other matters, namely, the Faldor, Rusnak and foreign exchange issues. He is not correct to state there has been no accountability. In the aftermath of the Rusnak affair, a number of people left the bank.

Senator Ross

Were they not based in the United States?

Mr. Gleeson

Yes, but they left the bank. The Senator's point is that there is never any accountability. I do not want to get into a row with him or the nuts and bolts but a number of people left the bank on that occasion. I draw the Senator's attention to this fact because he did not recall it when referring to the bank's record.

The Faldor case was completed a long time ago. I am not defending or understating the issue but disciplinary action has been taken in the past year and in one case is ongoing in respect of employees who were involved. The Senator is correct that names should not be mentioned in a forum such as this because I am not entitled to do so and there can be all sorts of abuses. People are entitled to privacy, even when they are in the wrong.

The disciplinary process in respect of the foreign exchange issue is ongoing. It is slow and tedious. I wish we could complete it more quickly but I know from experience that haste in such matters can mean one has no disciplinary process.

I have a slightly different take on the issue to the Senator, although I do not want to defend the DIRT issue or go back over it. There was accountability in respect of the Rusnak affair while disciplinary action has been taken this year in respect of the Faldor issue which arose a decade ago. In regard to this year's unhappy events in respect of foreign exchange, there is an ongoing disciplinary process. Therefore, I am not saying the Senator is wrong to state there should be accountability but disciplinary proceedings are in progress in respect of these issues.

I do not think the Senator's criticism of the board is fair. Board confidentiality is important. Therefore, I cannot account here for everything that transpires. However, I have had an opportunity, as someone who came from the public sector, to examine how responsibly the board conducts its soul searching and self-interrogation. The Senator has to take it from me that they compare well with my other experiences of how a board self-interrogates in business and the public service. My honest assessment is that the board self-interrogates strictly in a way which makes genuine demands of itself and those for whom it is responsible.

It was commented upon that no one believed what the bank was saying. I really believe in my heart and soul that while some customers are not discriminating and do not make judgments, many more are free to walk into or out of banks and have a selection from which to choose. The extent to which people make such choices and convey them to the bank is underestimated by commentators. We conduct one million transactions per day and one million people cross our threshold once every eight days. This represents a great degree of interaction. We get a great degree of feedback, not all of it positive, but are the first to learn of criticisms of our products, long before financial editors or public representatives, which is no criticism of either of those esteemed categories. Some of our customers are extraordinarily demanding, which puts us on our mettle in respect of the products we sell.

Mr. Buckley

Senator Ross referred to two people who had carried out investigative work for the bank, namely, Mr. Ludwig and Mr. Peter Scott-Morgan. The report produced by Mr. Ludwig on the fraud issue was highly critical of the bank and, as the chairman stated, a number of people left the bank as a result. Moreover, as a result of that report, we spent a great deal of money paying people to review our systems from top to bottom. The reports made 321 recommendations which we have followed religiously since the end of 2002, of which just 18 are still outstanding, and of which most will be dealt with during our preparations for Basel II.

The Rusnak investigation did not give us a clean bill of health by any manner of means. However, more recently, when we asked Mr. Ludwig to help us to see what more we needed to do, he told us that the bank was a much a better place from a control and risk management point of view than it was in 2002. I agree. He did not say this was a perfect place and that there was nothing to be done. Furthermore, as far as the chairman and the board are concerned, the work in which Mr. Ludwig's company is engaged is intended to bring more issues to our attention which need to be dealt with. The same is true of the research on the issue of the culture of the bank. The people concerned are not hired to whitewash the bank. Rather, their work gives rise to a huge amount of work and we value their recommendations to improve matters that need to be improved.

Mr. Gleeson

The business in which we are engaged is much too grave not to take it seriously. Criticisms have been made of external consultants but we ensure that when we get people in, they are prepared to bark and bite; otherwise the exercise would be worthless. What interest would I have in getting someone in to tell us we are great? That would be a pointless exercise and it would have no meaning to me.

Mr. Buckley reminded us of the 300 odd recommendations in the reports we received in 2002. I am not allowed talk about everything that goes on at the board. However, that list of recommendations was religiously produced and reproduced every six months at the board to discuss which of them were completed, which were still in hand, which were giving rise to difficulty, until all of them, apart from the 18 that are still outstanding, were met. The members can take that with a grain of salt if they want, but I witnessed it.

This has involved a considerable shake up and discomfort for some. I am not talking about discomfort in terms of discipline or anything like that but in terms of changing work practices, abolishing little enclaves in the bank or diminishing the importance of certain officials and the role they played. It is hard to convey this if one has not been there while this work was ongoing. It is true to say that the bank has been changed fairly considerably during the past three years, mostly during the time my predecessor, Lochlann Quinn, was there. I am intent that will not be lost at this stage.

Senator Ross

I take Mr. Gleeson's point that the report was critical in some parts and I agree that it was. I was at both press conferences. Mr. Gleeson may say I am wearing two hats——

Mr. Gleeson

Sorry, I missed that.

Senator Ross

Mr. Gleeson may say I am wearing two hats and I apologise if he finds that a difficulty——

Mr. Gleeson

The Senator may wear as many hats as he likes.

Senator Ross

——but that is the reality. In each case Mr. Ludwig was presented with some pride as a boaster and prop to the bank. On this occasion we have what is called a Concours research. It is stated that overall conclusions from the research are that AIB has a sound culture. It has some work that needs to be done. That may be Mr. Gleeson's interpretation of what he said — I have not seen that report — and it may be what he said, but nobody believes it. Everybody has seen what has happened to AIB and they know it does not have a sound culture from the evidence they see. They see offshore accounts and are aware of the DIRT issue. Mr. Gleeson did not answer the question on that, but perhaps he could answer this question on DIRT, which is fundamental. Is it fair that people who evaded their tax in a small way should have been pilloried in public in the way that they were while the people who encouraged them should not have been and, in many cases, should still be in their jobs or even promoted? Is that reasonable?

Mr. Buckley

I would dispute both of those points, as Senator Ross would know. Hopefully, we will have an opportunity at some other time to continue this debate. I dispute his characterisation of the culture of the bank. If I conveyed an impression or if the chairman's statement conveyed an impression that we did not have work to do on that culture front, I am sorry but that was a miscommunication. The chairman's statement clearly outlines the serious steps we have taken in the area of encouraging people to speak up and escalate issues when they see something that has gone wrong. That to me is the biggest part of that agenda that we had to get right. It was addressed with the utmost seriousness and that is why it takes up half a page of the chairman's statement. We are not minimising this. This is not a whitewash. In response to Senator O'Toole's questions, I outlined some of the other things we are doing that have a culture dimension, including complaints handling and other such measures where I have taken on certain responsibilities.

The DIRT issue was played out in front of a committee of both Houses of the Oireachtas in great detail. I do not want to get into that because my level of expertise on the issue is not as great perhaps as that of Senator Ross. None of that is something of which any of us is proud. We are trying to do our best to make things better in the future, and that is what I see as being my job.

Mr. Gleeson

May I add a brief comment?

Chairman

Yes.

Mr. Gleeson

On the sound culture of the bank, one can get an impression that some sort of malign influences are at work, that there is some sort of aberrant behaviour that in some ways is common in AIB. I do not think that is true. If one looks over the counter in the average branch and even if one sees some of the managers, one will see one's neighbours and one's neighbours' children. These are people who read the same newspapers, go to the same pubs, play on the same football teams, tell the same jokes and back the same horses. They are the people of Ireland. There is an enormous number of people working there. The idea that they are some subset of Irish society is something into which I do not buy.

I will give a positive and negative on the culture assessment. A positive assessment we got was that collegiality and loyalty is very important in AIB, but that raises the question of whether this admirable collegiality, something many organisations would try to encourage, could on occasion spill over into an inappropriate reluctance to report some sort of aberrant behaviour by a colleague. That is one of the questions we would have to examine. Collegiality is a positive virtue, but there may be circumstances in which it operates negatively. That is something to which we have to attend and examine.

Mr. Buckley

May I add a final comment on that point?

Chairman

Yes.

Mr. Buckley

That is why one of the actions we said in public we are taking is that in future, failure to escalate an issue of that nature is something that will be looked upon very severely from a disciplinary point of view. That is how the culture scan and the action should tie together.

Mr. Gleeson

I will add a final point on this. Since these matters became public in the summer I find that staff are communicating with me more than before. Staff take what I say seriously.

Deputy Boyle

I will be relatively brief considering the ground we have covered. I am grateful for the opportunity to contribute. As I pointed out at previous meetings, and I do so now for the benefit of the representatives of AIB, my wife is an employee of the AIB Group.

Mr. Gleeson

I am glad to hear it.

Deputy Boyle

She is currently on leave of absence since my election to this Dáil. I wish to return to the question of the culture at the bank of which the representatives are so defensive. Is it fair to say that because the Irish banking sector — the representatives may choose to disagree with this — lacks competition within itself, there is competition largely within the bank and it is encouraged? Is it the case that branches compete with other branches of the same bank, that branches are organised into units which compete with other units and that the units compete with regions into which they are organised? Do officials in headquarters tend to rub their hands with glee and hand out incentives from time to time to the region, unit or branch that achieves the highest level of profitability in the shortest possible time? Is that not the culture that operates because there is pressure on branch managers, unit managers and regional managers to achieve such profitability? Is it the case that often a blind eye is turned or shortcuts are taken at the most local of levels within the bank?

What we need to discover is to what extent this culture is encouraged or is somehow endorsed by the bank. Who is prepared to take responsibility for the existence of such a culture? With the litany of events that the bank has presided over in recent years, it seems the greatest public disquiet has been caused by people at management level from headquarters downwards being unwilling to take responsibility.

My second question is more to do with facts and figures. I am anxious to know to what extent repayments are being made to the bank's customers. Are they being made on the basis of the principal sum in which the over-estimation would have been made? Are allowances being made for the inflation of such a figure in the period since then? Is allowance being made for how that money might have been invested for more productive purposes over the period, given that if the bank had overcharged a customer by €500, the value of that amount would be much less several years later? To what extent is AIB offering a true and fair compensation package to the customers whom the bank has misled, at the very least, through its activities in recent years?

Mr. Buckley

I thank the Deputy for those serious and substantive questions. I disagree with him that there is no competition in the Irish banking sector. Regardless of whether one considers mortgages, credit cards or small or large business lending, one will note that there is pretty fierce competition between both indigenous banks and foreign banks. It is increasing all the time and I welcome it because it makes us all better. There is a myth circulating that there is no competition. I do not feel there is none from where I sit.

On competition between branches, I do not know of any sales organisation or service organisation in the world that does not have some sort of league table indicating, for example, the salesman or manager of the month.

Deputy Boyle

These are set targets given to each branch, unit or region, to which they are meant to aspire in any given timescale.

Mr. Buckley

I also know of no company in the world that does not set targets for its staff, be they sales or profit targets. Identifying the best salesman of the month or the most profitable branch of the year, for example, is a legitimate way of running a business and ensuring that people are shaped up for competition. I have no doubt that the competition for our branch in Mallow is not our branch in Skibbereen, as everybody working in the branch in Mallow knows. The competition is created by the other banks with branches in Mallow. A legitimate way of dealing with one's broad competitive environment is to make sure there is some competition between different people doing the same job within the organisation. We do not——

Deputy Boyle

Does Mr. Buckley not accept that it has led to different policies operating within different levels of the bank or to the charging of different fees?

Mr. Buckley

No, what is important is that people's bonuses do not depend on whether they are in the best bank in the world, the best in Munster or the best Leinster, but on the targets that are set for their branch in the context of the economic and competitive environment in which it is operating. I refute the point that this is unhealthy in any way. My approach to business is never to look for profit at the expense of fair dealing with the customer. If this ever happens, I make sure it is rooted out.

As the chairman has said, when we are refunding money to customers in interest rate-related cases — most of the cases about which we have spoken are such — we add to the interest rate. I believe EURIBOR+1% is used in calculating the total amount to be refunded. A significant amount of interest is included in the figures we have talked about all day.

Deputy Boyle

But not inflation.

Mr. Buckley

No, the interest rate is appropriate. It all concerns interest rates in any case. Some 96% of the sums we are giving back in foreign exchange charges repayments are under €250 and therefore the use of the interest rate is perfectly appropriate. Our regulator has agreed with us that this is the appropriate way to deal with inflation or any other issue one wants to raise. One per cent is added to the EURIBOR.

Chairman

I have two further observations. The witnesses have stated that disciplinary procedures regarding Faldor and the foreign exchange issue are not concluded but are being dealt with. When the Faldor scheme was announced in the summer, it was also announced that five executives were discovered to have tax issues as a result of a separate scheme. I heard it mentioned at the time that three existing executives were facing disciplinary action as a result of their involvement in the second scheme. Therefore, we know of three areas in which disciplinary action is potentially being taken. Has the advent of IFSRA encouraged the bank to take disciplinary action? Is it prompting the bank or looking over its shoulder to see how it deals with these issues? Apart from the activities of Mr. Rusnak in Allfirst, which took place substantially outside the country and represented a serious loss to the shareholders, and as a result of which the bank must regain their confidence, there was never disciplinary action in respect of all the domestic issues we touched upon, even those dating back to the DIRT issue. However, such action now seems to be taking place in respect of the three aforementioned cases. Is the advent of IFSRA beginning to bring about some of the changes the Legislature wanted to bring about through its establishment of that authority?

Mr. Buckley

In any given year quite a number of disciplinary proceedings are undertaken in the bank. These would not have started last year or the year before. They are not taken in a blaze of publicity but are done thoroughly and professionally. In all the cases the Deputy mentioned, including those related to the tax issues, disciplinary proceedings have been taken.

I was always a proponent of the current structure of regulation, which involves a single financial regulator with a particular type of relationship to the Central Bank. I find our regulator to be very professional, tough, rational and demanding. It is very good for us that we should have a very demanding one. Senator O'Toole has left but he should note that I believe the regulator has a principle-based approach, which I believe is the correct approach. IFSRA is forcing all financial institutions to up their game, including AIB, and that is a good thing.

Chairman

I am happy to hear that IFSRA is having an impact. I detected that Mr. Gleeson feels it was possibly a little severe on the bank regarding the penalties.

Mr. Gleeson

I felt that.

Chairman

As a Member of the Oireachtas, which set up IRSRA, I am pleased that the regulator is imposing penalties of sufficient magnitude to make a bank feel aggrieved. I would be very concerned about the future of IFSRA if the banks were very happy with everything it did. Perhaps the penalties were severe, or perhaps not, but it is important that they demonstrate to us that there is no cosy relationship between the banks and IFSRA.

I do not want to return to the issue of culture but let us consider the following statement by Mr. Gleeson: "In particular, we have reviewed the avenues which are open to staff to raise concerns on ethical issues, or issues about bad practice ...." To this end, the bank has availed of an external service provider, Public Concern at Work, in the UK. I believe this is a very good idea. This was done by the bigger IT companies and multinationals.

Mr. Gleeson

I understand. We have no previous experience of it.

Chairman

It is welcome and I am very pleased that staff do not necessarily have to report to the person immediately above them. The availability of the external service provider helps to surmount problems associated with loyalty and collegiality. Was Mr. Gleeson working with the IBOA in respect of this measure, if appropriate, or was it a management initiative whereby staff were just informed of the service? Did the IBOA have a role in bringing it about?

Mr. Buckley

The decision to add that service provider to the list of channels through which issues can be raised was a board decision. We have a policy called "speak up". It is a much broader policy relating to toleration of diversity of views and raising issues through the various channels, and there are many other dimensions to this. There has been a consultation process with the IBOA about the policy and we look for its support in rolling it out. The policy is rolled out at a whole series of seminars with staff and working sessions, right down to small units within branches and so on. We look for partnership with the IBOA on all these types of initiatives, as we do on other business such as productivity and other changes.

Chairman

I noted a little healthy tension between yourself, the IBOA and IFSRA, your staff representative organisation and your regulator, two institutions with which you must deal on a daily basis. This might or might not be good.

Mr. Buckley

It is very good in both cases. It is borne out of respect on our part in both cases.

Deputy Ó Caoláin

In his preamble to the meeting, Mr. Gleeson said that some work needs to be done to ensure that the bank's culture is fully in line with best standards. He went on to refer to staff raising concerns and so on and he said that he believes this is in accordance with best practice. What other areas of work does Mr. Gleeson acknowledge must be addressed to ensure the culture in AIB is fully in line with best standards?

Chairman raised the issue of discipline. I am sure other Deputies and Senators have had cases referred to them. A specific case, which goes back to 1997, has been raised with me. Following an investigation, AIB was obliged to refund to a northside customer in this city £22,000. The customer claimed that she was defrauded of £100,000. There was a Garda investigation. The bank acknowledged that money was taken from the lady by the use of forged dockets through the branch system. Was anyone ever disciplined in this case? There is no knowledge of this on the part of the injured party. She does not believe she was refunded all she lost. Was anyone disciplined or prosecuted in connection with the case? Has anyone ever been prosecuted within AIB for defrauding branch customers? I do not know if Mr. Gleeson is familiar with the case, perhaps he is not.

Mr. Gleeson

I am not.

Deputy Ó Caoláin

I would not expect Mr. Gleeson to be familiar with the case. I would be very happy to furnish Mr. Gleeson with the details.

Mr. Gleeson

The Deputy can feel free to do so. There may be customer confidentiality issues involved.

Deputy Ó Caoláin

That may be the case. I am just using it as an example to refer to the issue of discipline. If Mr. Gleeson cannot refer to the detail of the case——

Mr. Gleeson

I am at an obvious disadvantage.

Deputy Ó Caoláin

Have bank staff at any level within AIB and this jurisdiction been prosecuted for wrongdoing within the bank system?

Mr. Buckley

I am not familiar with the details of the case but I would be happy to get them. The answer to the second question is that people have been prosecuted.

Deputy Ó Caoláin

What still remains to be done to ensure the culture meets best practice standards?

Mr. Buckley

I already mentioned one aspect, which is probably an apposite one. It goes back to what my chairman said about the strong and weak points of having a strongly collegial culture. One of the weaker points in the highly collegial culture is that it can sometimes be difficult to learn from mistakes. This is one of the reasons I have taken responsibility for customer complaints handling standards within the organisation. We are already good at it. However, we could be better and we need to be more consistent. There is also a list of other aspects.

Deputy McHugh

On the issue of the Kerry charity, during the exchanges I understood Mr. Buckley to confirm that there was a payment of €210,000 to the charity. I also understood him to disagree that this was as a result of overcharging. In order that public confidence can be restored in AIB in respect of this issue, can Mr. Buckley confirm what the payment was for? Is Mr. Buckley aware that a Northern Ireland firm confirmed it was engaged to examine the accounts and it found that this sum of money was owed by AIB to this particular charity?

Mr. Buckley

I read the press statement issued by the customer concerned. It stated that the association wishes to categorically refute the allegations made in relation to AIB.

Deputy McHugh

In fairness, I heard the statement.

Mr. Buckley

The reason I read out the statement is that we are bound by customer confidentiality in respect of individual customers. The only thing I can read out is the categorical statement made by the customer. The whole issue was reported accurately in other newspapers but the original article was fundamentally inaccurate in every respect.

Deputy McHugh

Does Mr. Buckley think the bank should come out in the open and deal with the outstanding charges? He is not dealing with them, which does not serve the bank well.

Mr. Buckley

Our customer dealt with it on our behalf.

Deputy McHugh

I am asking is Mr. Buckley aware that a Northern Ireland based company confirmed it was engaged to carry out an examination of the accounts and it found the money was owed by AIB to this charity?

Mr. Gleeson

The overwhelming feature when speaking in a public forum is that we cannot talk about particular customers' business. What we can do is repeat what they have said. It is entirely a matter for the Kerry Friends and Parents Association to decide what, if any, of its banking affairs it wishes to make public. It has elected to make a particular public statement. In view of confidentiality obligations, it is not open to us to add to or subtract from that. We do not discuss particular customers' affairs in public. I ask the Deputy and the Chairman to assist me in that important principle.

Deputy McHugh

Mr. Gleeson said they elected to issue this statement. Are they obliged not to say anything because of a confidentiality clause?

Mr. Gleeson

No. We have placed no obligation on customers. There was no overcharging.

Deputy McHugh

Mr. Gleeson has said there was no over-charging with regard to every issue discussed today. There is obviously a different term for what happened, but we have not yet found it. Every organisation in the Republic dealing with handicapped people can now look forward to receiving a cheque for €210,000. There is no reason they gave it to the group in Kerry.

Mr. Gleeson

That is not fair. There are concessionary rates for certain charities. We have said what we can. I have tried to explain the restriction as best I can.

Chairman

We will conclude the meeting. Our numbers have decreased, but I thank Mr. Gleeson and Mr. Buckley for this afternoon's three hour session. It has been helpful. There has been much interest and people are following what is said. It is petering out at this time of the evening. However, their presence is appreciated. Perhaps we have not learned as much as we would like, but there will be another day and other issues. On behalf of the committee, I thank them for attending and answering questions.

The joint committee adjourned at 6.30 p.m. until 3 p.m. on Wednesday, 27 October 2004.