I thank the Chairman for the opportunity to address the committee on this matter. While my statement in this part of the session is focused on our investigations and report into AIB, it is important to note that much of my earlier statement on NIB and on the relevant regulatory developments that are taking place, particularly relating to fitness and probity matters, equally applies to the matters we are now about to discuss.
The committee is aware that we published an interim report in July last year and a final report on 7 December following our investigations into AIB on two issues, foreign exchange and other charging issues, and deal allocation and associated issues. The report outlined the background to these issues and detailed the actions we are taking, on foot of our investigations, to ensure AIB fully rectifies the situation in regard to its customers, those responsible for these activities, and its own internal practices, systems and controls. The committee will understand that I cannot go into detail with regard to any individual. The report also set out clear lessons for the financial services industry as a whole.
I wish to summarise the findings of our investigations, beginning with those into the foreign exchange and other charging issues. This part of our report dealt with the period from 1996, following the commencement of the Consumer Credit Act 1995. It showed that AIB failed in its regulatory obligations to comply with the law for a period of almost eight years. Certain members of staff and management within certain areas of AIB appear to have been aware, over different periods of time, that AIB was charging over the amount notified to the regulator for some foreign exchange transactions.
The report confirmed that the total amount of excess charges by AIB to be refunded to customers is €34.2 million, including interest. This amount can be divided into three categories. Some €25.6 million relates to the foreign exchange charges subject to statutory notification under section 149 of the Consumer Credit Act, €500,000 refers to non-foreign exchange charges also subject to the statutory notification and €8.1 million applies to other charges not requiring notification under section 149. To date, €14.55 million of the €25.6 million foreign exchange refund has been repaid to customers. Of the remaining refunds for other charges, totalling €8.6 million, €2.2 million has been repaid to customers. In addition, repayments totalling €645,000 to closed accounts have been identified and AIB is endeavouring to make contact with these customers.
As stated in our report, it appears that at least seven opportunities arose between 1998 and 2003 for certain staff and management within certain areas of AIB to identify and-or disclose the discrepancies to the relevant regulator. This was not done. These opportunities ranged from requests from the regulators to confirm that notified charges were correctly applied, to a situation where an internal document in 2002 analysed the issue and drew attention to the need to inform the regulator.
Our investigations also showed that between January and April of last year, AIB took a number of deliberate measures to reduce the foreign exchange charge being applied. The charge was reduced in April 2004 to the level that had originally been notified in 1996. This was done without informing the regulator. These matters are open to the interpretation that AIB intended to notify the regulator subsequently of a proposed increase and to do so without ever drawing attention to the previous breach, which had persisted for almost eight years.
There was inadequate documentary evidence of decisions made in regard to changes in charges, including the original notification. The procedures to raise matters up the line in AIB were inadequate and contributed to this matter persisting for so long. Controls within AIB were also weak in terms of monitoring customer charges.
AIB has a group internal audit function which reports directly to the audit committee of the bank. There is no evidence to suggest that group internal audit was aware of the issues with regard to foreign exchange overcharging prior to May 2004, or that these were brought to its attention. The financial regulator has been satisfied with the co-operation it received from group internal audit during its investigation of the issue. AIB is now strengthening, developing and refining its internal audit function as part of a review of the role of, and resources available to, group internal audit.
AlB has confirmed all customers will be able to obtain repayments due indefinitely. In addition, AIB will not benefit financially in any way from any amount not repaid to customers who cannot be identified.
With regard to deal allocation and associated issues, the investigation found that between 1989 and 1996, funds of certain senior executives of AIB at the time, and-or related parties, were managed by Allied Irish Investment Managers Limited, now AIBIM, through a British Virgin Islands investment company, Faldor Limited. Certain taxation issues arose and these are being dealt with by the Revenue Commissioners.
Faldor benefited from inappropriate favourable deal allocations, by way of artificial deals, amounting to approximately £48,000 out of AIBIM's own funds. We have no evidence to indicate the beneficiaries of Faldor influenced or were aware of these allocations. AIBIM's own trading funds were also used to boost, through the unacceptable practice of artificial deals, the performance of certain clients' portfolios, other than those of Faldor.
Further inappropriate deal allocation practices relating to eight transactions in the period 1991 to 1993 were identified which adversely affected the performance of two specialist unit trusts, amounting to a total of £174,000, to the advantage of other clients. These were unrelated to Faldor. While the internal audit function of AIB did identify some inappropriate dealing practices in 1991 and 1993, there is no evidence that the Faldor account was identified in these audits.
No disciplinary action was taken against individuals involved in these practices at the time and compensation was not paid to the unit trusts affected. A disciplinary process is now underway within AIB and compensation has been paid to those who were disadvantaged.
There has been a fundamental change in the way client relationships are managed by investment firms, such as AIBIM, following the enactment of the Investment Intermediaries Act 1995. Since that time, codes of conduct and client money rules, which require deals to be allocated immediately to the specific client, have been issued and investment managers have been required to invest substantially in compliance functions. Breaches of these, should they occur today, could be subject to sanctions under the new legislation.
AIB is undertaking a number of required actions. These include making all efforts to refund the full amounts identified in the charges issues investigation, totalling €34.2 million, including interest, to affected customers; undertaking a fundamental review of product pricing policy and systems; and introducing a centralised register of all charges levied on products. In addition, AIB will ensure full compliance with an effective policy of escalating matters "up the line" to include an ongoing training programme for management and staff. It will also accelerate and complete a programme of strengthening its compliance function and further developing its internal audit and operational risk management functions. AIB will consider and apply appropriate disciplinary actions against individuals found responsible and will report the outcome to the financial regulator. AIB will undertake an action programme to enhance regular reviews of risk management, controls and governance and to submit those results to the financial regulator. We will continue to monitor the implementation of all required actions.
In response to your request, I will say a few words about the issue of fitness and probity. In a principles-based supervision system heavy reliance is placed on persons in key leadership positions of financial services firms to act in compliance with applicable legislation and in the best interest of customers. For that reason, when a firm proposes to appoint a person to such a position it is obliged to demonstrate to the financial regulator that the person is competent to carry out the duties of the post and is of good character.
We will shortly publish a consultation paper setting out proposals for a comprehensive framework of standards for testing the probity and competence of directors and managers of financial services firms. The framework covers the standards to be observed and the means by which proposed directors and managers are to be tested. It also raises issues about scope, frequency and treatment of old offences.
In principle the standards of competence and probity do not change. However, in the context of the review, we have been considering how they might be elaborated to leave no doubt as to the comprehensive nature of the standards and to ensure there is complete clarity as to what is expected. Rather than describing the standards in terms of definitions or lists of qualities, which risks a suggestion that issues not explicitly mentioned are therefore not relevant, a description in terms of principles is more inclusive. With regard to probity and trustworthiness, for example, the principle would be that a proper person is one who would always act in a manner that is in the interest of the customers of the firm and which complies with all legislative and regulatory obligations of the firm.
In judging whether people are likely to meet, or are continuing to meet, our standards of probity, we suggest that in addition to looking at the individual's personal record, we also look at whether they are clearly committed to a compliant culture in their firm. This would include playing a part in supporting and rewarding staff within a firm for taking an ethical approach to their work.
As part of encouraging a compliant ethos in firms, we see merit in the firm that proposes a person as a director or manager taking the initial responsibility for checking the fitness and probity of that person before submitting their name to the financial regulator. In addition, there is merit in the firm itself applying a fit and proper test to employees below the level subject to scrutiny by the financial services regulator. These are issues on which we are seeking views from the industry, consumers, the general public and this committee for the purposes of the consultation paper.
Requirements of fair procedure also mean that we are required to apply high standards of proof in exercising these powers, since exercising those powers may involve taking away or significantly impairing someone's livelihood. In practice that means we would seek to rely on proven misdeeds in drawing the conclusion that someone falls short of the required standards of probity.
Other agencies, such as the Companies Registration Office or the Director of Corporate Enforcement, may be of assistance to us in establishing the facts of a case. Tax compliance is an issue where we need to consult with the Revenue Commissioners to help us to form a judgment about whether persons or institutions are tax compliant or have aided tax evasion. We are, as part of our consultation regarding fitness and probity, discussing the matter with the Revenue Commissioners.
Lessons arise, from both the NIB and AIB affairs, which relate to the financial services industry and its regulation. Staff members of financial institutions should not feel that they have to go to outside agencies in order to raise issues of importance to that institution. They should feel comfortable raising issues up the line. Those who wish to raise such issues should not be held responsible for the issue simply because they have raised the matter. The financial regulator would expect these issues, where relevant, to be brought to it through the normal compliance channels. However, we will listen, on a strictly confidential basis, to any staff members of any financial institution who may have relevant regulatory information and, where appropriate, we will act on that information.
We have required all credit institutions and bureaux de change to conduct a review of charges imposed on customers. We are examining all charges advised and are checking them to ensure all charges have been correctly notified and approved.
We have already commenced consumer-focused inspections of banks' headquarters and branches. These inspections are designed to test, on a random basis, the banks' own compliance systems and to raise compliance standards. This will not, however, eliminate breaches of requirements. In the new consumer-focused environment, financial institutions will be required to demonstrate their systems of control and audit cover consumer issues and consumer law. The key responsibility for the prevention of breaches of consumer-focused requirements remains squarely with the board and management of each firm.
Proven serious misbehaviour, including deliberate tax evasion, deliberate misleading of customers or deliberate concealment of facts from the financial regulator are taken extremely seriously when assessing a person's fitness and probity. Such proven behaviour or action will lead the financial regulator to disqualify persons from holding approved posts in the financial services industry.
In publishing our report on AIB within months of these issues arising, we ensured the key findings of our investigations were highlighted and put into the public domain in a timely manner in the public interest. It was very important — for the customers of AIB, for AIB itself, for consumers and the financial services industry in general — that the facts behind the issues covered in this report were highlighted and published without any delay. We wanted to raise these issues early and ensure that the appropriate remedial actions by AIB were clearly identified and acted upon. We will continue to monitor the implementation of the action programme under way in AIB to ensure this is the case.
It is also, of course, important that the financial services industry as a whole learns from this so that the consumer is always put centre-stage and that the type of activities described in both the AIB and the NIB reports do not recur. The failures uncovered by the investigations are completely unacceptable. We will not tolerate such practices within the financial services industry. Customers deserve better than this. As I have already stated, financial institutions that put short-term cost considerations before their customers and their regulatory obligations will ultimately suffer in the long term, as these events have shown.
