Behaviour and Culture of the Irish Retail Banks Report: Central Bank of Ireland

We will now deal with the examination of the Behaviour and Culture of the Irish Retail Banks report and our quarterly engagement with the Governor of the Central Bank, Professor Lane. I welcome him and his colleagues to the meeting. We will first deal with the culture report on the banks and I understand Professor Lane has an opening statement in this regard. We may then break for ten minutes and deal with the other general issues. That will be the format of the meeting.

I advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I invite Professor Lane to make his opening statement.

Professor Philip Lane

I welcome the opportunity to meet the committee for our regular engagement. I am joined today by Ms Derville Rowland, the director general for financial conduct, and Mr. Ed Sibley, the deputy governor for prudential regulation.

As the Chairman has indicated, I will divide my introductory statement into two parts. In the first part, I will provide an update on the tracker mortgage examination and the outcome of our recent culture report. In the second part, I will turn to the broad macro-financial outlook and outline the main issues and risks we see on the horizon, including non-performing loans, NPLs, and Brexit.

First, I wish to focus on the culture report, which builds on our conviction that consumers are best protected if firms not only comply with our regulatory requirements but also invest in organisational cultures that reward consumer-focused behaviour and penalise harmful behaviour that seeks to skirt around the duty to treat customers fairly. By way of wider context, I note that in the past decade we have seen many financial misconduct scandals around the world. At home, the mistreatment by banks of so many tracker mortgage customers has shown that financial misconduct is a substantial risk to households and firms that rely on the domestic system for the provision of financial services. Our tracker mortgage examination - the largest, most complex and most significant customer protection review we have undertaken to date - was undertaken to ensure lenders identified those customers harmed by this mistreatment and paid appropriate redress and compensation. The latest data show that by the end of August lenders had identified around 38,400 affected customers, including cases resolved before the examination was launched, and had paid €580 million in redress and compensation.

Some 93% of affected customer accounts identified and verified had received offers of redress and compensation by 31 August. Four of the five main lenders are close to completing their redress and compensation phases and we are exerting significant pressure on the remaining lender to finish its process. Our bank-by-bank supervisory review of the conduct of the examination is also significantly advanced but will not conclude until the process is completed. We will continue to challenge them where necessary to confirm that all groups of affected customers have been identified and included for redress and compensation. On a separate track, enforcement investigations are in train in respect of six lenders. In the past couple of minutes, I have focused on numbers at the macro level, such as the thousands of people involved. However, we all fully acknowledge that the statistics do not give the full picture. When we think about the individuals who have been harmed, especially those who have lost a home or a property, we fully recognise that this has had a devastating effect on them which numbers cannot capture.

This examination has exposed further evidence of a clear lack of consumer-centred culture in lenders. Even in how the examination itself was conducted, let alone the original tracker problems, we found some banks adopted a narrowly legalistic approach, offering initial compensation proposals that fell well short of our guided expectations. The examination raised serious questions about the current, not just historic, culture in the banks. This is why we were pleased to work on the culture report requested by the Minister and published in July.

Why are regulators focused on the concept of culture? The report is the latest step in the strengthening of our supervisory approach in recent years to focus on conduct and cultural issues. This is a process of evolution. In the wake of the financial crisis, our immediate focus was on strengthening the solvency and stability of the system and enhancing protections for consumers. A lot was done at that level and I emphasise that banks and other institutions have more and better-quality capital, more sustainable funding structures, are better governed and are more strongly equipped to deal with any difficulties in the future. I refer also to macro-prudential measures. For example, through stress-testing we focus on banks' ability to withstand adverse shocks. In response to the misconduct we have seen, there is much more extensive conduct regulation in order to protect consumers and investors.

That said, all of these rules and regulations should be reinforced by an additional focus on the organisational cultures of these firms. The boards and senior managers of regulated firms are responsible for ensuring that organisational cultures are focused on enhancing consumer protection and ensuring that risks are well understood and managed. Accordingly, how best to achieve this has become an increasing area of focus for regulators.

From a supervisory perspective, the importance of focusing not only on risks that materialise but on advance risk management has led to our introduction of the consumer protection risk assessment model. This is designed to help supervisors assess how risks to consumers are identified and managed within firms. Another important dimension of this is to improve the levels of diversity at senior levels in financial services firms. Diversity can improve decision-making, reduce the risk of groupthink, improve risk management and, in doing so, ensure organisations give sufficient priority to the experience and treatment of their customers.

I will now outline the report's findings. Our work underlines the fact that organisational culture is built on a shared purpose and vision as well as standards such as professionalism, honesty, integrity and accountability to deliver fair outcomes for consumers. This is what we expect in all the firms we regulate. The culture report is built on focused studies of the five main retail banks. We have found they have not yet built a truly consumer-focused culture.

We went about this work with our counterparts in the Dutch central bank, a recognised leader in the assessment of bank cultures. The review team was diverse in composition, comprising conduct and prudential supervisors, governance risk experts and organisational psychologists. The reviews involved both on-site and off-site assessments to ensure the necessary analytical breadth and depth. This included 1,400 hours of desk-based review of materials, more than 500 surveys and 75 interviews, in addition to observing meetings and assessing decisions in each bank. Our assessment focused on the executive committee of each bank, since the senior leadership is responsible for driving the behaviour and culture in an organisation under the direction of the board.

An effective consumer-focused organisational culture is one in which consumer needs are adequately identified, discussed and taken into account. We found that all of these banks have taken some steps to reinforce the consideration of consumer interest in strategy, decision-making and procedures. Clearly, however, some are more advanced than others. We also examined behavioural patterns in leadership, how strategic decisions are made and the general outlook of these firms which could put at risk the successful transition to a consumer-focused culture. These cultures remain under-developed and some obstructive patterns of behaviour form a barrier to successful implementation.

For example, in some cases we saw executives continuing to operate in a "fire-fighting" mode. This may have been suitable during the crisis, but may no longer be appropriate as we return to more normal conditions. We saw too much focus on short-term and legacy issues, with insufficient attention paid to consumer interests. We discovered some reversion to "command and control" in leadership styles. We determined that the banks have much more work to do to ensure their organisations are sufficiently diverse and inclusive, particularly at senior level. As I have indicated, this would be helpful in preventing groupthink, guarding against complacency and overconfidence and promoting internal challenge.

Will this report sit on a shelf? What are we going to do with it? Action points have emerged. The board of each bank is required to make a number of steps. Boards are required to investigate and assess potential drivers of these behaviours; consider what their executive committees need to do to address these problems; and create an action plan to address the identified concerns and mitigate the associated risks. We expect banks to be proactive in promoting an effective risk culture and to have fully embedded conduct risk frameworks in place. Additionally, there will be further enhancement of our supervisory approach, including more intrusive, targeted supervision of the conduct of the firms that pose the greatest risk of potential harm to consumers.

We think that is also in the long-term interest of the banks. There are incentives for the banks to embrace the agenda also, given all that we have seen in terms of the costs of dealing with misconduct after the fact.
We think it is important in this entire procedure that banks understand the difference between seeking people's trust and establishing trustworthiness in their culture. If banks wish to restore trust in their organisations, it must be earned by building a track record of consumer-focused behaviour. We give guidance but it is the executive responsibility of each bank to build that culture. It is not the case that one single culture can deliver. Part of being a skilled manager of a bank is to build the culture that makes sense for the bank, but we require it to have a consumer orientation to make sure that those firms will deliver fair outcomes for consumers while maintaining financial resilience and appropriate prudential standards.
Another action point from the culture report is to reinforce our advocacy of a new individual accountability framework, to apply not just to banks but to other regulated financial services providers. Such a framework would go significantly beyond the current requirements for staff to be fit and proper, it would set conduct standards for staff, and it would ensure clearer lines of accountability within firms.
The goal of the proposals is to act as a structured driver for positive behaviours and the recognition of individual responsibility. Many regulated firms and their leaders behave ethically and honestly, and seek to drive effective cultures. However, in order to guard against scenarios where that is not the case, the reforms will constrain the ability of senior executives to escape accountability for wrongdoing. The reforms will require Oireachtas consideration and approval, and we would welcome any questions members may have on our recommendations.
I will stop there in terms of the part A review of the culture report, and the tracker mortgage examination. We can turn to part B later.

There is no mention in Professor Lane's opening statement of sanctions against banks if they continue to ignore the drive for a better culture and focus. In the last paragraph he says that it is now up to the Oireachtas to consider and approve the reform. What does he mean by that?

Professor Philip Lane

I mean for this extra step. The individual accountability framework is not part of the current regulations. The UK introduced something similar about two or three years ago. We think the manner in which one holds senior executives to account is an extra step. I will ask Ms Rowland to elaborate on it.

Deputy Pearse Doherty has introduced a Bill to deal with this matter. Is Professor Lane saying that arising from this report what is required next is legislation? No sanctions are recommended in the report for banks that ignore the Central Bank. Could he or Ms Rowland elaborate on that for members?

Ms Derville Rowland

Could I separate out those two points?

Ms Derville Rowland

The Central Bank of Ireland already has enforcement powers and in the event of a breach of rules being proven, sanctions can be applied to both firms and individuals. The sanctions are in place and will remain in place and they are used by the Central Bank. More than 122 enforcement cases have been concluded to date, with €61 million of fines being incurred, and more than 12 individuals have been disqualified. The fitness and probity regime challenges the competence, capability and integrity of persons who are entering into senior roles and those who are in place. People have been disqualified there too and as we challenge we find more and more that a lot of senior people withdraw rather than face the challenge of the Central Bank. To date, there are more than 50 cases of people withdrawing. We have been to the High Court and the Court of Appeal to vindicate our right to use our enforcement powers. The sanctions are in place and they are working.

The new legislative proposal will require the Oireachtas to approve it and to put it in place. We aim to streamline the enforcement powers to make one uniform process, make some amendment to the current process, which would break the link between participation of an individual's conduct and that of a firm. We think it would strengthen the ability to take enforcement cases in the future.

In respect of the individual accountability proposals, we are making a proposal in a comprehensive way that mirrors the leading edge of approaches in other countries for a set of standards and an individual accountability regime that would require legislative action on the part of the Oireachtas to bring that into force. That is one of the parts in the report on which we are making a proposal but it is separate to the culture report, which will require action from the firms to improve their own culture. We see that as a complement to strengthening the approach that we are adopting.

I thank Ms Rowland.

I welcome the Governor and his colleagues. He dealt with the tracker issue in part 1 of his statement and I have one question on that. The Governor put on the record a reference to 38,400 impacted customers. That includes 7,100 pre-examination cases.

Professor Philip Lane

That is correct.

He said 7% remain without an offer of redress and compensation. Is that 7% of 38,400 or of the total minus the 7,100 cases? I am trying to clarify the number of customers that have yet to receive an offer of redress.

Professor Philip Lane

We can elaborate on the exact number.

Ms Derville Rowland

The current number of customers who are affected by the tracker mortgage examination is 31,300. A total of 7,100 customers received redress before the examination and that is where the aggregate number of 38,400 comes from. The information I am giving the committee is that, to date, 28,100 of the 31,300 customers are in receipt of compensation and redress. I just want to be clear. The high-level number is subject to change because it has not been entirely verified by the banks. What that means is, as they go through their verification process, they find there is duplication of accounts, for example, and the number can change slightly. We require them to be thorough in the final analysis and it has been our experience that the number can vary as people are checked. In the round, the answer to Deputy McGrath's question is that there remains approximately 3,000 customers who have yet to receive payment who have been identified in the tracker mortgage examination.

It is important to say that about 99% of the customers who were identified, as of the end of last year, have received their payments. The reasons people have not been paid are because they cannot be found or because the banks are engaged in complex discussions with them. Where people cannot be found the money is ring-fenced in an account so it will be there for them. Also, in the main, customers who were identified and verified before March of this year also have received their redress and compensation payments. We closely scrutinise and monitor the payments that are being made by each of the lenders on a month-by-month basis and challenge them to get on with it. It is our expectation that, in the main, most customers will have received their payments by the end of this year. There may be some few that go into early quarter 1 of next year, but we continue to challenge that timeline.

Members will have seen from the Governor's opening statement that four out of the five lenders are making reasonable progress with respect to concluding this matter, and one is somewhat behind the others but we are putting significant scrutiny on them to keep up with the timelines to the maximum extent they are capable of doing. It is also important to say that our own independent verification of the numbers continues because it is incumbent on us to make sure that the decisions that have been made about including and excluding customers is adequately and thoroughly tested through on-site and off-site supervision as well as data analytics.

We are doing that before we close out and give them the green light to say that is done.

In the cases of the 3,000 customers who are yet to receive redress and compensation, the banks know who they are. They are identified accounts and customers who have been impacted.

Ms Derville Rowland

That is right. About 2,000 of those are verified and about 1,000 who are not verified and are going through the process. All of those are timelined. The identity of those customers has been established by the bank and there is a timeline for the banks to get on with their payment. Each institution is being challenged and scrutinised closely by us to get on with that. We expect most of those customers to be paid in the coming months. Progress will be evident month by month. I appreciate that it should not have taken this long in the first place but most of the customers in question surfaced in the examination more recently this year.

They may have surfaced but they were always there. They were just not identified.

Ms Derville Rowland

I accept that.

In December 2015, the Central Bank wrote to the lenders setting out the framework of the examination. We will be a full three years on from that in two months, yet 10% of those identified as being affected have yet to receive their money back.

Professor Philip Lane

When we were here a year ago, we did say that this delay had taken place. It goes back to the culture report where the delay, by and large, was foot dragging by some banks. As we know, towards the end of last year, the banks more fully embraced their responsibilities in this report. As Ms Rowland indicated, what has happened is that those who were accepted at the end of last year have, by and large, been paid except for some technical issues. However, more cases came within the scope of this and the banks accepted that more of them needed to be included in the spring of this year. These are the remaining ones to be paid out. It goes back to the Central Bank not wanting to place an absolute deadline on this for fear of leaving someone behind. Numbers have grown partly because we did not close out the review at any point.

Professor Philip Lane

Ultimately, these customers should have been accepted by the banks from the word go. There is no doubt about that.

Why can the Central Bank not put a deadline for restitution for those who have been identified?

Professor Philip Lane

There are timelines here. The only physical limitation on this is the systems in some of these banks. It is an unfortunate technical reality that it puts a barrier to instant completion.

Ms Derville Rowland

I can only repeat that we have every single bank under close scrutiny and close reporting timelines and we have regular engagements with them to challenge the limitations that they say they have in identification and redress to customers. Our single biggest conduct priority is to get effective redress and compensation delivered from the banks to their customers. We are doing all in our power to challenge them to deal with that. Our aim is to issue a final report on the tracker mortgage issue at the close of this year and the team and I have been entirely focused on ensuring that the banks move at pace and we challenge them sufficiently robustly.

The Central Bank referred to the accountability framework in the behaviour and culture report. The public believes that there must be a consequence for poor behaviour. The Central Bank referred to a need for additional powers under legislation, which is a matter for the Oireachtas. What does it have in mind specifically in regard to powers that it requires and wants the Oireachtas to provide to strengthen the individual accountability framework which already exists?

Professor Philip Lane

That is a fair question. Looking to the future, the good news is we have a concrete example from next door because it was introduced in the UK two or three years ago. There was a question of whether it was necessary or a good idea and what consequences it might have. We think we can see concrete changes in how UK firms behave and how their executives accept this elevated degree of responsibility. This was also part of our submission to the Law Reform Commission earlier this year. I will ask Ms Rowland to speak about it.

Ms Derville Rowland

The origins of our proposal on the senior executive accountability framework are in our looking at the leading edge practices in other jurisdictions. We made a submission to the Law Reform Commission last year encouraging this course of action. If we take a step back and look at misconduct in financial services, a key driver for misconduct delivering poor outcomes for consumers can be a lack of accountability at senior levels in firms. A heightened focus on accountability and responsibility strengthens the outcomes for consumers. That is as it should be in properly run firms. Our proposal in this regard has a number of elements, all of which complement each other. The first is a very basic set of universal conduct standards which will apply to every body in all financial services firms. One might say these are no more than one would expect of a right-minded individual in a well-run firm but these principles are very important. Everyone who works in financial services, no matter what role they have from the top to the bottom, will be required to act ethically, with honesty, integrity, due skill care and diligence and, importantly, to be open and co-operative with the regulator and act in the best interests of the customer and treat them fairly and professionally. However, is important to overlay that with an additional set of responsibilities on those who run the firms at more senior levels. That is far more important because they hold positions of influence and it is very important to call that out clearly.

We wish to see the senior executive team, up to the board and the most senior people, have a higher set of standards and responsibilities in running the organisation. We proposed that they should be obliged to ensure that the business is run responsibly and controlled effectively, that they can be held to account when that is not the case, that they must take steps to ensure they are in compliance with the regulatory frameworks and that they oversee that work effectively. Complementing that, it is important that the business itself has a set of standards with which is must also comply. The next set of complementary standards should be on the business so that it is very clear that it, too, has an obligation to act professionally, honestly, with integrity and in conformity with ethics. Management and controls, financial prudence, client assets would all be part of that, as would managing conflicts of interest in the way that they communicate with their customers.

Under the senior executive accountability framework, which would be on top of that, the very senior people in the organisation would have a list of responsibilities that would be ascribed to them. These would be unavoidable and it would be very clear what they are responsible for. On top of that, the firm would ascribe responsibilities. That would be complemented by a responsibilities map that the organisation would have to put in place. There would be no more confusion or lack of clarity about accountability and responsibility. We see that as going towards good governance.

I have one brief final question. Is there sufficient focus on the long-term goals and performance of the institution, rather than an excessive focus on short-term performance, share price, dividend expectations, profitability and so on?

Professor Philip Lane

This is a fundamental part of the new philosophy of regulation everywhere. The kind of debate about short-termism versus long-termism is not settled. However, in finance, there is a deep conflict where an entity can make profits today by taking excessive risk or mistreating customers and the losses are down the line when an individual has retired and living at the seaside or something. I will ask Mr. Sibley to explain the clawback principle in compensation schemes.

Mr. Ed Sibley

The long-term sustainability of firms' business models is a core focus of supervision. There is tension between the short-term incentives and longer-term incentives. The Central Bank always endeavours to take a long-term view to ensure firms' business models are sustainable and they have sufficient resources over the long term, including plausible stress scenarios.

From a remuneration perspective, as Professor Lane has outlined, there are clawbacks in place for the banks for a number of years as to any variable pay they receive. That is less relevant to the likes of AIB, Bank of Ireland and PTSB because, under Irish legislation, they do not get variable pay but it is part of the regulatory system now.

Ms Rowland indicated there are 3,200 individuals or families who were on tracker mortgages and had money wrongly taken from them without having it returned. Of those, 2,000 have been verified. What is the delay in the banks returning the money to them and providing compensation? Is it caused by the banks or is it because there are 1,000 or 1,200 cases that the Central Bank has not verified?

Ms Derville Rowland

The verification process is one the banks must conduct. Separately the Central Bank samples and checks the banks' work. There is no delay from the Central Bank. The banks are able to get on with it as quickly as they can. These customers were identified, in the main, after March of this year and the banks are going through that process and are limited in their ability to go through the work. The Central Bank would never stop them making payments. The opposite is true. The Central Bank has been on to the banks to get on with these payments as quickly as they can. The Central Bank separately goes back to check the compensation and redress payments to ensure they are in accordance with what they should be, as well as other dimensions to the banks' work. The Central Bank has been very strict with the banks to get on with it to the best of their ability. Some of the banks are limited but I can tell the Deputy that four of the five banks are making substantial progress with that. We have them all timelined to put as much pressure on them to get the job done because we accept it is important they do that.

Which bank is not making significant progress?

Ms Derville Rowland

I cannot name a particular lender but the Central Bank is focused on getting all of them to get through the payments, as they should do, and give the compensation and redress back to the families and customers who were affected.

Can Ms Rowland give a breakdown across the five banks as to the 3,200 individuals who have not yet received redress?

Ms Derville Rowland

I cannot give information about any of the particular lenders.

Can Ms Rowland give the information without naming the banks?

Ms Derville Rowland

I do not have that information.

Professor Philip Lane

It is true to say the bulk of that is in one bank. There is one bank which is responsible for the major proportion of what is remaining.

The committee heard previously from the Central Bank about Ulster Bank and information technology difficulties that were causing delays in making payments. The committee was told last year that all of this would be paid in the first quarter of 2018. It will now be the first quarter of 2019 before people get payments. We were told additional action could be taken by the Central Bank. Is the Central Bank proposing to take action against banks that have been dragging their feet for the past number of years and have illegally taken money from customers' accounts that still has not been returned?

Professor Philip Lane

The Central Bank previously indicated to the committee that there are live enforcement actions against all of these banks. We do not want to comment in the middle of those enforcement actions, but they include how the examination was conducted. When those conclude, we can say more. All of that is under investigation.

The majority of the 3,200 customers have been identified since March. To the best of the Central Bank's knowledge, when were the final customers in this cohort of 3,200 people identified? Were they identified by June, July or last month?

Ms Derville Rowland

I do not have the precise month, but it was more in June and July. I can come back to the Deputy on that. In order to make payment, there is a verification process because the approach is to identify groups of customers who have a common set of circumstances. They should then be eligible for compensation and redress but it must turn into an actual review to ensure the customer can be specifically identified with the right account and getting the right number of people in that group, which must be done on a file-by-file basis.

There is a bit of work to be done.

Ms Derville Rowland

There is a bit of work to be done in that verification process.

Is there any challenge or discussion between the Central Bank and individual lenders about cohorts of individuals that the banks have not identified but the Central Bank believes should be identified?

Ms Derville Rowland

There is no known outstanding issue between the Central Bank and any of the lenders. The Central Bank is bringing challenge because it is on-site and off-site and looking at how the groups are constructed. There has been less checking as the work has developed. The Central Bank may uncover extra people who are entitled to compensation or, for example, challenge the banks' interpretation of the customer journey and the transparency requirements and impact. There are no outstanding issues between the Central Bank and any of the lenders but the Central Bank has not finished all of its checking work. The Central Bank is doing exclusion testing and reconstruction of the groups of customers and matching that with the information it has about the customer journeys to see are there any anomalies or exceptions. It is possible that issues arise, and they have arisen and we are dealing with those.

I appreciate that. A number of appeals are going through the Financial Services Ombudsman, FSO, and court cases are being taken against the institutions to ensure customers are adequately compensated and redressed. Does the Central Bank have an indication of the numbers of people who have made appeals to the FSO, having exhausted the internal and independent mechanisms, and the numbers who have taken cases? If the Financial Services Ombudsman or the courts find in favour of the customer and decides they were entitled to additional compensation, will the Central Bank ensure that the banks review the entire cohort, those individuals with a similar experience, to look at the appropriate compensation?

Professor Philip Lane

I will make one point and ask Ms Rowland to follow up. There are appeals systems within the banks before one gets to the ombudsman or the courts. It is interesting that while the number of people taking appeals has been limited so far, a fair number have been accepted. That is why the Central Bank is happy this appeals system was set up. Typically, when an appeal is successful, it is because of something specific to the family in question. There is some particular reason the family has suffered extra harm because of its individual circumstances. The independent appeals mechanism within each bank is delivering for those individuals who have particular circumstances. That does not rule out an individual or family wanting to go to the ombudsman or the courts. I will ask Ms Rowland to respond on that.

Ms Derville Rowland

I support what Professor Lane has told the committee. The appeals steps are independent processes, in the main, for serious cases. This is an additional step and an extra option that people have. They could have chosen to go to the courts or ombudsman if they wished. It would appear to be a reasonable option to see what the appeals mechanism will deliver and people are making appeals through the system. They will have 12 months from the date of receipt of their offer to make the decision to go to the courts or the ombudsman. That will, therefore, continue for some time.

The Central Banks expect the banks to be responsible and look at any decision of a court or the financial services ombudsman and consider the reasons for those decisions. If there is something that affects a broader group, the banks have to take that into account because the Central Bank has demanded they look at the outcomes of appeals to see if there are systemic trends. In any case, it may be there were circumstances particular to a family or individual that have no general application. That is the reason the appeals step is such an important one because nobody can give compensation proposals in the general sense, when they may have to understand what is happening in a family circumstance.

I understand that but my question was twofold. The first part is whether the Central Bank is aware of the numbers that are currently before the FSPO or the courts. The second, follow-on question is: if favourable opinions or decisions are given, either by the ombudsman or the courts, that would have a broader implication not just for the individual but a cohort of individuals who were not deemed as in-scope by the Central Bank or the banks themselves, or where the level of compensation was inadequate, will the Central Bank, as opposed to the banks themselves, review those decisions, instead of hoping the banks do the right thing when we know they have not done the right thing for the past five years or more on this issue?

Ms Derville Rowland

The Central Bank is in contact with the ombudsman because we all form part of the financial services regulatory infrastructure. We have information that is not in the public domain about the number of cases that are tracker-related and on hold before the ombudsman. We have been in contact with him to be very clear that where cases wish to go and be heard with the ombudsman, that is the correct thing to occur. We are monitoring the outcomes at that system level to see if we can spot trends in that conduct but, at the end of the day, it will be for the businesses to right the wrongs they have done to their customers, and they must be held to account for their conduct. Where issues arise and there is commonality of cause from ombudsman decisions or otherwise, all roads will lead to the banks. If they are responsible, they must fix it. We will certainly be having regard to that but the effectiveness of that system must hold the banks to account for their conduct. We are keeping an eye on this.

How many cases is the Central Bank aware of that are either before the ombudsman or the courts? This is the third time I have asked this question.

Ms Derville Rowland

I cannot provide that information accurately to the Deputy today because the information I have may change over time. I would be happy if we could provide it to him as a follow-up.

I appreciate that. Professor Lane mentioned that the cost in redress and compensation has been €580 million to date. We know the cost to the banks has been in excess of that and it was said before by the Central Bank that it could be up to €1 billion. Are we now past the €1 billion cost in terms of the tracker scandal?

Professor Philip Lane

I will ask Mr. Sibley if there is any change in terms of what the banks have put aside in their accounting treatment. Have there been any changes this year?

Mr. Ed Sibley

It is in or around that number. They are making other provisions along the way in respect of potential conduct issues but it is in or around €1 billion in terms of total cost, including redress and the cost of the examination.

There are a number of key recommendations in the report but the problem is that those recommendations were made before the report and we did not need the report. While we needed the investigation - and we have seen the methodology and the volume of work and hours that were put into it - the key recommendations were made before it, as Professor Lane mentioned in regard to LRC review. I was hoping there would be something more substantial. If any of the four key recommendations were implemented, what would that mean in terms of individual accountability for the fact in excess of €500 million was wrongly taken from 38,000 customers? If the Central Bank had those powers, would any individual within the banks be held accountable?

Professor Philip Lane

Let me emphasise that, within the culture report, while the recommendation on the accountability regime turns to the Oireachtas regarding additional legal powers, there is much else there with regard to other elements. It is a step forward in terms of our expectations of the banks and how we engage with the banks. I emphasise that all of the banks have remediation programmes issued to them. We have learned through this culture report of particular issues in particular banks and part of our normal supervisory work is to follow through on that. We cannot discuss those bank-by-bank individual issues here. We have, therefore, focused on and highlighted this legal change. The committee will have seen various officials come before it or before other fora to say, "Mistakes were made", in the passive voice, as if they were unaware of it and so on. The whole point here is to flip the burden of expectation. Under this new accountability framework, just as we are seeing now in the UK, a senior executive cannot say, "I did not see that email", or, "I was not involved in that decision." If a person is responsible for building the organisational culture, that is a heavy responsibility and it means that even if the person is not directly involved in some key decisions, he or she can still be held to account. There is the difficulty of establishing the chain of causation under the current legislation versus that-----

I understand that. I have beaten the drum for years regarding individual accountability from bankers, which we need. However, individual accountability from bankers where people see that nothing went wrong means nothing. There is no accountability if the Central Bank cannot say something went wrong. If the Central Bank had that individual accountability regime, which makes it clear a person can delegate tasks but cannot delegate responsibly, for which I have been arguing for many years, would it be in a position to hold individuals within the banks accountable in respect of the tracker mortgage scandal?

I acknowledge that the Central Bank did not make this initial recommendation here; it was done by the LRC. However, this was done in Britain two and a half years ago. There was a lead-in period to all of this and I believe the Central Bank is behind the curve. It was slow in arguing for this to happen and, now, we are just following what is in place for a number of years in other jurisdictions.

In Britain, the Financial Conduct Authority, FCA, has said not only does it need individual accountability and the senior management regime to apply to senior management in the banks, it needs to hold the regulators themselves to the highest standard and it has applied the same regime to the Bank of England. Is it proposed there will be individual accountability within the Central Bank in regard to the failures that may present in overseeing financial institutions, consumer protection or prudential regulation?

Professor Philip Lane

Let me emphasise that we have a parallel project in the bank to develop our own senior responsibilities frameworks. The Deputy will see on our website, when it is completed, phrases such as, "Here is what the governor is responsible for", "Here is what the deputy governor and the director general are responsible for", and so on. In mimicking that framework and being clear about who is responsible for what, we have had a big internal governance project in the past couple of years to reform all of our committees and to be super-clear about the accountability lines within the Central Bank. We hold ourselves to account regarding our performance as the regulator. That is perhaps slightly different from the way the Deputy phrased it. If we have failed, we will look at that. However, if there is a failure by the management of a bank, the bank is responsible. We cannot guarantee that every bank is going to conduct itself properly at all times. Our accountability relates to doing the best job we can as the regulator; it does not relate to taking responsibility where the banks should be responsible. I reiterate that we have this parallel internal project.

One interesting thing with the UK experience is that it reinforces the point that we waited. I am not disputing that maybe we should be quicker and all of that. However, when the Oireachtas moves to look at this, if it gets to it, it now has an evidence base and it is not just a hypothetical debate about whether this helps. The Oireachtas can perhaps take testimony from the UK about how this has been implemented in the past year or two. There were concerns in advance about whether this would scare people away and whether anyone would sign up to be the director of a bank, with this heavy responsibility on him or her. With regard to the facts of life about how it is operating, the Oireachtas will have hard facts from the UK to deal with. In general, I fully agree with the FCA. We are onto it in terms of saying, "Listen, if this is what we expect of the firms, we have to have something like that for ourselves."

Does the Central Bank intend to carry out a culture review of itself? Professor Lane's last point was telling in that it was a question of, "Will this scare away bankers?", as opposed to, "They stole €500 million from their customers and they have not returned it four years later". Reckless lending is still not illegal in Ireland, although it is illegal in Britain. Britain brought in these rules three years ago whereas we are still just talking about bringing in the rules. I believe the Central Bank needs to take the lead in this regard.

The banking crash was ten years ago, when the Central Bank failed to act appropriately. On the issue of accountability, I am not clear that if there was another crash, there would be a new inquiry which would give people the chance to blame the institution again. Can we hold a Central Bank employee to account for turning a blind eye to the fact that the concentration of assets in certain sectors was way beyond what was required? That is what we are looking at in terms of the FCA. It is not just about knowing that certain people are in charge of certain areas, but that if that person fails, he or she can be held to account individually, or he or she should hold himself or herself to account. I am not talking about systems failure, but the failure of individuals.

Professor Philip Lane

I share that perspective. We will match the ambition shown in the establishment of the FCA in the UK. I agree with the Deputy's statement.

We have finished on a good point.

I want to start by referring to the tracker mortgage scandal. What I am being told by customers affected is not matched by what we are being told here. When is the next update on the examination due? Customers are ringing the Central Bank and are being told that the next update has not been scheduled. Can Professor Lane clarify that?

Professor Philip Lane

The goal is to produce a final report before the end of the year. Some cases may continue into early 2019, but four of the banks are almost at the finish line and one of the banks still has some work to do. We intend to produce another report at the end of this year.

Ms Derville Rowland

Each bank is responsible for communication with its own customers, and is required to have information and communication channels with those customers. Where customers want an update on their case, they should speak to their bank. We have been in contact with the banks to ensure they are placed to provide that information to their customers.

Therein lies the problem. The banks are not communicating with their customers. Customers are being bounced from their own banks to the Central Bank to the ombudsman and back again.

Ms Derville Rowland

If the Senator has information about where that is happening, I would be happy to receive it. We act on all types of information. Our clear expectation has been communicated to each lender in terms of having information available for their customers. We have been in contact with the ombudsman to make the process of accessing information for customers clear. If the Senator has a particular, specific instance where that is not working, we would welcome that information. We have been acting on information like that. Information for customers is to be made available through each specific lender. The Central Bank would not be able to advise on an individual, case-by-case basis.

I understand that. However, customers who have been involved in this process since it began three years ago are at their wit's end. They cannot get answers to the most basic of questions. I will give one example. A person was on a tracker for months in 2007, then moved to a fixed rate. The bank says that the person involved decided to go onto a fixed rate mortgage and, therefore, it is nothing to do with the bank. These are basic scenarios which should have established answers. There should be no ambiguity about these cases. There were other questions about interests rates at a particular time. A letter said that the tracker mortgage averaged 7.9%; that interest rate clearly is not correct. The witnesses should know that the banks are telling consumers that a lack of decision-making at the Central Bank is holding things up.

Professor Philip Lane

Statistically that cannot be the case.

That is what is being communicated.

Professor Philip Lane

Some 93% of the overall has been paid out. A few thousand have not been dealt with yet. There are two scenarios. Either this case is one of the few thousand we know about and which are in the final process of verification, or the person has questions about his or her mortgage which are deemed to be outside the examination. I wonder if some of the non-communication relates to people whom the banks have decided are not part of the group that requires redress and compensation.

Professor Philip Lane

Those people still require a basic degree of communication from their banks.

Ms Derville Rowland

We have had specific conversations with each bank about these exact scenarios. They are fully aware of our view on all areas of this work, and have been clearly told by the Central Bank to get on with communicating the precise situation to all customers. We have been very clear with the FSPO. It has an agreement with us that in any cases to be progressed, there should be no impediment to effective communication to tell people whether they fall within or outside the scope of the inquiry, what their options are and how their cases are being progressed. We went to great lengths to ensure the system of options for people was working and to ensure there was nothing in the way to prevent it from working. We have been clear in communicating our expectations to each lender. If that is not translating into actions for customers, it is important that we have specific information, because that is entirely contrary to our expectation. Our communications have been unambiguously clear.

It seems that when people get in contact with the Central Bank seeking answers they are referred on to the ombudsman and there is a circular effect. How does the Central Bank make sure that communication between banks and customers is timely and accurate?

Ms Derville Rowland

We have set our expectations for the communications procedure the banks should have in place. If people ring the Central Bank, staff will seek to help them with general information, but-----

How does the Central Bank check that the banks are doing what it is telling them to do?

Professor Philip Lane

It is part of our inspections regime. Inspectors go into the banks to follow up on all kinds of issues. We check that banks are following through on what we require of them through a range of interventions. We have a large staff of supervisors who are there to engage with individual banks. An inspector might go into a bank and find something by conducting a check. On other occasions, the inspector might have some information which has come via an Oireachtas Member or some other channel. I want to emphasise that when a customer communicates with the Central Bank with something specific, we follow up and make inquiries. For that reason, I would take a dim view of any bank which essentially misleads customers in its communications.

How many inspectors work with the Central Bank? How often do they carry out checks in the banks?

Mr. Ed Sibley

A range of inspection teams operate across the bank. In terms of banking supervision, from a prudential perspective, there are approximately 45 inspectors today. Other inspectors work in the area of consumer protection. We have also dedicated additional resources to going into the banks because of the nature of the tracker mortgage examination and the need to go to the institutions to make sure they are delivering as we expect. That has been supplemented by third-party checks commissioned by the banks under the instruction of the Central Bank and third-party checks we carry out ourselves. It is hard to give a precise number of investigators. There are scores of full-time equivalents that are inspecting banks on a regular basis.

Scores of inspectors are working in this area but they are not picking up on the communications we are hearing.

Mr. Ed Sibley

If the Senator has any information she can share it with us and we will follow up and make sure that the banks are delivering as we expect them to.

I will certainly do that. The witnesses referred to enforcement action.

Could Professor Lane spell out for me what the enforcement action would be?

Professor Philip Lane

I will ask Ms Rowland to answer that.

Ms Derville Rowland

There are six open enforcement investigations in respect of the tracker mortgage issues. It is looking at the conduct of the business and any persons who may participate in that - that is the legal framework through which they look - at the time that the tracker mortgage issues arose to acquire evidence to see if any rules were broken and what is the evidence supporting that. They are looking at the conduct of the institution and the context of the senior persons who were in place at the time taking those decisions.

They also are scrutinising the conduct of the tracker mortgage examination as the examination played out in the business. The committee heard about that earlier. I refer to the behaviour with respect to how they behaved in the examination, redress and compensation behaviours, behaviours with respect causation and other matters. All of the different regulatory frameworks are being considered and the evidence is being acquired and scrutinised from emails, minutes of meetings, interviews with employees and staff.

What happens at the end of that in terms of the enforcement? What are the Central Bank's choices in respect of sanctions?

Ms Derville Rowland

There is a range of options that could be taken into account. Where there is evidence that the rules have been broken one would have to consider all the relevant options. One of the main tools that the Central Bank has is the administrative sanctions procedure where a case would be referred to a panel to adjudicate upon the matter and see if the case was proved in the way of a court case. Then the options that would be available to them range from fine to disqualifications of individuals where the rules have been deemed to be broken that individuals participated in wrong conduct.

Does that include custodial sentences?

Ms Derville Rowland

Separately, where there is evidence of criminal offences, the Central Bank would have an obligation to report those to the criminal authorities who would adjudicate on those matters and bring cases forward. Depending on what those offences were, if there was evidence of them, that would follow the court procedure and whatever penalties the court system has adjudicated upon as being appropriate for those offences.

Has the Central Bank reported any as criminal?

Ms Derville Rowland

The Central Bank keeps that under review at all times.

The Central Bank has not reported any cases to date.

Ms Derville Rowland

We have been in dialogue with the Garda and the criminal agencies about these matters and we keep that under close review.

Is Ms Rowland expecting that will progress in the coming months?

Ms Derville Rowland

We certainly are in discussion with the Garda about these matters. That is our regulatory obligation. It is something we take seriously.

They spoke earlier about persons who are subjected to the enforcement powers and persons who maybe disappear out of the system, withdraw their applications, etc. How do we know who these persons are? Are these persons ever held to account?

Ms Derville Rowland

First, we can pursue. Whether one is in the system, the Central Bank in enforcement cases can pursue persons who were involved in the management. That point was fought about in the courts and the Central Bank's view was favoured, which is that we can pursue persons in enforcement cases who were involved in businesses but who no longer are.

The power for fitness and probity is limited to applying to persons who want to work in the system or who are in the system, and we are seeking an extension of that. We keep a record of all of that. We keep flags on information, as is right that we do, about all of that. If somebody wants to withdraw from an application, of course, he or she can do so but if the person ever came back, we have a record of that information and that would be ready to meet the challenge on a successive application.

It seems like many individuals within the banking system have many places to hide. The banks themselves have many places to hide because we do not get the information about individual banks.

The report on the culture is quite shocking. I would ask the Central Bank representatives whether they themselves thought it was shocking. It is shocking to think that there are executives within the banking system who are paid hundreds of thousands of euro, and there are banks making billions of euro, and up to all of this - this is why it is connected with the tracker mortgage - reckless business behaviour. They do not even have clear lines of responsibility. We are talking about clear lines of responsibility; we are not talking about a crèche, a naíonra or a voluntary organisation. We are talking about significant organisations. It speaks of a toxic culture where nobody knew who was doing what or who was responsible for anything. It is bizarre to read a report such as this of the culture in them.

The language used in the report does a disservice to those who have been most impacted by the toxic behaviour and the lack of any type of management skills, even the most basic aspects such as knowing who is responsible for what within an organisation.

The Senator's time is up.

I thank the Cathaoirleach.

They talk of "insufficient attention paid to consumer interests". The language in it feeds into the culture of protecting the institution. I understand that the Central Bank does not have a direct line of responsibility for changing the culture within the banking system but I would have liked to have seen much plainer language in this. The report almost smacks to me of when one reads an academic book on change management and cultural behaviour within any organisation. I ask the Governor how many customer interviews were conducted in doing this report?

Professor Philip Lane

Let me turn to Ms Rowland shortly about that particular aspect.

We should focus on the substance. The Senator may have a different writing style to our writing style but the bottom line is we are saying this is not acceptable. We are saying that this culture has to change and we are saying, through a combination of supervisory interventions that we are making and will continue to make and enhance, that we think it would be reinforced by the legislative change we are recommending. It goes back to that phrase, "insufficient attention to a consumer focused culture". In the minds of some bankers, this was seen as a kind of secondary obligation as opposed to being at the heart of how they do business. This is the cultural shift that has to happen. Our conduct mandate and the expectations of the public are that the banks take their consumer protection obligations seriously. We all share that view. How we phrase it is not the core issue. It is underlined by the actions we are taking, and as I say, that could be reinforced by this legislative change.

I will ask Ms Rowland to answer in terms of how the customer perspective fed into the review.

Ms Derville Rowland

Precisely because we completely agree with the Senator that it was observable that the behaviour informed by the mindset of the banks was far from that which all of us expect, the culture reviews were undertaken. The focus of the reviews, because we saw the red flags in the tracker mortgage examination, the way that the compensation offers negotiated with the Central Bank were not what we expected and that we had to do more than 200 turns of challenge to get those up to any kind of a level at all, was precisely conduct in the wrong place. The culture review was undertaken. It was not a focus on the views of customers in the public, let me be clear, because we had a view on what that was, which was the lightning rod for undertaking these five cultural investigations.

The investigations were very detailed, forensic and careful pieces of work, with behavioural psychologists, prudential supervisors and conduct supervisors who focused on the senior leadership teams of the banks because these are so significant in delivering, from the inside out, the mindset and value the businesses place on customers and how they put customers, as they espouse to do, at the centre of their business, as well as the divergence from that. The language in the report represents an overview of the specific lender reports, which each bank got, but it has very important and significant findings.

We are meeting the banks' boards and being very clear about our expectations. However, the culture is for them to drive and it is for them to lead the tone from the top. The focus definitely was on the senior executive team and how it will ensure it is clear about what that risk culture and consumer focus culture looks like, and how it will embed it into its structures and processes. Precisely because we take this seriously, we will be in at firm level supervision measuring how the banks deliver that. We will assess whether they look at the complaints people are making and find the patterns; how they train their staff; whether they are making sure their staff are trained to give outcomes that are to the benefit of the customer, not to sell 20 products to them that generate more profit; and whether they check to see what they espouse as the culture for consumer-centricity is in fact being lived. The proof of the pudding will be in the work that they do and this will take time because clearly their behaviour has not been in the right place.

If a small or medium-sized business operated as recklessly as the banks have done, it would not be a behavioural psychologist who would be brought in but the enforcement authorities and a prison warden. That is the difference.

Ms Derville Rowland

We have enforcement investigations open in respect of all of the lenders.

I will take up the point raised by Senator Conway-Walsh raised. The Central Bank, in producing its report, did 1,400 hours of desktop review, 500 surveys and 75 interviews. Ten years have elapsed since the bailout and the committee is discussing this report. Is it not absolutely horrific that the banks are behaving in almost the same way they behaved leading up to the bust? They are displaying the same arrogance, using the same methods of operation and there has been no change to their structures.

In terms of customer focus, the banks have numerous glossy advertisements that use catchphrases such as "the bank of you" and that sort of nonsense. The first figure used in connection with the tracker mortgage issue was in the region of 8,700. That figure has since increased to 38,400. The people who are still experiencing difficulties in finding a resolution to the tracker issue with their banks, even though the number of cases has narrowed, will tell us they still encounter the aggression, bad manners, poor management and a determination to protect the bank at all costs, even if the sum involved is small money. That is the experience ten years since the bust and it is what we have experienced through the tracker review and scandal.

The report is timely and tells us in reasonable language what many of us know. However, if one were to describe the position in layman's language, one would say the banks are still getting away with it and still treating customers badly. Is it not amazing that banks need to be reminded that the people with whom they are doing business are their customers? Is it not incredible that the Central Bank must introduce certain protocols, sanctions and so on to make them view people as customers? Consumers will be utterly shocked to learn that this report is now being presented and further work must be done on sanctions.

I will reflect on a few more issues. The culture in the vulture funds and banking sector in Ireland is truly terrible. As I repeatedly say, their behaviour should not be tolerated in any civilised society.

The tracker mortgage issue is the big example of banks ripping off their customers and then telling them, more or less, to get lost because they will not deal with them.

We also have the proof presented in respect of the EBS agents who followed the advice given by the Central Bank. They did what was required of them in terms of looking after their customers and so on. I have seen emails in which these agents were told by EBS to do whatever it took to sell X number of products each week. All of that still exists. The EBS agents have not been dealt with. Tracker mortgage holders are still fighting their cases. While €580 million has been paid out, a significant number of them are in the appeals system or have gone to the Financial Services and Pensions Ombudsman. These people are still waiting for their cases to be dealt with.

The witnesses said that some of the recommendations the Central Bank will make have already been made in the report compiled by the Law Reform Commission. I do not see much change in the banks. I see some determination on the part of the Central Bank to deal with the issue. However, I would love the Central Bank to suggest to the Government that it introduce legislation setting a standard that the banks would find it extraordinarily difficult to meet and that the Central Bank would penalise them and make them individually responsible should they fail to meet that standard. The Central Bank is doing that to some extent but it should be far more forceful with the banks because they do not give a damn. They do not care, are open for business and do what they want. Matters are not being resolved.

The global restructuring group, GRG, is another scandal that has yet to be dealt with. Deputy Pearse Doherty raised a significant question which I will ask in a different way. If there is a disagreement between the banks and the Central Bank on, for example, a case such as margin issues, which relates to PTSB, and a settlement is reached in one case, will that outcome be applied to similar accounts? I believe that is the question Deputy Doherty asked. How will the Central Bank establish that? What degree of accuracy will there be in the context of the approach taken by the Central Bank?

Professor Philip Lane

I will make one general point in response to the Chairman and Mr. Sibley and Ms Rowland will comment on some of the other issues. One way to think about the gear shift in regulation, not just here but globally, is that these cultural issues are not new but they were overlaid by an instability issue. We had the reckless lending of 15 years ago and the facts that these banks basically collapsed, needed extra capital and needed to change their liquidity funding.

There has been much work to ensure these banks at the macro level of aggregate lending have enough capital to stand behind their businesses and are not overly reliant on short-term funding. We should remember we have the mortgage rules now. Those kinds of macro matters are being dealt with and there has been much progress. With the stabilisation of those indicators, there is now more visibility of more hidden issues, such as how the banks treat customers. The good news is the processes go hand in hand. The fact that banks are in better shape in a prudential sense allows us to change our supervisory priority towards looking at a higher level of ambition and to ask not only whether banks are safe but whether they are adhering to the standards we expect them to adhere to in terms of customer focus. This is a new reality and it is the next phase of supervisory focus. There are permanent challenges to maintaining stability but if the banks are now in better shape, we can do more in focusing on customer treatment issues.

Mr. Sibley will deal with the Chairman's comments.

Mr. Ed Sibley

I echo some of Professor Lane's comments. There has been a fundamental shift in the approach to regulation and supervision of the banks and other financial institutions. That is both from a prudential - or safety and soundness - perspective and that of consumer protection with regard to rules and supervision of those rules. There is a global issue because as well as addressing the rule book, there is a driving need for the culture to change within these institutions, as the Chairman noted. We have been focused on that for a number of years. The lightning rod of the tracker mortgage issue means it has come into very sharp focus how important it is that firms not only comply with the rules but think about the risk and their customers to a much greater extent than they have in the past.

Ms Derville Rowland

The global phenomenon of misconduct scandals has been clear in this jurisdiction, as in others. The culture report gets underneath the matter in a way that is different to the enforcement action through being backward-looking and looking at breach of rules. The culture report gets inside the mindset of what is really going on. It is insightful because these are the words and the thinking of the executives themselves, as well as the teams reporting to them. For the first time, there is insight into what is going on with the thinking used to motivate the outcomes seen for customers, which the committee might view as unacceptable. It explains a little why we are in this place. For change to happen, the businesses need to accept that they must be in a different place and know what the problem is. They also need to come up with a very detailed set of approaches that are meaningful and deliver that changed outcome. We are getting deeper and closer in our intrusiveness in conduct regulation. That is the phenomenon that is occurring.

We will make evaluations of risk mitigation programmes and meet the boards. We will do that with colleagues to ensure they are comprehensive and deep enough. This will require the businesses to apply and deliver those programmes. The jury is out on whether we can expect that to occur. The evidence before our eyes is different from the espoused ethos of consumer focus that we hear of. As we can see it, we are practising sceptical and intrusive supervision. The consumer protection risk assessment approach that we know must be put in place means we expect those firms to have a comprehensive conduct risk framework in place so they know that when they take decisions at a board level about new markets, strategies or profit versus consumer interest, that consumer interest would be properly considered and put in the centre. When designing products, they should not look at the product that they have and wish to sell to customers in order to generate profit. Rather, part of the thinking should be to ask what the benefit is to the customer, who the target group is and whether they are selling to the target group.

It is only through breaking this down into the component parts of how the businesses are governed, the way the products are designed and sold, as well as training and incentives to staff can we see the real change being effected. We recognise we will have to get granular and do very detailed work but the obligation is on the businesses to change. The culture report is a different kind of intervention from the enforcement cases. In order to effect the change we wish to see, the companies will have to embrace it. We know where the key transmission points to customers are in the sales process and we know where the deficit of thinking might be in the board level process. We will have to check that to ensure the businesses are doing what they should to develop consumer culture.

Is the case of the tied agents aspect of EBS not an example of where a bank could have made a deep investigation and taken serious action, arising from the emails I have seen?

Mr. Ed Sibley

Certainly, in terms of the information presented to us and our engagement with those EBS tied agents, we have examined the issue. As I understand it, there is a commercial dispute between the agents and the bank that is ongoing. We have information on the underlying issues and of course we investigated it.

Is that investigation complete or is it ongoing?

Mr. Ed Sibley

We have looked at the information presented to date. As we always say to the committee, if it has further information for us, we will look at it.

Is the investigation ongoing and will there be sanctions or has it been completed? Has the bank finished that investigation?

Mr. Ed Sibley

It is very difficult to answer that question precisely because we are talking about a specific firm. However, I am satisfied that we have looked thoroughly at the information provided to us and we have formed a conclusion on that information that was provided to us.

Is the Central Bank finished?

Mr. Ed Sibley

I have said that we have concluded, based on the information with which we have been provided.

That is where the problem is. There were no sanctions.

Mr. Ed Sibley

In the case of the EBS tied agents, there is a commercial dispute between EBS and AIB, as it is today.

I am not disputing that. I am simply saying there was an issue with the EBS agents. The emails I have seen support the case that was made. They clearly say the agents should do what it takes to shove this or that product. The agents have presented the case to the Central Bank of Ireland. There have been no sanctions. That tells us something about the Central Bank. In a case similar to EBS agents, GRG personnel have gone halfway around the world to try to get their case heard and something done. Lives and families have been destroyed. It is the same with the banks but it appears there is a softly-softly approach to the banks. There are voices out there shouting about particular cases of wrongdoing but they are not being heard.

Mr. Ed Sibley

I absolutely contest that we are going softly against the banks. The Chairman raised two distinct matters. We have looked at the information provided to us by the EBS tied agents who are in dispute with EBS or AIB as it is today. That is a commercial matter-----

That is just a cover.

Mr. Ed Sibley

It is not a cover. It is the fact of the matter.

When the Central Bank of Ireland wants to push something to one side here, we are told it is a matter being contested in the courts. EBS and AIB tell us that. Therefore, we cannot get to the end of it and the bank will not get to the end of it. The bank hopes that, over time, those who are making the complaints will simply fall away. It is the same approach taken with the customers. Let us put this straight. The original figure for the tracker issue was 8,700 and if it was not for the people who came forward and gave evidence before this committee, as well as the work of this committee, we would not be where we are today. The banks would have ridden roughshod over every single one of them and not given them a leg to stand on.

That is the disgraceful nature of banking in this country. If properly supervised, vulture funds and banks would not get away with it, but we cannot supervise them because we have locked ourselves into a legal or regulatory straitjacket. The Central Bank can properly supervise the banking system. If it cannot, it should go to the Minister to state that its powers must be improved to enable it to knock these institutions into shape before they do further damage to families and communities.

Professor Philip Lane

I acknowledge that. We cannot overemphasise that our role is to serve the public interest. We are public servants. We are clear that our only agenda is to serve the public. Our objective is no different from that of the members of the committee and I urge them to bear that in mind. We operate under certain legal and supervisory constraints. I appreciate it is sometimes frustrating when we cannot disclose all that we do, but that is due to the intrinsic nature of supervision. However, our underlying objectives are the same.

On how the tracker examination unfolded, we have acknowledged that the committee repeatedly calling before it representatives of the banks has been very helpful in terms of shining a spotlight on what happened. On the number the Chair cited from our original reporting, we adopted a conservative reporting approach and presented the numbers completed. It would be a mischaracterisation to assert that the move from 8,700 completed to where we are now was the journey we were always on. Essentially, we were always determined to see this through, and that has been borne out. We are very grateful that the Oireachtas supported that through the committee and that the Government did so through its interactions with the banks. I agree that it should never have been necessary. Part of the enforcement actions we are considering is why the banks did not comply with our requirements under the examination without obstruction.

It is very important for the public listening to these proceedings to appreciate that our only agenda is to serve the public interest and that we do that within our mandates. Most of the matters with which we deal and the interventions we make never become public because that is not the nature of supervision. I acknowledge that, like some others, the Central Bank must demonstrate its effectiveness in terms of the outcomes that are achieved to gain more trust. I ask the committee to accept that we have the same objective. We have no reason to go easy on the banks. Our job is to solve any problems we identify. In so doing, not everything is made public but we have the same objective as the committee.

I will finish on this point because Senator Paddy Burke wishes to come in. The tracker mortgage scandal and other banking issues would have been dealt differently if the committee had not exposed them. When the Central Bank investigates and identifies a wrongdoing, the culpable bank should be named and shamed. I refer to the case of EBS and the 2008 email which clearly states to the agents what they should sell, the numbers they should sell, that they can make money and to do what it takes to make the money, regardless of what they were selling. To gain public confidence, the Central Bank should tell the public what it has done in regard to such cases. If there is no legislation under which to do so, Professor Lane should suggest to the Minister how the legislation could be improved because ordinary punters, a category in which I include myself, believe that the banks are getting away with blue murder in this country and that no one is prepared to take them on. They look to the Central Bank to do so. If more legislation is needed, Professor Lane should tell us that. He spoke about building trust between banks and customers, but there is much to be done in building trust between the Central Bank, the ECB and the public.

Professor Philip Lane

I again emphasise that I agree that our track record is the most important element in building that trust. Ms Rowland highlighted all we are doing and the number of enforcement actions we have concluded in public. Some of our work must be conducted in private. We cannot make public that a particular person attempted to join the board of a firm and withdrew or was not approved by the Central Bank, but such situations happen all the time. We disclose the numbers of such cases in aggregate, but for various privacy reasons we cannot identify the persons involved.

There will always be a certain amount of our work which we can announce publicly. In recent years, when an individual may face a prohibition and that process may legally be pursued either publicly or privately, we usually pursue it in public. There are periodic announcements that certain persons have received a prohibition, and we want to make our work public when that is possible. We have that commitment to what we do.

How many cases have been withdrawn? Ms Rowland mentioned the number earlier.

Ms Derville Rowland

More than 50, so------

How many other cases are there? Did Ms Rowland earlier state there are 1,200?

Ms Derville Rowland

Some 122 enforcement cases have concluded. Our policy is and always has been to make outcomes public where possible. The importance of transparency is a key driver in our approach. In some cases, we cannot give out information. Professional secrecy and European confidentiality regimes apply to us as they do to central banks all in European countries such that we cannot put certain information into the public domain or are unable to comment on aspects of disputes, some of which may be in the public domain. Mr. Sibley may address this issue momentarily. Where it is possible to make enforcement outcomes or other details public, it is very important to us that we do so because the more aware the public is of the outcomes of cases, the more confidence it will have in the Central Bank. We have released a significant amount of detail about what happened, the resultant penalties and what drives the penalties and the behaviour that is described. We do not just detail the outcomes. We also address the story preceding the outcome because we know that is an investment in building trust and informing the public of the approaches we take. When we cannot release information regarding a particular case, we try to release aggregate information. It is a key part of how we approach regulation because we acknowledge that it is very important that our approach is understood and trusted as much as possible. We recognise that is not particularly easy for aspects of our role or actions to be understood, but we are driven by our aim to deliver on our mandate in the public interest, which is core to how we do our work and what we regard as important and serious.

Mr. Ed Sibley

To echo the points made by Ms Rowland, our stated and actual aim in terms of how we interpret that public interest towards which we are all working in the Central Bank from a financial regulation perspective is to have a financial system that serves the needs of the country and its people.

The culture report has shone a light on some aspects of behaviour and culture within the banks that are not acceptable and we are trying to drive a change to that.

I apologise for being late. This study was about the culture in the banks and how they dealt with customers. How many consumers or customers were interviewed for the report?

Ms Derville Rowland

This report was not based on customer interviews because we had seen a lack of consumer focus as a result of the tracker mortgage behaviours and others. We focused on the senior executive team and the way its members approached decision-making, their mindset and their business. Through the culture report, we wanted to get into their thinking about how they take decisions. During the initial phase-----

We have limited time. I and my colleagues are dealing with customers and constituents who still believe they are being very badly treated by the banks and that nothing has changed. I am a believer in primary research, which is going back to the consumer. In terms of both the tracker report and this culture report, did the researchers engage directly in interviews with customers of the banks?

Ms Derville Rowland

No, we did not engage directly-----

Ms Derville Rowland

The insight that customers of the banks were not being treated in the way that we expected-----

How can the witnesses stand over a report when the very people that the report is about were not interviewed?

Professor Philip Lane

If the Senator will excuse me, given the amount of information we have accumulated on consumers, the flow of information we get every day through the public contacts unit or through letters to me, it would have been redundant and wasteful to take a step which we take every day, namely, listening to consumers. We know, and I do not think there is any lack of insight into, the fact that consumers are deeply unhappy with how they are treated. If the Senator can share we me what he thinks was missing in terms of-----

I am just looking at it this way. The researchers undertook 1,400 hours of desktop reviews, ran more than 500 surveys and conducted 75 interviews. If none of those was with consumers, I as a public representative have to ask the question. Before we came in here today, I got a phone call from a customer of one of the banks who knew the witnesses would be appearing before the committee and asked that I put one question to them. This is a consumer who has been dealing with various banks and wanted me to ask if the witnesses conducted interviews with consumers and if they considered that the banks were engaging in a form of moral hazard themselves. If they felt their loans were going to be bought by funds now known as vulture funds, they effectively did non-engagement with customers by stealth because they knew the loans were going to go to the vulture fund, a bit like the bank guarantee being a backstop when it happened. There was a view taken by many that the banks knew the State would bail them out. They engaged in reckless lending, as everyone now agrees. I am disappointed and I believe the report is lacking because customers are not in it.

Will the witnesses address that point about moral hazard within the banks themselves? If they were of the view that their loans were going to be sold to vulture funds, the banks deliberately engaged in constructive non-engagement with consumers. On the tracker issue, do the witnesses believe that the banks allowed it to continue because it was adding to their bottom line in terms of profits at a time when their balance sheets were very vulnerable? They decided to ride on and rip off the tracker mortgage and, if they were caught, they would pay up. They decided to do first and explain later rather than explaining first. Will Professor Lane deal with those points?

Ultimately, ours is a questioning role. I acknowledge the work the Central Bank does but we have to provide probity. Will Professor Lane address the issue of my disappointment and concern around the lack of direct engagement with customers of banks regarding a cultural issue? How can he form an impression? If the researchers are doing 1,400 hours of desktop reviews, 600 surveys and 75 interviews and none of them is with bank customers, how is there not a gap in the due diligence and veracity of the report?

Senator Gerry Horkan took the Chair.

Professor Philip Lane

There was no question. If we went into this feeling that maybe the banks treated customers fairly and maybe we should check with customers-----

Am I correct in saying that of the 1,400 hours of desktop reviews, all the surveys and all the interviews, none was with bank customers? Who were they with?

Professor Philip Lane

This was about the conduct of the banks. We were not questioning-----

How could the Central Bank assess the conduct of the banks if it did not at the same time have the other side of the equation? That is the primary research.

Professor Philip Lane

We do that every day and there was no question about the nature of that research.

However, this was a stand-alone project.

Mr. Ed Sibley

There is no question that the banks have treated their customers appallingly in respect of trackers. There is no question of that. The scope of the work was to look at the behaviour and culture within the banks themselves.

How can anyone do that without talking to customers?

Mr. Ed Sibley

If the Senator will let me finish, one of the key aspects we can see from doing that work is the distance between the executive and boards that are making decisions that impact on customers and the customers themselves. We can see the distance within the banks between the banks and their customers. We can see the impact that has had on customers with the lightning rod of the trackers, as was said earlier. We see every day-----

With due respect to Mr. Sibley, in my experience dealing with banks, the front-end staff are getting the direction from the board and top management to sell products and meet targets. To say there is a disconnect and effectively that the boards are above in some ivory tower-----

Mr. Ed Sibley

That is not the point I was making.

The point I am trying to make is that I find it difficult to comprehend that anyone can come out with a report on the cultural treatment by banks of customers and, with all these desktop reviews, surveys and interviews, not have one interview with a bank customer. Any report surely has to have primary research. There is plenty of it in terms of the banks themselves but not in terms of how they interact with the customer. The witnesses appear to be basing it on feedback from people who ring the Central Bank. Who physically wrote the report?

Professor Philip Lane

I will turn to Ms Rowland.

Ms Derville Rowland

There is a lot in what the Senator is saying and I want to tell him-----

It is the customer. The bank customer is the person I am interested in.

Ms Derville Rowland

We have been clear that the customers were not interviewed. The purpose of the report was to identify the cultures that were in existence inside each of the lenders. There was a particular focus on the senior executive team precisely because what the Senator has said is correct, that they are so important in leading the culture, attitudes and tone from the top that the rest of the employees will follow. To understand their motivations, value set and mindset was the focus of the culture report. As Mr. Sibley and the Governor have said, we were aware that there was a significant cultural and behavioural deficit in the way they behaved towards their customers.

The report was to focus on how, at senior levels, the bank values the trade-offs in decisions between, for example, income from a particular initiative regarding a variety of things such as new products or market share and how the customer is valued within that. A team of leading world experts in cultural evaluation from our colleagues in the Dutch central bank came here to work with our team. We took a blended approach to their established model to examine the mindset, behaviours and the group behaviours in the organisation. We blended it with our own behaviours-----

I fully understand that. I am a practical person. If I wanted to know what was going on in a company, and I previously operated as an auditor, I went to the relevant person and asked him or her what was happening. I did not go to top management for everything. I would ask the customers. Ms Rowland stated that she is aware of customers. For the completeness of the report, where were a range of customers of the banks not interviewed as to how they felt the banks were dealing with them? Ms Rowland would get the information at first hand. In many cases, information can be sanitised up along the line but one could get a person into a room and ask him or her about his or her experience with bank A, bank B or bank C. There is no substitute for interviewing the customer.

Ms Derville Rowland

We did go beyond the people at executive level. The insights we got were from questionnaires and witness interviews with people who work for them and below that. We got a view of how a decision was made and what was valued in that decision. The outcomes in this report call out what the Deputy is talking about, which is a journey to travel in terms of being the consumer focused organisations they need to be and a deficit to be filled in their structures and embedding that. That is the insight and outcome gleaned through this process and approach. It has effectively given us the insight that while it may be something one thought was the case, it is confirmed on an evidence basis that it is the case. That is due to the rigour of looking not just at those on the executive level but interviewing others below them. The staff perceptions of what the executive team valued and the insight were part of this.

Many customers who ended up with the vulture funds believe that the banks stonewalled them when they were seeking to deal with restructuring their loans because the banks had the backstop of knowing the loans could go to a fund.

Professor Philip Lane

I will make three points. First, to return to the issue of customers, if we were starting at point zero or coming to this cold, of course one would have to do customer interviews. However, we have a great deal of information from customers already. It was not a stand-alone project. It is integral to all that has come before. Second, within that we believe it is important for these banks to embed the information to be gathered from customer surveys and focus groups. They would need to have mechanisms at board level to absorb what they learn from customers. That is part of this cultural shift.

On the Senator's points, under the CCMA and the code of conduct the banks have a responsibility to be proactive with any customer in arrears in engaging and trying to resolve them. If the Senator has evidence that any bank neglected that in any case-----

Customers who are constituents are telling me this.

Professor Philip Lane

I will make two other points. I agree with the Senator about the moral hazard of the bailout, not just here but elsewhere. That was part of the mindset going into the crisis. However, in that situation they were counting on the taxpayer to step in, which happened. In this situation there is no taxpayer step-in. If they have left a customer-----

Can Professor Lane deal with the final point, that they stood idly by and were not proactive? It suited the banks to allow the tracker overcharging to continue because it allowed them to boost their balance sheets at a time when they were extremely vulnerable. As far as they were concerned, they could ride on and explain later.

Professor Philip Lane

How these decisions were made is part of the enforcement actions we are undertaking. I do not wish to pre-empt the enforcement investigation. More generally-----

What is the current position with the enforcement procedure against the banks?

Professor Philip Lane

It is in train and is active. There are timelines.

When does Professor Lane think he will be imposing sanctions on the banks?

Professor Philip Lane

It is a mistake in an enforcement investigation to put a deadline because-----

When does he expect to conclude it?

Professor Philip Lane

We have timelines but it is not the case that these are going to conclude within weeks. I do not really wish to say-----

Will it be by the end of the year?

Professor Philip Lane

-----because that is part of how these enforcement actions-----

Will it be by the end of the year or in the next six months?

Professor Philip Lane

It is unlikely in 2018.

Ms Derville Rowland

I do not wish to give specific timelines on the enforcement cases because there are-----

In general terms, when will they be concluded?

Ms Derville Rowland

As these are long and detailed investigations, I would not expect outcomes this year.

Ms Derville Rowland

They are on different timelines. Some are more advanced than others because we started them earlier. We are getting documentation and interviews done quicker in some, and some contain different types of obstacles. The commitment to rigorous conclusion is more important than deadlines because enforcement cases can meet obstacles and different issues, but they are all timelined.

I wish to make a final point. The problem is that customers got ripped off in the context of tracker mortgages. They are watching this and saying that the banks, as far as they are concerned, have not changed and sanctions have yet to be imposed. There is a need for closure on this matter. For the people we deal with, those on tracker mortgages and small and medium-sized enterprises going over to the funds, this is an issue in respect of which they are entitled to closure. This matter has been ongoing for ten years. We are now celebrating the tenth anniversary of the bank guarantee. Those to whom I refer are entitled to closure.

Professor Philip Lane

We all want to close as much as possible as quickly as possible, but the Senator can appreciate that if one sets a deadline one just encourages banks to run down the clock through obstruction. We cannot have a situation where we impose a deadline which leads to a worse outcome for those affected. Over 30,000 customers have received their redress and compensation, so a great deal has happened. It is important to say that a lot has been delivered, but we are committed to it being complete and comprehensive and to not leaving any stone unturned in including all of those who should be repaid and compensated from the tracker.

On the broader issue, we had an earlier discussion about it being ten years since the crisis. A huge amount has been done. The regulation is vastly different from ten years ago. One of the by-products of the fact the banks are now stabilised is that we are able to do more in terms of holding them to a higher standard. It is not enough for them to be prudentially safe; it is also necessary for them to demonstrate their commitment to good consumer outcomes.

I welcome Professor Lane and his colleagues. I have some brief questions which follow on from what Senator Kieran O'Donnell said. He said there was constructive non-engagement by banks with the customers whose loans the banks believed would be sold to vulture funds. Professor Lane has told us on numerous occasions to tell the customers to become proactive and work with their banks. If they were in difficulty, they were to go to the banks.

Professor Lane says the report has been concluded and that he is looking at it. Has he found that there was constructive non-engagement?

Professor Philip Lane

I will turn to Mr. Sibley to give the Deputy some details, but there has been a lot of engagement. Many mortgages have been restructured because-----

We know all of that, but have the delegates found out about the specific point raised by Senator Kieran O'Donnell? Was there constructive non-engagement where the bank felt customers' loans were going to be sold to vulture funds? Have the delegates found out about that and if the banks closed down their work with customers?

Professor Philip Lane

That would be a violation of the code of conduct under which banks have a duty to engage constructively with customers-----

Have customers written to the Central Bank of Ireland on this issue to inform it that they have tried to engage with banks and that they will not engage with them?

Mr. Ed Sibley

Is the Senator referring to loans which are in difficulty as opposed to the tracker mortgage issue in order that I am clear on the question being asked?

I said I was continuing on from what Senator Kieran O'Donnell had left off. He referred to constructive non-engagement by banks on mortgages and all other types of loan where there were difficulties in making repayments.

Mr. Ed Sibley

We have seen no such evidence; in reality. the evidence points in an entirely different direction. If we look at what has happened in terms of the levels of distress-----

Is Mr. Sibley is saying there was full engagement between the banks and their customers on all occasions?

Mr. Ed Sibley

From what we have seen, there was. If the Senator has evidence to suggest something else, we will look at it, but on the approach taken to resolving the issue of mortgage arrears, we have required the banks to engage with their customers as soon as possible in a way that respects them, as outlined in the code of conduct on mortgage arrears.

The members-----

Mr. Ed Sibley

I wish to finish. We have required the banks to have a waterfall approach to make sure-----

We know all of that, but all members of the committee have said there were problems in the engagement between banks and customers with problems, but Mr. Sibley has said he has found that there were no such problems.

Mr. Ed Sibley

As borrowers in distress have engaged with their lenders, individual circumstances have been considered and restructuring has taken place, where required. It is not a straightforward exercise; it requires engagement on both sides and there is judgment associated with, it but we have not seen evidence that banks have been stonewalling their customers because they think the loans may be sold in the future. In fact, I would say the banks are not at all incentivised to do so.

How does Mr. Sibley make that judgment when the Central Bank has not interviewed customers as part of the study? How can he make such a categorical statement?

Mr. Ed Sibley

A number of points are being made. Members have asked about the approach taken to the culture review. We undertook a piece of work on the culture within the institutions. Using that methodology which is supported by the world experts, we undertook a review of the culture and behaviour within the banks. Separately, we undertake a huge amount of work on the ongoing engagement between banks and their customers, be it on specific tracker mortgage issues or non-performing loans. What we see and require is that they engage with borrowers who engage with them. There is a big issue surrounding engagement which requires continued diligence and focus on the part of both the lender and the borrower.

Deputy John McGuinness resumed the Chair.

We had EBS agents here, as alluded to by the Chairman earlier. Will the report deal with how EBS agents were treated after the takeover of the EBS by Allied Irish Banks?

Mr. Ed Sibley

The report focuses on the culture within the institutions today. There is an historical dispute between EBS agents and AIB. It is a matter that is going through the commercial courts. We had a discussion earlier with the Chairman on this matter, but it is separate from the culture report.

Yes, but quite a number of the banks that were represented here stated they grew their businesses through agents, rather than opening outlets in various towns throughout the country. Therefore, will the report issue a recommendation for banks that are going to employ agents to sell their products in the aftermath of what has happened with the EBS?

Professor Philip Lane

We recognise the risks associated with indirect agents and brokers in general and those associated with having that gap between a bank and a customer. It is a clear risk factor that we monitor. Our consumer protection risk assessment model looks at sales channels and the ultimate responsibility is on the bank, regardless of whether it is selling directly or through an agent. We hold the bank to account to make sure that sales channel is safe for customers. As Ms Rowland said, the sales process is often the key point of vulnerability in ensuring consumer protection. It is a high priority for us, but perhaps Ms Rowland might speak about the issue.

Ms Derville Rowland

The culture report recognises completely that all of the banks have a distance to travel to embed a true consumer focus in their practices and structures. It goes on to articulate how clear we are that in order for them to be effective and deliver the outcomes we all expect for customers, they need to have a full and comprehensive understanding of the risks their business poses to their customers and that they need to have a plan to address and mitigate these risks. Part of it will be the way they design their products, the way they incentivise their staff and/or agents to sell those products, the training people receive and the expectations set. We are clear that as the risks to consumers are understood more fully, the banks have to look closely at the approaches employed and adopted by businesses when selling to customers. That is one of the parts of the risk framework which will be scrutinised more closely, but they will be expected to know their own business model and put appropriate risk mitigation measures in place to do so. However, we will check that they do.

Irrespective of the commercial dispute between the EBS and AIB, the report will not deal with the specific issue at all; rather, it will sidestep it.

Ms Derville Rowland

The report we have published looks at the culture of the banks, with a forward looking analysis of what needs to happen and an expectation that the banks will be held to account in that regard. Each bank had presented to it its own report which was specific to it. It does not look in particular at the AIB and EBS agent issue, which is another issue. Mr. Sibley has said there are a lot of issues in the banking system that have to be dealt with and not all of them fall within the scope of the culture report. The culture report, effectively, looks at the trade-offs the senior executive team weighs up when it looks at income versus risk and consumer focus. It is with that lens that the report draws its conclusions.

On credit card interest rates, we have recently seen some credit card companies charging in excess of a 25% interest rate. Every single day there are more and more credit card transactions as we are on the way to having a moneyless society, with tap and go facilities. When we think about the billions of euro spent by credit card and the fact that the companies receive a percentage of turnover-----

Will the Senator deal with the report first?

This issue relates to the consumer. Have the delegates received any complaint about the 25% interest rate the credit card companies are charging?

This committee had to deal with moneylenders. The issue before us is not much different from moneylending because of the exorbitant interest rates being charged. Recently, the committee heard that if post offices could get into the mortgage lending, the cost of mortgages could decrease. An interest rate of 25% is exorbitant. Has the Central Bank received complaints in respect of it?

Professor Philip Lane

I will turn to Ms Derville Rowland shortly but to return to the issue of how I think about consumer risk, I agree with the Senator that credit cards are a clear priority because the temptation is to spend money now and not worry about the interest rate until later. The evidence globally is that the way those credit card contracts are designed is a source of risk for consumers. In general, the credit card system is something we have to monitor. We must remember the way credit cards work. Many people pay off their debt within the month. There is no charge for that, but then there is this high interest rate system. Those high interest rates are an international phenomenon. I do not believe we have any information for the Senator today about whether we are receiving complaints about them, but we can revert to him on that.

The report does not deal with this-----

Professor Philip Lane

We believe this culture report is important but it is not a report on everything going on. In terms of our daily supervision and work, we are dealing with all sorts of issues all the time. It is just one perspective. In addition to enforcing our rules and regulations, we are saying it would be better if these firms did not create the problems in the first instance. If they had an organisational culture, there would be more consumer focus and fewer headaches, so to speak, arising for us. The intent of the report is not to have a check list of all the problems we are facing and outline the solution. It is stating that, in addition to our daily work of checking that they are obeying the rules, we want to go beyond that by saying if they adopt these cultures, the risk to consumers would decrease because these problems would not emerge with the same frequency.

I thank the Governor, Mr. Sibley and Ms Rowland for their opening statements and for the 51-page report, which I read in great detail. We have touched on parts of it but there is much more of it we have not got to yet. Even though we have been questioning the witnesses for two hours, there is quite a lot of it we have not been able to reach as yet. It is important, however, that I touch on the question of tracker mortgages. It may not be for the culture report to do but there is a body of work to be done to work out, at some point, how every bank managed to make almost identical mistakes with tracker mortgages independently of each other. It is difficult for an ordinary person with any level of common sense not to wonder how there was not some level of semi-collusion or semi-discussion about it. Ireland is a small place and people talk to each other. Perhaps one bank said it was tightening the rules and putting on a bit of pressure and then everybody started doing it in the same way that everybody started running after Anglo Irish Bank when it started performing in a particular way. They all seemed to say that it is working for it, so let us all copy the model history says should not have worked. There is a body of work to be done on that. I am not saying it should have been done via the culture report, but the report has been compiled as a result of the tracker problem.

Professor Philip Lane

That is exactly why we have the enforcement processes in the works because they will go back over all the evidence in terms of what the files, the email trails and the minutes of committee meetings state. That is exactly what is going on, in addition to interviewing key people and so on. Reconstructing what happened is what the enforcement processes are doing.

I do not want to prejudice any legal cases but is it possible that it could be discovered that the banks were talking to each other? They were in huge trouble in terms of their profitability. Massive losses were being created. They were looking at any way to claw back some level of profitability or reduce losses. Were they talking to each other? It is amazing that all of them did more or less the same things independently of each other at the same time.

Professor Philip Lane

I will not rule anything out because we try to be evidence based in these processes. I have said to this committee previously that the counter narrative is essentially when the banks face the same common problem and when they have the same culture, the fact that they arrive at similar answers does not require collusion. It does not rule out collusion, but it does not require collusion.

They were breaking rules, breaking their own customers' contracts and interpreting them in a way they should not have been interpreting them.

Professor Philip Lane

Again, the balance between all of those different elements is part of the enforcement campaign. As we have emphasised, in this tracker examination, it is not just a question of looking at it rule by rule; it is the whole perspective in terms of whether they were treating customers correctly.

I want to put on record - and I may have done it previously in the context of individual banks - that in terms of the idea tracker mortgages cost the banks €1 billion, €580 million or whatever, they were giving the bulk of that money back to people who should never have had it taken from them in the first instance.

Professor Philip Lane

Yes.

That is not really a cost. If they had not been caught, effectively, it would have been extra profits they should never have earned. In the context of the idea that there was a huge cost, there is a compliance cost and an element of compensation, which is an additional cost, and an element of administrative burden, which in some cases is quite significant. However, a significant proportion of that €1 billion relates to returning to customers money that should never have been taken from them. Professor Lane might clarify the position in that regard.

Professor Philip Lane

Absolutely. That is true. We could-----

The report states that it has cost the banks €1 billion. We should not be talking in that way. It has given rise to a compliance cost for the banks and the-----

Professor Philip Lane

That is perfectly fair. If I were to rewrite the report, I would make that point. That is true.

That parks the issue, but I thank Professor Lane for acknowledging the position.

The report points out that however bad everything was, the position now is certainly better than previously. That is blatantly obvious. Ten years after the guarantee and almost eight years since the bailout, it should be. However, the tendency towards firefighting and going back to the old ways remains. I saw a reference to a board meeting being taken up with a great deal of regulation and headline items in respect of which it had to be informed. I know that happens in other organisations. They are dealing with so much compliance, they do not get any time to deal with long-term strategy, and Professor Lane mentioned that. Is there a genuine issue in the five main banks with planning and looking at their long-term futures, and that of the country? Regardless of whether we like it, the country needs banks as much as they need it. If we do not have banks, we need something else. I am not convinced by Professor Lane's report in terms of their being sufficient long-term strategic thinking happening at board level. It is very easy not to do it, but it is essential.

Professor Philip Lane

I will turn to Mr. Sibley on that shortly. In the past decade, much of the work was on resurrecting the capital positions of the banks and other measures, but that is done. There are some elements to do in terms of their balance sheets.

The next conversation is about the long-term strategy. There are two dimensions to that, one of which is the balance between long-term strategic decisions about, say, the role of IT or the business lines to be in. What we are saying in this report is that, in addition to what I have just said, there is a need for a long-term strategy regarding how one is going to do right by the consumer. There is not enough attention paid to consumers in those strategic discussions. Mr. Sibley might want to add to that.

Mr. Ed Sibley

It is a very good question in terms of how banks are considering strategy and the long-term future. As the Deputy indicated, part of the issue that comes out of the culture report is them being able to move away from the kind of circle-the-wagons mindset to thinking about the longer term. We are very focused on ensuring that they are thinking about the longer term and that they are not just thinking about the next six months or the next year. Typically, a strategy will be set for a three to five-year period.

There are some real challenges in doing so in light of the level of change in the system, financial innovation, changing technology, new competition and so on. It is very difficult to look forward three or five years with any degree of confidence, but we are absolutely driving to make sure they are thinking about it, both from a strategy perspective and, most importantly, a financial resources perspective in making sure their funding is much more secure than it was in order that they can sustain their businesses in the long term; that they will have sufficient capital to deal with a plausible downside if they get into difficulty; and, if they do get into difficulty, that they will have their own thoughts on how to recover. We are very active in resolution planning. It runs alongside the work about which we think from the perspective of how the banks are interacting with their customers and whether they are treating them in a sustainable way. Clearly, there is more work to be done in that regard. It is absolutely a focus of our work. They are getting better, although certainly I would not claim that they are completely where they need to be. There are also the other incentives of analyst reports and quarterly earnings which bring a short-term focus to what needs to be a long-term vision.

On will happen in the long term and the short term, it is fair to say that in the past a lot of performance bonuses, incentives and rewards were based on the amounts of money lent, rather than on the amounts the banks got back. Banks lent money all over the place to enable people to buy fields in counties Wicklow, Meath and Kildare in the hope they would be rezoned and that all kinds of thing would happen. I know of anecdotal stories where people were given €35 million or €40 million who did not even have to give any security on the loan. It was a question of if the bank did not know what security was needed by the borrower, neither did the borrower. That was happening. People were being rewarded for lending money recklessly. Is that still possible? Could it still happen or is it now the case that the reward is based on the long-term performance of a loan as it is repaid?

Mr. Ed Sibley

There are three aspects to cover in answering that question. First, in respect of the banks where there is a degree of State ownership, that is, Bank of Ireland, AlB and Permanent TSB, there are very firm restrictions on the variable pay rates that can be paid within them. It is very tight, but I will come back to that matter. Second, on the overarching rules at European and international level, a lot of work has been done to make sure there is a potential clawback on any variable pay element for up to ten years. In the circumstances described by the Senator, if someone is incentivised to do something that is profitable for the bank or institution in the short term but results in costs in the longer term, the variable element can be clawed back. That is part of the regulation.

If the person has retired, can it be clawed back from his or her pension? How does it work?

Mr. Ed Sibley

He or she would have to pay back whatever was the variable element.

The third point is that incentivisation goes beyond simple bonuses. We have seen an instance in which there was a table on a wall which showed things such as who was top of the charts in lending through to who was going to be promoted. There are lots of non-pay incentives. We are trying to understand how people are incentivised to behave in a particular way within their institutions and make sure it is aligned with both the long-term success of the institutions and the sustainable treatment of their customers. That is one of the reasons we are very interested in the behaviour and culture of firms because how culture is driven affects how people are incentivised. It is very much at the forefront of our minds.

There is a reference in the report to over-optimism and banks stating: "Look at where we came from, are we not fantastic?" I get the impression from the representatives of various banks who come before the committee that there is a certain lack of humility. Okay, some of the management teams are different and there are new people there who I suppose have to try to sell themselves as best they can, but I do not get the impression that they realise just how badly hit people individually were. We have many people coming to us and various members have heard really traumatic stories not just of people losing their homes but taking their own lives because of what happened during the crash. Some of it was at least partly the result of the pressure exerted by the banks and receiving telephone calls six, seven or eight times a day. I do not get the impression, even with all of the culture reports and so on, that the banks have the humility they should have based on how much they cost us. We have not had representatives of Anglo Irish Bank here, but every bank was culpable to a greater or lesser extent. I would be very concerned if there was over-optimism. Will Professor Lane expand a little more on that issue?

Professor Philip Lane

It is important to emphasise that one of the remedies to tackle that issue is building a culture of internal challenge, that is, the ability to speak up and speak out. There is also a very important role for the board in that regard. The non-executive members of a board, in particular, have that duty to hold the executives to account. In addition to what we can do as a regulator, the first line in managing the risk of over-optimism is having independent directors who are prepared to be independent. That is part of how we review people when we conduct fitness and probity checks for those going on bank boards. It is now an arduous process. It is a significant process and a component of the single supervisory mechanism, SSM, for the banks. On the internal dynamics on bank committees and so on, having the ability to speak out against any overarching culture is very important.

Mr. Ed Sibley

I will supplement what Professor Lane said. One of the things I do not want to be lost completely is that not all of the banks are at the same stage. This is an aggregate report, as is mentioned in it. I know that the committee might have a degree of scepticism in that regard, but there are banks that accepted the need for change earlier and which are further along in that change.

That is referenced in the report.

Mr. Ed Sibley

It is also one of the reasons we are so interested in diversity. The Senator is right. The representatives of the banks that the committee has had before it look very similar to the people it had before it in the past and they have very similar backgrounds. Aspects of the issues of over-optimism and resistance to challenge relate to the lack of diversity in the institutions at very senior levels, particularly at the levels and in the roles responsible for driving the business forward. We have been pushing for greater diversity across financial services in the past two or three years. Again, we are starting to see some element of change coming through, but, again, it is at a relatively early stage.

That was actually my next point. I had written it down. I was going to ask about the level of diversity and inclusion because we have been here for more than two hours and, although it is quite a big chapter in the report, nobody has mentioned it. One would expect to have quite a number of bankers and accountants in a bank. I declare that I happen to be an accountant. Obviously, gender balance is an issue. Some of the figures for female participation make Leinster House look good. Even in respect of applicants, at one stage the figure was down to 10% or 12%. It has been got up to 29% over five or six years, but that does not necessarily indicate that the women concerned were successful, only that they were applicants. Obviously, a gender balance is required, but about what other diversity measures are the delegates talking?

Professor Philip Lane

I will mention some things and then turn to Mr. Sibley again.

One of the things about which we are talking is geographic diversity. This is a small country. The observation, not only from our own experience but also from the crises in Iceland and some of the smaller countries in Eastern Europe, is that the insularity of a small country and the fact that executives and board members are drawn from a fairly small pool create a risk of groupthink and people being afraid to confront one another. A basic element which it is quite possible for small countries to achieve is having outside voices, people who are not connected to the Irish system and have no reason to be particularly bashful in speaking out. That is an obvious element, which is happening to a degree on the boards of banks.

Mr. Ed Sibley

To support Professor Lane's point, when we talk and think about diversity, we think about it in its broadest form in terms of what can and cannot be seen. We also think in terms of experience and capability. We are focused very much on thinking about it in a constructive way. We think about how the board and the executive team work as a whole, rather than just being individual capabilities within. Gender diversity is easier to measure than most other aspects. There is an acute gender diversity issue.

That can be seen in the report and statistics we published in the last couple of years for the numbers of applicants for the most senior positions. It is even more acute when one looks at the roles people are taking up. At entry and middle management levels, it is 50:50 and 60:40; therefore, it is relatively balanced, but as one proceeds further up the organisations, one finds very acute gender diversity imbalances. If we look at the roles that are driving businesses forward such as the chief executives, chief finance officers, chief operating officers and the heads of retail and the like, approximately 94% are male and they often come from similar backgrounds and experiences. We then get into real risks of groupthink, over-optimism, lack of challenge and resistance to external challenge or circling the wagons. This is on top of all that we do in the areas of the regulation and supervision. To my mind, where we see lack of diversity, it is a leading indicator of cultural issues and poor potential outcomes both from a prudential and consumer perspective.

On a related and final matter regarding the culture and diversity, there is the issue of the banks wanting the Government to release the cap on senior pay. Most people argue €500,000 is a lot of money, but obviously the people in question think it is not enough and that they are losing staff by mid-teen percentages, as was referenced by AIB. What are Mr. Sibley's thoughts on that matter? He mentioned that he was going to refer back to the banks that were State owned or partially State-owned versus those that were not. What are his thoughts on caps on salaries and bonus payments generally?

Mr. Ed Sibley

First and foremost, that is a matter for the Oireachtas to determine. It is part of the legislative framework, but within it there are certain choices to be made. The banks in State ownership are run as commercial enterprises. That is what the country decided was best to deliver the best outcome for the taxpayer. Obviously, it is perhaps subject to some discussion. It is true that in some of the senior level roles I have described people can earn more money in performing similar roles in institutions elsewhere, be they banks or non-banks. If it is purely a pay dynamic when people choose to stay in or enter into a role, that having lower pay thresholds will reduce the pool that can be either kept or recruited. The impact this has on the ultimate return the taxpayer receives is a choice for the Oireachtas. What we are most focused on is making sure the incentivisation lines up with ensuring the institution is run in a safe and sound way and a way that treats the customer with respect.

Is Mr. Sibley suggesting that if the cap is not removed, there will be fewer good staff and that the performance will not be as good?

Mr. Ed Sibley

Certainly not. All I am saying is it is a fact that somebody who is a chief executive, a chief finance officer, a chief operating officer or a head of retail can earn more than the cap and, in some cases, a significant multiple of it. I am not making any judgment on whether that is right or wrong. It is just a matter of factual reality. On what we and the rules are focused is making sure the incentivisation attempts to line up with the long-term good of the institution and the customer.

I thank Mr. Sibley. I will suspend the sitting as there will be a vote in the House at 12.45 p.m.

Sitting suspended at 12.35 p.m. and resumed at 1.35 p.m.