Matters Relating to the Banking Sector: Central Bank of Ireland

Today we continue our deliberations on a future framework for accountability in the banking sector with an engagement with representatives of the Central Bank of Ireland. I am pleased to welcome Ms Seana Cunningham, director of enforcement and anti-money laundering, Ms Mary-Elizabeth McMunn, director of credit institutions supervision, and Mr. Gerry Cross, director of financial regulation policy and risk.

I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses 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 Mr. Cross to make the opening presentation.

Mr. Gerry Cross

I thank the committee for inviting us to today's meeting to discuss the future framework for accountability in the banking sector. As this is an issue inextricably linked to various aspects of the Central Bank's responsibilities I am joined by Ms Seána Cunningham, director of enforcement, and Ms Mary-Elizabeth McMunn, director of credit institutions.

Ineffective governance, low standards and poor corporate culture are widely accepted as a root cause of a number of significant failings within the financial industry in recent years. These failings have had severe consequences for customers and shareholders and also, in the case of the financial crisis, for the stability of the financial system. It is important that standards are driven up. Global and national experience indicates that in order for a regulatory framework to work well, it must drive strong and effective governance in firms. To achieve this, the allocation of responsibilities within firms must be clear and comprehensive and individuals must know what they are responsible for, be clear on what standards are expected of them and recognise that if their actions fall short, they will be held accountable. Failings in the Irish banking sector have been well documented and there is a deficit of trust as a result. One component necessary to restore trust in the banking system is ensuring that firms are well run and organised, with clarity regarding individual responsibilities and expected standards and accountability when decisions are poorly made or poorly implemented.

The mission of the Central Bank is to serve the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy. We have accordingly put forward a proposal for a new framework of conduct standards and senior level accountability. We believe the proposed changes will be an important step in delivering better outcomes for consumers, ensuring that firms are well-run and improving confidence in the financial sector. That is why in our response to the Law Reform Commission's issues paper on regulatory enforcement and corporate offences in January 2018 we recommended a number of changes to the existing framework. We indicated that we supported reforms such as legislating for an offence of egregious recklessness, assigning responsibility to senior personnel, enhancing individual accountability and introducing conduct standards that would set clear expectations as to behaviour and conduct in the financial sector.

We built on those proposals in our July 2018 report to the Minister for Finance on the behaviour and culture of the Irish retail banks. We recommended the introduction of an enhanced individual accountability framework, key components of which would apply to all regulated financial services providers. These proposals are in line with recent recommendations of the Financial Stability Board that national authorities should identify and assign key responsibilities, hold individuals accountable and assess the suitability of individuals' assigned key responsibilities, including their responsibility for following conduct standards. They have much in common with frameworks introduced in recent years in other jurisdictions, such as the UK and Australia, which place obligations on firms and senior individuals within them to set out clearly where responsibility and decision making lies for their business and to adhere to certain conduct standards.

It is important to mention that individual accountability is not a new area of focus for the Central Bank. We already have a range of strong powers and we use them, both to keep unfit individuals out of the financial services industry and to pursue wrongdoing where it occurs. The fitness and probity regime was introduced in 2011. The key objective of that regime is to ensure that individuals who hold certain positions in regulated firms are committed to high standards of competence, integrity and honesty. For the most senior roles in the industry the Central Bank acts as gatekeeper and must approve proposed appointments. This regime has been instrumental in the Central Bank's work to ensure that the right people occupy senior management roles in the financial services sector. We have also conducted investigations in respect of existing role holders where suspicions have arisen.

We have also taken action against individuals under the administrative sanctions procedure, ASP, and when carrying out enforcement investigations we consider all possible angles, including individual accountability. Since 2006, sanctions have been imposed under the ASP against individuals, which have included monetary penalties and lengthy disqualifications from being a person concerned in the management of a regulated firm. In short, our system of assertive supervision is underpinned by robust enforcement. However, enforcement actions against individuals can be challenging and complex. Management in regulated entities may seek to insulate itself, or be at a remove, from apparent misconduct. Senior individuals can seek to escape liability for wrongdoing by hiding behind the collective. This experience is directly relevant to our proposals for an individual accountability framework.

I will turn to the key elements of our proposals. First, we have proposed enforceable conduct standards setting out the behaviour expected of regulated firms and individuals working within them, including relatively straightforward obligations to conduct themselves with honesty and integrity, to act with due skill, care, diligence and in the interest of consumers, and to co-operate with regulatory authorities. It is proposed that additional conduct standards would be imposed on those individuals in senior roles, including the requirement to take all reasonable steps to ensure the area of the business for which they are responsible is controlled effectively and complies with any regulatory requirements. There will also be principles for businesses applicable to all regulated firms. Where firms or individuals fall below these basic standards, the Central Bank may decide to take regulatory action and impose sanctions where necessary. The standards will also provide a sense of shared values and empower individuals at all levels in the organisation to speak up and challenge issues that arise in their firms. We believe that these are standards of behaviour that well-run firms already expect of their staff.

Second, we have proposed a senior executive accountability regime, SEAR. This will require firms to set out clearly where responsibility and decision making lie. It will foster better governance by identifying a set of senior executive functions with clear responsibilities, for which statements of responsibility will be put in place, and supported by responsibility maps within each relevant organisation. Taking a risk based approach, it is proposed that the initial introduction of a SEAR would focus on a subset of the financial services industry, including credit institutions, certain insurance undertakings and investment firms. Over time it would be rolled out more widely. This phased approach will help ensure efficiency, effectiveness and proportionality.

Third, we propose a new simplified unified enforcement process. The current hurdle of participation should be removed, such that the Central Bank could hold individuals to account directly for their misconduct under the administrative sanctions procedure rather than only where they are proven to have participated in a firm's breach of rules. Removal of the participation requirement is essential to enhancing the accountability of individuals for failing to maintain basic standards of conduct.

Finally, the fitness and probity framework would be enhanced to include a requirement for firms to certify the ongoing fitness and probity of individuals in key roles.

In conclusion, the proposals we have set out will clarify the lines of responsibility within relevant firms, build on our existing powers and enhance our ability to hold senior and other individuals in such firms to account. This will, over time, result in improved governance across the financial sector. Following the financial crisis the Central Bank has adopted a more intrusive approach to supervision combined with a credible threat of enforcement. The legal and regulatory framework has been greatly enhanced.

However, as recent events show, there is more to be done, in particular in the areas of conduct, culture, and individual accountability. We welcome the Minister for Finance’s indication that he will bring forward draft legislation on these proposals for Oireachtas consideration. My colleagues and I very much look forward to hearing the views of members of the committee and to answering questions.

My question is a general one on reform in banking culture. There is a drugs crisis in our society which generates enormous profits that find their way into the banking system. How does the Central Bank address the issue of money laundering? The bank was blamed by the general banks last year, and before that, for the huge amount of inquiries that went to elderly people in nursing homes as to the security and genuineness of their identity. I took this up with a number of people in the Central Bank who said they did not share that view. There is, however, a massive problem with money laundering in the banking system and this is one our greatest social threats. We are dealing with cultural issues so can the witnesses tell me if they work with the Criminal Assets Bureau, CAB, to spot money laundering or identify if small or cash businesses are being used for money laundering? I specifically have in mind casinos which are all over Ireland, including Dublin, and are unregulated despite the fact that most local councils have voted against them. They are heavy cash-generating machines. In other jurisdictions, people dealing with banking culture go after these issues. If we are generating large amounts of illicit cash through the massive drug and gun industries in society, what is the Central Bank doing to identify the problem areas? Large amounts of money are being generated in other areas, with destructive effect. I understand that the bank now passports bank executives but that is not working in the context of how the flow of illicit money is proceeding. Are there CAB people in the Central Bank, sharing their knowledge with the bank? Do the witnesses know the profiles of depositors in certain institutions?

Ms Seana Cunningham

The Central Bank is part of the anti-money laundering steering committee which is chaired by the Department of Finance and the constituent members of that committee include CAB, as well as An Garda Síochána, the Department of Justice and Equality, the Central Bank and others. We all play a role in the framework and our role is specifically in the supervision of how credit and financial institutions comply with anti-money laundering requirements. It is about institutions knowing who their customers are, understanding their customer profiles, monitoring the way accounts are used and, fundamentally, making reports of suspicions to An Garda Síochána and the Revenue Commissioners. An Garda Síochána and the Revenue Commissioners then investigate money laundering or terrorist financing. We carry out supervision on a risk basis and have a high degree of engagement with the banking sector over its compliance with anti-money laundering rules and with regulations to counter terrorist financing. We work very closely with An Garda Síochána, whose members also work with the banks to ensure the latter report suspicions and ensure the force can carry out effective investigations into money laundering.

How much reporting is there? What areas does it cover? Does it cover drugs, guns, terrorism, the illegal sex trade? There are a number of areas, globally and in Ireland, where a vast amount of money is being generated and this has to find its way into the banking structures. What does the Central Bank do and how does it train the banks which it supervises to deal with this?

Ms Seana Cunningham

The national risk assessment was conducted in advance of the Financial Action Task Force, FATF, review of Ireland's effectiveness in combatting money laundering and terrorist financing. It was published by the Department of Finance and it sets out, on a sectoral basis, where the threats and risks in Ireland are and how they are being mitigated. This was a joint effort by members of the anti-money laundering steering committee and it is a good starting place.

What role did the Central Bank play in that?

Ms Seana Cunningham

The Central Bank looked at the risks associated with the sectors we supervise. We were very much informed by An Garda Síochána as to where they saw the risks. The report was Ireland's view, at that point in time, of the national risks and there was also a supranational risk assessment, carried out at European level. Money flows do not respect borders so there needs to be an international context. The FATF review was carried out just over two years ago and the report identified the Central Bank's role, as well as the role of other compliance supervisors. The rating we got was "substantially effective" but there are issues on which Ireland needs to follow up and we are doing that through the anti-money laundering steering committee.

What issues has the Central Bank identified? It is one thing to talk about supervision and risk but the committee would like examples of where the Central Bank has put a stop to money laundering, drugs money and money from the sex trade. It has been raised in the Dáil and in committees on a number of occasions but the level of drug dealing is historically high at the moment, at least in Dublin. The bank must see and be aware of these money flows. What is it doing to stop this illicit activity?

Ms Seana Cunningham

We have been very focused on our supervision of the banking sector and on whether its anti-money laundering controls are good and effective. This has led to a report which we published on compliance in the banking sector, in which we set out the deficiencies we saw. We stated that we expected standards to improve and, a number of years ago, a number of enforcement actions were taken into anti-money laundering compliance. We have looked to the banks to improve their frameworks and our engagement with gardaí suggests that that has happened. This is about making sure suspicions are reported to An Garda Síochána to allow the latter to investigate. An Garda Síochána also works closely with banks to ensure that can happen.

There is a huge range of banks in the IFSC which are registered in Ireland. We are very anxious to have that business but we want it to be legitimate. We know that there are vast flows of money, worldwide and in Ireland, with much of it flowing out of some very poor countries. I asked if anybody from CAB went into the Central Bank to look at its systems to see how good they are for the purposes of stopping money laundering.

Ms Seana Cunningham

No, we do not have anyone in CAB working in the Central Bank.

Does the Central Bank have anybody from An Garda Síochána? When I was Minister for Social Protection, where there was a low but significant problem of nearly €20 billion with some areas of fraud, I had gardaí come in and be seconded to the Department to work in the Department. That interaction and learning from both cultures was extremely effective and was quite indicative of other issues that perhaps would have needed to be addressed. On the scale of illicit money going around the world, it strikes me that just going to committee meetings from time to time with CAB is rather inadequate. I really welcome the commitments the Central Bank is making to culture but I would like to see specifics.

Ms Seana Cunningham

I would not like to leave the Deputy with the impression that our work with CAB and An Garda Síochána rests with attending committee meetings. I personally meet regularly with An Garda Síochána on ant-money laundering, AML, as would many of the people who work in the anti-money laundering division. It is a close collaboration and it is certainly not limited to a committee meeting on a periodic basis. On our international engagement, the Deputy is right that AML is an international issue. We are part of the European Supervisory Authorities, ESAs, where we look at AML in a European context. We are attendees at FATF, together with colleagues from An Garda Síochána, the Department of Finance and the Department of Justice and Equality. We are very much part of the international efforts to look to improve efforts to combat money laundering and terrorist financing. I hope I have been able to give the Deputy a sense of how we are working with An Garda Síochána in Ireland to do that.

My second question is a brief one. In the context of Brexit, the threat of Brexit is now postponed for a period of time although we do not quite know for how long, but we clearly have issues with the Border. We do not want to see a hard border returned. On the other hand, we do not want to see massive illicit trade being generated as a consequence. Can Ms Cunningham tell us from her contacts with the North and with institutions in Northern Ireland what the Central Bank has been doing to set in place a framework that will provide for the deterrence of smuggling and money laundering post Brexit and also ensure that in co-operation with institutions in the North, we do not have a massive zone along the Border which becomes dominated by smuggling? We are obviously hoping that the best Brexit for Ireland is no Brexit. Nonetheless, it would look now that one way or the other, that it is likely that the status of the relationship between the United Kingdom, the Republic of Ireland and the EU will change. What is the Central Bank's involvement there? That is one of the big issues potentially coming down the line.

Mr. Gerry Cross

Let me start off and my colleague, Ms McMunn will say a little. As members can imagine, as it has been for these Houses, Brexit has been a major component of our work going back two and a half to three years and well before the referendum even. It has been a multifaceted effort. On the one hand, we had the significant inflow of authorisation applications across all of the sectors which has been widely reported on and which has meant that we have had to resource ourselves, organise ourselves and engage very effectively with that suite of applications. Second, we have been making sure that the firms for which we are responsible, namely the large number of regulated firms, are well prepared for Brexit, in all of its many ramifications, whether that is business that they do with the UK, business with Northern Ireland, exposures they may have or readiness for economic consequences and that has been a very major aspect of our supervisory engagement over recent times. Third, we have been addressing the cliff effects that are potentially there, namely the question of what would happen with various legislation and regulations if there was a no-deal Brexit. Particularly over the past nine months to one year, that has been a major part of our work and one which has gone very well. We feel we are in a good position on that. Fourth, right up until the middle of last week, there was a great focus on preparation for what would happen if there was a hard Brexit, how markets would react and what the dynamics would be.

We are pleased that progress is continuing and that work is continuing to try to avoid a hard Brexit. One of the matters we are very focused on is remaining at full readiness. The situation in the UK remains volatile and is hard to predict. In any event, we only have a six month delay if everything goes according to plan so for us it is very important that we, our firms and firms that are doing business in Ireland from outside remain ready and prepared and have their contingency planning in place.

Ms Mary-Elizabeth McMunn

I will speak a little to what Ms Cunningham was mentioning to the Deputy earlier on the team that I have that is responsible for the prudential supervision of the banks. We would work closely with Ms Cunningham's team in the context of anti-money laundering supervision. The prudential supervisors work with the anti-money laundering supervisors because the prudential supervisors would be very familiar with the institutions' business models, with what they are seeing and if there is a change in the business models of those entities. That dialogue is continual and we are an integrated supervisor so information flows can go between both teams.

In the context of Brexit, as Mr. Cross has mentioned, our focus has become increasingly acute as we have moved along in the timeline over the past number of months. What that has meant for us is that we are very clear on any business that our institutions might have in Northern Ireland, for example with the number of credit unions that are along the Border region. We also identify where there might be vulnerabilities from a Brexit perspective with those business lines. Over the recent period, we have also had an enhanced level of reporting to us in the context of any flows we are seeing in those businesses and any difficulties that we might see in things that are happening there. As Mr. Cross has mentioned, as we got closer to 29 March and 12 April, our focus has increased.

I will bring in Deputy Quinlivan in a moment but I ask the committee to agree that Deputy Burke will take over the Chair for a moment because the Taoiseach is addressing the Seanad and I would like to be there for that.

Deputy Peter Burke took the Chair.

I thank Mr. Cross for his presentation. I have a number of questions on the proposals the Central Bank is coming forward with and I will come back to them on Brexit later. If the Central Bank's proposals were implemented in full today and the tracker scandal broke tomorrow, how would things be different? Do any of the Central Bank's proposals seek jail sentences for breaches of these rules or did the Central Bank seek same in any engagement with the Department of Finance? Does the Central Bank believe that multi-party action or class action suits have a role in empowering working people to take on the banks? On bonus pay, which is unfortunately back on the agenda, is there any evidence that a bonus culture can lead to recklessness? How can this be managed or can it be managed at all? Why does the Central Bank have faith in the banking industry's Irish Banking Culture Board to deliver change? Is the lesson of the past decade or so that bankers do not act in the best interests of wider society and that while there is a group of them together in a room, this fact could be multiplied in its effect?

I will have a final question on Brexit that we can come back to afterwards. The Central Bank has answered some of that question but as the Central Bank has alluded to, Brexit has resulted in a large number of firms and employees setting up operations here, particularly in Dublin. For example, Barclays received approval from the British High Courts to move €190 billion of assets to Ireland. Bank of America Merrill Lynch also transferred €50 billion worth of assets to this jurisdiction in recent months. This comes in addition to a swathe of other financial and legal firms moving their operations here as a result of Brexit. IDA Ireland has said that last year alone it received 55 new investments as a result of Brexit, bringing in 4,500 additional jobs to Ireland in major financial and legal firms such as Morgan Stanley, Bank of America Merrill Lynch and DLA Piper. Some of these investments bring complex funds and asset portfolios with them to the value of hundreds of billions of euros.

Do the witnesses believe the Central Bank has enough resources to robustly monitor these new companies and their assets?

Mr. Gerry Cross

The Deputy has raised a number of related questions, so I will answer first before handing over to my colleagues who will answer different aspects of the questions.

The Deputy asked how things could have been different. As I said in my opening statement, we are seeking to respond to things we have seen in the past, to take account of international experience and to look forward in order to drive up standards. At the heart of our perspective is the importance of trust and confidence in the financial system. That is essential if the system is to function properly. We have put a holistic, integrated set of proposals on the table, aiming to contribute to the driving of those standards.

It is always very difficult to say whether things could have been different in the past, but we think that a set of proposals such as those we have made makes reoccurrences less likely and will help reduce the incidence of the types of events we have seen, whether prudential events, financial stability events or conduct events in the sector. They will do this in a number of ways. It is certainly the case, as we saw in the report on culture in banks from last year, that behaviours, standards and culture within financial firms must be driven upwards continuously. It is very important to clearly set out the standards we expect. It sounds simple to state that people shall act honestly and with integrity, or with diligence and due care.

That is a concern we have.

Mr. Gerry Cross

It is important not only to say it, but to say that it is expected at every level within a financial firm. It is not just a matter of telling them that they will be held to account, although that is part of it, but it also allows people within firms to hold each other to account so that they can say if they are not comfortable acting in a certain way or if they do not want to do something. It gives them a way of articulating those concerns. It will help.

If one looks back on the past ten or 12 years and considers the range of different bad events that have happened, either here or elsewhere, the issue of responsibility arises. It is said that the banks were responsible, or that things went wrong somewhere and it is hard to put one's finger on it. These proposals make things clear. It defines areas, and if people working in those areas do not take reasonable steps, they are accountable and responsible. I cannot say that certain things would not have happened if these proposals were in place in the past. However, we can say that we believe this will make a significant contribution to improving standards going forward.

The Deputy had a query concerning the Irish culture board. As Derville Rowland said earlier this week in response to the publication of this survey by the board, we believe it is a helpful, valuable development but it does not solve the problem. Culture and improvements in standards is something that the industry itself needs to get a grip on. This is one way in which this can be done, and we are supportive of that. It is part of the solution, and it is a helpful aspect. We believe that what is being put on the table now is a very concrete, sharp set of proposals. We have identified a gap that infiltrates the system in a number of different ways, and we believe these proposals will improve things. The culture board is helpful but we need to answer the question.

Ms Seana Cunningham

As a reflection on our experience, we were also very supportive of the work of the Law Reform Commission in the context of looking at regulatory powers and corporate offences, and indeed at the broader framework. We set out these high-level proposals initially and then put them forward as part of the culture report on the banking sector. This is about the enhancement of a framework. Legislative change has already enhanced the powers of the Central Bank, including the Central Bank Reform Act 2010 and the Central Bank (Supervision and Enforcement) Act 2013. These have been very helpful in advancing the framework; this is a very important proposal to further enhance things. This concerns looking directly at the conduct of individuals through the prism of a legal framework. Currently, under our framework, the administrative sanctions procedure, we must first look at whether a firm has breached a legal requirement and then whether an individual has participated. We believe that this proposal allows us to look at this in a very different way.

Ms Mary-Elizabeth McMunn

The Deputy mentioned remuneration and bonuses. Pre-crisis, there were no rules around how such payments were awarded, the form they would take or how they were paid. It is important to note that all banks and larger investment firms are subject to remuneration requirement changes made at a European level. There are now provisions in place which promote longer term incentivisation, and provisions for clawback where variable remuneration is awarded. The principle underlying those changes is that there is a much better balance between risk and reward, and ultimately trying to promote much more safe, sound and effective risk management within those institutions. There is a contextual piece to what has happened at European level, which we have been part of and supportive of in the context of moving from more short-term incentivisation to longer-term incentivisation. We have said in the past that we are keen to ensure that the cultural change espoused by the banks is properly incentivised and that incentivisation is not just monetary in the context of the behaviours and cultures within institutions more generally.

The Deputy asked a question about Brexit. He is absolutely right; we have spoken about the contingency planning work we have been doing and the cliff-edge work we have focused on. Another aspect of this situation is that we have had an unprecedented level of applications from companies that are looking to come here, far in excess of what we would see in normal times. That has meant that we have had to re-prioritise and assign our experienced resources to the assessment of those applications. That is not without some cost.

I asked whether the Central Bank believes it has sufficient resources now.

Ms Mary-Elizabeth McMunn

We have sought additional resources in those areas. The Deputy also mentioned Barclays and Bank of America. They are supervised as significant institutions, and we are part of that ECB supervision as members of the Single Supervisory Mechanism, SSM. Those banks are jointly supervised by teams that are on the ground in Dublin and by colleagues in Frankfurt. As they are deemed to be significant institutions because of their size, we are not on our own in supervising them.

I asked one question that was not answered; I asked a few, so I have no problem with that. Do the witnesses believe that multi-party actions or class action suits have a role to play in empowering working people in taking on the banks?

Ms Seana Cunningham

I understand that the Law Reform Commission looked at that quite some time ago. It is not something the Central Bank is necessarily advocating for, but it is certainly worth looking at in a much broader context.

The banking collapse was referenced in the opening statements. Perhaps the witnesses will disagree, but one of things that led to the banking collapse was a culture of very high levels of executive pay. Staff at companies such as Lehman Brothers were paying themselves huge salaries.

In terms of the culture board, currently there is a campaign to raise the salary caps in those banks, in particular, that were bailed out by the taxpayer. The salary cap currently is €600,000, which by the standard of most ordinary people is pretty generous. Many median salaries in Ireland are around the €50,000 mark. That salary cap is ten times more than the median salary that would qualify an individual to get some assistance with his or her mortgage. What is the bank's stance on the current campaign by a number of financial institutions and individuals to have the salary cap removed? Reference was made to moving to long-term incentivisation. Will Mr. Cross explain the position of the culture board on the removal of salary caps in the context that most people would consider €600,000 to be a generous enough salary? He said the argument has been made that the banks cannot get the right people. That particular culture was one of the key factors in precipitating the crash, and that included Ireland. Some of the entities which crashed were paying their senior executives extraordinary sums of money at the time. Has Mr. Cross a sense of where the Central Bank stands in the context of a culture of corporate responsibility to ensure there are no further crashes? Is the Central Bank a supporter of lifting the salary cap? Has it advised Government not to do it or to do it? Given the Central Bank is examining financial probity and reducing risk, and given, as has been acknowledged worldwide, the whole masters of the universe syndrome in terms of people like Lehman Brothers and the extraordinary salaries people were paid before the crash, does Mr. Cross support raising and allowing bank bonuses to rise very significantly in Ireland?

Mr. Gerry Cross

I will answer some of the Deputy's questions and I will ask Ms McMunn to answer the other questions. The Deputy's focus on the issue of remuneration and pay in the advance of the crisis is exactly right. The issue of pay before the crisis was a very big problem. Internationally and at the European level, a lot has been done. This is not specifically what the Deputy asked about, but it is important to set the context. In particular, there has been a very significant focus on aligning the incentives that executives in banks and other financial firms have with the risks they allow their institutions to run, whether it be clawback, long-term investment, malus etc. A lot has been done on that and that has changed the context fundamentally.

Second, in Europe specifically, there has been the introduction of a bonus cap. It was introduced as part of the capital requirements review post crisis alongside other important governance changes. We basically said that, in principle, no one should receive variable pay in excess of 100% of their fixed pay, and that can be raised subject to a vote of the shareholders. That is the broad context where a lot has been done. Specifically in the Irish context, we have the specific cap, about which the Deputy asked, and Ms McMunn will comment on that.

Deputy John McGuinness took the Chair.

Ms Mary-Elizabeth McMunn

To supplement Mr Cross's point in the context of the European changes, when we talk about clawback, it is envisaged in circumstances, for example, where a staff member has participated in or was responsible for conduct that resulted in significant losses for the institution or failed to meet the appropriate standards of fitness and probity. It is quite specific in terms of the circumstances where clawback can arise.

To answer specifically the Deputy's question regarding the salary cap in institutions that are still subject to State ownership, that has been the subject of previous discussions at this committee with the deputy governor, Mr. Sibley, and the Governor, Professor Lane. In the first instance, we indicated this is a matter for the Oireachtas, but the deputy governor, Mr. Sibley, indicated we did not see a case at this time for changing the position on the cap for senior executives. However, we thought there was some merit in the context of looking at staff underneath that level with respect to the restrictions that apply to a much larger set in terms of individuals who work within the banking sector. That would need to be looked at carefully from that perspective. We have been asked for our views on the review that is ongoing. We are considering our response in that regard and, as I said, I am reiterating a position in that regard articulated by the Governor, Professor Lane, and the deputy governor, Mr. Sibley, to this committee previously.

I apologise for being late but I was detained at another meeting. Who drives the task of changing that culture in the bank? Who does Mr. Cross see as driving that culture change? There can be all the reform one likes on paper, but if there is not someone to drive the reform or, in the Central Bank's case, to drive the change of culture, it will go nowhere. How committed will the Central Bank be to that change that is needed? How committed does Mr. Cross believe the banks are to that change?

Mr. Gerry Cross

On the question of who drives the reform, first, to take the industry, and this involves driving up standards, changing the way firms and the people within them behave, and changing their culture, that is something that was primarily to be driven and made happen within the firms themselves. The Chairman will recall from the culture report we published that we assessed that culture and put the onus back on the banks, requiring them to make a range of changes. However, the role of the regulator is very important. What we are putting on the table in this package is a set of proposals we believe will be very helpful and instrumental in helping drive that cultural change. For example, we clearly say we now need to know who is responsible for what within a firm and that the management of a firm must articulate who precisely is responsible for what, and that includes matters such as the implementation of this framework and responsibility for overseeing the compliance and conduct within firms. It specifically asks them to call out who within the firm is responsible for implementing this framework and overseeing conduct etc. It sets out standards of behaviour, general standards that apply throughout the firm, and specific standards for senior managers in taking all reasonable steps to make sure their areas are effectively controlled, that they do not cause regulatory breaches etc. We believe this framework very much goes towards answering the Chairman's question regarding how we make sure someone is taking responsibility for these changes.

The Chairman also asked us about the Central Bank. The fact there are three of us here today, and there could have been others as well, shows that this is something that the whole of the bank has been brought into. It is driven from the Governor down through the deputy governors and then throughout the organisation. We have a very significant enforcement aspect to this. As regards how we hold people and firms to account, we have a policy aspect to this with respect to what a framework should look like, what a good framework should look like, and what lessons have we learned from overseas. There is a sectoral aspect to it in terms of what is happening in the banking and insurance sectors. Also, the area of consumer protection, which is not represented here but easily could have been, has an important role in this regard. This is a commitment to drive up standards within the financial services sector. It is a commitment across the bank. If the Chairman notes our three-year strategy, I would point to the idea of the financial sector serving consumers and the economy, and the role we play in driving that to happen is at the heart of this.

I hope that answers the Chairman's question. It is a matter in which we have a very keen interest.

What sanctions will be imposed if the Central Bank finds that an individual or a bank, through its policy or approach, did not reach those standards?

Ms Seana Cunningham

The way the proposal is framed is that we are seeking to amend the current administrative sanctions regime under which there are a range of sanctions we can apply to individuals, including a monetary sanction of up to €1 million, a reprimand or a disqualification. It is about having a framework that allows us to take action directly against an individual rather than necessarily through the conduct of the firm. These are the sanctions that are then available to us when we investigate and find that breaches have been committed.

How will I know that the Central Bank has sanctioned a bank or an individual within it?

Ms Seana Cunningham

We are entirely committed to transparency in our enforcement actions. Where we have conducted an investigation, deemed sanctions appropriate and resolved the matter, we publish a public statement on our website setting out the suspected contraventions, the conduct and the sanction imposed by the Central Bank.

Does the Central Bank name those involved?

Ms Seana Cunningham

That is part of the process. Members may be aware that last year the Central Bank sanctioned two individuals formerly concerned in the management of Irish Nationwide Building Society, INBS, and published public statements naming them and outlining the sanctions imposed by the Central Bank.

The normal difficulty is that when dealing with a bank or an individual within it, the bank will circle its wagons, bring in its legal people, and stall and obstruct the Central Bank. It will be difficult to dig out that element of the culture. Does Ms Cunningham feel that the hand of the Central Bank is strong enough to deal with such obstruction?

Ms Seana Cunningham

We very much welcomed the legislative change in that regard in recent years. The Central Bank was given new and very helpful powers under the Central Bank (Supervision and Enforcement) Act 2013 and we have used those powers. In the administrative sanctions procedure, entities and individuals are legally represented, as they ought to be. We are committed to conducting investigations and, where we find suspected breaches, to taking matters through our administrative sanctions procedure. When those matters do not resolve by way of settlement, the Central Bank holds an inquiry. It is currently holding inquiries into three persons formerly concerned in the management of INBS and two persons formerly concerned in the management of Quinn Insurance. We are very committed to using our powers and to holding firms and individuals to account when appropriate.

Is the current legislation sufficient to allow the Central Bank to probe cartel-like activities by banks or insurance companies? The committee is dealing with insurance companies in the context of public liability and car insurance and so on. It is very difficult to deal with them because they continue to obstruct the work of the committee through the non-delivery of key information, for example. The obstruction is not obvious but it is present. I would like the role of the Central Bank to be such that the first phone call to the offending bank or insurance company will make it shake in its boots. The day for us to be afraid of the banks is long passed. They have had a clear run, blackguarded their customers and clients and so on, and caused much damage to the economy and society. People doing business in Ireland with the banks want far greater transparency, far heftier sanctions and a Central Bank that shows no fear in dealing with insurance companies or banks.

At a recent meeting of the Irish Banking Culture Board chaired by Mr. Justice Hedigan, at which its members were giving their opinions on various approaches, I stated that what is missing in much of the conversation is the customer and the protection of the customer and his or her rights. I believe the Central Bank is weak on consumer protection, but that forms part of holding banks to account under this new regime. I am sure the witnesses are aware of complaints raised with the Central Bank and at its in-house meetings. The manner in which banks and vulture funds treat customers is unacceptable. It would be unacceptable in any society. It is difficult when one sees them being called out for this behaviour or conduct but nothing being done about it. The banking sector has been out of control for many years. It had no controls on it and got away with murder. Customers of the banks have lost trust completely and believe the law is heavily weighted on the side of the banks rather than that of the customer. It will be up to the Central Bank to prove through its actions that that is not the case. I hope it is up to the task. I am not saying that it is not. The banks have appeared before the committee and totally stonewalled and ignored us. There are all sorts of plámásing when the banks are before the committee, but when they leave the room they go back to the same game of turning their customers over for an extra euro. That is not acceptable anymore.

Mr. Gerry Cross

Customer protection is at the heart of this matter, our proposals and how we approach the regulation, supervision and enforcement of the financial services sector. In our view, our proposals are designed precisely to help address the issues the Chair identified. In short, they are basically saying we want to know who is responsible for what. There must be no more lack of clarity within a bank, insurance company or other type of firm regarding who is responsible for what areas and tasks. The Chair referred to banks circling the wagons. The proposals will make it more difficult to circle the wagons because we will be able to say the breach was in the bank's bailiwick, it is accountable for it and the question is whether all reasonable steps were taken. That is very important.

The proposal also sets out the expected standards. In terms of the interests of customers, the basic standard is that all those within financial firms must act honestly, professionally and with due diligence and integrity. There are additional standards at senior level, such as whether all reasonable steps have been taken to organise an area, oversee the people to whom responsibilities are delegated, and ensure compliance with regulations. It allows us to home in and identify where the issue lies.

The proposal is to simplify, unify and make more straightforward the ability to pursue individuals. No longer would we have to show first of all that the firm created a breach and then link to participation in it. Rather, we could simply say that the individual is at the heart of the breach. This regime is precisely what is needed to help address the concerns articulated by the Chair and it is reflective of our absolute commitment to the effective regulation and supervision of, and enforcement in respect of, the financial services sector.

The Chair mentioned the issue of insurance companies and I will address it briefly because, of course, the Central Bank is very involved with the work of the cost of insurance working group. We have also been very involved in the development of the claims information database for motor insurance.

That is up and running. Work is under way to assess the viability of such a framework for public liability and employer liability.

We have made good progress in establishing clarity around this. There is much work going on under Mr. Justice Nicholas Kearns and others on other aspects of this. It is a multifaceted piece of work and, at least from our perspective, the work we are doing in that space to try to bring more clarity is progressing well.

Ms Mary-Elizabeth McMunn

I will add comments about consumer protection supervision and what we are looking to do. In recent years, we have increased the resilience of the firms within the financial system and the financial system itself. That is protecting consumers. Consumers are more protected if institutions are better capitalised and in better liquidity positions. We work with institutions on recovery and resolution so that, if they get into difficulty, they can recover and problems can be resolved without recourse to the taxpayer, and that is better for protecting consumers.

Speaking for my colleagues in the area of consumer protection supervision, we are very committed to increasing our scrutiny in that area of conduct risk and that is about embedding a consumer focus culture within those institutions. What does that mean in practice? Historically we have done sectoral-based work and will continue to. We look across sectors, or maybe at specific products across sectors, but now our intention is to look at higher impact firms in specific areas and conduct a model of firm-specific supervision on them. We have been doing that in the prudential area for many years. That is a slight change from what we have been doing and is heightening our conduct supervision.

We will also continue to challenge the banks and management in the context of a specific emphasis on behaviour and culture and taking the work that we have done in relation to the five institutions from last year and bringing it forward.

Ms Seana Cunningham

I will give the committee a sense of what an enforcement investigation involves and the use of the powers we have. An enforcement investigation involves the production of documents under statutory request. It involves the conduct of interviews of staff and former staff of institutions on a voluntary or compelled basis. It can involve listening to voice recordings and authorised officers of the Central Bank on site. It can involve the review of CCTV footage. That is to give the committee a sense of what the enforcement investigations look like and how they can be conducted in the context of the powers we have at the moment.

I will come to Deputy Quinlivan in a moment because I know he has a question, but before I do, I want to ask about the insurance business. We read in the newspapers how insurance premiums have dropped and savings of 20% and 25% are available now. That is nonsense. There have been cases where, for example, public liability insurance on a little pub in Carlow went up to €22,000 per year. The person who owns it has to get it insured outside the country and pay the first €5,000 of whatever claim might be made.

It is very difficult to deal with the spin that is put on this story by the industry when it is compared with reality. People turn to the consumer protection arm of the Central Bank to get the real story, to understand what is really happening in the industry. That is what people are looking for now.

I was disappointed with the make-up of the new board under Mr. Justice John Hedigan because one of the things we learned during the whole tracker issue was that the banks will rush to stack the case, or stack the house, against the individual. It is a rigged deck of cards and that applies to the insurance companies as much as it does to the banks. This new board is paid for by the banks and, looking at the membership of that board, and with all due respect to every single one of them, it is weighted heavily to the side of the banks. The consumer is not represented in the significant way I had expected. If the aim is to change the culture within banks, I would like to see this particular board giving up ownership of it and allowing access to people who are critical and who have a role to play in bringing about the transparency that is needed. Such people should be central to that board. The banks are watching over and holding ownership of the board in a way I do not like. I would prefer if we did not have the usual suspects on all of these committees and boards. How will the Central Bank engage with them, or will it engage with them?

Mr. Gerry Cross

We are very conscious of the high degree of concern about, and interest in, public liability, PL, and employee liability, EL, insurance. As I said, we are engaged with the cost of insurance working group under the Minister of State, Deputy D'Arcy. It is important in all of these situations to cut through the narrative or story to see what is actually going on. In the implementation of our mandates to ensure firms are running themselves effectively, provisioning properly, doing their business as they should be and treating customers fairly and in their interests, being clear about what is happening is at the heart of our approach.

The Irish Banking Culture Board is an initiative of the banking sector. As I said earlier, we regard it as a helpful development, but most important for us is what is happening within the banks and making sure that the banks are responding to the need to improve their standards, conduct and culture. We are focused on the framework we have put forward here as what we think is needed to drive that forward.

These other things are helpful, but we are focused on-----

When will all of this be in place? When will the Central Bank have everything in place - legislation, regulation or whatever it might be? When will the Central Bank be engaging directly with the banks on this issue?

Mr. Gerry Cross

We are already engaging directly on this.

Yes, but under the-----

Mr. Gerry Cross

We are in the hands of the Oireachtas on this and awaiting legislation. We are working on the assumption that this legislation will be put in place and we are working to prepare what we think the regulations and guidance will be. We plan to consult on that because this is significant and needs public consultation as soon as practicable. We need to wait for the legislation to do that.

My question is also about insurance. The Chairman spoke well about the impact it is having on businesses, communities, community groups and the voluntary sector. Everyone is struggling. The spin is that premiums are coming down but people do not see that.

My understanding is that staff from the Central Statistics Office, CSO, in collecting data, ring up insurance companies, identify themselves as being from the CSO and get a quote on that basis. Have our guests confidence in those figures if that is the way it is done? Is that a way to get proper statistics on whether premiums are going up or down? Most people would say that premiums are not going down.

Mr. Cross referred to the claims database. Could he briefly explain what that is and who has access to it?

Mr. Gerry Cross

This is not the specific topic we are here to talk about so I may need to come back to the Deputy on the specific questions. In the context of motor insurance, PL and EL, there were long discussions on the piece of work that led to the implementation of the motor insurance claims database. In trying to understand, it is helpful to note that there are different discussions and different points are being made about what has been driving up costs and whether costs are coming down. This allows one to see what is the case.

The Deputy asked who has access to the database.

I cannot remember precisely what the limitations of it are but I can revert to the Deputy on the matter.

In regard to my concerns about the manner in which the CSO collects the data, does Mr. Cross have any information in that regard?

Mr. Gerry Cross

Again, I do not have a specific comment to make.

I thank Mr. Cross for attending today's meeting and I wish him well in his work.

Sitting suspended at 11.10 a.m. and resumed at 1.50 p.m.