Léim ar aghaidh chuig an bpríomhábhar
Gnáthamharc

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Thursday, 20 May 2004

Irish Financial Services Regulations Authority: Presentation.

The main business today is the discussion with representatives of the Irish Financial Services Regulatory Authority on issues arising from over-charging for foreign currency services by AIB. I welcome Dr. Liam O'Reilly, the chief executive of IFSRA, Ms Mary O'Dea, the consumer director, Mr. George Tracey, the head of consumer policy and codes, and Mr. Martin Moloney in development. I thank the witnesses for attending at such short notice. The Governor of the Central Bank was due to attend today. However, the Governor is in Frankfurt attending a meeting of the governing council of the European Central Bank. There is also the question of whether this issue is relevant to the Governor's role and functions. Our discussions with IFSRA may help clarify that point.

The committee will consider the immediate issues involved. This raises important questions about the strength and structure of assistance for the regulation of the banks and the protection and promotion of the rights of consumers. On the other hand, it calls into question the place of the customer in AIB's order of priorities. The committee will deliberate on the investigations that are taking place on the issue of overcharging for foreign exchange services. However, we believe it is important to examine the consequences of this episode sooner rather than later, as the committee will soon finalise a report on bank customer charges and interest rates.

While the comments of members of the committee are protected by parliamentary privilege, those of the visitors are not. I remind the committee that members should not comment on, or make charges against a person who is outside the committee or outside the Oireachtas. We will begin with a presentation on behalf of IFSRA and this will be followed by an open discussion with members of the committee.

Dr. Liam O’Reilly

I thank the Chairman for the opportunity to address the committee this morning. Mary O'Dea and I, along with our colleagues, are happy to discuss with the committee the general issues arising from the overcharging by AIB of certain foreign exchange customers. I appreciate that in your invitation to us you noted that an examination into specific issues regarding AIB Bank is ongoing. You will understand that it is not possible, nor would it be appropriate or in the interests of consumers, for us to go into the detail at this point.

I would like to start by briefly putting the role of the financial services regulator in context by describing our statutory mandate. Our job is to protect consumers. We do this by helping them to make informed financial decisions in a safe and fair market and by fostering sound, dynamic financial institutions, thereby contributing to financial stability.

Earlier this year we published our three-year strategic plan. This sets out clearly how we intend to focus our efforts in terms of both the consumer and the financial services industry. The implementation of our strategy is intended to deliver to the consumer more and better information in a safe financial market that is fair and gives better value. Our strategy is aimed also at facilitating innovation, competitiveness and growth within the industry, which in turn will directly benefit the consumer. We were mandated by law to put the consumer at the heart of our regulatory job.

In recent days there has been much public debate and commentary on financial services regulation. We welcome this and believe it is a useful opportunity to help increase awareness of regulation and what it can achieve. We are committed to a principles-based approach to regulation. This is achieved by the boards and top management of financial institutions fully committing to a culture of integrity, competence and best practice. In turn we would expect them to ensure that this culture flows throughout all levels of their organisations.

This approach sets out high-level requirements within which these firms can operate. It is backed up by the development of conduct of business rules which oblige firms to act fairly and openly when dealing with consumers. These high-level requirements are addressed at the outset of the codes with the more specific business rules following on naturally from these. The purpose of this approach to regulation is to work towards ensuring that the long-term benefits for the industry are aligned with the long-term interests of the consumer.

However, the regulatory process has many other tools at its disposal. The requirement for effective internal controls is extremely important, particularly for larger institutions. As regulators we leverage off compliance and audit systems. There is a need for financial institutions to have compliance systems, controls and internal audit departments that have the standing and the powers to meet the standards of behaviour that we now expect of them. We set out those standards, but they must then invest in the systems and staff to ensure they are met.

Our aim is to have a regulatory environment that engenders an ethical and competent industry with appropriate risk systems in place. We strongly believe that when the industry focuses on the best long-term interests of their customers, they are ensuring the continued long-term health of the industry. On-site inspections are another feature of the regulatory process. It is important to emphasise that it is not possible to undertake checks on an ongoing basis on every aspect of a financial institution's operations. Inspections, by their nature, are sample-based. They are, of course, an essential element of our regulatory process and they do uncover breaches of rules and regulations, which are then dealt with appropriately.

Regulation is also about responding to issues as they arise. These can be identified through our inspections process, through the compliance and audit channels and, of course, directly through consumers. We have dealt with many issues through our own consumer helpline in the past 12 months and have taken appropriate action. The consumer helpline was the source from which we got this information about what was happening in AIB.

The regulatory environment has changed radically in the past year. The consumer is at the very heart of what we do. Since our establishment we have been working to assist consumers in making their own financial decisions by providing them with clear and relevant information, by monitoring competition and by developing the conduct of business rules that I mentioned earlier. We are currently undertaking a consultation process as part of our review of all conduct of business rules for financial institutions. This is to ensure a consumer-focused standard of protection for purchasers of financial products and services. It is also to ensure the same level of protection for consumers regardless of the type of financial services provider they choose and to facilitate competition by providing a level playing field. We have also been very active in the past 12 months in the prudential area, supervising all financial service providers and authorising 164 new entrants across the various sectors. The safety and soundness of the financial institutions and funds within financial institutions is one of the basic protections for the consumer.

We subscribe fully to the six principles of better regulation as described in the Government's White Paper published in January this year. We seek to ensure that they will inform the way we undertake our regulatory role. These principles include transparency, where we consult widely, publish all relevant information and respond to any queries received. We will ensure that our rules and regulations are consistent across the different industry sectors and that we are accountable to our stakeholders — the Government, industry and consumers. We will improve effectiveness by putting in place the necessary resources, expertise and procedures to ensure that our rules and regulations can be complied with and enforced. In addition, we are committed to taking appropriate action, proportionate to each issue, and we advocate and adopt a principles based approach to supervision. We will strive to ensure that the rules and regulations in place are necessary to support our principles-based approach.

Without going into the specific details of the ongoing investigation, I would like to inform the committee on how we dealt with the AIB case. We received an anonymous call a number of weeks ago, making certain allegations relating to foreign exchange charges within AIB. We are encouraged that this issue was brought directly to our attention. When the issue was raised with us we pursued it at a meeting with AIB. Once the scale and nature of the issue was established, we undertook an initial on-site inspection. Our primary focus was to determine the amount involved, the extent of the impact on customers and how those customers could be identified and recompensed.

Within a matter of days, it had been established that more than two thirds of the customers could be identified. A mechanism was agreed with AIB under which €25 million was lodged into an account in the Central Bank to cover the liabilities involved. We consider that the lodgement of this money was a very important signal to those customers of AIB affected by this case and indeed to all who may be concerned about this issue. AIB, it must be said, has been very active and co-operative right up to board level in addressing this issue since it came to light. Its response includes a commitment to a full and speedy review of the systems surrounding all of their charging issues.

It is very important that at all times IFSRA, as the regulator acting in the public interest, has direct control over all aspects of this case. We also believe it is necessary in this case for the board of AIB to act on the basis of an independent investigation. We agreed last week with AIB that the investigative process is to be fully independent. Mr. Lauri McDonnell, former Comptroller and Auditor General, has been appointed as the independent assurer and an external independent firm of forensic accountants will undertake the investigation, working with Mr. McDonnell. We are finalising the terms of reference which will be supported by a reporting framework that includes direct reporting to us in relation to all aspects of the case. Our inspectors will continue to be onsite throughout the investigation.

When the investigation is complete, we shall review the evidence and AIB's response to it. We will formulate our own conclusions as to whether or not the response is appropriate. This process will, of course, also involve determining how the matters could have arisen and persisted over an extended period of time and will involve identifying the measures necessary to deal with the possibility of such matters arising again. We will also be reviewing the regulatory process to see if any changes are necessary.

We have contacted other institutions requesting them to verify that the charges they apply to customers are within the maximum level previously notified to the financial services regulator, and we are requiring each firm to carry out a detailed review of their systems in this regard.

There has been some recent discussion concerning the powers of IFSRA. The work in which we are currently engaged is driven by our current powers and I assure the committee we are using those powers efficiently and effectively. We will ensure that this case is dealt with speedily and thoroughly. The case clearly demonstrates that we do have powers to act and are willing and able to use them on behalf of the consumer.

There are a range of additional enforcement powers that we are in the course of receiving under the Central Bank and Financial Services Authority of Ireland Bill 2003, although I will not detail them as the Bill has just reached Report Stage in the Dáil. These additional powers will assist us considerably to refine our regulatory approach and are welcome for that reason, and also very timely. We are in the process of developing our conduct of business rules and the powers to sanction will support the introduction of our revised codes.

The committee will understand that I cannot draw specific conclusions concerning this case until we have completed our investigations. There are already consequences from our approach that should be acknowledged. This kind of investigative process is a very expensive one for the institution concerned, and almost certainly more expensive than any fine we could impose, both in monetary and reputation terms. Our primary focus for now is that we identify as many customers affected by this case as possible and ensure that those customers get their money back.

Thank you. I fully agree it would be inappropriate and wrong to discuss the investigation under way. However, I notice from the advertisements placed by AIB in the newspapers that the period in question dates from 31 August 1995 until quite recently. IFSRA did not exist in 1995 and I understand that the Consumer Credit Act, which deals with this area, was only passed in mid-1996. Which regulatory body was responsible when the issue first arose in 1995?

Dr. O’Reilly

Three regulators covered the period from 1995. The Central Bank, up to the enactment of the Consumer Credit Act-——

I just want to know the sequence. If Dr. O'Reilly is saying that the Central Bank was the sole body responsible for regulation in 1995, the Governor of the Central Bank may be invited to appear before the committee. Will Dr. O'Reilly explain the further sequence?

Dr. O’Reilly

From the enactment of the Consumer Credit Act in 1996, the Director of Consumer Affairs was responsible up to 1 May last year when IFSRA took over.

During the period when the Director of Consumer Affairs was responsible, what powers or legal rights did that office have to obtain banking files which might have been necessary to investigate this matter? I understand that the Central Bank would have quoted the second EU directive on banking as a reason not to give confidential files to the Director of Consumer Affairs during that entire period. Is it correct that the Director of Consumer Affairs would not have had the power to obtain files from the Central Bank because of the banking directive?

Dr. O’Reilly

I do not have the details but my colleagues may be able to provide them.

The position under the Consumer Credit Act is that the Director of Consumer Affairs would have had power to obtain all necessary documentation from the bank concerned.

However, the director could not obtain any information which the Central Bank may have held on the same financial institution.

The information held by the Central Bank would have been that provided to it by the regulated institution. Therefore, it would have been in a position to get it directly from the regulated institution.

Surely the Central Bank would have generated some of its own files in respect of its own work regarding the regulated institutions. It appears the Director of Consumer Affairs had no right to the Central Bank files throughout this period. I have often heard it said by officials of the Central Bank that, under the EU banking directive, it only has authority to give its files to other Central Banks, which clearly rules out the Director of Consumer Affairs. Does Dr. O'Reilly understand the point?

Dr. O’Reilly

I do. One of the major reasons for the establishment of the new authority was to make sure there would be a single pool of information within one authority so that information could be shared more easily. For example, the sharing of tax information with the Revenue Commissioners was one area of improvement.

The new regime allows for a much freer flow of information across the whole range institutions concerned than would have been the case during the period. One of the major problems was that responsibility in the area of banks was fragmented in that some institutions were responsible for consumer matters while others were responsible for safety and soundness matters. Under the new legislation it is important to know there is a free flow of information and full connections between all elements of the task.

In the last paragraph of page 6 of your opening statement you say you have contacted other institutions requesting them to verify that the charges they apply to customers are within the maximum level previously notified to the Financial Services Regulator. You used the word "notified" as opposed to "approved". I ask you to explain the difference. Was there an approval mechanism or was it a notification mechanism?

The structure in the legislation provides for notification of charges. Before 1996 it was at the discretion of the Central Bank, after 1996 it was at the discretion of the ODCA and now it is at our discretion whether to issue a direction in response to that notification. Once charges have been notified it is perfectly legitimate for them to be applied. We have the discretion to decide whether we want to issue a direction. That is the way it is set out in the legislation. It is not an approval process, it is, in effect, a right of veto on the charges.

Dr. O’Reilly

The effect of the notification, if it is not vetoed, is approval.

Will you explain that again because there is a difference between notifying and seeking approval?

In practice what happens is effectively an approval because a maximum charge is notified, which may not necessarily be the charge that is being levied. In response to that the regulatory authority will issue a direction to say that one may not levy any charge except in accordance with those set out. That may be lower following discussions with the institution, as it frequently is, or it may be refused. It has the effect of being like an approval process. As framed, the legislation provides that the institutions notify, following which a direction is issued to say one may not make any charge except those set out. These are effectively the approved charges.

Was that the practice, during the period from 1995 and when the Director of Consumer Affairs was involved?

It was the practice during the period when the ODCA had responsibility. There was a change from the previous legislation under the Central Bank Act when it moved to the Director of Consumer Affairs.

Following what has emerged during the past 24 hours the irony is that we have heard of further incidents this morning about the same bank in a branch in Tallaght which I understand are being investigated. It appears Irish people have little sanctions in that banks take money out of their accounts in an unauthorised, unapproved manner. I noted from the news last night that three individuals got two years imprisonment each, a total of six years, for taking €6,000 out of an ATM machine in Dungarvan. I appreciate that is not a matter on which the delegation can comment. For taking money to the value of €1,000 from a customer's account, by way of ATM, the courts decided yesterday a sentence of one year's imprisonment was warranted. The public will say there is one law for one group and another for the more powerful. This is the confidence issue you will have to help correct.

Dr. O’Reilly

Yes. That is one of the reasons we were anxious from our inception to ensure we had sanctions. Not only that, we needed to link the sanctions to codes of practice that were legally and statutorily enforceable on the institutions. The major import of all the statutory requirements and codes would be that the institutions act in the best interests of the consumer. That is at the centre and everything has to go back to that. Various things have happened and we are carrying out an investigation. As things stand, consumers are owed funds. It is not AIB's money and we must get it back to the consumer.

What system of monitoring was in place? I am not clear whether you are blaming scattered responsibility and Chinese walls between the Central Bank and the Director of Consumer Affairs for the fact that there was no monitoring. Alternatively, are you saying they could have monitored and did not do it? What system of monitoring took place before you took over and what has happened since then? A whisteblower revealed this problem. While on-site inspections are a feature you say they have to be sample based. Were samples being taken? Were you unlucky in that the sample taken did not reveal this?

The second question relates to sanctions. As I understand it, there are no sanctions for this in the Consumer Credit Act. Were there sanctions in the earlier Central Bank Act and, therefore, with the Central Bank? Why is it that during the four year period when we were told the Departments of Enterprise, Trade and Employment and Finance and the Central Bank were struggling with the issue of how best to protect the consumer, it never twigged there was no monitoring of sanctions for this? If an audit of best practice was undertaken this matter would have come to your notice.

It appears a huge cultural change is needed in the banks. You say we leverage off compliance and audit systems on regulators. The reality is there are no adequate compliance systems within the banks so far as consumer law is concerned. We saw that again this morning in that where people took out add-on mortgages they did not get a letter informing them of what they were committing to and allowing them make an explicit sign up. If this was the case, my understanding is that the bank would have been in breach of consumer credit law. Given the daily evidence of a non-compliance culture in the banks is there a need for more hands-on monitoring, and realistic sanctions to change that culture?

How well do you believe consumers are protected so far as the banks are concerned? We have seen the suggestion of misselling of investment products by a bank, including the suggestion that it sold add-on products without proper authorisation by consumers and that it did not comply with the consumer charges sanctioned. How well are consumers protected in respect of their dealings with financial institutions? Is there a need for a serious crash course in compliance-sanction monitoring for a sustained period to get a change in attitude so that we can say consumer protection has moved from a low to a high priority? We do not want a continuous string of these controversies with delegations from IFSRA appearing before this committee saying there were no sanctions in a particular area but IFSRA is using other powers to address the issue. We want a strong consumer protection system that works. How far are we from that?

Dr. O’Reilly

There is no doubt the consumer would not have been seen as the major focus in terms of the objectives of financial institutions. Ultimately, financial institutions will suffer as a result. We have been given the job to make sure the consumer is put at the heart of the process.

Another point I have always made is that while we can have layer upon layer of rules — Enron is a case where there were rules but there were no principles — it is important that values, principles and rules can be linked together within an institution. That culture needs to be inculcated within institutions and we strongly believe it is the boards and senior management that must lead the way on that. That is our job.

After a year we have a long road to travel and our strategic plan sets out the way we intend to follow that road. On one side it will be through consumer education by making sure we alert and empower consumers to ask questions. It is with ensuring there are proper codes of practice linked to principles and which are statutorily based, and that there are sanctions in that regard. We must leverage off systems within the institutions, such as the internal audit and audit committee systems. From that point of view the IASSA legislation has made sure there will be compliance statements and responsibilities placed on the board and management to do it. In addition to that, we must make sure that the boards and managements of the institutions take responsibility and sign off on matters. We then will have the deterrent, in terms of sanctions, when it comes to complying with the codes of practice. On the questions about how the systems worked, I will hand over to Ms O'Dea and Mr. Treacy.

In regard to the inspections that are carried out for these type of charges, we undertake mystery shopper type exercises where people, say, carry out a cash transaction. In this particular case the type of transaction fell within the smaller number of transactions. We had focused our resources, as I understand the Director of Consumer Affairs had also, on areas which had the largest number of consumers, which is the straight FX transactions. We had not picked up on that in our inspection processes.

When we examine all of this area we will review the regulatory systems to see if any improvement can be made in that regard. However, it is important to note that those type of on-site inspections will always be sample-based. It is much more effective for the regulator to set out proper requirements in terms of controls for compliance with the law. In that regard, I understand that under the second Bill, which contains a specific statement, directors will have to sign off on their compliance with the law. That will focus people's minds in terms of having the proper systems in respect of all aspects of the law, and that consumer law is very much brought into that.

In addition, as people move forward in that regard there will not just be the existing law. There will also be the code of practice which, as Dr. O'Reilly said, focuses the hearts and minds of institutions in regard to the consumer. The principles-based approach, which examines integrity and fairness and will set out detailed rules as exist already, both in respect of credit institutions on an interim basis and other firms, will provide a much more consumer focused way of doing things.

In terms of consumer protection, another important element — mention was made of the elderly issue and other issues that are arising — is the consumer information we produce. We have to try to make sure we get that to the right place at the right time. Many of the stories members are hearing in regard to mis-selling took place at a time when there were no codes of practice on these issues and when it was much easier for firms to set out documentation and getting people to sign off in terms of having read and understood the risks without going through a proper sales process. For that reason, we have introduced a consultation paper on competency testing — we are just coming to the end of the consultation period — whereby we set out our belief that all those selling products should be appropriately trained and have the proper competence to understand the risks and to explain those risks properly to people when they buy any financial product.

Dr. O’Reilly

In terms of culture, we believe there is much more work to be done, and much more thought is being put into it internationally, in the area of performance management systems within institutions and whether they should be linked not alone to the bottom line but also to values and the long-term interests of the firm. In that regard more work is being done in the area of valuing shares, for instance, in that not alone should it be valued in terms of this year's profits but in terms of the culture of the management and the way they operate and reward their people.

Is Dr. O'Reilly saying that IFSRA engaged in monitoring by way of these sampling of products and mystery shoppers, and that over the eight years no one ever twigged on this particular type of transaction? Was that the only monitoring that took place? For example, did IFSRA not write to the chief executive outlining the charges it had observed and asking if the company was compliant with all those charges? There are no systems like that, other than simply getting a high level sign-off that the institutions concerned are compliant.

We are aware that the ODCA wrote to the banks and credit institutions in 1998, although I am open to correction on that, and got sign-off at that stage. To return to the issue of the inspections——

Can I interrupt you at that point? By way of information, I understand that the letter related only to current account charges, not to foreign exchange charges. Perhaps that could be verified. Was this particular issue included in that letter?

I can come back to you on that.

All of that audit trail will be part of the investigative process.

I understood the letter that has been mentioned in the public arena in recent days did not relate to this issue.

To return to the inspections, we use mystery shopping techniques but we will also respond to complaints. For example, we would visit the south east, the west and the Dublin area. We would conduct the inspections roughly on a quarterly basis but we concentrate on the cash foreign exchange because of the volume of transactions in those particular foreign exchange services. That is one of the reasons we did not catch this one. We have lessons to learn from this process that will be incorporated into our ongoing inspection process once the investigation is complete.

I welcome Dr. O'Reilly and his team. There has been a degree of reassurance for customers in that IFSRA has been able to respond rapidly, but I want to follow up on some of the Chairman's questions.

In regard to the hand-over and the establishment of IFSRA, what arrangements were made by the Central Bank and, presumably, the Director of Consumer Affairs, to brief IFSRA and hand over files to it on their ongoing inspections and investigations? In that context, specifically, was the Central Bank the recipient of complaints about charging structures in respect of this bank and perhaps other financial institutions? If so, was IFSRA advised of that when it was established?

My understanding is that the IFSRA operates broadly under the canopy of the Central Bank and, therefore, I anticipate that there will be no difficulty in the Central Bank passing on both its institutional memory and its files on matters which may have been brought to its attention. Has IFSRA received all of that information and, if not, why not?

I have a similar question regarding the Director of Consumer Affairs, although I am not as clear about IFSRA's relationship with that office. My understanding is that there have been a number of complaints of overcharging which were received by the Central Bank over a number of years. I understand that in one or two commercial situations, settlement was made and that the Central Bank was aware of that.

Banks have extremely expensive and elaborate internal audit structures. They are required by the Stock Exchange to have functioning audit committees which operate at a high level. They are also required to have an independent chair as well as a separate chief executive. The Stock Exchange has made those requirements not so much on behalf of the interests of consumers as on behalf of those of shareholders. It is aware that like all institutions, banks can make mistakes and people can try to rip off the system internally and externally.

I had experience many years ago of being involved in work connected with the audit of banks. Given that the internal audit function in a bank is elaborate and expensive, surely the internal audit function in this case must have identified some areas of weakness or a lack of clarity in regard to the charging of customers. Given that most banks have performance related management systems and bonus payments related to performance, if there was undercharging by banks of certain activities, I am certain that would have been reported within two to three months at the latest. Most banks have detailed monthly reviews. They also have red flag systems that come into play if activities in an area give rise to concern or if something untoward seems to be happening.

Given that IFSRA is only a year in existence and has taken over this role from the Central Bank and the Director of Consumer Affairs, when Dr. O'Reilly took office was it flagged that there were areas of concern and that complaints may have been made to the Central Bank? Has he concerns about other areas of activity in respect of which customers may have been overcharged and about a lack of clarity in the charging relationship for services between the bank and the customer? In that respect, I want to identify two areas. Many banks require staff to operate time based management charges. If a customer has a meeting with his or her bank manager, unless one is a large customer, one is likely to be charged for that service. If the meeting extends to one being given tea and biscuits, one is likely to pay much more for that service. A time activated charging system operates in many banking institutions.

Is Dr. O'Reilly satisfied that there is clarity for customers in how these charges are structured and regarding their composition? I do not know how they are composed. For example, does an official complete a time sheet having spent 20 minutes dealing with, say, Mr. Murphy, and charge for that service based on an hourly rate of €120? Is Dr. O'Reilly satisfied that such charges are being properly made?

My next point relates to some of the disclosures in this morning's newspapers. Many banks — I believe AIB and the Bank of Ireland do this — charge facilitation fees, particularly to business customers when, for instance, a loan is arranged. From talking to business people, particularly those engaged in middle sized enterprises, I am aware that these facilitation fees vary enormously. I am also aware of a case recently where the facilitation fee on a routine €130,000 loan was €1,600 in addition to ordinary overdraft interest rates plus the charges that apply for associated risk. Having been in office for a year, has Dr. O'Reilly had an oversight of the internal audit function and how it identifies risks, defaults and so on? Was such information handed over to him by the Central Bank, if it was aware of this?

In regard to the range of bank charges — this charge in question is only one of a range — is Dr. O'Reilly satisfied with their implementation? Does he intend to examine how they are implemented to assess if they are done in a fair and transparent way? I agree with him that this investigation will be very costly to the bank. This brings me back to my first point. If the bank already has an expensive internal audit committee system and external audit system in place, is it possible to have a system in place that works and reports to the authority to ensure that customers get a fast and effective service? The consumer ultimately pays for all this and such systems cost a fortune. I am particularly interested in the hand-over period and what the authority received.

Dr. O’Reilly

We have a fully open organisation and all the information on files is within it. There are two elements to this. Our banking supervision department would have been involved with the banks mainly in the area of safety and soundness, but it would have received complaints and it dealt with them appropriately with the institutions. Where possible, the Central Bank communicated that information to the ODCA. The full staff of the ODCA has been working with us over a period and all the files in regard to the ODCA and all the case histories in regard to these matters have been handed over to us. That is the position on the information front. Ms O'Dea might want to add to that.

Internal audit is about the business of consumer focus. Within the compliance system and the internal audit systems, there is also the matter of whether the people concerned considered these issues as risks within the institutions. This is to do with a consciousness of consumer focus within an institution and what sort of damage could be caused to the reputation of an institution by it not being consumer focused. There was a blind spot and the benefit of hindsight is a great advantage. This was a blind spot that we, as an authority, in some sense or other, were working hard to address, but there is much work to be done on that front.

Will Mr. O'Reilly elaborate on this blind spot because this is the heart of the matter? Is he saying it is his perception that there was an inadequate focus on compliance in respect of a range of charges?

Dr. O’Reilly

As the Deputy will appreciate, I do not want to talk about the specific case, but if I were to talk generally about the industry, its focus would have been on what effect this event would have on the profitability of the institution, and on its profitability in the wrong sense.

Is Dr. O'Reilly saying that its focus was on the profit of the institution rather than on achieving profit and fairness for customers?

Dr. O’Reilly

This is about having a balanced score card approach to doing things. That is the focus of many firms and it is one from which they are generally moving away. They need to do so. The long-term health of an institution will ultimately be determined by its customers' satisfaction with the service delivered. There is a need to get that idea across to institutions. I am speaking generally; I am not talking about this specific institution.

I indicated we would suspend for the Order of Business, resume thereafter and finish as soon as possible after that. Deputies Ó Caoláin and Senators O'Toole and Ross indicated they wish to speak.

Dr. O’Reilly

I have not answered some of the questions that were put to me.

We will come back to those. We have to suspend for Dáil business.

Sitting suspended at 10.30 and resumed at 11.10 a.m.

Dr. O'Reilly was in possession and I will allow him to conclude. I will then call on Deputy Ó Caoláin. Before we proceed, I wish to read into the record a letter we received this morning from Mr. Michael Buckley, group chief executive of Allied Irish Banks, following our invitation for its representatives to come before us. It is addressed to Martin Groves, Clerk to the Committee, and states:

Dear Mr. Groves,

Thank you for you letter inviting myself and other appropriate AIB representatives to attend a meeting of the Joint Committee to discuss issues arising from the overcharging by AIB for certain foreign exchange transactions.

We would be very happy to meet with the committee and answer any general or specific questions which committee members may wish to put to us. As you know, a detailed and independent investigation into this matter is currently underway. This is designed to elicit all of the relevant facts and draw independent conclusions both for the AIB Board and IFSRA. A fruitful discussion between the committee and AIB representatives can only take place after these facts and conclusions have been established.

The investigation is scheduled to be completed by mid June. Allowing for Board consideration, I would be glad to arrange to attend at a suitable date from early July onwards.

Yours sincerely

Michael Buckley

Under the circumstances this is probably a fair and reasonable response and we will agree to take up the matter when the investigation has been completed and when the AIB board has had an opportunity to consider it.

I wish to comment on that item of correspondence.

That is fine. The Deputy should confine his remarks specifically to the correspondence.

My concerns in respect of Mr. Buckley's correspondence focus on the fact that we have yet to conclude our report into bank charges and interest rates. This report has been outstanding for a considerable time. We have already taken a decision to defer closure on that report pending an opportunity to discuss with Mr. Buckley and colleagues from AIB a number of issues which have arisen in the recent past and about which there is major concern. This opportunity to further address representatives of AIB, following on from their earlier attendance before the committee, is going to delay the conclusion of our deliberative process, particularly if we must wait until early July or later to meet them. The Dáil goes into recess at the end of the first week in July but committees will continue to sit for the greater part of that month. I am somewhat concerned, in terms of deadlines, in respect of achieving closure on our report before the summer recess.

To the best of my knowledge — I am open to correction on this — the ongoing inquiry has no judicial dimension. I wonder why such strict views are being reflected as to the suitability of our engaging with Mr. Buckley and his colleagues. This is an inspection, as our guests from IFSRA informed us earlier. However, there is not, as I understand it, a judicial element involved. Is it reasonable or acceptable, as the Chair suggested in his response, that we should defer an engagement with Mr. Buckley, for the reasons I have already outlined, until July? I would have preferred that this matter would have been dealt with expeditiously. It would be appropriate for us to meet Mr. Buckley and the other representatives of AIB while it is of current and significant concern. There is nothing in his letter and nothing I can suggest which would support the request for such a deferral.

I do not accept what is stated in the letter and I require further information. I would like to hear the comments of other Members on this matter and perhaps a view from our guests as to whether there is a conflict of interest in our meeting representatives of AIB. I do not believe that such a conflict exists because IFSRA inspection is part of an open, publicly accountable process and that is exactly the way we conduct our business here. I would imagine that the two would be complementary and I cannot believe that anything we would elicit from Mr. Buckley or his colleagues would in any way jeopardise the on-site inspection that IFSRA is currently undertaking. I do not agree that this matter should be deferred as Mr. Buckley suggests.

Before calling Deputy Burton, I wish to state that this letter only arrived this morning. I had indicated, perhaps before she arrived, that, taking the investigation into account, we should perhaps meet him as quickly as possible. However, that would not be until early July. Deputy Ó Caoláin has expressed a different view.

There are two separate issues here. There is that of broad principle in respect of the overall response by AIB, as a bank, to the various facts that have been made known regarding overcharging, its foreign exchange dealings and the notice in last week's newspapers which indicated that the rate of overcharge error on travellers' cheques was 1.5%, which is very high. The second issue arises on foot of media reports today about charges on house mortgages and insurance policies related thereto. It would be advisable to encourage AIB to be responsive to the confusion among business and individual customers regarding where it stands in respect of charges. It would be appropriate to have Mr. Buckley appear before the committee to provide assurances that the bank has come to grips with the overcharging crisis that seems to affect the provision of a number of its services.

The bank has an extensive, expensive and exhaustive internal audit system. I am sure it has identified potential areas of weakness. Dr. O'Reilly stated earlier that there may have been a blind spot in respect of the reporting-accountability side because the focus of the bank seems to have been geared heavily towards profits as opposed to customer care. This is despite the fact that the bank has a charter relating to customer care.

In my opinion there should be no difficulty with our meeting representatives of AIB, including Mr. Buckley. One of the bank's senior officials came before us last July and, if I recall correctly, he stated that transparency was one of the hallmarks of AIB. We are entitled to ask for reassurance about how, in terms of a general oversight, the board of directors, the audit committee and the internal and external audit units are functioning in respect of protecting customers from what appears to be overcharging on a range of services. I am not satisfied about charges for other services by banks. To delay this until the middle of July in the context of the committee's desire to proceed would be unfortunate. Our proceedings could be structured in a way that would not impact on the detailed investigation the IFSRA is properly carrying out.

There is a legislative vacuum around this investigation. If the financial services Bill before the Dáil was in place, IFSRA would conduct the investigation. However, both IFSRA and the bank have voluntarily entered into an agreement where an independent person of high standing, a former Comptroller and Auditor General, will conduct the investigation. It is different from the normal quasi-judicial process that might otherwise have been put in place.

Perhaps the committee ought to seek the opinion of its legal adviser regarding how we could deal with the issues of urgent public interest concerning AIB while not offending due process or prejudicing the proper independent investigation. The committee could find the middle ground and address a number of the issues while red circling others that would not be covered.

I will ask the parliamentary legal adviser to provide a response to the note and what members have said before next Wednesday's meeting. The committee does not have powers of compellability with regard to AIB and I do not want to waste our time going down a cul-de-sac, out of which we will have to reverse.

It is important that what members have said should be taken into account. I do not like that such a step should be taken even for a week, as it smacks a little of kicking to touch or drawing a long breath. The committee should respond to Mr. Buckley stating that it would prefer to proceed. We earlier indicated 26 May. Is that the case? This will be a significant delay. In the context of completing a report that has been hanging around for a considerable time, it is inappropriate that a further delay should be approved. I do not approve of this.

There is a context to the committee's work. We have been examining bank charges, competition and so on from the point of view of the customer. A senior executive of AIB appeared before the committee and gave undertakings regarding how the bank treated customers and provided for competition. I will dig up his comments but I recall him making a point about transparency being one of its hallmarks, its customer charter and its commitment to customer relations. Perhaps the committee should resume that debate in light of recent developments.

I am keen to observe due process and there is an element of playing to the gallery in dealing with this issue. I feel conflicted in terms of how we should deal with it. I do not want the debate to focus only on what happened to 1% of customers last week. As Deputy Burton said, this is taking place in a broader context altogether. Deputy Ó Caoláin is correct that the committee should not be seen to be putting the issue off but the Oireachtas has backed off other issues in recent years. We could have put the boot in in terms of compliance on at least three occasions in the past few years. The investigation should have a broad basis and AIB should also appear before the committee to discuss its other foreign exchange charges. When one enters a branch, three different rates are on a board and nobody understands them. I want to know what happens to our money during weekends when it stops dead in the middle of a transfer at 5 a.m. or 6 p.m. Many other issues arise and they should be discussed.

Due process should be observed and nobody should be able to say afterwards the committee was not fair. The committee could proceed without interfering with the investigation. Our legal adviser should outline what the committee should keep away from and the committee would observe that scrupulously rather than backing off the issue.

Deputy Ó Caoláin is correct that AIB was invited to attend a meeting next Wednesday, 26 May. The bank has responded saying it would be happy to attend but only when the investigation has concluded in July. A date was specified but the bank has not taken it up.

The letter is a little puzzling. I can understand there may be reasons AIB representatives might feel uncomfortable appearing before the committee but to say they cannot do so because an investigation is ongoing does not hold water. Why can we not ask them questions about what was going on parallel to the investigation? Presumably, they no longer have anything to hide and they can in an open forum tell us what they are saying to the investigators. There is no reason they should fail to appear before us on 26 May.

What is our function, as Oireachtas Members, if we set up organisations such as IFSRA and then investigate every issue that makes newspaper headlines?

The committee set up an investigation into banks. A senior AIB executive made a presentation and gave us an understanding of the bank's approach. A series of revelations has put what the gentlemen and other representatives said to the committee in doubt. We want clarification of where AIB stands. This could be conducted in a way that does not prejudice the interests, for instance, of staff members who may be involved in the current investigation. We do not wish to act in a prejudicial way in regard to individuals but the bank came forward as a representative of the banking sector to inform the committee about how transparent it is. We should examine the minutes of the AIB statement.

Our function is clear. IFRSA's position is strengthened when its staff appear before Oireachtas committees to outline what they are doing. Equally, it adds to the value of the relationship significantly if we, having discussed issues and sought further information, can outline issues about which we are concerned to the authority and it can come back to us. It could be a fruitful relationship. While I agree it is not our job to investigate, it is our responsibility to delve into issues and provide support to the appropriate body, which should then act as the bloodhound and pursue them.

Committees do not have the power to make findings or decisions in regard to individuals outside the House. That was established following the Abbeylara inquiry undertaken by an Oireachtas committee.

The IFSRA Bill is going through its final Stages in the Dáil. If there are lessons to be learned, they should be outlined and the necessary changes should be made to the legislation. The Government introduced a sanction that was not intended because of what happened in AIB. I am uneasy because other discoveries could be made during the investigation but the Minister will say the train has left the station and the Bill is wrapped up and gone. It is important that the committee in a timely way should address whatever policy implications emerge from this overcharging issue.

We may be restricted by not being able to ask AIB about what happened in this instance. IFSRA will have the discretionary power to seek new compliance requirements from banks. Perhaps we will colour the way in which that section of the legislation will be drafted. It is confined to the Central Bank at present. It seems the power will not be available to the director or the consumer director. Certain issues still have a bearing on the legislation, which has yet to go to the Seanad in its entirety. There is some merit in ring-fencing the investigative issues, if we can do so, and dealing with the other public interest issues.

We have already made a decision about meeting representatives of AIB at executive level in the context of the report about bank charges and other related matters, which we have yet to complete. We have agreed that the report would be deficient if we were not to revisit our address of AIB representatives. We should proceed by responding to Mr. Buckley's letter. The committee should state that it considers that there is no conflict between its proposed meeting with him and other representatives of AIB and its ongoing onsite inspection. We should make clear that we would appreciate the presence of AIB representatives at a meeting of the committee, as proposed, on 26 May or another date as soon as possible thereafter. We do not accept the proposal to defer the meeting until some time in July. With respect to AIB and Mr. Buckley, the construction of this letter is a convenience for them. They do not want to attract the added attention that would undoubtedly result from their presence at a meeting of this committee. We should proceed. I have outlined how we should respond.

The Deputy's proposal deserves a seconder.

It is agreed that AIB's response is not acceptable and that we should respond by conveying our views to AIB. We should see if we can get a more suitable date for the meeting. The committee has to consider its response and the work of IFSRA and we should get on with that.

I will ask the Clerk to contact AIB again, reflecting what has been said today. I understand the point made by AIB in the letter. If IFSRA and the Director of Consumer Affairs are doing their jobs on an ongoing basis, they will always be investigating something. I would hate to think that the banks will not wish to speak to anybody else because IFSRA or the consumer director are involved in investigations. I hope IFSRA will always be involved in investigations — that is why it was formed. I do not accept the fact that an investigation is ongoing as a sufficient excuse to be used forever. There will always be investigations into the financial services sector.

We have a formal proposal and we should proceed on that basis.

That is agreed. The Clerk will draft a letter taking account of what has been said at this meeting. It will be drafted immediately after we have concluded our business but it may not be sent to AIB until tomorrow.

I wish to resume where we finished before the suspension at 10.25 a.m. I hope Dr. O'Reilly can recall what he was saying before he was cut off.

Dr. O’Reilly

Having listened with interest to the debate, I would like to clarify two matters. We have ensured that the processes, the terms of reference and the integrity of the ongoing independent process of investigation within AIB are sound. It is not the case, however, that we will not be involved in parallel throughout the process, with a separate inspection team, in doing whatever we consider necessary. We will gather information and take into account the findings of the independent investigation before we come to a final conclusion. It would not be right to state that we will hand over the investigation. Perhaps Ms O'Dea would like to speak about the legislation.

The new powers to be provided for in the Central Bank and Financial Services Authority of Ireland Bill 2003, which I understand is on Report Stage at present, are available to the authority as a whole. The Bill states that "bank" is a shorthand for the proposed Central Bank and Financial Services Authority of Ireland. We welcome the proposal, as we understand it, that the powers will be available to all the consumer issues in all the consumer areas. We said that we would clarify whether the 1998 letter that was discussed earlier referred to specific charges. It referred to all charges. The letter we sent to financial institutions recently, in light of the events of recent weeks, sought specific tabular information so that we can ascertain whether all the maximum charges were complied with by all institutions over the period of time.

Dr. O’Reilly

I wish to conclude by discussing the internal audit element of the questions asked by Deputy Burton. There is a new area within internal audit called "reputational and operational risk". The radar of internal audit sections is raised when customers are affected. Some work needs to be done in that regard.

I would like to make some specific comments on charges. Facilitation fees comprise one of the two major areas in that regard. Some areas are covered by the notification process. We need notification of such areas. The criteria we use are commercial justification, fair competition and the cost impact to consumers. The other major area is time. We have some role and responsibility in that regard, depending on the services. There has been redress and monetary refunds have been made when consumers have complained to the regulator in that regard. It is very important for consumers to ensure that they are alert to these things and that they come forward to the regulator.

I would like to speak about charges. We are trying to decide which ones we should examine first. The committee will understand that we are being hit from all directions with complaints about various charges. When we asked consumers to outline their most important areas of concern, we were told that personal and current account charges were most worrying, followed by motor insurance and credit cards in that order. We have issued advice about prices in the market because we believe competition will be the most powerful tool for consumers who are making up their minds. Consumers need information. Members of the committee know that the provision of information about motor insurance was particularly effective in awakening the interest of consumers. We have had great success as people made up their minds and changed their accounts as a result. That is where we are.

I join colleagues in welcoming the representatives of IFSRA to this meeting. I thank them for their presence and co-operation. Have terms of reference been set for the independent investigation that is under way? If so, could we have a copy of them? Is it the case that IFSRA is confining its inspections to foreign exchange transactions? Is it taking on board the entire gambit of charges and fees as they are applied by AIB? Given the public view of the growing extent of the problem from an initial €14 million to €25 million, which has now been lodged with the Central Bank, can IFSRA indicate whether the €25 million will cover fully what will be exposed, or does it consider that we are looking at something even greater?

Is it credible that from 1995 to 2002, AIB was unaware of these excessive charges on foreign exchange transactions? Is it credible that senior executives of the bank were not aware of the problem up to April this year? It has no public credibility. Would IFSRA like to share its views in this regard? Have you considered the possibility that the illegal additional charge regime which was in place might also apply in other financial institutions? Are you confining your attention to AIB or have you taken steps to establish that a similar practice is not in place in any other banks or financial institutions?

I am not in a position to comment personally on the author of correspondence received from someone who apparently represents a number of AIB shareholders whom it is stated are committed to the restoration of honesty and integrity throughout AIB. In a letter to this committee, dated 17 May, we are asked to consider the "bizarre inappropriate and unacceptable" response of IFSRA to recent complaints lodged against the directors of AIB. It would be inappropriate not to raise the matter, as the correspondence is directed to us specifically for attention at today's meeting. It is appropriate to have an opportunity to reply. Perhaps you are already familiar with the source of the complaint. They draw a comparison with the correspondence received from the Director of Corporate Enforcement, which they say is in stark contrast with your own. I hope the committee will agree that comment will be appropriate in this regard.

On the Central Bank and Financial Services Regulatory Authority Bill, I suggested yesterday during my exchange with the Minister for Finance, Deputy McCreevy, that if the legislation was currently in place, the regulatory authority carrying out the investigative function would have an option either to institute an inquiry where any non-compliance was exposed or, alternatively, it could accept a negotiable settlement with the financial institution on the basis of an acknowledgment of non-compliance from that body. I take the view, which I expressed strongly yesterday in the House, that this leaves an opening for what I regard as a comfortable relationship developing into the future. How would you have applied your position in terms of the current AIB situation if the legislation now being debated were already in place? The use of the word "may", leaving the discretion to the regulatory authority, is not appropriate. When we talk about an inquiry, we are not talking about tribunals of inquiry and the lengthy process we have seen. We are talking about something which would be efficient, effective, speedy and transparent. I do not think the idea that an inquiry should not be initiated in each situation is laborious; it is appropriate.

I do not believe we will ever know the full extent of the problem. If AIB made an acknowledgment under the option that the legislation provides, it would be told, "Well done, boys. Very good. We will now agree on a settlement in relation to this" — and we would only know about the €14 over-charge. It is because an on-site investigation — an inquiry by another name — may be carried out that the full extent of the abuse will come out.

I am deeply concerned that discretion is being applied and you are being provided with a legal option. I have no doubt members of the body are committed to consumer protection. However, there may be individuals in positions in the future who may develop a comfort factor with the banks and who might be tempted to say a little more than what has been said on page 6 of Dr. O'Reilly's introduction, namely, it must be said that the AIB has been very active and co-operative right up to board level. A little clap on the back but it could be developed a little bit. I have no doubt that a situation could occur in the future where an acknowledgment would result in a settlement, with no inquiry and the full extent of the problem not being exposed. I do not believe this would be in the broad interest of consumers. I am strongly of the view that an inquiry should occur in all cases, otherwise the extent of the problem will not be fully revealed and exposed. I would appreciate hearing Dr. O'Reilly's views on what I regard as a major deficiency in the legislation as presented.

Dr. O’Reilly

I have a long list of questions which I will try to get through. In terms of the precise investigation being carried out, it is very important to focus on the task at hand, which is to identify the individuals, return the money to them, identify how the problem occurred, who was involved and focus the investigation so that we can get closure. That does not mean we should not take on board all the other complaints. When a problem such as this occurs, we find that there is an avalanche. We have an important job to do, therefore, we must remain focused. Otherwise we could be diverted in all directions. Having said that, we take each complaint seriously. We examine trends and follow up with individual institutions, as required, which is what we intend to do.

On whether the €25 million is adequate, I cannot say it is the end of the matter. It would be totally wrong to do so. As part of the investigation, there will be a very detailed audit procedure to make sure there is a full and detailed investigation of what is happening not just in that area, but in the area of charges generally. On the question of whether it is credible and who is involved, that would be straying into the investigation, therefore, it would be inappropriate for me to talk about what conclusions we will reach. We must retain integrity in the process. When the job is done, we will be very well prepared to come back to the committee and talk about the whole process and the lessons learned, both from a regulatory point of view and from the point of view of the institution and the individuals concerned.

As regards certain correspondence, I understand my colleague, Mr. Moloney, has some extra information on that which relates to complaints and the "bizarre" way in which the authority responded. I would like him to deal with that. I was not aware of the individual case.

I am aware of the matter mentioned. Without talking about the details of the individual complaint, there are at least four regulatory bodies in Dublin that deal with financial institutions, the ODCA, the ODCE, the Competition Authority and the IFSRA.

For the benefit of the public can Mr. Moloney spell out the names of these bodies?

There is the Office of the Director of Consumer Affairs, ODCA, the Office of the Director of Corporate Enforcement, ODCE, the Competition Authority and the Irish Financial Services Regulatory Authority, ourselves.

That is part of our problem here. I am saying this as an aside to the members of the committee. It is where we and the public get lost, the fact that there are four such bodies that are responsible. It is not Mr. Moloney's responsibility.

It is an issue. One of the values we have identified as regards consumers is that, in so far as it is practicable, they should have a one-stop shop and we help them out even if they have come to the wrong place. This is to ensure that their complaints get dealt with efficiently and effectively. However, the matter the Chairman is referring to relates to company law and it would not have been appropriate for the IFSRA to have dealt with it. We have tried to ensure that the complaint is dealt with in the right place. That is as far as we can take the matter.

Just to peddle back to the terms of reference, other than what has been said is there something on paper-——

Dr. O’Reilly

We are finalising terms of reference, which should be completed during the week. From a legal point of view, I would have to consult to see to what extent the terms of reference could be made available. However, I believe this will have to be an integral part of the report, which is due next month.

One detail Dr. O'Reilly did not refer to was the question on other financial institutions.

Dr. O’Reilly

We have issued a letter to other financial institutions. Perhaps Ms O'Dea would like to say what we are doing in that area.

We have written to all other financial institutions, as a result of this, to ask them to look specifically at their systems and controls, not just to confirm whether the charges they are levying are right — both as regards those that are notifiable in accordance with section 149 of the Act and those that are not notifiable in respect of other issues that have come to our attention through consumer complaints. We have asked them to carry out a review of the systems they use to ensure they are in compliance with all these areas of consumer law and to confirm that the charges they tell people are in force correspond with what is being charged. Much of this relies on IT systems. We want to know what checks are being carried out within those systems to ensure they are being done properly. We have written not just to all banks but to foreign exchange dealers etc.

Dr. O’Reilly

On the last question, legislation, it is the public duty of the regulator to ensure that no stone is unturned under any circumstances to quantify and then return the amount of money to the consumer. It is demonstrable by the way we have carried out this job that this is what we are doing. We are not going to end the job until we have quantified the amount and ensured that it gets back to the customers affected. The committee will recall that early on the bank was saying it could not identify any of the consumers.

What we want is an efficient system. That is not to say it has not to be thorough. It must be absolutely above board and have integrity. We are not talking about the speed of the process of investigation. However, if it gets into a legalistic inquiry mode, where there is counsel on both sides and much time is being spent, the "law of delay" will cause us problems. It is like when someone is found without a light on a bike, it is a case of "hands up" and money is paid over; but in addition, it is important to name the institution and state what was the problem. Mr. Moloney may want to add something.

To the extent that we come to those type of conclusions with the regulated body, two things are critical for IFSRA. First, we have to know the facts before we come to any conclusion with a regulated body. That requires investigation and we would need to be certain we knew what we were coming to a conclusion on. There has to be an investigation before any conclusions along these lines are drawn. Second, the purpose of imposing a sanction on any regulated body is to promote compliance. Therefore, there is a strong argument that the outcome must be publicised in order to promote compliance. That would be the general approach we take.

Dr. O’Reilly

It is one of the values within the organisation and behind the spirit of the legislation that any processes in which IFSRA gets involved have to be totally transparent so that no cosy relationships can develop between the regulator and the institution.

I welcome the responses of our visitors. I think I exhausted the opportunity of trying to amend amendment No. 11, tabled by the Minister in yesterday's proceedings, so the passage of the legislation as it stands is assured. We will see how this works in practice. It will be interesting if we have to revisit it on the basis of the concerns I have expressed. I will take a note of it for the future.

In welcoming the presentation by IFSRA, it raises a great number of issues which we need to address. We need to say where the Houses of the Oireachtas stand on this. It is time we came out with our hands up as well on this issue. The only reason IFSRA has to work on a band between 0.5% and 1% is because the Oireachtas refuses to countenance the idea of price control. The argument is that competition and the market would be destroyed. Despite the issues that were raised and explained, the position on stratification or approval remains unclear. This overall lack of clarity has resulted in the legislation referred to.

I would like to hear the broader view. In the context of this area of foreign exchange, the band of 0.5% to 1% is in the halfpenny place. It is 15 years since we discussed the Cecchini report that was going to open up the market in Europe. At this stage if I write a cheque in my local AIB bank for someone living in some other part of Europe, it takes almost six weeks for that to clear. That is because the banks have conspired to ensure that there is no European clearing house. We are therefore forced to avail of foreign exchange. There is a cartel in operation. I would like to hear the views of IFSRA's chief executive on this. Banks may operate three levels of charges. One can pay more than €30 to get the cheque transferred by the close of business that day, or pay more than €20 and be guaranteed that it will arrive by the close of business two days later or pay a couple of euro and God only knows when it will arrive, but it will. I want to know how we get to that situation. I believe it is illegal.

I also believe it is wrong that credit card companies should be operating cartels and have franchised licensing areas while people all over Europe, although working on the same interest rates, are forced to pay different levels of interest. I believe we have not given IFSRA the authority it needs to deal with those issues. Perhaps I am wrong. I am sure the delegation will respond.

The next issue is a local one. I have yet to consider the proposed changes to the relevant legislation as it has not yet come before the Seanad. I am conscious of the point made by Dr. O'Reilly that IFSRA examines the levels of compliance and audit procedures, as it should. I am committed to the point he made that the approach should be principled rather than rules-based. It is not possible to have rules covering ever foreign exchange transaction. The application of principles is the central issue, as was seen with the Enron case.

Although I am sure he will not thank me for saying it, Dr. O'Reilly's view on compliance is that he signed off on a report which said that directors should sign a compliance statement to the effect that their companies are complying with the laws of the land. When that came before the Houses of the Oireachtas less than six months ago, the Government parties were pressurised — and accepted the pressure, ably supported by the main Opposition party — to back off from that. They said it would be terrible if company directors had to say that they complied with the laws of the land. If one goes back over the debate on the Companies Bill or the IASA Bill six months ago one will see that is what they said. As a result, section 45 was introduced. IFSRA has indicated that the IASA legislation could require company directors to make such a declaration, but I am not sure because it has been diluted to such an extent.

It was said that one could not expect company directors to sign off on health and safety issues. Would it be too much to ask them to take steps to ensure that their employees did not get killed or injured? That was the level of the debate we had less than six months ago in the Oireachtas. We finally came up with a provision whereby they would be required to state that they complied with the Companies Act, tax law, and any other enactment that provides a legal framework within which the company operates that may materially affect its financial statements. That is probably the aspect that applies to this situation, although it could easily be argued that the amount of money — a mere €20 million — and its impact on the financial statement of the company is such that it did not really materially affect it.

The legislation before the Dáil may require a company's compliance and an audit sign-off. It is the same argument again. The accountants will question why anyone should make them, as auditors, confirm that directors' compliance statements are fair, honest and reasonable.

On the question of individual response, I do not accept that fining AIB or any other bank €20 million, €30 million or even €100 million is any penalty on those involved. It is a penalty on the shareholders, who have asked the directors and the management to look after their interests in the company, and, eventually, the customers. It is a roundabout way of doing things, which is unacceptable.

The legislation before the Dáil proposes that individuals can be found responsible. It could be dealt with as a previous Companies Act dealt with reckless trading, whereby those responsible could no longer operate in the financial sector for a period of years. If there is no personal responsibility, those involved will not walk the plank, as we saw with Enron and other cases. Does IFSRA need such authority? If so, it should be provided. There is no acceptable reason not to do so.

Everytime something goes wrong, politicians say it was not their fault but the fault of those to whom the job was given. Why can there not be annual compliance statements by directors of companies and banks confirming, as honestly as they can, that they have put structures in place as best they could and that they believe they are compliant with all the laws of the land? It is not much to ask but it appears that it is too much for the business community. That is one of the difficulties we and IFSRA are facing.

Senator Ross has asked me to raise another issue concerning making blind checks as well as checking the usual aspects of foreign exchange. It must be asked, however, why this was not picked up. Was it due to a lack of resources or the lack of an approach? Was it a structural or resource issue? What was the reason? We need to know the answers to those questions.

Dr. O’Reilly

I will start at the end. It is part of the investigation as to why it was not picked up so we will be coming back with answers next month on that. It is important to pick up that question.

It is crucial, yes.

Dr. O’Reilly

We will do so. We have to face whether it was a system, structural or resource issue. We will see where that goes. As regards the Senator's question about the Bill, he is right. In the review group, I signed up to auditing for a certain formulation. However, given the processes involved in drafting the legislation we must accept what emerges.

Is it on schedule?

Dr. O’Reilly

Perhaps Mr. Moloney could say how it differs from the IASA Bill. Perhaps the Senator is aware of that. There is no doubt that the word "may" is not as good as "shall" but, ultimately, we will implement the legislation as it is handed to us.

In light of all we have discussed about AIB and everywhere else, it would be worthwhile for Dr. O'Reilly to state that in the legislation currently before the Dáil the word "shall" would be much better than the word "may" in the audit sign-off of the directors' compliance statement.

Dr. O’Reilly

There is no doubt that there is a need to, as regards directors. It will happen because the regulatory authority will do this. It is a question, as Deputy Ó Caoláin mentioned earlier, as to whether people in future will be as enthusiastic as ourselves. I would expect so but I accept there is a difference between that and it being in the law.

As regards the philosophical question about charges or no charges, the law must be obeyed. The major problem here is that the law was not obeyed. There was a breach of the law and as a result of that customers were charged more than the institution was legally entitled to charge.

The question as to whether we want price controls all over the place, is a separate one. It is a philosophical question. A much more powerful tool in this area is competition, transparency and choice. As the regulator, IFSRA has a duty to inform consumers to ensure they know they can shop around. There is a separate and much more important question about competition in the banking industry, which is already being undertaken by the Competition Authority. We await those results with interest because we need to concentrate on that area — making sure we can ascertain that the industry is fully competitive and that people have choices and know where to shop around. In our studies, we have found that there is a large degree of stickiness about individuals and their banks, and whether or not they move accounts. One of the major jobs in which we are getting involved is to encourage customers to switch accounts.

I have a follow up question about the banks themselves. I do not know whether Dr. O'Reilly was amazed by the fact that, last week, when the chief executive of the Bank of Ireland was asked for a comment on his main competitor he made a glorious statement about how good the banking service was in this country. That seemed extraordinary to many people. It raised a question for me, and I wonder if Dr. O'Reilly can answer it. What approximate level of investment would Bank of Ireland, Bank of Ireland Asset Management, Bank of Ireland Fund Management and all the other institutions, have in AIB? There is, to say the least, confusion here concerning the inter-connection between banks. We do not understand that inter-connection but we are entitled to know what investment Bank of Ireland's related companies might have in AIB. They may, therefore, have a vested interest in things taking a particular direction because they will lose if the shares drop.

Dr. O’Reilly

We do not have that information. However, it would be a worthwhile study, a copy of which we could supply to the committee. I wish now to correct something I said earlier. I referred to AIB breaching the law. I must state that all such allegations are subject to investigation.

Dr. O'Reilly stated that the regulators respond to issues as they arise and mentioned a number of ways they are identified such as, compliance, audit channels and the consumer. Can Dr. O'Reilly give us a breakdown of how such complaints are received? The complaint we are discussing was made by a consumer by way of an anonymous tip-off. Is that how most of your information is commonly obtained or was that unusual? As mentioned earlier, currently there are four offices dealing with consumer complaints. While Members of the committee are aware of IFSRA and its role, the public is not.

It is possible the situation in AIB has raised IFSRA's profile as consumer watchdog in terms of financial issues. However, IFSRA appears to maintain a relatively low profile with the consumer. I am interested to hear how many calls are received on the authority's helpline. The issue of transparency has been well covered. Dr. O'Reilly stated IFSRA is accountable to its stakeholders, the Oireachtas, the Government, industry and the consumer. However, given our discussions this morning and the current media debate regarding AIB, there is an enormous conflict of interest between IFSRA's accountability to industry and the consumer. It is not possible to serve the two.

AIB will make the argument that when such issues arise, especially those involving large sums of money, the powers that be should tread carefully because it would not be wise to give the upper hand to foreign competition or to damage the financial viability of our banks. I am sure this is being said in public and private corridors. Senator O'Toole mentioned that people in the industry should be held accountable for their actions. Arguments often used are that one should not push the issue too far because the industry, in terms of its international standing, might be damaged. There is a clear conflict of interests in that regard. It is not possible for IFSRA to serve both masters in this case. The industry is strong and, the consumer is weak and not as well informed or focused. There is a major conflict of interest involved.

Ultimately, banks are profitable organisations. Senator O'Toole asked if IFSRA is satisfied with legislation in this area. I would like a clear answer to that question. I am not sure if the authority is in a position to comment on legislation. Often, some groups that come before us are not in a position to do so. Perhaps Dr. O'Reilly will state if he believes the legislation is strong enough to protect the consumer. Senator O'Toole stated earlier that more than half of Members of the Oireachtas believe there is a lack of interest in forcing directors to be compliant with the law. I am concerned that this is commonplace in Irish industry. Perhaps there is an elitist type view that we are less inclined to make people in such industries criminally or financially responsible for their actions. I believe that is the case.

The consumer will be watching IFSRA carefully to see if it has any teeth. Many members of the public are trained accountants or economists. I am a medical doctor and often view things from a different perspective in terms of how we, in the Oireachtas, do our work. We often find that when delegations, such as that from IFSRA, come before our committees, they lack a connection with the public. Often the impression given is that such groups lack any teeth in performing their tasks. That is, in my view, the essence of what this committee and such groups is about.

I do not believe we need to focus on AIB, representatives of which will have to come before us to explain how it goes about its business. As regards the letters we received from AIB shareholders, it will be interesting to see how AIB deals with that matter. AIB is a business and may view matters differently to IFSRA.

Dr. O’Reilly

On the Deputy's final point in terms of IFSRA lacking teeth, there is no lack of teeth in the manner in which IFSRA has approached this issue and acted on it. We have succeeded, as a result of this experience, in making sure the job is being done. We have identified the amount of money involved and up to 66% of customers have been identified. None of this money will go back to AIB. We have ensured it is deposited in the Central Bank and ringfenced. IFSRA is not lacking in teeth.

IFSRA is seeking to operate in the area of sanctions and the new Bill will provide that element. Deputy Twomey asked from where we receive our information and how we do our job. We do our job through inspection processes, reviews and mystery shopper systems. Ms O'Dea will supply members with statistics on the number of people calling our helpline or logging on to our website. IFSRA has been up and running for a little more than a year. The Deputy is right in stating that incidences such as the one under consideration are tests for IFSRA but they are also ways in which it can demonstrate it has a job to do and is able to do it.

It is important to point out that IFSRA is accountable to this committee and the Dáil. The authority is separate from the Central Bank but is accountable, through the Legislature, to the Dáil. I am required to produce annual reports. As regards conflicts of interest, the Dáil put together a single regulator because it believed that information was being lost and the consumers' best interests were not being served. We have stated, unequivocally, that at the heart of our job is the consumer. We are also saying that as far as we are concerned, the long-term health of the financial services industry is best served by it putting the consumer at the centre of its objectives. In that way it can develop and become effective.

The Deputy asked about the number of people ringing our helpline. IFSRA recently launched an information campaign entitled Its Your Money, the website for which is www.itsyourmoney.ie on which the authority’s consumer information is available. Such information is also available through our locall line 1890 777 777. Up to the end April 2004, we received more than 11,000 calls to our helpline. Members may have recently seen advertisements on television in this regard. Approximately one third of those calls were requests for information. IFSRA has published guides on savings an investment, personal loans, credit and mortgages, all of which are vetted by the National Adult Literacy Association. They are user-friendly and simple documents which help consumers to make informed decisions. Approximately 20% of the calls related to banking and 20% more related to insurance.

From the outset, we were committed, through the helpline, to creating a one-stop shop for consumers so that they would not have to worry if other agencies were involved in the background as we would help them through the process. The next piece of legislation will provide for a statutory ombudsman who will deal with individual complaints. We will have a close working relationship with him or her without taking away from his or her right to make independent decisions. We will, however, continue to get information through all of the complaints we have been getting to date.

Dr. O’Reilly

There will be a full flow of information between ourselves and the ombudsman so that we can pick up on those institutions that constantly have problems, on consumers who have problems with them and on particular products, for example tracker bonds or pension products like non-standard PRSAs. We need to get to grips with such issues.

We are very much aligned to what the objectives of this committee would be and are statutorily bound and must at all times act in the public interest.

What is the definition of being accountable to industry? What does it mean for IFSRA?

Dr. O’Reilly

Industry is involved with foreign institutions and we are accountable in terms of the health of the industry. The new Bill will provide for two panels, an industry and a consumer panel. In establishing our rules and how we do our job it is important to do it in a way that is sensible and effective. We need to listen to both industry and consumer so that we do not impose costs on the industry that would eventually be passed onto the consumer. It is about being effective and efficient in the way we do our job. We do not do the job of industry but ensure that we do not get in the way of the legitimate work of industry, which is to create wealth and serve consumers.

It is important to return to the principles mentioned in Dr. O'Reilly's opening remarks. Those principles will ensure that industry remains competitive. It is no good for consumers if we have a burdensome system of regulation which does not deliver competitive prices or value for money for consumers. We must be conscious of that and carry out a detailed consultation process on all our new measures with industry and consumer groups to see whether this will be effective for them.

I have a final question relating to Senator O'Toole's question about making CEOs and auditors accountable. Was this discussed with IFSRA prior to the legislation?

Dr. O’Reilly

The legislation ——

The legislation not only allows us to apply sanctions to regulated entities but also to individuals involved in the management of those regulated entities. When the legislation completes its passage through the Oireachtas, we can look at its implementation.

Is it not the case that in the surveillance of equivalent legislation in the United States, chief financial officers can be held criminally responsible if they do not sign off properly on accounts? We do not have anything like that here.

That depends on the individual legislation being looked at. Offences arise on certain legislation but not on others. Some legislation has a specification whereby individuals can be charged. The route we are taking is an administrative penalties system. The strongest penalty relating to individuals is the ability to exclude them from the industry.

I join with other members of the committee in welcoming the representatives of IFSRA. This is an opportunity for us to hear how, as a body set up by the Oireachtas, it performs its duty.

I am conscious that banks and financial institutions are important employers and contribute to the economic well-being of this country. It would be remiss of anybody to exclude their work in this area. In my region some 1,300 people are employed, between MBNA and the retail banks. The sector is the single largest employer in the area and has contributed enormously. We want that to continue. Language or regulations that would undermine or ostracise financial institutions are not in the best interests of the country.

Many new entrants into Europe are keen to avail of the financial services we have already attracted to Ireland. Estonia is putting forward very attractive marketing for similar services. We must be conscious of our national interest. The problems we are talking about concern one institution in the banking sector.

Nevertheless, IFSRA has a job to do. We are here to find out whether the authority did the job properly and whether it carried out its duties as laid down by law. The authority states that its job is to protect customers in a safe and fair market. In the case of AIB, does it consider that it carried out its function in a satisfactory manner, particularly considering that the case in question came to light through a whistle-blower and not through any investigation or exercise of responsibility by the authority?

The AIB carried out this malpractice over a period without the knowledge of and undetected by IFSRA. Therefore, is the authority's remit of protecting the customer executed to a proper standard? Has it failed as an organisation in this area? One of the most extraordinary statements I have heard is that the authority will investigate itself on the matter to find out its shortcomings. That does not wash well with me, nor will it with the public.

In the final analysis of its statement the authority says that its primary focus now is to identify as many customers as possible affected by this in order to ensure those customers get their money back. Good for the authority but what about the people who took the money, who if it was not for the whistle-blower, would continue to take it? What about a penalty or a dismissal?

IFSRA said the law was broken, although it later amended this statement. However, I am prepared to say the law was broken and the authority failed to see it. It took a member of the public to telephone the authority to inform it the practice was going on.

IFSRA is the body set up by the Houses of the Oireachtas to carry out a certain function. However, from my perspective, the authority has failed to protect those — the customers — it was set up to protect. I appreciate the authority is only one year in existence and no doubt it is doing much good work. However, considering all the investigations of and troubles with banks and financial institutions over the past years, including the investigations undertaken by the Committee of Public Accounts and the ongoing consideration by this committee of the activities of financial institutions and bank charges, I am taken aback that the matter under consideration was allowed to continue and had to be exposed by somebody other than the authority with the responsibility for it.

Dr. O’Reilly

We will be looking at what happened. There will always be problems in financial institutions and some things will always happen. It would be foolish of me to guarantee that nothing will ever go wrong. We must ensure we have people who are responsible for setting up systems to ensure compliance with the law. That should have happened. It did not. We need to investigate the why and who. It would be very wrong of me at this stage to pre-empt the investigation or to start apportioning blame within an institution. However, if there are individuals who are responsible, then the price may have to be paid.

The authority has been established for a year. I cannot guarantee that other things will not happen in the future. We will always act in the public interest. We have a certain amount of resources. A system could be established whereby the authority would have 25,000 people to match the 25,000 in AIB. That would be very inefficient and ineffective. We will never catch everything. It would be the wrong way to do things. We must assign responsibility where it lies, within the institutions, to ensure there are systems and procedures in place to catch things like this, in the best interest of consumers.

Ms O’ Dea

The investigative process will focus critically on our processes for compliance. It is related to a point made by Deputy Burton about the internal control and assistance issues. It must be ensured that consumer issues are included, not just issues that are a risk to the financial institution and its profitability.

Dr. O’Reilly

We are here today, subject to the scrutiny of the committee. We will return next month when the report is completed and will remain subject to the committee's scrutiny. We are perfectly prepared to answer any questions which the members may wish to ask about the discharge of our duties.

What is the authority doing about the people who perpetrated the crime? Is there any sanction that can be applied? Does the authority believe there should be a sanction? If a farmer fills in a claim form and puts in an extra cow or calf to get more money from the Department, he could lose two years' grants as a result and his file could be sent to the Director of Public Prosecutions. He could face court, yet all that is involved is a few euro. In this case, it is a huge malpractice by a financial institution. The only sanction is that money is lodged with the Central Bank and is paid back over a period of time. There is no sanction against the director of a bank or any other person. Nobody pays the price. Is that appropriate?

Dr. O’Reilly

We will do our job carefully and there will be due process. We will then find out who is responsible and what the problem was. It is at that stage we can start talking about the appropriate sanctions for institutions or individuals under the existing legislation. We will undertake an investigation. It would be wrong to prejudice the results of this investigation by deciding on penalties to be imposed.

Under what law will the penalties be imposed?

Dr. O’Reilly

I presume the Deputy is asking whether any criminal law has been breached. That is a question to be considered. There is also a pre-1995 issue, where it is an offence under the Central Bank Act. That will also be investigated. The legislation as it stands, particularly relating to the breach of section 149, is light on the penalty side and this is being redressed in the new legislation.

I apologise for my late arrival as I had another meeting this morning. My points have been raised by other members. I welcome Dr. O'Reilly and his staff to the meeting. I understand his position at this time and, like the politicians, he is getting the works.

Internal and external audit systems were in place. Senator O'Toole made a good point that any time a bank is penalised, the money is taken from the shareholders or depositors because there are more profits in the bottom line. Directors usually get off scot free. A directorship is a nice honorary position to hold in both State and public plc companies. They are well paid. For instance, when C&C was launched, the directors received a large pay out.

The internal auditor is an in-house auditor. He works for the bank. Has the authority access to the internal audit documentation? What was the view of the external auditor when the audit was carried out? He has a role to play. I am sure management documentation would be available to the authority. Has the authority had sight of those letters and documents which followed the conclusion of the audit? These documents are usually available following the annual general meeting. They are placed with the chief executive or secretary of the company and put before the board.

Did the bank realise it was in breach or had made an error? It could have been stupidity. I am quoted today in the newspapers as saying the bank was giving the best value for money. I ask how the systems within the organisation did not find the error. The authority's investigation should be in a position to find the answer.

I do not wish to compromise the authority's position. The Competition Authority carried out an investigation into banking. Is this a very contentious area of banking? Everyone understands about charges. The authority's role is much greater than charges; it must watch the banking system and know how it operates and is regulated, for the depositor, lender, borrower, pension funds. It is a broader sphere of interest than bank charges. We politicians concentrate on the charges because it is a popular subject. As the Minister for Finance, Deputy McCreevy, said yesterday, bankers and politicians are not the most popular people in the land. I think IFSRA will be joining us.

Price control did not work in another area. I came from the private sector and the agricultural community. I remember when prices for feed and fertiliser were going through the roof. All the organisations met together to fix a price. Price control failed and came to an end where it applied in the case of beer, cigarettes, spirits. It is obviously not working in the financial area either.

I am not the smartest man in town but when I buy foreign exchange, I find credit unions give the best rates and they do not charge as much commission.

I understand Ms O'Dea has a background in banking, having come from the Central Bank to IFSRA. She would have a good knowledge of the banking system. Until recently the banks were fully controlled by the Central Bank as the regulatory authority. When this came to Ms O'Dea's attention, was she able to zoom in on the charges area and see where the weakness lay in any bank or in AIB? Regulation does not solve the problem. People are still dying on the roads, even with traffic regulations.

I do not wish to see IFSRA as a witch-hunting organisation, chasing after everyone. I doubt if Dr. O'Reilly would wish for that role either. He wants to be practical and pragmatic and exercise discretion. No organisation with the turnover and the number of employees and with such a stake in Irish society as AIB, Bank of Ireland and others wishes to be involved in those activities. I hope we will see the end of this thing and the bank's problems will be put to bed.

I worry that we will not have an Irish banking system if we continue to chase the banks as we are doing. Two organisations are doing good work for the Irish people, which is in contrast to the position in other countries. The German Chancellor, Mr. Schröder, was quoted in the Financial Times last week as saying that he would like all the German banks to amalgamate into one. If a similar move was made here, we would have no competition. It would be much worse.

Dr. O’Reilly

I would like to speak about the role of internal and external audit. I was asked if all the papers were picked up. We will examine what went wrong. The role of internal and external audit and the levels of compliance will be examined as part of the investigation. That will be dealt with.

Deputy O'Keeffe spoke about price control and bank charges. I agree with him that bank charges comprise a small element of the issue of banks' pricing. It is the view of IFSRA that competition is the most powerful tool in ensuring that consumers get a good deal. We promote competition by providing information and working closely with the Competition Authority, which is responsible for upholding competition in the financial services industry. The staff of IFSRA do not believe we should engage in witch-hunting. We should be proportionate. If we get involved in over-regulation — this is where we are accountable in terms of the public interest — we could destroy a worthwhile industry. We should ensure that the institutions' practices and values are such that this sort of thing can be kept to a minimum, although we will never eliminate them. We have a police force, but we have not eliminated crime.

I want to return to a comment made by Dr. O'Reilly earlier, when I asked him about the handover from the Central Bank. I asked if IFSRA will be able to access all the files and the institutional memory. Dr. O'Reilly confirmed that there had been a number of cases — I presume he was referring to the days of the Central Bank regulation — of various types of over-charging being identified or being the subject of complaints. I think he said that refunds have been made. I am amazed that this went on for eight years or more without being spotted. It is my firm conviction that the internal auditor, the external auditor or the audit committee must have become aware of it. I refer to expensive operations for which people pay.

One should bear in mind that shareholders in many banking institutions are workers with pension funds. Such people comprise a significant cohort of shareholders. I would like Dr. O'Reilly to elaborate on the cases in respect of which refunds were made. I appreciate that there may be confidentiality issues, but can he indicate the areas in which refunds were made? It seems that some sort of regulatory system should have been operating at some level. I have heard of a number of cases relating to commercial customers. I wish to express my concern about the broad range of ways in which banks charge fees, such as time-based charging and facilitation fees. Many people do not understand such charges.

I am particularly concerned about start-ups and smaller businesses. Some businesses get a good deal from their banks. Many banks are very helpful to people who are setting up businesses. However, financial institutions are quite unscrupulous in many cases. I do not refer to AIB in particular, but I speak generally. All sorts of penalties and charges kick in when there are defaults or delays in payments. I would like Dr. O'Reilly to elaborate on that.

Has IFSRA had a chance to scrutinise or review the Companies (Auditing and Accounting) Act 2003 since it was established? I mentioned on Second Stage and again yesterday that internal audit is the first line of defence for everybody in modern systems. Deputy Ned O'Keeffe suggested that the management pays for and controls internal audit, but that is not the case.

I am concerned that internal audit is not specifically mentioned in the IFSRA legislation. The Minister introduced a series of amendments last Friday, one of which was 15 pages long. There was a two-page briefing note, of which a long paragraph related to the 15-page amendment. We are being critical, to some extent, of the way in which enforcement is carried out. We are asking questions about it. In fairness to the Members of the Dáil, it should be stated that the Department of Finance gave us a note of three quarters of a page on Report Stage yesterday. The 15-page amendment to section 11 fundamentally changes the architecture of IFSRA. It alters its powers in respect of complaints and the appeals tribunal. I have not been able to get any detailed advice on it, but I feel it will probably be an improvement in the long run. Has IFSRA had an opportunity to review it?

The committee had a detailed Committee Stage discussion on the Central Bank and Financial Services Authority of Ireland Bill 2003. The Minister's amendments, some of which we examined yesterday, upended a significant part of the select commission's discussion. We received a comment of three quarters of a page from the Department of Finance. Dr. Jonathan Westropp gave a lecture at the ACCA about the subject of his doctoral thesis, which was the weakness of the Dáil's enforcement. Does IFSRA have any ideas about how the Dáil might get better quality advice? Could it suggest a communication mechanism other than being sent an e-mail on Friday saying that huge changes are coming about?

Subsequent changes, which have not yet been the subject of Report Stage debate, are equally important. I refer, for example to the proposal that a director's compliant statement will be made mandatory. I understand that this proposal emanated from IFSRA. We are in a pickle because Report Stage of the IFSRA Bill is our last chance to examine this legislation for a couple of years. If it is not comprehensive or reasonable, we will be crying after the horse has bolted.

I would like Dr. O'Reilly to clarify his comments on complaints about over-charging. I presume that refunds were made when the Central Bank was the appropriate body. What is his view of the state of certain legislation? I refer to the Companies (Auditing and Accounting) Act 2003 and, in particular, to the role of internal audit and the audit committees. I am aware that it is referred to in the legislation, but many of the references make it an option rather than a mandatory requirement.

Dr. O’Reilly

I would like to elaborate on the issue of complaints. Under the Consumer Credit Act 1995, the Director of Consumer Affairs was primarily responsible for the relationship with consumers from 1996 until 2003. We have all the files for that period. We have spoken to the individuals who were involved, some of whom are still involved in the work. It is important to know that there is continuity. We would have seen information on the files about refunds and redress for customers. Perhaps Ms O'Dea would like to elaborate on that. There was redress in cases prior to 1996.

Was that by the Central Bank?

Dr. O’Reilly

Yes. Even in the period 1996 to 2003, complaints would have found their way to the Central Bank where people did not know to whom they should complain. In those circumstances, the Central Bank liaised where possible with the office of the Director of Consumer Affairs.

Can you explain the nature of the liaison? To say the bank liaised with the Director of Consumer Affairs could mean a great deal or it could mean very little.

Dr. O’Reilly

Before the office of the Director of Consumer Affairs took over the job, one member of the staff originally dealing with it was seconded six months prior to the enactment of the legislation to ensure a smooth transfer of functions and duties.

Was the staff member in the employ of the Central Bank or the Director of Consumer Affairs?

Dr. O’Reilly

He was an employee of the Central Bank seconded to and in a sense employed by the Director of Consumer Affairs. There was a full and free flow of information about the job which had to be taken on.

That highlights my ultimate concern. We had to turn to an ad hoc secondment of one individual to deal with these issues. The system must have been quite weak from a regulatory perspective if the only way to deal with this depended on the goodwill of the Governor of the Central Bank and the Director of Consumer Affairs in agreeing on the secondment of a staff member. It is very poor if that was the only system we had to rely on.

Dr. O’Reilly

Ms O'Dea can speak a little more about that. After later legislation, the full set of files and all staff of the office of the Director of Consumer Affairs were involved in the hand-over last year of the work to IFSRA.

My understanding is that when the function moved from the Central Bank to the Director of Consumer Affairs, no transfer provisions were made to ensure the files would be passed to IFSRA. Such provisions exist in the current legislation. There may be some confusion as to whether a notification was approved or not as at that time the Director of Consumer Affairs took the view that all current charges should be notified by way of a benchmark. There was a question as to whether that involved a formal approval process. The real issue is what had been approved. That will form part of the investigation we are carrying out.

People should be clear that there may have been different types of overcharging which came to the attention of various regulators during the period in question. There could have been overcharging in the sense of notifying a maximum charge to the Director of Consumer Affairs while charging more. There could also have been overcharging where the level of charge a customer was told would be applied differed from the level of charge imposed. While all of that might have been well within the maximum, it still constituted overcharging. There were cases of that sort where customers received their money back.

While there were different forms of overcharging, the key questions are whether they were the result of individual errors or computer glitches, whether overcharging was systemic and whether the internal control systems involved recognised them. Those are the questions on which the regulators focused at the time. In our current review of charging across the industry, we are focusing specifically on systems and controls.

When the documentation was passed on and the changeover occurred, was IFSRA advised that bankers should be watched in certain areas as cases had come forward and redress had been made? Everyone accepts that simple mistakes happen everywhere, but we are talking here about systemic error and poor controls or a culture in which units or individuals of banks are under such pressure that making money becomes the over-riding concern. If there is an opportunity to jack up a percentage by imposing extra charges, they are added and the consumer knows nothing about it. Was anything done to discover if this was a cultural issue within banks when the Central Bank was handling these cases or subsequently when the Director of Consumer Affairs took over responsibility? Was pricing passed over as a result of the pressure to make money? Was it the case that while individual cases were dealt with, no lessons were learned through a failure to question whether overcharging was happening generally?

No particular issues were brought to our attention within IFSRA during the transfer and we were not told to watch out for particular institutions or practices. In conjunction with our complaint line and discussions with our inspectors, we use a risk based approach to identify where resources need to be focused and what areas need to be examined. In that context, we have broadened the scope of this investigation outside section 149 to consider bilateral negotiation of particular interest rates.

I do not understand. What is the bilateral negotiation of interest rates?

It is where a business or individual uses bargaining power to obtain a better interest rate than the one advertised. The question to be asked is whether that process is being recorded properly in systems. It would require a manual override function. We want to check whether there are any issues to be investigated in this area. The reason we are worried about this is that issues have been brought to our attention by consumers who have received individual redress. If it has happened to one or two consumers, perhaps it is happening to others.

Are there codes of practice on time-based charges and facilitation fees? Is it possible to identify who was charged what? Very often, when one looks back at the totality, bank charges are higher than might have been expected. That is partly because additional charges were imposed. It is like mission creep in a war. With banks there appears to be charge creep as the charges expand. This is often missed as bank charges are treated globally in annual accounts.

The Deputy is quite right. We believe there is a lack of transparency in the way charges are notified. One must add up various charges to find the total imposed for something. Therefore, we have made specific reference in our codes of conduct consultation document to the area of transparency. It is one thing to insist as we do in the current code that charges must be disclosed, but we want them to be disclosed in a way which is easy for people to understand. Our latest survey shows that 75% of consumers do not understand the financial information they are given. We want to ensure that we have a format for providing information which is much more user friendly. I agree fully with the Deputy that the information customers get about charges is not transparent. For that reason, we are addressing the issue through the codes.

I thank Ms O'Dea for her patience and thoroughness. There are just a couple of things I want to get clarification on. At what exact level was the 1998 letter which we are told included all charges signed off? It has been contended by, among others, the Minister for Finance that the 1% rate being charged was the going rate and that the 0.5% rate was arguably much lower than the rate the market would bear. Can Ms O'Dea clarify whether that was the case?

May I clarify IFSRA's views on the law going forward? Is compliance with consumer law caught under the existing directors' compliance, which is waiting to come into effect and which has already passed through the Oireachtas? There is some doubt, from what they stated, as to whether consumer compliance is caught or not.

They stated to Senator O'Toole that they would advocate "shall" rather than "may" in the compliance requirements in the new Bill, the relevant section of which we have not yet reached. Can I clarify their argument on that? The briefing that appears to be coming from the Department of Finance would suggest the word "may" is more than adequate because the existing obligations are fairly thoroughly met, and the reason for having this is so that one can catch companies which are not incorporated and would not be caught by the general obligations. They should clarify that because it is relevant to our debate on Report Stage.

What precise codes of practice has IFSRA in development? There was an issue surrounding the mis-selling of products and now it appears that there is an issue over an absence of sign-off on some of the optional extras available with top-up mortgages. There is the issue of there not being a satisfactory ability to shop around and move one's business from a bank without encountering a large number of problems, particularly with direct debits and standing orders. There are also a number of anti-consumer practices in place. Can IFSRA give us a clear statement that it has codes of practice under development in each of those areas and that they will have the force of law when they reach the end game?

There is a Dáil vote.

Finally, will IFSRA have European-wide cost competitiveness indicators as opposed to simply comparing AIB with Bank of Ireland so that we will see that the consumer is getting a genuinely good deal compared to other countries, as well as domestically?

I want to let Deputy Timmins make a brief contribution. I think we will conclude then.

Could we get a written response to those questions?

The 1998 one is very relevant. Perhaps they could clarify that.

One of the related issues about which I have concern is the concept of uncashed bank drafts. I do not know if IFSRA has looked at that issue but I would have grave concerns that there are a great many uncashed bank drafts, the records of which are held by the banks. In some cases the holder of the original bank draft is deceased and when the legal people, following up on the person's estate afterwards, make requests of the banks, they do not check out the bank drafts. I would be concerned that there is a large quantity of money lying about in uncashed bank drafts.

I ask IFSRA to look at that issue with a view to regulating the lifetime of a bank draft. This is similar to the dormant accounts issue. I have anecdotal evidence that there are uncashed bank drafts, which the banks knew about, which belonged to deceased people. I ask IFSRA to look at that issue.

Dr. O’Reilly

We will try to reply to many of the questions in writing. Deputy Bruton asked a question about sign-off levels. We do not have the precise information on that but we will look it up. It was not at CEO level.

We will conclude at this stage because there is a Dáil vote and there is no point in coming back in 20 minutes. On behalf of the committee I thank Dr. O'Reilly, Ms O'Dea, Mr. Tracey and Mr. Moloney for their contributions which we found helpful. We will be moving on to the Central Bank and AIB. We look forward to meeting IFSRA again in due course.

Dr. O’Reilly

I thank the committee for their valid questions and invite it to come and look at our consumer office.

We look forward to taking up that offer.

The joint committee adjourned at 1.05 p.m. until 3 p.m. on Wednesday, 26 May 2004.

Barr
Roinn