I am the chairman of Allied Irish Banks plc and I am accompanied by Mr. Michael Buckley, the bank's chief executive. As the Chairman of the committee has indicated, we are here in response to an invitation to discuss matters relating to foreign exchange charges at AIB which have recently given rise to public concern.
I will start by repeating what we said in our public statements in July. AIB is sorry for the serious lapse in our responsibilities towards the regulator in the matter of foreign exchange charges. We failed to operate the statutory system of invigilation under the 1996 Act in the way intended and thereby failed in our obligations to the regulator. We failed to comply with the law, which is a serious matter.
When these matters originally came to public attention, they were characterised as overcharging. It is important to understand the July IFSRA report has established that that is not what happened. That confirmation is provided on page 12 of the report. The terms in which this was rendered are important:
It is important to note that had AIB complied with the notification requirement in relation to foreign exchange charges, and notified the charges it was actually levying, it would have been notifying rates which generally appear to be comparable to the rates notified by its competitors. In this context, customers of AIB did not appear to suffer in financial terms compared with customers dealing with competitors.
In other words, the rates we charged were approximately the same as everyone else charged — lower in some cases — and it is likely that if we had simply notified these rates to the regulator, they would have been approved.
We have decided to go back over all the transactions in question, make refunds to customers and treat the transactions as if they were bound by the notified prices to the regulator, rather than the prices advertised to customers. In effect, our customers are now getting the last eight years of foreign exchange transactions at half price.
I do not want to try to minimise our failing. To date, we have identified about 1.1 million transactions eligible for refunds and about 173,000 accounts. Therefore, repayment is a large and costly project. We have repaid about €12.7 million of the figure of €26.1 million which arose over an eight year period. About one third of the repayments are under €10, two thirds under €20 while 96% are under €250.
The first phase of the refund process was conducted by automatic processes, effectively by computer programmes specially written for the purpose. We are now in the second phase which adds a manual process to identify customers. We have an active contact programme and invited customers to identify themselves in order that refunds can be made.
We are putting in place arrangements which will result in one identified person in AIB being responsible for ensuring our prices are in line with our regulatory filings and approvals. There are approximately 625 regulated prices and charges.
At the time this matter came to light it seemed appropriate to take stock on a wider front, lest there were other instances where charges had not been properly applied or promised benefits fully delivered. This was extended to areas where there was no statutory control on prices, that is, beyond the 625 regulated prices. We then went back over all products to all customers in the retail area over eight years and discovered a small number of cases where errors in our processes had led to customers not receiving the full range of benefits promised on some products. For example, someone might have been promised, say, free banking for three years on signing up for a particular product and only received it for 18 months because the appropriate manual intervention, which extended for 36 months, had not been made.
Upon review of a very large number of products, involving approximately €8.2 billion of revenue, over a considerable number of years we found discrepancies which showed that we owed €8.1 million by way of refunds to customers on non-foreign exchange products. We expect to have refunds made to the majority of customers by the end of the year. We also discovered a range of instances where customers had been undercharged. However, we have not requested repayment in these instances.
The main weaknesses we found were that in a period of substantial product innovation the processes had not been automated enough to deliver reliably every one of the product features. We had relied too much on manual intervention which always has a higher rate of error which is not acceptable. We are embarking on a programme to simplify many of our product offerings and invest in the processes and technology which will ensure the product features we offer are given effect accurately and consistently.
The investigations which were very extensive did not uncover a culture of overcharging. What we found was a degree of error in the dependability with which we had delivered a small number of products to our customers which is not acceptable. We have been trying in recent years to simplify our pricing and products and make them more transparent. In 1994 AIB was the first bank to introduce pre-notification of fees and charges to business customers. In 1995 this was repeated for personal customers. We abolished the charge for management time in 2001.
I would like to deal with a couple of issues, the first of which comes broadly under the heading of "culture". The investigation showed that the failure to notify the correct charges became known within AIB in September 2002. The failure to resolve the issue then is a matter of serious concern. It was clearly a management failure. We have made it clear that any such failure is regarded very seriously.
Some have raised the question of whether the culture in AIB creates an environment which leads to problems of the sort we are discussing today. This is an issue that the board and management of the company take very seriously. We commissioned a well known international expert, Dr. Peter Scott-Morgan of the Concours Group, who has done this type of work for a number of very large companies in the world. He is the world expert on corporate culture. The overall conclusion reached from his research is that AIB has a sound culture. While it is not fundamentally flawed, some work needs to be done to ensure it is fully in line with best standards.
We have reviewed the avenues open to staff to raise concerns about ethical issues, issues to do with bad practice or the failure of the bank to live up to best standards in any area. To this end, we have reviewed and renovated these systems and processes which are now in accordance with best practice. They include a range of options for staff to go directly to senior management, including the group chief executive or me as chairman. Staff can use confidential helplines to contact the compliance section of the bank. We have added another completely new layer — I do not know who else uses it in this country — whereby, if they wish, staff can go to an external service provider in the United Kingdom, Public Concern at Work, which does nothing except this sort of work. It acts as a completely segregated avenue for registering concerns. This body will have direct access at various levels within the bank, including me. I need hardly say it remains an option for staff who have concerns that they believe are not being addressed by any of these mechanisms to go directly to the regulator.
We have undertaken a major programme of action since 2002 to transform our control and risk management structures across the group. There were significant external hirings from North America. As announced in July, we are working on a number of fronts to achieve the necessary balance between business goals and front-line control and compliance responsibilities. We are also reviewing reward and performance management systems — bonus pay in effect — to ensure business growth is always achieved in an ethical and compliant manner. We recently launched a board-approved code of leadership behaviours for senior executives. It was launched jointly by Mr. Buckley and me. We keep IFSRA informed on all aspects of these matters.
The next item on which I want to touch is disciplinary action. On 15 September 2004 we announced that the inquiry undertaken by Deloitte, at the behest of the bank and the financial services regulator, which was independently assured by the former Comptroller and Auditor General, Mr. McDonnell, had been completed. At the time we announced that the board had established a sub-committee, comprised of three directors, to consider the report and determine whether disciplinary procedures should be recommended in respect of individuals. The sub-committee will shortly make these determinations and communicate with the individuals concerned who are entitled to fair procedures. As I indicated in my prior correspondence which the Chairman was kind enough to mention, I am obliged to speak with circumspection because if I do not, I run the risk of subverting any disciplinary process. I ask the committee to understand this, as I believe it does.
I want to refer to what has become known as the Faldor matter, specifically in regard to tax compliance issues and some deal allocation practices in regard to the investment vehicle known as Faldor which functioned in the late 1980s and early 1990s. When they came to light in September 2003, they were reported by AIB to IFSRA and other relevant authorities, including the Revenue Commissioners. A process of investigation was agreed, the investigation completed and the results made available to IFSRA and other relevant authorities. The investigation found, inter alia, that there had been no similar vehicle to Faldor which functioned between 1989 and 1996. Second, the Faldor investment vehicle did not receive any advantage in deal allocation to the disadvantage of other customers. Third, high quality deal allocation practices and standards have been in place in AIBIM since 1997. Disciplinary action was taken in respect of persons still in our employment. The Revenue Commissioners conducted an examination of AIB in regard to tax issues arising, which process is nearing completion.
It is my intention and that of Mr. Buckley and the board that any issues which have surfaced will be properly and fully dealt with. As I have tried to explain, we have this summer gone searching for other issues in regard to our products and where we have found them, we have brought them out into the open. An analyst observed recently that AIB had had its soul more thoroughly searched than almost any other bank.
I apologise again for the failures that have occurred. It is my firm intention, which Mr. Buckley shares, that all of the issues raised will be dealt with properly and promptly. I thank the Chairman for giving me this opportunity to speak to the committee.