IFSRA: The financial regulator which failed

Anon: On January 1st 2010, we saw how the basic philosophy of IFSRA, and the key people, seemed to be informed by the philosophy of “free” markets and the need to keep state interference or regulation to a minimum. Yet the government established an agency with 350 staff and a big budget to “regulate” financial markets. This was hardly just to follow European Central Bank rules?

On the establishment of IFSRA in May 2003, the first chairman Mr Brian Patterson said: "Good regulation is good for consumers and it's good for the industry." He said the authority would be a "passionate proponent" of the public interest.

He defended the composition of the authority's board, which had been criticised in certain quarters as lacking a consumer champion. "This is not meant to be a representative board but a public interest board," he said.

IFSRA was to be responsible for regulating more than 4,000 entities and had a budget in excess of €20 million per annum back then. It rose to €50m by 2006, the apex of the frenzied bank lending, and it is €63m today.

An interim board of IFSRA had been set up by Finance Minister, Charlie McCreevy, in April 2002.

IFSRA had a limited degree of independence from the restructured Central Bank, which was re-named the Central Bank of Ireland and Financial Services Authority (CBIFSA). The restructured Central Bank continued to be headed by the governor, “Mr John Hurley, who had the over-arching role with the IFSRA, and Mr Patterson and the board will be accountable to him.”

Mr Hurley, the former Dept Finance Secretary General, was also influential in creating the regulatory system and system of regulation.

The members of the Authority are as follows, entering 2010:

Thus it can be seen that there are nine members of the board of IFSRA today. Two-thirds, or six members, are original/founder members and are still on the board. There had been ten members of the original board. New members were Alan Gray and Tony Grimes, appointed in December 2006 and May 2008 respectively. The three who left were Patterson (Chair), Danz, and O’Reilly (CEO).

Contrary to good governance, none of the directors’ other interests, ages, or main occupations are even listed in the IFSRA Annual Reports (which are not available before 2005).

Jim Farrell, now Chairman, was an original member from 2003. He was appointed chair in May 2008, when Patterson stood down. He was a senior executive with the National Treasury Management Agency and was first chief executive of the state’s National Development Finance Agency and has “extensive experience of international banking.”

Alan Ashe, original member from 2003, is former managing director at Standard Life Assurance and chairman of the Rotunda Hospital. Shane Ross wrote, in his usual style, that “Alan Ashe pretended to retire in 2000 when he left the top job in Standard Life (Ireland) at the tender age of 58. His 12 years there had been preceded by another dozen in the TSB and a long period in manufacturing industry. To serve on IFSRA's board, he felt obliged to give up as a director of two promising companies, Stella Life Assurance and Business Solutions Ltd. The possible conflict of interest forced him to make a choice between service to the State or to the private sector,” Ross concluded.

John Dunne was formerly Director General of IBEC, the employers organisation, until 2000, and is Chairman of the IDA today.

Gerard Danaher is a barrister, closely linked to Fianna Fail. He is also chairman of the National Library. He was counsel for Ray Burke at the Flood tribunal.

Alan Gray is an economic consultant. Appointed at the peak of the lending frenzy in late 2006, he is head of Indecon International Economic Consulting Group, Chairman of London Economics and has previously served on the Boards of a number of commercial companies including the Irish and European Boards of Canada Life. Indecon does a lot of work for government, public bodies and internationally. Paddy Mullarkey, the Secretary General of the Department of Finance 1994-2000 is chair of Indecon and Donal O'Donoghue, “Indecon Advisor on Local Government”, was previously Galway County manager.

Deirdre Purcell, original member from 2003, is a novelist and a former member of the Council of the Credit Institutions' Ombudsman.

Tony Grimes, appointed in May 2008, is Director General of the Central Bank and Financial Services Authority where he has worked for most of his life. He also worked in the ESRI and with Davy Stockbrokers, once a subsidiary of Bank of Ireland.

Dermot Quigley, original member from 2003, was 42 years in the public service including 26 years in the Department of Finance where he was an assistant secretary. He became a Revenue Commissioner in 1990, before assuming the chair in 1998, and was on the board of FAS as one of the Dept of Finance’s two “watchdogs.” He also led a group reporting into public procurement in 2005.

Mary O’Dea is an executive director, Consumer Director, and has been on the board from the beginning. She briefly acted as CEO until the board was amalgamated into the Central Bank.

In addition, it should be noted that Matthew Elderfield, the new Head of Financial Supervision, was appointed recently. He takes up his position with the Central Bank in January, as IFSRA is re-merged with that Bank.
Back in 2005, the IFSRA board comprised Brian Patterson chairman, Patrick Neary CEO, Mary O’Dea Consumer Director, Alan Ashe, former Standard Life CEO, Friedhelm Danz; former meat processor, Dermot Quigley, former Revenue commissioner; novelist Deirdre Purcell; former boss of IBEC, John Dunne; FF linked barrister, Gerry Danaher, and Jim Farrell of the NTMA.

The three former IFSRA board members were:

Brian Patterson who was the Chairman of the Interim Authority. He was former Waterford Wedgwood chief executive, was also chief executive of the management training body IMI, and is a former chair of the Irish Times Trust. He was also appointed chair of Vodafone Ireland in 2007.

Liam O’Reilly was the first Chief Executive of the new financial services regulator, the interim Irish Financial Services Regulatory Authority, on 18 November 2002. Mr O’Reilly was Assistant Director General of the Central Bank of Ireland since 1998, and had been responsible for all of the Central Bank’s financial supervision functions. He was a Central Bank insider. Liam O'Reilly was subsequently appointed as a director of Merrill Lynch International Bank in 2007. This sparked some controversy due to what some perceived as potential for conflict of interest in his working for one of the companies he so recently acted as financial watchdog over. He also chairs the Chartered Accountants Regulatory Board in Ireland.

Friedhelm Danz was first put on the board of the Central Bank on February 1 1996, and then reappointed by Charlie McCreevey, in whose constituency he resides, until 2005. He had been a major beef processor and was a competitor of Larry Goodman's.

It was the IFSRA board that Patrick Neary reported to. It was the IFSRA board that Liam O’Reilly reported to until January 2006. It was this board that implemented the regulation of the Irish banks. It was this board that oversaw the “principles based” regulation system that allowed the banks to collapse and means that the taxpayer has had to pay out billions to the same banks.

In addition to the board, others who were indirectly responsible for the lack of regulation (influencing board appointments and attitudes to governance) were listed by the former Chairman Mr Brian Patterson, in the 2005 Annual report, as follows:

“Thanks are due to all those who work tirelessly to support our mandate:

• Ministers and civil servants, particularly in the Department of Finance.
• Members of the Authority who give of themselves tirelessly and often beyond the call of duty.
• Our management team under our newly appointed Chief Executive, Patrick Neary.
• A special word of thanks to our Chief Executive, Liam O'Reilly, who retired earlier this year and to whom we owe much.
• Our dedicated and professional staff.
• The Governor and staff of our sister organisation, the Central Bank - without whose support our task would be considerably more difficult".

He then said “Our role is to serve the public interest. It is that principle which guides all of our work and which motivates all of our people.”

But he also tellingly said the following –

“Ireland needs an efficient and competitive financial services industry - because it oils the wheels of the whole economy and is the repository of the country's savings. The industry needs to be competitive and profitable in order to underpin its stability - something we can easily take for granted.”

It was this thinking that impaired the Authority’s views of the prudent public interest. Unless corporate governance in Ireland is radically reformed, we are bound to repeat these mistakes.

Re-arranging the deck-chairs – the structure of the IFSRA within the Central Bank, with largely the same board in place, the same blinkered thinking in the Dept of Finance, in the same Government, will not help Ireland.

To date, the taxpayer has given €11,000 million to the Irish banks. The last Budget was a row about whether a mere €1,300 million was to be in cuts or taxes.

Paying the price of poor regulation in Banking

Anon:  Morgan Kelly’s UCD paper on the Irish Bubble reproduced here on 29th December is a chilling view of the kind of policies which nearly brought this economy down, and a warning that worse may yet come – much of it due to poor regulation. It is worth the effort to read it.

He found that it was “the increased supply of credit rather than improved fundamentals drove lending.” “All of these factors were present for Irish banks, and their impact was magnified by failures of regulation by the Central Bank and government. The rapid expansion of credit in the Irish economy and the consequent rise in property prices and construction activity represent systematic failures of control at all levels of the Irish economy.”

Kelly said that “In summary, the activities of the Irish banks remained extremely simple by international standards and could easily have been regulated, had the will to do so been present.”

He concluded that “Given the weak independence of the Irish Central Bank, (IFSRA, in fact) the will to control banks derived ultimately from government.”

The claims on systemic failure; at all levels of power in the economy; and the lack of will to regulate are correct. He does not say that all of these failures stemmed from the strong ideological economic hostility to regulation by the state.

It is worth exploring the governance and composition of IFSRA in this and a subsequent Blog. As Kelly pointed out, the government ultimately controlled the banks – all the appointments to these boards are made – carefully and politically - by government. The advice of the deeply conservative (albeit in this instance, not conservative at all) Department of Finance dominates too. It is clear that while some of the directors had a considerable knowledge of economics and/or finance, others had no such knowledge or skill and some may have been hostile to regulation.
The cost of the collapse of the Irish banking system is still unknown. The ultimate buck stopped, not with Patrick Neary, the CEO of the Irish Financial Services Regulator, nor his predecessor, Liam O’ Reilly, to 31 January 2006, but with the board to which he reported.
Much has been made of Patrick Neary, the inadequate and overpaid CEO of IFSRA, but the board he reported to remains largely in place. What links did they have to Fianna Fail/PDs? What influences were there on Mr McCreevy, Ms Harney and Mr Cowen in the selection of the board, in additional to the political?

At the time of IFSRA’s establishment in 2002, Siobhan Creaton, of the Irish Times commented very pertinently, that “The restructuring of the Central Bank has been a lengthy and controversial process and was finally agreed in a compromise between the Department of Finance and the Department of Enterprise, Trade and Employment.”

Creaton said, “The degree of complexity involved in tinkering with an organisation as fundamentally important to the Irish economy as the Central Bank has resulted in the creation of a complicated structure”.

But interestingly, she also said that “It has been described as unwieldy and unworkable by observers in the financial services industry and politicians, with Fine Gael finance spokesman, Mr Jim Mitchell, pledging to seek a more streamlined organisation if his party gets into Government in the months ahead.”

What if the late Mr Mitchell’s Fine Gael/Labour had attained power in that general election? Would a new government have meant real change as IFSRA, in the system of regulation, in attitudes to enforcement, in the state’s attitudes and dealings with builders, speculators and other creditors? Would Ireland today not be facing such gigantic financial problems and almost facing bankruptcy if NAMA does not deliver, as Morgan and others believe that it wont/cant?

Why did all the key people in and around financial regulation fail Ireland so badly?

The reason was because of the over-riding philosophy by so many people in powerful positions who really, sincerely believed in the workings of markets. Many of these people were not very tolerant of differing views. Most in the media promoted the view that markets worked best when left largely un-regulated and were totally “free” - of interference.

There has been much questioning and debate on the profound ill-effects of this economic ideology in the UK, France Germany and even in the US. But little here in Ireland – even now. The view that this is a recession, a temporary downturn and it will be back to business as usual soon, may cost us, yet.

IFSRA set out its philosophy clearly in its annual report in 2006:
“We adopt a principles led approach to supervision.”

What this means is that “the Board of Directors of a financial service provider are responsible for setting their tolerance for risk and for ensuring that management establishes a framework for assessing the various risks.” [The banks - Not IFSRA]

“Financial service providers are also required to develop a system to relate risk to their level of capital and establish a method for monitoring compliance with internal policies.” [The banks - Not IFSRA]

“Our role [only] involves oversight of the quality of the institution's corporate governance including risk management and internal control systems, the focus being on structures and methodologies used.”
In December 2005, Brian Patterson, chairman of the financial regulator, announced the appointment of Patrick Neary as CEO of the regulator. Patterson claimed that “Mr Neary had played a central role in the shape and direction of the financial regulator since its establishment. "Pat is ideally suited to take the financial regulator through the next phase of its development.”.
Mr Neary was the unanimous choice of the selection panel, which was made up of non-executive members of the authority and an international regulatory expert from Finland.
It is of interest that the Irish Times reported that Mr Neary's appointment was welcomed by Financial Services Ireland, a trade association for the financial services sector, affiliated to the Irish Business Employers Confederation, which said “tackling the cost of regulation should be top of Mr Neary's agenda.”
IBEC did not want better regulation – it wanted lower cost of regulation…………! Ironically they had a case. Its members were paying most of the cost - for no effective regulation of finance.
In 2006, the staff was 350 and the cost including consultancies etc., was €49m. There is now 400 staff. The cost today is €63.6m of which €34.4m is raised from the industry plus a subsidy of €29.2m, given by the Central Bank, which makes up for the shortfall from the credit union sector and some other areas.
The composition of the IFSRA board will be examined in a second part of this Blog.