On January 19th, 2009, as Dublin’s financial industry was reeling from the nationalisation three days earlier of Anglo Irish Bank, David Guinane, head of Permanent TSB (since rebranded as PTSB) at the time, sent a three-word email that would land him before a regulatory inquiry 15 years later.
“Ok to that,” he wrote, responding to a message the bank’s then marketing manager, Niall O’Grady, on how the lender should deal with a group of customers that had taken out mortgages during the property boom where interest rates were linked to prevailing European Central Bank (ECB) rates.
The loan agreements contained a clause – known as special condition 706 – from when PTSB first started offering cheap ECB tracker loans in 2004. It required customers that moved to fix their rates for a spell to instruct the bank, at the end of this, if they wanted another fixed period or to be put back on a tracker rate. Otherwise, they would default to a standard variable rate.
Special condition 706, as it turned out, was ambiguously worded. Attendees of the first day of the public inquiry into Guinane’s alleged role in the industrywide tracker mortgage scandal heard on Wednesday that the clause had led to questions in early 2009 about whether a customer opting to go back on to a tracker rate after a fixed period was entitled to a loan set at the original margin over the ECB rate, or a higher margin then on offer from PTSB.
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On foot of internal legal advice, O’Grady sent an email to Guinane on January 16th, 2009, proposing only customers who actually contacted the bank requesting the original margin should be offered the more favourable rate, the inquiry heard. Guinane’s three words gave the plan the imprimatur.
The Central Bank would fine PTSB in 2019 some €21 million for a 42 regulatory breaches affecting thousands of tracker mortgage customers. Two of the findings related to special condition 706.
The regulator claims Guinane participated in one of these alleged breaches: the first general principle of the Central Bank’s Consumer Protection Code 2006 which requires financial firms to act “honestly, fairly and professionally in the best interests of its customers”.
Guinane is the only known individual to have been pursued to date by the regulator for their alleged role in the tracker debacle, which has resulted in almost €279 million of fines against seven lenders
“It’s apparent from even those three words that Mr Guinane was following a recommendation that had been put together by others,” Paul McGarry SC, for the former PTSB chief executive, told the inquiry. “The person or persons who put together the information are not being pursued by this inquiry. Instead, Mr Guinane is being singled out.”
Guinane has asked for the inquiry to be held in public, McGarry said, “to clear his good name and reputation”.
Guinane is the only known individual to have been pursued to date by the regulator for their alleged role in the tracker debacle, which has resulted in almost €279 million of fines against seven lenders. All told, the banks set aside €1.5 billion of provisions in the past seven years to cover refunds, compensation, fines and administrative costs as they dealt with more than 41,000 borrowers so far deemed to have been affected by a sector-wide debacle that stretches back to 2008.
The saga continues. The Court of Appeal is due next week to hear an appeal being taken by Ulster Bank against a High Court ruling last year that upheld a Financial Services and Pensions Ombudsman (FSPO) decision that a further two borrowers were entitlement to tracker mortgage refunds and compensation. The outcome will affect at least 5,300 similar mortgages taken out before the crash, according to the bank. The case is likely to be subject to a further appeal from one side or the other before the Supreme Court.
Elsewhere, PTSB is waiting for the High Court to hear its challenge against two other FSPO tracker decisions – the outcome of which could have a “material” financial impact, according to its interim 2023 report.
“It’s not unknown to sometimes seek a scapegoat or somebody to be the so-called face of a particular scandal, episode or difficulty,” said McGarry. “But just because that sometimes happens, it doesn’t make it right or proper.”
Still, the Central Bank’s director of enforcement, Seána Cunningham, said in September 2022, when her team concluded its last tracker investigation into the banks, that “individual accountability is an area of focus” and that the regulator would “take action where we believe it is merited and appropriate”.
The period subject to the current inquiry precedes a change in Central Bank sanctions rules in August 2013 that saw the maximum fine that can be imposed on an individual double to €1 million. An individual found to have participated in regulatory breaches can also be barred from senior financial positions for a period or ordered to pay the costs of holding an inquiry.
OTHER INQUIRIES
The Guinane case puts the Central Bank’s public inquiry system – to which its enforcement cases are referred after attempts to reach a settlement alleged regulatory breaches have failed – under the spotlight. It comes at a time of speculation in financial circles that more cases may end up before an inquiry after a new senior executive accountability regime (Sear) comes into effect in the middle of this year.
Peter Hinchliffe, the UK barrister in charge of the Guinane inquiry, said in an opening statement on Wednesday that he plans to issue his findings “as soon as possible” after the end of the hearing, scheduled for March 15th.
It may be the first of five cases that have ended up at inquiry to result a decision.
The first case was referred in 2015 against five former executives and directors at Irish Nationwide Building Society (INBS). Since an inquiry panel, led by solicitor Marion Shanley, started public hearings in late 2017, the Central Bank has reached settlements with three of the men – former INBS chairman Michael Walsh and its one-time heads of commercial lending and UK commercial lending, Tom McMenamin and Gary McCollum – and dropped its case against the failed lender’s long-standing managing director, Michael Fingleton (86) in late 2019, due to his health.
The INBS inquiry, which had been the subject of sporadic public hearings between 2017 and mid-2021, has yet to deliver its decision on the remaining individual subject to investigation, former finance director John Stanley Purcell. There is a hope among close observers of the inquiry that it will finally be delivered this year.
A public inquiry launched in 2015 against former directors of Quinn Insurance Limited (QIL) Liam McCaffrey and Kevin Lunney, five years after the insurer collapsed, also ended up with settlements being reached between the Central Bank with the two men.
Another inquiry, into insurance broker Seamus Sutcliffe, trading as The Mortgage Centre, for failing to hold necessary professional indemnity insurance for a period ended up with a settlement involving a €2,750 in 2016.
Elsewhere, an inquiry was initiated last year into what the Central Bank calls “a person formerly concerned with the management of a regulated financial services provider”. The Irish Times has reported that the individual is former RSA Insurance Ireland chief executive Philip Smith and that the case is about suspected regulatory breaches relating to accounting issues at the general insurer more than a decade ago.
Three case-management meetings relating to this inquiry, chaired by former High Court judge Mr Justice Iarfhlaith O’Neill, have been held in private so far, including one earlier this month.
“The time that some of these cases have taken suggests to me that the public inquiry system [established under laws enacted in 2003], which was supposed to be relatively quick and efficient, is not fit for purpose,” said Brendan Burgess, a consumer advocate and founder of askaboutmoney.com. “At times during the INBS inquiry, in particular, there were more solicitors and barristers in the room than you’d see at a big case in the Four Courts.”
But, for others, the fact that so few cases end up going to public inquiry underscores how the credible threat of an inquiry has resulted in the overwhelming majority of Central Bank enforcement cases being settled.
The Central Bank has imposed almost €405 million of fines on 115 firms and individuals since 2006. By far the largest ones have been against banks for their involvement in the tracker mortgage scandal, led by a record €100.5 million penalty imposed on Bank of Ireland in September 2022 and €96.7 million demanded months earlier from AIB and its EBS subsidiary. These fines were after standard 30 per cent discounts were applied to what the Central Bank found to be the appropriate penalties – after taking into account how the parties had agreed to settle and not drag the cases to full inquiry.
NEW ACCOUNTABILTY REGIME
In all cases taken against individuals to date, the Central Bank first had to find that their firms had carried out regulatory breaches. However, a new so-called senior executive accountability regime (Sear) that takes effect in July removes that requirement.
The new rules – similar to those introduced in the UK in 2016 in the wake of scandals surrounding the rigging of interest-rate benchmarks and the foreign-exchange market – will force firms to document top managers’ responsibilities, making it easier for regulators to go after individuals if they take unnecessary, uncalculated risks, refuse to follow correct processes or knowingly commit wrongdoing.
A central aim of Sear is to do away with a key part of the existing sanctions regime, known as the “participation link”, where regulators must first find that a financial firm committed regulatory breaches before they can take individuals to task.
There is a view in the Central Bank – if a regulatory axiom that firms settle but individuals fight holds true – that Sear will ultimately see more cases going to full inquiry.
“Following the removal of the so-called participation link, which allows the Central Bank to proceed against an individual without having to prove a case against a financial institution, a lot of finance and insurance executives are at the least perturbed, if not worried,” said Peter Oakes, a former enforcement director at the Central Bank and experienced independent non-executive director in the finance industry.
“Executives might be cut loose, so to speak, by their employers, being left to fend for themselves against a heavily-resourced regulator. In these circumstances it may well make sense for individuals to defend themselves rather than going quietly into the night. Individuals generally have more to lose than companies.”
Others take a different view. Kian Caulwell, head of financial services consulting at Mazars, said the introduction of several distinct obligations that senior finance executives must be able to demonstrate that they adhere to under Sear “could result in more settled enforcement actions against individuals”.
Hanging over the specific obligations is an overarching new legal requirement, Caulwell notes, that all senior finance workers must adhere to a conduct standard of “acting in the best interests of customers and treating them fairly and professionally”.
AFFECTED CUSTOMERS
Back at the inquiry into Guinane, attendees heard this week that PTSB had reconsidered its position on the special condition 706 tracker cases – following engagement with regulators – and had gone about remediating borrowers affected by its previous stance.
Some 279 customers who had suffered financial loss from the delay in applying the lower rate would share €1 million in compensation.
“The Central Bank’s contention appears to be that by signing off in a limited space of time on a recommendation made to him, that Mr Guinane is seemingly responsible to a standard of strict liability, unbridled by any limitation period, for the consequences which flowed from that – despite full remediation having been put in place by the bank for affected customers,” McGarry said.
“Such a strict liability argument to the effect that Mr Guinane can be sanctioned even if there was no fault on his part should, in our respectful submission, be a cause for serious concern for anyone who believes in the rule of law in this jurisdiction.”
John Breslin SC, of the legal practitioner team supporting the inquiry, noted that neither PTSB nor Guinane is suspected by the Central Bank to have acted dishonestly.
The inquiry is scheduled to hear evidence from a total of 12 witnesses, including Guinane, before public hearings come to an end in the middle of next month.
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