The McDowell report on financial regulation was not an attack on the Central Bank's past record in financial regulation and was not intended in any way to give a verdict on the performance of any body, according to the man who chaired the group.
Mr Michael McDowell, who will shortly be appointed Attorney General, said that the debate now should now be on how the new regulator should operate, rather than where it should be located.
Mr McDowell was speaking at a seminar on financial regulation in Dublin yesterday organised by the Irish Centre for Commercial Law Studies at UCD and Dillon Eustace solicitors.
"The proposed changes recommended in the report were not in any sense to be taken as adversely reflecting on those who have discharged the regulatory functions of the Irish state until now," he said.
The report was based on a Government decision of October 1998 to establish a single regulatory authority. "The issue as to whether there ought to be a single regulatory authority was never a matter for consideration by the Implementation Advisory Group," which he chaired.
Last week the Central Bank criticised the committee report for failing to draw attention to the "potential downsides" of a move to a new greenfield regulator and warned that removing regulation from the Central Bank involved risks to the Republic's international reputation and that of the IFSC.
Mr McDowell said that the debate should concentrate on the role and functions of the new regulator rather than its precise location. The issue of whether to move regulation away from the Central Bank "is exclusively a matter for the members of the Government to decide, especially now that they have invited a public debate on the issue". If the Government follows through on its 1996 decision to establish a single regulator, then whichever route it takes will be a radical one as it will either involve taking powers away from the Central Bank or moving all regulatory functions, including that of the insurance sector, under the bank's wing. No EU member has followed the latter route, he said.
According to Mr McDowell, efforts were made to have continuity in regulatory policy, with the twin pillar approach of reorganising the Central Bank into two sections dealing with prudential regulation and consumer protection being considered. He added that the advisory group had concluded that prudential supervision and consumer protection could be married in one regulatory code implemented by a single regulatory authority. Even if the bank was stripped of its regulatory responsibilities, Mr McDowell maintained that any such move would not, as some commentators had suggested, leave the bank "a bleeding mass on the ground", as only 30 per cent of staff would have to move from the Central Bank to a new authority.
The seminar heard that the current system of sanctions and penalties for financial institutions in Ireland was ineffective. At the moment the only option for the Central Bank seeking to punish a bank was to withdraw its licence, which, Mr McDowell said, was considered "a nuclear option". "Any such move would lead to mutually assured destruction and therefore nobody will push the button." The report suggests the establishment of a tribunal independent of the regulator with powers equivalent to a court or judicial tribunal which would make recommendations on sanctions, such as fines, on offending firms. "Whatever structure the institution takes, the focus should be on having a system of regulation which is efficient, effective, accountable and commands public respect: an authority that is defensible in public and effective in practice."
Mr David Llewellyn, professor of money and banking at Loughborough University, who is public interest director, UK Personal Investment Authority, told the seminar that there were both pros and cons to either establishing an independent regulator or appointing the Central Bank as the single regulatory body. Prof Llewellyn stressed that the arguments on both sides were finely balanced and that there was no single right answer.
"The institutional structure of the new regulatory body will have to be one which reduces the probability of regulatory failure, because there will always be failure."
Controversy has surrounded the length of transitional period before the establishment of a new authority but Mr Llewellyn pointed to the British process where the PIA, in order to remove uncertainty, subcontracted its work to the new body, the FSA, while waiting for the relevant bills to be approved by Parliament.
