BUSINESS OPINION/John McManus: A warm welcome to Dr Liam O'Reilly, the new chief executive of the nascent Irish Financial Services Regulatory Authority (IFSRA). Currently a director general of the Central Bank, he takes up the reins of a new body that brings the various strands of financial services regulation under one roof - the one designed by Sam Stephenson for the Central Bank on Dame Street.
Dr O'Reilly's appointment looks like the latest nail in the coffin of the idea that the IFSRA would be an independent body that would put the interests of the consumer ahead of the financial services sector. Such criticism is unfair, according to Mr John Hurley, governor of the Central Bank, of which IFSRA is a division. As he pointed out in an interview with this paper last Friday, Dr O'Reilly was selected through an open competition that attracted candidates from home and abroad. In addition, none of the members of the Central Bank board was involved in the selection process.
However, Dr O'Reilly is very much seen as a Central Bank man and that sends an important signal. As does Mr Hurley's comments to the effect that he was taking a hands-on role in the shaping of the new body. Equally significant is the fact that Mr Hurley has dispensed with the title of governor of the Central Bank of Ireland and Financial Services Authority. He is just known as the governor of the Central Bank.
To all intents and purposes, the idea of a financial services regulator that is independent of the Central Bank is dead. It represents a huge victory for Dame Street, which was fighting for its life a few years ago. It is hard to believe that the original idea behind the IFSRA was to strip the Bank of its regulatory powers following some high-profile failures in this area.
The concept was first mooted following the collapse in 1996 of the investment business run by Tony Taylor, which left his clients €2.16 million out of pocket. The Tánaiste took up the ball and ran with it after taking office in 1997 and the idea gathered steam as various financial scandals broke, including the Ansbacher Deposits, National Irish Bank and the abuse of non-resident accounts.
The collateral damage done to the Central Bank's credibility was enormous, particularly in the case of Ansbacher when it emerged the Bank suspected something was not quite right at Guinness & Mahon - the Irish arm of the Ansbacher scam - but took no action.
The Bank also pointed out that it was primarily concerned with the financial health of the institutions it regulated and not whether they complied with other responsibilities under company and revenue law. From the Central Bank's viewpoint, it was the lesser of two evils to take no action over this issue to insure the health of the Irish banking sector. A similar line was taken by the bank when explaining its actions - or lack of them - over the abuse of non-resident accounts.
It is somewhat alarming then to hear Mr Hurley's view as to how the Central Bank will interact with IFSRA. "Where the connection comes with the Central Bank is through financial stability and the health of the financial system in general that this might have for the economy as a whole. That is the role of the Central Bank; it is the role of the European Central Bank."
It is pretty clear that the dog that didn't bark in the 1990s will call the shots at the IFSRA and, ultimately, it will act in the way it thinks is best for the financial system not the consumer. Plus ça change.
SO how did the Central Bank pull off this coup? The answer is that it had the support of the Minister for Finance. Mr McCreevy came out in support of the Bank very early on in the debate, saying it was the subject of ill-informed comment and criticism about issues over which it had no control. The Minister then effectively blocked the Tánaiste's plan to strip the Bank of its regulatory powers and transfer them to a new independent regulator with a consumer focus. A compromise was reached in 2001 but, in reality, it was a victory for the Central Bank and the Minister for Finance.
A complex structure was agreed that would comprise two independent pillars under the auspices of the new Central Bank of Ireland and Financial Services Authority. One would deal with monetary policy and the other with regulation. However, the monetary policy pillar has been subsumed back into the Bank and the IFSRA re-positioned as a division within the bank.
Mr McCreevy this time last year helped himself to €610 million of the Bank's reserves to balance his budget. Some €370 million came from the transfer to the Exchequer of the rights to profits from the issue of coins while the remaining €240 million was the windfall profits from the introduction of the euro notes. The board of the Bank appears to have been only too willing to go along with this, even though it could have objected to the second of the Minister's initiatives on the basis that Bank's reserves are part of the European Central Bank (ECB) system.
This year the Minister has made it clear that he covets the Bank's foreign currency reserves, which amount to something like €6 billion. The argument put forward by Mr McCreevy and most of his European colleagues is that only a portion of these reserves are part of the ECB system and the rest should be returned to the national Exchequer. The Central Bank has shown only a limited amount of enthusiasm but as Mr McCreevy is no doubt reminding them: its payback time.
jmcmanus@irish-times.ie
