OPINION:The financial regulator has paid a high price, but the structures and regulatory philosophy he inherited have also failed, writes MICHAEL CASEY.
THE RESIGNATION of outgoing financial regulator Patrick Neary could probably not have been avoided. Nevertheless, there are more general and more fundamental elements of corporate governance that need urgent reform. Before commenting on these, it is important to try to make sense of the partial information which has recently come to light.
This is not easy because the Financial Regulation Authority (FRA) which was Neary’s governing body (although he was also a member of it) has indicated that, for legal reasons, it could not publish its full report. All we have to go on is a summary of its findings.
Regarding the €87 million loan from Anglo Irish Bank to Seán FitzPatrick at a time when FitzPatrick was chairman of the same bank, the summary states that the FRA could not reconcile the evidence collected.
But it also states that there is no suggestion that any communication (on the FitzPatrick issue) was made to Neary or his prudential director “in the period (subsequent to January) to December 2008”.
As we know, Neary claimed that he received no such information until December 10th, 2008, when he heard it from Minister for Finance Brian Lenihan. (One wonders who told the Minister?)
There is evidence, however, that someone in financial regulation became aware of the information quite a long time ago. Look again at what the FRA said in its summary, ie the last line of the third paragraph above.
Why was the phrase, “subsequent to January” inserted in parentheses? These little nuances don’t happen by accident.
The insertion must have been made to allow the possibility that someone in financial regulation had the information before January 2008. This would hardly be surprising given that FitzPatrick had received the loan eight years ago. It is not easy to understand why the FRA is so coy about who knew what – and when they knew it.
And, of course, we’re still left with the question of who informed the Minister before December 10th last. It is being assumed here that none of the non-executive directors of the FRA (or of the board of the Central Bank) had the information before the Minister. In short, the summary of the FRA does not help much.
Returning to the more fundamental aspects of corporate governance, the first point to note is that the original intention of Government (and of the McDowell Committee) was to hive the regulatory function off from the Central Bank and to establish it as an independent body.
This was resisted vehemently by the Central Bank and the Department of Finance. Members of the Central Bank board who were close to the Government finally prevailed. A compromise was reached. The regulatory function would remain as a “distinct component” within the Central Bank.
Many difficulties were encountered in trying to integrate the two pillars and the two senior boards. Management consultants were hired for a number of years, but the difficulties remained.
In late 2004. the then chairman of the FRA wrote: “Some said [this sophisticated structure] couldn’t work . . . We have proved them wrong. This structure can and does work in the public interest . . .”
Unfortunately, when the real test came during the property bubble it did not work very well in the public interest.
The then chairman also expressed a preference for “principles-based regulation” where the regulator would place “the responsibility on the boards and managements of financial service providers. We, therefore, have to rely heavily on the fitness and probity of the people who carry the responsibility for those entities. Looking after other people’s money is a special kind of trust and we make no apology for insisting on the highest of standards in high places.”
This was the kind of structure and regulatory philosophy which Neary inherited.
The second major point about corporate governance relates to the fact that virtually all of the non-executive directors of the FRA and the board of the Central Bank are appointed by the Minister for Finance.
These are people who have made significant contributions to Irish life – but in areas other than financial regulation or central banking.
With the best will in the world, it is very difficult for such boards to take charge of the institutions which they govern. And it is asking a lot to expect generalists to take corporate responsibility for highly specialised work. And yet that is precisely what boards and authorities should do.
Third, there is a long-standing tradition and culture of secrecy, especially in the area of financial regulation.
Several years ago, staff had to take a binding oath on a Bible in front of a peace commissioner. There is now a legal restraint on staff which is more draconian than the Official Secrets Act.
Fourth, for many years there has been a strong pro-bank culture. It may have been caused partly by fear of litigation or fear of starting a run on a bank if it were regulated too rigorously.
This lenient attitude may also be due to the tradition of former governors and senior regulatory staff joining the boards of banks they once supervised.
It is very surprising that the FRA and the board of the Central Bank have not questioned this practice before now.
What all of this means is that Neary has paid a price which should have been more equitably shared by his senior colleagues and by the Ministers who appointed them.
Before ending, it is worth noting some other points made in the recent FRA summary. There is a strong hint that more regulatory staff are needed. This does not follow at all.
What is needed is a tougher form of regulation with stiffer penalties and a contingency levy on banks. Throwing more resources at the problem will not work.
The summary report refers to a missing letter from Anglo and the need for a better document management system.
In fairness, it should be pointed out that, for years, the regulators had sought precisely that (plus laptop computers) which the computer department continuously refused. Were the members of the authority not aware of that?
Another reference is made to yet more consultants who are examining the practice of financial regulation in Ireland.
It is stated that the consultants' recommendations will be implemented by the authority as a matter of urgency, if considered appropriate(emphasis added).
How can non-executive members of the authority, who have no experience of financial regulation, decide on whether the recommendations are appropriate or not?
And are the executive members of the FRA going to adopt radical new practices with alacrity, and change the habits of a lifetime?
Twenty years ago, Britain abandoned its belief in the gifted amateur, and adopted a much more professional approach.
It is time for the Government of this country to insist on appointing people with appropriate professional skills and relevant experience, through open competition, to the boards and authorities of public bodies.
- Michael Casey is a former chief economist at the Central Bank and a member of the board of the International Monetary Fund