There are unpalatable conclusions for AIB in the report published yesterday by the Irish Financial Services Regulatory Authority (IFSRA).
The report examined two separate issues - the bank's response to the overcharging of customers and the practices involved in the offshore company Faldor, of which some former senior AIB executives were beneficiaries. In relation to the overcharging, the inquiry found that at least seven opportunities arose for certain staff and management to identify and disclose the fact that foreign exchange customers were being charged in excess of the rate notified to the regulator. Looking at the Faldor controversy, IFSRA states baldly that in certain parts of AIB "there were ineffective standards of governance and a culture that led to unacceptable behaviour and practices in the late 1980s and 1990s".
The lack of action when the overcharging came to light is more damaging for the bank than the overcharging itself. The original notification of the incorrect charge level for foreign exchange transactions to the regulator was, in all probability, an error. However the failure of various staff and management to end the practice when it came to light is inexcusable. And AIB will read uncomfortably the paragraph which says that from January to April 2004 actions were taken to reduce charges to the notified level in a way that was "open to the interpretation that it was intended to subsequently notify the regulator of a proposed increase without ever drawing attention to the previous breach".
The disciplinary procedure within AIB relating to the overcharging affair is still underway and the IFSRA report does not "name names". However there is no sign of any senior figures in the bank paying a real price for what happened. Nor will the bank face any specific financial penalty for its breaches, though it has repaid the customers and paid a substantial cost for the inquiries. New legislation will give the regulator power to impose fines in similar cases in future.
The most significant cost, of course, will be to AIB's reputation. This is unlikely to lead to a big fall in the bank's share price or a mass desertion by customers. However, investors will be conscious that AIB's management has been distracted by the affair. Its customers will be mindful that it is becoming increasingly easy to move from one bank to another. The danger to AIB is a long-term one - it will take all the efforts of its management and staff to rebuild the trust of both investors and customers.
Inevitably, confidence in the regulation of the financial sector over the years has also been severely hit. IFSRA, through its investigation into the AIB affair, has taken some important steps in the right direction. However, the outcome of the disciplinary process in AIB is still awaited. The key question remains: is the regulator prepared to make the boards and senior management of financial institutions fully accountable when things go wrong and to impose serious financial penalties?