Saturday, 2 January 2010

IFSRA: The financial regulator which failed

Anon: On January 1st 2010, we saw how the basic philosophy of IFSRA, and the key people, seemed to be informed by the philosophy of “free” markets and the need to keep state interference or regulation to a minimum. Yet the government established an agency with 350 staff and a big budget to “regulate” financial markets. This was hardly just to follow European Central Bank rules?

On the establishment of IFSRA in May 2003, the first chairman Mr Brian Patterson said: "Good regulation is good for consumers and it's good for the industry." He said the authority would be a "passionate proponent" of the public interest.

He defended the composition of the authority's board, which had been criticised in certain quarters as lacking a consumer champion. "This is not meant to be a representative board but a public interest board," he said.

IFSRA was to be responsible for regulating more than 4,000 entities and had a budget in excess of €20 million per annum back then. It rose to €50m by 2006, the apex of the frenzied bank lending, and it is €63m today.

An interim board of IFSRA had been set up by Finance Minister, Charlie McCreevy, in April 2002.

IFSRA had a limited degree of independence from the restructured Central Bank, which was re-named the Central Bank of Ireland and Financial Services Authority (CBIFSA). The restructured Central Bank continued to be headed by the governor, “Mr John Hurley, who had the over-arching role with the IFSRA, and Mr Patterson and the board will be accountable to him.”

Mr Hurley, the former Dept Finance Secretary General, was also influential in creating the regulatory system and system of regulation.

The members of the Authority are as follows, entering 2010:

Thus it can be seen that there are nine members of the board of IFSRA today. Two-thirds, or six members, are original/founder members and are still on the board. There had been ten members of the original board. New members were Alan Gray and Tony Grimes, appointed in December 2006 and May 2008 respectively. The three who left were Patterson (Chair), Danz, and O’Reilly (CEO).

Contrary to good governance, none of the directors’ other interests, ages, or main occupations are even listed in the IFSRA Annual Reports (which are not available before 2005).

Jim Farrell, now Chairman, was an original member from 2003. He was appointed chair in May 2008, when Patterson stood down. He was a senior executive with the National Treasury Management Agency and was first chief executive of the state’s National Development Finance Agency and has “extensive experience of international banking.”

Alan Ashe, original member from 2003, is former managing director at Standard Life Assurance and chairman of the Rotunda Hospital. Shane Ross wrote, in his usual style, that “Alan Ashe pretended to retire in 2000 when he left the top job in Standard Life (Ireland) at the tender age of 58. His 12 years there had been preceded by another dozen in the TSB and a long period in manufacturing industry. To serve on IFSRA's board, he felt obliged to give up as a director of two promising companies, Stella Life Assurance and Business Solutions Ltd. The possible conflict of interest forced him to make a choice between service to the State or to the private sector,” Ross concluded.

John Dunne was formerly Director General of IBEC, the employers organisation, until 2000, and is Chairman of the IDA today.

Gerard Danaher is a barrister, closely linked to Fianna Fail. He is also chairman of the National Library. He was counsel for Ray Burke at the Flood tribunal.

Alan Gray is an economic consultant. Appointed at the peak of the lending frenzy in late 2006, he is head of Indecon International Economic Consulting Group, Chairman of London Economics and has previously served on the Boards of a number of commercial companies including the Irish and European Boards of Canada Life. Indecon does a lot of work for government, public bodies and internationally. Paddy Mullarkey, the Secretary General of the Department of Finance 1994-2000 is chair of Indecon and Donal O'Donoghue, “Indecon Advisor on Local Government”, was previously Galway County manager.

Deirdre Purcell, original member from 2003, is a novelist and a former member of the Council of the Credit Institutions' Ombudsman.

Tony Grimes, appointed in May 2008, is Director General of the Central Bank and Financial Services Authority where he has worked for most of his life. He also worked in the ESRI and with Davy Stockbrokers, once a subsidiary of Bank of Ireland.

Dermot Quigley, original member from 2003, was 42 years in the public service including 26 years in the Department of Finance where he was an assistant secretary. He became a Revenue Commissioner in 1990, before assuming the chair in 1998, and was on the board of FAS as one of the Dept of Finance’s two “watchdogs.” He also led a group reporting into public procurement in 2005.

Mary O’Dea is an executive director, Consumer Director, and has been on the board from the beginning. She briefly acted as CEO until the board was amalgamated into the Central Bank.

In addition, it should be noted that Matthew Elderfield, the new Head of Financial Supervision, was appointed recently. He takes up his position with the Central Bank in January, as IFSRA is re-merged with that Bank.
Back in 2005, the IFSRA board comprised Brian Patterson chairman, Patrick Neary CEO, Mary O’Dea Consumer Director, Alan Ashe, former Standard Life CEO, Friedhelm Danz; former meat processor, Dermot Quigley, former Revenue commissioner; novelist Deirdre Purcell; former boss of IBEC, John Dunne; FF linked barrister, Gerry Danaher, and Jim Farrell of the NTMA.

The three former IFSRA board members were:

Brian Patterson who was the Chairman of the Interim Authority. He was former Waterford Wedgwood chief executive, was also chief executive of the management training body IMI, and is a former chair of the Irish Times Trust. He was also appointed chair of Vodafone Ireland in 2007.

Liam O’Reilly was the first Chief Executive of the new financial services regulator, the interim Irish Financial Services Regulatory Authority, on 18 November 2002. Mr O’Reilly was Assistant Director General of the Central Bank of Ireland since 1998, and had been responsible for all of the Central Bank’s financial supervision functions. He was a Central Bank insider. Liam O'Reilly was subsequently appointed as a director of Merrill Lynch International Bank in 2007. This sparked some controversy due to what some perceived as potential for conflict of interest in his working for one of the companies he so recently acted as financial watchdog over. He also chairs the Chartered Accountants Regulatory Board in Ireland.

Friedhelm Danz was first put on the board of the Central Bank on February 1 1996, and then reappointed by Charlie McCreevey, in whose constituency he resides, until 2005. He had been a major beef processor and was a competitor of Larry Goodman's.

It was the IFSRA board that Patrick Neary reported to. It was the IFSRA board that Liam O’Reilly reported to until January 2006. It was this board that implemented the regulation of the Irish banks. It was this board that oversaw the “principles based” regulation system that allowed the banks to collapse and means that the taxpayer has had to pay out billions to the same banks.

In addition to the board, others who were indirectly responsible for the lack of regulation (influencing board appointments and attitudes to governance) were listed by the former Chairman Mr Brian Patterson, in the 2005 Annual report, as follows:

“Thanks are due to all those who work tirelessly to support our mandate:

  • Ministers and civil servants, particularly in the Department of Finance.
  • Members of the Authority who give of themselves tirelessly and often beyond the call of duty.
  • Our management team under our newly appointed Chief Executive, Patrick Neary.
  • A special word of thanks to our Chief Executive, Liam O'Reilly, who retired earlier this year and to whom we owe much.
  • Our dedicated and professional staff.
  • The Governor and staff of our sister organisation, the Central Bank - without whose support our task would be considerably more difficult".

He then said “Our role is to serve the public interest. It is that principle which guides all of our work and which motivates all of our people.”

But he also tellingly said the following –

“Ireland needs an efficient and competitive financial services industry - because it oils the wheels of the whole economy and is the repository of the country's savings. The industry needs to be competitive and profitable in order to underpin its stability - something we can easily take for granted.”

It was this thinking that impaired the Authority’s views of the prudent public interest. Unless corporate governance in Ireland is radically reformed, we are bound to repeat these mistakes.

Re-arranging the deck-chairs – the structure of the IFSRA within the Central Bank, with largely the same board in place, the same blinkered thinking in the Dept of Finance, in the same Government, will not help Ireland.

To date, the taxpayer has given €11,000 million to the Irish banks. The last Budget was a row about whether a mere €1,300 million was to be in cuts or taxes.


Slí Eile said...

The following report in last Saturday's Irish Times about the implications of an a pending legal action in Germany against former CEO of DEPFA is newsworthy.
Irish Board members of DEPFA's subsidiary here in Dublin could be implicated, according to the report. The article states:
"The picture that has emerged of Depfa in Germany in the last months is of a badly run institution that pursued risky business practices by exploiting weak supervision in Ireland and, in Germany, fragmented supervision and perfectly legal loopholes."

Anonymous said...

These Independent articles are very interesting on DEFPA. Its former Irish board is very interesting and relevant to interventions in the economic debate today. Do any contributors know who were the Irish directors who led this "Irish" bank - which crashed? Germany picked up the bill - over €100bn, thankfully!

Slí Eile said...

@Anonymous The following article in the Irish Times, recently,names a few people