Friday 22 September 2017

Nightmare on Dame Street as the Central Bank feels the heat over allegations we are still suffering from regulatory failures

Philip Lane Photo: Tony Gavin
Philip Lane Photo: Tony Gavin
Charlie Weston

Charlie Weston

It has been a rough week for our financial regulator. The Central Bank was accused of throwing motorists to the wolves over its failure to stem shocking insurance rises.

It also emerged that regulators had indulged rule breaches at Rush Credit Union for years.

No kudos was forthcoming for the regulatory honchos when it was revealed they did not want big international banks to move here, despite the thousands of jobs this would generate.

Although the move to alter its mortgage restrictions for first-time buyers was broadly welcomed, the decision had the whiff of bowing to political pressure.

Jaws dropped when documents produced in the High Court, and sworn by a senior Central Banker, showed regulators had been led on a merry dance for years by now shut-down Rush Credit Union.

The lender repeatedly breached instructions and directions it was given by the Dame Street, Dublin-based regulators.

As far back as July 2009 the Central Bank ordered the credit union not to issue any loans greater than €20,000.

But a subsequent inspection by staff from the Registrar of Credit Unions in the Central Bank found "instances of non-compliance with the lending restrictions".

A 53-page resolution report presented to the High Court by senior regulator Patrick Casey outlines a string of regulatory breaches over the past seven years.

Numerous inspections were carried out by regulators which found "significant, pervasive and recurring issues in relation to the reserve position, governance, internal control framework and lending practices".

Deputy governor Sharon Donnery gave a less-than stellar performance on the 'Today With Sean O'Rourke' programme on RTÉ when asked why the regulator was so indulgent of the errant lender.

She said there was a reluctance to close a community-focused organisation like a credit union, and it had been hoped that a merger would have rescued Rush.

Ms Donnery, who was registrar of credit unions in the Central Bank from February 2013 to August 2014, was forced to defend the regulator from accusations it was not on top of its job. She said fraudulent activity was hard to detect.

The tardiness in acting on Rush CU is reminiscent of the regulator's handling of the shocking mess that occurred at investment firm Custom House Capital.

Lawyers for its clients Lavelle Coleman questioned why the Central Bank failed to protect them when regulators were aware of problems for at least two years before the firm collapsed.

If the Central Bank has questions to answer about its role in regulating relatively small financial fry like Custom House Capital and Rush Credit Union, it is no wonder it is discouraging big banks from setting up here.

The Central Bank insists it is not trying to turn away investment. But news agency Reuters reported the Central Bank had indicated to global investment banks they would face a tough time getting approval to shift operations here.

Investment banks such as Credit Suisse, Barclays, Goldman Sachs and Morgan Stanley are working out how to secure access to the European Union when Britain leaves the bloc. Each employs thousands of people in the UK.

If that was not bad enough, there was no comfort for Governor Philip Lane and his colleagues when the Oireachtas Finance Committee produced a report on motor insurance. The committee claimed the Central Bank had abandoned its role in protecting consumers hit by exorbitant price hikes. "It is the opinion of the committee that the consumer has been thrown to the wolves."

The Central Bank's other deputy governor, Cyril Roux, had told the committee European law prevents it from getting involved in pricing. This defence seems to run contrary to a letter from previous governor Patrick Honohan to Finance Minister Michael Noonan last year explaining why premiums had risen so much.

Prof Honohan stated the Central Bank had requested insurers to take measures, including "a revision of their pricing".

The stinging rebuke from the TDs and senators blew away any feel-good factor for governor Philip Lane for his announcement this week of a major relaxation of the much-criticised mortgage rules.

The change to allow first-time buyers to borrow up to 90pc of the value of a home was seen as positive and practical. But Prof Lane and the Central Bank are also open to the charge that the change constitutes a climb-down, and a bowing to political pressure.

Some have also depicted the change to the deposit rules as Prof Lane failing his first big test.

Those criticisms of Prof Lane, an academic who is sincere and eager to improve the work of the regulator, may be unfair.

But it is hard to escape the conclusion the Central Bank still has a lot of work to do to instil confidence in its ability to protect consumers.

Irish Independent

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