News Analysis

Saturday 23 August 2014

Failure to point finger at Aviva culprits leaves lessons in doubt

Published 20/12/2012 | 05:00

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ANOTHER day, another Central Bank fine for a financial institution. Yesterday, it was Aviva's turn to feel the wrath of the regulator, this time for failing to adequately control a share lending scheme it ran for a decade.

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The €2.45m fine is one of the biggest penalties the Bank has imposed on a firm in recent years, and ranks up there with fines handed to the likes of Combined Insurance, Quinn Insurance and Alico Life.

The regulator's findings are damning. Aviva had no investment policy for stock lending worth the name. It did not set proper risk limits. Investment managers weren't monitored and, crucially, management did not receive regular updates on the firm's exposure. These are basic requirements for any trading operation.

Stock lending is common, especially in the UK and US. An insurer or pension fund regularly lends shares to the likes of hedge funds who can then trade them but not before they hand over collateral. In theory, it works well but, like anything involving securities, there is a risk to both sides. A hedge fund might not be able to hand back the shares when required, for example, leaving the lender and its clients out of pocket.

Aviva yesterday emphasised that no client funds were at risk but, the fact is, it went on for a decade without being fixed.

Clearly, there were many people working for Aviva who knew about the problem but did nothing about it. Unfortunately, the Central Bank did not name names. Yet again, we are stuck with reading about "systemic failures" and an over-reliance on "group controls".

Over and over, we hear about these problems but, each time, we are basically asked to believe the issue has been resolved without knowing if those responsible have been punished.

A culture of blame is bad. A culture of people answering for their failures is good. But with these reports, the Central Bank has maintained the fantasy that errors can be fixed without punishing the perpetrators.

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