Tuesday 22 January 2019

Bankers will receive yellow cards but no reds over tracker scandal

Central Bank governor Philip Lane is waving a ‘big stick’ over the tracker scandal, but he’s unlikely to crack heads this time around. Photo: PA
Central Bank governor Philip Lane is waving a ‘big stick’ over the tracker scandal, but he’s unlikely to crack heads this time around. Photo: PA
Richard Curran

Richard Curran

The Central Bank maintains that it is keeping all angles open in its enforcement investigations into the behaviour of the main banks on tracker mortgages. These angles include examining "individual culpability" in the tracker scandal the Central Bank said during week.

Enforcement investigations have begun into Permanent TSB, Ulster Bank, Bank of Ireland, KBC Bank, AIB and EBS.

It is a relatively new area for the Central Bank. If it makes findings against the banks and fines them, will it have clear evidence of individual bankers making those decisions that deserved the fines? Presumably, it will, because companies don't make decisions, the people who run them do.

In the case of the tracker scandal, which now looks like being a €1bn tracker customer rip-off, if the banks deserved to be fined, then surely individuals behind those decisions should be personally held to account.

It isn't that simple. The fact that the Central Bank, the Financial Ombudsman, and even sections of the courts, were so slow to find in favour of customers in all of this, means actions against individual bankers might be fought very hard.

The banks might even pay their legal costs, given they would argue they were representing the bank's interest in their actions.

It seems more likely that the Central Bank will give a big warning and a financial shot across the bows by taking enforcement action against the banks, collect some money and warn about banker behaviour for the future. This is akin to the referee giving lots of yellows but never a red card.

The tracker investigation is being presented as something of a regulatory and political success now. The banks are admitting to more cases, which now number 34,100 and close to €500m has been paid out.

But it remains stubbornly slow. Of the cases identified and where sums of money are due to be awarded in compensation and redress, what percentage of victims have been paid in full?

According to the latest Central Bank update, for those due to receive between €10,000 and €50,000, just 48pc of them have been paid in full.

For those due to receive in excess of €100,000, less than one in five of them have been paid in full. And we don't know how many plan to challenge their level of compensation.

The Central Bank is talking the talk about enforcement and even individual culpability, yet its update doesn't even identify the individual banks that have made the least or most progress. It retreats to referring to how 'Bank A' has made 97pc progress on redress and compensation but 'Bank E' is on just 48pc.

This doesn't exactly set the tone for going after culpable individuals within banks when the progress update won't identify how each bank is doing. So much for naming and shaming.

If the Central Bank did go after individuals it can fine them up to €500,000 for breaches made before 2013 or €1m for those afterwards. It is much more likely if actions against individuals were pursued, it would cover how they handled the co-operation with the Central Bank in making full disclosures, as opposed to the decisions that left so many people stranded in the first place.

The regulator can also ban a person indefinitely from acting as a manager in a regulated firm. Would the person be fired? If they were, would the bank give them a big payoff, presumably to help cover the personal fine? It is quite possible and depends on their employment contracts.

Central Bank governor Philip Lane did remind a recent Oireachtas committee sitting that while an investigation is going on, "the board members and senior personnel of lenders have significant legal obligations to report potential regulatory breaches to the Central Bank".

Lane's predecessor Patrick Honohan once said that regulators need to talk softly but carry a big stick. Lane is waving the stick at this point, but I don't think he is going to start cracking a few heads with it this time round.

It's a case of 'all duck or no dinner' for bankers' bonuses

Irish bankers won't be getting bonuses any time soon if the chairwoman of the ECB Supervisory Board, Daniele Nouy, has anything to do with it. And apparently she does. Her board regulates bonuses in eurozone banks.

Nouy believes Irish bankers should not get bonuses until the last vestiges of the financial crash are dealt with. The bonus culture in banking is blamed for helping to create the financial crash. Unfortunately for Irish bankers, the bonus culture has been replaced with no bonuses at all - 'all duck or no dinner' as they used to say down the country.

Finance Minister Paschal Donohoe has shot down AIB's share bonus plans but offered a review of pay policy for later this year. If the consultants conducting the review conclude a new pay structure, including bonuses, is warranted, the report will have to be sent over to Nouy in Frankfurt.

We could end up with a government minister in control of 71pc of AIB on behalf of the taxpayer, believing bonuses are now appropriate and a senior executive in the ECB, which overstepped its legal reach during the crisis in my view when it threatened to pull liquidity funding to the banks, saying 'no they shouldn't'.

What politician would go out to bat for bankers' bonuses?

The solution may reside in Nouy's belief that front line staff dealing with troubled legacy loans are more deserving of bonuses. So instead of a bonus scheme for the top 100 employees, it may stretch to the top 5,000.

But wasn't the AIB staff pension fund bailed out by the State to the tune of €1.1bn after the crash?

Banker bonuses may yet dredge up some old wounds.

Finance mandarins get good deal on Apple's €13bn cash deposit

There must have been tough competition between fund managers, administrators and custodians to land the €13bn escrow account that will house Apple's back taxes to the Irish state pending a European Court challenge. That is a lot of zeros and some very fat fees.

The contracts were won by a raft of blue chip institutions including Bank of New York Mellon, Amundi, BlackRock Investment Management and Goldman Sachs Asset Management International.

The tricky bit here is who owns the money - Apple or the State? The State needed to ensure it gets a good return on investment in the event Apple loses the case and we keep the money. Apple needed to ensure it gets a good return in case it wins the action.

But who carries the can if the investment managers made a mess of things, or there was another big financial crash, and the amount of money falls below the €13bn due to be put in by Apple?

Well, Minister for Finance Paschal Donohoe alluded to this when he announced the winners of the tender last week by saying the agreement with Apple would protect the Irish Exchequer from any loss on the investment. "Any loss on the fund will reside with the fund not with the taxpayer," Donohoe said. It appears to suggest that the fund managers will have to make good on any losses in the fund, which looks like a good deal for the State.

The cash is due to start flowing into the account by the billion in the coming months, with all €13bn in there before this winter. The managers have only to decide on the best place to invest the cash for a solid but low-risk return.

Apple shares might be a bit risky at current levels. Why not buy some Irish Government bonds? They look pretty safe.

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