INBS 'dodged' regulator's call for profit-share policy
THE financial regulator identified Irish Nationwide's lack of formal policies on profit-share loans as a serious risk in 2004 but failed to nail down the building society on the matter, a former regulatory chief testified yesterday.
Liam O'Reilly, who was CEO of the Irish Financial Services Regulatory Authority from 2003 to 2006, told the Central Bank inquiry into INBS that he and other senior officials met the bank's top directors, including managing director Michael Fingleton, on December 3, 2004, to raise concerns over how INBS was being run.
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These included, Mr O'Reilly said, the rapid growth of profit-share loans issued to developers on terms that included no security beyond the property being acquired, and no repayments until the asset was sold, when INBS would take a slice of profits. By 2003, these loans had grown to €1bn and, by 2006, would reach €4.8bn. The bank collapsed in 2011 at an estimated taxpayer cost of €5.4bn.
Mr O'Reilly agreed with inquiry counsel Brian O'Moore SC that, following their meeting, the financial regulator issued a detailed list of demands for INBS to take immediate action on several issues, including the drafting of formal policy for managing profit-share loans, with a progress report due by the end of January 2005. The inquiry heard that INBS replied on February 1, 2005 and March 31, 2005 with letters that emphasised the strength of the bank's lending strategy and quality of its loan book, without mentioning profit-share loans.
"They are saying nothing to you about the issue that you had raised in respect of profit-share agreements, isn't that right?" Mr O'Moore asked Mr O'Reilly, who agreed. "Given your own focus on these issues," Mr O'Moore said, "it is odd that nobody on the regulator's side picked up on the fact... that the important issue of the profit-sharing agreements had not been addressed in any way, shape or form by the society."
"That's true," replied Mr O'Reilly, who was asked if he could explain this. "Not really," he said.
The barrister pressed him, saying regulators must have carefully read the INBS letters. "How is it then," he asked, "that nobody realised that the question with regard to profit-share had been dodged?"
"I have no explanation," Mr O'Reilly responded.
Following correspondence into mid-2005, Mr O'Moore said: "It's plain that they have done nothing about it."
"I'm afraid so," Mr O'Reilly replied.
"And that wasn't picked up by the department you supervised or by yourself at the time?" Mr O'Moore asked. "No," said Mr O'Reilly.