Business Irish

Monday 19 August 2019

INBS 'ignored' internal auditor's calls for policy on profit-shares

Excused: Michael Fingleton Snr. Photo: Tom Burke
Excused: Michael Fingleton Snr. Photo: Tom Burke

Shawn Pogatchnik

Irish Nationwide consistently violated its own commercial lending criteria by approving 100pc profit-share loans and twice ignored internal calls to introduce any specific formal rules for the risky practice, the bank's former top auditor testified yesterday.

Former head of internal audit Killian McMahon told the Central Bank Inquiry examining the 2011 collapse of Irish Nationwide Building Society (INBS) that he wrote 2004 and 2006 reports calling for urgent action to draft formal policies on how profit-share loans were governed, limited and documented, but this spurred no apparent action.

"The lack of a policy meant internal audit couldn't audit against such a policy. Where there were controls, they weren't documented. And where they weren't documented, they may not be implemented," Mr McMahon said.

He noted that the official INBS policy on commercial lending capped exposure at 75pc of asset value. Most profit-share loans, by contrast, offered far looser terms, averaging 100pc of value with no additional securities, and in expectation that the bank would gain 25pc to 50pc of profits when the land or property was sold. "If you have a policy that says you shouldn't exceed 75pc and you do, then you should have a policy that addresses that," Mr McMahon said.

The Inquiry also heard that another scheduled witness, London-based solicitor Martin Philips, has declined to appear.

Senior counsel Brian O'Moore SC said the inquiry had documentation indicating that Mr Philips' UK law firm, Howard Kennedy, had represented both sides in the negotiation of many profit-share loans provided by INBS to developers from 2004 to 2008, by which time these loans had grown to €4.8bn, most of the INBS commercial loan book.

"It seems pretty clear they were acting on both sides of the transactions," Mr O'Moore said.

He said the Inquiry had written to Mr Philips several times seeking a witness statement and his attendance hearing, but his firm Howard Kennedy said that there was "no legal basis for the Inquiry to request or compel a statement from Mr Philips".

The firm also said it was concerned that Mr Philips' testimony could undermine the confidentiality of other clients.

Mr O'Moore said the London firm appeared to consider that, because the Inquiry has a statutory basis in Irish law rather than English law, it could be safely rebuffed. "The whole attitude of Howard Kennedy is to treat as second-class the legislation passed by the Oireachtas of this State," Mr O'Moore said.

The special liquidators at Irish Bank Resolution Corp (IBRC), in a December 2018 letter, had provided an unconditional release from the duty of confidentiality in regard to Mr Philips' handling of profit-share loans. But Mr O'Moore said Howard Kennedy had rejected the IBRC release as inadequate.

He noted that IBRC were effectively "the current proprietors" overseeing the INBS loan book, so were in the correct position to provide this release from confidentiality.

"Howard Kennedy appears somewhat patronisingly to be saying, 'well, the special liquidators may not realise what they've done and therefore we won't cooperate'," Mr O'Moore said.

"Their reply... makes no sense as a matter of logic and law, and flies in the face of the very helpful consents given by the special liquidators."

"For a firm of solicitors to take this position is particularly regrettable," said inquiry chairperson Marian Shanley.

The Inquiry has yet to hear from several other witnesses identified in the current phase of work focused on INBS profit-shares, including Michael Fingleton Snr, who has been excused due to illness, and Michael Fingleton Jnr, who did not reply to letters seeking his testimony.

Former head of UK lending Gary McCollum may attend in September, while former INBS credit committee member John Roche said he would be travelling internationally for the coming year.

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