Tracker scandal proves we still can't trust bank bosses or watchdog to do right thing
Finance Minister Paschal Donohoe gave bank chief executives a right good talking to. They will pony up compensation by Christmas and everything will be OK. Oh no. It isn't that simple.
There is still no final agreement on exactly who have been victims of the tracker mortgage scandal and whether the compensation likely to be paid will be enough. Who will adjudicate on the answers to both of those questions? This sorry saga is far from over.
If anything, the whole debacle has shown how little has really changed in the financial services industry when it comes to bankers and regulators.
On a superficial level there has been lots of change. The Central Bank is bigger and more intrusive in ensuring none of the banks go bust or the system doesn't collapse. It has a lot more staff and a spanking new building along the quays in Dublin.
The banks are more carefully watched when it comes to lending practices and risks to the system. There is a lot more bureaucracy and regulatory material to be provided. However, despite a systemic banking collapse that required €62bn of taxpayers' money to fix, there is a sadly familiar tone to the tracker scandal.
This was evident from the performances of senior Central Bankers at the Oireachtas committee last week. They talked about holding "legal powers in reserve" and providing the banks with the opportunity to "do the right thing".
The tracker mortgage situation is complex and vast in scale. Not all banks had the same contracts or ripped off their customers in quite the same ways. But the outcome was consistent, predictable and cynical - contracts were interpreted in favour of the bank rather than the customer.
Either the banks were not allowed to do that - in which case there needs to be enforcement - or they were, in which case the banks are laughing at all of us.
To best understand the depressing vista before us in all of this, it is worth going back to the report written by then governor of the Central Bank, Patrick Honohan, in 2010.
He wrote his report for the Government to try and understand where the Central Bank and financial regulator had gone so badly wrong in the build-up to the financial crisis.
On the question of its approach to enforcement, his insights are rather interesting when considered with last week's evidence to the committee. He is talking about 2003-2008.
He said the approach to enforcement taken by the financial regulator "saw enforcement largely as a problem-solving exercise between the FR and the bank or building society".
"An action plan would be drawn up to address the breaches of the principles, codes, regulations and/or rules."
When it came to the regulator taking banks to court, he said "it was felt there was a danger that court cases might be lost, while attaching conditions to licences and similar measures might attract unseemly adverse publicity and discourage promotion of the Irish financial sector".
It goes on: "Underlying this model of enforcement was the view that those running the banks and building societies were honourable persons striving to do their best to comply with the principles … as well as the various rules, codes and regulations."
Mr Honohan characterised this approach as 'walk softly and carry no stick' and instead he advocated a different approach of 'walk softly but carry a big stick'. On the question of the stick, Mr Honohan said that "if the perceived probability of sanctions - especially escalating sanctions - is considered low, regulated credit institutions may not pay a great deal of attention to ensuring compliance".
He cited one example of how the leading banks were investigated by the European Commission over concerns that a cartel existed in relation to cash exchange for eurozone currencies.
"Proceedings were ended against Ulster Bank after it changed its tariffs for exchanging eurozone currencies in May 2001. Under Irish competition law, such behaviour constitutes a criminal offence," Mr Honohan noted.
The Central Bank will argue in its defence this time round that its powers to enforce compensation on banks only applies in cases after 2013 and the tracker mortgage cases pre-date that.
Central Bank governor Philip Lane kept emphasising last week how he is pushing out the boundaries or limits of the powers he has in relation to this.
The banks clearly believe they are on firm legal ground to withstand a court challenge. Yet, some of them are paying up compensation.
Either they broke the rules and breached people's contracts or they didn't.
Where they didn't, they have imposed a financial hardship on people in a most immoral and appalling way. So what does this saga say about how the banks have changed?
First of all, it isn't the "banks", as anonymous entities. It is about the people who run the banks. The banks are run by senior management and their boards. How have they changed after the €62bn national crisis their predecessors created?
The deputy governor of the Central Bank said last week that the culture of banking in Ireland is still too focused on whether something is legal or not, rather than focusing on whether it is in the best long-term interests of the customer and the bank.
I remember reading the recommendations of the banking inquiry, which laid down strict new rules about the qualifications of those in senior positions in banking. It seemed reasonable, except it wasn't a lack of qualifications that caused the banking crisis.
The problem lay with the culture of banking itself. The banks didn't collapse because the people at the helm were underqualified and lacked a piece of paper. It was because they were reckless, greedy, short-termist and arrogant.
It could be said they are less reckless now. In the more intrusive regulatory regime they are not allowed to be as reckless. In fact, the only positive changes are in areas where bankers are not allowed to make the same mistakes.
In the areas where they are left to their own discretion and judgement, it seems that very little has changed. This is primarily in the area of how they treat customers. Once again, customers have been let down both by the banks and the regulatory apparatus around them.
So how do you change a banking culture? Isn't the culture similar all over the world, from London to Wall Street? There is the naïve way and the big stick way. The naïve way involves slowly bringing about a cultural change in how a bank sets its priorities and commitments to its customers against its goals and need for profit growth. It is the "naïve way" because it actually doesn't work.
So we are only left with the "big stick" approach. This is where you go after negligence, complacency, error, failure or deliberate wrongdoing and you come down really hard on it.
Perhaps the only way of achieving this kind of regulatory approach is to start afresh and separate consumer protection powers from the Central Bank into a new entity. Given the expansion of the Central Bank since the crash, it might be very difficult and expensive to achieve this separation now.
The Central Bank has not covered itself in glory on this one. Even its governor last week talked about bank "failures" rather than bank behaviour. One implies a mistake, the other implies possibly something deliberate.
It is appalling that in 2017, after everything that has happened with the banking crash, a finance minister has to call in bank chief executives and demand what are reasonable and fair outcomes.
The real scale of this scandal is not yet known. There is little evidence that banks are including people who lost trackers, fell into arrears and went on to sell their homes, as opposed to waiting to have the house repossessed.
Where banks cannot be trusted to do the right thing, they must be forced to do it.