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Colm McCarthy: Quinn collapse exposes crucial lack of scrutiny

Chairman of the Public Accounts Committee John McGuinness TD has announced, at last, plans for a public inquiry into the banking disaster, long overdue and essential if support for further budgetary cutbacks is to be cultivated.

The perception, that too little has been done to shine a light on incompetence and wrongdoing in the financial sector, has fed public resistance to the austerity measures which are unavoidable.

In the crash-and-burn of Ireland's first systemic banking collapse, the country's second major insurance failure has passed beneath the radar. The first was the collapse of Joe Moore's PMPA group back in 1983, accompanied by the demise of the Insurance Corporation of Ireland two years later which necessitated the first State rescue of AIB, which owned ICI at the time.

The collapse of Quinn Insurance is thus Ireland's second major insurance disaster and has many echoes of the PMPA affair. Insurance crashes are very different from bank failures in one crucial respect. Insurance companies tend to be flush with cash: they get the premium income up-front and pay out on claims over a period of many years. As a result, they tend to collapse slowly, even when they are grievously mismanaged. It is the other way round with banks: the assets, rather than the liabilities, are of uncertain value, and banks go illiquid pretty quickly once depositors and lenders lose confidence.

Insurance companies are cash-rich of their nature, excess liabilities take a long time to emerge and an insurer can be perfectly liquid, but fundamentally insolvent, for many years. As a result, insurers are supposed to be carefully supervised by the regulatory authorities. The assets they hold are mainly the property of policyholders who will have claims to make as the years unfold. They are in a fiduciary position, holding the public's cash temporarily, in the secure knowledge that it will be called upon in due course.

Naturally companies with these features are attractive to those who might be careless about the cash entrusted to their care, hence the need for careful vetting of those granted insurance licenses and for diligent supervision thereafter.

From small beginnings in the Sixties, PMPA built a share in motor insurance which had reached 40 per cent of the total market by 1980. Throughout this period the company had been highly competitive on premiums, the main driver of spectacular market-share growth. Since claims are paid with a lag of several years, premium income will exceed claims so long as the company is growing. When claims eventually catch up and premiums have to be increased, the growth phase is ended, premium income declines but claims keep piling in from earlier years.

The company is exposed where the growing number of new customers is not enough to pay the historical claims. The company goes wallop and, in the case of PMPA, the public picked up the tab in the form of a levy on all insurance premiums.

The same device is now to be pressed into service in the case of Quinn Insurance, another native Irish insurance company which grew rapidly from a standing start. The other parallels with PMPA are uncanny: a charismatic Irish pioneer taking on the big, bad (and British) insurance companies, offering a better deal to the public, providing employment, feted in the media and indulged by a complacent regulatory regime.

In the regulation of insurance companies, there is one very obvious red flag: rapid growth in market share from small beginnings. That there should have been two similar failures in insurance regulation in Ireland in a generation is extraordinary and would have been seen as a shocking regulatory failure on its own had it not coincided with the far larger disaster in the banks.

There have been other problems with Quinn Insurance, including questions about the deployment of insurance-company assets (effectively investments held in trust for policyholder claims) for the private purposes of the owners. The Financial Regulator showed excessive and unexplained forbearance for many years before the new regulator, Matthew Elderfield, placed Quinn Insurance in administration, one of his first acts shortly after his appointment.

When the inquiry announced recently by the Dail Public Accounts Committee gets under way, it should include the management and regulatory failures surrounding this latest Irish insurance debacle. The demise of Anglo Irish is in any event linked to the Quinn affair, since the Quinn family are major debtors to the State through the IBRC, the successor vehicle charged with recovering debts owed to Anglo and Irish Nationwide.

The IBRC and the Quinn family are engaged in litigation in several jurisdictions and separate inquiries are continuing into the possibility that there were infractions of company law by Anglo.

The collapse of the Irish banking system has yet to be subjected to the level of official public scrutiny which it manifestly deserves under several headings. There are three lines of defence for the taxpayers against the costs of banking rescues. The first is bank boards and management, which failed to defend against the destruction of the businesses in their charge. The second is the regulatory regime, which failed to perceive the problems as they emerged. Finally, the State authorities responded in a manner which has resulted in extraordinary socialisation of banking debt.

Both the genesis of the crisis and the manner in which it has been handled were influenced greatly by Ireland's membership of the eurozone and the actions of our European partners have influenced the manner in which it has been addressed. All of these matters have received insufficient public scrutiny.

There has as yet been no systematic examination of the behaviour of the individual banks in the years leading up to the bursting of the bubble. A remarkable feature is that not one of the banks has offered a comprehensive explanation, even to their own shareholders. The failings of the Financial Regulator have been outlined in the report of the Central Bank governor but there is limited detail. None of those charged with oversight of the banking system has been asked to explain how bank-loan losses were permitted to escalate on their watch.

The policy response from September 2008 onwards has contributed to the insolvency of the state and the decisions taken by the Government, in particular the blanket bank guarantee, remain shrouded in secrecy. The Public Accounts Committee inquiry will be an important exercise in democratic accountability, long overdue. For each bank which went bust, including Bank of Ireland, which would not be in private ownership and open for business today without State support, the following questions need to be answered:

• What was the lending policy over the years from about 2002 onwards?

• Was the policy implemented approved by the board?

• Were risks properly assessed, and were they properly reported to the board?

• Who was in charge of risk, group credit control and internal audit, and how did they carry out their duties?

• Did the external auditors do the necessary checks on loan-loss provisions?

• Were loans, and collateral, properly documented?

• Did the bank give accurate information to the regulator over the years, and did the bank give proper warning about emerging concerns to the Department of Finance in September 2008?

Those who ran the Central Bank and the Financial Regulator's office over the years leading up to the collapse should also be asked to account for their stewardship. Numerous employees of these bodies are still in position, have moved on to new assignments in Ireland and abroad, or have retired.

High office in banks or public institutions should entail an obligation of public explanation when things go wrong and the loud public silence from most of the bankers and their supervisors is dispiriting.

The apparent avoidance of accountability has fed public cynicism and is demoralising for those now charged with reconstruction. It would help rebuild national morale should the people concerned choose to welcome the opportunity to explain. Most of them have nothing to fear from criminal prosecution: they just made mistakes.

The avoidance of future mistakes requires a full accounting for the disaster, one of the biggest banking crashes, relative to the size of the economy, which has ever occurred anywhere.

Sunday Independent