Wednesday 16 January 2019

Emmet Oliver: This Financial Regulator is a man who means business

Emmet Oliver

THE close-knit financial community of Dublin has never seen anything quite like it. Nor has the Irish banking sector or Sean Quinn. But firm, uncompromising financial regulation has come to Ireland and is being dispensed by a slightly gangly, ever-so-polite Englishman called Matthew.

At a meeting yesterday of the Oireachtas Committee on Economic and Regulatory Affairs, the shocked faces of TDs and senators said it all. Matthew Elderfield, the former regulator for Bermuda, is polite, occasionally diplomatic, but mostly just blunt.

The Irish financial system has for years been run on the basis of close personal connections and not doing anything to inhibit the short-term profitability of the banks. Regulators and bankers were friends and enjoyed a cosy relationship.

While there were occasional skirmishes over small technical matters, the office of the Financial Regulator was there to facilitate the growth and expansion of the banks, not to restrict it.

Bursting into this cosy world is Mr Elderfield, who is already being tipped to head up the UK's Financial Services Authority (FSA), once he has shown what he can do in Ireland.

Not since Eliot Spitzer took on the might of Wall Street earlier this decade has a regulator caused such fear and consternation among the financial elites.

Mr Elderfield, if he does a four or five-year stint in this country, will make a host of tough and sometimes unpopular decisions.

But amazingly, in just three months he has already made two huge decisions, which would have been inconceivable to his predecessor Patrick Neary.

Firstly, he caused huge controversy among the banking fraternity by insisting they hold 8pc capital on their balance sheets, to mop up losses from mortgages and other loans.

As he admitted himself yesterday this "wasn't hugely popular" with certain banks, but it should mean that finally Ireland's banks are sufficiently capitalised to meet any threat from higher loan losses.

It is understood that the banks thought the 8pc figure was excessive and the desire to reach the target by the end of this year unrealistic.

But Mr Elderfield persisted, the Government backed him and he got his way.

It was a huge moment.

Rather than bagging this victory and lying low for a while, he then waded into another fraught area, dealing with Quinn Insurance Limited.

Since May 2008, Quinn and the Regulator have been at loggerheads over the company's financial position, including its level of assets over liabilities (known as the solvency margin).

Even at that stage, Patrick Neary, Mr Elderfield's predecessor, was asking the insurer to restore its solvency margin and to deal with the loans the insurance company had given to other Quinn firms.

In 2008, relations seriously deteriorated when the Regulator fined Quinn Insurance and Sean Quinn personally for breaches of insurance regulations.

Rather than let the matter just meander, Elderfield decided to take action a fortnight ago, after it is alleged that Quinn Insurance provided guarantees to lenders for loans taken out by the Quinn Group itself, thereby reducing the value of its assets by €448m and putting a huge hole in its balance sheet.

THE bank capital decision earlier in the year was not noticed much by any one outside the narrow world of banking, but the decision to move against Quinn Insurance via administration put Mr Elderfield and the organisation he leads under the microscope.

Political pressure, of both the local and national varieties, has also been applied to him, but those that really matter, notably Finance Minister Brian Lenihan, have remained unstintingly loyal to him.

As long as that lasts, Mr Elderfield has huge leverage to get what he wants and act tough with Quinn Insurance.

And he is not the only uncompromising regulator operating out of Dame Street these days. He is assisted in his role by the head of financial services regulation, Jonathan McMahon, another young former FSA staff member, who has come over from the UK.

These two men are here to do a specific job and rules are there to be complied with, not bargained away or diluted down for reasons of political expediency.

This makes sense in relation to Quinn Insurance. Even if the Regulator wanted to loosen the solvency rules for Quinn, he could not. The rule that insurance companies must have assets worth 50pc more than liabilities is applied without fear or favour across the entire insurance sector.

To let Quinn escape this restriction would be to hand a huge commercial advantage to the company over his rivals.

As Mr Elderfield told the Oireachtas committee yesterday: "We don't do favours."

However, his opponents, who are many, are asking whether an obsession with rule-making and regulatory compliance could blind Mr Elderfield to the realities of normal commercial life.

There are, after all, thousands of jobs at stake in Quinn Insurance and at the Quinn Group. He, however, points out that there are 1.3 million policy holders who also need protection and that he is the only official person appointed to perform that duty.

So far, he is taking the role very seriously. Probably too seriously for some.

Irish Independent

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