John Hurley: The role of the central bank and the current issues being
considered by the Financial Services Regulator
Opening statement by Mr John Hurley, Governor of the Central Bank and Financial Services Authority
of Ireland, to the Joint Committee on Finance and Public Service, Dublin, 1 June 2004.
* * *
Introduction
Thank you Chairman for the opportunity to address the Committee this afternoon. My colleagues and I
are happy to discuss with the Committee the general issues arising from the overcharging by AIB of
certain foreign exchange customers. I appreciate that you noted, in your invitation to us, that an
examination into specific issues relating to AIB Bank is ongoing. Other serious issues have emerged
since the time of your invitation. As you know, work on all these matters is now the responsibility of the
Irish Financial Services Regulatory Authority rather than the Bank.
In my opening remarks I would like to deal with the following:
•
The role of the Central Bank in financial regulation following the restructuring that took place
last year;
•
The Central Bank's role in relation to financial stability;
•
The profile of the banking system in Ireland;
•
The former responsibilities of the Central Bank in relation to foreign exchange charges;
•
The current issues being considered by the Financial Services Regulator; and
•
The compliance environment.
Role of the Central Bank
I would like to start by briefly putting the role of the Central Bank in context by describing the new
regulatory structures that are now in place following the establishment of the new Financial Services
Regulator and our own restructuring last year.
On the first of May 2003 the Central Bank and Financial Services Authority of Ireland was established.
This body carries out all the activities formerly carried out by the Central Bank of Ireland as well as
several additional regulatory functions, including those previously discharged by other regulatory
bodies. The regulatory Departments of the Central Bank, i.e., staff and records, were transferred to the
Regulatory Authority. Accordingly the CBFSAI has two distinct component entities:
1. The Central Bank
In addition to being the corporate entity with responsibility for central services, the Central Bank also
has extensive other functions, including euro-area related functions. Our main functions are:
a) Monetary policy operations;
b) Financial stability;
c) Economic analysis;
d) Currency and payment systems;
e) Investment of foreign and domestic assets.
2. The Irish Financial Services Regulatory Authority
As you know, this body is responsible for the regulation of all authorised financial entities including
banking, securities and insurance and for consumer protection and consumer information matters.
The Financial Services Regulator has clearly defined responsibilities and decision-making powers of
its own. It is now responsible for the regulation of all financial services firms in Ireland. It also has
greatly enhanced functions when it comes to consumer protection and consumer education. These
regulatory powers and functions are exercised independently of the Central Bank.
There is a wide range of additional enforcement powers being assigned to the Financial Services
Regulator under the Central Bank and Financial Services Authority of Ireland Bill, 2003. These
additional powers, I know, are very much welcomed by the Financial Services Regulator and I believe
they are both appropriate and timely.
There is now a new focus on financial regulation and this includes, in particular, more emphasis on the
consumer. There is also growing recognition internationally of the desirability of all financial institutions
being supervised by a single regulator as is now the case in Ireland. The Financial Services Regulator
has as its focus the protection of consumers by helping them to make more informed decisions in a
safe and fair market and to foster sound dynamic financial institutions. The Central Bank's statutory
responsibility in this regard relates to the stability of the overall financial system and not individual
institutions. We have a common interest in the stability and solvency of the financial sector and the
protection of the interests of the consumers. In discharging this function we aim to promote a vibrant
financial services industry that can continue to prosper in a very competitive international environment.
Financial stability
Some concerns were expressed before the current arrangements were put in place that, somehow,
the Financial Services Regulator might not be fully independent of the Central Bank. I can assure the
Committee that this is not the case. The Central Bank's role relates only to the stability of the overall
financial system. This year, we will publish a stand-alone Financial Stability Report outlining the
extensive work being undertaken by the Bank on financial stability. Financial stability work includes the
development of various early warning indicators of systemic risks. These are events that could spread
from one institution to another giving rise to serious problems in the financial system and the economy
more generally. The work also includes the procedures required in the event of a systemic emergency.
The reason for the strong focus on financial stability is that financial crises are very costly, not alone in
financial but also in economic terms. Many countries have experienced crises that seriously impacted
on economic growth - in some cases, 10% or more of GNP. On an international comparison, Ireland's
financial stability record has been very good.
It is worth noting that in discharging its financial stability role in the public interest the Central Bank is
also protecting the consumers of financial services.
In concluding my comments on financial stability, I should stress that while the events currently under
investigation carry serious reputational risks, they have not given rise to adverse implications for
financial stability.
Profile of banking system
One of the unfortunate fallouts from the problems that have arisen is the tarnishing of the image of the
Irish banking system, which has an excellent reputation internationally. This is most regrettable, as we
have a sound and successful banking system that compares very well with international peers. The
banks are also one of our largest employers with a workforce of nearly 40,000. The banking sector
accounts for 4-5% of GNP and is a major contributor to Government revenue. Pensions and other
types of savings hold significant shareholdings in banks so that the performance of banks is important
for them. The banking industry is vital to this country. I should not pass without a brief reference to the
IFSC. As you know, this has been one of our great success stories. The Centre has a solid record of
success even during the global downturn of the early 90's. There are now nearly 12,000 people
directly employed in the IFSC making a significant contribution to the economy.
In a large industry like the financial services, problems and improper practices inevitably arise from
time to time; this is true of all countries. The most important point is that procedures and processes are
in place to deal with them in a timely and expeditious manner, as the Financial Services Regulator is
now doing.
Despite the serious problems that have arisen, I believe that there has been a marked improvement in
Corporate Governance standards in the industry in recent years. Any recommendations emanating
from the current investigation that suggest further improvements are necessary should be
implemented without any delay.
I should emphasise that no regulatory system - no matter how extensive or expensive can guarantee
that mistakes, inappropriate practices or behaviour will never happen. However, it is essential that
when such events occur - despite a comprehensive regulatory system being in place - the regulatory
machinery is capable of dealing with them effectively and speedily. I believe that the measures put in
place since the mid-nineties together with the forthcoming enactment of the new powers presently at
Report stage in the Dáil, will provide such a system.
Foreign exchange charges
There was no statutory control over bank charges prior to the enactment of the Central Bank Act,
1989. Section 28 of the 1989 Act placed a statutory requirement on banks to notify the Central Bank of
every proposal to change any charge or associated term and condition. The Central Bank had power
to direct a bank to refrain from changing the charge, term or condition. This power was frequently
exercised. In addition to the legislative requirements, the Central Bank also required banks to
advertise all changes to charges in the national press before they came into effect. I should mention
that in having a statutory underpinning for the control of bank charges, the Irish system was much
more stringent than that of most countries.
In 1994, the Government formally announced its intention to transfer responsibility for bank charges
from the Central Bank to the Director of Consumer Affairs. From that time, the Central Bank decided
that it would not consider any further applications for increases in charges; it did not wish to pre-empt,
in any way, the future role and decisions of the Director. Some exceptions were made to this, such as
the introduction of new services such as "laser", with agreement with the Director of Consumer Affairs.
When the legislation came into effect the Director considered all proposals independently and was
advised, under the legislation, by all the institutions of the charges applied by them. Responsibility for
approving bank charges is now vested in the Financial Services Regulator since 1 May 2003. As I
indicated already, the issue of overcharging by AIB is the subject of an independent investigation
which will report to the Financial Services Regulator and AIB.
Recent developments
When Liam O'Reilly and his team were before you in recent days they gave you information on the
background to their investigation into the foreign exchange charging issues within AIB.
An independent investigation - which I understand will be funded by AIB - into its foreign exchange
charges has been established with direct involvement by the Financial Services Regulator. It is being
carried out by an external firm of forensic accountants and is overseen by an independent assuror,
Mr Lauri McDonnell. I understand that a full report on the issues will be issued.
The Financial Services Regulator is also engaged with another investigation, relating to matters
concerning AIB Investment Managers Ltd (AIBIM) during the period 1989 to 1996. All of the issues
raised by the investigations will be considered by the Regulator comprehensively and in detail. It will
then decide what further actions need to be taken in this regard.
I fully share the concerns already expressed by Liam O'Reilly regarding recent revelations, and that
any improper practices within the financial services industry in Ireland are totally unacceptable. I fully
support the approach that is being taken to these issues by the Financial Services Regulator.
The compliance environment
I wish to offer a few words on the compliance environment.
It is important to recognise that there has been a fundamental change in the way client funds are
handled by investment firms, such as AIBIM, since the passage of the Investment Intermediaries Act
1995 and Stock Exchange Act, 1995. Since that time Codes of Conduct and Client Money rules have
been issued and investment managers have been required to invest substantially in compliance
functions. The systems of control are now more transparent than they would have been in the
1989-1996 period and I think it is less likely that anything like what happened then could happen now
and if it did it would be unlikely to go undetected.
With regard to tax matters generally, we have gone through a similar cultural change. Since the Public
Accounts Committee DIRT investigations and since the development, during the late 1990s, of the
money laundering regime - which includes tax evasion - which now applies to banks. Banks are being
required to heavily invest in compliance. Money laundering is a special focus of the Financial Services
Regulator's inspections programme and there is now detailed guidance in place for banks in this
regard. I feel that there is no similarity in the way tax issues are treated now and the way that they
were treated in the early 1990s, either in the banks or, I think, among the public generally. The
approach to all taxation matters is now much more rigorous.
In relation to the remaining issues, it is best to wait to hear the outcome of the Financial Services
Regulator's investigation. Only then will the Regulator be in a position to give a full report on all the
issues relating to AIB. Many of the matters of concern here have had their roots in an earlier period
when the compliance environment was much weaker than at present. I think that there is a danger that
by generalizing on the basis of events, many of which occurred several years ago, we are in danger of
missing the improvements which have taken place and the significant changes in both the regulatory
and compliance framework within which banks operate. Problems and improper behaviour will
inevitably occur. But generally speaking, the attitude to compliance among Irish banks has improved in
recent years and, I have no doubt that following these events, the standards will be further
strengthened.
Conclusion
To summarise my position, Chairman, I regard the events about which we are speaking today to be
both very serious and deeply disappointing. These matters are being fully investigated by the Financial
Services Regulator. The Financial Services Regulator has gone about its task in a comprehensive,
detailed and pro-active manner. I have full confidence that it will reach the appropriate conclusions
and take any necessary further remedial action.
Thank you, Chairman, for permitting me to make this opening statement. My colleagues and I will be
very happy to answer any questions the Committee may wish to put to us.