Matthew Elderfield: Effective enforcement - encouraging compliance and
good practice
Opening remarks by Mr Matthew Elderfield, Deputy Governor of the Central Bank of Ireland,
to the Central Bank Enforcement Conference, Dublin, 11 December 2012.
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I would like to welcome you to the first conference on enforcement that we are hosting at the
Central Bank of Ireland. We are very glad to be hosting this event and that you are able to
join us here today.
Enforcement is an important element of our regulatory strategy at the Central Bank. Our
approach of assertive, risk-based supervision is underpinned by having a credible
enforcement deterrent in place. Effective enforcement certainly has a corrective element that
is designed to ensure accountability for non-compliance with regulatory requirements, both
by firms and - as I would like to talk about briefly in a moment - ideally also for individuals.
But effective enforcement is much more powerful than simply being about bringing a
particular firm or its management to account.
The broader benefit, which supports supervision, is the deterrent effect of enforcement. If
firms think there is a credible risk that their own non-compliance with regulatory standards
would lead to sanctions from the Central Bank, then that provides a very powerful motivation
to boards of directors and senior management teams to ensure a high standard of conduct.
The fact that the Central Bank has sanctioned firms and has published details of these
sanctions has made some in the industry uncomfortable and leads to pleas to ease up on the
use of the enforcement tool. We do not apologise for taking enforcement actions or
publicising them. There is no deterrence value unless firms, investors, consumers and the
public are aware that we will respond with enforcement action where behaviour and practices
fall short. I am firm in my belief that this is a necessary and best practice element in the
regulatory toolkit of the Central Bank. And, unless these sanctions are published with enough
detail about what occurred and the sanctions imposed the deterrent effect will be diluted.
We have purposefully made an effort to be more explicit and detailed in the publicity
statements involving enforcement sanctions. The purpose of this is to provide greater
transparency to industry, the markets and the public about the nature of breaches that have
been committed. The publication of the enforcement action has a reputational impact on the
firm and management concerned. A consequence of this approach is that the impact of our
enforcement efforts is greater because, frankly, the message is clearly communicated to
industry and the public that breaches will not be tolerated. Consequently all firms are
powerfully incentivised to avoid enforcement action by being more diligent in respect of
regulatory compliance.
This raises standards generally in the financial services sector. It shows that there are
consequences for non-compliance. And it is an efficient use of resources. Rather than trying
to individually mark all the firms that we supervise, the risk of enforcement action has a
multiplier effect across the regulatory population in terms of encouraging compliance and
good practice. It is, for example, particularly useful for the large population of smaller, low
impact, firms where we cannot have a routine supervisory interaction.
The benefits of enforcement are therefore very clear in terms of raising standards. These
benefits are not only recognised in Ireland but, of course, across many other jurisdictions in
Europe and more generally internationally elsewhere. Enforcement actions are taken by
supervisors in Ireland, in the UK and the US, and also across the European Union including
France, Germany, Sweden, Malta and Luxembourg for example. So, I think concerns over
the competitiveness impact of taking enforcement actions, which is a point sometimes put to
me, is somewhat overstated.
And to be clear, I don't think it makes sense to somehow ring fence international firms from
the scope of potential enforcement action. We see weaknesses in governance, systems and
controls and other breaches amongst international firms, just as we do for domestic ones.
Protecting Ireland's reputation as an international financial centre is important and means
that both firms and the Central Bank need to be vigilant about standards in this sector.
What about the argument that it's not fair to take enforcement action for mistakes? Or that
when a management team self-reports a breach they should get an exemption from
enforcement? These are, frankly, well-trodden and somewhat hackneyed arguments. These
are certainly relevant factors to consider during the enforcement process, and typically would
be given consideration when assessing the correct sanctions. But the clear international
practice is that enforcement still takes place in such circumstances. It is important that the
deterrent effect still applies to inadvertent breaches and to self-reported ones as well. To do
otherwise, would be to effectively turn a blind eye to the requirements which we are required
to uphold and would encourage a culture of slackness that would sow the seeds of significant
detriment to consumers and damage the financial stability.
So, let me be clear, enforcement in the financial sector in Ireland is here to stay. We aim to
be transparent about our particular enforcement priorities in any given year and publicly state
what these are. We are clear that certain types of breaches will be more likely to attract
enforcement action than others. Additionally, we allocate resources to take cases on a
reactive basis so that we can respond appropriately to serious breaches. Enforcement is not
automatic for all breaches and involves collaborative effort between the supervisory teams
and the enforcement directorate. We exercise judgement and discretion in using the tool.
I'm very pleased by the progress we have made over the past three years with our
enforcement strategy. We have established a good track record of taking cases against
financial services firms for a wide range of breaches. In the last three years, the Central Bank
has concluded 30 administrative sanctions cases and imposed approximately €13.3 million in
fines. We can see the benefit of this in terms of behaviour in the industry. For example,
financial firms' efforts to provide restitution in overcharging cases tended to drag on
interminably prior to setting a strict deadline backed up by the threat of enforcement action -
and by taking a couple of cases. We have targeted transaction reporting as an area of
concern and see firms tightening up the procedures as a result. We have sent a strong signal
to firms both domestic and international that their systems and controls need to be strong
and robust. We have also, as part of our mandate to protect consumers, focused on how
firms handle complaints from their customers, emphasising to firms the importance of
consumer protection and professional interaction.
I would like to thank the staff of the enforcement directorate of the Central Bank and also
those supervisors will help prepare enforcement cases for the good work in making this
happen.
But while we have quickly delivered on our enforcement strategy in terms of actions against
firms, we still have some way to go to conclude successful actions against individuals
involved in the management of financial firms. Generally speaking, firms tend to settle but
individuals tend to fight their corner to the bitter end. So be it. That means that the process is
protracted, both for financial regulators and other enforcement authorities. So, there is a
need for considerable patience and determination.
The introduction of the fitness and probity regime was an important step forward in
developing a comprehensive and effective regime. The ability to remove persons occupying
important functions within regulated firms where they fail to meet the required standards of
fitness and probity, and indeed prevent those who do not meet such standards from entering
the industry, will ensure greater confidence and trust in persons occupying important
functions within regulated firms.
All that said, I think it would be useful to find an appropriate mechanism to provide a
measured analysis of and reflection on our overall structures in Ireland for taking cases
against individuals for breaches of financial regulation or indeed for cases of white collar
financial crime. This is a challenging area in most, if not all, countries, but I think many
people in Ireland have the impression that the national track record here could be stronger.
The Central Bank, and its predecessor the Financial Regulator, has only applied financial
sanctions to seven individuals during the past 10 years. We do have some substantial cases
against individuals in the pipeline, but they are taking a lot of time. Similarly, on the criminal
front, despite the efforts of the Gardaí, DPP and ODCE, we are still some way from the start
of criminal proceedings, never mind their successful conclusion, of the cases arising from the
financial crisis. Looking further back, we can see that it has taken a long time for high profile
cases and tribunals to reach their conclusions.
Taken together, this track record arguably undermines public confidence in the "enforcement
system" broadly defined and weakens its deterrent impact to head off the next crisis or
scandal. Surely, then there is a case to step back and ask some rather fundamental
questions.
This is not just a question of delivering speedier enforcement action against individuals - but
without cutting corners - although that is part of it. It is about examining whether the current
enforcement system is able to really deliver results when it comes to individuals who are
responsible for financial failures that impose costs on society, for breaches of financial
regulatory standards and for financial white collar crime more generally.
This is clearly a difficult area where frankly many other countries struggle as well. But let me
very briefly suggest a few possible areas that could be explored.
A coordinated strategic approach is necessary for effective enforcement. At a high level, it
would first make sense to examine the respective roles and missions of the principal
enforcement bodies involved with financial white collar crime and, as part of this, to assess
the capabilities and resources for delivering their objectives.
It would additionally make sense to assess whether there are best practice enforcement
techniques that can be adopted from other leading jurisdictions.
It would also be useful to carefully review whether the existing legal framework for collecting
evidence and pursuing cases is appropriately calibrated to ensure success. In November
2010 the then Director of Corporate Enforcement made a commendable submission to the
Department of Justice on their White Collar Crime white paper, highlighting the problems with
the current system, and suggesting possible reforms. He also raised a concern over the rules
governing questioning of suspects and, to its credit, the government is acting quickly on this
matter. It seems to me that these proposals have merit.
More fundamentally, I would argue that we should use the opportunity to examine some of
the underlying legal offences in the area of financial white collar crime and to consider
whether they need amendment or bolstering. For example, regarding administrative sanction
cases taken by the Central Bank, how strict a test of responsibility should be applied to
directors and senior management - i.e. the individuals themselves - of a firm that has been
in breach of regulation and is itself subject to sanctions? Should we, like the FSA has
proposed and the UK Treasury committee is considering, introduce some degree of
presumptive liability or sanctions for directors of banks which failed and required public
support? Should there be a general offence - either civil or criminal - for reckless trading of a
financial services company? What other adjustments to the legislative framework might result
in more effective enforcement action against individuals in cases of financial white collar
crime? These matters require close scrutiny and careful debate, and not all should
necessarily make it to the statute book. But it is important that these issues are examined
systematically in a thoughtful and considered way as part of a broader, strategic initiative to
strengthen Ireland enforcement capability and effectiveness.
These matters deserve some public debate, as well as expert study. Indeed such an
approach can be seen from the Department of Justice's white paper on Crime - currently
being prepared - which includes a section on organised and white collar crime, and has
been the subject of public consultations and submissions, with many of the matters referred
to here being raised. This may usefully lead to a package of policy proposals to enhance the
Irish enforcement system. This will not change the rules of the game or prospects of the
financial crisis cases that are currently in the pipeline at the Central Bank or shortly before
the courts (although the lessons from the proceedings should also inform the reform agenda)
- but it will strengthen the system for the future.
What is the best way to go about this? The Law Reform Commission? A Government Green
Paper? A Wise Persons Report? Some mechanism for a measured and careful analysis of
the issues in the round would seem to make sense, alongside a thoughtful public debate on
the issues. Perhaps some of the leading academic bodies in Ireland might facilitate and
stimulate discussion in this area, for example.
But we should somehow take the opportunity to ask some searching questions about how we
can raise our collective game to ensure that we have a truly effective enforcement system
that delivers deterrence where it really counts: at the door of the individual who breaks the
rules. Only then will we be able to take comfort that we have created a system that will help
deter the origins of the next financial crisis.
Just as the impetus for our internationally lauded criminal assets bureau came from the tragic
circumstances surrounding Dublin's gangland problem in the 1990s, so too should the recent
financial crisis provide a catalyst and opportunity for Ireland to create a truly effective system
to assist in the fight against white collar crime, bringing with it individual responsibility for the
actions of persons who hold senior positions in financial institutions.