Business Opinion: Events appear to have once again caught Ifsra with its trousers somewhere in the vicinity of its ankles.

As the ripples from the latest scandal to engulf international finance reached our shores two weeks ago the Irish regulator gave every appearance of being asleep at the wheel.

Some six months after being told by its Australian counterpart that a number of people working in the Dublin office of Cologne Re had been banned from working in Australia, Ifsra was unable or unwilling to explain why they could and were working in Dublin.

The two individuals, one of whom has left his position in Dublin in recent days, were involved in a reinsurance transaction that allegedly improperly boosted the profits of an Australian insurer, FAI, shortly before it was taken over by another company. A separate reinsurance transaction between Cologne Re and AIG, the US insurance giant, is also being investigated by New York attorney general Eliot Spitzer, and has claimed the scalp of AIG's chairman Maurice "Hank" Greenberg and threatens to tarnish the reputation of legendary investor Warren Buffett whose Berkshire Hathaway group has long-established links with AIG.

Ifsra has steadfastly refused to explain why it took no action against the individuals deemed by the Australians as not fit and proper to work in financial services. However, the chief executive of the organisation addressed the issue somewhat obliquely in a speech to the Finance Ireland conference last week.

Liam O'Reilly devoted a considerable portion of his speech to defending the approach adopted to financial services regulation in Ireland, which is increasingly at odds with the approach adopted in the US and on the continent. Ifsra, he said, favours a principles rather than a rules-based approach. ...

What this means is that rather than have a long and detailed set of rules that financial services companies must abide by, it sets out some basic principles by which they operate. At the risk of oversimplification it is rather like telling everybody that they have to drive safely, and not bother with speed limits and fines.

The principles-based approach is flexible and also easier and cheaper to comply with, said O'Reilly, who criticised the rules-based approach as allowing no scope for interpretation, being slow to react to change and punishing the compliant equally with the non-compliant.

O'Reilly went on to point out the success of the principles-based approach in countries such as Hong Kong, while the strict rules-based approach in the US had failed to prevent the Enron scandal.

What O'Reilly did not point out was that Enron may have happened in the US, but the consequences for those involved in it and other scandals have been dramatic. Keneth Lay, the Enron chief executive faces jail, as does the head of WorldCom Bernie Ebbers and numerous other corporate chieftains found to have broken the rules.

In the same two year period Ifsra has failed to publicly censure anyone, never mind seek to have them prosecuted, despite a plethora of banking scandals that must breech its basic principles of "solvency, governance, consumer protection and disclosure".

The prospect of a phone call from Spitzer has US executives breaking out the spare undies, while Irish bankers presumably look forward to a nice chat about principles with O'Reilly.

This however is really a side issue. The real problem with the principles based approach is that it puts the needs of the financial services industry ahead of the consumer. You have to ask yourself who benefits from a regulatory system that is to quote O'Reilly "relatively flexible" and "easier and cheaper to comply with".

Is it the customers of the banks, or is it the banks themselves who see regulation as just another cost to be borne in the endless battle to liberate money from their clients' pockets.

It seems obvious that the system reflects the primary concern of the regulators - and ultimately the Government - which is the health of the banking system generally and the IFSC in particular. Fear of killing the goose that laid the golden egg has produced what is fundamentally a weak, industry-centric regulatory regime, dressed up as something else.

If you doubt this, then ask yourself why Cologne Re chose to base its "Alternative Solutions Group" in Dublin and not New York. You might also wonder why Dublin and not "rules-based" New York is on route to becoming the hedge fund capital of the world.

It is all a bit reminiscent of the attitude adopted by the Central Bank - which is Ifsra's parent - to the regulation of Guinness & Mahon. As a result of its prudential work the bank came close to uncovering the whole Ansbacher scam in the 1980s. But with the memory of the collapse of Irish Trust Bank in 1976 and Merchant Banking in 1982 it was reluctant to push the issue, for fear of damaging the banking sector.

That turned out to be a pretty short sighted move and the danger is that the current approach to regulation will prove equally misguided.

jmcmanus@irish-times.ie