THE IRISH Financial Services Regulatory Authority (Ifsra) is a badly broken organisation. It has failed to supervise the operation of the banking system and to enforce ethical standards in the industry. No more than any regulator, Ifsra does not have a crystal ball. But it does have a responsibility to ensure that banks lend money responsibly with a view to the longer-term consequences of their actions.
Instead – on its watch – banks embarked on a profit-driven lending spree which has ultimately almost bankrupted them, leaving the tax payer to pick up the tab. As a result, Ireland is facing into a global economic downturn with a property market in freefall and a banjaxed banking system.
The regulator also failed to enforce ethical standards for individuals and institutions. The controversy over the hiding of loans by the chairman of Anglo Irish Bank is the latest in a sorry litany of ethical failings within the domestic banking sector stretching back to the NIB scandal in 1998.
At both a systemic and individual level, the regulator relied on a principle-based rather than rule-based approach. Instead of closely supervising the banks and their staff, the regulator trusted them to act responsibly. It was a calculated gamble that went spectacularly wrong. The banks told Ifsra they knew what they were doing offering 100 per cent mortgages and funding property developers to extraordinary levels: unfortunately they didn’t. Equally, the chairman of Anglo Irish Bank signed off on reports about his debts which he said could be relied on. This was blatantly false.
Yesterday, the chairman of Ifsra signalled that it was reviewing its approach and would be stepping up the level of supervision of the industry. Such a move is inevitable and the banks only have themselves to blame for the additional costs and administrative burden this will entail. Closer supervision is no guarantee of higher standards as the Madoff scandal in the US – which adopts a more rules-based approach to financial supervision – has shown. But that does not negate the argument for more robust regulation here.
Any effort to reform regulation risks being little more than cosmetic if it does not address the conflict between preserving the stability of the banking system – the job of the Central Bank – and enforcing standards and good practice – which is the role of the regulator. Resolving this conflict was at the heart of a report produced in 1999 by an independent advisory group that ultimately gave rise to the establishment of Ifsra.
Its recommendation in favour of a new independent regulatory body was headed off by the Central Bank with the support of the Department of Finance. The result was the birth of Ifsra as an organisation very much in the mould of the Central Bank and ultimately subservient to it. This ensured a continuation of a culture which put the preservation of the impression of a stable banking industry above the actual enforcement of the standards needed to underpin an honest and responsible one. The price is now being paid for that decision.