Mr. Seamus McCarthy:

The primary purpose of the examination reported on in Special Report No. 72 - Financial Regulator, responding to the financial market crisis - was to identify the measures taken or proposed by the Financial Regulator to respond to shortcomings in financial regulation that came to light as the financial market crisis unfolded during 2008 and 2009. It also reported on the regulator's response to recommendations in two earlier special reports that had dealt with regulation of financial services providers by the Central Bank and the regulator.

The first examination carried out by my office was reported on in 1999. It looked at the Central Bank's approach to the regulation of credit and investment institutions which was the extent of the bank's regulatory remit at that time. The report on the examination concluded that the frequency of the bank's on-site prudential inspection appeared low. The target levels of prudential inspection were not being achieved. The Central Bank had adopted a light touch to prudential supervision based on limited on-site inspection activity, combined with periodic review meetings with the management of the institutions. Also, the Central Bank did not base its prudential supervision work on a formal risk assessment system.

We recommended that a risk assessment system be developed on the basis that the prudential risk profile of financial service providers could potentially be used to gauge the stability of the credit and investment sectors. Following publication of the special report and the committee's inquiry into deposit interest retention tax administration, which was completed around the same time, there was an in-depth review of the role of financial regulation and its structures. That resulted in the establishment of the Financial Services Authority of Ireland in 2003. That brought responsibility for most financial regulation into a single agency and operates as a stand alone entity within the Central Bank. The functions of the then Department of Enterprise, Trade and Employment regarding regulation of the insurance sector were transferred to the regulator, which was also given a consumer protection remit.

Having allowed a period for the new regulatory regime to settle in, a second examination of financial services regulation was undertaken by my office. The report on that examination was published in May 2007. The examination's main finding regarding prudential supervision was that the regulator had developed a formal risk assessment system.