Professor Philip Lane:

I welcome the opportunity to meet the committee for our regular engagement. I am joined today by Ms Derville Rowland, the director general for financial conduct, and Mr. Ed Sibley, the deputy governor for prudential regulation.

As the Chairman has indicated, I will divide my introductory statement into two parts. In the first part, I will provide an update on the tracker mortgage examination and the outcome of our recent culture report. In the second part, I will turn to the broad macro-financial outlook and outline the main issues and risks we see on the horizon, including non-performing loans, NPLs, and Brexit.

First, I wish to focus on the culture report, which builds on our conviction that consumers are best protected if firms not only comply with our regulatory requirements but also invest in organisational cultures that reward consumer-focused behaviour and penalise harmful behaviour that seeks to skirt around the duty to treat customers fairly. By way of wider context, I note that in the past decade we have seen many financial misconduct scandals around the world. At home, the mistreatment by banks of so many tracker mortgage customers has shown that financial misconduct is a substantial risk to households and firms that rely on the domestic system for the provision of financial services. Our tracker mortgage examination - the largest, most complex and most significant customer protection review we have undertaken to date - was undertaken to ensure lenders identified those customers harmed by this mistreatment and paid appropriate redress and compensation. The latest data show that by the end of August lenders had identified around 38,400 affected customers, including cases resolved before the examination was launched, and had paid €580 million in redress and compensation.

Some 93% of affected customer accounts identified and verified had received offers of redress and compensation by 31 August. Four of the five main lenders are close to completing their redress and compensation phases and we are exerting significant pressure on the remaining lender to finish its process. Our bank-by-bank supervisory review of the conduct of the examination is also significantly advanced but will not conclude until the process is completed. We will continue to challenge them where necessary to confirm that all groups of affected customers have been identified and included for redress and compensation. On a separate track, enforcement investigations are in train in respect of six lenders. In the past couple of minutes, I have focused on numbers at the macro level, such as the thousands of people involved. However, we all fully acknowledge that the statistics do not give the full picture. When we think about the individuals who have been harmed, especially those who have lost a home or a property, we fully recognise that this has had a devastating effect on them which numbers cannot capture.

This examination has exposed further evidence of a clear lack of consumer-centred culture in lenders. Even in how the examination itself was conducted, let alone the original tracker problems, we found some banks adopted a narrowly legalistic approach, offering initial compensation proposals that fell well short of our guided expectations. The examination raised serious questions about the current, not just historic, culture in the banks. This is why we were pleased to work on the culture report requested by the Minister and published in July.

Why are regulators focused on the concept of culture? The report is the latest step in the strengthening of our supervisory approach in recent years to focus on conduct and cultural issues. This is a process of evolution. In the wake of the financial crisis, our immediate focus was on strengthening the solvency and stability of the system and enhancing protections for consumers. A lot was done at that level and I emphasise that banks and other institutions have more and better-quality capital, more sustainable funding structures, are better governed and are more strongly equipped to deal with any difficulties in the future. I refer also to macro-prudential measures. For example, through stress-testing we focus on banks' ability to withstand adverse shocks. In response to the misconduct we have seen, there is much more extensive conduct regulation in order to protect consumers and investors.

That said, all of these rules and regulations should be reinforced by an additional focus on the organisational cultures of these firms. The boards and senior managers of regulated firms are responsible for ensuring that organisational cultures are focused on enhancing consumer protection and ensuring that risks are well understood and managed. Accordingly, how best to achieve this has become an increasing area of focus for regulators.

From a supervisory perspective, the importance of focusing not only on risks that materialise but on advance risk management has led to our introduction of the consumer protection risk assessment model. This is designed to help supervisors assess how risks to consumers are identified and managed within firms. Another important dimension of this is to improve the levels of diversity at senior levels in financial services firms. Diversity can improve decision-making, reduce the risk of groupthink, improve risk management and, in doing so, ensure organisations give sufficient priority to the experience and treatment of their customers.

I will now outline the report's findings. Our work underlines the fact that organisational culture is built on a shared purpose and vision as well as standards such as professionalism, honesty, integrity and accountability to deliver fair outcomes for consumers. This is what we expect in all the firms we regulate. The culture report is built on focused studies of the five main retail banks. We have found they have not yet built a truly consumer-focused culture.

We went about this work with our counterparts in the Dutch central bank, a recognised leader in the assessment of bank cultures. The review team was diverse in composition, comprising conduct and prudential supervisors, governance risk experts and organisational psychologists. The reviews involved both on-site and off-site assessments to ensure the necessary analytical breadth and depth. This included 1,400 hours of desk-based review of materials, more than 500 surveys and 75 interviews, in addition to observing meetings and assessing decisions in each bank. Our assessment focused on the executive committee of each bank, since the senior leadership is responsible for driving the behaviour and culture in an organisation under the direction of the board.

An effective consumer-focused organisational culture is one in which consumer needs are adequately identified, discussed and taken into account. We found that all of these banks have taken some steps to reinforce the consideration of consumer interest in strategy, decision-making and procedures. Clearly, however, some are more advanced than others. We also examined behavioural patterns in leadership, how strategic decisions are made and the general outlook of these firms which could put at risk the successful transition to a consumer-focused culture. These cultures remain under-developed and some obstructive patterns of behaviour form a barrier to successful implementation.

For example, in some cases we saw executives continuing to operate in a "fire-fighting" mode. This may have been suitable during the crisis, but may no longer be appropriate as we return to more normal conditions. We saw too much focus on short-term and legacy issues, with insufficient attention paid to consumer interests. We discovered some reversion to "command and control" in leadership styles. We determined that the banks have much more work to do to ensure their organisations are sufficiently diverse and inclusive, particularly at senior level. As I have indicated, this would be helpful in preventing groupthink, guarding against complacency and overconfidence and promoting internal challenge.

Will this report sit on a shelf? What are we going to do with it? Action points have emerged. The board of each bank is required to make a number of steps. Boards are required to investigate and assess potential drivers of these behaviours; consider what their executive committees need to do to address these problems; and create an action plan to address the identified concerns and mitigate the associated risks. We expect banks to be proactive in promoting an effective risk culture and to have fully embedded conduct risk frameworks in place. Additionally, there will be further enhancement of our supervisory approach, including more intrusive, targeted supervision of the conduct of the firms that pose the greatest risk of potential harm to consumers.

We think that is also in the long-term interest of the banks. There are incentives for the banks to embrace the agenda also, given all that we have seen in terms of the costs of dealing with misconduct after the fact.

We think it is important in this entire procedure that banks understand the difference between seeking people's trust and establishing trustworthiness in their culture. If banks wish to restore trust in their organisations, it must be earned by building a track record of consumer-focused behaviour. We give guidance but it is the executive responsibility of each bank to build that culture. It is not the case that one single culture can deliver. Part of being a skilled manager of a bank is to build the culture that makes sense for the bank, but we require it to have a consumer orientation to make sure that those firms will deliver fair outcomes for consumers while maintaining financial resilience and appropriate prudential standards.

Another action point from the culture report is to reinforce our advocacy of a new individual accountability framework, to apply not just to banks but to other regulated financial services providers. Such a framework would go significantly beyond the current requirements for staff to be fit and proper, it would set conduct standards for staff, and it would ensure clearer lines of accountability within firms.

The goal of the proposals is to act as a structured driver for positive behaviours and the recognition of individual responsibility. Many regulated firms and their leaders behave ethically and honestly, and seek to drive effective cultures. However, in order to guard against scenarios where that is not the case, the reforms will constrain the ability of senior executives to escape accountability for wrongdoing. The reforms will require Oireachtas consideration and approval, and we would welcome any questions members may have on our recommendations.

I will stop there in terms of the part A review of the culture report, and the tracker mortgage examination. We can turn to part B later.