Oireachtas Joint and Select Committees
Wednesday, 13 May 2015
Committee of Inquiry into the Banking Crisis
Nexus Phase
Ciarán Lynch (Cork South Central, Labour)
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As we have a quorum, the Joint Committee of Inquiry into the Banking Crisis is now in public session. Is that agreed? Agreed. And in doing so can I remind members and those in public Gallery to ensure that their mobile devices are switched off? We begin session one is a public hearing discussion with Mr. Tom Parlon, director general, and Mr. Liam Kelleher, former director general, of the Construction Industry Federation.
I would like to welcome everyone to the 25th public hearing of the Joint Committee of Inquiry into the Banking Crisis. Today we continue our hearings with the key players during the crisis. This morning we will hear from Mr. Tom Parlon, director general, and Mr. Liam Kelleher, former director general, of the Construction Industry Federation.
Tom Parlon has been the director general for the Construction Industry Federation since 2007. From 2002 to 2007 he was Minister for State at the Department of Finance with special responsibility for the OPW. Prior to this, he was president of the Irish Farmers Association. Mr. Liam Kelleher was the director general of the Construction Industry Federation from 1993 until his retirement in 2007. Prior to this, he worked with An Bord Tráchtála - previously Córas Tráchtála - and from 1977, holding the position of European director from 1989 to 1993. Mr. Parlon and Mr. Kelleher, you are both welcome before the inquiry this morning.
Before I hear from the witnesses, I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you're directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You're directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. The utmost caution should be taken not to prejudice those proceedings in this regard. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, those ... these documents will be displayed on the screen to your left and right and members of the public and journalists are reminded that these documents are confidential and should not publish any of the documents so displayed.
The witnesses have been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So to commence proceedings if I can ask the clerk to now administer the oath.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. So if I can I invite Mr. Parlon and Mr. Kelleher to make your opening statement to the inquiry, please.
Mr. Liam Kelleher:
Chairman, if I may proceed first, Chairman. Good morning, members of ... Chairman, members of the committee. My name is Liam Kelleher, I was director general of the federation from 1993 to 2007.
The CIF is the national and regional body for construction company, contractors, subcontractors and house builders in Ireland. It is recognised by Government and public bodies as the representative body for the Irish construction industry. This was reflected in its position as a social partner for the period. The federation is owned and run by its members via an executive body of 34 members appointed through the various branches and associations that comprise the CIF. All interests, sectoral and regional, are represented in the CIF’s decision-making processes. The organisation has 13 branches and a number of sectoral associations that pursue the policy objectives of their own subsector.
The five main industry groups are the Master Builders and Contractors Association, the Civil Engineering Contractors Association, the Mechanical and Electrical Contractors Associations, the Irish Home Builders Association and the Alliance of Specialist Contractors. That umbrella group, the details of the membership of it were given in the submission that I made. At its peak, the federation had in excess of 2,500 members, large, medium and small, whose priorities differed and where competition between groups and regions could be quite strenuous. The purpose of the federation is to provide services to its members and to represent its members.
For the period covered by this inquiry, 90% or more of the federation's resources were devoted to the provision of services to members. Some of these services were outlined in the submission and I am covering some of them briefly here. Industrial relations was a core service, including representation at various labour relations fora: the Labour Court, the Labour Relations Commission, the Employment Appeals Tribunal, as well as dealing with the trade unions and the industry at the time. Health and safety was a high priority for the federation during the period the joint committee is examining. The CIF worked with the Health and Safety Authority and the relevant trade unions to ensure compliance and competence in meeting and exceeding rising statutory safety standards. The CIF remains one of the key stakeholders and drivers of the construction safety partnership.
Briefly on each of the main groups, main contracting, building and civil engineering, the staff at the federation provide information, advice and assistance to the main contracting members of the federation in general building and civil engineering. They're the members of the federation who build the country's ports and airports, road and rail network, as well as hospitals, schools, public and private buildings. Specialist contracting, the mechanical and electrical specialists, as well as the other range of specialist contractors - that group represents a wide range of specialist subcontractors and both the main contractors and the mech. and elec. contractors have built the wide range of foreign direct investment projects which have established in Ireland over the past 25 years and have built an international reputation for expertise in implementing high-technology projects on time and on budget. In housing and planning, that department addresses a wide range of issues affecting members, including technical, planning, economic and environmental matters.
Representation and lobbying - representation and lobbying has always been a key element of CIF’s activity. As the members' representative body for the construction sector, it was our responsibility to represent members and the issues of the industry and to convey those to the media, Government and public bodies, national and local. The CIF's policy position was clearly set out, after my time in August 2012, which formalised what had always been the federation's approach in this area. We have always carried out our engagement with Government in an open manner. We believe transparency should be a requirement for political and public service ... Civil Service engagement, when it comes to public policy issues. We have always published our reports and policy papers and we have provided information about meetings and conversation ... and conversations concerning political and policy issues to our members. It's part of a two-way process that encourages a better understanding of the issues involved on both sides.
A variety of the Departments, in keeping with the subject matter of the inquiry, the variety of the Government Departments that we would have met included the Department of the Environment, which had responsibility for construction policy ... for publishing the review and outlook for the construction industry and for many of the issues with which the industry dealt. Our main contact with the Department of Finance would have been through the budgetary process where we made an annual pre-budgetary ... pre-budget submission, and usually met the Minister for Finance during that process or as part of that process. Our submission would normally focus on taxation policy, both industry-specific and general, and the public capital programme. Our interactions with the Department of the Taoiseach were generally around the macroeconomic position of the construction sector in Ireland and its place in the wider Irish economy. During the years of social partnership, CIF was involved in more extensive discussions with the Department on issues relating to the implementation of successive national development plans and on pay-related issues in specific national agreements.
Striving to increase supply to meet demand across all subsectors of the industry was a recurrent theme of discussion. Other Departments are listed in my submission: the Departments of Education, Jobs, Enterprise, Transport, Communications, Health, all of which we had communications with in relation to various aspects either of policy or the implementation of specific public expenditure programmes.
Members of the Oireachtas - the CIF engages on a broad level with Members of the Oireachtas, nationally and regionally. This is done in an open manner, includes distribution of our annual pre-budget submission and other relevant information materials. We interact with local authorities where there are programmes of local road investment, implementation of water and waste treatment programmes, social housing investment and a variety of other issues. We would meet with An Bord Pleanála to discuss policy matters - generally once a year - planning policy, including timescales for decision making.
In relation to the banks, banking regulators and banking representatives, we had very few ... we had very few interactions with banking authorities such as the Central Bank prior to the economic downturn and that, of course, was in the period that I was there. Banking was just not a feature of CIF's activities pre-2008. Access to finance was not an issue for CIF members with the federation in that period. And I should also point out that the CIF, as an organisation, had no knowledge of the banking arrangements of any of its individual members or of how they financed their businesses or of their cash reserves or their borrowings.
Now, construction in Ireland has always been an important part of the Irish economy. It has been a strong creator of jobs. It has enabled foreign direct investment and it has built those inward investment projects very quickly and the necessary infrastructure to go with them to enable the Irish economy and Irish society to grow. Pre-2000, during the national development plan of '94 to '99, I know that precedes this inquiry's period, but money was scarce and people were plentiful, but as the year 2000 approached, a major concern of the CIF was that as structural and cohesion funding from Europe was reduced that the public capital programme would be squeezed. That turned out to be largely an unnecessary fear and concerns developed in Government about the capacity of the industry to deliver on the new national development plan. One senior Government Minister spoke of bringing 2,000 immigrants into the State. The Taoiseach indicated his concern that the industry did not have the capacity to manage large projects and both Government and Opposition were calling on the industry to expand in order to deliver on NDP projects and to increase the supply of housing. There was a broad consensus across the political spectrum of the need ... and wider, of the need to build 500,000 plus new housing units in the following decade - that's from 2000 onwards. Every sector was striving to increase supply and obviously, the figures for the value of the construction industry ... they're contained in my submission and you can see that they grew rapidly. But in the period from 2000 onwards, I cannot overestimate the pressure I felt, and which I believe the industry was under, to expand its capacity to deliver building and civil engineering projects and to increase housing output. And right up to ... output increased incrementally each year but right up to the end of 2006, demand for housing continued very strongly and then when housing output commenced to fall rapidly in 2007, a supply adjusted rapidly to falling demand.
Previous evidence to this committee has stated the overwhelming consensus were that the over ... the essential pillars of the economy were sound. The prevailing wisdom was that if there was a property bubble, if one was to emerge, the country's still-high employment figures and positive Government finances would mitigate against a serious economic downturn. The prevailing view was that a soft landing would follow.
The figures for housing have been included in our submission and we issued our projections annually. We got them wrong on occasion, but the trend was pretty well upwards constantly through the years 2000. But they were ... our forecasts were based on feedback from members but also on reports from NESC, from the ESRI, from the Department of Finance, the Department of the Environment and wider sources.
On the way up ... up to and including 2006, housing demand exceeded supply and the industry strove to meet that. Builders secured finance to purchase residentially zoned lands - and this is my final page, Chairman - secured planning permission, secured development finance to build the units, purchased secured mortgages to purchase the homes and builders built, and build, when and where they think they can sell. Errors made in the scale of building in some parts of the country are fully acknowledged by the industry but these were lands that had been zoned for housing, the financial system had financed land purchase and development and planning permission had been given for the developments. Taking the wider property investment perspective, the red ... the very ready availability of finance for development and property investment generally over the period was a prime driver of the demand for property, for investment property, in general, and, particularly, housing, new and second hand. The extent of lending to the broader property sector, to property syndicates and to individuals in Ireland and abroad accelerated to levels which, in hindsight, were unsustainable. The full scale of such lending for national and international property purchases only emerged with the establishment of NAMA.
To conclude, the level of construction activity reached unsustainable levels in the 2006-2007 period. Specifically, too many houses were being built; too much economic activity was dependent on the sector. Our mental focus as a federation, rightly or wrongly, was on the pressures that existed to deliver needed works in the building and civil engineering sectors and to meet the demand in the housing sector from a growing population. When decline in the housing sector commenced, we believed it was a necessary correction and that the industry would settle around the 50,000 units output per annum. We believed in the soft landing expectation from all Irish sources and a wide range of economic forecasts - the IMF, the EU and the OECD. We made mistakes; I made mistakes. Not listening to contrarians was one of them, believing too readily the benign economic forecasts of the ... and the soft landing, and I am sorry for that.
There were many other entities involved also, but we are a part ... we were a part of it, I was a part of it and, to that extent, Chairman, I apologise.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Kelleher. I call Mr. Parlon.
Mr. Tom Parlon:
Thank you very much, Chairman, and good morning.
My name is Tom Parlon, and I have been director general of the construction industry since January 2008. Before then I spent two months working with Liam in preparation for his retirement. In my previous career, I was a farmer and was heavily involved in the Irish Farmers' Association serving as deputy president from '91 to '93 and from president ... and as president from '97 to 2001. I also had a brief political career, serving as a TD for Laois-Offaly from 2002 to 2007. And during my time here in Leinster House, I was also Minister of State in ... at the Department of Finance.
Liam has already outlined the nature of the CIF and the role and the services played by the federation. Ultimately, we exist to serve our members. It is the various construction companies employees and contractors who make up the Irish construction industry and who are the backbone of the CIF. Without them, there wouldn't be any federation.
Our role is to help our members on a broad industry-wide level and to provide support to them under many different headings. These include issue like ... issues like industrial relations, contracting representation and lobbying, health and safety as well as several other areas that Liam has already referred to. The nature of our membership is what gives CIF status in the Irish construction industry and the wider economy. We are also a means for the industry to come together and to have a strong united voice. It is also this responsibility that makes the CIF leaders for the construction industry in Ireland. Our job is not just to work with the industry, but to work on their behalf through good times and through bad times.
As this inquiry is all too aware, over the last ten years the construction industry went through some very, very good times and we've also had to endure just over seven years of decline. Obviously, it is the work of this Inquiry to find out the causes of the collapse of the economy as a whole, and I would like ... I would also encourage you to take a ... a close look at the plight suffered specifically by the construction industry during the course of your deliberations. Without wanting to pre-empt the findings of the committee, I am sure that these findings will suggest that the causes of what went wrong in the economy were complex and had many different dimensions. Certainly, one element that went wrong was the scale of the industry, how big it grew. It reached unsustainable levels of activity and was responsible for far too big a percentage of the Irish economy.
As leaders of the industry, the CIF have to accept responsibility for the role we played in that growth. Everything we did and every position we adopted we did to help our sector and to help our members. Our various policy positions were driven by the views of our members as well as the prevailing economic and industry thinking at any particular moment in time. Yes we were being told by national and international experts, economists and the Government that there would be a soft landing but we have to take responsibility as well. However, time has shown that that approach was wrong and we're certainly sorry for that situation. We accept that we should have done more to encourage a more responsible level of activity, we should have taken greater heed of the warnings coming from the various sources even if they were going against the mainstream. We should have encouraged greater caution. If we knew of course back then what we know now we would do things entirely differently. There was a huge demand for houses and people needed some place to live, but looking back with perspective we can see that some of that demand was driven by speculation and the level of house building became sustainable. We're sorry that this happened, we want to learn from the lessons that the economic collapse has taught us. We are acutely conscious that tens of thousands of people in the construction sector lost their jobs and we want to ensure nothing like this happens again. If the construction industry was one of the drivers of the boom it is certainly one of the major victims of the crash.
Practically from around the time I joined the CIF, the construction industry had entered into a period of decline and difficulty. I believe if you look at the Ulster Bank purchasing managers index that there were about 75 consecutive months of decline from May 2007 until September 2013. The impact on the sector was massive, equally the pain felt in the industry had huge implications for the rest of the economy.
Throughout the course of the downturn huge numbers of construction companies went out of business, at one point practically every week was bringing news of another significant company closing its doors. At times it seemed like the industry was losing hundreds of businesses every month, it was the case. It was a depressing and distressing time for our industry, for construction workers and their families. The impact was most keenly demonstrated in the unemployment figures. In the second quarter of 2007 there were 273,900 people directly employed in the industry according to the Central Statistics Office, by the first quarter of 2013 the number had fallen to 96,300. That's a loss of 177,600 jobs over the course of almost six years so, you know, the impact that had on families around the country in every town and every village had a major impact.
The turnaround had also been clear in Exchequer returns, the people who lost their jobs and the ones who didn't emigrate or seek job opportunities abroad went from paying income tax to receiving social welfare payment. We never want to see the construction industry suffer like this again. We want to see a sustainable construction industry operating at about 12% of GNP. This is a level that Forfás recently and the Government have both stated is appropriate for a country of our size with our demographic needs. Unfortunately now and I ... acknowledge that we went to 23% of the economy at one stage back in 2006, we're now a long, long way below that particular point but thankfully we're now starting to move in the right direction. However, as part of our final deliberations I would encourage the inquiry to at least note how badly the construction sector has suffered during the downturn.
As part of my appearance here, Chairman, before the committee, I was asked to talk about the establishment, the operation and the effectiveness of NAMA. I think it is fair to say that the industry was very worried about what NAMA was going to be and what it was going to involve when it was established. It was an entirely new entity that hadn't been established anywhere else on the globe, and you will see from the various reports that we provided to the inquiry that our members were expressing massive concern about the various provisions and the powers that would be provided to NAMA. We were also anxious that the wrong approach could mean even greater suffering for an already distressed construction industry. As we say in our submission to the inquiry, and I quote, "It was clear to the CIF that its members would be subject to an entirely different banking environment and the establishment of NAMA would have a profound effect on the ability of some members to support their ongoing businesses."
I think a lot of our concerns came at that time from the scarcity of information about NAMA. There was a lot of speculation floating around and the problem was that no one fully understood just how NAMA would end up operating and how it would work with the construction industry. It is also fair to point out that the CIF wasn't alone in having concerns about NAMA prior to its establishment. I know that many Members of both Houses of the Oireachtas were particularly verbal in their opposition to NAMA. However, the extensive public debate on the establishment of this entity was a very good thing. It allowed concerns to be taken on board and, in some cases, assuaged before the enactment of legislation.
The CIF believe that NAMA are doing a good job in handling a very difficult role. On a macro level, we fully acknowledge that NAMA are fulfilling their remit and seem to be achieving results. They are also one of the few sources of development capital in recent years for the industry, as they are funding the finalisation and the development of some of their assets to realise their full value. Again, this is important and has played a part in the recovery of the construction sector. While we may have expressed strong concerns in the past, I would like to think that the CIF and NAMA have since developed a more co-operative approach. As we have seen the progress being made by NAMA, the industry has come to realise that they are part of the solution. We respect what they are doing and a signal of that respect, I think, has been the invitation we have expended to senior members, both chairman and chief executive, to speak at our CIF annual conference for the last three years. In conclusion, Chairman, I'd like to thank the committee for the opportunity to talk about the various issues surrounding the economic downturn and the construction industry and I would hope in the course of our discussion that we're able to bring some greater understanding to the committee's deliberations. And I look forward-----
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Parlon, and thank you, Mr. Kelleher. Deputy Eoghan Murphy, you have 15 minutes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you to both of the witnesses. You're both very welcome. Mr. Parlon, just a couple of questions to clarify. Is membership of the CIF mandatory?
Eoghan Murphy (Dublin South East, Fine Gael)
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And is there a subscription fee for membership?
Eoghan Murphy (Dublin South East, Fine Gael)
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Subscription fee.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And would you describe the CIF as a form of self regulator for the industry or is it a watchdog for its interests?
Mr. Tom Parlon:
Well, no, I think it's just a representative group. We are involved with Government recently, and with the Department of Environment, in setting up ... which we've set up a voluntary register now that would register construction companies and would give some credibility to the public when they are engaging a construction company that they are ... that they have experience, that they're tax compliant, that they have their health and safety standards, their insurance and all of their other elements, which unfortunately was not the case. Anybody and everybody ... choose to be builders and developers when things were going very, very well.
Eoghan Murphy (Dublin South East, Fine Gael)
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You both said in your opening statements that the level of activity-----
Mr. Tom Parlon:
Let me just clarify. In terms of membership, we have our Dublin branch meeting, we have our associations and we have our regional branch meetings. And when somebody applies to be a member, it has to be passed by whatever ... either association or branch. So, you know, around a table of people attending a meeting ... a present ... an application is made by Tom Parlon Construction Ltd. and the members would have a discussion as to, you know, were they an upstanding company, did they have experience and so on. And that would've ... that was the method of clearing membership.
Eoghan Murphy (Dublin South East, Fine Gael)
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You both say in your opening statement that the level of activity in the construction industry reached unsustainable levels during the boom years. Mr. Kelleher, does the CIF bear responsibility for that?
Mr. Liam Kelleher:
The CIF was one of the players in that scene. You've got to look at what was causing the ... the rise in construction activity. I said in my statement that the pressures that I felt were all to increase supply. And those pressures were coming right across the board. They were coming from a broad range of the political spectrum, all parties. The belief was that we were trying to implement ... trying to catch up on a substantial infrastructural deficit, which had accumulated over many decades. The economy was growing rapidly, population expanding, inward investment strong ... all of the indicators looking very good. So there was ... a very ambitious series of national development plans. You couple that then with the rising population and social changes which meant that what had been a very high number of people per house in Ireland by European standards was gradually moving towards the European norm. It hasn't reached it yet incidentally. But, overall, we bore ... we bear a responsibility but I think we were one of many players seeing an optimistic, expanding scenario for Ireland in which a wide number of people shared.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you. Mr. Kelleher, did the CIF have in place a protocol for its members on financial contributions to political parties?
Eoghan Murphy (Dublin South East, Fine Gael)
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Was there a protocol at all for members on giving gifts to political parties or individual TDs?
Eoghan Murphy (Dublin South East, Fine Gael)
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Why weren't there protocols in place?
Eoghan Murphy (Dublin South East, Fine Gael)
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So perhaps-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Well, Mr. Parlon, are there protocols in place now-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----in the CIF? No.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Kelleher, just to clarify, the CIF itself never donated to a political party or individuals.
Eoghan Murphy (Dublin South East, Fine Gael)
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What about giving gifts?
Eoghan Murphy (Dublin South East, Fine Gael)
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Well, you ... say corporate hospitality, tickets to a match, a bottle of wine, that kind of thing.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Parlon?
Eoghan Murphy (Dublin South East, Fine Gael)
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And the giving of gifts to TDs or political parties?
Eoghan Murphy (Dublin South East, Fine Gael)
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That would've been a once-off?
Eoghan Murphy (Dublin South East, Fine Gael)
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But the CIF lobbies on behalf of its members?
Eoghan Murphy (Dublin South East, Fine Gael)
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Are members free to lobby independently of the CIF?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And given the fact that lobbying is taking place by the CIF and by members of the CIF, you still did not think it was appropriate to have a protocol in place in relation to the giving of political donations? Did the CIF ever draw a correlation between the giving of political donations or financial contributions and lobbying for certain changes to tax laws, for example?
Mr. Liam Kelleher:
The activity of any individual member is in that area. It's a matter for a company. It's not a matter for the CIF. The CIF as an organisation was nowhere near that, you know ... was not in any way involved in giving donations. It just wasn't an issue for us as a membership organisation.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Have you seen Dr. Elaine Byrne's research? It's in the booklets that you were provided with. Page 106 to 107 in the first volume. And in it she states that between 1997 and 2007, 35% of Fianna Fáil's disclosed donations were from property and construction interests and 34% of the PDs' disclosed donations came from the property sector. Mr. Kelleher, why was your industry such a significant donor to the main political parties of government at the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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Why was your industry such a significant donor to the main political parties of government at the time?
Mr. Liam Kelleher:
I don't know the answer. I can only answer for the organisation that I ran, and that was the organisation of the members ... the activities of individual members are a matter for the individual members. I can only take responsibility for the organisation that I was the director general of.
Eoghan Murphy (Dublin South East, Fine Gael)
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Would you be ... have been aware at the time of these donations taking place?
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Parlon would you be aware as ... in your current role?
Mr. Tom Parlon:
Well, certainly lately, there's been little or no donations and I think they haven't been sought but I think at that time, and I read Elaine's report and clearly it researched quite accurately through the contributions that were put on the record. It probably illustrated that that's where the money appeared to be at the time. Political parties clearly sought donations as well. I have some experience of running an election campaign and it's a very expensive business, so builders and developers and, you know ... we need to make a distinction here. The CIF represents the builders. We did have some builders-developers but there were a lot of big developers out there and investors and some recently very high-profile people that were ... that had no experience in building, that had invested over €1 billion in property around the world, and were part of the whole problem that we have. But certainly, you know, they were a target, I'm sure, for political parties as well. They probably had their own original ... you know, back in the day when I was running for election in 2002 in Laois-Offaly, you were either Fine Gael or you were Fianna Fáil.
There wasn't too many other parties around at the time and people that would have been in business at that time were one way or the other, and I'm sure they were approached and made their contributions.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Kelleher, do you see any relationship between these donations, and the level of donations, and decisions taken by the Government that would favour the industry by way of tax reliefs or incentives?
Mr. Liam Kelleher:
No way, we would make our budget submission each year, we would put forward what we felt were ... having listened to members, and the members would have been involved in drawing up a budget submission, we would have made that submission, it would have covered taxation areas and taxation issues important to the members and we would have sought to fit in the submission with what we knew to be Government priorities of the day, be it the national spatial strategy or the investment in gateways or whatever it might be. And that would be the nature of it.
Eoghan Murphy (Dublin South East, Fine Gael)
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Let's look at your budget submission, then, from 2001, which is in the documentation as well. Where's the reference ... CIF, page 183. Mr. Bacon was before the committee, Mr. Kelleher, and in 2001 we saw that a number of measures designed by Mr. Bacon to calm the rising house prices were reversed by the Government. Stamp duty for investors was cut and the tax on second homes was eliminated and Mr. Bacon said this reversal of policy was too early. And an article in The Irish Timesfrom 6 December 2001 by Colm Keena suggested that the decision on stamp duty was made by the then finance Minister, Charlie McCreevy, against official advice and after intensive lobbying by interested parties. And your budget documentation, on page 183, shows the CIF lobbying for these changes. You said earlier that you were under pressure to ... under pressure to increase output at the time, but is this not an example of the CIF lobbying to change what the Government intended to do in relation to the property sector?
Mr. Liam Kelleher:
But, you know, at budget time there are 200 or 300 submissions from representative bodies, from interest groups, from trade unions ... that go into the Department of Finance, that go to the Minister for Finance. Every one of them is looking for some sort of, something extra in the budget, for their particular group, that's the nature of the democracy. The Department, the Minister, the officials, they weigh up the submissions, they have a view on policy. They develop policy and they implement budgetary policy.
Eoghan Murphy (Dublin South East, Fine Gael)
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And the evidence for the submission, where does it come from?
Eoghan Murphy (Dublin South East, Fine Gael)
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For the submission that you made in 2001 or any budget submission, where does the evidence come from for proposing those changes?
Mr. Liam Kelleher:
Where we were seeking changes? I think you've got to think back to what the environment was like in the 2001-2002 period. I think I said earlier, and there's a piece of correspondence in the core documents, that I had with Minister McCreevy at the time, that we were concerned that, post-2000, there would be a squeezing of capital investment relative to current expenditure, after Structural and Cohesion Funds started to taper down. Then you had 9/11, I think you had foot and mouth disease around the same time, you certainly had a very sharp deterioration in global and Irish economic conditions for a period. It wasn't all a rollercoaster ride upwards. There were periods of softness, and drop. And inward investment, post 9/11, had dried up pretty significantly. So I would say the policy environment of that time was very different from when Peter Bacon had made his recommendations and that, you know, hopefully, and that's what we would have wished for, that the Government of the day, the Minister of the day, would have adjusted policy in this area to help the construction industry, yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you. My time is limited so I've got to move on to another area. Mr. Parlon, just in relation to NAMA, if I may, you stated in your opening statement that banking was not a feature of the CIF's activities pre-2008, and you commissioned a report then from the ... Lombard Street Research which was critical of NAMA, and this is in core document, page 7. Where did the funding for this report come from to commission this report?
Mr. Tom Parlon:
We raised some extra funding ... I just ... probably, the impression, and this discussion has all been about house building and about developing. But that's quite a... it's a minuscule part, as you can imagine, of CIF now. It probably only makes up 5% of the total activity within CIF.
At the peak in 1996 when we built ... or in 2006 rather, when we built over 90,000 houses, even then it was about half of the total of construction output. So, within the CIF, the main contractors, the electrical contractors, the other ... they would have a big input and probably a lot of concern that the focus, entirely, within CIF, was on house building and development, and ... and as a result of the ... the over-build in that area, bringing difficulties for the industry, for the country, and for workers, and so on ... so when concerns were raised, we ... the Irish House Builders ... the IH ... the Irish House Builders Association, you know, are a constituent organisation within the CIF ... they had their concerns in the lead-up to the establishment of NAMA. They sought the support of the CIF as the overall organisation and said: "Look it, we're majorly concerned here". We didn't invest in legal challenges or anything, we invested in a ... an external financial consultancy group from London, and we sought to raise funds amongst the builders themselves because it was fairly likely, when things were going downhill, that a main contractor that had no involvement and ... or wasn't going to have an involvement in NAMA ... so we sought an extra voluntary subscription from members.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was a subcommittee set up within the CIF?
Eoghan Murphy (Dublin South East, Fine Gael)
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And it's purpose was to ... to what?
Mr. Tom Parlon:
Well, I suppose it was to investigate what the likely implications of NAMA were going to be for the industry.
Eoghan Murphy (Dublin South East, Fine Gael)
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And there was a fee for being a part of the subcommittee to pay for the research.
Eoghan Murphy (Dublin South East, Fine Gael)
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What level of subscription?
Eoghan Murphy (Dublin South East, Fine Gael)
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Per member of the committee.
Ciarán Lynch (Cork South Central, Labour)
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I'll move it on now Deputy, if you don't ask.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Staying with the same document, Mr. Parlon, if I can maybe just ... and it refers to your opening statement as well. This report was commissioned by the CIF in 2010 from Lombard Street Research. It was quite critical of NAMA in 2010, and at the bottom end of the page there it says:
NAMA is not intended [as a bank] ... as 'a 'bad bank' but as an asset manager. NAMA is therefore different from the Swedish Securum or the American Resolution Trust Corp[oration], both of which were clearly bad banks, not asset managers".
And then in bold print it goes on to say:
By taking over good loans as well as bad, NAMA actually impairs the banking system's potential recovery. This would be a departure from previous best practice as experienced in other countries [and] It would add to the work load and complexity of NAMA at a time when speed and efficiency are of the essence.
Would you please like to comment upon that this morning, given what you said in your opening statement, which would seem to be at-----
Mr. Tom Parlon:
Well, certainly, we didn't have the competencies within the CIF to examine an alternative to NAMA, and, clearly, the Government would have expended very substantial consultancy fees with ... originally with Dr. Peter Bacon, and with other experts, at massive expense to set up that new model. So we sought outside ... we got some advice, we decided upon Lombard Street finance, a London-based outfit. They came over, we gave them some terms of reference to look at NAMA, to see the particular model that was being laid out, how effective that might be, what the implications were going to have on the industry, and so on. They went along and did the report. As soon as we got the report, we looked at it ourselves. We immediately forwarded it on to the Minister for Finance, to his senior officials, and to the NAMA people at the time.
Ciarán Lynch (Cork South Central, Labour)
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The question I'd be putting to you though, Mr. Parlon, is ... and, as Deputy Murphy outlined, there was quite a significant time investment, energy investment, and financial investment into putting this report together. Does it actually hold up or not?
Mr. Tom Parlon:
Well, look it, I don't know what impact it had on ... obviously, there's two sides to every story. The Government chose to go on a particular route. I know the Opposition at the time felt it wasn't the right route to go, which would be ... wouldn't be unusual at any particular time anyhow, but we felt that investing in some alternative point of view from an expert agency might be helpful, and, you know, we ... when NAMA was set up, we immediately said: "Well, they're the only game in town". We had a number of meetings where we invited in our developer/builders, who were going to be involved in NAMA, and both the chairman and the chief executive, and some other senior officials attended large meetings, and several meetings, to outline how NAMA was going to operate-----
Ciarán Lynch (Cork South Central, Labour)
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I'll just press you on the point, if you don't mind, Mr. Parlon. The conclusion of that report was one of an entirely different action. Do you believe on ... or do you have a view now, looking back on the conclusion of that report, whether it was the best, or maybe a better option was available?
Ciarán Lynch (Cork South Central, Labour)
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A year later, yes?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Tom Parlon:
In terms of the progress and the speed of the progress they were making which, I think, we were all a bit concerned and it's not to diminish the major job that NAMA had to do at that stage in terms of getting in all the assets first of all, before they began to manage them.
Ciarán Lynch (Cork South Central, Labour)
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Right, thank you. Deputy Michael McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair. You're very welcome, Mr. Parlon and Mr. Kelleher. Can I just start by asking in relation to what you both have said was an unsustainable level of construction ... and just to recap on some of the figures in 2006, about 270,000 direct jobs, construction accounted for over 25% of GNP, stamp duty receipts were €3.7 billion, which were 8% of total tax and 93,000 houses completed in 2006. At your own executive board, and I suppose it relates more to your time, Mr. Kelleher, were there any vigorous discussions at the executive board of the CIF? Were there any contrarian views, that, "Look, this may not be sustainable; we may not have a soft landing; this is going to head over the cliff? Were there any such discussions during your time?
Mr. Liam Kelleher:
Deputy, no. The industry focus was very much on delivering a very high level of project activity at the time and that's not just housing, that's across the board in civil engineering, in major construction projects, in the inward investment projects. Even the soft landing thesis, if you like, only came on the scene in 2006-2007. Prior to then, it's incremental and when things happen incrementally, you're not, if you like, as aware of the cumulative impact that it's having. It's incremental and the belief was that there was a substantial infrastructural deficit, the belief was that with the population growing, with incomes growing, with inward investment, that it would continue. We knew it was high by European standards, we knew we were building, both in general and in housing, above European norms, but we believed that that was justified by the economic circumstances and we weren't inventing that belief. That was the general view of economists, of economic institutes, of Government at the time.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask if CIF took a view on the extent to which a relatively small number of builders and developers became so large and accounted for a massive proportion of overall bank borrowings? Was that underpinned by CIF's strategy? Was it to help to develop some very large players in the market? Was that your plan and your strategy?
Mr. Liam Kelleher:
No, the CIF, if anything, was oriented the other way. It had, as I mentioned, up to 2,500 members at its peak, very diversified, both in the nature of what they did and in where they were located. And the views from Donegal to Kerry would have been on local issues and would have been of small firms striving to be a step larger. In fact, many of the largest companies that we know now had become the largest companies and the largest borrowers were not actively involved in the CIF. Their affairs were at some distance from the CIF itself and many of them ... some of them were not members of the CIF.
Michael McGrath (Cork South Central, Fianna Fail)
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In response to Deputy Murphy, Mr. Parlon, you explained the membership fee structure, that it's based on turnover. Is that the case in ... across all classes of membership?
Mr. Tom Parlon:
Well, I think, house building was an exception and it's still .... we've introduced a new arrangement lately, but certainly we wouldn't have been aware of the scale of some of our members in terms of their turnover, now that it's become apparent. For normal construction firms, they send in their turnover figures from their accountants and that's the basis ... but the housing section would have been different. There would have been more of a flat rate applied to them.
Michael McGrath (Cork South Central, Fianna Fail)
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Irrespective of size?
Michael McGrath (Cork South Central, Fianna Fail)
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Even during the boom years?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, okay.
Michael McGrath (Cork South Central, Fianna Fail)
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And what other sources of income would the CIF have apart from membership fees?
Michael McGrath (Cork South Central, Fianna Fail)
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What percentage of your overall income would be derived from membership fees?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And during the mid-2000s, when a lot of the builders were very successful, had huge businesses, what would have been the largest membership fee-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----for the CIF, approximately?
Michael McGrath (Cork South Central, Fianna Fail)
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And that would have been based on turnover?
Michael McGrath (Cork South Central, Fianna Fail)
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Sure, okay. And, in terms of the basis for that, it would be an accountant's letter or would it be the actual accounts would be provided to the CIF?
Mr. Tom Parlon:
Yes. And now ... like, with a lot of our firms now, not all of their construction is within the country, so it's in their Irish-based construction activity and that was always ... you send in your turnover figures and typically, you know, you might be working on a turnover figure that's two or three years old and subscriptions weren't a problem until shortly after I took over, when the downturn started, and then all of a sudden we began to have our own income crisis and then we worked a lot closer on turnover figures and on being up to date and insisting on getting them and so on and insisting that the different subscription levels were up to scratch.
Michael McGrath (Cork South Central, Fianna Fail)
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And, at the peak, how many firms, roughly, would have been paying in the region of €25,000, €30,000?
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. And in any sense were you very dependent on that income as an organisation or did you have a good spread overall in terms of your revenue base?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, were you-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----very dependent on the revenue from the largest members?
Mr. Liam Kelleher:
No, no. There was a very broad base of membership around the country. The subscription income, in my time, at the peak, would have been more from subscriptions rather than from training programmes. The training programmes, when you ... were health and safety and were management services and upgrading management in the industry. That revenue would have been about 20% of the organisation in the mid-2000s and in many ways the costs of providing it were a substantial part of the revenue - when you take hotels into account, when you take lecturers into account ... lecturer's fees. And those training programmes were designed, as I say, to integrate in with the services we were providing to members.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Mr Parlon, you spoke about NAMA in your opening remarks and you used the term a while ago that they've done a very good job, in terms of the role that they have and the mandate that they have. Does that represent a change in thinking from CIF?
Mr. Tom Parlon:
Well, obviously it was a bit like, I suppose, suck it and see. There were people who went in there and I think, to quote some Minister, they were hopelessly insolvent; who didn't have any other objection, but the banks handed over their loans, that were mainly based upon loans that were associated with property that had massively decreased in value and so on. So I think the bulk of the people in NAMA - all of them, practically - were as a result of property investments that the values had gone down and they'd overextended themselves.
So, you know, it took a long time and if we think back then, you know, it was sort of crisis mode for the construction industry. The period around when NAMA was being introduced, bank lending had stopped entirely, house building had practically stopped, there was nobody getting a mortgage or nobody ... the sentiment had turned totally in the opposite direction; nobody wanted to buy a house or know about property. So that was an extremely nervous time for the industry and, as I said earlier in my opening remarks, you know, the big issue was companies going out of business, people being laid off and people emigrating all over the world to try and find jobs in construction after they'd learn very good skills here. So, it was a very, very nervous time and we didn't know ... and, like I said earlier, the issue was and probably still would be debated by a lot of experts that would be more expert than me about, you know, was NAMA's intervention and all their different actions, did it, you know ... when they started there was a big concern that there was going to be, you know, major sell-offs.
And clearly if, in a weak market, you start selling off a massive lot of other stuff, it weakens the market further and the market will be in freefall. So, you know, the issue the industry have when we're ... if you attempt to build a house, and for a number of years after 2006 there was a carryover of stock, so when that can't be shifted, and there still, unfortunately, is a carryover in some of the regional towns and so on around the country, if the carryover can't be shifted you have little or no chance of starting building anything new. Very often the carryover is available at maybe half the price of the original construction. So that's the sort of timescale around our concerns about NAMA at that stage.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. But overall now, given the experience that you've had over the last five or six years, do you think that it was the right model to take all of the good and bad loans, property-related loans, out of the banking system or do you believe it would have been better to leave them in the banks and let the banks work them out with the debtors?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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And do you think NAMA has got the balance right in terms of working with debtors co-operatively and using enforcement powers where they have to, appointing a receiver and bringing companies down?
Mr. Tom Parlon:
You know, there used to be speculation that NAMA was a bailout ... a bailout for developers. Certainly, my experience, it hasn't been. I think they've been fair with people but they've been very, very tough with people. There's people that just are literally working for a salary now that were major operators at one stage, but they are happy to use the expertise they have, and try and work out their situation, and they're responsible people, I think, that feel responsible for the situation they got themselves in. So, you know, I think it is positive, and if you look at some of the big projects that are happening now, and hopefully about to happen, they're happening as a result of NAMA choosing to invest, and when we particularly have a major deficit down around the docklands with regard to grade-A office space, I understand that NAMA are in the act of investing in a couple of very substantial projects there, and that's very positive.
Michael McGrath (Cork South Central, Fianna Fail)
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So you don't support the allegation that was made at the time that NAMA was being set up that it would be a bailout for developers?
Michael McGrath (Cork South Central, Fianna Fail)
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That's not your experience?
Michael McGrath (Cork South Central, Fianna Fail)
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Or your members'?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. The fact that-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. The fact that ... of NAMA's disposals, about 90% of the assets have been bought by US private equity firms, what impact does that have on the construction industry in Ireland?
Mr. Tom Parlon:
Well, look it, it's ... you know, they've been called vulture ... vulture capitalists and, you know, there are elements of those investors that trawl around economies that are in a difficult situation, find value, hold it for a while and then move on. Unfortunately for NAMA and for the rest of the country, there was nobody else to come in and buy at that stage. And, you know, on the one hand NAMA have been criticised for selling too soon in some circumstances. You know, the percentage - and I just don't remember it offhand - but the percentage of assets that NAMA inherited, a massive percentage of them were outside of this country altogether, borrowed from Irish banks. Some other markets have picked up a lot quicker ... and there will be NAMA assets, I'm sure, around some of our country towns, and, you know, I've heard them say a number of times that they're ... they're very much in the minority, that they won't be able to offload for a long, long time.
Michael McGrath (Cork South Central, Fianna Fail)
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Finally, in the core booklet, Vol. 1, page 16, there is a reference to a meeting on 28 September 2009, where you, Mr. Parlon, represented the CIF at a meeting with the Department of Finance and the NTMA officials. And the meeting notes say that the "CIF support the appointment of a ... retired [property] industry professional to the Board ... [of NAMA and the Department of Finance and] NTMA officials indicated [that] CIF should [make] suggestions." Did that happen subsequently?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, thank you. Thanks, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Thank you, Deputy McGrath. If I can maybe just deal with one final item on NAMA there before we move on. And that is ... the question is, Mr. Parlon, that the NAMA chief executive advised this joint committee that one of the notable features of the acquired loan portfolio was that many debtor connections did not have the terms ... or did not have the teams with the necessary skillsets to manage the loans effectively, and I'll just reference his quote there for you, if you don't mind, it's on page-----
Ciarán Lynch (Cork South Central, Labour)
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It's ... I ... I'll see if I can put it up there for you, but it's actually on page 16 of Mr. McDonagh's opening statement. But I'll just take you through the sentiment of the comment-----
Ciarán Lynch (Cork South Central, Labour)
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-----more than anything else, and to get your comment upon it, Mr. Parlon. It says that:
Some of the more professional debtor connections tended to focus on particular sectors in which they had developed an expertise; this was particularly the case for debtor connections whose main asset ... was outside of Ireland. However, one of the [more] ...notable features of the acquired loan portfolio was that many debtor connections had borrowed against a diverse range of assets. It was not unusual to find, when all of the loan information was collated, that a connection had [an] exposure [on] a number of jurisdictions and ... a range of sectors including office, retail and residential, in addition to ownership of one or more hotels as well as undeveloped land interests.
He then goes on to say: "After NAMA acquired the loans, it was not always apparent to us what the debtor’s strategy might have been in assembling a range of assets which were so diverse by reference to sector and location; the obvious conclusion in some cases was that the compulsion to purchase more and more uncorrelated assets was entirely related to the almost unlimited availability of debt funding." If you could maybe ... if I could maybe to ask you, maybe, to comment on Mr. McDonagh's statement, but maybe to enlighten the committee as to whether the skill deficits that are indicated in terms of strategic management of assets was a problem at the time? And if that problem has subsequently been rectified by the CIF looking at its members now and saying, "Do we take a more strategic approach as to how we go about our business?"
Mr. Tom Parlon:
Well, in terms of the diversity of properties and businesses that had been eventually put together when ... and I don't think there was an appreciation, certainly not within the CIF, or not with me personally, but I think even amongst individual banks of the exposure that individuals had until NAMA pulled them all together and said, "Mr. X, Jesus, he has 15 different loans from 15 different banks and accumulatively they're into the billion." Right? So that was a surprise, I think, but I think Brendan McDonagh did also say that when he examined the original portfolio he had, starting with the top, with the sort of billion-plus, there were a number of individuals up there who had been investing and who had been operating at a global level, and when you got down to about the hundred-million mark, which there was a lot, he said a lot of them were both syndicates and groups of individuals and individuals whose primary skillset wasn't in either building or in property development. So all sorts of choose to get into syndicates that time and, clearly, there was too much money, there's no question about it, it was ... my colleague made the point earlier that CIF didn't have any role in terms of dealing with banks because banks were giving out money very freely to both builders and developers at the time without ... so it wasn't an issue. And interest rates for a lot of the time were okay. Towards the time ... the handover from Liam to me, I think we had about eight successive interest rate increases, which began to bring a bit of concern.
Ciarán Lynch (Cork South Central, Labour)
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And today is the CIF more cognisant of this ... of a more sustainable and more structured business model in terms of development?
Mr. Tom Parlon:
Well, I'd say if we are to examine our membership today, Chairman, our membership is entirely construction based. And it's the specialists and ... like, if you look at the Intels, the Corrib Gas, the Pfizers, and so on, you know, we have the specialist main contractors and subcontractors that have built and delivered those and, thankfully, that pipeline is still very good. And the core ... the big group of our ... both the people who are contributing to us and the people who are involved as presidents and vice presidents and so on, are very much in that sector.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much. Senator O'Keeffe.
Ciarán Lynch (Cork South Central, Labour)
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Six minutes.
Susan O'Keeffe (Labour)
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In 2009 the CIF was critical of the NAMA Bill, stating that it failed to provide adequate redress for borrowers. We now know, of course, as you do, about the extent of non-performing loans, about interest roll-up and paper collateral against borrowings. So what do you make of those things? And how has your view changed? Because you've said, of course, now you've a much better relationship.
Susan O'Keeffe (Labour)
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You have a relationship.
Mr. Tom Parlon:
Well, as ... again I say there was a vacuum there and some of our members expressed their concerns through the Irish House Builders Association. And that's ... my role as the director general, and would have been Liam's previously, when there is an issue in one of our associations they come up the line and say, "Look it, can we have the support of the CIF on this?" And so on. We set up a subcommittee that time, which was made up of people who had a large degree of both involvement and experience and they sort of raised the issues and, as a result, we invested in the external advice. But certainly-----
Susan O'Keeffe (Labour)
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Yes, but given what you know about the non-peforming loans and so on-----
Mr. Tom Parlon:
-----it wouldn't have been our appreciation at all ... you know ... as to the extent of the exposure that was there. It wouldn't have been ... it wouldn't ... we wouldn't have had ... it was probably quite shocking when we eventually discovered when NAMA took over the loans the degree of ... of discounting they had to do with the individual banks in terms of the ... the-----
Susan O'Keeffe (Labour)
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So is it fair ... so are you saying that the CIF was shocked by the extent of non-performing loans and the interest roll-up?
Mr. Tom Parlon:
Yes, I think, ultimately, when NAMA sort of ... agreed the discounting they would have to do on the individual loans ... like it was ... it was quite shocking. But, on the other hand I suppose it reflected ... and this is the issue ... if I was asked, you know, what could I have done after I took up to slow down ... like, it's construction and particularly, housing construction ... is like the big liner that we talk about. It's moving along very slowly and it's very difficult to stop it.
By the time that you acquire the lands, by the time that you get the zoning, that you get the planning permission and then get the finance and then get the people on site and start building it and eventually have to sell it. Like ... unfortunately, a lot of people had bought the land just when the turnover came, at maximum price. And that left them extremely exposed because those lands are ... you'd be lucky to get agricultural price for a lot of them still ... the ones that are outside the greater Dublin area.
Susan O'Keeffe (Labour)
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Mr. Kelleher, in your tenure, what percentage roughly of the whole, sort of, property construction business people operating did the CIF represent? Did you represent 20% of the operators in the field or 90%? Just roughly, even.
Susan O'Keeffe (Labour)
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Yes, that's ... that's all ... I'm just ... but ... but the public at large would ... would see the CIF as speaking for the industry, even though you didn't represent everybody?
Mr. Liam Kelleher:
Yes, that's true. We were the representative body but, as Tom Parlon said earlier, it's an entirely voluntary thing. Nobody had to join and some choose not to. And it was ... it was a federation of contractors and subcontractors and house builders. That, I would absolutely stress.
Susan O'Keeffe (Labour)
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How close do you believe in your time, Mr. Kelleher, that the CIF and or its members ... how close were they to the Fianna Fáil party?
Susan O'Keeffe (Labour)
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You can't speak for the members at all?
Susan O'Keeffe (Labour)
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But, as you stood and watched your own members and you could see what was going on, you were not obviously blind to what was happening in the market. Would you have an observation as to whether there was a closeness between some of your members, other perhaps people in the ... in the business who were not members ... were to that political party? Do you have any observation?
Susan O'Keeffe (Labour)
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And that's all you would say about that? There were members who were close? That's your-----
Susan O'Keeffe (Labour)
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How, Mr. Parlon ... how useful was it to the CIF that you yourself had been a Minister for State at the Department of Finance and that you had also had responsibilities for the OPW? Because I think you said yourself in a ... in a ... an interview that ... ''I'm in and out of the Dáil every other day ... any chance I get everybody does it''.
Ciarán Lynch (Cork South Central, Labour)
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Senator-----
Susan O'Keeffe (Labour)
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The ... it's a quote from the Irish Independent. I can give you the reference.
Mr. Tom Parlon:
Well ... there's no doubt knowing how government works, or having an understanding of how government works is certainly a help. And I'm sure any ... sort of ... public affairs consultant would say that as well when they are out, sort of, looking for business. But I certainly believe ... and I had just lost my seat at the time in 2007 ... I'm not sure if that's an experience if that any of you around the table have but it's, sort of, a bit sobering, anyhow. And I was approached about this job. It had been apparently advertised quite substantially earlier. I didn't ... it passed over my head. I was too busy trying to ... to win an election.
Susan O'Keeffe (Labour)
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Did you have to interview for it, Mr. Parlon or-----
Mr. Tom Parlon:
Of course, absolutely ... a very rigorous interview process. But I felt at the time that my attraction to the CIF was that I had a long-term experience in being involved in a representative organisation in the IFA and had been a president of that and it's ... you know ... there's still ... there were individuals within the CIF that felt the IFA's mode of action by marching up the streets and making a big fuss and so on was a hell of a lot better than ... than Mr. Kelleher's previous campaign who was very diplomatic about how he did his business but that was just a view. And that's my understanding and that's my belief and I'm saying that very truthfully that my attraction for the job was my involvement. I have no doubt that having the experience of being in government and so on was a help ... but it was my previous organisational experience.
Susan O'Keeffe (Labour)
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Can I close by asking-----
Ciarán Lynch (Cork South Central, Labour)
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One last question, Senator-----
Susan O'Keeffe (Labour)
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Can I close by asking ... particularly Mr. Parlon on why so much of your actual formal submission to the ... to the ... to this inquiry is actually drawn from the CIF's website rather than ... it doesn't appear ... it's not a reflection of your story or your involvement? It doesn't seem to me much of the content of it is actually available on your website. Why is that?
Mr. Tom Parlon:
Well, I think the message I'm trying to get across in the statement was ... in terms of CIF and we are here, both of us, because of our roles in CIF during that particular time ... and you're trying to get as much information in terms of coming to your conclusions. that CIF, while the big focus here is about development-building and the impact that that had and building 93,000 houses in 2006, the impact that that had on the economy ... the CIF as an organisation is way bigger and broader than that. Every element of society depend on construction for ... whether it be this room here or the ... sound system or the video system or whatever-----
Susan O'Keeffe (Labour)
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Sure, but we were hoping for your submission, Mr. Parlon, as opposed to, if you like, what we can get on the website, which, in fairness, is available to everybody, including ourselves. I'm just puzzled why you ... why there isn't, if you like, why there isn't more information what was going on, particularly in relation to the lines of inquiry.
Ciarán Lynch (Cork South Central, Labour)
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-----then I'm moving on-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy Kieran O'Donnell. Deputy, you have six minutes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Chairman. I welcome Mr. Parlon and Mr. Kelleher. Do you have any comment to make on the fact that the ghost estates appear to be concentrated very much with low areas ... areas with low population densities in, we'll say, Longford, Leitrim and Roscommon ... and a survey done by ... a report done by the National Institute for Regional and Social Analysis and NUI Maynooth in 2010 stated that for both Leitrim and Longford that if .... based on, we'll say, the rate of growth normally ... the normal rate of growth in ... in households between ... in the ten years leading up to 2006 ... based on the number of houses that were built by ... over the three period from '06 to '09 ... 6,500 houses were built in Leitrim and Longford alone that would take ten years to fill the ... fill the ... to fill those houses based on housing stock they had? And if you could just indicate ... it was during your time, Mr. Kelleher ... did you lobby for the tax incentive schemes, particularly the rural incentive scheme along the Shannon?
Ciarán Lynch (Cork South Central, Labour)
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There's two different questions there now. One relates to the ghost estates and the other one deals with the taxes ... tax break incentives. If you could maybe deal with both of them.
Ciarán Lynch (Cork South Central, Labour)
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The-----
Kieran O'Donnell (Limerick City, Fine Gael)
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The ... I think they are interrelated.
Mr. Liam Kelleher:
The ghost estates ... the tax incentives ... in our budget submissions in that period, we would have ... we would have integrated our suggestions, our proposals with Government strategy at the time ... with the national spatial strategy, with the gateways, with the completion of the inter-urban motorway network ... with ... with what we would have seen as the necessary infrastructure.
I'm not sure, to be honest, if we specifically included ... we wouldn't have excluded the ... the ... that area from ... we wouldn't have said, "Drop those incentives''. But I don't think we highlighted them and I know we did highlight the need to integrate incentives with the implementation of the national spatial strategy and of the gate ... particularly of the eight gateway towns and cities that were identified.
Kieran O'Donnell (Limerick City, Fine Gael)
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In, we'll say, looking at the tax incentives ... and, Mr. Parlon, you were Minister for State in the Department for Finance with responsibility for the OPW between '02 and '07 and, Mr. Kelleher, during that period you would have been director general of the Construction Industry Federation. And over that time period in ... in December 2002 ... the Planning and Development (Amendment) Act came in, Mr. Parlon, which effectively allowed developers to negotiate out of that Part V ... the social and affordable contribution. Subsequently, in the Finance Act 2004, all the tax incentives, which were due to have finished by the end of '04, were extended to July '06. Subsequently, in the Finance Act 2006, they were further extended right up to July 2008.
So the questions are for both. Mr. Kelleher, did you lobby the Department of Finance and Government for those deadlines to be extended? And, Mr. Parlon, were you lobbied by the CIF in your role as Minister for State in the Department of Finance on these particular issues and what view did you take in terms of ... which, clearly, these ... you literally had tax incentives being extended for an eight ... for a four-year period during your tenure at Ministry of finance-----
Ciarán Lynch (Cork South Central, Labour)
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There's a multiplicity of questions there now, Deputy, and I need to afford appropriate time to people to answer them, so if I can ask you to deal explicitly with the ghost estate issue, and the-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Chairman, I've already dealt with that.
Ciarán Lynch (Cork South Central, Labour)
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And then the tax breaks issue that we are on as well - to the both of you. Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Why?
Mr. Liam Kelleher:
We'd have made the case for it. Why? Because our members would have been involved in implementing projects that were ... that were, if you like, benefitting from those incentives and they wished to see the projects covered by ... by the ... by an extended period. You've got to remember that in many cases planning permission takes time to be given and a pipeline of projects builds up. We would have looked for the extension of those projects because our members ... and, as a representative organisation, our members wished us to do so.
Kieran O'Donnell (Limerick City, Fine Gael)
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Even though, Mr. Kelleher, during that time period from '04 to '08 the level of house completions were peaking at incredible rates and, clearly, were-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And, Mr. Parlon-----
Kieran O'Donnell (Limerick City, Fine Gael)
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So your members were looking for this?
Ciarán Lynch (Cork South Central, Labour)
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Is that a question, Deputy, or is that a statement? Are you asking-----
Kieran O'Donnell (Limerick City, Fine Gael)
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A minute of Mr. Parlon's time there please ... the question really was were member of your Construction Industry Federation, namely, developers, lobbying the CIF to look for the extension of the deadline dates for these tax incentives?
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose I am conscious, Mr. Kelleher, in the limited time I want to hear Mr. Parlon-----
Ciarán Lynch (Cork South Central, Labour)
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I am conscious that there's a question outstanding to Mr. McParland and them I'm going to wrap up.
Kieran O'Donnell (Limerick City, Fine Gael)
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Mr. Parlon, in your time as Minister for State in the Department of Finance and the OPW, were you lobbied by the CIF and Mr. Kelleher for the extension of these timelines from up ... literally being extended for a four-year period from the end of December '04 right up to July '08 for all these tax incentive schemes that kept the construction sector going? Were you lobbied by the CIF and what was your view on those?
Mr. Tom Parlon:
And, Deputy, I've, sort of, pre-empted this sort of question and I've striven to find any case where I was lobbied directly by CIF, and I can't. I would've been aware certainly of pressures coming on. I have a recollection, particularly with regard to hotels, where somebody had made a major investment, as Mr. Kelleher said-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Were you lobbied by anyone on these-----
Kieran O'Donnell (Limerick City, Fine Gael)
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By whom?
Kieran O'Donnell (Limerick City, Fine Gael)
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Were you lobbied by developers?
Kieran O'Donnell (Limerick City, Fine Gael)
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What view would you have taken, Mr. Parlon?
Mr. Tom Parlon:
Well, I would have had sympathy with somebody who had already invested substantially in a site and in a build project, and if ... outside his own control, which, of course, anybody who would have ever lobbied anyone said: "It wasn't my fault it's delayed and if we don't get it over-----"
Kieran O'Donnell (Limerick City, Fine Gael)
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Did the PDs and you, as Minister of State at the Department of Finance, support the extension deadline dates for these tax incentive schemes for literally a four-year period?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, you did not support it?
Ciarán Lynch (Cork South Central, Labour)
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Deputy Joe Higgins, six minutes.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Parlon, you told the inquiry that you were headhunted by the Construction Industry Federation. Was the fact that Fianna Fáil and your party that you were a part of, and part of the Government ... was continuing on in office ... was that perceived to be a major advantage by the construction industry in lobbying terms and was that the reason why a farmer would be put in charge of the Construction Industry Federation?
Mr. Tom Parlon:
Well, I don't know. Obviously, the powers that be in the CIF chose to hire me eventually. It was coincidental that I found myself redundant, I suppose, at the same period that Mr. Kelleher had announced he was about to retire or ... from the organisation. So I believe the position was widely advertised and a recruitment agency, you know, recruited, or rather interviewed a lot of people, and apparently it was quite after the event before a decision was taken that I got a phone call saying, "Look it, we understand you might have an interest in this job".
Joe Higgins (Dublin West, Socialist Party)
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But do you think the fact that you would have an inside track to Government would be a big advantage in lobbying? Do you think that may or may not have been a consideration?
Mr. Tom Parlon:
Well, I think the fact that I understood about how government works, or I had an understanding, was a help. But I know there was lots of suggestions afterwards saying that because I was involved in the OPW, and that the OPW would have been the contractor on ... or the client on behalf of the State, that I would have been able to impart some individual knowledge to members ... you know. I think it's important to point out that the members of CIF are ... you know, absolutely keen, vicious competitors with each other when a project goes up and it would be very important that the federation and its officers, would be very, very straight down the middle. And if I were to impart some personal knowledge, if I were to have some, to an individual member, I think it would've been my swan song.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Gentlemen, a Maynooth NUI study found in 2010 in a report, 620 ghost estates after the crash of the bubble. Does the Construction Industry Federation have a policy of what should be done with gold estates ... ghosts estates?
Mr. Tom Parlon:
Well, since I remember the Maynooth, and I just know that that was back in March 2010 ... they did a figure. There was the urban environmental project in UCD suggested an even higher figure, and, the following February, the Department of the Environment said ... you know they talked about the ... Maynooth I think talked about 300,000 houses, eventually the Department said it was about 25,000 completed houses in the State ... new houses. But since then, the Department of the Environment, the CIF and a number of other stakeholders have been involved in a ... in a stakeholder group looking at the estates with the local authorities and so on ... and my understanding now is there's been massive progress in terms if either finishing out the parts that were viable, closing them down, putting in the services and so on and making life a bit more comfortable for the people that had the misfortune to invest in those particular estates.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Kelleher, could I ask yourself ... Mr. Frank Daly, chairman of NAMA, was very critical of the construction industry for non-compliance with regulatory standards, including fire safety standards. And we know there were some very high-profile issues with fire safety causing huge problems for the ordinary people who had bought mortgages, etc. When you were director general of the Construction Industry Federation, did your organisation, in any proactive way, take initiatives that your members were properly complying with building regulations, safety, fire safety, etc.?
Joe Higgins (Dublin West, Socialist Party)
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No, there were a number of ... I wasn't referring to anyone in particular.
Mr. Liam Kelleher:
There was one particular one that ... but ... I just mention that. No, the CIF would have no time for any construction activity that did not meet with the required statutory, safety and other performance. Fire safety as such ... I know the regime has changed now, our focus in that area would have been more on safety, on safety in construction and on ... on the steadily increasing, and correctly so, standards for safety on site and on project. I know that in more recent times that there has been a change in relation to building inspection. It wasn't ... it wasn't comprehensive at the time but that wasn't an issue ... that wasn't something that the CIF had a regulatory responsibility in relation to implementation of and ... but we regard it as absolutely unacceptable.
Joe Higgins (Dublin West, Socialist Party)
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Roughly, what was your annual budget in the 2000s?
Joe Higgins (Dublin West, Socialist Party)
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Yes, €5 million or €6 million. Mr. Alan Ahearne, in evidence to the inquiry, said, "In a study I wrote with ... former colleagues, which was published on the [United States] Federal Reserve's website in September 2005, we identified no fewer than 44 episodes of house price booms and busts in 18 advanced countries since 1970."
Ciarán Lynch (Cork South Central, Labour)
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Last question now, Deputy.
Joe Higgins (Dublin West, Socialist Party)
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Yes. And there were other studies, late '90s, early 2000s, pointing to a well-recognised pattern of boom and then a disastrous crash. With the huge resources you had, and the capability for analysis and research, did you identify in any way the dangers that was happening with the blowing up of the bubble that was going on and what might follow from it?
Mr. Liam Kelleher:
We did not have huge resources and, as I said earlier, 90% plus of the resources were devoted to the provision of services to members, which they were looking for, which they wanted, and which, you could say, they demanded. Now, the second half of it ... so we did not have a research capability of any depth. We had a single economist at the time. But you mentioned Mr. Alan Ahearne's research. It's ... you know, I've read the papers closely. I read them quickly probably at the time. They're very good. They stand up very well. I wish I had taken more ... paid more attention to it at the time. I'd say the same about Morgan's Kelly's articles. But the vast majority of prevailing opinion at the time was that it was ... that it could continue, that it was sustainable, that economic growth was strong. I'm recognising that ... and if there's a lesson I'd take out of all of this, if I had my time all over again, it is to listen more to contrarian views.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Senator Sean Barrett. Senator, six minutes.
Sean Barrett (Independent)
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Thank you very much and welcome to our visitors this morning. The chairman of NAMA, when he was here on 22 April, he said that an unexpected cost to NAMA was incurred due to the remedial works that had to be carried out as a result of the poor construction with many of the building projects that went into NAMA. Does the federation have anything to do with that particular problem?
Sean Barrett (Independent)
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I think it was in your time, or Tom Parlon's-----
Mr. Tom Parlon:
-----that are obviously a lot more stricter and so on, particularly with regard to inspections. Unfortunately, at that time, as in banking and other areas, there was a high level of self-certification and professionals signed off on buildings ... that may have been, you know, employed by the builder and, perhaps, you know, they weren't as strict as they should have been. The new regulations now require that you've got to have an assigned certifier. The assigned certifier has to be an architect, a chartered engineer or a chartered surveyor and he has to sign off on the different elements, and he is obliged to be responsible for, and have insurance to cover, any sort of ... if he signs off on something that doesn't prove to be the case, be it the quality of the foundations, be it the insulation, be it the fire safety regulations or whatever. So I believe we have a very rigorous regulation in place now, and the CIF have supported the Department of the Environment all the way through in terms of bringing those regulations forward.
Sean Barrett (Independent)
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Could we look, Chairman, at the core document on page 27, and it's a representation made by the CIF in relation to NAMA in 2009, and it says, "Verbal Representation[s on] ... Undertakings given by banks to borrowers must be enforceable against NAMA". Isn't that the opposite to what you've just been saying? You know, that we have to get this industry more professional, and we're saying, no, that NAMA should honour verbal agreements between banks and developers?
Mr. Tom Parlon:
Well, I'm just picking up on that now. That is our own ... well, obviously this was a result of ... well, you know, I think it's apparent now that in terms of due diligence for loans and so on that there was major deficiencies in terms ... and that became apparent to NAMA as well when they took over loan packages from banks, they discovered that the actual due diligence was very poor, that in terms of complying with the different areas of ... so on, security were very lax, but clearly there were ... there was verbal representations given at the time as well. I'm not 100% sure of why that particular ... but obviously there was somebody on our group that made a point of that and that point was made to NAMA. I don't believe NAMA, you know, took it on board certainly.
Sean Barrett (Independent)
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Thank you. We have estimates that since 2009, the fraction of a typical household disposable income needed to cover the cost of a newly built family home has gone from 25% to 40% and that in the same period, 2009 to 2014, the price of a three-bedroom semi-detached house rose by almost a third. You know, does the construction industry have a problem with, you know, the burdens it's imposing on people buying houses and borrowing excessively so to do?
Mr. Tom Parlon:
Well, if we take now, the current price of a house to a first-time buyer, 40% of that house we would estimate, and has been sort of agreed by other commentators, goes directly to the Exchequer when you take in the VAT, the stamp duty ... like, it's important to realise ... and we've been making this point, you know, to Government, you know, all along, and we have always been for reduced stamp duty, and I know at one stage when Minister Cowen came in as Minister, he reduced stamp duty, he took off the liability for stamp duty for the first €125,000. It meant that somebody instead of paying, I think, about €25,000 for a house, paid about €15,000. And ... like, that's a cost ... like, whether it be stamp duty or VAT or local development contributions or whatever, it's ultimately the first-time buyer that ends up paying them. There was a sort of a notion previously that if you lumped all these costs up on the developer, you'd sort of ... he was going to pay, but ultimately it's the first-time buyer or the buyer of a house that pays. And currently VAT at ... is it 13% or 13.5%, you know, that when the ... if ... if I have a house built and ready to sell, the VAT is only payable as soon as I sign the contract to sell the house, and then 13.5% of a €300,000 house is quite a substantial amount of money that goes straight to the Exchequer. And there were times when we had our difficulties and nobody was buying houses and there was an overlap, that we were imploring the Government to incentivise the buying of those houses to release the VAT as an Exchequer sort of a benefit to them, so as it would give an opportunity for the industry to get started again. But there's no question about it, the Government ... the construction of houses in particular and ... over the years has been a major cash cow for different Governments.
Sean Barrett (Independent)
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Thank you, Mr. Parlon. And just the last point ... and thank you, Chairman, on page 171 of the core document, we have the sentence, in your submission in 2005-----
Ciarán Lynch (Cork South Central, Labour)
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Please be brief now, Senator-----
Sean Barrett (Independent)
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I will, thank you.
Ciarán Lynch (Cork South Central, Labour)
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-----because you're opening up another line of questioning here.
Ciarán Lynch (Cork South Central, Labour)
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I just want you to conclude with your questioning, not opening up a new line.
Sean Barrett (Independent)
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Yes. "Taxation incentives may already exist", and you mention five categories-----
Sean Barrett (Independent)
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And then you describe five of those, and you say, "Where this is the case", that is, where you say, "Taxation incentives may already exist", they "should be retained and, where required, enhanced". Wasn't that inflationary to ... you know, in the market at the time, to ask for more of those incentives? Houses prices were rising rapidly, and it was eventually to bring down the entire country and cost over €100 billion to both the Irish and UK Governments. So was there not a note of irresponsibility or recklessness in that treatment of the tax incentives-----
Ciarán Lynch (Cork South Central, Labour)
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Or not.
Sean Barrett (Independent)
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-----or not, as the case may be?
Sean Barrett (Independent)
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So I'll direct it to Mr. Kelleher then, if I may.
Ciarán Lynch (Cork South Central, Labour)
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Quickly.
Mr. Liam Kelleher:
Certainly, Senator. Yes, looking back on it now, not all of it reads ... you know, not all of it reads as one would wish it to read. But, again, you'd have to put it in the context of the time. In a variety of these cases - third level education buildings, student accommodation - the colleges were looking for the student accommodation to be continued and extended because they needed the facilities. In many cases, the economic benefit of ... the economic benefit of the activity produced more benefit for the Exchequer than the tax foregone in extending the allowances, but, however, you know, they did go on - and that was a question asked earlier - longer than would have been ideal, and we were looking for that.
Ciarán Lynch (Cork South Central, Labour)
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Okay thank you.
Sean Barrett (Independent)
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Thank you very much. Thank you, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Senator Michael D'Arcy. Senator, you have six minutes.
Michael D'Arcy (Fine Gael)
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Thank you. Can I ask, Mr. Parlon, your views in relation to the construction standards today, are they sufficient?
Mr. Tom Parlon:
Yes, I believe the new standards are ... are very, very good. I think the ... where they are adhered to, of course, and like, we always had reasonably good standards, and I admit there were some very, very poor examples of shoddy work when we were building massively and when a lot of people who didn't have the experience or the skills to manage such big projects. But I do believe that the current regulations are very, very good. They do add a cost, of course, which in a new tight situation is difficulty, and I know that the regulations that currently apply to all housing, there is political moves to remove them from once-off buildings, which we object to-----
Michael D'Arcy (Fine Gael)
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Can I ask you-----
Michael D'Arcy (Fine Gael)
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: Yes, can I ask your view upon the costs? Is it worth the cost?
Michael D'Arcy (Fine Gael)
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No, I am aware. But, are they worth the cost?
Mr. Tom Parlon:
There is a limited group, and clearly if you restrict a service to a limited group, the costs are going to go up. We believe that the assigned certifiers, that there are lots of very, very good architectural technicians that have lots of experience and some other professionals as well, that could be included as assigned certifiers that would bring more competition and would reduce the cost.
Michael D'Arcy (Fine Gael)
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Okay. Mr. Kelleher, you stated previously about data that was available to the CIF. It sounds similar to what some people from the banking sector had said and I'm particularly quoting Mr. Dermot Gleeson, when he spoke about the demographics that AIB had about the children born in 1980 ... would be requiring dwellings at some stage in the noughties. Was there any conversation between CIF and banks and others in relation to ensuring that, this coterie of people would be housed and that your industry would ... would benefit from the construction of those ... that housing?
Mr. Liam Kelleher:
Not between banks and the CIF, as an organisation, on that issue. But obviously the members of the CIF ... well we would have been aware of demographic forecasts from the CSO, from economic and demographic forecasts indeed from the ESRI or the Department of Finance and the Central Bank. So obviously there was ... there was, if you like, a shared pool of information that we would feed off, and that would drive our confidence that construction activity and housing activity should continue at a high level.
Michael D'Arcy (Fine Gael)
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And, again, to Mr. Kelleher, in evidence last week, Mr. Dan McLaughlin, chief economist with Bank of Ireland, outlined the fact that his view was that it was the commercial real estate property sector that was a difficulty. And I'm going to quote you from last week, and it was in ... making a point to Deputy Pearse Doherty. "You, know [that] the State injected ... €30 billion into Anglo. Anglo was not a residential property manager." Did the CI ...Construction Industry Federation have any analysis upon the quantity of commercial real estate or ... we have spoken about the 90,000 plus units being unsustainable, but it would seem from Mr. McLaughlin's evidence that it was the commercial real estate that broke the banks and not perhaps the residential. Did you have any conversation with the banks in relation to there being an oversupply in that sector?
Mr. Liam Kelleher:
No. And I think if you go back to the Nyberg report, he also referred to the prominence of commercial lending as being a significant factor. I think about the ... the issue about the commercial lending and why it didn't impact on the CIF in the way in which the housing figures did is that ... precisely because it was a relatively small number of relatively large companies. The investments in some cases would have been for completed buildings, not for ... not for construction activity as such. It would have involved a large number of players from insurance companies to pension funds, other investment funds as well as banks, who would be investing in commercial property. And I think there are figures to say that in 2006, 2007, there was €12 billion invested in commercial property of which something between €1.5 billion and €3 billion, I am not sure of the exact figure, was invested in Ireland. The vast majority of it was being invested outside the State.
Michael D'Arcy (Fine Gael)
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Can I ask you also-----
Michael D'Arcy (Fine Gael)
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Yes, can I also ask you, Mr. Kelleher, the term "unsustainable" has been used by yourselves.
Ciarán Lynch (Cork South Central, Labour)
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Final question now, Senator.
Michael D'Arcy (Fine Gael)
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Final question. In terms of the unsustainability of the sector, if the banks hadn't have funded your members, your members couldn't have gone building. Was there any analysis upon ICIF, you said you had one economist, about the increase of the banks' balance sheet? Figures quoted quite consistently at this stage is, Bank of Ireland and AIB, in or around 30% year on year, a compound increase. Did that raise any alarm bells within the CIF during the period-----
Ciarán Lynch (Cork South Central, Labour)
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I need to allow time to reply for Senator, so I need to push the question.
Michael D'Arcy (Fine Gael)
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-----between 2001 and 2005, in particular; they were the big increases?
Ciarán Lynch (Cork South Central, Labour)
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Final question, Senator. Response, then I'm moving on.
Mr. Liam Kelleher:
I understand that. The short answer is "No". We took it, you could... you might say we were naive in hindsight, that the bank knew their business. They were reporting ever-increasing profits each year, they were employing - each of them - thousands of people. We felt they had teams of expertise in each area, relatively speaking, we had no reason to feel that the banking sector was in any way vulnerable.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy John Paul Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chair. Good morning gentlemen. Firstly, Mr. Kelleher, I want to ask you in relation to the evidence of the chief executive of NAMA, before the committee he referenced ... he was speaking about project funding at the time and he told the committee that it was quite common for lending to be on the basis of very high levels of project funding, sometimes 100%. And where equity... where an equity pledge from the borrower was required, it often took the form of unrealised paper equity from other transactions. Were you or the Construction Industry Federation aware of that practice at the time?
Mr. Liam Kelleher:
I said in our opening statement that we really didn't have any involvement and never had any involvement with the financial affairs of individual members. And I'd have to stress, they wouldn't have wanted us to. They wouldn't have seen that as a role for a federation, if they were a member of it. And I really believe that, and I believe that would be true of the IBECs or any other business organisation. Member firms regard their financial activities as ... as theirs and not their federation's.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So you didn't take any active part, really, in how some of these projects were funded and the huge escalation in the costs of funding, in those kind of years 2000 to 2005?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I want to turn to Mr. Parlon, it has been touched on by previous speakers, were you conscious when you became director general of the CIF in 2008, of the appearance or otherwise of a conflict of interest between your previous role, if you like, and the new role that you took ... that you were taking up? And did you take any actions to alleviate such an appearance?
Mr. Tom Parlon:
Well, I think at the outset, when I was offered a job, I examined whatever legal restrictions or if there was any implication and there was nothing there that I was doing by taking up a job and really taking it over at the end of the year. So ... but no sooner had it been announced and there was quite an outcry of former Opposition people who said it was a dreadful misuse of whatever. And I didn't have any issue with it, I ... as far as I am concerned, you know, I did my duty in OPW entirely correctly and continued to do my duties otherwise and other than picking up some experience, I didn't see any ... I didn't see any conflict. And I still don't.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. And were you aware, I suppose to put the other side of the question that I was just asking Mr. Kelleher, in your role as a minister in the Department of Finance, of the huge increases in bank property lending at the time when you would have been the junior minister, were you concerned at the time? Or is it only with the benefit of hindsight maybe that-----
Mr. Tom Parlon:
Well, I suppose the year before I took over the job, 2006 had been the peak and immediately in 2007 there were some concerns. I referred earlier to ... you know, interest rates had gone up a number of times. The Irish economy had started to falter a little bit, there were some international issues that caused less of ... and the sentiment that had been there. The mad sentiment where everybody just wanted to buy property and extra property had disappeared.
So there was no question about it. House building decreased substantially from the peak in 2007 and when I started in 2008, you know, there were issues ... there had been a budget brought in. The national development plan, which was the other side of the story ... I think there was €18 billion there over a couple of years and that was deemed to take up the slack ... if there was a reduction on house building, the national development plan was going to take up the slack. And, unfortunately, each year after that as Government finances deteriorated, the national development plan got slashed as well so we ended up with a situation where the industry ended up one fifth the size it was in about seven years, which was a massive collapse. And I felt I and the organisation were fire-fighting a lot of the time to try and protect ... to stall the slow down, try and ... you know, and there's times when I look back at some of the stuff I did and I'm embarrassed saying that we ... we've hit the bottom in 2008 and it's a good time to start buying again and houses were never so affordable. That's what I believed at the time but there was a new bottom found the next year, unfortunately, and so on, and, you know, we got into a major decline. The construction ... Minister Mr. Lenihan, the late Mr. Lenihan, opened a conference for us and he was widely publicised. We were hosting the international construction conference for Europe in Dublin Castle and he said he had the pleasure or otherwise in taking over as Minister of Finance when the construction industry had come to a shuddering halt and that was, unfortunately, matched by a fairly substantial credit crisis as well. So I found ... my first number of years there fire-fighting to try and stall the decline that was happening in the industry.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask you both this, I only have a minute left. In relation to the national spatial strategy, which we touched on previously, and decentralisation, in the two roles that you were both in at the time, was the Construction Industry Federation involved in lobbying extensively on both of those matters? I can remember being in a different role in the Seanad at the time of the decentralisation announcement. You were junior Minister in the Department of Finance. There was general surprise the day that the Minister stood up to give the budget statement and virtually all of it was on the matter of decentralisation, which seemed to come out of the blue. Were you aware? Had you been lobbied by the CIF or others? Were you aware of the budgetary statement and what was-----
Ciarán Lynch (Cork South Central, Labour)
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We have to have an appropriate time and a response so running down the clock on a question like that is very difficult-----
Mr. Tom Parlon:
Again, I'd say I have no recollection. I knew Liam Kelleher mainly through having met him at partnership negotiations when I was IFA president and Liam was in his role. I don't believe I ever met him in between so I didn't have any direct contact with CIF. As for decentralisation, that was a Government decision that was announced by Minister McCreevy. The PDs were part of that Government. I had some idea ... it was part of the whole policy lead up. As for the detail and so on, I didn't. I certainly welcomed it and took whatever political advantage out of the fallout for it and thought personally it was a good idea. And for the OPW at the time, it was a major boost. All of a sudden the OPW had substantial budget to build new offices around the country and an initiative I took myself was to sell off at the peak of the market some very expensive and very ... you know, some of the highest priced pieces of property in the country were ones that the OPW sold and took advantage of the ... the ... the strong market at the time.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Marc MacSharry.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----the Construction Industry Federation about the spatial strategy-----
Ciarán Lynch (Cork South Central, Labour)
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You're way over time now Deputy, very briefly
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I'm not, I'm not actually. It's the question I asked.
Mr. Liam Kelleher:
On the national spatial strategy specifically, it was a very thorough, very detailed project implemented in the Department of the Environment. They consulted widely in developing it ... I thought it was a very good document; I thought it was a very good strategy. They invested a huge amount of ... they being the servants and I'm sure the Minister in that Department, and I think it had a lot of merit. But it has fallen by the wayside in a resources issue now.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And on decentralisation?
Marc MacSharry (Fianna Fail)
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Thanks very much. A few "yes", "no" answers here, gentlemen. I'll let you know which are appropriate. Why, in your view, was the danger of a crash in the commercial property market not perceived given that the housing market was in decline? And that's to Mr. Parlon first.
Mr. Tom Parlon:
Well, I think, as my colleague said earlier, a lot of commercial exposure by banks was in buildings that had been maybe built for €20 million and been sold for €100 million based upon, sort of, the rising economy and so on. So in terms of ... if you take the other commercial in construction that happened in terms of either foreign direct investment, some of the biggest plants in the ... in Europe were constructed here on a contract price and probably the main contractors making 3% or 4% or 5% on them, so you know I don't know the ... When we look back and, as we say, it's much easier looking back, the notion that we could consider building 90,000 houses in a particular year with our population, you know, doesn't seem ... seems ridiculous now. At the time, even after the event, you know, it didn't appear to be, we were-----
Marc MacSharry (Fianna Fail)
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On commercial property-----
Mr. Tom Parlon:
Just to finish ... there was a view around that, unfortunately, we all bought into - and in politics I did and in the CIF when I went in there - that the Irish economy was somehow different than other ones, that we were growing faster, that we had bigger population growth, that we were coming from a low base, we had massive immigration and that, somehow or other, we could buck the trend. Clearly, we know that's not the case now.
Marc MacSharry (Fianna Fail)
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Okay, Mr. Kelleher, you want to-----
Mr. Liam Kelleher:
On commercial property, again our focus was on contractors and subcontractors and, as Mr. Parlon has said, working on margins of 3%, if they're fortunate, in net profit at the end of the year. We were just not as conscious of the commercial lending that was going on. It was ... in a sense outside the normal day-to-day business of the federation - the scale of it, the concentration of it and, indeed, the fact that so much of it was taking place outside the country until after the event when the figures became available.
Marc MacSharry (Fianna Fail)
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Okay and to Mr. Kelleher, "yes", "no" type stuff here now. In terms of your period from 1993, I think, right up to your retirement in 2007, was your relationship with government or the political system any different at the beginning than it was at the end or were there changes substantially, or was it a case that things started as they went on?
Marc MacSharry (Fianna Fail)
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So other than social partnership your interaction with Government and political parties was it the same at the beginning as it was at the end?
Marc MacSharry (Fianna Fail)
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Okay, you mentioned to Senator O'Keeffe earlier that members were close to Fianna Fáil and Fine Gael-----
Marc MacSharry (Fianna Fail)
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Did it stop there or were there members who were close to Labour or Sinn Féin or Independents or socialists, or was it specific to Fianna Fáil and the PDs of course or was it specific to Fianna Fáil and Fine Gael?
Marc MacSharry (Fianna Fail)
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Well, you can break it down. If it's "yes" to one and "no" to the other, please specify.
Ciarán Lynch (Cork South Central, Labour)
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You can choose to answer it any way you wish, Mr. Kelleher.
Marc MacSharry (Fianna Fail)
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You seemed to know that there was Fine Gael and Fianna Fáil members so did you know about the others ... or were there others?
Marc MacSharry (Fianna Fail)
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How did you know that they were Fianna Fáil and Fine Gael then if you didn't know about the others? Did they wear it on their sleeves?
Marc MacSharry (Fianna Fail)
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Okay. Was it ever publicised in the case of Labour or Sinn Féin or the Socialist Party or Independents?
Marc MacSharry (Fianna Fail)
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He's not the only socialist as you know.
Ciarán Lynch (Cork South Central, Labour)
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Please, can we get on please.
Marc MacSharry (Fianna Fail)
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But this is important, so I mean was it a case that the Construction Industry Federation had a man in every port for want of a better expression. So that if you were coming on a particular day to lobby in the Oireachtas, was it specific to the Government parties or did you see everybody?
Marc MacSharry (Fianna Fail)
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Okay, and in the main, did that tend to be all Opposition parties as well as Government parties or?
Marc MacSharry (Fianna Fail)
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Okay, so can you give those instances then in your period up to the end of 2007 or the end of your tenure, can you highlight for us the dissenting voices as it were, or those parties that may have been saying to you: "Mr. Kelleher, we need to cool this market; we are concerned that this is overheating; we are concerned there is a bubble building"? Can you give us instances, if there were any, of any political entities, be them Government or Opposition, who were giving those messages to you at the time?
Marc MacSharry (Fianna Fail)
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Government and Opposition would have been promoting a pro-cyclical rather than counter-cyclical agenda, would that be fair or unfair to say?
Marc MacSharry (Fianna Fail)
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Would there have been anybody advocating-----
Ciarán Lynch (Cork South Central, Labour)
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Time up, Senator.
Marc MacSharry (Fianna Fail)
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You're being a bit hard on me now compared to some of the others.
Ciarán Lynch (Cork South Central, Labour)
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No, no, I'm not.
Marc MacSharry (Fianna Fail)
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Were there ... was there anybody at the time advocating an increase in stamp duty, as opposed to a decrease in stamp duty?
Marc MacSharry (Fianna Fail)
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And, very finally, can I ask that ... the spatial strategy, I think most people would agree, would've been one of the drivers in the formulation of the National Development Plan 2006 onwards, as opposed to the one before. To the best of your knowledge, apart from submissions from yourselves and indeed many people in this room and elsewhere, in terms of the drawing up of that strategy, was there to your knowledge a level of spatial planning expertise used in the formulation of the document we know as the spatial ... national spatial strategy?
Marc MacSharry (Fianna Fail)
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Was there international assistance with that?
Ciarán Lynch (Cork South Central, Labour)
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Sorry, I have to bring you to an end there now.
Marc MacSharry (Fianna Fail)
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Thanks very much.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much, Senator. There's been a number of engagements or questions this morning, Mr. Kelleher and Mr. Parlon, in regard to the CIF's engagement with NAMA, the CIF's and its members' engagements with politicians. I want to kind of broaden that out into other engagements as an active organisation and one of them relates to your engagement with the Central Bank. In the Central Bank business sentiment survey from late 2005 - the reference document is going to come up on the screen here shortly - from late 2006 the CIF was quoted as a respondent. In late 2006, the CIF's feedback was still very positive in indicating only gradually declining housing input and more moderate price inflation. Why were such positive statements given at the time and planning permission and housing starts were clearly indicating weaker industry conditions at that time, Mr. Kelleher?
Ciarán Lynch (Cork South Central, Labour)
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Is it coming up there, is it? Sure. It should be on the screen there now in the next moment or two. It's in front of you. And what ... the business sentiment survey there that was-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Basically this is a summary of the business sentiment survey that was issued ... or dealt with through the CIF with the Central Bank:
- In [the] Central Bank['s] Business Sentiment Survey from late 2006, the CIF indicated that they only expected housing input to be around 90,000, with only a small decline the following year.
- They advised that the market was coming more into equilibrium with output [as] stabilising and then declining gradually, with price inflation easing to moderate levels.
- They also pointed ... that An Bord Pleanala [have] declined thousands of planning permissions for particular reasons, which would likely reappear in the data subsequently and that this may be giving too negative an impression on the outlook for housing output.
So what is happening there is the CIF in its engagement, as part of the survey with the Central Bank business, the sentiment was that we're ... it's positive, there's going to be a bit of a slow down but more or less it will still be sustainable. Where was that analysis coming from, Mr. Kelleher, back in 2006?
Mr. Liam Kelleher:
I am not sure exactly when it was and, I'm sorry, I don't recall this ... I am trying to place it as best I can. The figure for housing output would've been the ... would've been close to what turned out to be the outcome. So that was reasonable to have there. On several occasions we thought in previous years that output had stabilised and that it would not increase further beyond figures significantly below that figure there. So we were always, I suppose you would say, hoping that output was stabilising at a high and reasonably sustainable level. On the latter point, the third point, I actually have no specific information. I can't ... I can't-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, and I can appreciate that but would you ... looking at that now ... consider it to be a fair and accurate reflection or not of what the general sentiment of the CIF was around that time in 2006?
Ciarán Lynch (Cork South Central, Labour)
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In about a year later, a programme was broadcast by RTE called "Future Shock[s]", which gave an entirely different reading of the situation out there. And at the time, Hubert Fitzpatrick on behalf of the CIF, the housing director there, issued a strong statement challenging the "Future Shock[s]" programme, with the opening comment that "the continued strength of the Irish economy is such that the programme's pessimism is completely misplaced." Do you have a comment to make upon that now?
Mr. Liam Kelleher:
We were too optimistic at the time. That programme turned out to be pretty accurate. The style of the programme at the time I thought was unduly alarmist, it was done in a somewhat tabloid style. That would have been my own personal question mark in relation to it. The ... those who organised the programme were obviously entitled to do that. Optimism declined rapidly through 2007. From late 2006, in some ways the peak had passed. And we were saying in late 2007 that it had temporarily abandoned, as we felt, the industry entirely. So very rapidly, confidence disappeared and demand for housing declined.
Ciarán Lynch (Cork South Central, Labour)
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But in the statement of that time which was in around April 2007, the statement goes on to say in the same paragraph, "Even the most pessimistic prediction of economic growth next year which is 3.5%, will see the Irish economy growing at nearly twice the EU average." Then it goes on further in the statement to say, "The current situation in the housing sector is a sign of strength and maturity, with the industry responding quickly to the transition in the market." So there was a very strong position coming out in the CIF that despite the concerns being expressed in the "Future Shock[s]" programme, that you were making ... or the CIF, through Mr. Fitzpatrick, was making the statement that this was completely misplaced. Would you on ... despite the presentational aspects of it, what is your view of that now, going back and revisiting what the CIF's position was at that time?
Mr. Liam Kelleher:
None of us thought for one moment that the scale of the decline which occurred would ... would occur. We did see the absolute drop in confidence from ... on the purchasing side as bringing down - and we were pretty early to signal that in 2007 - that we felt that output in 2008 could drop as low as 45,000 units, I think, was the figure we were talking about at the time, at a time when official projections from all sources were still of the order of 65,000 units per annum. So we were the outrider ... outlier late in 2007 in saying "Confidence is gone and the thing is dropping". In 2006 the picture was still obviously different from our point of view.
Ciarán Lynch (Cork South Central, Labour)
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Final question on this, Mr. Kelleher. All organisations ... they have a number of different activities, of them one would be monitoring Government policy, engaging around Government policy - we discussed taxation this morning - others would be having a press agency in it, which kind of refers to the statement here, and other parts would be maybe taking on a more stronger rebuttal on positions that organisations would not agree with. Did the CIF write to RTE after that programme and express a view about it?
Mr. Liam Kelleher:
My memory is that I wrote to RTE and that I expressed the view that I have given to this committee, that I thought the style of the programme was not what you'd expect from the national broadcasting channel. I didn't, to the best of my recollection, and this ... you raise with me now out of the blue ... I did not object to the content of the programme. I probably said it was too alarmist all right but it was the style of the programme that I thought was inappropriate.
Ciarán Lynch (Cork South Central, Labour)
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Okay. So presentation rather than substance, is that what you are saying to us today?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Pearse Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat, a Chathaoirligh, agus fáilte chun an beirt agaibh chuig an coiste. Can I ask you did the CIF undertake or commission research into the structure or outlook of the construction and property sector in 2007, especially on the way that it was being funded?
Pearse Doherty (Donegal South West, Sinn Fein)
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Did you have any concern in relation to how the property sector was being funded and if not-----
Mr. Liam Kelleher:
You quite fairly, rightly, refer to the property sector and I've been ... we have been both been drawing a bit of a distinction during this morning in saying that the focus of the federation was on contractors, subcontractors and house builders. Now, there are elements of the property sector ... the wider property sector that are absolutely remote from the ... from the federation. In fact, if I can digress for just one minute Deputy and I'm not cutting short on you, on pages 115 to 118, there's a reference to a series of representations made by ... by bodies to Government Ministers and I've taken from the year 2001 to the end of 2007 and there are 62 references there ... 62 items of correspondence. Twenty three of them just were made by the CIF or the IHBA, a constituent member. Thirty nine were made by other bodies in the wider construction, in the wider property sector, 19 different organisations and individuals. So, I suppose a point I would make strongly is that property is wider than construction. Construction is the most obvious and most visible. Construction is the supply side that adds to the stock of property in the country. But that's what it is. It is the new build ... it is the new build side of things, not the wider property and not the financing of property-----
Pearse Doherty (Donegal South West, Sinn Fein)
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So can you give the committee an example, because obviously we know that NAMA took on board the loans of commercial property into NAMA and you have made very strong submissions and strong critique of NAMA in the past. Yet, they weren't houses that people owned mortgages from in rural Ireland or indeed in the capital city, they were commercial property in the most, in the main. So when you say that the CIF are only interested or only represent the construction part, the building part, when somebody has €1 billion of property loans, with the vast majority of that being commercial, do you not represent all of their interests or just part of their interest?
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, can I ask you-----
Pearse Doherty (Donegal South West, Sinn Fein)
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You're on the record that CIF has lobbied Government for tax relief ... sorry, reductions. So would that not be in relation to property speculation and the benefits of transactions and not the construction in itself?
Pearse Doherty (Donegal South West, Sinn Fein)
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And would it be the larger developers, which were also members of the CIF, that would have been the major beneficiaries of such moves?
Pearse Doherty (Donegal South West, Sinn Fein)
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The NIRSA report, and it's been mentioned earlier on ... there's parts of it in page 5 to 9 of Vol. 2, there's a subsequent reference in the later part of the report and I quoted it. It talks about the issue of oversupply is not limited to housing but also hotels, shopping centre, retail parks and industrial units. Can you explain in your opinion why this happened? Why there was such an oversupply on this type of commercial property?
Mr. Liam Kelleher:
I don't think there is now that level of oversupply. I think that's overstated in that ... in that report. I think for a period there was overbuilding of retail and probably retail park-type construction activity. But that was against a background of a period where many of the British multiples and, you know, furniture companies, DIY companies were moving into ... into Ireland because it was a growing and expanding market. I don't think that there is a significant issue of oversupply with individual exceptions of the type of commercial construction you've itemised there.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Can I ask just to clarify for the record in the evidence here, you mentioned to Mr. MacSharry that you lobbied all parties and just to clarify in relation to that there, how does that ... how far did that go? There's some parties that existed a number of years ago that have no representation in this House. There's other parties that would've been of smaller. So did you ... did the CIF directly lobby the Greens, the PDs, the Sinn Féin, the Independents? Can you explain that? And were you aware of the policies of those parties when you made the statement that you made? And the final question, as well, can I ask either of you, have you ever visited the Galway tent? I think Mr. Parlon that you said that you weren't ... you may have mentioned that you weren't a frequent visitor or .... and so if you can maybe explain-----
Ciarán Lynch (Cork South Central, Labour)
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As Minister or as a member of the CIF?
Pearse Doherty (Donegal South West, Sinn Fein)
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Well that's for him to answer.
Ciarán Lynch (Cork South Central, Labour)
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Okay, sure.
Pearse Doherty (Donegal South West, Sinn Fein)
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You know. So if you can explain just the circumstances that surrounded you, if you have visited the Galway tent how did that happen?
Ciarán Lynch (Cork South Central, Labour)
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Okay, final reply now and then I am going to wrap up.
Mr. Tom Parlon:
Well, first of all I've been a regular visitor to the Galway races since I can hardly remember. I do remember once, anyhow, being at the Galway tent when I was in IFA and a member of the FBD insurance board. I think we ... we took a table or whatever. Otherwise, not since I've been ... not since I was in politics, I believe and not, certainly not since I've been in CIF. I'm not sure if the Galway tent existed since I've been in CIF anyhow.
Pearse Doherty (Donegal South West, Sinn Fein)
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Right.
Pearse Doherty (Donegal South West, Sinn Fein)
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The first question was the extent when you mentioned that the CIF lobbied all political parties, just for the record, are we talking about every single political party here? Where there's very small political parties, there's larger-----
Pearse Doherty (Donegal South West, Sinn Fein)
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And just to clarify, did that mean that the CIF directly lobbied the Labour Party? And because the main political parties have different, you know ... parties grow in strength and reduce in strength, so did you directly lobby the Labour Party? Did you directly lobby the Green Party? Did you directly lobby the PDs, which would be very small in certain times but may be seen a main political party? Did you directly lobby Sinn Féin, the Socialist Party, and so on? Can you give us an indication because this is ... this is required for evidence or may be required as we determine our conclusions at the end.
Mr. Liam Kelleher:
Chair, I'm not sure ... I have to be honest and say I'm not sure about Sinn Féin, and I wouldn't think that we lobbied the Labour Party ... or now, sorry, the, the Socialist Party, for no very good reason of any exception or otherwise. But we did lobby all of the other political parties. We would've met them and we would've been anxious to meet them. It would've been, at times, not easy to meet them. And we wouldn't have met them that often. But the main focus would've been about, around our budget submission.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy Murphy, final supplementary, then Deputy McGrath supplementary and we'll wrap up.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair. Mr. Parlon, I just want to go back to a meeting that Deputy McGrath raised earlier, it was in relation to NAMA on 28 September 2009. It's page 15 in the core booklet. This is a meeting between the CIF with the Department of Finance and the NTMA. On top of page 15. You were there representing the CIF as director general at the time, but you had a number of colleagues there with you. Why were they there?
Mr. Tom Parlon:
Well if you go through, Hubert Fitzpatrick is our director of housing and led up the Irish house builders. Joe Cosgrave was one of our members and was a member of that sub-committee, as was Michael O'Flynn and Alex Brett, likewise, was a member of that sub-committee that we established to look at the whole NAMA issue.
Eoghan Murphy (Dublin South East, Fine Gael)
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In relation to the first paragraph then, on pre-establishment issues, you queried whether the Central Bank letter issued in May was still in effect. Now this was a letter and we've been through it with NAMA already that stated: "where additional funds were lent to [borrowers] following the announcement to establish NAMA, a haircut would not be applied on these amounts provided funds were lent on a sound commercial basis". And just, a little later in that paragraph, "members were finding it very difficult to secure working capital". Now did you make that point on behalf of the CIF or did-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----one of the others present?
Mr. Tom Parlon:
-----and I think at the time, obviously the banks were in disarray. They weren't ... the whole issue of NAMA taking over the loans ... weren't too sure. So, there were people involved in negotiations with their banks at the time. And all of a sudden NAMA came in.
So it was about to cut off, it is about did the status quoexist or has NAMA changed the whole ... so it was a very transient time and we were just trying to establish what was the scenario.
Eoghan Murphy (Dublin South East, Fine Gael)
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So, members were finding it difficult to secure working capital but they did secure working capital. NAMA told us that they secured €2.3 billion in working capital in that period but if they decided that roughly half of this was not eligible under the Central Bank scheme, that the money wasn't advanced for commercial purposes - roughly half, about €1.1 billion, so what was it advanced for?
Mr. Tom Parlon:
Well, I assume it was projects that were being developed at the time. I honestly don't know off the top of my head. I assume it was for projects that were ongoing, because NAMA came in when it did, like, the industry had been in serious decline but even in the worst-case scenario, our industry was worth about ... over €8 billion worth of activity, in any year, and employed, sort of, at the minimum, 96,000 people, so there was still quite a lot of work going on at any particular time, even in the worst-case scenario.
Eoghan Murphy (Dublin South East, Fine Gael)
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But NAMA concluded that €1.1 billion wasn't advanced to these borrowers for commercial purposes, it wasn't eligible under the scheme and you had lobbied for this money to be released.
Mr. Tom Parlon:
Well, I think it was more seeking clarity was the situation, rather than lobbying, but clearly we represented our members and that's sort of unashamedly what any representative organisation would do, or if as a Deputy or as a Senator, if a constituent comes to you and says I have a problem with X, and I'm not happy the way a particular Department dealt with me, and so on, that's what you would do, and that's what I did in my role as CIF director, I represented the members' issue.
Eoghan Murphy (Dublin South East, Fine Gael)
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Given what NAMA has told us since then, that €1.1 billion was advanced and wasn't eligible, should you have lobbied for that?
Mr. Tom Parlon:
Well, look it ... I'm very conscious that we were before Brendan McDonagh, Kevin Cardiff, Derek Moran, who I think now is the Secretary General at the Department of Finance, we were in front of heavy hitters, there was no one going to roll over, nobody was going to take a particular view. We made our case, as we always did, and very often it was, you know, it was dismissed or it wasn't taken on board-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Not in this instance.
Ciarán Lynch (Cork South Central, Labour)
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All right, thank you very much. Deputy McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thanks, Chair. You state in your opening statement, Mr. Kelleher, access to finance was not an issue raised by CIF members in that period, the period leading up to 2008, actually, it is Mr. Parlon's opening statement, and I suppose that has to be seen against the backdrop of the evidence that has emerged since from the banks in terms of the relatively easy access to credit that was there. But would the CIF at any stage have got involved in supporting individual loan applications with any of your members, during either of your tenure, have requested the support of the CIF to access credit? And you would have become involved in directly contacting a bank, for example, to support a loan application?
Michael McGrath (Cork South Central, Fianna Fail)
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Mr. Parlon?
Mr. Tom Parlon:
Well clearly, I came in at a different time, and this was like in 2006, 100% mortgages were the norm. So all of a sudden that changed, and, you know, the banks tightened up very much and then very shortly, within two years, the banks practically closed up in terms of lending to either construction or to house building. And it would have been very difficult at that time to make a case for building houses, when we had an oversupply of houses. But certainly, we began then a range of meetings with the banks to explain the situation on behalf of the industry and find out where they were coming from, and it was a bit of a cant, even lately. The banks always say, "Look, we're open for business, come in and talk to us", but in practice, this wasn't happening for a long, long time-----
Michael McGrath (Cork South Central, Fianna Fail)
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Would you have got involved in individual loan applications?
Michael McGrath (Cork South Central, Fianna Fail)
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You have done.
Mr. Tom Parlon:
On individual members that found themselves in pretty severe financial situations approached me, and that was one of the features with the banks, they said to us if we had a sort of a touchpoint, we had somebody, that we had arranged to deal with, and raise some issues that maybe people were finding it difficult otherwise. But that was the end of it. We made the particular points and they went along-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. Has the CIF got involved in individual planning applications, supporting applications, in either of your tenure?
Mr. Tom Parlon:
No, but we would have very, very substantial expertise in the planning side, and we would have advised members, certainly, with regard to planning applications or, if in the event of a planning application being rejected, we would have expertise that would have looked at it and said "Look, obviously the reason is X, Y or Z, and if you want to reapply you should amend that particular element of it", or whatever.
Michael McGrath (Cork South Central, Fianna Fail)
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Finally, Mr. Kelleher, you said earlier on that if you knew the way things were going to transpire, you might have sought to temper things, I think is the phrase you used. And I suppose my question for you is, if you were put in a time capsule and put back to 2003, as head of the CIF, with all of the knowledge you now have, and you were able to carry all of that with you, what could you have done, in that role, to temper things?
Mr. Liam Kelleher:
It's a good question, Deputy. I'm not sure, as early as 2003, that anybody would have wanted to do anything differently. I think it is later on, 2006, that the contrarian voices were making up their statements, very much a minority, but nonetheless they were there, and we didn't pay the attention to them that we should have. That's one thing I would do differently. The other thing that I would certainly have learned from the whole period and subsequently, is just how essential the issue you were previously talking about, working capital, or was being talked about earlier, is to the construction industry. Really, you know, a certain level of credit, a certain level of working capital, is essential to the construction industry. There was too much of it in the period you're referring to, and then it disappeared, totally, and there was too little of it.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. So with that said, if there is anything, Mr. Parlon, Mr. Kelleher, you would like to add further before I bring matters to a close, is there anything you'd like to add in conclusion, Mr. Parlon?
Mr. Tom Parlon:
No, I appreciate the opportunity you have given us to explain and just, I'm glad I wasn't asked that question, Deputy, but if I was put back in my new role when I went in, to sort of stop the galloping horse that was there would have been an extremely difficult job. If I had to jump out in front of it, I probably would have been dumped out of the job very, very quickly. And just to give a final point, in terms of, at that time, 10,000 houses created a billion's worth of Exchequer return. It created 30,000 jobs and it accounted for a 1% increase in economic growth. So it was a massive cash cow, everyone thought it was brilliant, but clearly, it wasn't ... and we were a big part of that. Our industry has suffered very badly as a result of it, and likewise, the whole country has suffered, and individuals, so, you know, to have stopped it at the time ... clearly we all, and I am looking forward to the eventual ... decisions that you take, and recommendations, but, just to say, having thought about it long and hard, and the CIF, whatever the impression might have been, they're a very impressive, serious organisation with people that have been there for 20 and 30 years, a lot of experience, and a lot of integrity involved in the people. We look at that in terms ourselves and say, "What could we have done?"
It would have been bloody difficult to stop it, at that time, but clearly, you know, a company that's reliant on your customers having 100% mortgages, and we not knowing where the financing was coming, and a banking system that was reliant on a massive lot of short-term credit and giving long-term loans was a recipe for disaster, but I didn't have the scope to see that, I'm sorry to say, at the time.
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Mr. Parlon. So with that said, I would like to thank Mr. Parlon and Mr. Kelleher for their participation today and for their engagement with the inquiry. I now formally excuse the witnesses and I propose that we suspend until, if we take a ten-minute break, returning at ten minutes after 12 p.m., where we will then hear from Mr. Patrick Davitt, chief executive of the Institute of Professional Auctioneers and Valuers. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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I now am proposing that we go back into public session. Is that agreed? Agreed. We now move on to session 2 of today's proceedings, which is a public hearing discussion with Mr. Patrick Davitt, chief executive, Institute of Professional Auctioneers and Valuers. The Committee of Inquiry into the Banking Crisis is now resuming in public session and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off.
Today we continue our hearings with Mr. Patrick Davitt, chief executive, Institute of Professional Auctioneers and Valuers. Mr. Patrick Davitt has been chief executive of IPAV since May 2013. He has been a member of the IPAV since 1983, serving as president on two occasions. He was a member of the Auctioneering-Estate Agency Review Group in 2004 and is a member of the Property Services Regulatory Authority, established on a statutory authority basis on 3 April 2012.
Before hearing from Mr. Davitt, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given.
I would remind members and those present that there are currently criminal proceedings ongoing and that further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings.
Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and should not publish any of the documents so displayed.
The witness has been directed to attend the meeting of the Joint Committee of Inquiry into the Banking Crisis and you have been furnished with booklets of core documents. These are before the committee and will be relied upon in questioning and form part of the evidence of the inquiry. So if I can now ask the clerk to administer the oath.
Ciarán Lynch (Cork South Central, Labour)
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So, once again, Mr. Davitt, you're very welcome here this afternoon-----
Ciarán Lynch (Cork South Central, Labour)
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-----and if I can invite you to make your opening statement, please, Mr. Davitt.
Mr. Patrick Davitt:
Thank you, Chairman, Deputies and Senators. The Institute of Professional Auctioneers and Valuers, IPAV, was established in 1971 as a representative professional body for qualified, licensed auctioneers, valuers and estate agents. IPAV is the only Irish representative body solely catering for the professional and educational requirements and needs of auctioneers and valuers and, in 2013, represented almost 800 members nationwide. IPAV has three categories of membership for practising auctioneers and valuers in Ireland which enables it to cater for the professional ... property professional, the certified valuer, the recognised valuer, REV, and this is through its association with TEGoVA, the European Group of Valuers Associations, using the blue book and the European valuation standards.
The institute is governed by a national council of 20 members from throughout the country. The institute is further supported by an executive council which consists of IPAV president, senior vice president, junior vice president and CEO. I am the chief executive officer of IPAV, appointed in May 2013, and I'm responsible for the day-to-day running of the institute.
A summary of IPAV's main objectives are: it was originally set up to provide a professional, representative organisation for auctioneers, valuers and estate agents to protect, advance and promote professional standards among its member; to promote professional competence among its members; to protect the interests of members, as between themselves and between non-members and general public; to provide a system of professional education; to ensure education plays a continuous and significant part in its members' professional development; to apply, petition or promote in the Republic of Ireland any Act of the Oireachtas, EU directive or other legal measures in order with a view to attainment of the above objectives; and to establish a disciplinary committee, consisting of five internal and two external professionals.
IPAV has submitted to the committee IPAV's memorandum and articles of association, as amended in 2013, which details the structure and process of IPAV. Further to this, all documents supplied by IPAV to the committee and detailed in the metadata sheets is, to the best of my knowledge, true and correct. To the best of my knowledge, the majority of documents supplied to the committee are in the public domain. However, some documents, such as IPAV practice handbook, the blue book valuation templates and the blue book terms of engagements are specifically for IPAV members and are available to IPAV members in the members area only of ipav.ie.
Chairman, in relation to the specific references, B4b and R5d, I am asked to comment upon, I wish to make the following points but, before so, I wish to emphasis that I can only comment in relation to IPAV and my role as CEO.
Self-regulation through IPAV: all IPAV valuers are subject to self-regulation through IPAV. Unlike auctioneering and estate agency, which is governed by the Property Services Regulatory Authority, there are no national valuation standards for valuers in Ireland. However, IPAV undertook the role as self-regulator for its own members. While the valuer must possess the necessary qualifications, experience, ability, knowledge and training, he or she must always be objective and professional in his or her view and in appraisals and assessment of value. In many cases, it will be necessary for the valuer and, where appropriate, any valuation company, to show that he or she is independent of any party interest in the outcome of the valuation. Any such connection, or potential conflict of interest, or threat to the valuer's independence and objectivity, should be disclosed in writing to the client and recorded in the valuation report and the terms of conditions.
Conflicts of interest: it is important to note a quote from the Central Bank of Ireland, CBI, paper Valuation Processes in the Banking Crisis - Lessons Learned - Guiding the Future in the final paper of 18 December 2012, a copy of which has been supplied by IPAV to the committee. And they say:
Where a conflict of interest exists, the valuation is not independent and accordingly it is much more likely that the valuation provided is neither robust nor reliable. All valuations include judgements, but where a conflict of interest exists, it is more likely that such judgements are biased and not in favour of the lender.
The area of conflict of interest is also addressed under IPAV's code of conduct and TEGoVA's Corporate Governance and in the blue book itself. Again, copies of these documents have been supplied by IPAV to the committee.
Article 4, paragraph 76 of EU Regulation No. 575/2013, on 26 June 2013, defines market value and market value is defined as, "The estimated amount for which the property should exchange at the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion." Market value is internationally recognised as the assessment of the value of the property at a given moment in time. It estimates the price that could be obtained for a property at the valuation date, notwithstanding that date could alter over time and sometimes very rapidly. The definition of market value should be recorded in both the terms of engagement and the valuation report the valuers produce.
Valuation in general: the source of valuation and how properties are valued has been very topical in Ireland for many years. Basically the valuation process is broken into two segments: the methodology used to arrive at the valuation figure, there are five standard methods of valuation, namely, comparative, contractors, investment, profit and residual; and the standards used in writing the report. The valuation must be presented in a clear, written format to a professional standard, transparent as to the instruction, purpose, biases, method, conclusion and prospective use of the valuation. The valuation, as determined by the valuer, must be clearly and effectively conveyed to the client. The form and detail of the valuation report is a matter for the valuer's discretion, but must meet the specific instructions from the client to the valuer. A valuation report must adequately report all matters contained within the terms of engagement.
In line with the European valuation standards, EVS, a market valuation should report the following: the instructions for the assignment; the valuer's qualifications; the basis and purpose of the valuation; the valuation date; a description of the property, including a note as to the basis on which the area has been measured; a summary of the legal context - tenure, development control, etc.; a commentary on the marketability for the property; a description of the valuation method and analysis; any assumptions that have been made; any limits on the report; and the valuation standards supplied.
I am of the understanding that banks and financial institutions have generally organised and managed their own valuation panels, with some exceptions, where valuation panels are outsourced. IPAV valuers, in the past and to date, must apply to the relevant financial institutions to be accepted onto the panel. Central to acceptance onto a valuation panel is the holding of an appropriate level of professional indemnity insurance.
The valuation figure derived becomes the critical part of the valuation, as it helps banks and other financial institutions to decide the worthiness of the risk it's going to lend on. The valuation figure will only be reached by experienced, professional valuers, with years of experience in valuing property with their own competency. The standards, while important, are designed to give financial institutions an explanation of, and insight into, the process, factors and judgments applied to help arrive at the final valuation figure, though not a methodology.
Again, I am of the understanding that financial institution valuation panels have operated, and continue to do so, on the basis of getting a spread of valuers throughout the country with the necessary competencies and expertise required by the financial institutions to complete the particular financial institution's own valuation templates.
IPAV, as a professional representative body for valuers, has provided guidelines for practising valuers and regular courses and seminars on the subject. However, the actual compilation of the valuation report is a matter for the individual valuer. The completion of the financial instruction's template is a matter between the financial institution and the valuers completing it.
Again, I refer to the Central Bank report of the Valuation Process in the Banking Crisis - Lessons Learned - Guiding The Future, final paper of December 2012. I would like to quote from it:
Credit institutions should have a properly approved panel of valuers using appropriate selection criteria consistent with the loan portfolio risk. An institution should have [an] on-going assessment of performance to enable a valuer remain on the panel. This assessment should include a review of [the] valuers performance and professional indemnity insurance...
Credit institutions should ensure that no one firm of valuers has the bulk of their valuation business. Consideration should be given to having no one valuer doing more than, say, 33% of all valuation reports.
Credit institutions should report any concerns in relation to non-ethical behaviour, including instances of unrealistic valuations, to the appropriate regulatory body. In such circumstances, CBI recommend that credit institutions remove such valuers from the panel, which effectively bans them from working with the credit institution...
The valuers duty of care is to the credit institution and this should be emphasised by credit institutions in their written instructions to valuers...
Instructions to valuers for property valuations on collateral security should come from the credit institution in accordance with its clearly defined terms of engagement. Fees should only be discharged by the credit institution. It is for the credit institution to decide as to how it will allocate such costs.
Valuation reports should always be addressed to the credit institution that is advancing the [loan].
And I just want to talk for a minute on European valuation standards, as that's what IPAV use. In the absence of national valuation standards, and following the economic crisis, as part of its ongoing review to increase the professional standards of its members, IPAV carefully studied the valuation process and standards available in Europe, and its choice was to either adopt the English or European valuation standard. After detailed analysis and consideration, IPAV concluded that the European valuation standards, EVS, of the blue book were the most appropriate for IPAV's needs. IPAV believed that with the UK threatening to leave the EU and Ireland committed to Europe, it was both prudent and progressive for IPAV valuers to accept and adopt the EVS.
IPAV was awarded membership of the European Group of Valuers Associations, TEGoVA, in 2012 and also appointed as their administrator in Ireland. From this, IPAV introduced its members to the recognised European valuation, REV, scheme. This scheme is administered across Europe by TEGoVA, which in 1996 created the blue book. This book is continually updated and is now in its seventh edition. There are approximately 2,200 REVs throughout Europe and by 31 December 2013, and 60 of those were in Ireland. The EVS of the blue book are recognised as reliable International standards by the Central Bank of Ireland, the European Central Bank, and the European Parliament.
To achieve REV status, IPAV educates its qualified valuers through its specially tailored courses, held in the Institute of Technology in Tallaght. This ensures that IPAV members who complete this course meet with the expected minimum educational standards, MER, of TEGoVA, a copy of whichhas been supplied to the committee. IPAV’s qualified valuers are those who are professionally qualified, experienced valuers, with a minimum of ten years practical experience, and who have at their fingertips vast knowledge, comparable instructions, and details of sales in their own area. Since the REV qualification was first introduced in Ireland in 2013, all IPAV REV valuers must agree and sign up to a contract that demonstrates their commitment to IPAV and also confirms the level of self-regulation it imposes. Compliance and standards are the cornerstone of the EVS valuation reports, and IPAV compliance officers monitors and examines valuers’ written valuation reports on an ad hocbasis. IPAV, as the administrator of the REV scheme in Ireland, is subject itself to five years reviews.
I will now move on to R5d. R5d - appropriateness of relationship between Government, the Oireachtas, the banking sector, and the property sector. Again, Chairman, I wish to begin by starting ... I can only comment on the role of IPAV and its members' relationship with the Government, the Oireachtas, the banking sector, and the property industry generally. I will summarise briefly as follows.
The Government: IPAV has always engaged with members of Government in regard to lobbying on various items of legislation and issues of interest as they arise. For example, IPAV makes an annual pre-budget submission to the Minister for Finance and Minister for Public Expenditure and Reform, and, in recent years, has also made presentations to the Joint Oireachtas Committees on Finance and the Public Service, and Department of Agriculture. IPAV has engaged, as necessary, with the Minister, Minister of State, and senior officials in the Department of Environment, Community and Local Government in relation to housing and related matters. Ministers and Ministers of State have attended and addressed IPAV’s annual conferences and regional seminars over the years. IPAV has always kept lines of communication open with Members of the Dáil and Seanad, both Government and Opposition, in briefing them on relevant issues as they arise both individually and in committee. IPAV makes regular submissions to joint Oireachtas committees where useful exchanges of views regularly take place. IPAV has nominating rights to Seanad Éireann and members are from time to time elected to either House.
The property industry itself: IPAV has engaged with parallel professions and professional bodies in the property business and industry. IPAV representatives have regularly attended conferences organised by related professionals and institutions and have made, and continue to make, a determined effort to engage with all stakeholders in the industry. Representatives of such professional bodies are invited to attend IPAV’s annual conference.
And the banking sector: IPAV has engaged as much as possible with the Central Bank of Ireland and individual financial institutions. IPAV lobbied for the inclusion of the blue book as one of the preferred standards in the CBI final report issued in December 2012.
And my conclusion, Mr. Chairman: Overall, it is IPAV’s view that the relationship between the four sectors, Government, Oireachtas, banks and property stakeholders, should be one of being independent of each other, yet communicating through the correct and transparent channels for the betterment of all, and the common good of Irish society. While the priorities of the sectors often differ, as is to be expected, IPAV believes there should be an ongoing dialogue between the stakeholders. However, to date it has tended to be sporadic rather than consistent. In this regard, IPAV has long advocated the need for establishment of a property council, which would be representative of all stakeholders and which would help advise Government in a holistic way on all issues in relation to property. While it would advise participants, it would be expected to respect the democratic imperative that Government governs and have the final say on any policy initiative. IPAV believes such a body, which would have a purely advisory role, would have the potential to play an enormous part in helping build a sustainable property market, bringing about stability and avoiding future troughs and peaks, as have occurred in the recent past. Volatility may serve isolated interests. It does not serve consumers, it does not serve the auctioneering profession and it does not serve the common good.
Thank you for all for listening to my long statement, and I'll take some questions.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Davitt. Just one summary, just with regard to your opening statement: you talk about the qualifications and continuous professional development required to valuers. Can you please describe the principal features of both, and maybe if you can also inform the committee as to whether the IPAV assessed the effectiveness of courses through, for example, surveyors ... or surveys of valuer clients?
Mr. Patrick Davitt:
The professional CPD is 20 hours, and it has to be done by ... completed by all valuers. At the moment, the valuers that completed it are the REV valuers. IPAV had recently, which probably hasn't anything to do with where we were up to now, but has recently introduced a second status, which is a TRV status, which is for residential valuers, so now we have one for residential valuers-----
Ciarán Lynch (Cork South Central, Labour)
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That's 20 hours per annum, is it?
Mr. Patrick Davitt:
Yes, 20 hours per annum. So they must complete 20 hours per annum, and that 20 hours per annum will go through something from maybe new directives that come in, new laws, regulations, to the completion of valuation reports and how they're completed. And the ad hocreporting then: we have a compliance officer who will, each year check each valuer that we have that's registered under a REV scheme or our TRV scheme, and checks them if their valuation reports ... to see that they're done correctly and that they're up-to-date.
Ciarán Lynch (Cork South Central, Labour)
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And in terms of this evaluating the effectiveness of the courses, do you take surveys or ... of valuer clients?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Doherty. Fifteen ... 12 minutes, 12 minutes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat, a Chathaoirligh, agus fáilte an tUasal Davitt chuig an coiste. In your opening statement you talked about how IPAV valuers are subject to self-regulation through IPAV, and that there are no national valuation standards for valuers in Ireland. And, bearing in mind that statement, can I ask you what is your assessment of the robustness in the valuation process used by IPAV pre the crisis and post the crisis?
Mr. Patrick Davitt:
Well, pre the crisis the valuation standards were a certified valuer by IPAV, and a certified ... to be a certified valuer from IPAV you would have to have a minimum of ten years' experience to be a member of IPAV. You would have to have completed some of our IPAV courses, our educational courses. And since we brought in the blue book, which ... the TEGoVA blue book, for the REV status, you would have to have ten years' experience, and you have to have completed the minimum educational standards of TEGoVA. So, I suppose, since 2013 the standard is obviously moved on, I'd say, and it's moved on because we now have an outside body that certifies the valuers, so it's very good from a European point of view and from an Irish point of view.
Pearse Doherty (Donegal South West, Sinn Fein)
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But pre the crisis, were the processes robust is the question I asked.?
Pearse Doherty (Donegal South West, Sinn Fein)
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So what was the weaknesses in the processes if they weren't as robust as they are now?
Mr. Patrick Davitt:
I'd say the weakness in the process was that there was no valuation standards there so ... like ... we didn't ... IPAV didn't have to have standards for their valuers, as such, because there was no national actual standards. So whatever we had was a plus from a national point of view.
Pearse Doherty (Donegal South West, Sinn Fein)
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And why are there no national valuation standards for valuers in Ireland?
Mr. Patrick Davitt:
Well, there are none ... up to this date there's none. But when the new European mortgage directive comes into effect in March of next year ... 2016, there will be then ... Ireland will have to have valuation standards and national valuation standards because it's a ... Article 26 of the mortgage directive it says that there has to be valuation standards that are recognised as European or international valuation standards. So they're going to have to come in then. But there was none actually in the country that you could use or that people would use or that valuers would use.
Pearse Doherty (Donegal South West, Sinn Fein)
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And has IPAV ever lobbied Government looking for such standards to be brought in ... such standards to be enshrined in Irish law?
Pearse Doherty (Donegal South West, Sinn Fein)
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But prior to that, though, you never suggested there should be national standards brought in by Government. Is that correct? Is that what you are saying?
Pearse Doherty (Donegal South West, Sinn Fein)
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And why would you ... why would the ... your body not suggest that your members would be ... would be accountable to national standards enshrined in law? Why did you never suggest this?
Pearse Doherty (Donegal South West, Sinn Fein)
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But the point I'm making is that you've actually never suggested that there should be a national standard up until 2012. That you were comfortable with the fact that you were a self-regulating body, is that correct?
Mr. Patrick Davitt:
Yes. Well, there are two different things with the valuation standards. There's the valuation standards and the valuation methodology. The methodologies were always there which is the way the actual valuations are worked out. The standard is how it's written up. So just to ... sort of ... and I know probably people here maybe know more about valuation than I do but it's to ... to write it up ... to write up the valuation its written like a composition, I suppose. You know, there's a heading and there's a centre and there's a tail piece. So the standards would actually make the way the valuation is written - that's it's written in a clear and concise manner. But the valuation methodologies, that the way the valuation is worked on are always there and were always there and are still always there.
Pearse Doherty (Donegal South West, Sinn Fein)
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And did anybody ever suggest that there should be - in Government circles or Department circles - that there should be a national valuation standard prior to 2012?
Pearse Doherty (Donegal South West, Sinn Fein)
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Was your body comfortable, or not, being a self-regulating body for valuers?
Pearse Doherty (Donegal South West, Sinn Fein)
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You mentioned the methodologies used in relation to valuation. Can you outline how the methodologies used in relation to Ireland pre the crisis compared to our European partners?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. The banks valued loans on an amortised basis as they were the originators of the loans. By contrast, NAMA, on acquisition of the loans, value them on fair and true-market-value basis. As a result, the aggregate loans came to be valued at €31.8 billion by NAMA in contrast to €74 billion value estimated by the banks. Against this background, how robust in your view were the valuation methodologies during the boom years given such a scale of downward adjustment? And we can see the NAMA discounts on page 25 of the core documents.
Mr. Patrick Davitt:
The valuation ... a valuation ... a market valuation ... both of them are done on market valuations. Like ... the ... the ... NAMA call them a different ... a different valuation but this is an open market valuation. So the open market valuation of a property is taken on a valuation date ... on a particular valuation date. So if I value a property today ... if I go to look at a property today under the now understanding of market value which is in the new directive in June 2013, I have to actually ... today is the day I have ... I have to do the valuation value. I can't come back in two weeks' time and when I start to write up the report do the valuation value on that day. So I have to do it today. So when I do the valuation report today and I do that today, it could be value A. Now if I was six months prior to that or a year prior to that, or a year again prior to that, obviously the open market valuation is going to be ... its a moving figure at any time because it is ... on the particular day that you do the valuation. So while the discounts are there for NAMA ... but the discounts are on different times. So the timeframe would have been possibly ... the NAMA date was 2009, 13 November 2009. Whereas a lot of the valuations were done ... completed before that. So the valuations ... you would only have to ... have to believe that the valuations were done on the correct valuation open market value on that date that they were done.
Pearse Doherty (Donegal South West, Sinn Fein)
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You mentioned you'd have to believe. Do you believe that they ... in the robustness of the valuations that took place that amounted to the fact that the banks ... the institutions had loans of €74 billion that were written down as you said in 2009 by NAMA to the value of €31.8 billion?
Mr. Patrick Davitt:
Well, I personally would believe in them. But, like, until such time as you would look at each report you would ... you obviously ... it's only then you would ... you would see whether the valuation was correct or not correct. But the ... the next scenario after that is that every valuer has to have professional indemnity insurance when they write a valuation. So its ... apart from the standards that the institute would actually make for them, they have ... they have professional indemnity insurance to cover in the event ... if they make a mistake. So if the valuations are incorrect ... like, the banks obviously can sue the valuer. And we haven't seen any evidence of that. So, like, the robustness of them from looking at them ... looking in at them without actually seeing the actual valuation itself would lead me to believe that they were robust ... on the date that they were done. Like ... it ... what happened with NAMA and the prices went down, you could also say if those valuations were done in 2002 and then you were comparing them to 2006 you would also see that the valuations could have gone a way up.
Pearse Doherty (Donegal South West, Sinn Fein)
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So is there anything in your methodologies today that would suggest that the valuations that were given on those assets to the institutions would be any ... any way different?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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No, no ... the methodologies.
Pearse Doherty (Donegal South West, Sinn Fein)
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So, using the practice that you apply today and ... going back to that period in 2006, 2007, 2008 ... the valuations in your view would still be of the level that they were?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Can you explain this to me. We have had evidence in today's inquiry about some people that ... that would have been looking for trophy properties for status purposes - and I won't be mentioning any individuals ... no individuals' properties was mentioned in that case - but ... just explain this to me, from a valuation point of view. If somebody is after a trophy property ... and lets say it's a group of hotels, for example, and they're willing to pay €1.5 billion for that group of hotels. Is that the value that you will put on it, despite the fact ... because that it what somebody is willing to pay for it ... despite the fact that you know that the comparison group of hotels in the region or in that region would be maybe half the value?
Mr. Patrick Davitt:
No. That isn't the value we put on it. You would have to put ... the comparison value is ... normally what valuation of what open market value works to. So you have to look at the comparison value. So, for instance, if I was going to value hotels and a valuer was going to value a hotel group, they would have to have comparisons to back up their own valuation. So they would have to look at recent sales that took part ... or that took place in hotel industry ... and they would have to look at those valuations and they would have to build those valuations or valuations similar to them into their ... their ... their figure for the new valuation the were doing.
Pearse Doherty (Donegal South West, Sinn Fein)
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Can I ask you why did your body, which represents valuers, lobby the Government in relation to tax changes for the property sector? For example, the abolition of the stamp duty and changes to the stamp duty, mortgage rent scheme, mortgage interest relief... they are quite numerous. Why did a body such as yours ... that are ... is an institution in terms of valuation, go into that area?
Mr. Patrick Davitt:
Well, we are not an institute as regards valuation, we're an institute in regards of auctioneers and valuers so like we obviously have auctioneer members who are selling properties every day of the week, as well as the valuation on the other side of our business. So since I came to IPAV in 2013, I've tried to divide up the institute to have valuers and valuers with proficient qualifications on one side and auctioneers on the other side. Now, at the auctioneering end of our business as well there was no regulation ... well there's an auctioneer's license there but until such time as 2012 when the property regulation came into being ... like the regulation there was scarce enough as well because you could go to court and get a licence. But ... so why would we ... we do this? I presume at the time ... the CEO at the time felt that it was a good thing to do and he felt that that was needed ... and that's ... that's why they looked for it.
Pearse Doherty (Donegal South West, Sinn Fein)
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Was it the right thing to do in hindsight?
Pearse Doherty (Donegal South West, Sinn Fein)
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Can I ask you ... in the position that you hold, was it appropriate in 2006 to be lobbying for the abolition of stamp duty? Was it appropriate to be lobbying for a number of measures that some would say would have potentially fuelled the property bubble?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Mr. Patrick Davitt:
At that particular time, I think in that document you will see that the CEO of IPAV at the time said that supply had caught up with demand and that ... in 2006 we were talking about, on one side of 2006 we were talking about some elements of the market were saying that we needed 93,000 units a year to fulfil the Irish demand. Other people were saying that the property market was going to bust and boom and they'd been saying that for quite a while, and the Government were saying we were going to have a soft landing if all this happens. So, like the IPAV would see, from their members throughout the country, that there were a certain amount of properties ... that probably overbuilt. So like, you know ... obviously, from this point of view, to help first-time buyers this would have been an ideal thing from our point of view.
Ciarán Lynch (Cork South Central, Labour)
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Final supplementary. You'll have time once more at the end, Deputy Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Can you just inform the committee or ... or for a body that represents auctioneers, who sells the property, and a body who represents valuers, who value the property, some people would see that as a conflict of interest and suggest that when valuations increase everybody wins. What would you say to that notion? How would you rest ... how would you rest the concerns that people would have, that by increasing the valuation you increased the benefits to the members that you represent on both ends?
Mr. Patrick Davitt:
Well, I would say that valuers have to value property on the basis of ... open market value I'm speaking about here. So if you're a bank and you instruct a valuer to value a property, you ask them to value it on open market value, so the valuer has to value it on that value and they have to use comparables to prove their valuation. So like ... if it helps the other side of the business, well then fine. But, also like we are taking a scenario here where valuations only go up like. Valuations go down as well. So we are looking at if the valuation, if he values it down the valuer, well then one people aren't happy and if he values it up other people aren't happy. So all they can do is use their professional judgment and if their professional judgment are incorrect ... like what ... there is a step, a fall-back part there and the fall-back part there is the professional indemnity insurance that they hold.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Deputy John Paul Phelan. Deputy, 12 minutes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chair. Mr. Davitt, good afternoon. To touch on an area that Deputy Doherty mentioned in relation to methodologies for valuation, can you outline for the committee what changes have taken place since the period of the bust in terms of the valuation methodologies that are used by your members?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Do you not feel that perhaps, following on from the collapse in property prices ... that questions at least were raised as to some of the valuation methodologies that were used prior to the ... prior to the property collapse?
Mr. Patrick Davitt:
Well, I feel that, and I think every valuer and auctioneer would feel, that it's very unfortunate what has happened and it's very unfortunate that the property went the way it did and like, you know, from people's point of view that are in negative equity and ... it's very, very unfortunate - certainly that part of the ... is very, very unfortunate and we certainly feel for that and we have lots of auctioneering members and valuers who went out of business and had to let employees go and their families themselves were involved with this. But, at the end of the day, the valuer has a responsibility. If you instruct the valuer to do a valuation for you on market value, that's what they have to do. They can't - just because they see that the property prices fell in 2006 or 2007 or 2009, or '82 or whatever - say "well I'm not ... I'm going to treat this valuation differently and I'm going to value it lowerly or higherly. And like they can't do that. They have to value the property on the basis of market value and there's a specific methodology there for it, so that's what you must do.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Following on from that, did you ever come across, in your current role or your previous role, any situations where valuers were put under pressure by financial institutions or developers to alter their valuations?
Mr. Patrick Davitt:
Well, I think ... under normal circumstances when valuers would do valuations, I think lots of times different people, or different members of the community would call valuers because it depends on who they are valuing the property for - X, Y or Z. So in your situation, if you speak about bankers and you talk about developers, obviously valuers would take calls from bankers and developers because when you're doing up the valuation it is very important that you do get the value right because we're talking about a lot of money here. So ... if developers would call you and tell you "Look, are you taking this into consideration, are you taking that into consideration?", if bankers would call you and say "Are you taking this into consideration, are you taking that into consideration?", there's no problem in taking a telephone call from them and seeing are you .. have you got the correct information, have you got everything right. But to change the valuation up or down because somebody would ask you - it would be a very foolish valuer that would do that.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Again, to touch briefly on that matter that Deputy Doherty raised - the standards, the European standards that have been adopted. The group that ... which you are a member of now, I think has existed since 1971.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Why is it that it took until 2012 for the Irish institute to join up? Is there any particular reason?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But why did the institute not join the European umbrella group, if you like, earlier and adopt those standards, in the absence of domestic standards?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You were president of the organisation on occasions. Was there discussions? That's what everybody-----
Mr. Patrick Davitt:
There were discussions, yes. There were discussions about different groupings and different bodies. The most body that would be here in Ireland would be the English valuation standards of the RICS, or the Red Book, and, I suppose, members were trying to decide among themselves as to which standard would be good for them to have. And, I suppose, being honest about it there was no need to have a membership of any body, there was no need to certify your standards ... and standards we are talking about, not methodologies. There was no need to do that so, I suppose, valuers decided they wouldn't do it. But when I did become CEO of the institute, when I could do something about it I did something about it, and we joined TEGoVA, and not alone that but we have ... we have valuers now that are ... have the highest standing in Europe ... in recognised European valuer and now the new residential valuer. I know it's only two years ago but a lot of work has been done on it.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can you offer any explanation for the inquiry as to the often large variances in valuations that existed in property valuation in the period prior to the collapse in property prices?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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I've the reference for that there if you want to bring it up.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I don't have the reference-----
Ciarán Lynch (Cork South Central, Labour)
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I have it here. It's Vol. 2, core documents, IPAV, Jones Lang LaSalle valuation report Project Atlas, pages 11 to 21.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In a relatively short period of time, valuations seemed to diverge pretty dramatically between different valuers and I'm really looking for ... your ... an explanation as to that divergence.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's on the screen in front of you.
Ciarán Lynch (Cork South Central, Labour)
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These would be a sample of valuations that would have been provided to yourself, Mr. Davitt, in preparation for you coming before the committee today.
Ciarán Lynch (Cork South Central, Labour)
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Sorry, it's Vol. 2, my apologies.
Mr. Patrick Davitt:
Yes, it is, yes. I have it... well if this is the one we're speaking about here ... this particular document here that I am looking at is not really a valuation, so like ... to comment on it ... I can comment on it to a certain degree, but obviously it's probably outside of where I am as CEO of the institute, but I will comment on it for you, if you'd like me to.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Please, if you would.
Mr. Patrick Davitt:
The document itself is ... it's a note written on ... taking into consideration, or taking into account, a valuation that was done at different times and it's a pro-formatype of valuation that's done or it's a note confirming the valuation is really what it is - it's not a valuation. There's possibly a valuation report behind this, I'm not sure of whether there is or whether there isn't. But it says on the right hand side, if I'm reading it correctly, it says the internal valuation held by the bank on 1 October is €65 million and it says on 31 May 2008 it's €65 million and they're happy to hold it at 65 - sorry, it may be done the other way around, it is possibly done the other way around - that it was done by a valuation company of the 31 May of €65 million and it was held by the bank at €65 million. They continued the valuation at that stage, and then when the normalised valuation was done at the 30th ... I don't know what date it is ... it's ... I think it's the end of November I think it was when these valuations were done, or the first week in December - the normalised value, the sale is valued by €43 million ... €42,500,000. And obviously they say different reasons why the valuation is different. They say the value with and without planning permission provided in the report and the value adopted, was a lower figure. So like they are looking at different ... the inputs in a valuation are going to be what the outputs are going to be, so if you put in different inputs obviously you are going to get different outputs. This valuation is possibly for land - I don't know what it's for - but the land values have fallen from 2006-2007 to 2008 and 2009 by possibly by as much as 90%, so they fell very, very quickly. But if you put in different things ... if you take different ... different assumptions when you're putting the valuation together, obviously you are going to get different ends at the other end. So it's the ... the valuation might have fallen, and it looks there it has fallen - obviously we can see that - but the reasons is what we'd want to look at.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I'm going to change briefly. I only have a few minutes left. Does your organisation conduct audits or, kind of, a sampling of valuations by its members to ensure that ... to test for accuracy and to test for adherence to the standards?
Mr. Patrick Davitt:
We have a process now where every valuer is checked on an ad hoc basis and, at least once per year, we have a compliance officer that looks at the valuation and looks at the valuation standard. But you can't really .. and IPAV aren't in a position to examine whether the valuation is done ... the valuation figure at the end, if that's what you mean, is correct or not correct, because we simply wouldn't know unless you take the valuation and you look at it by an expert to see if the valuation is done correctly according to standards and if it comes up with the right figure, because different valuers will see different valuations in different lights and they will look at different inputs again that they put into them. So the valuations are going to be different and the end result is going to be different.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Did you say every member is evaluated or how does that process work?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So it's not what you'd call an audit, effectively, then. It's ... because there can be differences ... legitimate differences, is what you're saying-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----between what one valuer sees and what another-----
Mr. Patrick Davitt:
It's not an audit from the point of view of a valuer. There's the person that would look at these valuations ... the compliance officer who'd look at these valuations isn't going out to look to see if the valuation figure came out right at the end of the day, and I don't think it's IPAV's responsibility to see that, because that person holds professional indemnity insurance, so if there's a problem with it, I think that's where it ... that's where the liability will lie.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Final question. Can you describe for the committee the stress test that would typically be applied to a large multi-purpose commercial and residential development in a major urban centre, and how such stress tests would account for low occupancy uptake potentially of that facility?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
Mr. Patrick Davitt:
The stress testing from the valuation point of view would be depending on whether the building would be tenanted or not tenanted; how long the tenancies are for; the covenant that would go with the tenancies, so whether the covenant is good; whether the covenant isn't good; whether there is a long lease, a short lease; whether the lease is subject to break clause; or whether it isn't subject to break clause. All of these things would be tested to see where they are and what is the scenario with them. So, like, you know, the occupancy, obviously, in any shopping centre is very, very important. It may not have been that important during the period that we're talking about but it's exceptionally important at the moment, and, at that time, in 2006, 2005, 2004, like, they were tenants ... lots of tenants were in and out of buildings, so, like, it was much easier to rent property, but now it's quite difficult, even though now it's like there's ... the market is changing again now slightly.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. The next questioner is Deputy Eoghan Murphy. Deputy, you've five minutes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman. And thank you, Mr. Davitt, you're very welcome. Looking at the pre-crisis years, how did the various codes of conduct deal with a situation whereby the valuer was being paid by a borrower, often a large developer, rather than directly by the lender? How did the code of conduct deal with that? Or did the code of conduct deal with that?
Mr. Patrick Davitt:
Well, the code of conduct didn't deal with it because it was the norm at the time. Like, valuers were paid by the person who required the valuation, and the bank, if we're talking about bank valuations here now, the bank would tell the valuer to go ... or tell the person who was getting the valuation, in some banks ... and some banks were different. But if you look at a situation that you're talking about, a bank would possibly give a valuation form to somebody who was borrowing money and say, "There's your valuation form. You take that to a valuer and get it completed and take it back to us." Some of them may have had valuation panels, some of them may not have had valuation panels. So that person would pay the valuer for doing that work.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, and how would the valuer protect themselves then from a potential conflict of interest, if it arose?
Mr. Patrick Davitt:
Well, the potential conflict of interest is in the code of conduct, and there is a potential conflict of interest in what you're speaking about, but, at the same time, like, that's the normal practice that was done and that's the way ... that's the way things were done until now ... well, probably until 2012, I'd say, until the Central Bank examined the banks and they came up with different proposals as what should happen. But valuers would be very happy with this and would have looked for this on lots of different occasions because if you go to value something for somebody and they're not happy with the valuation and you're in a small area or even you're in a big area, it's not a great situation to be in, because they will obviously want bigger values and the valuer doesn't do it, so, like, you've very little choice as to what you're going to do. You've to say to them, "Look it, I can't do that, I'm sorry. You may ask somebody else or do something different or whatever you want, but I can only do a valuation for you to this value."
Eoghan Murphy (Dublin South East, Fine Gael)
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Would that be a likely outcome in such a situation where such pressure was coming down on a valuer?
Mr. Patrick Davitt:
It could be. It depends on how well they know the person and how well they knew them and what happened with them and ... you know, like, it could well be, but, like, in most cases valuers would have to value the property and the end result isn't always what people wanted but that's what you have to do.
Eoghan Murphy (Dublin South East, Fine Gael)
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During the boom years then we had a small number of large developers having a disproportionate share of land and property development, so how would the valuation process mitigate against the risk of a developer, you know, using that position to have the values increased in a general way?
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes, but even by point of view of, say, where you're in an almost cartel-like position or monopoly-type position, you can use your land banks to influence potential valuations because you're able to put the pressure on the valuers, given your size of the market.
Mr. Patrick Davitt:
Well, you're able to put pressure on the valuers if the valuer will take the pressure and that's fair enough, but also the valuer has to have ... like, valuers mostly ... if I could put a scenario to you, like, on a Monday morning, a valuer would go into work in his valuating office and he would see headlines, maybe on the way in, that somebody went to an auction on Friday and they bought a piece of land which is a new record price, so that record price that that particular piece of property made on the Friday previous is the new comparable that that valuer has to use if he's doing valuations in that week. He can't go back and use comparables that he had the week before that, which was probably a lesser price. So according as values moved up and valuations moved ... the valuation price moved up as well. So, like, if builders went and they paid over the top for land or whatever they paid for it, the valuer had to use those comparables, because if you didn't use those comparables you weren't doing what you were actually paid to do - you weren't doing a proper valuation of the property.
Eoghan Murphy (Dublin South East, Fine Gael)
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Can that become a self-fulfilling mechanism to increase property values in general?
Eoghan Murphy (Dublin South East, Fine Gael)
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Can it become a self-fulfilling mechanism whereby someone pays a particular price, that then sets a new value, the valuer then comes to value a piece of land close to it or similar to it the following week, there's now a new value placed-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Self-inflating, if you like.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And then ... how do we explain then a situation whereby someone might put a value or a perceived value, in terms of bidding for a property, and have a valuation done subsequently that would come in at the same amount? I'll give you an example.
Eoghan Murphy (Dublin South East, Fine Gael)
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If you look at - and Deputy O'Donnell has raised it before - the Irish Glass Bottle site-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----where there was a valuation, I think, in 2006, of €264 million. That same year, a bid was made for €411 million and then the organisation, Becbay, had to get financing from Anglo Irish Bank, so they had the site actually valued after they'd made the bid, and the valuation came in at €412 million.
Eoghan Murphy (Dublin South East, Fine Gael)
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It was only out by €1 million.
Eoghan Murphy (Dublin South East, Fine Gael)
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How do you explain that?
Mr. Patrick Davitt:
Well, I can't explain it, because I haven't seen the valuation, but I've heard lots of talk about it, so, like, you, know, the valuer ... it wouldn't be any different for ... the valuer has to do the same thing. They have to come up with the comparable evidence to prove the valuation. So if they didn't come up with the comparable evidence to prove the valuation well, then, obviously, again we have a fall-back position of their professional indemnity insurance.
Ciarán Lynch (Cork South Central, Labour)
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Final question, Deputy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you. And just to clarify then, when you're doing a valuation, there is no future element. You don't look forward as to where the property sector might be going or where values might be going, it's the valuation.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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And when there is no market?
Mr. Patrick Davitt:
Well, if there's no market then you will put in your report ... when you do up your report, you'll do up your report ... at the bottom you'll say that there is no ... there's possibly not as good evidence for comparable valuations as what I would like. But at the same time, like, you have to try and look for as much comparable evidence as you can get. That's what you have to do.
Eoghan Murphy (Dublin South East, Fine Gael)
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But if you think the market is maybe going into decline-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----you can't factor that into the valuation give on that point in time.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy. Senator Sean Barrett. Senator, five minutes.
Sean Barrett (Independent)
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I think Senator MacSharry is on the list, is he? Yes.
Ciarán Lynch (Cork South Central, Labour)
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You're next, Senator Barrett.
Sean Barrett (Independent)
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Thank you, Chairman, and I don't want to delay the proceedings. The IPAV members, if I may ask Mr. Davitt, on the valuation panels, are they subject to participation restrictions such as a maximum number of valuations for the same bank client or does a rotation regime apply?
Mr. Patrick Davitt:
I don't know that. I don't know what way the banks would work their valuers. The Central Bank ... the only reference that I have to that is what the Central Bank said in 2012 when they did the final report. They said that valuations reports shouldn't ... or a valuation business shouldn't be carrying on any more than 33% with any one particular valuation company, so I wouldn't know which way that ... when value ... when banks come to look at ... I presume it's area, I would imagine. So if something comes, for instance, in Naas, the valuer in Naas that we have on our panel would get that valuation.
Sean Barrett (Independent)
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Are your members paid a percentage of the price of a property, for their services?
Mr. Patrick Davitt:
Okay, well we will take the bank situation first. So the bank situation is that the bank would have an agreed fee that they would pay the values, which to do a valuation for a house, for instance, could be somewhere in the region of €100 to probably €120 to €130 to maybe €150. So that the bank ... the valuer would know that every time they do an evaluation, they will get so much money for it. On bigger properties, there will be fees and scales for bigger properties with... so if you are taking it up to €1 million, maybe €1 million to €2 million, €2 million to €5 million, €5 million to €20 million and so on and so forth. There will be different rates that the banks would agree with it, and they would pay the valuer on that basis. If you are doing it for an ordinary individual, it depends again on what sort of valuation you are doing. If you are doing a short-term valuation or you are doing a long valuation, like a blue book valuation. If you did a blue book valuation, if you give me a figure and I'll tell you roughly what I would think you would be ... that you would be paid for it.
Sean Barrett (Independent)
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Okay, now in Vol. 2, page 15 of the papers, core documents, if I may refer you to that. There is a statement at the end of that, "Anglo methodology not market practice." What was the difference between the Anglo methodology and the market practice?
Sean Barrett (Independent)
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But somebody is offering it as an explanation why a property dropped €104 million between 1 September 2008 and 11 December 2008. Did Anglo have a different methodology to everybody else? Was that known in the trade?
Mr. Patrick Davitt:
Well, it certainly isn't known to me. And like, you know, the valuer does say there that the methodology used can either be if market value or net disposable, net development value, so either one there would get you to where you are. But they ... they're saying the methodology was not market practice, so I don't know what value they were using.
Sean Barrett (Independent)
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And just, can I bring another question to you, if I may? That you called, in Vol. 1 for, on page 55 of that document, in your pre-budget submission, for "a doubling of mortgage interest relief for first-time buyers" and that was in 2007. Wouldn't that have caused yet another bout of house price inflation?
Mr. Patrick Davitt:
Well, it could well have caused another bout of house price ... valuation. But, at the end of the day, you know, what first-time buyers were finding at that particular stage, probably from our members were, that it was very difficult to buy properties being a first-time buyer. And that was why, obviously, it was called for at the time. I suppose when you further read on that you will see there's a bit of a note on the market as to where the market was or where they felt the market was, which was slightly different.
Sean Barrett (Independent)
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In that same document, around page 13,16, the Central Bank says that you have poor valuation instructions, poor documentation, poor qualifications, failure to conduct regular evaluation, informal evaluation, updates. It's a fairly strong indictment of your profession, isn't it?
Sean Barrett (Independent)
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I'm looking at Vol. 1, pages 13, 16, 18. I was coming to the end of my time, so I had to lump them all together, 18, 20, but there is a lot of criticism from the Central Bank of the-----
Sean Barrett (Independent)
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I think the first of them starts on page 13, "Poor valuation instructions" and then, but it's a theme that continued, very strongly throughout the document as you know.
Mr. Patrick Davitt:
Okay. Well, the "poor valuation instructions", they were talking about the banks giving valuation instructions to the valuers. And in lots of case the valuation instructions, I'd say were quite poor. Normal valuers would look or normally a valuer would look for an instruction that would give you precise instructions as to what the bank wanted the valuation for and maps and everything to go with it. And in lots of cases, that wouldn't happen. The valuers might get a telephone call and say "will you go out to look at this house or this property, and will you do this valuation on it"? I suppose, that is what the Central Bank found and valuers ... we would have to say that that is correct.
Sean Barrett (Independent)
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And, poor documentation, poor qualifications, failure to conduct regular valuations, informal valuations and updates?
Ciarán Lynch (Cork South Central, Labour)
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Okay, Senator, so be brief.
Sean Barrett (Independent)
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Do those all stand as criticisms, or what has been done since to remedy what the Central Bank was saying?
Mr. Patrick Davitt:
Well, those criticisms are what they found that the banks were doing. That the banks weren't getting proper valuations, possibly or ... not maybe proper valuations, but getting valuations on a ... a very regular basis. Like, valuers are happy to do valuations whenever they are required, because obviously they get paid for them, and they will look at the valuations. But like, in lots of reasons maybe banks don't want to get valuations done up to date. And I presume in those documents, you are talking about, the Central Bank was talking about the impairment of loans, because they had something to do with the impairment of loans. So that would make a differences to the valuations ... up-to-date valuation, as opposed to an older valuation that they were using because of the fact that we are looking at market value, and the values keep changing .
Sean Barrett (Independent)
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Thank you and thanks, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Can I just deal with one question there before I bring in, before I invite Senator O'Keeffe? It just comes back to your own opening statement there Mr. Davitt. Can I ask you if, overall in your assessment, how robust were the checks and balances in dealing with potential conflicts of interests in the pre-crisis period?
Mr. Patrick Davitt:
I'd say that the conflicts of interest that were ... that were there, the valuation, like being instructed by a person who was buying a property to do a valuation is something that the institutes wouldn't like and still don't like, but it still happens in some cases. So, like, there obviously is, and which can be seen to be a conflict of interest there right from the start, but institutes would and we have a code of conduct, so we would expect members to act to that code of conduct.
Ciarán Lynch (Cork South Central, Labour)
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Okay. But in a very, very simple fashion. Let's say, during the period of time when house prices were escalating very, very rapidly, coming up to 2007. If somebody, let's say, was selling a house-----
Ciarán Lynch (Cork South Central, Labour)
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-----and they were going to buy another house.
Ciarán Lynch (Cork South Central, Labour)
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The first thing that they may do is that they would ring up a valuer. Now, where would they find a valuer? Would there be an office that just has valuers inside in it, or would it be an estate agent or an auctioneer they would be calling to find the valuer?
Mr. Patrick Davitt:
The valuer that would do that valuation would probably be an auctioneer and they would do what we would call "a thinking of selling". So they would go out to visit that person, the auctioneer would, and they would tell them what they thought the property was going to be worth and what it would make.
Ciarán Lynch (Cork South Central, Labour)
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Now, as I understand it, the practice at the time, it may not be the practice anymore, but the practice at the time was, is that the auctioneer at the estate agent selling the house would set their fee on a percentage of the sale value. So let's say if I was selling my house for €100,000, the auctioneer, the estate agent would get 2% of that, which would be €2,000 and if my house sold for €200,000, they would get 2% or 3% of that, which would be twice the sum. Was that the practice then and does that still remain the practice now?
Mr. Patrick Davitt:
That was the practice then and that is the practice now. And the practice then would have been as well as that, that some auctioneers would go and they would do a particular fee on to sell a property or they would do a particular fee if they got X amount of moneys to sell a property.
Ciarán Lynch (Cork South Central, Labour)
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How much would a valuation cost? Approximately, a standard?
Ciarán Lynch (Cork South Central, Labour)
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€150? And 1% of the sale of a house for €100,000. How much would that be?
Ciarán Lynch (Cork South Central, Labour)
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Okay, so it is about seven or eight times the cost of a valuation, yes?
Ciarán Lynch (Cork South Central, Labour)
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So in profitability terms, there is a ... the profit margin on a sale or a valuation, which provides a greater potential for profit?
Mr. Patrick Davitt:
Well, the valuer has to go out and look at the property and has to do up the valuation report. The person who is going to sell the property has to go out and look at the property and estimates what he thinks the property is going to make and then they have to market it, they have to view it, they have to sell it, they have to do the conditions to go with it and everything.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay, I want to talk about the kind of ... the particular years when we saw massive house price inflation, here it was going up multiples over a period of time. What was the ... what would be the standard percentage rate on a sale from an auctioneer or an estate agent? How much ... would it be 1%, 2%, 3%?
Ciarán Lynch (Cork South Central, Labour)
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Okay, yes.
Mr. Patrick Davitt:
So there was always sort of a ... and I am talking about even before the crisis that we are speaking about now, there was always this sort of an anticipation that the property prices in Dublin when they were high that the fees would be somewhere in the region of 1.5% to 2% and the fees in the country would be anywhere from 2.5% to 3%.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Patrick Davitt:
Now, when the prices of houses moved up, obviously the fees moved down slightly. So, like, at that particular stage if you are talking about a house in Dublin, you could be talking about maybe 0.5% of a fee for it. Maybe less even depending ... or maybe more depending on who the auctioneer was and what fee they were able to negotiate.
Ciarán Lynch (Cork South Central, Labour)
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I understand, so let's just split the difference and say it was 2% national average at aggregate figure or it is 1.5%. The point that I would like to be arriving at with you is this: when house prices were escalating at a rapid rate, were the profitability of auctioneers increasing in a similar fold?
Ciarán Lynch (Cork South Central, Labour)
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Yes. The income. If you were getting 1.5% or 2% on a €100,000 house and five years later that house was selling for €200,000, it would have meant that your income would have increased by 100%.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Would ... did that present any thoughts within your industry as to whether these are great times or are these times of great concern?
Mr. Patrick Davitt:
Well, I think the prices were times of great concern. The fees that auctioneers were making or earning at the particular time would depend how they were running their offices, where there offices were, were they on main street offices were they working from their car or what were they doing and the amount of staff they had to back it up because, obviously, everything it's about ... at the end of the day, it's about take home pay. Now whatever amount of take home pay you're able to manage to get out of your office depends on the, obviously, the cost, that you've got in it so really when the fees are large there's probably going to be a lot more cost, if the fees are small there's probably going to be less cost.
Ciarán Lynch (Cork South Central, Labour)
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But the people purchasing houses during that time their wages were being increased on a kind of a steady rate, but the prices of the houses that they were trying to buy were increasing in multiple folds. Are you suggesting that auctioneers, that their wages or incomes were increasing like those people who were buying houses or were you in a different space that your incomes were actually increasing with the speed at which house prices were increasing?
Ciarán Lynch (Cork South Central, Labour)
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I'm on about the firm now-----
Ciarán Lynch (Cork South Central, Labour)
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We're talking about the firm's profitability, not the individual, because he'd be on a salary but the firm itself.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Senator O'Keefre.
Susan O'Keeffe (Labour)
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Thank you, Chair. Mr. Davitt, you were an auctioneer yourself?
Susan O'Keeffe (Labour)
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And you're not practising anymore?
Ciarán Lynch (Cork South Central, Labour)
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I can get a bit of phone distortion there.
Susan O'Keeffe (Labour)
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I'm sorry, Chairman. You were but you are not anymore.
Susan O'Keeffe (Labour)
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Okay and were you a valuer also?
Susan O'Keeffe (Labour)
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Thank you. How many auctioneers in Ireland does your organisation represent?
Susan O'Keeffe (Labour)
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I mean how many of the practising auctioneers proportionately? Do you represent 2% or 52% or 92%?
Mr. Patrick Davitt:
Well, the auctioneering licences at the moment are broken down into different sections. So there are companies, which there are 2,000 companies in Ireland and IPAV would have about 500 of those companies and there are 6,000 employees and IPAV would had about 500 or 600 of those employees. So there are roughly 6,000 auctioneers licences in the country at the moment.
Susan O'Keeffe (Labour)
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Given what the Chair was talking about there in terms of fees and so on that were payable to auctioneers at the time of selling a house, do you accept or not that auctioneers played a part in driving up the prices of houses in that, in the period of time that we're discussing?
Mr. Patrick Davitt:
Well, they played a part because they were in the game, and the game being that they were in the business. Like, if prices were moving up the auctioneer would have to get them because they have got a responsibility to the vendor that employs them to sell a property to get the best price possible for that property. And in this particular time that we're speaking about, if you went to auction, a vendor could go to the auction and sell for herself and run up the price of the actual sale themselves to the value, to the reserve price that they would decide to put on the property. So auctioneers were caught in a bind between representing their agents, or representing their vendors and getting the best price. And, obviously, if you get the best price, like if auctioneers knew, obviously, that the prices were going to tumble by 50% and 60% when we look ... hindsight is a great thing but we were, we were part of it so, yes, of course.
Susan O'Keeffe (Labour)
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And at the time an auctioneer would benefit directly if your fee was 2% and you got a higher price you'd get more money. it's as simple as that is it?
Susan O'Keeffe (Labour)
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Do you know did banks and auctioneers work together in places perhaps to try to shift properties on or to move them or to entice developers to get involved with buying a particular site or a piece of land or anything? Was there collaboration and co-operation going on behind the scenes?
Susan O'Keeffe (Labour)
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I'm just trying to see whether the banks and the auctioneers were talking to each other about trying to move property, about trying to sell land and sites. Were they working together informally?
Mr. Patrick Davitt:
I would say the quick answer to that is "No", but, having said that, if an auctioneer had a show house or show houses, they could have banks, a representative from the bank in that particular property that would sell mortgages. They could have a mortgage broker or something in that particular house on the day that they would open the property so people could come and talk to the mortgage guy there or the bank there about a property and about a mortgage.
Susan O'Keeffe (Labour)
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How many complaints, if any, were made to your organisation in that time period about flipping, about auctioneers being involved in flipping properties on?
Susan O'Keeffe (Labour)
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All through that time as well?
Susan O'Keeffe (Labour)
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I'd like if I might to read from a book called Breakfast with Anglo, which you may be familiar with, written by Simon Kelly, who was himself a developer, and he says simply:
Banks believe valuers which always amazes me because valuers don't buy buildings. Valuation figures could be swapped for real money less a discount of about 20%. We'd be able to borrow 80% of whatever figure I could squeeze out of the valuer. An extra million in the valuation would be like the valuer writing me a cheque for £800,000.
What do you say? Yes.
Mr. Patrick Davitt:
Well, what I say is that the valuer to back up that figure that Simon is speaking about, he has to back up the figure. So like if he has to back up the figure, whether there's a million different or not a million different, he still has to back up the figure that he's putting on the property.
Susan O'Keeffe (Labour)
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But he goes on to describe how he, in one particular circumstance, and it's obviously had happened before, that he sat down and had a great conversation several conversations with the valuer and they haggled about how they could arrive at the valuation. And he explains how, you know, if you change the ERV and if you looked at the ... you could, it was money in the bank for him. And he's ... you know, it's quite a graphic account. I'm just wondering is this familiar to you, is this what happened? Was this what ... I mean developers sitting down with valuers to discuss and haggle about the valuation seems to me to be at odds with the professional guidelines and principles of your organisation, so?
Mr. Patrick Davitt:
Well, I think haggling about the value is one thing, but discussing the value, let it be haggling or discussing or whatever it is, because a valuer will make up his mind to the value of a property and, obviously, if the developer as you speak about there thought the valuation is differently, well then, obviously they, will contact the valuer and then say, "Listen we think that valuation is incorrect", or whatever the case may be. So the valuer will say, 'Why do you think it's incorrect,' and then, if this is what you call haggling, the valuer could say, 'Well, did you take into consideration this, did you take into consideration that?" And the valuer then, obviously, from his point of view or her point of view has to decide on if they took this into consideration or they didn't. So if that's the haggling part-----
Susan O'Keeffe (Labour)
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Yes, but there was discussion. It wasn't just that the valuer did it in a silo, not liaising with the developer.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair. You're very welcome Mr. Davitt. Can I just start by asking you about the lack of a residential property price register and, indeed, a commercial one during the decade, let's say, leading up to the crisis? What difference might it have made if there was a published register of prices that were achieved?
Mr. Patrick Davitt:
I think it would have made the difference that people would be able to see what actual properties made because auctioneers' hands were tied. If you called me ... if I sold somebody's property and you called me and asked me how much I got for it, I couldn't actually tell you. Despite the fact of whether I wanted to tell you or whether I didn't want to tell you, I couldn't tell you. So the property register made all that information available to people that's actually out there in the open and people can see openly what properties made and what people got for their properties. So it makes an awful lot of difference and it makes a great difference from comparables, even though the property register for the moment it holds a certain amount of information. It could be extended to holding different amounts. But it does and it has been a great help.
Michael McGrath (Cork South Central, Fianna Fail)
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But in the absence of such a register, would speculation about what price a property fetched, could that potentially help to push up prices in the absence of hard data?
Mr. Patrick Davitt:
It could but, like, you still have to, if you're a valuer, you still have to take into consideration what properties were making so you would have to find out, so like what you would have to do is before the price register was there, you would have to get a brochure on a property. So if I went to do a valuation, I would have to come get a brochure and a property, possibly call the agent and see on a one-to-one did you sell this property, how much did it make, what happened with it? So like lots of auctioneers were keeping databases of their own or valuers were keeping databases of their own to see what different particles of land or different properties made in different areas.
Michael McGrath (Cork South Central, Fianna Fail)
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And do you believe there should be a commercial property price register?
Mr. Patrick Davitt:
Well, I do. There's a commercial property price lease register and the compulsion is on the people who actually lease the property to put the details into it. And I do believe that the lease register would be very, very good and I think it would be very informative from an auctioneer's point of view, and valuer's point of view as well.
Michael McGrath (Cork South Central, Fianna Fail)
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To have a register of sales prices?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. Okay. What level of disclosure is there on a valuation of the assumptions that underpin that valuation? How informative is a valuation document for the reader apart from the figure that it gives for the valuation?
Mr. Patrick Davitt:
Well, the plan of a blue book valuation report, which is quite a document, it is anything from probably 20 to 50 pages, the plan of that blue book document is, if I did that for you and I gave it to you, and you didn't know the property, just take it if you didn't know the property at all, somebody was buying possibly that property for you, and you looked at this valuation report, the plan of that document is, that when you look from the first page to the photograph, to the end page to where the valuation figure is, that you will know as much about that property by the time you've finished the report, as I will after writing it. That is what it's supposed to portray, with all the different headings and everything that are in it. So the assumptions are one part of that and the special assumptions are another part of it. So, like, those assumptions, first of all to do a blue book valuation, I must write you a letter or a terms of engagement. So that terms of engagement must take in what assumptions I am going to use. So if I am going to use A, B, C or D or if I am going to use special assumptions like forward looking, like planning or something like that, so they must take consideration of that.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes but who is that document made available to?
Michael McGrath (Cork South Central, Fianna Fail)
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Right, but not necessarily the purchaser, who may be relying on a valuation?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, I know what you mean. I suppose if an organisation is selling a property and they base the asking price on a valuation, they have that blue book as you call it-----
Michael McGrath (Cork South Central, Fianna Fail)
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----- with the assumptions and so forth. But a prospective purchaser does not have any knowledge of the valuation which underpins the asking price. They can get their own valuation.
Mr. Patrick Davitt:
Exactly. They can, yes. Well, they can ask for, like, you know, if a purchaser gets a blue book valuation the property to find out what the valuer believes that the value of that building is before they put it on the market, pre-putting it on the market, well then obviously the purchaser is going to know that the value of the property is X, Y, Z, whatever it is and they are going to know how the valuation is worked out. It was worked out on open market or whatever it is worked out on. So they are going to know that, and that's the information that they are going to have. They are going to put their property on the market and they are going to put a reserve price on it of X, Y, Z. So then the person who wants to buy the property is going to come and look at the property and say, "Well I think that's too much money for it", or "I don't think that's too much money for it, but I better get a valuation on it to make sure of what the situation is with it." So the chances are that valuers may well talk at that particular stage about the assumptions that have been put on the property, if there have been any put on it.
Michael McGrath (Cork South Central, Fianna Fail)
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What is the downside to a requirement whereby the seller's valuation, with all of that detail, would be made available?
Mr. Patrick Davitt:
The duty of care is the problem from a valuer's point of view because the valuer will have a duty of care to somebody, they can't have it to everybody. So if they write a valuation to whom it may concern, they could have a duty of care to loads of people, but if they do a valuation for a particular person, that's who they're doing the valuation for and that's who's paying them for doing the valuation and that is who their duty of care is to.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Senator Michael D'Arcy.
Michael D'Arcy (Fine Gael)
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Mr. Davitt you are very welcome. Can I ask you in relation to the blue book, we are up to the seventh edition now. Prior to the peak of the boom, how many, what edition was available at that stage? What are the improvement in the standards?
Mr. Patrick Davitt:
It is roughly every four years the blue book is issued. Now, it could be in between that as well. There is a new one coming out in 2016. It is being part-written at the moment. So the next one will be, the eighth edition will be in 2016, the last one was in 2012. The one before that was in 2008. So it could have been in the beginning, because the blue book was a new document that was written with valuation standards, so it changed possibly quite often. So until such a time as they got a firm view on the valuations standards or the valuation standards they were putting into it, until they got them right from their point of view.
Michael D'Arcy (Fine Gael)
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So what you are saying is that the book, the '04, would there have been an '04 edition?
Michael D'Arcy (Fine Gael)
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In terms of the improvements from '04 to the current edition of the seventh, what are the major ticket items that have improved, in terms of the standards, for your profession?
Mr. Patrick Davitt:
The biggest thing that changed in this particular edition from the last edition was they have a mortgage lending value in it, which wasn't in it before. A mortgage lending value would be a sustainable value for a mortgage, like the Germans use this particular mortgage lending value for sustainable value of properties and they brought in this into law. It is BelWertV is what they call it, and that might not be the greatest German explanation of it, but we call it BelWert five. It was brought into law in Germany in 2006, which would use mortgage lending value on a property which would smooth the value over a particular term of the mortgage. So it could be over 20 years or it could be over 15 years, or whatever it is over. So that mortgage lending value and a definition of mortgage lending value was brought into the blue book in 2016. There are other things brought into it, like there are different directives brought into it, like the new mortgage directive, there is the capital requirements document, is part of that in it, which were brought into Ireland in law in 2012, I think. So those documents are there in the blue book which weren't there or would not have been there before. So as current evaluation standards change, the blue book is updated.
Michael D'Arcy (Fine Gael)
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Can I reference document IPAV, Vol. 2. On page 3 to page 10, it is Project Atlas.
Michael D'Arcy (Fine Gael)
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Page 3 to page 10. If you look at, effectively, at the terms and conditions, the instructions, assumptions, normalised value and then going down to the very last page, the use of this review. Would those terms and conditions be standard for a direction for external valuation, for PwC? Are they unusual and as a former president and CEO, and previously a professional auctioneer, would they be normal? The terms and conditions?
Michael D'Arcy (Fine Gael)
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Effectively, from page 3 to page 10, all of that document to date, to where it starts, the actual information. Is that a standard progression for valuers?
Michael D'Arcy (Fine Gael)
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That is all that is available to us, so it's the only evidence we can operate from.
Mr. Patrick Davitt:
No, that's okay. But it is a draft one, so, like, it could have changed differently from this but at the same time, it wouldn't have changed much because like a lot of the stuff that are here is in the blue book. Now there are some assumptions that they were taking that, under normal circumstances, would you get to allow, would you not get to allow, I suppose it depends on who you are doing the valuation for, and it depends on the instruction that you're doing the valuation for. You would get away with different, or have to use different valuation assumptions than you would have had used here.
Michael D'Arcy (Fine Gael)
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Can I ask on the very last page of that page 10 of the terms and conditions. The area that I want to pursue you upon, Mr. Davitt, "It is critical to understand that our instruction was to provide a considered commercial review of material provided, and not to carry out a due diligence exercise."
Ciarán Lynch (Cork South Central, Labour)
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Sorry Senator, what page of the document are you on?
Ciarán Lynch (Cork South Central, Labour)
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Page 10. Thank you.
Michael D'Arcy (Fine Gael)
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So it is the second paragraph on page 10. Would that be a standard term and condition for a project of this type? This was a PwC, it was a €5.5 million contract. Jones Lang LaSalle were participating with PwC in this. Would that be a standard term and condition?
Mr. Patrick Davitt:
Obviously, from my point of view, I will discuss this with you, but like from my point of view, I am obviously the CEO of an institute and I would not be aware of what's behind this and what material they're talking about. But like the material you are talking about, if you are going to do a valuation for anybody, you are going to depend a certain amount on the material that you are given and that you can use. In this particular case, because they were getting information, I presume from the bank, they had to make sure that, is the information they are getting, is it valid, is it enough, is it not enough. So in some cases it may not have been enough, but they're saying that we are working on doing this valuation on the basis of the information we're getting, and like, it would be standard yes.
Michael D'Arcy (Fine Gael)
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That would be standard. Just to take the information provided by the bank and effectively accept that as 100% accurate.
Ciarán Lynch (Cork South Central, Labour)
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Okay brief supplementary now. Is that a question or ...?
Michael D'Arcy (Fine Gael)
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That is the question I'm putting. It is standard, you're telling me, that they take the information provided by a bank, even though the analysis is to ensure that the banks were solvent and you're telling me that that is standard practice. The information that the auditors are being given and are being requested, that they just take it and run with that information provided by the institution.
Mr. Patrick Davitt:
They are saying that they don't do any due diligence on each valuation so I presume on this particular case, they did not look at each valuation as such because maybe they weren't there. I am not sure what this means. You'd have to be behind the scenes to know what this means. Like, you know, I am commenting on the outside here but I am telling you that under normal circumstances, if I was doing valuations for a bank or you were doing valuations for a bank that you have to take it as correct, that the valuation papers that they have are correct, unless it's a thing that you do particular due diligence on every valuation, which would cost, I don't know, you are telling me how much this cost, I don't know what it costs but like, it's a different scenario because you're going to have to go and look and view every valuation and see what, whether the information is correct or not.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Davitt, does the Institute of Professional Auctioneers and Valuers have a position on the requirements regarding deposits for mortgages from both the borrower and the economy generally?
Joe Higgins (Dublin West, Socialist Party)
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Can you tell us?
Joe Higgins (Dublin West, Socialist Party)
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And what would your recommendation be?
Mr. Patrick Davitt:
We'd like to recommend that there would be a market valuation ... a sustainable value instead of that because it gives the bank and it gives the person the ability to know that the valuation of the property isn't going to go up in troughs and rises and falls, like ... so it's going to be a lot leveller and it's going to be a smoothing valuation as opposed to having the 20% for everybody.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Do you have a figure that you recommend in regard to the percentage?
Mr. Patrick Davitt:
The ... again, I'll go to the German one ... what the Germans look at, and these figures are ... they're looked at every year, so the Germans would come at a valuation for this for their mortgage lending value and they would come at a valuation that you could use for indexing properties with the yield of somewhere between 5% and 6%, depending on if there was zone areas or there are different zoned areas.
Ciarán Lynch (Cork South Central, Labour)
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First-time buyers or in general, Mr.-----
Ciarán Lynch (Cork South Central, Labour)
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First-time buyers or in general?
Mr. Patrick Davitt:
No. I'm talking about in general and I'm talking about property in general here. I'm not talking about first-time buyers. So, they would have this, and this ... it's viewed every two years in Germany. Now it could be viewed every year in Ireland until such time as we get to a figure ... a yield figure that we're happy about. But for first-time buyers, like, 20% of a money for a first-time buyer to buy a property is a considerable amount of money to have to get their hands on to buy a property.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Mr. Davitt, you said in your opening statement that:
IPAV [the Institute of Professional Auctioneers and Valuers] believes such a body, [you're referring to a national property council] which would have a purely advisory role, would have the potential to play an enormous part in helping build a sustainable property market, bringing about stability and avoiding future troughs and peaks, as have occurred in the past. Volatility may serve isolated interested. It does not serve consumers. It does not serve the auctioneering profession. And it does not serve the common good.
But is it or is it not a reality that what happened during the bubble with property and house prices was hugely advantageous, materially speaking, for the income and the profits of auctioneers?
Joe Higgins (Dublin West, Socialist Party)
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The ... you say in page 7 of your testimony that the institute, "...makes regular submissions to Joint Oireachtas Committees where useful exchanges of views regularly take place", and you have made budget submissions.
Joe Higgins (Dublin West, Socialist Party)
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Now, can I ask you, Mr. Davitt, if during the 2000s, when house prices for first-time buyers especially, were shooting up by anybody's standard, and where research shows that between 1996 and 2006, the price of an ordinary home went up each year by the equivalent of the average industrial wage, which was a huge figure, and a huge imposition on the people who were now suffering the consequences. But your institute and your members, seeing the people who are the victims of this, if you like, did you make any representations to the Oireachtas or to any Government agency with regard to the seemingly unrestrained way that house prices were rising?
Joe Higgins (Dublin West, Socialist Party)
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Do you think ... was that a failure by the institute or not, that it didn't intervene when it might seem obvious to many people that things were becoming completely unsustainable in the sense that first-time buyers being forced to go for 35 or even 40 year mortgages at unsustainable levels? Should your institute have intervened?
Mr. Patrick Davitt:
In our pre-budget document of, I think it's 2006, I think it's the one it is ... I'm not 100% sure about it now but I could take it out of it but I think it's 2006 and it's one that you have there. We did say in that document, that we felt that the prices were changing and the prices were too high and it wasn't sustainable. And I think auctioneers and everybody in the marketplace was aware that the prices weren't sustainable because they had gone up an awful lot as you correctly say.
Ciarán Lynch (Cork South Central, Labour)
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I just want to deal with this to get a bit of clarification on one thing with you, Mr. Davitt, and thus in regard to the IPAV. During the period, or even currently, has the IPAV adopted any best practice monitoring and implementations model arising from other European countries?
Ciarán Lynch (Cork South Central, Labour)
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I'm asking has your association or your agency adopted any best practice monitoring and implementation models arising from other European countries? So have you looked in other jurisdictions and said, "There's something happening over there. It's not happening here. Let's go away and do that?"
Mr. Patrick Davitt:
Well we have done ... we have done different surveys of different European partners because we are members of different European groups. Apart even from TEGoVA we're members of different surveying groups or European groups, and we have done different surveys on pricing throughout Europe, on mortgages throughout Europe, on LTVs throughout Europe, on conveyancing throughout Europe. We have different surveys as to what it is, and we have made these surveys and reports available to the Government. The most recent one we did was on conveyancing and the time of conveyancing. So we have done this throughout the years and we have made Government aware of them.
Ciarán Lynch (Cork South Central, Labour)
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Alright. Okay. Thank you very much. Deputy Doherty. Oh, sorry, Deputy O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Chairman. Welcome Mr. Davitt. Dr. Davitt, I'm referring you to document Vol. 2, primarily to presentations made by Alan Ahearne and what I wanted really was, was that page 27 and page 31 to 32, and have you examined the factors that fuel property bubbles, as an organisation?
Kieran O'Donnell (Limerick City, Fine Gael)
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No, no. In terms of the property bubble that arose during the 2000s.
Kieran O'Donnell (Limerick City, Fine Gael)
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Did you study why you feel it happened?
Kieran O'Donnell (Limerick City, Fine Gael)
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Why not? I mean, for an organisation of your size, representing so many members, why was it never decided to commission a report as to what the causes were?
Kieran O'Donnell (Limerick City, Fine Gael)
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And what's your own view of what caused it?
Mr. Patrick Davitt:
Well our own ... my own view of what caused it is that the money was, I think, too freely available. Like a lot of European banks and German banks must be ... pumped a lot of money into the Irish market and banks here gave it out to different people which caused that different people could buy properties and bid against each other on the same banks' moneys and rise the property prices up and that's really where the prices went up very, very ... too far.
Kieran O'Donnell (Limerick City, Fine Gael)
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And in hindsight now, what do you think could've been done to prevent the property crisis ... property crash?
Mr. Patrick Davitt:
I think the availability of money is one. Like, the interest rates at the time were very conducive and they were very, very low. I think that would be, certainly, another one. But the mortgage lending value, I think, would be another one, if we were ... if we were able to get into a situation where mortgage lending value could happen. I think that would be another one.
Kieran O'Donnell (Limerick City, Fine Gael)
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And do you think that the auctioneering and the valuers profession in any way have to take responsibility for what happened with the property crash?
Mr. Patrick Davitt:
Well, I think it's very unfortunate what has happened and we would certainly be very sorry for what has happened and we've come to a situation where property prices went up that quickly that even auctioneers couldn't believe it themselves because like, you would do a show house possibly on a Saturday and the prices could be X and you come back on Sunday and the prices could be Y, and even auctioneers themselves were in a situation where the prices were going that quickly that they couldn't probably even ... they didn't even know themselves what the value of properties were-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Would it be fair to say, Mr. Davitt, that as prices went up, auctioneers and valuers were gaining?
Kieran O'Donnell (Limerick City, Fine Gael)
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So was there any incentive to call "Stop"?
Mr. Patrick Davitt:
But how could you stop it? Like you're ... you have to ... you're representing a vendor who you have to get the most money that's in the market for them. Like, how could you just call "Stop" unless you sold the property at under the market value when you would leave yourself wide open to litigation from the person you sold it for?
Kieran O'Donnell (Limerick City, Fine Gael)
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Could you have a situation where an auctioneer was acting for both the vendor and the purchaser? Was it prohibited? Is it prohibited, or was it prohibited?
Kieran O'Donnell (Limerick City, Fine Gael)
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Was there any penalties for them? Or any sanctions for them if they were caught acting for both sides?
Mr. Patrick Davitt:
Well if there was a ... if there was a complaint made to the institute, the institute could set up an inquiry, if there was a prima facie case set up for an inquiry, they could set up an inquiry into this.
If they found that, at the end of the day, the member wasn't acting inside of the code of conduct, they could him put out of the institute or her out of the institute.
Kieran O'Donnell (Limerick City, Fine Gael)
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Was there ever such an inquiry established, Mr. Davitt?
Kieran O'Donnell (Limerick City, Fine Gael)
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But was it for that particular reason, where they acted for both the buyer and the seller, was there ever an inquiry set up by the institute?
Kieran O'Donnell (Limerick City, Fine Gael)
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Could you have a situation where many of your members were also agents for various building societies?
Kieran O'Donnell (Limerick City, Fine Gael)
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And could you have a situation where they would have acted both for the buyer and the seller and also acted for the purchaser in terms of obtaining the finance to purchase the property?
Kieran O'Donnell (Limerick City, Fine Gael)
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Do you believe there was conflicts of interest in that situation?
Kieran O'Donnell (Limerick City, Fine Gael)
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How was it allowed to continue in terms of regulation of your members? You're self-regulating?
Kieran O'Donnell (Limerick City, Fine Gael)
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But there was never a situation where an investigation was carried out ... where you had a situation where you had an auctioneer acting for both a buyer and a seller and, at the same time, gaining from both the buyer and the seller and also gaining financially from putting the finance in place?
Ciarán Lynch (Cork South Central, Labour)
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Okay, Deputy. Thank you very much. I just want to ... just before I bring in the two leads to wrap up, Mr. Davitt, just to kind of deal with the conflict of interest issue, in maybe a different sphere. And one of the purposes of the inquiry here is looking at best practice going into the future - and looking at practice in the past - but also to look at the nexus of relationships. And in local authorities, for instance, okay, you would have members who would serve on that. Is there a code of conduct or some regulation or book of ethics that would govern how they deal with how the ... local authorities would make decisions upon developments?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Patrick Davitt:
Again, local authority ... councillors you're speaking about here, that would be auctioneers or TDs that would be auctioneers or whatever. So it's really up to the individuals themselves as to how they would conduct themselves and we would hope they would conduct themselves in relation to our code of conduct, but there isn't a specific code of conduct for Oireachtas members, no.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And they do, because I've been a member of council - in the chamber - and people would disclose that they would have a relationship and so forth. But this is nothing that the IPAV ... are you saying today, haven't a code of conduct about or don't give any recommendations as to members who might be in that space?
Ciarán Lynch (Cork South Central, Labour)
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Okay. The purpose of this is to establish a material relationship between a development that might be going through a local authority, and a member inside in the chamber, it doesn't necessarily have to be an estate agent or an auctioneer, it could be a builder, it could be a ... supplier, anything at all, whatsoever, it could be an electrician. However, in the situation where a person doesn't have a material relationship with the development or the plan or the proposal as it's actually going through the council but, subsequently, when the development is finished and the product is being put to market, the houses are being sold, and somebody comes in, in an estate agency role at that stage, and are now selling the houses, even though they had no relationship at the planning stage-----
Ciarán Lynch (Cork South Central, Labour)
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-----would you see a potential conflict of interest there?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Right, thank you. We'll now wrap up. Deputy Doherty, one supplementary, and then Deputy John Paul Phelan, one supplementary. Deputy Doherty?
Pearse Doherty (Donegal South West, Sinn Fein)
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I just want to ask you in relation to evaluation panels, you mentioned that they were generally organised and managed by the financial institutions and I'm interested to see how those panels created competition between valuers ... amongst valuers ... and also in relation to the Central Bank's report that you mentioned on ... on page 4, "Valuation Processes in the Banking Crisis – Lessons Learned", I would ask you to give comment to the weaknesses identified by the Central Bank, where they say, there was appointment of valuers without sufficient qualifications, appointment without evidence or sufficient professional indemnity insurance, appointment of valuers on the basis that they were customers of the bank, utilisation of valuers without the appropriate experience for the particular assignment and inadequate or no review of panels' members' performance. And given the finding of the Central Bank in relation to that, what action did the IPAV take or were you unaware that this was happening during that period?
Mr. Patrick Davitt:
No, we weren't unaware of it because valuers ... members of IPAV were looking to get on valuation panels. So, like, if a valuer member of IPAV looked to get on a panel, we could guarantee from our point of view that at least they had the experience of being a certified valuer. There were lots of valuers probably on the panels who weren't members of IPAV and who possibly weren't valuers in their own right and there's nothing obviously we could do about that because they weren't members of ours. But, at the same time, any member that had the experience, we would count them as certified valuers and we would be happy they would get on the panels of banks. And if banks had a problem, obviously they would make representations to IPAV and tell them that this valuer did X or Y or whatever and we would look at it. But the whole scenario with the banks and who they would appoint ... and if they appointed them because you were a customer of the bank, for instance, if that be the case, that would be the case. And if you were a member of IPAV and you thought the way to get on the panel was to talk to your local bank manager, because you were a client in that bank-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Can I ask you this here ... because one of the Central Bank's findings is the point about the relevant experience, where they talk about where "there were instances in which valuation appointments were not assigned to valuers with the requisite experience and inappropriate valuations were utilised by the credit institution[s]". So would there not be a situation where somebody could be accredited to you, but would work in a market which would be ... maybe the housing market, and then is providing a valuation for a major commercial property development that may be happening in the region that they operate but, therefore, wouldn't have the necessary experience? It appears that what you are saying is, all the people that signed up to IPAV were okay, it's the other ones that didn't have the experience and so on. But is it not the case that actually valuations were done ... what the Central Bank is finding is that valuations were done by valuers who didn't have the experience to do those valuations, while they may have experience in other areas?
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Deputy. Mr. Davitt, and then I'll move on to Deputy Phelan.
Mr. Patrick Davitt:
I'm saying that the valuers in IPAV, because they had to have experience to become valuers in IPAV, and they had to have a CV qualification certified by IPAV, would have had the experience to do valuations in their own field of valuation and there's no doubt about that. Now their own field of valuation is where we'd expect them to stay in, their own competency. We wouldn't expect valuers ... if they were valuing a house today, valuing a house for €100,000, to value a shopping centre tomorrow for €10 million or €15 million or something, we wouldn't expect a valuer to do that. And we wouldn't like to see a valuer doing that.
Pearse Doherty (Donegal South West, Sinn Fein)
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Have you done anything ... the Central Bank suggests this practice did happen. And what did IPAV ... do you accept that? What did IPAV ... what have IPAV done, as the self-regulating body in relation to valuers?
Mr. Patrick Davitt:
What IPAV have done is they've brought in the blue book valuation and the EVS, the European Valuation Standards, into Ireland, and they have certified their valuers that they have valuation qualifications in particular fields, so that now, European valuation, REV, which is the recognised European valuer, would have ... and would be capable of doing valuations to commercial standards.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chair. A couple of quick questions, Mr. Davitt. First of all I want to know ... can you outline briefly how IPAV is funded, what's the structure, how the organisation is run? And in relation to disciplinary procedures, what sanctions are available where a complaint is upheld - what sanctions are available to IPAV against its members? And, finally, in answer to one of my previous questions, I asked about the issue of undue influence possibly being brought to bear on valuers, and you said that sometimes maybe valuers might take calls, "Did you take such-and-such into account?" Is there any obligation on valuers that such calls be recorded or that they would be referenced in the final valuation report and, if not, do you think that the valuation report would benefit from such a record being kept?
Mr. Patrick Davitt:
Okay. Let's take the first question first. So the ... how IPAV is funded is, we have a membership base obviously of approximately 1,000 members right now, we'd 800 in 2013. And those members pay a particular amount of money to the institute every year, which, if you're a member or a member firm, you'd pay €400 plus VAT or, if you are an employee, you would pay €200 plus VAT. Now we're not a conglomerate, we are a very small organisation. We have three employees and myself, which is four employees. So our ... sort of turnover would be about €400,000 to €500,000 and that would ... our expenses ... last year actually we lost €50,000. But that's unfortunately the way it is. We would do education and we would do CPD as well and we would get a certain amount of fees in for CPD and for education, which would go towards our running costs.
So, that's basically where we ... we don't get grants from anybody, or we don't get anything else from anybody else, like, that's where we're funded. The second one was, sorry-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The sanctions that are available, if a complaint is upheld.
Mr. Patrick Davitt:
Yes. The sanctions that are available are you can put somebody out of the institute, you can put them out for a short time, or you can fine them. Now, we didn't have the fine at the particular time. We've only changed our articles of memorandum and articles in 2013, where we put the fining into it, because we found that with members, you either had to put them out of the institute altogether, or suspend them for a short term which could be up to two years, and that's really all we had. So we've changed that round about to make sure that we have other punishments as well that we could do, if you want to take it like that, and financial ... from a financial point of view.
The third question is the notes ... valuers would have notes, valuer's notes on every valuation. So when you go to look at a site you would have a valuation and you would have your valuer's notes, so you would write your valuer's notes down in your valuation. Now, that could take in the form of e-mails, it could take in the form of site visits, it could take in the form of telephone conversations, so you would, again, expect every valuer to have a site notes and to have them up-to-date, but I can tell you one ... one sort of a small fact which ... from ... I just ... I checked, in the past couple of days, about our ... we would run, with an insurance broker, a professional indemnity scheme for members to make sure that they're covered, and in the past four years, from 2010, '11, '12, and '13 ... In 2010, we've had two claims on our professional indemnity policies. We've had one in 2011, one in 2012, and one in 2013. Now, these policies are written by an insurance company, obviously. They're written by a broker first who would pass them onto an insurance company, so that if there are incorrectness with valuations, that's the place they should go. So, like-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you have figures for the previous years? I know you weren't in the current position but-----
Mr. Patrick Davitt:
No ... I ... I don't ... I didn't get them, because, like, normally these claims would take a year or two to work out like this, but I ... I know that in ... I haven't got the actual figures for the ... the official figures of the insurance company for 2009, 2008, 2007, but I know that they're still quite small, and if they weren't very small, like each of these ... there's over 500 policies on this particular scheme with all on ... on a separate basis. So if they were actually large, you can be sure the insurance company wouldn't be actually taking the cover ... or they wouldn't be at a reasonable price. So the amount of claims in professional indemnity insurance in Ireland for valuers is very, very low.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much. Okay, with that said I'm going to bring matters to a conclusion. Mr. Davitt, is there anything further you'd like to add this morning before we close?
Ciarán Lynch (Cork South Central, Labour)
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Okay. In that regard I would also like to thank you, Mr. Davitt, for your participation here today, and for your engagement with the inquiry. And now to just formally excuse you, and in doing so, I also propose that we suspend until 3 p.m. where we will resume with Mr. Pat Cullen, managing partner, Deloitte Ireland, and Mr. Gerry Fitzpatrick, partner head of audit, Deloitte Ireland. Is that agreed? Okay.
Ciarán Lynch (Cork South Central, Labour)
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Alright, if both of you are ready and if committee members are ready, I'm going to go back into public session. So I now propose that the committee return into public session, is that agreed? We now commence this afternoon's proceedings with a public hearing with Mr. Pat Cullen, managing partner of Deloitte Ireland, and Mr. Gerry Fitzpatrick, partner head of audit, Deloitte Ireland.
The Committee of Inquiry into the Banking Crisis is now resuming in public session and I can remind members and those in the public Gallery to ensure that their mobile devices are switched off.
Today we continue our hearings with auditors who had roles during the crisis. This afternoon, we will now hear from Mr. Pat Cullen, managing partner, Deloitte Ireland, and Mr Gerry Fitzpatrick, partner, head of audit at Deloitte Ireland. Pat Cullen has been the managing partner of Deloitte Ireland since 2011. He joined Deloitte in 1978 and became a partner in 1986. Mr. Cullen is a past president of the Irish Taxation Institute. Mr. Gerry Fitzpatrick is a partner and head of audit with Deloitte. From 2004 to 2008, he was group audit partner for Ulster Bank. Mr. Cullen and Mr. Fitzpatrick, you're both welcome before the committee this afternoon.
Before I hear from the witnesses, I wish to advise both of you that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room and, for those sitting in the Gallery, these documents will be displayed on the screen to your left and to the right and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witnesses have been directed to attend the meeting of the Joint Committee of Inquiry into the Banking Crisis and you have been furnished with booklets of core documents. These are before the committee and will be relied upon in questioning and form part of the evidence of the inquiry. So, with that said, if I can now ask the clerk to administer the oath to Mr. Fitzpatrick and Mr. Cullen this afternoon.
Ciarán Lynch (Cork South Central, Labour)
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I now invite members to give their questioning. The two leads ... they are Deputy McGrath and Senator O'Keeffe. Deputy McGrath, you've 25 minutes. Oh, sorry, my apologies, I need an opening statement. I'm jumping ahead. My apologies, Mr. Cullen, Mr. Fitzpatrick. If I can invite you to make your opening comments, please.
Mr. Pat Cullen:
Good afternoon, Chairman, Deputies and Senators. Firstly, I'd like to thank the members of the committee for your invitation today. My name is Pat Cullen, I'm a partner in Deloitte, specialising in taxation, with over 30 years' experience and, for a four-year term from mid-2007 to mid-2011, I served as managing partner of Deloitte. As managing partner, I was responsible to the partners and the firm's executive committee for the management and operation of all aspects of the firm's affairs. In my role as managing partner, I oversaw the management of the firm, including the provision of professional services to our clients, the skills and resources of our people and the financial management of the practice.
In my written statement - provided to the committee of inquiry some weeks ago - I provided the inquiry with a summary of salient aspects of our legal framework and governance structures, together with key features of our audit quality processes, which are of such fundamental importance to all of the work we carry out as auditors to a wide range of clients. In the interests of brevity, I'm not going to read my written statement. Instead, I'm going to refer to some areas that I consider may be of particular interest. Audit quality is a key area of public and stakeholder interest and delivering the highest standards of services and advice to our clients is our continuing and overarching objective. An important part of my responsibility as managing partner was to ensure that we had the appropriate processes in place to carry out our responsibilities in this regard. At an overall level, this helps to ensure that our professional services and our business conduct were in the public interest. Our audit approach is centred on providing clients with the most skilled audit partner and team appropriate to the needs and complexity of their case. Our quality governance processes require engagement partners to be fully responsible for the services they provide and for understanding our clients' business. Their involvement in the audit process is required from the very outset of any engagement, with partner-led audit planning key to our audit approach.
Our audit practice is structured into specialist industry groups, led by partners with a great depth of experience and expertise in that industry. Our financial services group, which includes banking, is one such group. These groups collaborate in order to share their understanding of market developments, risk assessments and emerging trends and this is of particular value during times of market turbulence and change. Audit partners are also supported by our professional practice directors and by the audit risk and reputation leader. The professional practice directors are responsible for technical, accounting and auditing support and their approach is responsive and consultative. Deloitte member firms are also part of a network of similar industry groups from around the world. These groups include experts with day-to-day, first-hand experience of the application of accounting standards across different legal and regulatory environments and include designated experts who are available to advise audit partners on engagements in dealing with complex or contentious accounting or auditing issues. The availability of these resources ensure that there is specialist support available if required to deal with difficult issues as they arise and to support our audit teams.
A review of our audit practice is carried out annually and this is overseen by Deloitte globally. The practice review determines whether we have complied, in all material respects, with Deloitte policies and procedures, applicable professional standards and applicable legal and regulatory requirements. Our audit practice is also subject to external review by the Chartered Accountants Regulatory Board, the independent regulatory board of Chartered Accountants Ireland. The results of our practice reviews are considered by our executive management committee and action is taken, as and where appropriate, to implement measures to address the recommendations made. It is a key element in our continuous drive to improve and enhance audit quality.
As I explained in my written statement, all partners who act as audit engagement partners for statutory audits have been granted responsible individual status by the Chartered Accountants Regulatory Board and are registered statutory auditors. Personally, I am not, and I never have been, a registered statutory auditor. My professional expertise lies primarily in the area of taxation. Therefore, I'm joined here today by Mr. Gerry Fitzpatrick, who is a registered auditor and a specialist in the banking sector. Mr. Fitzpatrick kindly advised me on the responses in my written statement to the lines of an inquiry in your direction of 2 April. Today, Mr. Fitzpatrick will address some of the issues in your lines of an inquiry in the context of his role as lead audit partner on the audit of Ulster Bank Ireland Limited, UBIL, from 2004 to 2008. Before I hand you over to Mr. Fitzpatrick, I would like firstly to make it clear what I understand to be the purpose of financial statements and our role and responsibilities as auditors.
International financial reporting standards, or IFRS, which is a framework used by the directors of UBIL to prepare the bank's financial statements, describe the purpose of financial statements as being, "A structured representation of the financial position and financial performance of an entity", the objective being to provide information about the financial position, financial performance and cash flows that's useful to a wide range of users in making decisions and presenting the results of management's stewardship of the entity's resources. The whole essence of IFRS is to provide for recognition, measurement, presentation and disclosure of specific aspects of financial reporting in a way that leads to a true and fair view being shown of the financial position and profit or loss of the entity. IFRS states that, in virtually all circumstances, an entity achieves a true and fair view by compliance with IFRS. Objective, professional judgment must be applied by the directors to ensure that financial statements give a true and fair view. Under the Irish Companies Acts, every company of the size of UBIL must appoint a statutory auditor and that auditor must make a report to the members on the financial statements examined by them, with the primary purpose being to state whether, in their opinion, the company's balance sheet and profit and loss account have been properly prepared in accordance with the provisions of the Companies Acts and give a true and fair view of the state of the company's affairs as at the end of its financial year and of the company's profit or loss for the financial year.
Over the years there has been much done to provide direction and guidance to auditors in carrying out the audits of specialised entities. This includes practice note 19, the audit of banks in the Republic of Ireland. While its main purpose is to provide guidance on the application of auditing standards to the audit of banks, it also comments on the objectives of the Financial Regulator and the objectives of the auditor, emphasising that while they may have complementary concerns, there are fundamental differences in their objectives. The Financial Regulator is primarily concerned with maintaining the stability of the banking system and fostering the safety and soundness of individual banks in order to protect the interests of depositors. The auditor's primary responsibility is to report his opinion as to whether the financial statements of the bank being audited present a true and fair view.
It's clear that the banking crisis has had an enormous impact on a wide range of stakeholders. It is absolutely regrettable that a number of major factors came together back in 2007-2008, including international market conditions, major banking failures like Lehman and a slowdown in the Irish property market, which conspired to create conditions of an economically catastrophic nature, which few, if any, could consider would lie within the range of expectations that one could normally predict.
Consequently accounting standards were faced with challenges which they found exceedingly difficult to keep pace with, as, for example, the concept underlying the incurred loss impairment model. The occurrence of loss events was happening at a pace and on such a systemic basis that the quantum of impairment provisions could change from day to day, let alone from month to month. And that was the difficult background against which audits were carried out in 2009. Hindsight does have the benefit of 20:20 vision and in the cold light of day, some seven or eight years later, yes, there is scope for asking questions about, "What if?" There is a broad need to learn from the crisis, and we support inclusion of the role of auditing in any reviews being carried out. Across the globe and in Ireland, the auditing profession has reflected on their role and considered how financial reporting and auditing could be enhanced. Deloitte has engaged and been a leader in such developments, some of which Mr. Fitzpatrick will comment on.
I'm now going to hand you over to Mr. Fitzpatrick.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Fitzpatrick.
Mr. Gerry Fitzpatrick:
Thank you, Pat. Good afternoon and thank you for the opportunity of addressing the committee. My name is Gerry Fitzpatrick and I'm one of the Deloitte partners engaged with auditing the banking sector. I've worked with Deloitte for over 30 years and have been an audit partner for 15 years, and I was, as stated, a partner on the auditing of Ulster Bank Ireland Limited, or UBIL, from 2004 to 2008. I've provided a detailed written statement addressing our role as auditors of UBIL and I would propose to take that statement as read. I will now make some introductory remarks.
As independent auditors to UBIL, our role was to report to the shareholder in accordance with the requirements of the Companies Acts. Our work was carried out in accordance with international standards on auditing. The UBIL financial statements were prepared by the directors in accordance with international financial reporting standards and under the requirements of companies legislation. A true and fair view is normally achieved when the financial statements are prepared in accordance with IFRS standards. Auditors do not set the accounting framework but rather, we provide an opinion on whether the financial statements prepared by the directors give a true and fair view. An audit is a point-in-time examination of the reporting of financial performance and position, measured in accordance with standards and an audit is primarily an examination of historical data prepared by the directors and presented in their annual report. Shareholders and capital markets value the audit process, as the audit underpins the trust and obligation of stewardship between those who manage a company and those who own it, and with a range of other users. To demonstrate the stewardship, the financial statements are prepared under IFRS to provide extensive analysis, both of accounting policies adopted by the directors and in preparing the financial statements' extensive financial data. Separate to the financial statements, the bank submits various capital and liquidity returns to the regulator. Those returns are prepared under separate rules or sent directly to the regulator, and are not subject to audit.
Our audit process is focused on the financial statements. The process commences mid-year, when a plan is presented to an audit committee. The plan sets out our work on key audit areas, on key issues, on major judgments, together with a summary of our proposed approach. That approach is a risk-based one, which includes tests of controls, reviewing the work of internal audit, evaluating control and remediation within the organisation, IT audit testing and tests of financial data. And that testing work commences in quarter four of the year, looking then at the transactions to the end of September. And following the conclusion of the year, we finalise our testing work and examine the financial statements prepared. The audit process is detailed and uses sample testing of the tens of millions of transactions and balances that the bank has recorded on its financial systems. Sample items are agreed to supporting records and to external confirmations. In the case of areas of judgment, we examine the evidence provided by management and challenge the nature and source of that data. We seek evidence of contradictory data available either internally or externally. Our work on UBIL was linked closely to the work of Deloitte RBS Group audit team and we reported the results of our work to them also. And throughout our audit, we met regularly with management and the audit committee of the board. When the directors have approved the financial statements and our audit is complete, we issue our report on those financial statements and the report for 2008 year issued ... was issued in February 2009. It was an unmodified, true and fair view opinion. And in reaching our opinion, we consider the results of our audit work, we assess the accounting policies and, where appropriate ... and consider where they were appropriate. We consider the nature and risks of and uncertainties in how they were disclosed and then adequate disclosure to be made on key items, such as loan impairment and going concern.
In addition to our statutory audit opinion, which is included in the annual report, we provided a detailed audit summary report to the audit committee of Ulster Bank Group, which included a summary of our work on UBIL. A copy of that report and similar reports for other years were submitted to the joint committee in February. In our own summary report, we provided the audit committee with details of our audit work, we showed analysis of risks in customer lending and data on corporation coverage by lending category. We reported on the impairment process tested by us. For 2008, as example, we refer to the absence of up-to-date collateral evaluations and the need for enhanced documentation of the impairment process. We also reported that the going concern assessment relied on RBS Group, the group's management of capital and funding, and in addition to being presented to the audit committee, our summary reports are made available to the regulator.
Our summary is presented to the audit committee as they approve the financial statements and those financial statements, as I've mentioned earlier, provide extensive analysis both of the accounting policies and the financial data. In taking the 2000 financial statements, by way of example, across 80 pages, these included accounting policies and disclosures on a wide range of topics.
I would like to highlight some key aspects of those disclosures relating to loan quality and finding. With regard to loan quality, the directors described in their financial statements six important elements. Firstly, the accounting policy was set out detailing the incurred loss approach which is required by the accounting standard IAS 39. Next, the directors highlighted key judgments and uncertainties which they explained could cause the actual losses to differ materially from those reported from their reported impairment provision. A third item was the detailed analysis of the quality of all loans, and this was done by reference to the bank's internal credit grading system. That data showed details of deterioration in the quality of the bank's loans in the year, showing that the gross value of loans in the lower quality categories had increased from €6.3 billion at the end of 2007 to €14 billion during 2008. Other aspects, including overdue payments, were also shown. A fifth item was the analysis of lending exposure by industry and sector, which provided insight into the lending strategy, showing, for example, that of the total exposures that property and related exposures included, construction, 6%; home mortgages, 19%; and property, 22%. And lastly the impairment for the year ... charged for the year was disclosed.
With regard to the funding model of the bank, the financial statements disclosed, amongst other things, three important aspects. Firstly, that 46% of the funding was provided by RBS Group entities. Next, that 75% of the financial liabilities fell due within three months of the balance sheet date. And lastly, the directors explained that, in their judgment, it was appropriate to prepare the financial statements of the bank on a going concern basis, and that the bank had adequate resources to continue its business for the foreseeable future. The directors disclosed that they had concluded this assessment having considered the financial position of the bank, and referenced the ongoing support of RBS Group by way of capital funding and liquidity facilities. Similar disclosures on loan impairment and going concern were provided with financial statements for other years.
The analysis presented by the directors within the financial statements shows the transparency of disclosure made available to both the shareholder and to the regulator. Our role was to ensure the measurement and disclosure was in accordance with a true and fair view. Our role, as Mr. Cullen has pointed out, is fundamentally different to the role of the Financial Regulator, who is primarily concerned with maintaining the stability of the banking system. And whilst audited financial statements contribute to the regulatory process, the determination of capital, the undertaking of tests for future stress, and the setting of regulatory buffers are functions undertaken by the regulator. That process is not under statute part of the scope of the audit, of the external audit. In providing our opinions on the financial statements, I believe we discharged our responsibility professionally and with due care and diligence.
Finally, I would echo Mr. Cullen's comments and recognise the financial crisis has had a normal impact ... enormous impact on a wide range of stakeholders and our profession has recognised the need to learn from the crisis and has reflected on how financial reporting and auditing could be enhanced. We have engaged in a variety of reviews across the world and at Deloitte in Ireland, we support the enhancements explored in those reviews and I would highlight just five things: firstly, the development of a new expected loss accounting standard, IFRS 9, which subject to EU approval, is due to be implemented in 2018. The development of with the regulator of an expanded auditor assurance protocol and this involves auditors reporting separately on aspects of governance processes at financial institutions and this expanded process has commenced from 2014. Thirdly, recommended changes in auditor reporting to audit committees and shareholders are now in place. Next, availability of new audit tools was proposed and that is now in place. And, lastly, enhanced dialogue around the audit process with regulators and this has been a feature for the audited banks in Ireland since 2009.
Whilst these are not changes to the scope of the core audit, such initiatives can, through enhanced communication of the existing scope and the setting of a wider scope, help to create a broad level of awareness of banking models and their underlying economics and, in some way, mitigate some of the understandability and relevance issues of historic financial information. Nonetheless, the preparation and audit of financial statements will continue to require significant judgment. Finally, the financial statements contain valuable data, but, as a point in time measure, can only attempt to present measures based on that point in time judgment. And the scope of an audit is an assessment of whether those financial statements present a through and fair view and, in that regard, has significant value. Thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. If I can now invite Deputy McGrath. Deputy, you have 25 minutes.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair, and you are very welcome, Mr. Cullen and Mr. Fitzpatrick. Can I just start by taking, for example, the Ulster Bank Ireland Limited financial statements for 2007 and 2008, which were audited by Deloitte and provided an unqualified, independent audit opinion? In hindsight, knowing now what you know about the bank and the issues that it was facing, would you still say that those accounts gave a true and fair view at that time?
Mr. Gerry Fitzpatrick:
Deputy, I am absolutely satisfied that that opinion was appropriately given. As I explained, the framework for the audit involves looking at a point in time judgment, looking at the available data that supports the directors' view of the financial statement. So they are the directors' accounts ... they prepare them on the basis of assumptions of available data. What we have seen, I suppose, is a fairly dramatic series of movements post-year ends, which were unimaginable in some ... in some respects. But I think in relation to the data that was prepared, the appropriate framework which was IFRS ... the measurement of data and the governance that the board went through and the work that I've done which, I believe, is comprehensive ... that those accounts were ... and those opinions stand as at that point in time and were appropriate.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask Mr. Fitzpatrick if you held concerns about, for example, the over-exposure of the bank to property lending, the concentration of risk, the possibility of the risk of a collapse in asset values, and you wanted to impart that information to the readers of the financial statements, what options would you have to impart that information on the statements?
Mr. Gerry Fitzpatrick:
I guess, firstly, the financial statements are the directors' financial statements so my job is to make sure that the directors properly reflect all of those aspects. And so the key role and the challenge that the auditor provides is to the board is to make sure they are giving disclosure of those elements. You've instanced any concerns one might have in relation to asset values or liquidity and some of the disclosures I described were very important in allowing the reader understand the maturity of debt facilities, the funding gap the organisation had with the ... with the short-term funding model and a long-term asset base, and on the asset base, gave reference to the quality of that loan book. My concerns were to ensure that the directors were properly reflecting what was happening in those on the ground in terms of their records and their financial systems, ensuring that the financial statements properly capture those elements of disclosure.
In terms of my discussions with the audit committee, clearly, as an audit process, as I described, starts in terms of setting out a plan. And that plan would include looking at particular areas of focus and some of the areas like loan impairment, like going concern and other significant judgments would have been disclosed and discussed with an audit committee and I would have set out my approach to testing that, but, ultimately, my concern is to make sure the financial statements present the information that the directors have in terms of their records.
Michael McGrath (Cork South Central, Fianna Fail)
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What constraints did IAS 39 place on you in terms of making provisions that if you did ... if you believed that it would be prudent to make provisions, what constraints did that standard place on you?
Mr. Gerry Fitzpatrick:
Again, I don't need to ... the IFRS puts constraints ... is ... is set for the directors to measure the financial statements. So when I challenge the directors in terms of the way they followed that standard that I think was appropriate, that that was a standard that dealt specifically with loan impairment, I think, has been discussed and well flagged that is an incurred loss model. And there is good reason why, I guess, that that standard was set in that way.
Previous standards had had a notorious capacity for manipulation where people made big bath provisions and, therefore, the comparability of information from one organisation to another was difficult. So the idea of setting a standard that it was an incurred loss model was well-intentioned and-----
Michael McGrath (Cork South Central, Fianna Fail)
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When was that standard introduced? IAS 39.
Ciarán Lynch (Cork South Central, Labour)
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Just because it's an important issue it might be important to explain what IAS 39 actually was and you can correct it here that, ''This was a standard that outlines the requirements for the recognition and measurement of financial assets, financial liabilities and some contracts to buy or sell non-financial items and the standard outlines how a provision for bad debts should be calculated from one year going into the next''.
Michael McGrath (Cork South Central, Fianna Fail)
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I suppose the point I'm getting at Mr. Fitzpatrick is that, okay, you were somewhat constrained by IAS 39 and I understand the financial statements are the preserve of the directors and you're performing the statutory audit. But if you had concerns about events that might transpire, there may be a collapse in asset values, but you were constrained from providing for that in the financial statements, or advising the directors to provide for that in the financial statements because of that accounting standard, what other facility did you have to convey that information or convey your concerns and ensure the directors conveyed those concerns to the readers of the financial statements? Could you, for example, have insisted upon a note to the financial statements along those lines?
Mr. Gerry Fitzpatrick:
I think for someone to give a disclosure in relation to a judgment, they have to have data to support that judgment. And warning of concerns in the future of something that might happen is given in the financial statements. And again, I referenced that in my opening statement that the standard makes it clear that there are ... it's based on judgment and that loss, impairment losses may be different depending on how events turn out. But, ultimately, to give any quantification of that, you would actually have to have better data and I think the situation the directors faced was in looking at the valuation of ... of loans was to establish what was the ... what was the data. They were relying on market data and I think if you recall at the time, we now know in relation to, for instance, house prices, the property index was 100 in 2005. In 2009, it was only 92. It took until 2011, 2012 for it to go down to 67.
So some suggestion with hindsight that the directors knew that this was going to happen I would have ... I would have had a major concern if I thought the directors believed that their judgments were over-optimistic and I would certainly bring that to their attention. And through the audit process I, by looking at individual loans ... there's a process for challenge of that data ... but the challenge we gave was to look at both that bottom-up analysis of loans and on a case-by-case basis, which was being done across the bank in a credit review process but also to try and look at a top-down analysis to say, "Well, looking at your loan portfolio and looking at how it is supported by collateral, what type of impairment loss would you expect given what we had seen in the market?"
So I think the challenge and you referenced concerns, I think the issue is one of challenge from my perspective showing scepticism to say, "Is your judgment based on data that is available?" And to look for any contradictory evidence of other data that might suggest it wasn't available, but to flag some concern that things might get worse, you need to put some quantification on it and I don't think that would have been appropriate.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. An auditor would discuss their findings privately with management and any significant risk would be formally recorded in a management letter. Can you recall any issue which could have potentially led to a qualified audit report but which after discussion with bank management was regarded as not warranting inclusion in a formal management letter?
Mr. Gerry Fitzpatrick:
I guess the first thing in a qualified audit report, a management letter is an output for the audit, separate to the qualification ... potential qualification in the set of accounts.
I mean, things that would cause a qualification to a set of accounts would be inappropriate standards or inappropriate measures. Clearly we would have discussions but there was certainly no record, and my information, if I had had some dispute with management, would have been recorded in my audit summary presented to the audit committee. There were no such instances of me saying I was in disagreement with the organisation. And then, I guess, the next process which you mention is the management letter, I mean ... in a management letter, we make disclosure of any material items in a ... from a control perspective, that haven't already been identified by the organisation. So we would have had, and observed, certain significant issues. In relation to the 2007-2008 period, there was an integration process that was ongoing, there was issues raised in relation to control environments and what we say in our management letter is that ... what we are raising ... we would raise, would be items that haven't already been reported to management. Therefore those issues were clearly of concern to us in terms of our audit process, in terms of understanding how those had been dealt with, what impact they might have on financial records, what the response to group internal audit ... findings have been and to be able to establish whether those issues were giving cause of concern for the actual measurement of assets or liabilities, and if we had had serious concerns on other matters, not reported by internally, we would have put them in that ... in a management letter.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask when did Deloitte win the Ulster Bank audit? When did you first carry it out?
Michael McGrath (Cork South Central, Fianna Fail)
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And do you still have it?
Mr. Gerry Fitzpatrick:
We are currently the auditors ... in the change in Europe in rotation of auditors, audit tendering is now a mandatory requirement so the bank put the ... the RBS Group put the audit out to tender for 2016. We were included in that process, but because we would obviously had only a small number of years, because we are timed out in rotation process, we weren't successful. The audit will change for 2016.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, so you won't have it after 2015?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and can I just ask about the audit fees? There was a very substantial hike in the audit fees from 2009 to 2010. In 2009, the audit fees were €283,000 and in 2010, that jumped to €894,000. What's the reason for that?
Mr. Gerry Fitzpatrick:
There's a number of reasons. The overall Ulster Bank ... so Ulster Bank Ireland Limited is part of the overall structure of Ulster Bank Group. There wasn't any significant change from those years in terms of the total quantum of fee. What happened in that period was certain subsidiaries were unwound. So First Active - which had been a regulated entity separately to Ulster Bank Ireland Limited - was wound into Ulster Bank Ireland Limited and there was a rebalancing of the overall fee of Ulster Bank Group. So it was the way the fee was being charged around the group, together with a restructuring that had that impact. It didn't reflect a particular change in the dynamic of our overall audit for Ulster Bank Group.
Michael McGrath (Cork South Central, Fianna Fail)
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So was it a reporting issue? Is it that you were earning similar fees in previous years but they were sitting in separate bank statements?
Mr. Gerry Fitzpatrick:
The Ulster Bank Group is an agreed fee, under the Royal Bank of Scotland process, that the audit committee of the Royal Bank of Scotland would monitor and then report to the audit ... committee of Ulster Bank. The allocation of fee for each individual entity was part of ... was a part of internal accounting and therefore, the change was as a consequence of some of the changes of activity, rather than any change in the nature of the audit process.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. So for example, in previous years Deloitte would have received similar levels of fee income from Ulster Bank for the audit?
Michael McGrath (Cork South Central, Fianna Fail)
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So, it would've been in the region of €800,000 to €900,000 for say 2008-2009?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and then in 2011 the figure jumped again from €894,000 to just under €1.1 million. Is that a more natural increase or is that reflected by a change in reporting as well, or is that an actual increase in fees?
Mr. Gerry Fitzpatrick:
There was an increase at that point. Because of rotation rules for all the partners, we can only spend a certain number of years on a client so I had finished my involvement, my direct involvement and obviously for client confidentiality reasons, I wouldn't be involved in the detail of Ulster Bank post that event. But I understand, as Ulster Bank was doing restructuring of its loan books and the Royal Bank of Scotland Group was doing a lot of work in relation to its core and non-core activities, there was a significant increase in ... in the ... in the audit work because of the restructuring and that may have caused ... that caused a real increase in cost.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, then there was also very significant non-audit fee income and very often it is said that auditors will get the foot in the door by getting the statutory audit but will earn very significant fees from non-audit work. So for example, there was a figure of €381,000 in 2010, which was the highest of years around that time, but what kind of work did Deloitte do for Ulster Bank apart from the statutory audit?
Mr. Gerry Fitzpatrick:
I guess first of all there is a framework for ... two frameworks that are really important in terms of doing non-audit work. One is an ethical requirement that whatever we would do can't fall within what we call a restrictive service - something that would be ... would cause us to be ... to have bias in our audit. The other process was a very detailed Royal Bank of Scotland process where any non-audit fees paid to the auditor had to go through an approval process. The work in the Royal Ulster Bank Group ... non-audit work, tended to fall on Ulster Bank Ireland and so perhaps the ratio in Ulster Bank Ireland was higher than for the overall group because I think over the ten-year period under review, the non-audit fees would be less that 20% of the audit fees. But the work would have been independent business reviews or receivership work that might have been happening on Ulster Bank clients.
Michael McGrath (Cork South Central, Fianna Fail)
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Do you think is it healthy, Mr. Fitzpatrick, for an audit firm to have the audit of the bank for 15 years?
Mr. Gerry Fitzpatrick:
There's been quite a lot of debate in relation to the benefits and ... and ... of audit rotation. I think ... there's a lot of learned, in experience, in terms of understanding an organisation. I think the way we as a firm, and our profession, have mitigated that with rotation of audit partners. So in terms of the risk that you might think that might exist - it might be one of bias or whether one had too close a relationship in terms of the judgments made - the rotation of audit partners both right around the Royal Bank of Scotland Group and the Ulster Bank Group caused, to my mind, that to be mitigated. I think an audit process is a very detailed process. I described tens of millions of transactions and very complex processes and therefore transitioning audit can be quite a challenge, so I see no issue - as long as the right safeguards are in process or in place shall we say, and the scrutiny that an audit committee puts an auditor under - to have an audit for a 15-year period.
Michael McGrath (Cork South Central, Fianna Fail)
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And what would you say to the argument that, you know, getting the audit is a very lucrative business, huge streams of revenue for your firm and essentially an auditor is not going to rock the boat because an auditor wants to be back the following year doing the same job again and earning massive fee income? What would you say to that argument?
Mr. Gerry Fitzpatrick:
I would say, from a personal perspective, there is nothing in the ethic of our firm, or my personal ethic which caused me to produce a report that I didn't agree with. So as a personal perspective, I have an ethical responsibility, a professional responsibility to be clear in my audits. In terms of bias caused by other commercial relationships, that is a risk and I think our profession is very clear in terms of how you ... how that risk should be mitigated in terms of separation of teams, separation of responsibilities, having clear guidance and ultimately ... having the audit community of the organisation approve any non-audit services. We don't certainly set out our pricing on our contractual arrangements in relation to audit in contemplation of any other fee because that would be both unethical and unwise, and obviously a lot of audit committees have parameters where they would restrict the amount of non-audit fees and regulation will change that a little bit further in the future.
Michael McGrath (Cork South Central, Fianna Fail)
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Returning briefly -----
Michael McGrath (Cork South Central, Fianna Fail)
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Sure Mr. Cullen yes.
Mr. Pat Cullen:
In the context of the overall firm of Deloitte, the Ulster Bank total fees never exceeded roughly 1% of our revenue. So putting it in the context of the overall firm, although a sizable fee, it's not as if we were significantly dependent on Ulster Bank as a client which would in any way have impacted on our relationship.
Michael McGrath (Cork South Central, Fianna Fail)
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Returning briefly to IAS 39 Mr. Fitzpatrick, it has been very significant in the context of Irish banks. Did the adoption of that standard mean that audited financial statements no longer had to comply with the true and fair view standard? It didn't remove the true and fair view standard?
Mr. Gerry Fitzpatrick:
No, the true and fair view is what's in law. I guess what the true and fair view is, is a concept going back many years when a framework for accounting standards wasn't as clear as now. It has been for many years an international framework. A common, accepted view would be that international financial reporting standards are rebuttable presumption to achieve a true and fair view. And in a situation where you have a specific standard that deals with a specific issue, you ... it would be exceptional for one not to follow that standard.
Michael McGrath (Cork South Central, Fianna Fail)
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And did you personally, and Deloitte generally, feel it was an appropriate standard?
Mr. Gerry Fitzpatrick:
I think the history has shown that perhaps it didn't cause the ... identification of provision as earlier as the new standard would.
I think at the time ... I think ... and as I've referenced earlier, there have been huge concerns in relation to the kind of, the discretionary impact that previous provisioning had which would actually hide ... could cause people to make provisions in a good time and then wouldn't see the performance of the bank. So I thought it was a good standard in relation to the comparability factor. I think the danger would be that anybody would think that a new standard would actually be able to predict the future. So the new standard ... and unfortunately it's not yet actually EU endorsed so we don't actually know for 2018 whether we'll be able to use that standard. It is an expected loss model and therefore books more of the provisions. I guess, as an auditor, the losses have already been incurred before you're measuring it for provisions purposes, so that the lending criteria are long made before you're actually measuring for impairment. Impairment happens down the road. But an expected loss model certainly will allow some greater prediction of impairment, albeit with significant huge judgments. And if you look at the house price index I referenced earlier, even an expected loss model will only use the date and the time, and won't necessarily say, well, that ... what could predictably happen in the future in relation to asset values. It will use current asset values.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. The Central Bank Act 1989, as you know, places an obligation on auditors to report to the Financial Regulator if they have any reason to believe that there are any circumstances which would affect the bank's ability to meet its financial obligations, for example. Did Deloitte make any such report to the Financial Regulator under section 47, pertaining to Ulster Bank?
Mr. Gerry Fitzpatrick:
We made reports annually. First of all, I guess, the report we make is a confirmation of whether we may had ... had circumstances during the period. The criteria set out in that Act is something that would jeopardise the continuous functioning of the organisation, as you referenced, either inability to meet depositors' requirements or perhaps other material factors.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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So it was a nil return, as such, each year.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And apart from that statutory duty to report to the Financial Regulator, as auditor of the bank, would you have had other interaction with the Financial Regulator relating to Ulster Bank?
Mr. Gerry Fitzpatrick:
Not specific to the audit. I guess, during the audit process, clearly, a detailed understanding of concerns the regulator would have would be part of our audit work, so review of regulatory correspondence and an understanding of how the concerns of the regulator might have an impact on the financial measures, whether provisions might be required as a result of that. So we would have a good understanding of what the regulator was writing to the organisation on. We would have made our returns and obviously given copies of our audit summary documents and, at a more thematic level, from time to time, we, as an organisation, would be talking to the regulator about, perhaps, the guidance notes they would be issuing on a whole range of things, but specifically in my period as auditor to Ulster Bank Ireland Limited, the regulator didn't seek any input from me in relation to particular issues they were dealing with.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I just take you to the booklet of core documents, Vol. 1, page 34. So it's from Ulster Bank Limited board paper, UBIL capital injection requests, August 2007, and on page 34. So we see that Ulster Bank Ireland had-----
Michael McGrath (Cork South Central, Fianna Fail)
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It's coming up on the screen there as well. Ulster Bank Ireland had transferred over €4.5 billion of-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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It's page 34 of the booklet.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, can you see it?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. So we see that Ulster Bank Ireland had transferred €4.5 billion of Republic of Ireland property risk to a different company to stay within property sector limits set by the Financial Regulator. Were you aware of the fact that €4.5 billion had been shifted, in essence, to get around any breach of the regulatory limits, and what was your view of it?
Mr. Gerry Fitzpatrick:
I certainly was aware. There's no doubt in terms of, again, the audit process that we start in understanding what the organisation is doing, reading board minutes, reading audit committee minutes, reading ALCO minutes are very important. In this particular paper, I think, is in the context of the way RBS was particularly managing its capital around both RBS and the Ulster Bank Group Limited. In the previous pages, on page 28, for instance, there's a reference to Ulster Bank Group having significant euro surplus capital. So, basically, the way it managed it ... it had a lot of capital. It just was whether it was in the right entity. So this transaction, which you say was designed to mitigate something, to my mind it was appropriate transaction. An organisation that has a number of licensed entities will have capital in one and perhaps risk in another and is obviously ... must retain its capital ratios appropriately, and, therefore, the transfer of loans and the risk associated with loans, into another regulated entity, as long as that entity has sufficient capital, and in this case, Ulster Bank Limited, which is FSA regulated, which we were also the auditors to, I was fully aware that that transaction was taking place and was properly reflected in the books and records of Ulster Bank Limited. So, yes, we were aware of it.
No, I didn't have concern about it as long as it was properly reflected. I would be concerned if a transaction like this happened and wasn't properly recorded in the financial statements of the two regulated entities. And I think, as explained in this document and in the earlier document, it was about efficient capital management, and that's ... nothing unusual about that. You can either shift the asset book or shift the capital. A lot of international financial service companies based in Dublin would have capital and would have loans transferred to them by other entities around their global organisations and that wouldn't be either unusual or inappropriate.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. As you know, Mr. Fitzpatrick, Ulster Bank Ireland ultimately required a bailout of over £14 billion from RBS, so when you look back now at the period for which you were the auditor in charge of the audit for Deloitte, is there anything further that you could have done to ring any alarm bells, signpost any risks to a greater extent, made the readers of the financial statements more aware of what may happen in the future? Could you have done anything more?
Mr. Gerry Fitzpatrick:
I think the financial statements that I was auditing were properly reflecting the transactions and the level of risks, the kind of disclosures I referenced earlier in relation loan quality, and funding actually quite highlighted that. The one issue that was difficult was to predict the extent that judgments would change. And an audit process, as I said earlier, challenges the data, looks for contradictory evidence, but the significant deterioration of asset values ... and that took a number of years to happen, wasn't contemplated at that stage and I don't think it was reasonable to assume could have been imagined. A whole roll call of commentators were talking about what might happen and, certainly, we were living in a stressed situation. I think the level of risk the organisation was undertaking was properly reflected on its disclosures. So in terms of other matters, I don't think there was anything different that I would have done in relation to the information at that point in time.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you. Thank you, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator O'Keeffe.
Susan O'Keeffe (Labour)
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Thank you, Chair. If I could just follow up on that thought, Mr. Fitzpatrick. I mean, you can imagine that it's quite difficult for members of the public at large who, perhaps, have never had an auditor, don't know an auditor, and don't know what an audit actually might mean, but in their heads, believe that it's something that protects, and is something that ... if something's been audited, it's okay in their heads, and yet we see in this case the Ulster Bank losing ... having to have that much money put into it. It's quite a leap for people to understand. Indeed, I'd include myself in that. How can it be that a bank was in such a bad state and yet the auditors were, if you like, going through and saying, "We've done our job as competently and as well as we can"? I'm just asking for maybe-----
Mr. Gerry Fitzpatrick:
As I say, in terms of the audit process and making sure that it's properly understood is a challenge auditors have had from time immemorial in terms of expectations. When you say the organisation was in a mess, it subsequently had challenges because of asset values. At the points of measurement, an audit can only establish that the records and transactions that have happened are properly reflected, that they're measured in accordance with accounting policies, and there are very, very substantial judgments that underpin the calculations, and I think the financial statements are quite lengthy, I understand, 80 pages. In fact, there's many ... many ... more detailed notes in new standards that have caused ... will be even more lengthy. But the financial statements present a picture of the point in time. They analyse the extent of risks. They show the level of judgments.
But this is not an insurance policy or a prediction of the future. It's saying, at this point in time, have things been measured correctly looking at the historic situation. And it's not saying, as in an accounting standard, for instance, on impairment, that you would book future losses. In fact, that standard said that you didn't recognise those losses no matter how likely they were to be. It was trying to measure and adopt a neutrality of measures so that you can compare organisation to organisation. The stresses that the organisation had were about lending concentration and about funding gap and the disclosures of the ... in the financial statements were quite comprehensive and the reader could see what this level of concentration was and the level of funding gap that was supporting it. Whether those assets were going to be recoverable if the situation worsened was not something that the financial statement nor the auditor was trying to purport to display.
So, I do understand that it is a challenge but they are complex statements, financial statements. And they're not simply a case of one measure, there's quite a lot of measures that are disclosed and the reader has to understand. So it's not a prediction of the future. I think people use it as an important element of the measure into the stewardship of the ... of the organisation and directors present information and, clearly, if they haven't presented it properly in accordance with their knowledge, or with the auditors challenge in relation to other information, then that will be a concern. But I think when you look at a set of financial statements you will understand that they are a historic set of information at a point of time, using a series of judgments. If the information was ... or if that data and those judgments were based on unreasonable data, then certainly the auditor would have an issue. But we had a situation which was very dramatic over periods of years ... after audited accounts and they couldn't have been contemplated in terms of the deterioration in asset values. So the fact that there was going to be further default and a recovery of assets and the extent of that, at that point in time, for instance at the end of 2007, couldn't have been contemplated in my mind and the events were so dramatic and the assets shifts ... the level of-----
Susan O'Keeffe (Labour)
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It couldn't ... they couldn't have been contemplated?
Mr. Gerry Fitzpatrick:
I certainly ... was challenging the organisation to understand what data they had. I think a whole roll call of organisations, from the IMF through to the EU through to economists and various others that the committee has been talking to, have seen that was a very difficult thing to do. Certainly there was stresses in the system and, I think, organisations were showing that, so deterioration in loan quality in the Ulster Bank 2008 accounts showed that there were some stresses in the situation. But predicting that those stresses could be ... could anticipate asset value falls that we saw subsequently, so by 2011 or 2012, where an index, which was at 92 in 2008 fell to 67, I don't believe was contemplated. And, in any event, that would have been a future loss and the reader understood that because that was quite clearly explained in the accounting policy ... that it was a future loss model ... or an incurred loss model, should I say.
Susan O'Keeffe (Labour)
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Mr. Cullen, could I ask for your view on that also, please, on that whole idea that it's very difficult for people to understand how a bank ends up in that state and yet its audited accounts are by the book and they're okay?
Mr. Pat Cullen:
Well, I'd be giving you an opinion as a non-auditor and a non-banking expert but, as Mr. Fitzpatrick has said, there has been that challenge for decades in terms of the role of the auditor in relation to the accounts. And it is very much a point-in-time picture of the organisation. And as long as the accounts are prepared in accordance with the accounting standards which apply at the time-----
Mr. Pat Cullen:
It's not a fact that it's okay, but those are the rules. And the auditor's duty is set out in the Companies Act in terms of what the auditor must do in accordance with the rules. And the big issue at the time obviously was how you recognise the level of impairment which subsequently happened when most of the opinion at the time, which would've been considered to be more expert in valuation probably then what we would be in relation to property, was saying that, "There isn't going to be a drop in value to that extent."
Susan O'Keeffe (Labour)
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Mr. Fitzpatrick, do you believe your audit team ... the audit team that was in place at that time had sufficient expertise and experience in banking and property, particularly? Did you, for example, have to bring in auditors from anywhere else or did you have sufficient ... because obviously you can have auditors that then become specialists in particular sectors, so given what was going on and the concentration of property activity in Ireland was higher, I think, than in many other places, do you believe that you had the expertise and experience?
Mr. Gerry Fitzpatrick:
Yes and that was, I guess, based on a whole range of factors. Certainly within our own team, auditing skills and knowledge ... and in terms of experience in the audit ... I mean, there was a question earlier in relation to is it appropriate to have 15 years involvement in audit ... yes, you need that actually to have people who have that skill and a knowledge of that industry. So there was a whole range of people in that team who have had years experience within Ulster Bank and understand banking.
Secondly, in terms of market trends, it is hugely important, obviously as a firm, that we're aware of things that are happening both from an accounting standards perspective or an expertise perspective. So the link to our Royal Bank of Scotland audit team is critical. That team ... I was very much a part of that team, they attended all the committees here with me, so I was certainly linked into international thinking in relation to financial markets and that is obviously another way ... very important way of gathering information. We would have learning programmes and then we have other specialists around our firm who we use from time to time to help support areas where I might personally have knowledge. And that would range everything from ... there is very complex IT systems in banks and we would have computer audit experts, we have taxation matters, we bring in experts from that perspective and we would have corporate finance people ... experts who are dealing from time to time with transactions in property or otherwise who can add to that expertise from time to time.
And, lastly, I suppose, when I talk about contradictory evidence, we're certainly on the ... our challenge and our scepticism has to be to look to see what information we can see that might prove the directors' assumptions incorrect and, therefore, briefings from valuers was a regular feature to our firm to make sure we understood trends in valuations, both in terms of IPD indexes, valuers themselves, in terms of how they are going about valuations. And certainly around the 2008 period the challenges in actually getting valuations. So I think those factors in terms of our knowledge over a period of time of the organisational running of a ... of the bank, the link to RBS and its expertise that we could get from that source and bringing specialists from other disciplines within our organisation to bear in terms of my judgments ... I think that was an appropriate way to have ... to have that knowledge. Auditors aren't experts on every industry they audit in, so you can audit a nuclear power plant and you can audit a bank. So you are not saying you're necessarily an expert in nuclear power or in lending. What you have to understand is the risks associated with those things, so I have never been a lender and I am not ... I've not lent money. But I understand the risks associated with how you measure lending and measure lending impairment and how those things get disclosed under accounting rules, which is the critical factor that I am trying to achieve in terms of giving my audit opinion, which I think, as I said earlier, was reasonably given.
Susan O'Keeffe (Labour)
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Did your team ... and I assume there would have been a team of people assembled over a period of time that would have been some core people and some would have come and gone ...did you use, sort of, junior trainee auditors-accountants as part of your team?
Mr. Gerry Fitzpatrick:
There are a whole range of levels of expertise in audit teams. So some people will be ... they would all be graduates, they all would've been either qualified accountants or studying for the chartered accounting exams. I guess the processes in an audit are multitudinous so in some cases you're looking at basic process and documentation flow and, therefore, people who ... where we've had set structures of how you map transactions, that can be done by very bright graduates. When it comes to areas of judgment in relation to loan impairment, in relation to pensions calculations, in relations to taxation, then you need much more experienced people. And, clearly, in relation to something like loan impairment, I would've been very much active in that process. At the time there was ... there were three audit partners involved in the audit, including myself, plus an IT audit partner. So I think, yes, the answer is there were people at all levels, but for the more significant areas of judgment and that required a challenge to management particularly reporting to the board, that would have been my role and I would've put a significant amount of time into that.
Susan O'Keeffe (Labour)
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But I am correct in understanding what you've said, both to me and to my colleague, that you are broadly happy and satisfied that Deloitte did a good job as auditor to Ulster Bank in Ireland at this time?
Mr. Gerry Fitzpatrick:
Absolutely. I think I had a duty of care of a professional standard. I believe it was a difficult environment to work in because judgments were quite difficult. I can see that the ... in hindsight the shortcomings in a historical measurement of financial information could be misinterpreted. But in no way did I feel that I was either unable to give a report, because in that case I would have to qualify. But I looked for the appropriate data at the time and I thought the board ... because ultimately it was their accounts, were searching and looking to make sure that they had measurement, and that included trying to understand what the state of impairment was in their loan book, and having reasonably processes, not always perfect processes, to do that. And then, secondly, having identified those cases that were impaired, the question was what collateral value would you recover. And that was a challenge but seeking out information, as I say, from a bottom-up, looking at individual cases, and then a top-down, at portfolio level saying "What is the level of risk?", they measured that in appropriate ... in accordance with the appropriate standard. It didn't ultimately transpire to be that way because the assumptions proved to be flawed, because ultimately the market and future events caused collateral values to fall further and further and further. But ultimately that, as I say, it is not a future-loss model.
Ciarán Lynch (Cork South Central, Labour)
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12 minutes coming up there.
Susan O'Keeffe (Labour)
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Looking back, as you must have done, do you have any thought at all that Ulster Bank may have, at any time, withheld information from you and your team from your firm, in any way, shape or form?
Mr. Gerry Fitzpatrick:
That's a factor. One always has to have critical ... in one's mind. In fact, a key element of an audit process is considering fraud risk. That could be either fraud risk internally or fraud risk by inappropriate information. The provision of information to auditors is a requirement under law and we know that certain processes that that requires, including makings of representations. So, do I believe that I was misled? I don't. I have no cause to believe that.
Susan O'Keeffe (Labour)
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Okay. Deputy McGrath raised just the issue of what you might have done for your non-audit fee, and I'm wondering whether or not you ... you gave some responses and I'm wondering whether or not you were ever involved in setting up any kind of offshore vehicles for Ulster Bank, or any sort of favourable taxation vehicles for the bank?
Susan O'Keeffe (Labour)
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We are aware from our engagement with Ulster Bank that obviously the Financial Regulator brought concerns, its concerns to Ulster Bank on a number of occasions and I'll refer to them if need be but just in short would that have been something you would have been aware of or would that have been relevant to you or would you not have come across that level of engagement?
Mr. Gerry Fitzpatrick:
It certainly would be an obligation on me to be aware of those situations so I think as was recalled I think in the book as well were issues like the Dublin mortgage centre or exception reporting. So in something like a process system like a centre which is going through an integration as having challenges in terms of operational efficiency, it would be absolutely critical that I would understand that. That would arise initially from my understanding of how that was being reported at the board level, but also from on the ground visits that we might have to understand elements of the controlled environment. We met with internal audit and obviously attended audit committees and understood the reports they were presenting so in that case of, of something like a mortgage centre we were fully aware of the risks that we were ... that were arisen in that situation.
Susan O'Keeffe (Labour)
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Because we had quite a lot of engagement with the bank in relation to that and some of the observations that the witnesses said, was that they were concerned at the time that the Financial Regulator they had wished that there might have been more on the ground conversation rather then the Financial Regulator going away and writing back to them. But Mr. McCarthy said on ... it's on page 77 of his own evidence he said, "...we self-raised them, the regulator was aware of them, we took significant steps with Royal Bank of Scotland to fix them, and by the end of 2007 they were fixed."
There has been a long, long series of correspondence 2003, 2004, 2006 and again in 2008 in relation to commercial property. So I'm just wondering how much of an issue it was ... what was the auditor to do? Were you to encourage Ulster Bank to fix those problems, to make sure that they were fixed to see evidence? I'm just not clear of what you ... if you like in plain English what would you have been doing?
Susan O'Keeffe (Labour)
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I have I'm sorry----
Mr. Gerry Fitzpatrick:
No that's fine but they weren't all interconnected so if you take a single issue, and clearly the concern would be if they were interconnected you would say, "Is there a flaw in the overall attitude to control in this organisation?" If we take the most recent one which was the 2006 Dublin mortgage centre issue which then had an internal audit report at that time and then proceeded into another internal audit report, my concern was always to say well actually how has this issue affecting the measurement of loans given within the organisation, so my understanding would be to understand how they were responding to the regulator's concerns. So the regulator in that case had a letter some time in 2007 which was referred to in Mr. McCarthy's evidence. And clearly I would want to understand how they were responding to that issue because obviously I would be concerned in relation to some of those elements also.
In relation to the method of engagement with the regulator, I wouldn't have been there when those queries were being shared with the regulator. I certainly saw subsequently that, you know, the provisioning information perhaps hadn't been strong because actually a lot of the queries appear to be ... as a recall, being responded to by information being provided. Now whether that was because of the mechanics of the process or Ulster Bank's process of providing that information, it didn't seem to be a very well organised on both sides inspection.
But my concern was to see were those issues being closed down. So yes if loans had been processed with a control weakness was that an isolated incident or was that wholesale and could that have an impact on the actual properly, proper recording of loans? And then lastly if loans were given and the process in the mortgage centre wasn't identifying impairment because people were maybe not paying on loans and maybe the system didn't allow Ulster Bank to understand that, that would be a concern I would have. So it wasn't because I could see they were rectifying those issues so they had arrears because maybe things hadn't been processed well but they were closing them down and I don't believe from my understanding and my recollection of the 2007 audit there was material loss associated with the Dublin mortgage centre. There had been a lot of operational mismanagement that they were correcting but it didn't have financial loss and therefore didn't require loans to be written off because they had been given in an inappropriate way.
Susan O'Keeffe (Labour)
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In the bank's growth strategy ... the growth strategy appears to have been predicated on gaining significant market share from their competitors and they did discuss that with us. Did Deloitte, did you ever analyse the risk level associated with the percentage share of the property related lending market and the retail market targeted by Ulster Bank? And again if you can be a bit concise with your response. Did you ever analyse that risk level, was that part of your job or not?
Susan O'Keeffe (Labour)
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Okay, and would it have shown any concern? Because that was the thing they were pursuing and they have been open about that. Would you have any-----
Susan O'Keeffe (Labour)
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And you believed it did?
Susan O'Keeffe (Labour)
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And was sufficient priority given in the external audit to the consideration of the risks associated with both borrower concentration levels and sectoral concentration levels?
Susan O'Keeffe (Labour)
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Right. I'm just wondering for either of you but perhaps particularly for Mr. Cullen, did you ever have any engagement with the Department of Finance with the Minister for Finance, with the Taoiseach, with the Central Bank? You mention in your own statement you would have had some engagement with the Central Bank, but would you ever have sought out to speak with them about concerns about your thoughts or indeed did they seek you out as being people in the financial sphere who might have had a view? Especially as things began to tighten and change.
Susan O'Keeffe (Labour)
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Of course. Yes I don't mean specifically about Ulster Bank.
Mr. Pat Cullen:
I think it's also important to mention the Central Bank Act gives us a duty to report on certain things but doesn't give us a right to report on certain things. So the Central Bank Act is a duty rather than a right, so we wouldn't have shared particular concerns. If I had a concern in relation to the standing of the organisation I would have had an automatic duty to go to the regulator and I didn't have that concern so I wouldn't have talked about Ulster Bank to those parties in other matter. As I said from time to time we might have thematic discussions about how they were setting the regulatory environment or their standards or guidance and we might give input to that, but it would not be on a specific Ulster Bank theme.
Susan O'Keeffe (Labour)
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You're mixing me up, I'm asking about whether or not broadly speaking in the context of the financial world in which you both inhabited at that time, would you have ever had calls to discuss as things were changing, were you concerned, did you have any thoughts? Or were your heads down being auditors if you'll excuse my-----
Susan O'Keeffe (Labour)
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Okay thank you. Did your audit have any dealings with the global restructuring group within Ulster Bank, obviously Ulster Bank Ireland now as opposed to Ulster Bank, as opposed to the RBS?
Mr. Gerry Fitzpatrick:
As I said my audit was up to 2008 my understanding was that acronym GRG was a construct from that point on. There was a special lending services unit if I recall before that. So I think it might have been a precursor of that so they were the organisation or at least part of the organisation that looked at particularly stressed cases but no ... but the construct of the global restructuring group is not something that was I recall in place in 2008.
Susan O'Keeffe (Labour)
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How much of the auditors' work is generated by the bank's own internal auditors? Again I'm thinking here of the public not quite understanding ... in a simple way of describing that. Clearly internal audit is an ongoing process so do you guys come in and take that and work from there or do you have to go back and review all that or how-----
Mr. Gerry Fitzpatrick:
We are informed by their work. In the case of Ulster Bank we didn't rely on their work so auditing standards in some cases allows you to rely on their work, but only if you've planned it and know exactly in advance what they're doing and have helped direct that. So they had a particular programme of work they worked with an audit committee on so we weren't going to interrupt their work, so therefore we didn't rely on it we had to do ... we used all of our own work. However their work would have informed our understanding of risks and was very, very helpful so a very active dialogue with the head of internal audit, understanding how they were rating the systems, understanding their view of controlled culture, understanding where significant stresses in the system were was really important to help us understand how we would go about our audit. But no we didn't use their work as a reduction of our own work.
Susan O'Keeffe (Labour)
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Professor Ed Kane when he was here giving testimony he said on page 233, "One may know that the firm is in grave trouble but the auditors may not have sufficient information to allow them to determine that." Is that-----
Mr. Gerry Fitzpatrick:
I'm not sure quite what he was ... I suppose I can see two scenarios in that situation. One is if the funding or if the availability of funding isn't strong, one might in an organisation - I'm not saying Ulster Bank - the question will be how you can be reasonably assured that it will have sufficient funding. That wasn't the case in this case because it was part of an integrated group with scaled sophistication and collective balance sheet management. That wouldn't have been something unknown to us. The other factor, the unknown, is what we talked about earlier in relation to the judgment factors, assumptions of property valuations, but if the concern he had was that the auditor wouldn't be given that information, I wasn't ... I didn't feel that I was ... that information was withheld from me and certainly not to my knowledge.
Susan O'Keeffe (Labour)
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Finally, in 2011, the corporate watchdog, Paul Appleby, said there were grounds for questioning and I'm quoting what he said, "the consistency and quality of audit work within the profession." He went on to say he thought, "Auditors report surprisingly few types of company law offences to us", and went on to say that the so-called Big Four, of course of which you are a member, "the so-called big four auditing firms reporting the least often to his office at just 5% of all reports." You might care to comment on those observations.
Mr. Gerry Fitzpatrick:
It's difficult to comment in terms of where he based his information from. He was questioning the quality of work. He isn't the regulator for auditors, so I don't know what basis he had to challenge the work. As I had interpreted it and I vaguely recall that statement, which was he was saying the number of reportable incidents to him were less. I don't believe that is again in my ethic not to report those things. It may be that larger firms have clients which have more structured corporate governance, and that might typically be the case. We have lots of small clients as well as big clients, but perhaps that concentration in the bigger organisations would have meant that the things that are reported to him, which are specific breaches of company law, loans to directors in relation to their own situations, might be more applicable to the smaller audit firms. I don't know but I certainly don't feel that in our engagement with ODCE and understanding the rules of ODCE, that we engage in any way differently in relation to our client group. And his view that that was caused by some quality issue in our firm, I find difficult to understand how he could make a statement that not being the regulator of audit. We are regulated in, as Pat has described, in relation to practice reviews and by the Chartered Accountants Regulatory Board, which is overseen by ASA, which is another independent body. And those had not found failings in our work that suggest the consistency and quality of our firm's work could be criticised in that regard, so I would find it difficult to accept that ... at that statement.
Ciarán Lynch (Cork South Central, Labour)
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I will just bring in Senator D'Arcy before we go to the break. I just want to tidy up one matter in IAS 39. In earlier testimony that we had, in the Context Phase of this and in other documentation, one of the critiques or challenges that arises from that was the supposed backward looking nature of IAS 39 in that it required evidence of a loss before the loss is actually written down, that the process meant that the auditor is very much looking at the nature of the bank in this current situation and, I suppose to use an analogy, that the auditing process is looking in the rear view mirror of the car instead of the road ahead. Would you agree with that sentiment?
Mr. Gerry Fitzpatrick:
Gosh, there is quite a lot of sentiment in that. First of all, the accounting standards and the preparation of the numbers are by the directors, so the accounting standards may ... are backward looking, it is a measurement of a point in time. IAS 39 meant that there was a particular constraint in looking at what was incurred at the time so it does represent, perhaps, a ... some limitation of what ... predicting expected loss might be. So I guess the new standard will allow some greater forward looking, but it still has to be an expected loss, not an unexpected loss. There is no standard that allows you predict the unexpected, and I think any view that there's a kind of forward future proofing or early warning system for things that might happen in the future, that won't be the case under even the expected loss standard, because you still have to have data and say, "What will this impairment likely turn out to be?" And you have to have an assumption, which is what the collateral value might be when you realise it in an impaired loan and, therefore, you have to have a view on the current state of the market, not the future state of the market.
Ciarán Lynch (Cork South Central, Labour)
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And in this morning's testimony and other testimonies we heard, that sort of transitional period between 2006 and 2008 where, in 2006, a lot of the people that have come before this inquiry have said that there was still an upbeat kind of forward looking, you know, positive view of things, that if things were to slow down, they wouldn't crash, that there'd be a soft landing and all the rest of it. How would that impact upon IAS 39 in the basis that, by 2008, we could see, whatever was in the rear view mirror, the road ahead was completely different. Was there any recognition that there was going to be that level of acceleration, so it just wasn't going to be a percentage increase on what came the year before - what was going to happen in the coming period was a major acceleration of loss?
Mr. Gerry Fitzpatrick:
Well, there was going to be a major deceleration in business activity, first of all, I suppose and that was well known. I guess the question was what degree of loss is going to arise. We didn't know at the time but the CSO index, as I referenced earlier, at the end of 2008 was 113 so the suggestion that the losses emerged very very quickly in property value, I don't think is that clear. The index was set in 2005; it was 130 by the end of 2007; it was 113 by 2008; it was still only 92 by the end of 2009 so the prediction of future loss was ... that data wasn't there. We know that from the valuation data that we had.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Listen, I am going to propose that we actually take a break now. We will return at 4.45 p.m. or so, no later than 4.50 p.m. so we'll be finished by 6 o'clock. Just a note for Members as well, we just have one item to deal with in private session before we conclude today. So if I can just propose that we take a break. The witnesses are reminded once again before giving evidence, they should not confer with any other person other than their legal team in relation to evidence of matters that are being discussed before the committee. With that in mind, I now suspend the meeting until 4.45 p.m. and remind the witnesses that they are still under oath until we resume. Okay. Is that agreed? Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Cullen, Mr. Fitzpatrick, are you okay? All right, thank you. Okay so, I'm going to ... I now propose that we go back into public session, is that agreed? And our next member to question is Senator Michael D'Arcy. Senator, you've ten minutes.
Michael D'Arcy (Fine Gael)
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You're welcome, gentlemen. Mr. Cullen, you're the senior person in Deloitte. You didn't have audit responsibilities, is that correct?
Michael D'Arcy (Fine Gael)
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Did you listen to what contrarian views were saying from that period, early noughties onwards? Did you think there was any store in anything that they were saying or did you just dismiss their views entirely?
Mr. Pat Cullen:
Well, I suppose, as managing partner, I'm certainly very aware of what was happening in the economy. I was very clued in to all the international developments and, clearly, there was a bit of a storm which was coming.
But I suppose, from my point of view, what I needed to be satisfied on was that, particularly in the context of Ulster Bank, that we had the right team in place, with the right expertise to deal with the issues which were occurring. I needed to make sure that the team were tied in with our international colleagues who were also involved in the banking sector so we were fully up-to-date with the impact it was going to have on the audits and-----
Michael D'Arcy (Fine Gael)
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And did your international colleagues question anything that was coming in relation to the banking sector in Ireland? Ulster Bank were involved in some of the largest commercial real estate deals in the State. The scale of those deals, the size of them, did anybody say that these were in any way ... that the appropriateness of the risk was appropriate?
Mr. Pat Cullen:
Well, certainly nobody had a discussion with me around that. Like, I wasn't involved in any of the detail around Ulster Bank. I didn't have any banking expertise, so it would have been surprising if anybody from the international organisation had spoken to me around that. I suppose the size of the risk is always evaluated in the context of the ability of the group to fund the risks associated with that and clearly there was a funding model in place in the group so it had to be looked at in that context.
Michael D'Arcy (Fine Gael)
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Were you surprised at the scale of the recapitalisation costs that were required from the RBS Group, with Ulster Bank at around 3% and less of the entire group taking one third of the moneys that came from the British taxpayer for Ulster Bank?
Mr. Pat Cullen:
Well, clearly, I think, nobody predicted the size of the losses in general, across the whole banking sector. Ulster Bank clearly ... the issues that RBS had in Ireland were mainly around the property side. The issues they had in other areas were to do with other financial instruments and different issues, but certainly, obviously the size of the losses they had in their Irish book related to property were very significant. And clearly the outcome of that still has to be finally determined.
Michael D'Arcy (Fine Gael)
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Were you surprised at the size of them?
Michael D'Arcy (Fine Gael)
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Mr. Fitzpatrick, you said that it was unforeseen what came down the tracks internationally. In Simon Carswell's book Anglo Republic, I can't remember the exact page but I think it was page 57, he said that Mike Soden said that if liquidity ... if a liquidity crisis occurred, that Anglo were sunk. He was concerned about a liquidity crisis and he left Bank of Ireland in summer 2004. Can I ask ... you said that it was unforeseen, it wasn't unforeseen by everybody. Did you, as a person who was participating in the Ulster Bank audits on behalf of Deloitte, did you listen to what some of the contrarians were saying-----
Michael D'Arcy (Fine Gael)
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-----in the Irish sector?
Mr. Gerry Fitzpatrick:
I mean, I think what ... clearly an audit process involves understanding the environment that is ... the bank is operating ... or any company is operating in. You've referenced a liquidity crisis as part of that and Mr. Soden, and I'm not familiar with Bank of Ireland, or its operations, so it's ... funding banks is clearly a major issue. As I highlighted in relation to the example of 2008, the balance sheet is very much driven by a short-term funding model for long-term assets-----
Mr. Gerry Fitzpatrick:
-----and any drying up of liquidity is an issue, so I was absolutely aware of that and absolutely focused on understanding what implications it could have. You could see, in 2007 - and perhaps earlier - that the model for funding which included securitisations, which is a normal model for banks such as Ulster Bank, the appetite the market had for taking up securitisation notes was reducing and therefore that had an implication. So, capital planning was hugely important and so clearly that was something that was unpredictable but obviously the processes, in a sophisticated group like RBS, allowed them understand what that was. The unmanageable piece, in my mind, was more in relation to asset values that were underpinning the potential future loan losses and that was much more unpredictable. I mean, I think when we saw events happen through 2007 and into 2008, when we had all the various things that happened in the global credit crisis-----
Michael D'Arcy (Fine Gael)
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In terms of the firm's annual audit plan and the risk assessment underpinning it, did the risk assessment approach adopt a change to meet the prevailing challenging environment?
Mr. Gerry Fitzpatrick:
Yes, I mean, I think the loan impairing ... the areas of focus and the depth and balance of work and where it gets deployed certainly changed. In relation to a major financial institution, loan provisioning will always be an aspect, regardless of the ... kind of ... how the environment is. But as the environment got more and more difficult, clearly greater levels of focus was required in that space, both in terms of the process for identifying difficult loans, understanding how they were managing them, understanding the kind of risk analytics that were required in relation to understanding concentrations. Certainly the ... we, we ... it didn't change the risk, but it certainly changed the focus.
Michael D'Arcy (Fine Gael)
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And in 2004 Mr. McCarthy and Mr. Torpey came from First Active?
Mr. Gerry Fitzpatrick:
The concern I had was to make sure that that risk was properly disclosed in the financial statements, the level of lending. In terms of concern that I would have it as a product, it wasn't something that I was examining in terms of a sense of its significance as a product. I recall, and certainly I think reference was given to its level of significance to the balance sheet, I think it was 4% of all mortgages. This was a €61 billion balance sheet, so the 100% was a significant ... was a factor, and needing to understand how it was provisioned and what control processes were gone through, and certainly, I think as referred to, as Senator O'Keeffe's, the way we were talking about Dublin Mortgage Centre, how those systems were ... had some flaws in them, that was a concern I had. But as a product, the question was, as an auditor, is to make sure that loans, as they are provisioned and underwritten, they're properly reflected in the financial statements and properly categorised.
Michael D'Arcy (Fine Gael)
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Did the firm conduct their own independent assessment of the bank's credit risk methodology to satisfy the principles process adopted by the bank?
Mr. Gerry Fitzpatrick:
The process of? Yes, is the answer. The process of understanding the credit cycle, it's hugely important to our understanding of the organisation. They had a quite a sophisticated credit control risk framework around the organisation, including a risk policy, so that cascade from the group audit ... or the group credit committee in Royal Bank of Scotland down through various tiers, was an important part of understanding how that operated. So the infrastructure for risk and control was important. Ultimately, I suppose, any system is only as good as the people who are ... and the assumptions they have underlying it, so we understand the ... now that certain events happened that caused some of the credit risk decisions to be ... to be flawed, and assumptions they made to be seriously flawed but at the time, yes, we were looking at the credit provisioning ... or credit underwriting process, and understanding how that was reflecting itself in properly disclosed financial information.
Michael D'Arcy (Fine Gael)
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On the booklet, Deloitte Vol. 1, page 55 ... excuse me.
Ciarán Lynch (Cork South Central, Labour)
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Final question now.
Michael D'Arcy (Fine Gael)
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It's a memo from Ruth Carroll from Deloitte to Martin Reilly from Ulster Bank. On the last paragraph-----
Michael D'Arcy (Fine Gael)
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Oh sorry, yes, sorry, okay. In terms of the last paragraph, I'm not going to read it out, because I don't have time, there's a-----
Ciarán Lynch (Cork South Central, Labour)
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I'll afford you a bit of time to read it out, but I need you to get on to the question then afterwards, okay?
Michael D'Arcy (Fine Gael)
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Okay. I'll read it out:
Furthermore, the mortgage system does not automatically flag cases of underwriting outside discretionary levels or credit policies. Identification of such exceptions is a manual process, done by looking at two of the loans approved per member of the Underwriting Team a week. If a loan is underwritten outside of discretion[ary] levels, and the underwriter omitted to catalogue this loan in the Exceptions Report, the only way it could be detected would be if the loan in question was selected as one of the files reviewed each week.
Can you outline your concerns in relation to that type of practice that effectively left loans that are outside the discretion off the books?
Michael D'Arcy (Fine Gael)
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Was able to find them, yes.
Mr. Gerry Fitzpatrick:
CCC00175 type: 1 -->I take that point. So certainly my concern ... obviously is to make sure things were on the books and therefore properly recorded. I think ... I mean this is an example of one of the elements ... one of the small elements ... the hundreds of steps that were involved in the review of mortgage processes. So this is just one of many ... I mean ... I don't ... I think it highlights how we were looking at the depth of understanding. What isn't clear here in relation to that piece is, was, there were other entry level controls we call it, which were higher level reviews, so this was a particular step-through working on this particular element. But there were other controls that aren't referred to in that memo. So I was concerned and obviously when we identify an issue like that our concern is to talk to those who had raised them previously in terms of self-identifying -----
Michael D'Arcy (Fine Gael)
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Can I just make the point that the date of that is 12 December 2007. The show is over at this stage -----
Ciarán Lynch (Cork South Central, Labour)
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Deputy. Can we not make statements? Ask questions.
Michael D'Arcy (Fine Gael)
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We had gone over the peak of the boom. We had gone over the peak of the boom at that stage. Certainly that type of an exception should have been, one would imagine, should have been reported earlier.
Mr. Gerry Fitzpatrick:
By ... group internal audit. This is a reflection of what was happened. Group internal audit had done reviews on this. We had talked to group internal audit about that. I'm not entirely sure this was, how this was identified but it was partly self-identified. So this was an issue that we were aware of. The question was how the bank was mitigating a risk like that and therefore, I think that when you say, I don't know what your phrase was, ''the boom was over'', this is a process issue. This is, the loans are given after we come to review them and to test them.
So the question is, can you properly capture the risk associated with the lending and properly reflect it in the financial statements? So whether the boom or whatever it was was over or not, this was an issue that I needed to address and there are many other pages in our audit report where the multiple steps in provisioning and underwriting loans would have been looked at. This would have been something that we would have being trying to see and as I say, this is one paper out of hundreds and therefore I think this shows us the kind of understanding of the systems that we were doing and we would have looked for a mitigating control to say, could this cause a material error in the financial statements to be misreported?
Michael D'Arcy (Fine Gael)
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And how long before that ... I just want to finish my point, Chairman because -----
Ciarán Lynch (Cork South Central, Labour)
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I know, but you are out of time so make it very quick.
Michael D'Arcy (Fine Gael)
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How long before ... how long was this practice going on before it was finished? In terms of that last paragraph?
Mr. Gerry Fitzpatrick:
The ... I, I can't recall, Deputy, or, Senator. The issues in the Dublin mortgage centre were referred to in other minutes, were identified late 2006. A series of internal audit reports were addressed and, and any issues were closed down by the end of 2007 when the financial statements ... after which we had assigned our financial statements. So my understanding is the processes and weaknesses in mortgage centre were cleared and there was a substantial ... I can't remember the phrase internal audit used, for instance ... but that they were substantially addressed by the end of ... by an audit report in December, later in December or early January 2008.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Joe Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Fitzpatrick, Mr. Cullen in his opening statement to the inquiry, as I see it, sums up the role of the audit to check about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions and in that sense, that it's tight and limited according to regulations and law. Would that be a fair representation of what an audit is about?
Mr. Gerry Fitzpatrick:
It's, yes, I think it is, it has a definition under law as to what it is. There's obviously ... and it is this process of seeing is the stewardship in the previous period properly reflected so the user or the shareholder can understand what the profit or loss or cash flows were in that period, and associated notes that would help them understand the components of the balance sheet. So yes, I think that-----
Joe Higgins (Dublin West, Socialist Party)
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There has been a lot of comment on the role of auditors in relation to the period of bubble and bust. And just to try and understand, we get people watching us from the stand and indeed, myself. Let me just put this short analogy to you and ask you if you think it's fair or not. So a patient comes to a GP for a heart check and a blood pressure check. Doctor checks the two ... "You're grand in those two fronts ... good luck", not mentioning ''by the way you have a serious tumour that should be checked out.'' So time passes, tumour develops ... catastrophe for the patient ... doctor says, ''Don't blame me, I reported on what I was supposed to.'' So, patient is the bank being audited, doctor is the auditor. In Ireland's bust and bubble or bubble and bust, would that be a fair analogy or not?
It's an analogy. I don't think it's a fair one. I think the reason I would feel that there is some question about it is the patient in your analogy has to explain his symptoms, and so they have to be measurable. So if the patient has some issue that can't be predicted - because it's something that's about ... that is unseen and is about to happen in the future and doesn't share that with his physician - I'm not sure the physician will call out that issue. I agree with you if the physician or the doctor saw that there was an issue and didn't call ... that was clear and identifiable and there was objective evidence that the person had this condition and then just ignored it, that would be different. I don't know whether that answers your question, Deputy.
Joe Higgins (Dublin West, Socialist Party)
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Well, let's tease it out a little bit further. When you were examining Ulster Bank, the Governor of the Central Bank, currently Patrick Honohan, said in the Economic and Social Review summer 2009:
A very simple warning sign used by most regulators to identify a bank exposed to increased risk is rapid balance sheet growth. An annual real growth rate of 20% is often taken as the trigger.
And if you look at Ulster Bank loans and advances to customers, they grew massively in the mid 2000s - not exactly the same as balance sheet, but it gives a good indication. Now, would that for you not raise, you as an experienced auditor of 30 years standing, raise serious issues that should be brought to attention, even if you weren't required legally to do so?
Mr. Gerry Fitzpatrick:
They would and they were. I think ... the growth wasn't hidden, so if you are saying the concern was there was growth, that was reflected in the financial statements prepared by the directors and audited by us. The concentration was there and disclosed in the financial statements and the loan quality of that was disclosed. I think perhaps your concern is, was the speed of that undermining the model, and therefore was that of a wider concern? I think in the context of an organisation that's moving, having had acquired a business like First Active moving to grow its loan book, there would be a period where significant growth would be there. My concern in that situation would be to understand is the funding available to allow them do that. So that the quote you made was in relation to standard - I would imagine in relation to standard banking practice - where there's consistent loan growth without the funding for it. So where would the funding come from? But if you have a supply of funding -----
Joe Higgins (Dublin West, Socialist Party)
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But there's the rub Mr. Fitzpatrick. In a sense of course the information was there, but the danger of what that information indicated ... as the Governor hints, and for example in evidence Dr. Alan Ahearne referred to a study he did in 2005 of, I think it's 44 housing boom and slumps, showing how over extension of credit, etc., finishes up in disaster. Should those figures not have sent alarm bells ringing for yourself in relation to a potential difficulty for the bank?
Mr. Gerry Fitzpatrick:
I mean alarm bells ... it certainly raises that the scrutiny trying to understand what's going on in an organisation. If one thought the depositors or the structure of those lending money to the organisation were in jeopardy as a result of this, one might consider that, but I suppose the funding model and the capital plan was there and I understood where those sources of funding were coming from. I was absolutely at pains to make sure, and I think the directors to be fair were also doing lots in that they weren't reflecting this analysis in their financial statements. The setting of the capital plan that ... under ... that ...as to what a licensed bank, I don't ... you know that I suppose ... I don't license the organisation - the organisation that licenses it decides what level of capital in a growth environment like that could be, and decides what scalers to put on its capital. It can say "There's a minimum capital level, but because you're growing so fast you need different capital levels." And that's ... the regulator uses the financial information to make those decisions. So clearly the regulatory structure, and the licensing of banks means you should look at the financial information and decide whether that pace of growth is sustainable by capital and funding. But it was properly explained I thought in the financial statements.
Joe Higgins (Dublin West, Socialist Party)
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But were you or not perhaps looking at all the waves as they were coming towards the shore one by one, concentrated on that and you didn't see the tsunami that was being generated further out that eventually overwhelmed the system?
Mr. Gerry Fitzpatrick:
There were two tsunamis that came. One was the funding crisis - how or where banks were going to create this funding. So we certainly were focused on that, on understanding where the funding was coming from.
The tsunami you talked about on the other side of the balance sheet was the asset side, and I don't believe in relation to ... whilst there was a serious credit crisis arriving, the assumptions that when ... in recognising that, the assumptions would've said, well, that property values were going to fall by 60%, 70% in commercial property or ... in residential values ... were going to fall by 55%. As I said, at the end of 2009, they'd only fallen 8%. So that tsunami took a long time to come in relation to reflecting in asset values, which is where, perhaps, you feel my concern should've been.
Joe Higgins (Dublin West, Socialist Party)
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So, Mr. Cullen-----
Ciarán Lynch (Cork South Central, Labour)
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Just over two minutes now, Deputy.
Joe Higgins (Dublin West, Socialist Party)
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Sorry?
Ciarán Lynch (Cork South Central, Labour)
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Just over two minutes.
Joe Higgins (Dublin West, Socialist Party)
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Nearly three, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Cullen, various sectors have come in here and said they accepted certain responsibility for the horrific crisis that emerged from the bubble. Does the auditing profession take any responsibility for what happened, the bubble and the bust?
Mr. Pat Cullen:
Well, I suppose, you get back to the fact that the accounts are prepared by the directors and, as auditors, our role is to report on those accounts in accordance with the accounting and auditing framework which is there. And even Nyberg, in his report, said that we carried out that function quite professionally and well. But I think what ... the question it did raise was whether the scope of what the auditor does is adequate. And the auditing profession, certainly, has been looking at that question very closely since that time. And, as Mr. Fitzpatrick went into in some detail in his opening statement, there are quite a lot of changes which have already come in or changes which are in progress, which ... certainly the hope and expectation would be that those changes would certainly mitigate the risk of a similar situation arising again.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Fitzpatrick, can you comment on the maintenance and availability of concise and accurate management information on a group-wide basis by Ulster Bank Ireland Limited? Were you satisfied, for example, that you had access to accurate management information which allowed you to discern the full financial position of the group at all times?
Mr. Gerry Fitzpatrick:
Over the period that I was involved I was satisfied. There were times when that became stressed. There was a time at the end of 2006, as referred to in some of the papers, where they transferred their financial reporting to a shared services centre in ... in ... in the ... under the control of Royal Bank of Scotland. That was a concern. The issue there, I think, I was satisfied, was that the core data wasn't affected. There were some challenges for a period of time, in getting what they call the cube of information that gave the information the way they were familiar with it. But I didn't feel that affected my view in relation to the way the financial information was being reflected in the audited accounts. So it was a ... so generally through the organisation it was an organised structure of financial reporting. There were stresses in the system in particular in that period and that obviously was a particular focus for our work, trying to understand that information, and so ... and if the controls weren't working we had to do more work to make sure the numbers were accurate.
Joe Higgins (Dublin West, Socialist Party)
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Were there any possible issues relating to the generation of reports used to inform the financial statements, for example, the level of use of manual rather than system-generated spreadsheets for the preparation of reports, the completeness of reports, if drawn from across the groups, and the possibility of imprecise figures as a result?
Mr. Gerry Fitzpatrick:
No, I think the ... I mean, a lot of big organisations struggle with straight-through processing of data and use manual processes. That certainly, again, will be a focus for our work. The question in my mind has been obviously that increases the risk of error and ... because it's a manual process. But, again, that would've been a focus of our work and didn't, certainly, result in us believing there was a material error in the control process we were checking, which might have been manual, as you described.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy Higgins. Deputy Kieran O'Donnell. Deputy, ten minutes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. I want to welcome Mr. Fitzpatrick and Mr. Cullen. Can I just deal with the whole issue in terms of the valuation of the security that's offered in respect of loans? And would ye have performed a review in respect of the valuations received for the assets offered as security? And, given the fact, we'll say, that property was falling in value, how would ye have felt about the accuracy of the valuations? And then, would ye have reviewed in that context as well Ulster Bank's process for the registration of mortgage securities, because obviously that was ... would be implicit in terms of the value of the loan?
Mr. Gerry Fitzpatrick:
Yes, I mean, our process of understanding the underwriting involves looking at how security is taken and looking at how ... when a loan becomes impaired, how you assess the potential valuation of that collateral. So we look and see what the bank is doing in terms of trying to determine that. Clearly, what you're looking for in that situation is that they have undertaken or have had a valuation undertaken on the collateral.
If that valuation is in place, you are trying to understand who undertook that valuation, were they informed ... was any scope restrictions on their works, because sometimes valuers say, you know, it was based on the desktop versus inspection, etc. So yes, understanding that valuation process is important. At times and certainly as I referred to in the opening statement, at the end of 2008 it was very difficult to get valuations, and so in any control process what you are trying to say is that if the process isn't working because there isn't data available, how is the organisation responding to that? And as referred to in the audit summary memo that we gave to the audit committee, we were concerned that valuations weren't up to date. The bank was explaining that valuers weren't in some cases willing to give those valuations. We did report that they had been very materially reduced in line with indices, so that is the next piece you go to, so you say, is there any external data which tells... or internal data so the bank was certainly talking to panels, or values, or to say what was the valuation adjustment.
Kieran O'Donnell (Limerick City, Fine Gael)
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But we'll say, in simple terms, did you ever commission independent valuers to carry out evaluation of some of the... a sample of the loans, the security for the loans in the bank?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. Secondly, if you had those concerns in terms of the valuation of the security, why didn't you qualify your audit opinion?
Kieran O'Donnell (Limerick City, Fine Gael)
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But you said it was significant.
Kieran O'Donnell (Limerick City, Fine Gael)
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You said... okay so therefore, surely in terms of true and fair... sorry I-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Well I asked-----
Ciarán Lynch (Cork South Central, Labour)
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Without interruption there Deputy, please.
Kieran O'Donnell (Limerick City, Fine Gael)
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Sorry?
Ciarán Lynch (Cork South Central, Labour)
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Without interruption. Mr. Fitzpatrick, you have the floor.
Kieran O'Donnell (Limerick City, Fine Gael)
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We are... I just want to say Chairman, we are on the same page. I only want to know the process by which you got to it. I wasn't asking.
Mr. Gerry Fitzpatrick:
The process I got to was to say, if in the absence of valuations, how has the bank valued the collateral. It was significant, you look to various... there were valuations, the question was was the valuations they were doing reflective of the internal data and external data in relation to valuations ... property valuations. So we had a series of internal valuation reports. They had panels of valuers where they were consulting with valuers in relation to collateral movements by a particular type of geography. Then we were looking to external sources of data, IPD indexes, valuers indexes, briefing by valuers and we inquired of them in 2008 to undertake a process which I would call a top down process to say, "Where are all your stress loans? What year were they written in? What if the situation is that there is a loan... a value that falls by X amount? And is that consistent with the impairment number that came up from the bottom up analysis?"
Unfortunately that situation, looking back in time, the stresses they were assuming in terms of the fall in collateral values were reflective of the information generally understood in the market at that time as the incurred loss models we described which is, not the future loss the current loss. And obviously those assumptions in hindsight were flawed, but at the time I satisfied myself that they went through an appropriate valuation process and therefore that is how I validated their judgment.
Kieran O'Donnell (Limerick City, Fine Gael)
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The fact, Mr. Fitzpatrick, that it was so significant right, why didn't you draw attention to it in your audit report by way of an emphasis a matter, not strictly speaking a qualification?
Mr. Gerry Fitzpatrick:
To my mind, the emphasis would have meant that I was unclear about something that the directors were stating. So you emphasise something if you think the directors have caused something out, that they have been unable to deal with. I was happy, it was the way I guess the industry was looking at it, not only in Ireland but around the world, in terms of how do you deal with the valuation of any asset where there is an illiquid market? So, not to digress too much, but I suppose there were lots of instruments at that time where markets just weren't functioning. And the question was, was their a realistic approach taken to the valuation. And I thought it was reasonable, Deputy, and I thought that the process that they went through was rigorous, and it was reasonable and therefore emphasising it meant that I was... would have suggested that I was unhappy, and any amendment to an audit report for a bank was is-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Looking back, the fact that €13 billion of, effectively from RBS went into Ulster Bank Ireland. On reflection, what would you feel about not qualifying the reports in any shape or form on the valuation?
Kieran O'Donnell (Limerick City, Fine Gael)
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On IAS 39, can you just confirm ... clarify to me that the valuation basis for looking at impaired loans. Am I correct in saying that the way you valued the loans was based on looking at any loss would be a measure between the difference between what the asset was being carried at on the balance sheet of the bank and the net present value of the cash flow from the loans? So, I suppose the question I am asking is, you had a situation where you had property prices falling in 2007 and 2008.
They fell nearly 13% between those two years. You would have been signing off the '08 accounts in February '09. Surely the fact that there was a drying up of liquidity and the market was falling, surely then-----
Ciarán Lynch (Cork South Central, Labour)
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Ignore the surely, just ask the question.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, the provision you provided, which was €304 million of impairment for 2008, surely that was grossly inadequate?
Kieran O'Donnell (Limerick City, Fine Gael)
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But you've signed off on the provisions.
Kieran O'Donnell (Limerick City, Fine Gael)
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No, no I'm asking you ... surely with the valuation basis under IAS 39, that you look at the difference, you're looking at the future cash flows from loans. So it's not strictly correct to say you do not book losses until they're realised. The valuation method under IAS 39 is based on future cash flows that come in from the loans and to evaluate those, and I'm saying against the market of where you had valuations falling significantly and you'd a drying up in liquidity surely on that basis, for 2008, you should have provided more than €304 million of a provision, which was roughly just over 1%, 1.3% of the loan book in terms of loans.
Kieran O'Donnell (Limerick City, Fine Gael)
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It's still very low as a percentage of the overall.
Mr. Gerry Fitzpatrick:
Now we know that in terms of what happened in the asset values, the net present value is done. There are a number of factors you're looking at. You're saying, "Where is the asset value sourced?" You're right, Deputy, in terms of a net present value. You actually then also have to look at when the collateral might be realised because you're discounting it. Part of the analysis - and you'll see in my own summary document were we discussed it with the audit committee but not just the valuation issues but actually when collateral in a tightened market might be realised. We forced them to do some stress test to say, "Well, actually you're saying you'll realised the collateral in maybe 2009, 2010; we're saying what would the impact of-----
Kieran O'Donnell (Limerick City, Fine Gael)
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The question I'm really asking Mr. Fitzpatrick, am I correct in saying is the IAS 39 is not strictly about showing the loss when you realise or sell the asset? It's actually about looking at the future cash flows from a loan. And the point I'm making here is, on that basis, surely the provisioning should have been higher by the banks and, consequently, the audit report should have reflected that there was an under-provision.
Mr. Gerry Fitzpatrick:
No, I don't believe that. You use the value of collateral as you understand it to be. If you think the value is going to fall in relation to a future event because the market will fall further, you're not predicting that future event. I know that's quite difficult to do but you can't suddenly say, "Well, I think it will go down by 20%". If the directors said to me they think it'll go down by 50%, they would have been potentially misrepresenting the information, the financials because they wouldn't know what it was. It would be pure conjecture. And the idea of the standard was an evidenced, verifiable evidence-based standard. And we may believe there are flaws in that but a verifiable evidence-based standard is actually better than one that is purely based on conjecture. If a group of directors are saying to me, "We have looked at the valuations and actually yeah we think we'll hack off another 60%" , that would be misrepresenting because it would be based on conjecture. So it is a difficult thing I agree with you. I think we're in agreement that the standard does require you to look at what would be realised and to net present value it but you have to use the available data in terms of what you believe valuations are standing at the moment. Valuations can equally increase and decrease; it would be conjecture otherwise not to use the available data. Just like if you're holding a security, Deputy, like interest in a stock or share, it could go down in the future but you value it at the point in time even though you mightn't sell it, you mightn't sell it for ten years-----
Ciarán Lynch (Cork South Central, Labour)
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Last question now.
Kieran O'Donnell (Limerick City, Fine Gael)
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In hindsight, Mr. Fitzpatrick, looking back now, would you have done anything differently in terms of, particularly the audit of the '08 accounts?
Mr. Gerry Fitzpatrick:
I believe that the audit I did and the opinion that I raised was appropriate and that I did the work required. And I think Mr. Cullen and myself both described how the process for future looking, which is outside the audit scope, can be enhanced. And, therefore, the process the regulator has now put in place in terms of reviewing other aspects of organisations, their governance, etc,. under what's called GL44 and a whole series of new audit reports is a good thing. But in relation to the past I'm, I'm comfortable with the opinions I gave.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Deputy John Paul Phelan. Deputy, you have ten minutes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you Chair and good afternoon, gentlemen. Firstly, I want to ask you, maybe both, in your opinion, did the management structure of Ulster Bank impede provision of good governance within the bank or what impact did it have, if any, in your opinion?
Mr. Gerry Fitzpatrick:
I certainly wouldn't start by impeding it. As a structure, they benefitted from good practice internationally. I think that compared to other organisations was a particular benefit they had, so they had a strong governance culture, they had a good framework, which was consistent with how similar organisations in the RBS network were managed. So from a starting point, the structure was good and the materials I saw going to board, although they had laws at times, that was in terms of some elements, they were always corrected and I always found that there was a good attitude towards control so if they had a process with something that was identified, there was an escalation process and it got addressed. Maybe not always the speed that they might like, but that process seemed on the face of it, quite good. There was obviously a number of legal entities. UBIL, which is the Irish entity, First Active, and so the boards, they very much looked to an Ulster Bank Group. That was an agreement with the regulator, which is the proper way it would be done, that actually they would look across the totality of their arrangements. I thought the structure was reasonable, in terms of an active board and a reasonably structured governance environment.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Mr. Cullen, you referenced the Nyberg report. We have had discussions with Mr. Nyberg and others, who have referenced this report as well. I want to put to you a particular passage which is well known and has been discussed at this committee before. Page 56 of this report, paragraph 3.6.2. The quote is as follows, "The Commission would have expected a bank auditor, exercising necessary professional scepticism, to have concerns where there were growing property and funding exposures, combined with material governance failings." Do either of you believe that that criticism or that comment has application in terms of the role that Deloitte had, in terms of auditing Ulster Bank Ireland?
Mr. Gerry Fitzpatrick:
Again, to be clear about what Mr. Nyberg did, he looked at covered banks, so he wasn't looking at the auditor of Ulster Bank or the financial statements of Ulster Bank. I am not aware if he spoke to the people in Ulster Bank. Governance concerns may have applied to other organisations but I am not aware if the regulator was raising governance concerns in relation to Ulster Bank Ireland Limited. From my recollection, they were raising serious queries at times, as regulators rightly do, and I said in relation to concerns, I think I have voiced this earlier, which is if the concerns were about the business model, the concern was to make sure that the reader of the financial statements fully understood that business model, which was where the lending was being done, what the quality of that loan book was, ensuring that credit quality analysis was provided in the accounts and then most particularly, and maybe was unique, and maybe therefore not why Mr. Nyberg wasn't covering it, was the liquidity issue, which was more acute for those who are stand-alone entities, was a different environment. It still required the liquidity that a bank needs but it was different because it was done in the context of an RBS capital model, which looked at capital, which was over one hundred and something billion right round the organisation, and therefore the concerns I think ... I don't think his concerns were about Ulster Bank.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you believe to use that phrase "necessary professional scepticism" that you were necessarily professionally sceptical in your role as the auditors of Ulster Bank Ireland?
Mr. Gerry Fitzpatrick:
It is a question auditors have to ask themselves every day, which is, "Am I being sceptical, am I being biased, is my, is there confirmation bias to what I'm doing, is someone giving me information and I'm going "well, that looks sensible"." So it is something we really always try and work on. I think the process we went through to try and challenge what the organisation is doing, to look at all the sources of data was sceptical. I guess the judge of that can probably not be best myself, but I suppose we have had reviews of our work, both of our audit work and I don't recall that someone, in the context of my audit work, questioned that scepticism and equally, in the context of financial reports, whilst we went through this significant crisis, securities regulators in Ireland or abroad didn't require or didn't demand the withdrawal of accounts that were presented because I think they understood that yes, that they were historic information, that maybe there could be enhancements to them going forward. But there wasn't a withdrawal of the financial statements, nor a request to restate the financial statements by the regulator or others, in terms of, as the period went on. I think people accept what it was that was reflected in those financial statements.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Following on from the Nyberg report, the auditing ... professional Auditing Practices Board, in March 2012, produced a paper on the concept of professional scepticism and it noted that the auditing standards defined professional scepticism as, "An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence." Following on from that, have you instituted changes in your own practices, be it in relation to auditing Ulster Bank Ireland or other auditing that you've done since the publication of that report in 2012?
Mr. Gerry Fitzpatrick:
I wouldn't say we've done it differently. I think that the emphasis around our whole organisation about the importance of scepticism is reinforced and maybe more so reinforced which is that idea of constantly reinforcing that view of the sceptical mind. I don't think it has changed the way we've done our audit process and I guess ... but reinforcing that scepticism and being alert is something that we have got to do. I think the ... some of the tools that maybe are available to us in terms of data analytics now, maybe allow a greater level of analysis of certain things which maybe help that scepticism but it doesn't change the way we approach things, which is with a sceptical mind.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I change, for my last few minutes, onto the actual nature that the audit of Ulster Bank Ireland would take within Deloitte in terms of the numbers of people who were involved, the grades ... I don't want to know anything about individuals other than, you know, roughly speaking, what ... how many people from different grades within the organisation of Deloitte would be involved within the audit of Ulster Bank Ireland?
Mr. Gerry Fitzpatrick:
I don't have the exact data to hand but I can give you a flavour and it would probably be at the Ulster Bank Group level because that's the way we co-ordinate our overall team. I'd say, in all ... and this is from memory, Deputy, that we have about 50 people involved in that work, from a variety of disciplines, as I described earlier in relation to core audit team, to specialists, some with many years of experience, some with less experience. I would say, and again, if you'll allow me just ... from a guesstimate, the kind of ... the senior cohort of the time, in terms of people who were long experienced managers, partners, specialists in tax, pensions and IT would be about over 30% of that time. The amount of time, if you take that group plus all the qualified staff ... people, not just graduates, of ... which is our own intake, but people who've done the exams of either Institute of Chartered Accountants or other institutes, would probably ... would represent more than 50% at the time. And those involved in ... who are less experienced would be subject to the review of those people in the 50%, if you get me.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. A perception, correctly or incorrectly, may exist in some quarters that significant numbers of very junior staff are involved in the auditing process of some of the institutions. I just want to ask in relation to your own ... but I also want to ask, in relation to the staff and the level that they would be at within the organisation, how do you square the conflicting interests of the necessity to rotate, which was mentioned earlier on, but also the maybe necessary sceptical requirement of continuity that, you know, a professional auditor is ... in an institution or examining their books for a number of years and can identify maybe concerns over, you know, that particular period of time and knows what they're looking for, rather than, you know, perception that a significant number of junior staff would be doing most of the grunt work, for want of a better term?
Mr. Gerry Fitzpatrick:
There is certainly a perception, I think, and there are people who are young - and we have recently qualified graduates in our number - but I'd say about anybody who is in that level, there's people with honour degrees in ... from third level, they're studying for exams of an institute. They're spending, in terms of a training timetable within our firm, four to five weeks a year on simply that training and then plus another two to three months training for the exams. So there's quite a lot of infrastructure, even for those who have a small ... number ... of experience. My issue obviously is that, as the person who signs an opinion with 50 people doing the work, how do I know, I think this was your question, that they are all ... they all get the message? And what we do ... and probably at the risk of further boring you in relation to other processes, but we have this process driven by an automated audit tool which still looks at this risks and material misstatement.
And I set out what those risks I believe are. And the techniques then you try and use to try and get my scepticism across to those doing the work is to ensure that you're following a process that actually addresses those risks. And we benefit from that as being what we call, in our audit methodology, the tools and techniques people use are not just the ones I decide on, but people right around our firm, nearly 200,000 people globally, not all are doing banking work, but those who are in banking work are contributing to a model and a database of risks and controls, so I feel that group of people are informed. It does fall on me, I'm the person who makes the decisions to make sure that those risks are correct and for me and my team to review the work of anybody who has less experience. And every piece of work will be reviewed by another person, including my own, and, therefore, I'm subject in that scepticism to an independent partner who is not directly involved in the audit process looking through my opinion, my key working papers, my audit summary document, and saying, "Is there a risk, Gerry, that you're being ... that you have a bias here, or that you're subject to this confirmation bias, which is information that passes you is the one that you think is the most relevant at the time?" So, your initial point was, was there a perception? There possibly is a perception. I'd say there's superb, really bright people working for us, who have lots more skills in some areas than I have. They are put together in a model and we train them and it's a value-training process, and the amount of specialist time and expertise that goes into it, drawing from the best of our organisation is put into it. Ultimately, these things aren't all processed though, and I think ... the earlier comments which ... there are judgments around big issues, and that requires people of experience to apply to, and that's where I certainly focus my efforts in an audit process.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy Phelan. Can I maybe just summarise where we are at the moment before I bring in Deputy Doherty? Mr. Fitzgerald, earlier in your evidence you, just to confirm again, you're stating that Deloitte were aware of the risks in Ulster Bank, i.e. concentration levels and such, yes?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And that these risks were then detailed in the accounts.
Ciarán Lynch (Cork South Central, Labour)
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Okay. That being the case, how did Ulster Bank not see the risks?
Mr. Gerry Fitzpatrick:
The risks were the exposure they had, so what they didn't see, I think, within, they didn't foresee was the series of events that would cause a concentration risk to be ... to have such a calamitous effect in terms of the future. So, yes, the financial statements disclosed the concentrations and the funding model. I think they would have described, and I saw parts of what they described, which was a whole series of events that happened that meant the assumptions they'd made about be it soft landings or the impact of collateral values, they were unfounded, so what they didn't see was the consequences rather than the core data, so what we ensured was the core data was properly described. I think it's the consequences that wasn't, and they felt obviously, as I understand it, that core demographics, economic activity, soft landing, etc., meant that it wouldn't be as acute as it was, and, ultimately, they set out a capital plan which got submitted to the regulator, who was saying, "Well, you need to have a certain amount of capital put away in this ICAAP process the regulator does." And that looks at potential scenarios and stresses, and those stresses, unfortunately, weren't severe enough, in their evaluations.
Ciarán Lynch (Cork South Central, Labour)
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Okay, so just staying with the stated accounts, Mr. Cullen, you're on record earlier this evening as saying that the accounts were not an insurance policy or a picture for the future, Mr. Fitzpatrick with a question with Deputy Phelan and others, have spoken at length detailing the skill sets and experience of the auditing team. So in that regard, did the auditors not think, and being aware of the risks associated that we just discussed now with the lending strategy adopted by the bank, that they did not have an obligation to make it clear, make this clear in the accounts, for example, by putting a note in the accounts in this regard? Did you put a note in the accounts in that regard?
Ciarán Lynch (Cork South Central, Labour)
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I'll repeat it, if you want.
Mr. Gerry Fitzpatrick:
The question is about ... the note in the account are the directors' notes; I don't put notes in the accounts. What I was ... what they did have in the accounts were notes that described credit quality, funding gap, spending concentration, so I thought the notes in the accounts met the requirement for disclosure that was set out for this framework.
Ciarán Lynch (Cork South Central, Labour)
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We'll go back to the very, very start of this conversation. You're saying that Deloitte were aware of the risks, i.e. the concentration levels, and that these were detailed in the accounts. Now, we went over Ulster Bank's explanation as to whether they saw the risks or not saw the risks.
But I'll move back to what I'm asking you now. Is ... we've spoken at length, I ... you've explained to us at length of skillsets and the experience that the auditing team actually had inside there, but the question I'm putting to you, in this regard, did the auditors not think, in being aware of the risks associated with the lending strategy adopted by the bank - and we've spoken about the concentration levels - that they did not have an obligation to make this clear in the accounts, that this issue specifically would be made clear and that a note would be put in the accounts in this regard? Was that done?
Mr. Gerry Fitzpatrick:
Maybe I didn't answer very well. I clearly didn't because you were ... because the question ... the risks I was seeing was the risk that the financial statements might be misdisclosed, mispresented, there might be error in them. Not that the business model was risky, that the financial statements ... that's what I'm trying to report ... which is ... might the recorded profit and loss account balance sheet, cash flows, etc., be ... have risks of material error because the measurement wasn't done correctly, or wasn't ... so I believe that those risks were ... were considered by us on our team, in our ... in our work, be that of the risk of impairment ... what level of credit quality was disclosed, the risk of liquidity, that was disclosed in relation to the funding gap, and also in relation to the basis of growing concern. So, I do think the notes the directors put in in relation to those issues did point to the ... the measurement risks and were appropriately disclosed. It may not be that future-proofing objective that maybe you might want in ... in terms of that idea of proofing the future, but I thought the risks and the ... of measurement of numbers were reasonably well disclosed and the accounting standards required that and they met that measurement standard.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Even with the full knowledge of time you would still think that they were accurate at that time?
Ciarán Lynch (Cork South Central, Labour)
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And I'm not looking back ... 20:20 may be hindsight-----
Mr. Gerry Fitzpatrick:
No, I think ... I think the ... what it has taught us, I suppose, is that maybe that sensitivity analysis ... so that you're saying, okay, it is this point-in-time picture, and the reader needs to see that, the question then is the what ... so you want to get people measuring it to a consistent standard, bank to bank to bank, that maybe more focus ... and the newer standards have a little bit more focus on, well, maybe the "what if" piece, which is, okay, well ... which is trying to say, well, not so much what will happen, but if something happened, if we had a 1% movement in something, what cause that might have. So, that is where standards maybe currently are looking to push more on, and that may be somewhere that that will give it. But it still is ... you still have to work with ... you still have to be able to say, well, can I anticipate what's going to happen, and in terms of ... you never anticipate the unexpected, and I think there was a significant level of unexpected in the long-term deterioration in asset values.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat, a Chathaoirligh, agus fáitle roimh an bheirt chuig an coiste. Can I ask you, to start off, did Deloitte perform any stress testing as part of your external audit of the bank to take into account the correlation between the different types of property being financed, that being residential, commercial, development land and speculative land banks?
Pearse Doherty (Donegal South West, Sinn Fein)
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And, in relation to how it was being financed in terms of realising equity that was in one project, financed in another project, did you look at that area?
Mr. Gerry Fitzpatrick:
That would have been looked at if ... if you've ... if you'd a loan that was ... had objective evidence of impairment, you're trying to see, well, what is the collateral value. If that was based on the value of a property, as you say, that had been previously financed, you'd be looking to understand how that valuation was carried out, and how was it stood up.
Pearse Doherty (Donegal South West, Sinn Fein)
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And were you satisfied with what you'd seen?
Mr. Gerry Fitzpatrick:
In terms of the valuation process, we've talked a little bit about what ... how we went ... go about doing that. I was satisfied that they had a process for establishing valuation. If that collateral was ... was in place, you have to test the security of it and you need to understand the assumptions that underlied it. So I was ... I ... I obtained the evidence I required to make my conclusion in relation to impairment of those assets.
Pearse Doherty (Donegal South West, Sinn Fein)
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And the stress test that you examined ... what ... what factors did you ... what percentage drops were included in those stress tests, say, for example, on the 2008 returns that you audited?
Mr. Gerry Fitzpatrick:
What I ... what I said ... what I asked the bank was to do certain stresses and they looked at ... at peak-to-troughs at that stage, which were ... and perhaps some further more ... but it was certainly looking at ... and Deputy I ... I don't remember the numbers, but it was 10% to 20% further falls in value.
Pearse Doherty (Donegal South West, Sinn Fein)
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Of residential or commercial?
Pearse Doherty (Donegal South West, Sinn Fein)
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That's peak-to-troughs?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. We've heard from Professor Eamonn Walsh before the committee previously and he talked about the IAS 39 which we ... we've examined in ... in detail here at this committee. Professor Walsh also said in his evidence, it's on page 7 ... 478, and I'm going to quote it, so just for your benefit, he said:
One could have a disclosure which says the impairments are low, the profits are high, and loans have been made which could go bad quite quickly. A disclosure could be made to investors which states that loans may get into difficulty despite the fact they are not reflected in the balance sheet or the income statement.
Did this happen in practice?
Mr. Gerry Fitzpatrick:
I'm not sure where, what kinds of disclosure, he really wants. That sounds like a boilerplate suggestion that things can go up and down ... if that's what I'm hearing. There was a disclosure which just said the directors highlighted the key judgments and uncertainties which could cause actual credit losses to differ materially from the report of impairment efficiency. That was a statement made by the directors in the accounts, so I think if that's the statement he makes, the reference to the profits high and impairments low is not a statement I would have thought was appropriate but certainly, the statement that of risk which is the risk that judgments may be incorrect is required by standard and was made, as I said, which says-----
Pearse Doherty (Donegal South West, Sinn Fein)
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But is that statement not ... just a general kind of statement that you would see in nearly every statement of audited accounts? Would that be a general statement instead of saying, "Look, we have to value this in terms of IAS 39, we have to audit this in terms of IAS 39 and why ... while the bank is very profitable, while the impairments are low, the profits are high at the bank, we see trouble in the horizon?". That is what I assume he was getting to and is something like that possible?
Mr. Gerry Fitzpatrick:
I think it's not quite there. What standards require you to do is to say ... certain items can be measured, there is no judgment of it, cash is cash. What you're required to do is to say where the significant judgment required in the determination of an asset or a liability, you've got to describe that uncertainty. So in relation to pension liabilities, in relation to asset impairment, so in significant debts and judgments, you are required to make statements about it. So I think that's what he is referring to which is IAS 1 says you must do that and I think that was properly done. The question is what depth you can put on it, because you're saying "Well, something could move, as you say, which is a boilerplate statement." You don't know what it might move by, you're just highlighting to the user that this is something that is based on judgment.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Are you familiar with that Anglo went beyond the provisioning that was required under IAS 39 and provided for, I think, half a million ... half a billion euro additional provisions?
Pearse Doherty (Donegal South West, Sinn Fein)
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Indeed. It was evidence that was provided to the committee.
Mr. Gerry Fitzpatrick:
Yes, I read that piece and I think that might be misunderstood. That's ... there is a thing called ... stop me if I'm getting too technical ... there is a thing called IBNR. There is a recognition that at a point in time, at the balance sheet date, there are certain things that are incurred but not yet recognised, so if you have a situation where maybe ... so you're saying ... you know, it takes up three months to find an impaired loss, you make a provision for that loss in terms of an emergence period, it takes a month so-----
Ciarán Lynch (Cork South Central, Labour)
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Please, just be mindful here now.
Pearse Doherty (Donegal South West, Sinn Fein)
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That's fine if you think that-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. We can leave that.
Mr. Gerry Fitzpatrick:
-----and IBNR is part of that mechanics and something I would have looked at. Ultimately, though, that is based on data which you are saying "Well, if things have gone wrong in the last month or two what loss", ... you're back to the same assumptions on valuation of collateral.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. The Nyberg report gave you the label, when I say "gave you", I'm taking about external auditors of the silent observers. He explains on the page, he says:
The problems in the Irish banks [and I am quoting] were building for several years before the crisis. These were problems of credit quality, sustainable lending practices and adequacy of internal procedures; they were not generally operational problems related to ... IT systems or the mechanics of loan documentation. Auditors, there ..., did not feel that commenting on the implications of such business model problems fell within their proper remit. In fact, it may be questioned whether they even saw them as problems since very few others appear to have seen them either. On these issues, they appear generally to have stayed silent.
Do you believe, from Nyberg's analysis, that you were one of the silent observers?
Mr. Gerry Fitzpatrick:
I believe I wasn't silent in terms of ... but I think the point was in terms of what the scope is, so I was very vocal in terms of what I was looking at in terms of around the organisation, challenging people, so I think in terms of ensuring that the financial statements reflect what they show, I think, maybe I'll just take it personally, that silent observer was pointed at auditors, seem to be a unique heading pointed to the auditors. We were looking at presenting good financial information. I think the capital standing stability was not part of our role and I think he referred to that. So I think he referred us to doing our role, I think what is referred to earlier, there are some now enhancements in terms of talking to the Central Bank about not changing that role but adding a new role in terms of looking at governance and maybe that would allow more objective observation of the things he suggested.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. In relation to going concern, it was stated in the opening statement there that, in assessing whether the going concern assumption is appropriate, that you take into account all available information about the future, which is at least, but not limited to, 12 months in advance. Can I ask you, Mr. Fitzpatrick, because you've mentioned a number of times the CSO residential property index and you say that, by 2009, it was 8% below; now, that's 8% below 2005 figures. Can I ask you, just bearing in mind these figures and bearing in mind we've had evidence from the economists from within the banks, including Ulster Bank, which believes that commercial property was the major factor in terms of the losses to the banks - and you may have an opinion on that or not - but Jones Lang LaSalle property index shows that by the end of December 2008, property values had dropped by 36.4%. Indeed, by the end of March 2009, just a number of days after you submitted your audit report for that year, it had dropped 40.5%. Commercial ... or residential property had dropped, peak to trough in that period, from 128% at the start of 2008 to ... to, the time you submitted your report, 108%-----
Ciarán Lynch (Cork South Central, Labour)
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... please, Deputy.
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, the first ... the residential property that shows a drop statewide from 128.7% at the start of 2008 to 108.5% at the time you submitted your report is the CSO reference and Jones Lang LaSalle has their own property index which is on their website, which comments that there has been a decrease in commercial property in that year of 36.4%, in 2008. When you look at the CSO, also you actually see that property decreases were accelerating during that period. Why, given all of that, did you not suggest more provisioning or suggest that there was a concern in relation to the future viability of the business model of the bank that you were auditing?
Mr. Gerry Fitzpatrick:
The initial question was about going concern, so what the going concern assessment is saying, not that you change the values of the assets, which is the incurred loss model, what you say is having determined that valuation and that balance sheet assessment based on the judgments at that point in time, you then say, well, has there ... is there a reasonable expectation of this entity in the head winds it might be having it, or the tail winds, that has a reasonable expectation that that organisation will continue in business? Not that it's going to make profit or loss; simply it has the facility to stay ... be in business within 12 months. In the case of Ulster Bank, the directors, as I've explained, had the support, liquidity and capital and otherwise from Royal Bank of Scotland and, therefore, there were reasonable expectations that that ... that provision of that facilities of liquidity and capital would be available. So they were perhaps in a better position than others to make that assessment, so the going concern is saying you don't change the values-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry, sorry, you had to be convinced as the auditor-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----that there was no issue of going concern because in the statement you say that the-----
Ciarán Lynch (Cork South Central, Labour)
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This is a supplementary now, Deputy, to wrap it up.
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry. In the statement you say that the ... it was the board of directors but the auditor has to be-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----convinced of ongoing concern.
Mr. Gerry Fitzpatrick:
Yes. So, the bank make the assessment, the directors make the assessment of going concern and then I have to make an assessment that I believe that's reasonable. The directors make it based on all reasonable assumptions and I look at those assumptions to say are they reasonable. The big assumption in this case was the support of its parent and that was a significant assumption because of the sources of funding, the percentage of the balance sheet that was coming from that source and that, I believed, was reasonable expectation. It ... and when capital was needed in 2009, that expectation was borne fruit because there was a number of ... a couple of hundred million in 2009 that Royal Bank of Scotland did inject into the company. So, that was a reasonable expectation, therefore, the going concern assessment the directors made, based on the support of RBS, was reasonable and I ... and I made ... and I formed the view also that I thought it was reasonable.
Pearse Doherty (Donegal South West, Sinn Fein)
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The ... and I know I'm over time, but the core issue there was that commercial property had decreased by 40% in 2008 or, sorry, 36.4% in 2008 and was accelerating and residential property the same, yet the provision ... you didn't suggest additional provision in relation to that, even though you were supposed to. You talked about looking at the IMF and other bodies for data but this data was available through Jones Lang LaSalle and the CSO.
Mr. Gerry Fitzpatrick:
I believe that the valuation, which is a separate part of ... in relation to the assets reflected the ... in terms of the assessments they did reflected the valuations that were ... that there was ... I'm not ... I can't reconcile with those exact peaks and troughs but those ... that market available data was being reflected. Deputy, there was ... the question was ... the subsequent losses weren't necessarily in relation to those cases that were impaired at 31 December of any year because, in subsequent years, other things happen and other loans get impaired, so losses, there's a pro-cyclicality, as people say, which is as the market turns not only the items that you think are impaired are in one period, further items get impaired.
It's not all about the loss identified in one year, and then it goes down further. There's new losses that arrive in a subsequent year as businesses or properties ... or sorry, businesses or individuals default on ... in a future. But that future loss-----
Ciarán Lynch (Cork South Central, Labour)
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All right.
Ciarán Lynch (Cork South Central, Labour)
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All right. Okay, thank you, Mr. Fitzpatrick. Senator Barrett. Ten minutes, please.
Sean Barrett (Independent)
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Thank you very much, and welcome, gentlemen. How many people in Deloitte worked on the Ulster Bank audit?
Sean Barrett (Independent)
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And then I think there's about €2 million on the audit paid to you between 2004 and 2010, and about €1 million on other activities. What were the other activities?
Mr. Gerry Fitzpatrick:
There were certain business reviews done on ... in relation to ... I don't have the full list of them again, Chairman, but they were engagements to do reviews of businesses that the bank might have been looking at in terms of their structure or otherwise. I explained earlier, the process was if there was any non-audit work to be carried out, it had to be done ... firstly, that it's not restricted. So the ethical rules say you can't do certain types of work, absolutely not. For instance, the building of systems, the doing of tax structures. And then equally you have to be aware of any threat that might be involved. But if there was a receivership, and most of them were in that kind of business review or receivership area, that was something that was ... is allowable under the standards and would have been reviewed by the audit committee.
Sean Barrett (Independent)
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Thank you. Did you ever have any concerns about the exceptions to lending policy in Ulster Bank?
Mr. Gerry Fitzpatrick:
Certainly it was an area that I needed to be aware of, and I certainly was aware of the process for exceptions, and therefore where you have ... I mean, any process that you have allows for exceptions, because the way it's written, and the ... what would concern me was that ... were those exceptions properly governed? There were times, I think, back in 2004, as highlighted by the regulator, enhanced governance by bringing it to the board was important, so I think that was a useful development. But I didn't have concerns that they were being made without the control environment or the four eyes principles that-----
Sean Barrett (Independent)
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And who did you express the concerns to?
Mr. Gerry Fitzpatrick:
No, my concerns were in relation to my focus on my work, so to understand the control process and how it worked. So if there were exceptions in any system, reconciliations, differences, something outside policy, I'd need to understand how that was governed. So my concerns were to understand how that was governed, what kind of data was available, who was reviewing it, and were they satisfied those exceptions were appropriate.
Sean Barrett (Independent)
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And were Ulster Bank aware of your concerns?
Mr. Gerry Fitzpatrick:
I think I may have ... So my concerns were in terms of that there could be risk of misstatement in the accounts. So they weren't concerns that they were inappropriate. My concerns were to make sure that they were being governed correctly. So concerns where, in the audit process, you're saying, "Here is a process; it has exceptions to it; should those exceptions apply? And if they are, who governs that process and who signs off on those exceptions?" To understand if they're properly ... they're properly governed. But they weren't concerns, Senator, that these were ... that these weren't acceptable exceptions. The question was who was, you know, in an escalation process where if someone gets authority to do something, if they need to do something above their authority that somebody else has the underwriting capability to do that, and therefore the exceptions have to be reported to a higher level, and that was where my concerns ... So my concerns weren't about impropriety, Senator.
Sean Barrett (Independent)
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I know, but who did you express the concerns to? Were Ulster Bank aware that you were concerned?
Mr. Gerry Fitzpatrick:
They would have ... well, they would have seen that I was testing in that area, so that's how my concerns ... I have to get myself satisfied, and therefore my concerns were to make sure that that process was working. So I think maybe we're misunderstanding what concerns ... to me concerns are, could this process with exceptions cause the numbers to be incorrect? And therefore my concern is what I call a risk focus. It wasn't that this was an ... that this process was inappropriate, and that's ... if I thought it was inappropriate I would have-----
Sean Barrett (Independent)
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So you ... so I take it you weren't concerned that these were 40% in 2006? You were concerned about how the numbers were made up?
Sean Barrett (Independent)
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You weren't concerned that these were 40% in 2006, these-----?
Sean Barrett (Independent)
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Okay. Professor Brennan, who is an accountant, in 2004 she said that she was concerned about the level of sanctions outside limits, especially with regard to those who had breached both the loan-to-value and the debt service ratio limits. That was 2004.
Ciarán Lynch (Cork South Central, Labour)
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Have you the document there?
Sean Barrett (Independent)
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Yes, thank you, Chairman. That is Deloitte, Vol. 1 and it's on page 40. So were you aware that there was concern about these matters at the board level in Ulster Bank ... by ... by an eminent accountant?
Sean Barrett (Independent)
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It is 31/04 and "Professor Brennan queried the level of sanctions outside limits, especially with regard to those which breached [the limits] ... which breached both the loan to value and the debt service ratio limits."
Mr. Gerry Fitzpatrick:
I certainly was aware because I would've review ... I would've reviewed the board minutes. What I was ... what I ... when someone raises ... and you would expect this at a board meeting for people to have questions and raise questions in relation to what was happening. The process I would be seeing is ... well ... whether that concern was sustained. And I don't believe that that action was ... there was a ... that having addressed the matter that there was an open item ... I thought that the item was taken seriously and the action was taken. So if a board member had a concern that sustained, then I would be certainly questioning that ... at the time of the approval of the accounts, whether they thought that their accounts were, therefore, materially misstated. And I don't believe that .. that ... that concern or that question sustained because I think the ... the issue was addressed as far as I was aware ... because the regulator-----
Sean Barrett (Independent)
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Well, I think it was greater in 2007 than it was 2004 when Professor Brennan raised it.
Mr. Gerry Fitzpatrick:
The board members who raised questions approved the accounts. So, therefore, if their concerns are unsatisfied, they obviously need to ... they would ... I would be ... that would have come up at the approval of the accounts. So, yes, it's right to have concerns in relation to exception limits. It's right to highlight them. It's right to have processes that address, kind of, the approval of those. But ... but I don't believe, and maybe I'm wrong in terms of the documents, that that concern was sustained through that period in terms of 2004 because otherwise it would have appeared in the board minutes on an continuing basis. I don't believe Professor Brennan or others continued to raise that issue.
Sean Barrett (Independent)
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I do believe there were concerns still of that kind in 2007. In fact, that was one of the questions we were putting to people. How was this ... raised by Professor Brennan in 2004 and nothing ... and it getting worse by 2007-----
Mr. Gerry Fitzpatrick:
I think ... I think, Senator, in terms of the concerns the ... the concerns in 2000 and ... without going into each of the documents ... there were different concerns. Certainly the .. the level of reporting of it in 2004 was an issue. There were certainly issues raised by the regulator that Professor Brennan and others queried in relation to the 2007 ... because of the Dublin mortgage centre. It wasn't a ... it wasn't the same issue. But, ultimately, Senator ... the ... if board members have concerns - and clearly I read the board minutes so I make sure that there is an action from my stake I follow it up -but the financial statements are approved by the board members, they give representations to the auditors and that's a particularly significant legal requirement. At no point were those concerns expressed to me as being unsatisfied by the audit committee or the board when they were signing the financial statements ... for which they're responsible.
Sean Barrett (Independent)
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But do you not quantify these and see they were greater in 2007 than they were in 2004, when Professor Brennan raised them?
Sean Barrett (Independent)
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I don't understand your use of the word ''concern''. Because each time we come to it you ... you're not concerned. You ... you don't seek to correct the problems which the data disclose.
Mr. Gerry Fitzpatrick:
I don't correct any of the data because I'm the auditor. What I do is ... I ... maybe I misused that word ''concern''. But what I see is a system. And I see what numbers are generated by the system. If there's a risk that the numbers that that system generates are inaccurate and, therefore, that the numbers recorded for loans, for impairment or for anything else are inaccurate, then my concern is to say well ... am I looking at the controls in that area and I can test that area. I can look at individual cases and satisfy myself that that number isn't materially misstated. Which ultimately is what the purpose of my-----
Sean Barrett (Independent)
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And the controls didn't work. Let's go to loan-to-deposit ratio. It was 211 when it should have been 120. And you said that this was excusable because Royal Bank of Scotland was a sophisticated group with a strong governance culture. I don't think anybody in the United Kingdom believes that of the Royal Bank of Scotland. Record losses ... a bailout by the British Government and a chief executive who was deprived of his knighthood.
Ciarán Lynch (Cork South Central, Labour)
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Senator, Senator, I ask you ... Senator, Senator, please. Excuse me one second you can refer to the Chair, Senator. I would ask you to be more measured and more ... directed in questionings towards Mr. Fitzpatrick and Mr. Cullen, rather than taking maybe value judgments or implied value judgments either in this jurisdiction or in other jurisdictions. So I would ask you to reframe your question again and to put it to Mr. Fitzpatrick and Mr. Cullen.
Was it a mistake to take the standards which Royal Bank of Scotland were operating in the United Kingdom?
Mr. Gerry Fitzpatrick:
I am not aware that in relation to financial reporting the issues you refer to have caused the regulator in that jurisdiction to require revision of accounts or financial reporting - I am not aware of that, so no, I don't believe that information affected the financial statements in that group in terms of the preparation and the proper financial reporting. There were no withdrawals, as I understand, by the regulator or the securities regulator or requirements for restatements of financial statements. There may have been other issues, Senator, in relation to that organisation but I'm not familiar with them and I certainly haven't been involved in the audit of Ulster Bank since 2008 so I wouldn't be familiar with the detail of them as they pertain to Ulster Bank Ireland Limited.
Ciarán Lynch (Cork South Central, Labour)
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Senator MacSharry.
Marc MacSharry (Fianna Fail)
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Thank you and welcome gentlemen. Can I ask Mr. Cullen to confirm or not that Deloitte & Touche are an international ... they're a global company?
Marc MacSharry (Fianna Fail)
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And is there a consistency of approach, standards, professionalism, ethics across all of those, or are they different from country to country?
Marc MacSharry (Fianna Fail)
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For example in auditing?
Mr. Gerry Fitzpatrick:
In auditing we would have a consistent audit approach, as Mr. Cullen refers to it. Local regulation might require ... so there are international standards in auditing for Ireland and the UK. They might be different to some of the standards in ... so there's specific rules for auditing in the US perhaps. But the framework for how we address risk - the process we do our audit, to the training we give our people, the scepticism and the kind of ... the learning messages, the alerts we get around issues - we use the infrastructure to inform us of those things.
Marc MacSharry (Fianna Fail)
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Would it be fair to say or not that I suppose the level of thoroughness or intrusiveness for want of a better expression, internationally would be broadly the same in auditing would it?
Marc MacSharry (Fianna Fail)
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Who regulates your company, your profession?
Marc MacSharry (Fianna Fail)
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The which? And in audit?
Marc MacSharry (Fianna Fail)
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CARB is the Chartered Accountants Regulatory Board and IAASA then is the Irish Auditing and Accounting Supervisory Authority, isn't that right?
Marc MacSharry (Fianna Fail)
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Okay, so did these organisations review your bank auditing work?
Marc MacSharry (Fianna Fail)
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Why? Are both organisations seen as one?
Marc MacSharry (Fianna Fail)
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Did they review these audits?
Marc MacSharry (Fianna Fail)
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And that includes IAASA, no?
Marc MacSharry (Fianna Fail)
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So would they have reviewed these audits for example?
Marc MacSharry (Fianna Fail)
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Okay. And what was the findings of that?
Marc MacSharry (Fianna Fail)
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And would you describe their review as intrusive or, for want of a better expression, light touch?
Mr. Gerry Fitzpatrick:
Thorough. I guess they ... they too benefit if I recall, and I don't exactly, they use inspectors who had experience of the UK environment in banks. So some of the inspectors, they had local inspectors, and I must declare as I have on my CV, that I am a member of one of the quality assurance boards - not obviously looking at my own work. But they have local inspectors and they bring in experts as well, so they have an expertise in auditing and in auditing our firm, and globally and also in relation to banks.
Marc MacSharry (Fianna Fail)
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They made no adverse findings. And would their activities be the same as, or less intrusive than, the Public Company Accounting Oversight Board in the United States for example?
Mr. Gerry Fitzpatrick:
I guess ... they review to different standards, so that's going back to your earlier point, is there are ... there are global Deloitte approaches to work but local regulators have standards, so the PCAOB, the public ... the regulator in the UK, or US, has a series of different standards and therefore they have a different inspection process.
Marc MacSharry (Fianna Fail)
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And would you be aware that ... and this is why I asked earlier. I mean, is there a similar and a consistent approach taken internationally, that on a review in 2014, that the Public Company Accounting Oversight Board found that 25% of audits were deficient in the United States, and citing in particular testing controls over the valuation of long-lived assets, purchased loans-----
Ciarán Lynch (Cork South Central, Labour)
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Could you just reference that bit for us?
Marc MacSharry (Fianna Fail)
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I will in a second, if it's okay.
Ciarán Lynch (Cork South Central, Labour)
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Sure, yes.
Marc MacSharry (Fianna Fail)
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-----impaired loans-----
Ciarán Lynch (Cork South Central, Labour)
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Or maybe reference it first and then give it to us.
Marc MacSharry (Fianna Fail)
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Yes, I'm quoting from The Wall Street Journalof June 2, article by Michael Rapoport.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay, I don't know if the witness is familiar or not with it but we'll get the question now.
Marc MacSharry (Fianna Fail)
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Yes. No, that's-----
Marc MacSharry (Fianna Fail)
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-----of course it wasn't. I'm merely asking, if we're applying the same standards internationally, if we have the same approach internationally, and we're finding these kind of deficiencies in similar activities in the United States on 25% of audits, and the regulator here is finding that everything is in good shape, I'm just merely trying to ascertain, do both regulatory organisations take the same intrusive approach or is the one here less intrusive, or are we just better here in Deloitte & Touche than our colleagues in the United States?
Mr. Gerry Fitzpatrick:
What I believe is that they are auditing to a set of standards in the US which are different to the standards here, so, I mean, I can't say what is, that is in that difference. What I don't have to hand, Chairman, is their grading of finding, so they ... in any audit process you will have findings and make observations and there are some divisions. I don't believe in 2004, 2014 our firm would have had withdrawals of audit appeals as a result of that, so I'd have to see the grading system and I just don't have it to hand.
Marc MacSharry (Fianna Fail)
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Yes. No. Again, I'm just asking because it's something that came up on another-----
Marc MacSharry (Fianna Fail)
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And their treatment of impaired loans and purchase loans is different, is it, very substantially to here?
Ciarán Lynch (Cork South Central, Labour)
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Well, okay, I might allow some space for it, Senator, and I'll bring you back in. It is a part of the job of this inquiry is to provide recommendations at the end, maybe look at activities in other jurisdictions, such as Sarbanes-Oxley, as you've mentioned already, and to see how other practices may be ... may be examined in terms of recommendation for this committee's work. So back to yourself.
Mr. Gerry Fitzpatrick:
I guess ... I suppose, to be fair to the local regulator, I ... they have to be allowed to explain the differences in terms of their process. I feel that they're ... I haven't been subject to a PCAOB audit inspection, but I have been subject to local regulatory inspection and they are comprehensive. Whether the two compare, I think you'd have to ask them to be honest, because I haven't-----
Ciarán Lynch (Cork South Central, Labour)
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Just coming up to two minutes there, Senator.
Marc MacSharry (Fianna Fail)
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Yes. How would you briefly characterise the firm's interaction with the Financial Regulator in the period 2003 to 2008, Mr. Cullen?
Marc MacSharry (Fianna Fail)
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Okay. That's the process, but how was it? Good, bad?
Mr. Gerry Fitzpatrick:
I think the dialogue ... we didn't have active dialogue. Certainly, I was aware of all the ... sorry, we won't use that word again ... the issues they were raising in relation to our correspondence. But in terms of direct contact, there wasn't a protocol in place that ... for active dialogue. We were looking for that, and that was put in place I think in 2009, because, as I said earlier, we have a duty to report, but we don't have a right to report, and so ... so I think more active dialogue is one of the lessons learned that I ... they instanced earlier, and ... but there has to be two-way dialogue, but I think certainly if you look at what happens now, it was certainly less active or proactive than ... sorry, it wasn't ... it was less proactive then than it is now.
Marc MacSharry (Fianna Fail)
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So since 2009, would you have ever had occasion to say to the regulator, "Look, we have concerns, to use your word, about client X", or-----
Marc MacSharry (Fianna Fail)
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I'm not asking him to name them.
Ciarán Lynch (Cork South Central, Labour)
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I wouldn't even say his words. I will let Mr. Fitzpatrick use his own language in his response.
Mr. Gerry Fitzpatrick:
Again I will have to, kind of, take your guidance here, Chairman. I was auditor to ... auditor to Bank of Ireland Limited in 2008. I have been auditor to other organisations since that point. If I was to be suggesting that I was or wasn't talking to the regulator about issues, that would suggest that I was talking about those other organisations, and I'm not here to talk about those organisations.
Ciarán Lynch (Cork South Central, Labour)
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All right, fair enough.
Ciarán Lynch (Cork South Central, Labour)
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I think the question can be reframed. Can you comment on the role of the Financial Regulator and what they played in the period leading up to the crisis?
Marc MacSharry (Fianna Fail)
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No, it can't be reframed to that. In fairness.
Ciarán Lynch (Cork South Central, Labour)
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Well, it's not a case of letting him away or anything else-----
Marc MacSharry (Fianna Fail)
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Well I'm not letting anybody away. But I mean like, the reality is, I'm not asking him to name any clients at all. What I'm saying is, you said that you sought the ability to ... you said you had a legal obligation first of all to report, but you didn't have a facility to report. So you sought that, and it was given in 2009. All I'm asking is, did you ever use it?
Marc MacSharry (Fianna Fail)
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Did it change after 2009?
Ciarán Lynch (Cork South Central, Labour)
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Okay, I'm going to hold it there, because we are slipping outside of the directions here that was given to Mr. Fitzpatrick as well. So I just need to ask you to move to your final question.
Marc MacSharry (Fianna Fail)
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Do you feel that the report issued to the Financial Regulator provided them with enough information to enable them to discern the full regulatory position of the group?
Mr. Gerry Fitzpatrick:
The report as in ... do you mean the Deloitte and Touche report? So the Deloitte and Touche letter, the section 47 letter, as it is referred to, is a confirmation of certain statutory requirements, so those requirements are at a high level in relation to things that jeopardise the organisation. The information that is given in ... outside of that report, which is the audit summary document, which shows what we are talking to the audit committee, talks about the issues we are dealing with. We don't report on the capital calculations or the liquidity calculations; that's not required by statute. So the regulator gets that information directly, although it reconciles with the financial statements, but there are lots of returns, Senator, that the regulator uses which aren't the subject of the audit and, therefore, they have that information directly - the monthly, daily reports that flow through to the regulator that allows them to make that decisions, and I'm sure that you can ask them whether they thought that information ... I'm not ... what I have to do is in my audit, if I come across a flaw in that, a serious flaw in a regulatory return, I would have to under section 47 report it. And I didn't come across serious flaws in the way ... because I would have reported them otherwise.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. I just want to move into two issues, then I'm going to take the wrap up. Can I maybe ask you one brief question and Mr. Cullen and Mr. Fitzpatrick can answer that? In the firm's opinion, did the external audit fulfil its role or not?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Cullen?
Ciarán Lynch (Cork South Central, Labour)
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On a related matter, and as I mentioned earlier, this committee will have finding of recommendations when we conclude in November. One proposed recommendation that was put to us was put by Professor Bill Black earlier, back in February 2015, and it was in a response to a question put by Deputy Phelan actually at the time, and a follow up to an earlier question. And Deputy Phelan was asking Professor Black, "Will he outline for the committee the changes to those rules with regard to external auditors that could be made?" And one suggestion that Professor Black made was that the straight answer is not to allow "the bankers to pick the auditors. There should instead be a panel of qualified auditors that are assigned to each of them, and we should track the performance of thosee auditors It would be like [regulation, or] relegation [sorry, actually]. If someone had a record of screwing up, they get yanked out from the panel...". Then he goes on to say that they'd go on to "do smaller accounts and prove over the five years that they can do it right, and then get back up to [do] the "bigs.". That being the big four and the big eight or whatever. When asked who should operate the relegation process, he said the United States Government, but in the context of this inquiry, it would be the Irish Government. Do you have any comment on such an approach?
Mr. Gerry Fitzpatrick:
I am not aware that is the approach in the US, the United States or anywhere else. I think the ... this is to probably to fundamental point of company law. The directors are responsible for stewardship, they have to account for that stewardship and have an auditor appointed. So it's a scrutiny process that an independent auditor is appointed; I think that auditor is independent, but I would do because I am one of them. And I don't think selection of auditors by another body who wouldn't know the right skills that was required for that organisation, I can see some flaws in that. So it's not a process I have seen.
I think the regulation of audit and the certain recent changes in relation to audit regulation are constant, which are requiring greater rotation, and that might achieve the same objective.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Wrapping up, Deputy McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, thank you very much Chair. Mr Fitzpatrick, can I just, by way of example, I've been looking at the 2007 financial statements for Ulster Bank Ireland Limited and there is reference in the ... in the report of the directors to risk management and the key risks are cited and one of them is credit risk, and then note 25 is much more detailed in terms of risk management. But what would you understand to mean from credit risk in that context, as a risk that the bank was facing?
Michael McGrath (Cork South Central, Fianna Fail)
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That you won't be repaid by your customers?
Michael McGrath (Cork South Central, Fianna Fail)
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Would that be part of it?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Now in note 8 to the accounts, dealing with asset quality there are a number of tables, which as you indicate, do statistically break down, you know, the loans that have been provided and there are descriptions given including, the word property is used as one heading, construction is used as another but no commentary. And when you go on to note 25, which deals with risk, there isn't, as I can see, a reference to concentration risk in terms of the concentration of the bank's exposure to property construction development, for example. Yes, the figures are in the tables in note 8, but in note 25, where really the directors are describing their approach to risk management, there isn't any reference that I can see for 2007, for example, to what emerged as a key risk for the bank. An overdependence on one sector and the risk of the collapse in that sector meaning many of the loans simply couldn't be repaid.
Mr. Gerry Fitzpatrick:
I don't have the financial statements here but I suppose, I take your word that that's the disclosure so I'm not questioning that. I think the table gives that analysis. Perhaps the narrative could have been greater, I don't think it would have, I think what they're trying to describe is their credit management process, which would include a whole range of things from their appetite to their concentration list. So they're saying they have a process in place, it is not ... the standard doesn't require a narrative to say this is what we currently have and this is what we're currently doing about it, so they're meeting their requirement in describing risk management processes, rather than specific details. If they were to list ... that narrative hasn't been a part of the analysis. Now there are some new standards that have perhaps enhanced some of the risk analysis subsequent to 2007, but again they're still commenting on the data and not giving comment to say, "well we think this is right or this is wrong".
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. But would I be right in saying that even back then, say in 2006 and 2007, there wasn't any impediment or prohibition on the directors providing additional information, additional commentary in the note dealing with risks that the bank was facing?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. I asked that really in the context of one of the first questions I asked earlier on. And if I can rephrase it; if you had been absolutely certain in your own mind back in 2007 that this was heading over a cliff, that the bank, the banking system, was facing a crash but you'd no evidence for that because it hadn't happened yet, but if you were certain as the auditor that this is not sustainable, it's heading over a cliff, what could you have done? And I'm using this by way of example because we'll have to make recommendations as a committee and you know the role of auditors is certainly an element of that, but what could you have done? What could you have advised the directors in terms of disclosures in the accounts for example?
Michael McGrath (Cork South Central, Fianna Fail)
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But you had no evidence.
Michael McGrath (Cork South Central, Fianna Fail)
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But personally certain, as in, you know, you had a gut instinct that this simply is not going to last. What could you have done as auditor? Could you have requested additional disclosures, could you have requested that the risk note, for example, be much more detailed?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. If you strongly felt.
Mr. Gerry Fitzpatrick:
If I didn't believe their assumptions, I would have qualified the accounts so, I would have challenged that, so if I had data to show that their assumptions were incorrect, I would obviously have to pursue that and tell them that I was unhappy with the accounts and they would have to change them or else I qualify.
Ciarán Lynch (Cork South Central, Labour)
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If there was evidence external to the bank, for instance, that-----
Michael McGrath (Cork South Central, Fianna Fail)
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A final question for Mr. Cullen. You said that the fee income from Ulster Bank, I think, was, even at the peak, less than 1% of the total income that Deloitte had. Was it one of the largest clients, was it among your top ten clients, for example?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, was it your largest financial services client?
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. Was it the largest financial services client for Deloitte?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Senator O'Keeffe.
Susan O'Keeffe (Labour)
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I have a few very short questions and then a couple of longer ones. Mr Cullen, on page 3 of your own statement you say ... I'm sorry, page 7 of your own ... you talk about PN 19 (1) includes section B which deals with the auditor's right and duty to report - "It requires that where an apparent breach of statutory or regulatory requirements comes to the auditor's attention, the auditor should" do various things. Is that "should" or "must"? It is just a "Yes" or "No". Does "should" mean "must" or not?
Susan O'Keeffe (Labour)
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Okay, well you put it in your statement Mr. Cullen so.
Susan O'Keeffe (Labour)
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Okay, well fine. Is it "should" or "must"? Does "should" mean "must" or not? "Yes" or "No"?
Susan O'Keeffe (Labour)
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It does. Thank you. Did you ever ... Did Ulster Bank or the RBS ever say anything to you after 2008-2009 about the audit or about their concerns given what happened?
Mr. Gerry Fitzpatrick:
No, not to me. I wasn't the auditing partner. I passed 2008, I rotated off it, but to my knowledge there was no request for re-statement or challenge in relation to prior adjustment to those financial statements, because the directors would have to have made that determination themselves if they were making ... if they felt their statements were wrong.
Susan O'Keeffe (Labour)
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Obviously, thousands of loans are made in any bank. Who would choose the sample for the audit of the loans? Would you guys choose them or would the bank choose them and give you the sample?
Susan O'Keeffe (Labour)
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You would choose them. Can you tell me then, in relation to your statement, you say on page 2, point No. 10, "The quality of loans had deteriorated during 2008." Had they also deteriorated during 2007?
Susan O'Keeffe (Labour)
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By a much smaller degree.
Susan O'Keeffe (Labour)
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Okay. In point 19-----
Susan O'Keeffe (Labour)
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So they were deteriorating. There was a trend.
Susan O'Keeffe (Labour)
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Okay. In point 19 yourself, you say: "We reported that the going concern assessment relied on the RBS Group's management of capital and funding on a group-wide basis". I take it this is in reference to point 14, where you say the directors confirm "it was appropriate to prepare the financial statements of the bank on a going concern basis...". So I'm taking it, is this some kind of qualification? "We reported the going concern assessment relied on the RBS Group's management of capital funding on a group-wide basis". It sounds to me like some kind of qualification but maybe not.
Mr. Gerry Fitzpatrick:
It wasn't a qualification; it was a statement of the importance of that reliance and, as I referred to earlier, I had to establish whether that was reasonable for them to have done that, but it wasn't a qualification. It was an emphasis in my discussions with them. Because when this whole summary document is produced before they approved the accounts and they approved the going concern assessment as our last assessment and I was highlighting the importance of that reliance.
Susan O'Keeffe (Labour)
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Just before that you say, "We referred to the absence of up-to-date collateral valuations and the need for enhanced documentation of the impairment process." What ... How significant was the absence of the valuations and the need for enhanced documentation, and why are you drawing our attention to them?
Mr. Gerry Fitzpatrick:
It was an explanation of my ... of the issues faced in the auditing terms of understanding judgments and therefore, to me, I was pointing out that I had come across this point about valuations. I'd satisfied myself because ... the statement goes on much further to say how I satisfied myself. And in relation to loan documentation, I was pointing out to them that they had a body of work to do. Even though I had established for each case by case, the documentation that was required to make my assessments, I was pointing out to them that work was required to make sure that was in a coherent way from case to case.
Susan O'Keeffe (Labour)
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But this was between you and them. This wasn't a ... this wasn't something that went into the accounts or wasn't a note to them-----
Susan O'Keeffe (Labour)
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And finally then, at point 15, "Similar disclosures on loan impairment and going concern were provided in financial statements for earlier years." So again, there were loan ... what are you trying to tell us there?
Mr. Gerry Fitzpatrick:
And in paragraph 10, and the loan in paragraph 13 was talking about the funding. So it just said that ... I was trying to point out maybe delicately was the disclosure in 2008 as I had been giving it as an example, were also in the directors' disclosures for earlier years. So I was just saying it wasn't a 2008 event that their disclosures were comprehensive. It was every year they made comprehensive disclosures.
Susan O'Keeffe (Labour)
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So there had been loan impairments in previous years?
Susan O'Keeffe (Labour)
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And again a trend of loan-----
Ciarán Lynch (Cork South Central, Labour)
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Senator.
Susan O'Keeffe (Labour)
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Final question. A trend of loan impairment at that point when you look at then the eventual disparity between what was said in the accounts and what resulted, would that trend not have again been saying to you, "Hm, loan impairments." I mean, I'm sorry, I'm a layperson, so loan impairments, loan impairments, loan impairments.
Susan O'Keeffe (Labour)
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But in reality, much more than that.
Susan O'Keeffe (Labour)
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Thank you, Chairman.
Susan O'Keeffe (Labour)
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It was less than-----
Susan O'Keeffe (Labour)
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It was less than adequate.
Mr. Gerry Fitzpatrick:
No, no, at the time it was adequate. What happened was, further impairments of other loans happened. So a single loan that was on the balance sheet in 2007 could've gone bad in 2008, 2009, so the subsequent losses are to do with events that happened subsequent to that year end.
Ciarán Lynch (Cork South Central, Labour)
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Alright, Mr. Fitzgerald, I just want to bring matters to conclusion, so-----
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Mr. Fitzpatrick, sorry.
Susan O'Keeffe (Labour)
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It's the end of the day.
Ciarán Lynch (Cork South Central, Labour)
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My porridge I had this morning is after wearing off. Okay, it's agreed that the notes highlighting the risks, concentrations, etc., were included in the accounts. We covered that ground earlier. So we can take that as agreed, yes?
Ciarán Lynch (Cork South Central, Labour)
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Alright. Notwithstanding this, the bank continued with the strategies adopted that's very much the narrative of your position today as well, yes?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So in that regard, how effective do you feel the communication of these risks were to Ulster Bank and could you have provided more clarity or direction to them?
Mr. Gerry Fitzpatrick:
I think they were clear in ... they would ... doing the analysis, I was clear that their analysis was accurate and therefore true and fair and therefore I think they had the appropriate analysis. What was ... if ... what was ... and this the question I got asked before, if I had known that the assumptions underlying their disclosures were inaccurate, then that would've been something I would've communicated. I didn't know that those assumptions were flawed.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay, alright, fair enough. Thank you for that. I'm going to bring matters to a close. Is there anything else you'd like to add, Mr. Fitzpatrick or Mr. Cullen?
Ciarán Lynch (Cork South Central, Labour)
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Alright, thank you. So with that said, I would like to thank Mr. Cullen and Mr. Fitzpatrick for their participation today and for their engagement with the inquiry. The witnesses are now excused. Before I go for adjournment, there's just one item in regard to a direction that the committee needs to deal with, with one of the investigation teams, so if I can just hold on. It's a one single item agenda. I just want to suspend the meeting for a few moments to excuse the witnesses and we will resume just to deal with that particular item.