Mr. William Molloy:

I thank the Chair. Good morning to committee members. I am joined by my colleague, Mr. Adrian Varley, the Central Bank's director of prudential analysis and inspections. We welcome the opportunity to discuss with the committee the Comptroller and Auditor General’s separate and distinct reports on the insurance compensation fund, ICF, and the Central Fund of the Exchequer.

The Revenue Commissioners and the Central Bank are the two State bodies referred to in the report on the ICF, so we are appearing with colleagues Mr. Eugene Creighton and Ms Angela O'Gorman from the Revenue Commissioners. Similarly, the report relating to the central fund of the Exchequer refers to the Department of Finance and the Central Bank, so we are joined by Dr. Colm O'Reardon and Mr. Paul Cotter from the Department. The full opening statement and additional briefings have already been circulated, so my comments will focus on the key aspects. The two reports highlight the challenges and operational complexity of end-to-end processes where several agencies are involved and the need for these agencies to collaborate effectively on those processes, as well as having clarity on their individual roles and responsibilities within them.

The Central Bank takes an open, proactive and collaborative approach to identifying and resolving issues. If and when operational incidents occur, we review our processes to learn lessons and provide assurances as to the mitigation of any recurrence. While we seek to have robust control processes in place and review these on a regular basis, we are always aware that mistakes can happen in busy teams with competing demands and a human factor. However, we are committed to transparency and continuous improvement, whether that is for internal processes or those that involve other parties.

Members will be aware from the Comptroller and Auditor General's report of the respective roles of the Central Bank and the Revenue Commissioners in regard to the ICF. As part of the due diligence undertaken by the Central Bank following its appointment as administrator of the fund in 2018, it uncovered a potential discrepancy between amounts collected by the Revenue Commissioners and amounts transferred to the ICF. In November 2019, the Central Bank brought this to the attention of the Revenue Commissioners, which confirmed that ICF contributions totalling €33 million relating to the period 2016 to 2018 were initially misclassified as stamp duty and incorrectly transferred to the Exchequer account. Following the identification of this misclassification error, the Central Bank informed the Comptroller and Auditor General, who then performed an examination of the fund and made four recommendations to the Revenue Commissioners and the Central Bank. The recommendations have been accepted and implemented by both parties and are detailed in the report in our briefing document.

To mitigate the risk of a similar error recurring, the Revenue Commissioners have introduced a mandatory electronic pay-and-file system for both the stamp duty insurance levies and the ICF that will ensure the automated identification and allocation of stamp duty and ICF receipts and the timely transfer of ICF contributions to the Central Bank.

On the matter of the grants of credit and Exchequer payments, members will be aware from the Comptroller and Auditor General's report of the respective roles of the Central Bank and the Department of Finance in relation to the Central Fund of the Exchequer. The Central Bank takes its responsibilities with regard to the operation of the Exchequer account very seriously. In this regard, it is clear that the end-to-end process between the Department and Central Bank did not prevent a breach in the grants of credit limits in October 2022, and this is a matter of sincere regret. It is important to note that at no time was the actual Exchequer account overdrawn, and there was no financial loss.

With regard to the root cause, the Department has identified two factors on its side. First, there was an oversight whereby the Department did not seek a credit from the Comptroller and Auditor General earlier in the year, after Dáil Éireann had approved all of the Revised Estimates for 2022. At the time the payment orders were submitted to the Central Bank, no check was made of the existing credit to ensure sufficient credit was available to cover the request.

From the perspective of the Central Bank, we recognise that our payments process, which involves the execution of payment orders from the Department, and our reconciliation process, by which we update the grant of credit against executed payments at the end of the day, were not sufficiently integrated to prevent this breach from occurring. The Department and the Central Bank have worked individually and collectively to address the issue and introduce additional controls to prevent a recurrence. The Department has introduced changes and enhancements in relation to the monitoring and tracking of grants of credit together with internal systems improvements.

The Central Bank is now updating the grants of credit balance intraday, or in real time, and performing real-time checks before payment orders are executed, reconciled against both the grants of credit balance figures provided from the Department of Finance and our own independently calculated figures - that is, a four eyes check. This effectively integrates two previously separate processes, namely, the reconciliation process and payment process, strengthening controls in advance of executing time-critical payments.

The Central Bank and the Department will revise the service level agreement in the coming weeks once we are satisfied the new process is working effectively.

In respect of the ICF, the Central Bank and the Revenue Commissioners are confident that the measures taken are sufficient to ensure the issues identified will not recur and that the fund will function more effectively in future. In respect of the Central Fund of the Exchequer, the Central Bank and the Department of Finance are confident that the changes introduced ensure that the process is significantly stronger and robust enough to avoid a recurrence of the October incident.

I thank members for their time. We will be happy to take their questions.