Deirdre Clune (Cork South Central, Fine Gael)

The central plank of the Central Bank Reform Bill 2010 is to replace the Central Bank and the Financial Services Authority with a new Central Bank Commission. That commission will consist of the Governor of the Central Bank, the head of the Central Bank, the head of financial regulation, the Secretary General of the Department of Finance and six to eight other members who will be appointed by the Minister.

My party's spokesperson on the subject, Deputy Richard Bruton, has already outlined his concerns on those proposals. The European Central Bank has expressed concerns about the extent of ministerial influence. The Secretary General is an ex officio member, and the head of the Central Bank and the head of financial regulation are to be appointed with the Minister's consent. The six to eight members will also be appointed by the Minister. The ECB stated that the Minister's influence over the Central Bank supervisory role will be increased and its operational independence endangered.

This House has debated the need for openness and transparency in appointments, including those made by Ministers to relevant boards. The structures the Bill sets out are important for the future regulation and control of banking and credit institutions. It is an appropriate area in which to ensure we have transparent structures in place.

The Central Bank Reform Bill 2010 is the first of three Bills. It will be followed by a Bill to enhance our regulatory functions and an overarching consolidation Bill.

It is important that we look back, as many Members have, at where things went wrong and how we can ensure we do not have such lax regulation - to put it mildly - in future. The Comptroller and Auditor General produced a report last December on the financial crisis and on regulation. It quoted from the Financial Regulator's 2008 annual report, which referred to the factors that increased demand in the property sector. One factor was the strong economic growth from 1995 to 2004, during which our GDP increased by 93%, which was four times the average increase in GDP throughout the EU during the same period. The age structure of our population was a contributing factor - the percentage of people aged 25 to 54 increased from 35% in 1990 to 45% in 2005. Interest rates in the EU were low at that time and the large number of property-based tax incentives - such as tax relief on mortgage interest and tax incentives for property investment - contributed to the increased demand for property. The demand for housing supply continued to fuel the property market during that time.

The Financial Regulator was asked by the Comptroller and Auditor General what steps he had taken between 2004 and 2007 in response to the accelerating credit growth. He said that in 2004, consumers were warned about the risk of debt, which included warnings about refinancing personal debts into mortgages. In October 2005, new requirements were introduced for credit loss provisioning, including requirements for credit risk management. In May 2006, capital requirements were increased on high loan-to-value mortgages. In June 2006, new liquidity measures were introduced and they became effective in July 2007. In August 2006, the consumer protection code was introduced to tackle aggressive lending. In January 2007, discretions available to the Financial Regulator under the capital requirements directive relating to property were exercised by increasing the risk rating to 150% from 100% on exposure to speculative real estate.

Did the steps taken by the Financial Regulator succeed in dampening expectations or reducing the demand for capital given that banks ensured double-digit returns in their profits in the time in question? Did it ensure banks met their financial commitments from their deposit base rather than through the purchase of bonds? Did it ensure consumers would not be given 100% mortgages in an inflated housing market and that credit would not be obtained so easily? Did it ensure banks would take greater account of their exposure to the property market? I do not believe so. We have seen all the signs of lax regulation. Professor Honohan stated growth of 20% on the balance sheet of any bank should act as a trigger, yet Anglo Irish Bank had annual growth of 36% during eight of the nine years in question. Foreign-owned operators in the Irish banking sector pursued aggressive growth levels.

A cause of concern that should have been addressed was the high loan-to-value ratio with regard to mortgages. In 2005 and 2006, two thirds of mortgages for first-time buyers were 90% mortgages while one third of applicants got 100% mortgages. There was a negligible regulatory response in this period. Against this background, it was probably refreshing and reassuring to have heard the new regulator, Mr. Matthew Elderfield, say in his first public statement that we need to undertake a fundamental overhaul of our regulatory model for financial services in Ireland, including the setting up of a dedicated division to deal with enforcement with special investigative units established for the first time. We all welcome this and other statements made by the Financial Regulator and we look forward to its new regime.

There already has been a change to the regulatory approach to the covered institutions. It involves a more on-site presence at each institution, increased reporting requirements for the institutions, improved reviewing and security regarding management information, a focus on the governance structures and processes and the establishment of a dedicated department within the Office of the Financial Regulator for supervising the covered institutions. This will require finance, staff and more resources. Mr. Elderfield has raised this matter in public. Tomorrow he is due before the Committee of Public Accounts and I am sure he will be addressing this matter at that forum also.

The OECD agrees there were two main concerns over regulation and supervision. It pointed to the issues associated with Anglo Irish Bank in respect of which the threat of enforcement was weak. Regulatory structures should have been in place. We need more structures because there was a culture of non-regulation and an expectation that the regulator would not visit financial institutions. Enforcement was weak and there was no threat thereof in the period in question.

We have heard criticism of the light-touch regulation that was in place. It was a chosen policy of the Government. Guidelines were recommended rather than rules enforced, and this had major negative consequences. There was a failure to enforce strict rules and we are all dealing with the fallout now.

The Financial Regulator issued a consultation paper on corporate governance, which is to be welcomed. It is aimed at addressing the inadequate oversight of the financial institutions, which is widely regarded as a cause of the financial crisis. The paper requires that the number of directorships each director can hold be limited. Directors spread themselves about and were not in a position to give their full attention to each demanding, onerous position that they held. Further proposals are that membership of the board be reviewed every three years, that there be clear separation of the roles of chairman and CEO and that an individual who has been a CEO, director or senior manager of an institution during the previous five years be precluded from becoming chairman of that institution. We all know where these recommendations have come from. It is important that they be acted upon.

The role of the non-executive director needs to be defined clearly and minimum requirements for board committees should be set out. The purpose of these recommendations are to prevent a recurrence of the circumstances that obtained when boards of some financial institutions acted as nothing other than a rubber stamp for decisions taken by chairmen or CEOs, who ran the institutions as personal fiefdoms.

Enforcement is very important. New legislation designed to ensure a new system of regulation must have enforcement at its heart. There is no point in having an improved set of rules if we are to undermine them through inadequate enforcement.

Many public representatives have received representations from constituents who are having difficulties with their banks. They are running businesses and some of them have been in business for a long time and have been working with what they perceive to be performing loans. Now, however, they find their banks are, to quote a constituent of mine, "putting the squeeze on them". The constituent had a performing loan and he was working to repay it within the guidelines set down by the bank but the terms and conditions of the loan are now changing and the bank is demanding an increased return and shortening the term of the loan without prior notification or affording an opportunity for consultation. This practice is affecting small and medium-sized businesses throughout the country.

Although a credit review process has been established, it applies only to new loans. What structures are in place for small businesses that find themselves at the mercy of their banks? These businesses have a long track record but find the terms and conditions of their overdrafts are changing. I was speaking to an individual recently who could not obtain a €10,000 advance from the bank to pay his lease although he was always given it in previous years. The individual is running a successful retail unit that will continue to trade because there is a demand for it, but because he could not obtain funding he had to let go a member of staff. Stories such as this are real and can be heard throughout the country. They are very serious because the employers affected comprise the lifeblood of the economy. Without them, towns and cities would not be functioning. This is what is happening. These are the real stories. There are very serious stories throughout the country. These people are employers. They are the lifeblood of our economy. If they do not employ people, our towns and cities will not function. I am using this opportunity to raise this matter again. It will continue to be raised. It is a serious concern for people who are at the mercy of their banks. The terms and conditions of loans can be changed at will without consultation.

I would like to make a point about the future of banking in this country. Six weeks ago, in late March, Mr. Larry Broderick, who is the general secretary of the Irish Bank Officials Association, expressed his view that members of his union are facing the future with trepidation. The recent loss of 900 jobs in Quinn Direct shows how vulnerable large-scale financial institutions are at present. It is obvious that changes will be made to the whole banking structure. Many people are fearful about losing their jobs.

Another matter that is addressed is the credit union movement. This legislation will have an impact on credit unions. The Irish League of Credit Unions has welcomed the amendment to section 35 of the Bill. It is important to say that smaller credit unions have some difficulty with the definition of "impaired loan" in this Bill. This point has been made to me by the manager of a local credit union, who has been working in the credit union for 25 years. Members of credit unions can miss payments because they are on holidays, or over the Christmas period. They always make up the balance over the course of the year. Under the terms of this legislation, such loans will be considered to be impaired. There is some concern within the credit union movement about this issue. Members of the Health Services Staffs Credit Union, for example, have had to renegotiate their loans on foot of the recent pay cut and the reduction resulting from the pension levy. Are such loans now deemed to be impaired? I understand the Minister for Finance and officials in his Department are engaged in ongoing discussions in this regard. I am sure the matter will be explored further on Committee Stage.

I had wanted to raise the whole issue of auditors and auditing. Throughout this period, auditors were looking at the banks' books. We need to look at the whole situation. There is a body of opinion that believes auditors are too close to their employees - the credit institutions. Auditors are appointed by the boards of such institutions to audit their yearly accounts. Perhaps a degree of cosiness sets in over the years. Do we need to introduce changes in this area? Should auditors be rotated? Should they be approved by the Financial Regulator? Such changes should be considered if we are to renew confidence in our banking sector and ensure that what happened before is not repeated. I accept that they would have cost implications for the credit unions, but we are familiar with the cost implications for the taxpayer arising from the current approach. I refer to the fall-out we are dealing with today.

I look forward to debating the various amendments that will be proposed on Committee Stage.

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