Central Bank plan to protect investors

THE CENTRAL Bank has unveiled plans to strengthen how it protects client assets after a new report into its handling of failed Dublin investment firm Custom House Capital criticised its inspections of the firm, finding that the regulator lacked sufficient powers.

The report, by two of the Central Bank’s risk advisers, found that the regulator would have preferred to change senior management at the firm but only had the power to either withdraw its authorisation or put the company into liquidation. Both options were likely to lead to “greater potential loss to customers,” they said.

“The Central Bank was therefore unable to intervene effectively in the management of the business and was hindered by the absence of the ability to appoint an administrator,” their report said.

The Central Bank was criticised by investors for failing to do more after it found irregularities in 2009. It emerged last year that €56 million in client funds had been deliberately and systematically misused to cover shortfalls in property investments in what was described “as a sort of Irish Ponzi scheme” by a High Court judge.

The court appointed Central Bank inspectors to the firm, run by directors Harry Cassidy and John Mulholland, after discrepancies in client accounts were discovered last year during the transfer of company’s assets to a new firm.

A liquidator was appointed to the company in October 2011.

The risk advisers said the Central Bank should be given powers to apply to the High Court for the appointment of an administrator to take control of a firm where it had concerns about client assets.

Matthew Elderfield, deputy governor of the Central Bank, said it planned to strengthen client asset protection with “tougher supervision, better rules, stronger audits, assumption of new powers and more accountability for firms’ directors.”

The Central Bank has asked for these provisions to be included in the new Central Bank (Supervisions and Enforcement) Bill 2011.

Risk advisers Andrea Pack and James Bagge also recommended that the Central Bank set up a team dedicated to supervising client assets and that it force firms to appoint a director or senior manager, pre-approved by the regulator, responsible for client assets.

External audit reports should be replaced by an annual “client asset examination”, the report said, drawn from a new document to be held by firms called a “client assets management plan” that would force them to set out arrangements for protecting client assets.

The report found that 284 breaches of client asset requirements were found by the Central Bank in 43 inspections up to September 2011, while auditors found just 110 breaches in 178 audits.

The report recommends that, where firms are authorised to hold client funds, a cap of 10 per cent on turnover on any unregulated business, such as property investments, should be imposed.

'RIGID AND INFLEXIBLE' CENTRAL BANK INSPECTION FAILED TO SEE BIGGER PICTURE

The Central Bank's inspection of Custom House Capital (CHC) in 2009 was criticised for being "too rigid and inflexible" by two of the regulator's risk advisers.

Their report said a routine inspection in 2007 found "significant breaches" of client money regulations at the firm. The Central Bank found that the firm was not performing daily calculations on accounts and that clients had not been told that their money was held in pooled accounts. There were also recurring unreconciled items on the bank reconciliations of which the Central Bank had not been notified. Some of these were very significant, including one for €4 million outstanding for more than a year.

The firm was inspected again in March 2009, after information was received on potential misappropriation of client assets and this time serious issues were uncovered.

Through 2009 and 2010, the Central Bank forced the firm to restore money due to client accounts so property investments could be realised in an orderly way and to improve its weak solvency position until the firm could be sold and management replaced.

The Central Bank's fear was that withdrawing authorisation or liquidation, the only options available, could create bigger losses for clients.

The risk advisers criticised the March 2009 inspection because the separate divisions of the Central Bank focused on discreet rule breaches and activities particular to their own responsibilities. It "seemed to be too rigid and inflexible to develop a more holistic view of what was going on at CHC", they said.

SIMON CARSWELL