New regulator's independence
IN HIS first public speech as Financial Regulator last month, Matthew Elderfield promised a much tougher approach to the supervision of banking and financial matters. Following the destruction of living standards through reckless lending and borrowing, it was the kind of language taxpayers wanted to hear. Evidence of a new approach came quickly. Provisional administrators were appointed to Quinn Insurance last week because of solvency issues. Uproar followed as the company fought back by orchestrating street protests and political action designed to reverse the decision.
Mr Elderfield has been painted as the bad guy in all of this, jeopardising more than 5,000 jobs through unnecessary and precipitate action and by making one of the worst blunders in Irish corporate history. The reality is very different. The regulator has acted to protect consumer interests. Seán Quinn has been the architect of his own difficulties. It was his irresponsible behaviour and a series of disastrous investments that brought the Quinn Group to the brink of ruin. His actions echoed those of some other high-flyers who have since left the jurisdiction. But Mr Quinn fights on, invoking Cabinet, party political and local support in an attempt to retain control of the companies he built up.
It is the statutory duty of a financial regulator to monitor the soundness of individual institutions and to protect consumer interests. In doing that, he relies on co-operation from the companies concerned. But Quinn Insurance failed to notify the regulator about certain loan guarantees that had effectively wiped out its solvency cushion. It reflected a cavalier approach to corporate affairs that should be confined to the past. The discovery effectively led to a High Court application and the appointment of administrators.
Failure by Mr Elderfield’s predecessor to ensure effective supervision has filled many thousands of column inches in newspapers. It would be perverse, in such circumstances, to complain when higher standards are being demanded. The regulator is required by law to ensure the market for financial products is fair and safe. And, if the office is to be relevant, assertive risk-based regulation must be underpinned by a credible threat of enforcement.
What is now at issue is that “credible threat of enforcement”. Political pressure to revisit the situation has become intense in recent days, driven by the possibility of significant job losses. Government and Opposition politicians were granted a hearing by the regulator, even as Mr Elderfield stressed his independence. That was a useful political public relations exercise, given the jobs situation. But the bigger picture involves the credibility of Irish financial institutions, the protection of consumers and the establishment of higher standards. Light-touch financial regulation was a disaster for the economy. The consequences will be felt for years as taxpayers fund the operations of Nama and a recapitalisation of banks. A new regulatory regime independent of vested – and political – interests is emerging. It would be grossly hypocritical not to support it.