Regulatory reform

NO AREA of Irish business life will be more thoroughly reformed and renewed by year-end than the financial services sector. By then the Oireachtas should have passed three Bills to establish a system of financial regulation that can inspire public confidence. One stark measure of the failure of the previous regulatory system is the huge cost of recapitalising the State’s major banks and Irish Nationwide. Even with a better regulatory system, with higher standards of regulation more rigorously enforced, Ireland could not have escaped the fallout from the global financial crisis.

But the cost might well have been much less. It is likely the excessive lending practices of banks and reckless borrowing by property developers would have been curtailed. And for taxpayers, the cost of rescuing the banking system would be much reduced.

The first of these legislative measures, the Central Bank Reform Bill, is under consideration by the Dáil. It gives Financial Regulator Matthew Elderfield statutory powers to ensure the fitness and probity of those who work in or who may be appointed to key positions in financial institutions. Minister for Finance Brian Lenihan, in introducing the legislation, noted “the devastating effects of irresponsible and incompetent behaviour at senior levels in financial institutions” – a clear reference to Anglo Irish Bank and Irish Nationwide.

Mr Elderfield, who on Tuesday published a consultation paper on the regulatory framework for corporate governance for financial institutions, has outlined some of the major changes envisaged. He proposes to impose stricter requirements on the boards of banks and insurance companies. These would involve a clear separation of the roles of chairman and chief executive and require a minimum of five directors, of whom a majority must be non-executive. In addition, one person could not hold directorships in more than three financial institutions. Companies would be required also to review their board membership every three years.

These changes will be implemented later this year and will involve Mr Elderfield adopting a tougher and more assertive approach to financial regulation, supported by a much larger staff. The robust model of oversight of the banking and financial sector that he now proposes will be underpinned, as he has stated, “by the credible threat of enforcement”. Past failures of corporate governance have come at great financial cost to taxpayers and shareholders and were greatly facilitated by lax regulation. Higher standards in high places cannot come too soon.