Yesterday’s report by the Financial Services Consultative Consumer Panel draws a direct connection between the “significant amounts of money” lost by most consumers and “the inadequate functioning of the present financial regulatory structures”.
While welcoming the Government’s commitment to reform the Central Bank, it says it is “concerned about where the consumer fits into the new framework”.
The panel, which has the job of monitoring the performance of the Financial Regulator, has called for an overhaul of financial regulation both here and overseas.
“Changes must be affected at both national and European level and the change is as much about a transformation in the willingness of regulators to act as it is about any formal structures,” it notes.
The report also criticises the “deficient” response of the regulator to threats to consumers, including the domestic property bubble.
“We are unclear as to why the regulator did not move to dampen the bubble at an earlier stage, for instance by requiring banks to set aside more capital for riskier products,” the report said, highlighting products such as interest-only loans.
“This shows the indispensable need to scrutinise new products in financial markets”. “It is not good enough for the Financial Regulator to ignore products or players it feels are not within its remit.”
For instance, sub-prime lending was initially not regulated by the Financial Regulator because the lenders involved were not deposit-taking institutions, it explained.
Any wrongdoing by the regulator should be investigated by an external authority, it advised.
The panel also recommended that the next chief executive of the Financial Regulator should be a person with a strong track record of “independent thinking” and “facing down vested interests”. The selectors should draw on a wide range of candidates, including those from the private sector and from overseas.
In January, the Regulator’s chief executive, Pat Neary, retired early over the handling of the organisation’s investigation into the secret directors’ loans scandal at Anglo Irish Bank.
In addition, senior staff should be recruited from a wide pool – rather than just the public sector – in order to ensure the independence of the Regulator.
The report stressed the need for those people involved in the regulatory process to have an understanding of sophisticated financial products. “The Regulator should not need to consult external experts before taking action to deal with problems arising from such products,” it said.
A special unit should be established within the Regulator to scrutinise all new financial players and products entering the domestic market for “systemic risk”, it advised.
It also recommended that there should be a consumer expert on the boards of both the Regulator and the Central Bank.
Furthermore retail banks should be reorganised to resemble the traditional building society model, and should be regulated to prevent them from becoming “closeted investment banks”, it said.
Responding to the report, the Regulator said: “At present we are actively engaged in intensifying and reorganising our approach to regulation. We agree it is crucial the level of consumer protection that has been established is maintained and further developed . . . ”
The Consumer Panel: what it does
The Financial Services Consultative Consumer Panel is responsible for monitoring and commenting on the performance of the Financial Regulator. The panel’s members are appointed by the Minister for Finance. The members consist of consumers of financial services; consumer advocates and activists; industry experts; and individuals from the banking, academic and media communities. A sub-group of the panel was involved in the preparation of yesterday’s report on the current financial regulatory framework, and its members included Seán O’Sullivan, Kathleen Barrington, John Maher, Prof Noel Mulcahy and Raymond O’Rourke.
