Elderfield plans to replace light touch with assertive approach

REGULATION: Regulator hopes new legislation will enable office to exercise greater powers

REGULATION:Regulator hopes new legislation will enable office to exercise greater powers

IF THERE is any comfort to be drawn from the two banking reports published this week, it is that the chaos, damage and failures they describe are all in the past. Since then, a new regulatory sheriff has rode into town and a new scheme of regulation is being established. The goal, above all others, is to ensure that the events of the past few years can never be repeated.

Matthew Elderfield, as head of financial regulation, is the hinge on which the success of the new system will hang. His outlook on the financial world is one where the principles of regulation mix fairly with its rules - the light touches that Ireland was so proud in the past are no longer in vogue.

The framework in which Elderfield will eventually work is not yet complete, with the first of three pieces of legislation establishing a new Central Bank Commission still at a fairly early stage. The Central Bank Reform Bill allows for the dissolution of the Irish Financial Regulatory Authority as it exists now and places most of its powers with a new Central Bank Commission.

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Forthcoming legislation will outline the specific powers to be exercised by this commission, but it is already fairly clear that they will take a certain tone.

Elderfield, who will have the strongest influence on its content, has spoken repeatedly of the need to beef up the Irish approach to regulation, in the wake of the banking crisis.

Since taking up the job in January, he has made his name for sending Quinn Insurance into administration, but that is only a small part of the picture.

He has, for example, begun to interview candidates for top jobs in financial institutions, to test their suitability for positions that have been shown to hold importance for the economy as a whole.

He has also proposed strict new rules to curb lending by banks and building societies to their directors, senior managers, related parties and shareholders. The €2.8 billion debt owed to Anglo Irish by Seán Quinn could, for example, never happen again. Nor could the up to €122 million in concealed loans to Seán FitzPatrick at the same institution.

Loan exposures to particular sectors (eg, construction) will also be monitored, while some institutions can expect a more "intrusive" approach than others.

Staff numbers in Elderfield's office are also being boosted, with most of his public appearances including a call for greater resources.

"Ireland is competing as a premier financial services centre. But you can't referee a Premier League match with one linesman and no red card in your pocket," he told a gathering some months ago. It is an amusing image, but one that becomes less so in light of the regulatory system painted by Dr Patrick Honohan, Central Bank Governor, in his report into the banking crisis, published this week. Honohan describes a "deferential" culture, where regulators did not see a need to second guess those running the banks.

"Voluntary compliance was the preferred enforcement strategy," Honohan wrote. And from the perspective of the financial institutions, he described a "seeming lack of a credible threat of action by the Financial Regulator". Thus the difficulties came with enforcement - something the Financial Regulator saw, according to Honohan, largely as a "problem-solving exercise" between the regulator and the affected institution.

This "walk softly and carry no stick" approach was inherited by the old Financial Regulator from its parent, the Central Bank. The nature of the relationship between the two was the product of a decision by the then Fianna Fáil/ Progressive Democrat government in 2001. By that stage, a two-year regulatory battle had been waged, as a new system of regulation, cleansed of Dirt and Ansbacher scandals, was sought and agreement on its nature could not be found.

On one side was Mary Harney, then tánaiste and minister for enterprise, trade and employment, who wanted to strip the Central Bank of its regulatory powers.

Charlie McCreevy, then minister for finance, favoured a new regulator, but wanted it to be placed within a reorganised Central Bank. In the end, and after much delay and a strong lobbying campaign by the Central Bank, the McCreevy vision won out and the Central Bank of Ireland and Financial Services Authority was established.

The idea was that the new structure would have two "pillars" - one dealing with monetary policy and the other handling regulation. This latter body, the Irish Financial Services Regulatory Authority, emerges particularly badly from the Honohan report.

He outlined a number of basic actions, from banning mortgages exceeding certain loan-to-value levels to imposing a ceiling on credit growth rates in some institutions, which could have helped stave off the ultimate crisis. Acknowledging that his suggestions are informed by hindsight, Honohan nonetheless exposed the flimsy nature of the "light-touch" regulatory agenda pursued in the Republic at the time.

One aspect of this was the Central Bank's role as promoter and developer of financial services in the State, a role which can now be seen to sit very uneasily with a strong regulatory position. This duty will be removed from the new Central Bank Commission, with the Department of Finance saying it was "inconsistent with the enhanced regulatory focus" of the new regime.

Another key change brings the creation of two new posts: a head of financial regulation and a head of central banking. The previously eminent role of consumer director within the regulator is being abolished, with responsibility for consumer information and eduction being transferred to the National Consumer Agency.

The board of the Central Bank is also set to be overhauled, with some members already signalling their desire to step down.

Until the firm parameters of the new regulatory universe are established, Elderfield must try to force change from within the old structure. His actions so far demonstrate an ability to achieve his goals even without the resources he craves.

The regulator has 382 staff, up from 360 at the start of the year. He wants to bring this up to about 700, with a particular focus on "enforcement teams". A "high-impact" firm could require supervision from up to 10 regulatory staff, according to Elderfield. This compares to two people being responsible for AIB and Irish Life & Permanent in 2005 - it should have been three, but there was a vacancy - and three for Anglo Irish Bank and Bank of Ireland at the same time.

In his first public speech earlier this year, Elderfield described plans for an "assertive risk-based regulation underpinned by a credible threat of enforcement".

Thus far, his words and actions have demonstrated exactly this but, as every good regulator knows, a new test always lies ahead.