Unenviable task in taming the banks


FRIDAY INTERVIEW - Matthew Elderfield Financial RegulatorIT IS 11 weeks since Matthew Elderfield swapped regulator jobs leaving sunny Bermuda behind for snowy Dublin to take up the post of head of financial regulation at the new Central Bank of Ireland.

He must rebuild the financial regulator and its battered reputation, oversee the recapitalisation of the banks, helping to wean them off the funding support of Government guarantees, match Ireland’s regulatory changes with the raft of measures coming internationally, and strike a measured balance in his approach to maintain a competitive position for the Irish financial services sector at a global level.

He faces all this on lower pay – he is receiving €340,000 a year compared compared to a salary of $730,000 (€533,000) in Bermuda. So why did he take the job?

“I was approached about it. I read myself in about the Irish situation. The situation looked very tough but frankly that made it more attractive to me,” he said.

The Irish banking crisis presented a challenge and there was “an opportunity to rebuild the regulator”, he said. International changes facing regulators, particularly within the EU and the euro zone, as well as the prospect of living in Dublin appealed to him.

He was also comfortable with the pay cut. “It is more about an interesting job,” he said.

What has surprised him most was how poorly resourced the regulator was. That key ratio of regulators to regulated firms was low, particularly at what he calls “high-impact firms”, the systemically important banks at the epicentre of the country’s financial crisis.

Since joining, he has consulted the heads and deputy heads of departments and been startled at staffing levels. “I walked around and asked people: ‘Are you the supervisor for this firm? Who else is working on the team?’ And they would say: ‘I am the only person.’”

In the US there are 30 to 40 regulators monitoring the big banks, he said, compared with at least 10 staff at the Financial Services Authority (FSA), the UK regulator where he worked for eight years.

“It is clear that we have a long way to go to get to the benchmark internationally,” he said.

To help fill the gaps, Elderfield plans to bring staffing levels up to 520 this year, an increase of about 160 on last year, and add a further 200 staff over the next two years.

He believes the so-called “high-impact” firms may each require eight to 10 supervisors, but the final figure will be guided by further analysis of the regulated firms.

“You need to be able to man-mark the biggest financial firms – you need to be able to match them in skills, expertise,” he said.

The absence of a large enforcement unit and special investigative teams also surprised Elderfield, with these roles being filled by the day-to-day supervisors of firms.

“If you are a supervisor and an enforcement action comes up, you have this invidious choice of continuing with your day job of supervision and stopping, and starting up an enforcement case. Enforcement cases are very time consuming, require a lot of analysis and if you are going to take action against individuals, it can take years and be highly contested.”

Elderfield is looking to fill a new role as head of enforcement at the rank of assistant director general.

He believes the enforcement team will need about 60 staff including forensic accountants and former gardaí, in addition to a prosecuting team, but will leave the final number of staff required for this section up to its new chief.

“Bolstering your powers, getting the resources in place, being more pointed about actions against individuals – that will have a beneficial effect in terms of raising standards in the firms.”

Elderfield believes the problem at the heart of the crisis was the focus on principles-based regulation, which “has become codeword for light-touch regulation”. There was “too much willingness to defer to senior management” at financial institutions and there wasn’t “a good escalation process” of reporting problems up to the top level with the regulator.

However, he believes there needs to be a mix of both rules and principles to guide regulation. “You need principles as well as rules because you can’t write a rule for every single situation. Your rule book grows and grows if you try to write a rule for every mis-selling scandal,” he said.

Elderfield was also startled at the deficiencies in the regulator’s powers. He was surprised the fitness and probity checks were on a non-statutory basis, for example.

Since taking charge, Elderfield has ordered his staff to interview candidates for top jobs at “high-impact” firm to make sure they are competent for the job they are being hired to do. Where necessary, the regulator will adjust the size of a job and change reporting lines “so we are more happy with the corporate governance”.

Elderfield believes fitness and probity checks should not stop there. The regulator should be able to remove staff from their jobs at the financial institutions.

“I would like to see an ability to remove people from posts if there are clear grounds that they are no longer fit and proper,” he said.

He also believes the regulator’s top penalty of €5 million “is not a strong enough level of deterrent”.

The Government plans to introduce legislation in the coming weeks establishing the new Central Bank of Ireland, which will re-house the Central Bank and Financial Regulator under the one board and governor. Elderfield is encouraged that the second piece of legislation, to be introduced in the latter half of this year, will bolster the regulator’s powers, guided by his recommendations.

“You want to have a broad range of powers. You want to have an escalation ladder that you can move through and not go straight to a nuclear level,” he said.

For example, the regulator would seek to adjust capital levels for banks depending on the risks they take on, restrict their activities if necessary and cap pay in certain circumstances, he said.

To prevent an over-exposure of lending in certain areas, Elderfield says the regulator will seek to force banks to stop lending to a particular sector by “ratcheting up” the capital needed for that sector to “put a check or anchor on to drag any increase in lending”.

In his first public speech last week, Elderfield outlined his strategy to rebuild the regulator. This included, as an immediate priority, setting the right capital levels for the banks and drawing a line under the banking crisis.

Over the longer term, the changes will involve introducing a “risk-based” regulatory approach “backed by some steel that requires a credible threat of enforcement”, he said.

This will require a greater focus on “high-impact” firms with more supervisors being assigned to monitor them. If he isn’t happy with their commercial decisions, the regulator will engage with them but then will force their hand by threatening enforcement action.

“That willingness to be assertive, a bit pushy, a bit challenging – that’s the missing element that needs to be brought to bear.”

Elderfield noted that the regulator did not have a track record of taking cases against individuals. Changing this, he believes, would help underpin the credit threat of enforcement. “The deterrent value as a supervisor is stronger if you are able to take some cases against individuals.”

While promising action, he also believes the threat of enforcement must be balanced and companies should be given the chance to persuade the regulator about their approach. “If, at the end of the day, the problem is that the consequences of the firm’s mismanaging are devastating – as we have seen in terms of the economy, the fiscal position of the State, the impact on consumers – there has to be a bias to intervention at an earlier stage.”

The first priority will be to score risk to determine the “high-impact” firms. This system could take two to three years to build, said Elderfield. It will involve looking at the number of customers or the size of balance sheets for retail banks, for example, or gross written premiums for insurance companies.

This will help create a risk scale to determine the most important firms and the number of supervisors required for each.

The quantity of “high-impact” firms to be supervised was “not a large number” but they could include IFSC-based firms, he said. “We have to calibrate the level of intervention and be more willing to act. We need to do that in a risk-based approach and apply that test to our most risky, systemically important institutions where the consequences of them getting it wrong is more devastating.”

Parts of the IFSC may not have seen the same trouble as the domestic retail banks, said Elderfield, but its reputation was tarnished by problems elsewhere. Strengthening regulation will help parts of the IFSC, he says, while international regulatory changes such as Solvency II for insurance companies and the UCITS IV directive for fund companies will present further opportunities for Ireland.

Elderfield says the regulator will leave current high-profile investigations, which include the inquiries into Anglo Irish Bank, to the Garda and the Office of the Director of Corporate Enforcement (ODCE), giving them time to investigate as criminal actions are “preferable” to civil actions. “The sanctions are stronger, the offences are graver – it makes sense to let the guards and the ODCE have the first shot.”

Elderfield is getting to show off his “get tough” approach for the first time by trying to clear the “backlog” of overcharging cases. Last Friday the regulator wrote to the culprits, warning them to set deadlines for reimbursements to customers or else face action.

There has been “reasonable dialogue” with the companies, said Elderfield, but it was “time to put our foot down”. “Overcharging is a problem area and it has been persisting too long,” he said. “There could be more effort and focus to act faster – that has surprised me . . . Frankly no matter how complex an overcharging case is there is an imperative to get on with it. The consumer protection code says they have to handle this in a speedy manner so it’s time to act speedily,” he said.

While last week’s speech allowed Elderfield to set out his strategy for the regulator, he faces a tough task to follow this with immediate and meaningful action.

“I am under no illusion about the size of the job,” he said, “but I think we just have to pragmatically break it down, prioritise it and work hard to get it done.”


Name:Matthew Elderfield


Family:Married, no children

Education:Degrees in foreign service from Georgetown University and international relations from Cambridge

Career:Worked at the International Swaps and Derivatives Association, the London Investment Banking Association, the British Bankers Association and Washington DC-based consultancy, the Institute for Strategy Development before joining the UK Financial Services Authority. From 2007 to 2009 he headed up Bermudas financial regulator.

Hobbies:Cycling, Leeds United, music

Something that might surprise:A big fan of indie music and a heavy iTunes user, his most recent favourite gig was the Friendly Fires concert in London last July.

Another thing that might surprise:Could only last eight weeks on the small island of Bermuda before suffering from “island fever” and having to travel abroad.