Bankers were helping draft regulations as crisis hit

 

THE BANKING and financial sectors played a central role in an expert group that was preparing light-touch financial regulation laws for the Government when the banking crisis hit in late 2008.

The Advisory Forum on Financial Legislation was set up by Taoiseach Brian Cowen when he was minister for finance and held seven meetings between the autumn of 2007 and November 2008. It was quietly disbanded during 2009 at a time when light-touch, or principles-based, regulation was being increasingly blamed for contributing to Ireland’s regulatory failures.

The forum had a brief to draft Heads of the Bill for a modernised financial regulation scheme that would consolidate 45 Acts and over 150 pieces of secondary legislation. The forum was chaired by Pádraig Ó Ríordáin, the managing partner of Arthur Cox solicitors, and the membership of the forum, as well as its drafting subgroups, was dominated by the financial industry and the private sector.

It is rare for private sector interests to be involved in the drafting of legislation: in this instance the Government asked the financial industry to become involved in helping draft legislation that would have the effect of regulating the industry itself in future.

In a private address to the forum in January 2008, Mr Cowen said he had established it with full Government approval to ensure full “involvement of the wider community of interests”.

The forum’s task was to prepare for “cross-sectoral principles-led regulation of the financial sector” within 12 months.

The minutes of its meetings, as well as internal Department of Finance documents, show that the forum adopted the light-touch approach of then financial regulator Pat Neary. The records were released to The Irish Times under the Freedom of Information Act.

Nine of its 23 members were drawn from the banking and finance sectors, compared to only six members from government departments.

Four members represented consumer interests; one member was a trade union representative, one member represented credit unions; and one member was from the community sector.

The subgroups charged with drafting the proposed legislation were also dominated by the private sector. An internal Finance memo from January 2007 said that its expectation was that the private sector would provide expert personnel whose pay would be resourced by the industry itself.

Of the 19 members of the drafting subgroups, only five came from the government side: two from the Financial Regulator’s office; and three from Finance. The others were lawyers and regulatory experts drawn from private law firms and banks including Merrill Lynch, Arthur Cox, AL Goodbody, McCann Fitzgerald, Educational Building Society, Bank of Ireland, Mason, Hayes and Curran, Davy and the Irish Stock Exchange.

A Finance position paper from March 2007 stated: “Lawyers from the important sectors of banking, insurance, funds and investment sectors would be closely involved in the steering group.”

In several e-mails and Powerpoint presentations, department officials made it clear that the structure of the Bill should be principles-based. This approach sets out principles to be followed but leaves the responsibility to the financial institution to decide on how it can best comply.

Rules-based regulation involves setting out detailed rules which must be followed and is backed up by regular inspection.

In November 2007, it was stated at the forum that a risk-based approach should be integral. However, by September 2008 with uncertainty mounting in global finance, Mr Ó Ríordáin said that forum might need to reflect on principles-based regulation. In a review of progress, Mr Ó Ríordáin said that work would lead to an easier-to-understand system that would weed out historical anomalies and create a lot of efficiencies. He added the project was “still at the big picture stage”.

In November, the forum produced an outline framework of the possible structure of the Bill, but one that was still subject to approval.

The forum did not meet during 2009. In February, the Minister for Finance said it expected its first report in the coming months.

However, in December 2009, in a parliamentary answer to Labour Party finance spokeswoman Joan Burton, Mr Lenihan confirmed that the forum was in abeyance and that its report had been deferred.