The new Head of Financial Regulation, Matthew Elderfield, has said there needs to be “assertive risk-based regulation underpinned by the credible threat of enforcement” in a wide-ranging speech on plans to overhaul financial supervision in Ireland.
In his first public speech since taking up the job last January, Mr Elderfield outlined his plans to overhaul financial regulation, strengthen the banking system and continue to protect consumers in a landmark and wide-ranging address.
The former financial regulator of Bermuda told a lunch hosted by the Leinster Society of Chartered Accountants he planned to set up a dedicated division to deal with enforcement, establishing special investigative units for the first time.
The regulator needed to increase its workforce substantially, he said, and new legislation will be informed by “an assessment of the gaps in our current powers”.
“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 said.
Mr Elderfield said the regulator’s immediate priority was to complete its work on the recapitalisation of the banking sector.
"A robust recapitalisation exercise will ensure that Ireland’s banks start this process in a stronger position and with a better funding outlook,” he said.
The regulator was carrying out stress tests on the banks’ remaining loan books after the transfer of loans to the National Asset Management Agency (Nama) to determine “a prudent target capital requirement” that is informed by international standards.
It would take “some time” for the banks to rebalance the banks’ funding positions and exit the Government’s funding support measures. “Appropriate transitional arrangements will therefore be needed before the new liquidity framework comes into force,” he said.
In a reference to the banks’ heavy exposure to property development, Mr Elderfield said new regulations would include measures to prevent “future excesses of concentrated lending against individual sectors by developing tougher standards for concentrated exposures”.
There had been “fundamental failings in corporate governance”, he said, and the regulator would introduce proposals for more stringent fitness and probity requirements and guidelines on pay in the financial sector and risk-taking.
The regulator also plans to carry out a review to check whether banks are complying with the 12-month moratorium on taking legal action against home owners who are in arrears on their mortgages.
Mr Elderfield said there needed to be “a judicious mix” of rules-based and principles-based regulation “rather than swings between the extreme”. The biggest and riskiest financial firms needed to manage themselves better and their management needed to be more accountable for their actions, he said.
A risk-based approach would allow the regulator to “calibrate” day-to-day supervision of companies depending on the risk profile of the firms and sectors monitored. The regulator would not have “a one-size fits all approach” but supervision would be balanced and proportionate depending on the risk of the sector or firm.
The risk-based approach also to regulation needed to be assertive, he said.
“Risk-based supervision is not just about identifying risk and pointing it out to a firm’s senior management to sort as they think best,” he said. “Our risk-based approach must insist that risks are not only identified but are also managed effectively.”
“High-impact firms and those with a poor track record should not expect to receive the benefit of the doubt from me or my staff when the best approach to addressing a risk is a point of contention between us,” he said.
Mr Elderfield said that the regulator would maintain an open dialogue with the senior management of financial companies. However, if the regulator was unconvinced by management’s plans “we will be prepared to substitute our prudential judgement for their commercial one and say: Just do it.”
“We don’t need to become an enforcement-led regulator who shoots first and asks questions later,” he said. “But both financial firms and those that lead them need to be held much more accountable for their actions than has happened in the past, and be subject to tougher sanctions.”