Yesterday's IFSRA Final Report into the AIB overcharging has a consumer focus that will be widely welcomed, writes Ray Kinsella.
In its Final Report on AIB Investigations, published yesterday, the Irish Financial Services Regulatory Authority (IFSRA) returned to deal with unfinished business arising from its Interim Report, issued in July.
The Interim Report identified the key parameters of the overcharging debacle involving some €34 million: the amounts due to be repaid to customers, the numbers and categories of transactions involved, as well as the process for ensuring that restitution was carried out effectively and speedily.
The report also set out the issues to be addressed in relation to the Faldor offshore scheme, which existed from 1989 to 1996.
Prioritising the restitution was in line with the principles underlying IFSRA's strategic plan for "putting the consumer at the heart of the regulatory system". It promised in its Final Report to turn to the issues of who knew, when they knew, and why the matter remained unreported for so long. And, of course, to set out what needed to be done to put matters right.
The conclusions reached were tersely summarised by IFSRA's chief executive, Dr Liam O'Reilly: "The failures within AIB uncovered by the investigations are completely unacceptable. We will not tolerate such practices within the financial services industry."
AIB's chief executive, Mr Michael Buckley, accepted the report's findings in full. He acknowledged that procedures for dealing with compliance failures were inadequate and that, at critical times, they simply didn't work.
The bank will, in addition to the measures it has already taken, implement a series of actions required of it by IFSRA. These include, crucially, disciplinary action in regard both to the overcharging issue and, also, to inappropriate share dealings by AIB's subsidiary, AIBIM, in relation to Faldor and other transactions.
Who then knew what was going on?
The form of words used - more than once - in the IFSRA report is striking. "Certain staff and management within certain areas of AIB appear to have been aware. . ."
IFSRA's investigation will have addressed the issue of accountability thoroughly. Equally, the independent report by DeLoitte, commissioned by AIB following consultation with IFSRA, and overseen by the former C&AG, Mr Lauri McDonnell, delivered to AIB some weeks ago and forwarded to IFSRA, will have dealt with this question. It has been reported by RTÉ's Charlie Bird that a sub-committee of AIB's board has already initiated a disciplinary process by writing to some 10 individuals.
Both IFSRA and AIB have insisted that "due process" would be subverted by naming individuals. They are right. It is a basic principle of justice that individuals are entitled to be considered innocent until proven guilty.
Even then, there may be mitigating circumstances. Moreover, the public interest, which is central, would almost certainly be undermined by premature disclosure. That doesn't mean that it won't happen, just that it shouldn't.
The form of words used in the report also points to another conclusion. Namely, that what was happening was not known throughout the bank. This is important for a number of reasons.
The words "certain staff and management within certain areas of AIB. . ." suggest that there were serious deficiencies in communications and in procedures that prevented these breaches of compliance requirements being "fast-tracked" right to the top.
Mr Buckley stated yesterday that he himself was unaware of the overcharging. There is every reason to believe that this is the case. Firstly, this would have been the crucial question addressed by the two reports.
Secondly, because of the statement by IFSRA to a Dáil committee that "AIB, it must be said, has been very active and co-operative right up to board level in addressing this issue since it came to light. Their response includes a commitment to a full and speedy review of systems surrounding all of their charging issues."
The issue of whether the board should have known is a separate matter. What is clear, however, is that there was a major failure in internal controls as well as in the culture of "certain areas within the bank".
So when did they know?
Perhaps the most devastating finding of the report is that the non-compliance in respect of charges existed for almost eight years. An internal memo in 2002 identified the cost of dealing with the issue and the need to inform the regulator. Nothing happened.
All in all, there were at least seven opportunities for "certain staff and management in certain areas of AIB" to identify and/or disclose the breaches of compliance to the relevant regulators. It didn't happen.
Controls and procedures are a proxy - and not the greatest one - for a culture that both demands, and incentivises, compliance and the promotion of good practice. It requires a corporate ethos in which all staff are empowered to bring the values by which they strive to live their lives to the workplace - the office, the branch.
This takes us to the heart of the issue. Ireland has a principles-based regulatory system. IFSRA sets down high-level controls and codes of conduct - it is for the individual institution to comply not just with the letter of the law but also its spirit.
Indeed, what is at issue here is not simply compliance per se but, rather, "obedience to the unenforceable". The short-term shareholder value business model, which was pre-eminent up until recently, crowded out any such considerations. In the case of AIB, it is clear that ethical leadership from the top takes a considerable time to change mindsets, behaviour, and a whole way of thinking.
There is still a long way to go.
The focus will now turn to disciplinary procedures which have to be informed, rigorous and impartial. The issue of whether or not IFSRA has sufficient sanctions at its disposal to prevent this deviant behaviour morphing into some other form is another key question.
Ultimately, Dr Liam O'Reilly was surely right in asserting that, notwithstanding its new powers, the real sanctions involve the costs of rectifying breaches of compliance and the reputational costs.
Customers will feel vindicated by the consumer-focused approach by IFSRA, including the remedial action that it has taken. Institutional investors will, no doubt, be relieved that Michael Buckley decided to stay on to put this episode to bed and allow his successor to start with a clean sheet.
Bank staff, whose integrity was highlighted by IFSRA in the Interim Report, will almost certainly feel that the rebuilding of trust is once again down to them. This powerfully reinforces the case for co-opting the IBOA on to the consultative panels. It is helping to rebuild trust, not alone within a single institution, but in an industry of crucial importance to the economy and to society. It deserves its place at the table.
Prof Ray Kinsella is editor of Internal Controls in Banking (Wiley) 1995