High price of failure to regulate

IT WOULD be hard to imagine a more damning indictment of a State agency by a monitoring body

IT WOULD be hard to imagine a more damning indictment of a State agency by a monitoring body. The virulence of the criticisms, concerning the failures and inadequacies of the Office of Financial Regulator by a Government-appointed Consumer Consultative Panel, should guarantee early remedial action by Government in order to defend the interests of consumers and society. An independent inquiry into what went wrong in the banking system is also overdue.

The Office of the Financial Regulator was almost designed to fail. Its independence was compromised from the outset when it was lumped in with the Central Bank, where the governor traditionally came from the Department of Finance and the views of government were quietly acknowledged. In such an environment, “rocking the boat” and challenging banking practices was not encouraged while consumer interests were of peripheral concern.

In its report, the Consumer Consultative Panel (CCP) blames the Financial Regulator for not deflating the property bubble, clamping down on risky products or investigating insurance premiums. It finds recent reforms to be inadequate. A “slap on the wrist” approach to major financial concerns is seen in failure to impose fines on the MBNA credit card company, which overcharged its customers by €18 million. And it is severely critical of those board members who declined to take responsibility for regulatory failures during the last six years.

The disdain, verging on contempt, in which consumer interests were held led officials from the Financial Regulator’s office to refuse to meet the CCP to discuss its concerns. At the same time, regulatory failures led to negative equity on homes, falling share prices, poor returns on pension funds and a shortage of credit. Another worry, shared by retiring Financial Services Ombudsman Joe Meade, has been the excessive secrecy employed by the Financial Regulator when complaints against banks and other financial service providers were investigated.

READ MORE

Changes to the structure of financial regulation must address these grave shortcomings. The appointment of Patrick Honohan, a highly respected academic, as the new governor of the Central Bank represented a start in putting distance between the Department of Finance and that institution. Professor Honohan has already displayed his independence by calling for an inquiry into what went wrong within the banking system. That approach held no attraction for Taoiseach Brian Cowen who spoke in the Dáil about the difficulties it entailed. However, now that the CCP has become involved as a champion of consumer rights, such an inquiry may have moved a step closer.

As banks rebuild their balance sheets, greater pressure will fall on consumers. Already, the sale of inappropriate financial products and the provision of wrong investment advice have caused concern. Interest rates should be closely monitored. The taxpayer, who is funding a rescue of the banking system, should not be asked to tolerate inequitable charges.