Good morning, ladies and gentlemen. I am delighted to be here with you, and I am grateful to the organisers of today’s conference for the opportunity to speak to you about the Government’s plans for the future of financial regulation in this country.
Brexit
However, given today’s conference, of course, falls on the day when our nearest neighbour was due to be leaving the European Union, I would first like to say a few words on this.
We welcome the fact that the EU and UK have agreed a revised Withdrawal Agreement, since unanimously endorsed by the European Council.
The Agreement, including the revised Protocol on Ireland – Northern Ireland, is now subject to ratification by the European Parliament and Westminster.
Earlier this week, EU 27 leaders unanimously agreed to extend the Article 50 process, to 31 January.
This was done to help the necessary ratification of the Withdrawal Agreement, and avert the risk of a No Deal Brexit.
The extension is also flexible, allowing the UK withdraw earlier, if ratification is completed earlier.
Ireland’s objectives for the Brexit process have been clear and consistent from the very beginning.
Recognising the unique situation on the island of Ireland, the deal provides important safeguards that the Good Friday Agreement will be protected in all its parts, including avoiding a hard border, protecting North-South cooperation and the all-island economy.
It also protects the integrity of the EU’s Single Market and Customs Union and Ireland’s place in them.
It provides a legally operable solution, and certainty that at the end of the transition period the benefits of the peace process and the all-island economy can continue to be enjoyed.
We believe these arrangements will work well for the people and the economy of Northern Ireland.
Much now depends on developments in London and the outcome of the General Election on December 12th.
EU-UK future relationship
Should the Agreement be ratified, we can move on to building our new relationship with the UK, post-Withdrawal.
The Agreement secures transition, giving us time, and a good basis to start this work.
We will need to move as soon as possible into these negotiations.
The revised Political Declaration seeks a comprehensive and balanced free trade agreement.
It is clear that considerable work lies ahead and we will continue to work to ensure that our economy and Ireland’s national interests are fully protected.
Ireland wants the closest possible relationship between the EU and the UK, including on trade, in order to minimise the impact on our economy. We want this partnership to be deep and ambitious.
At the same time, it is vital to our economic interests that the EU’s Single Market is fully protected.
Addressing a level playing field will be particularly important.
This means a common basis for standards in terms of social rights, environmental protection, State aid and taxation issues.
Membership of the Single Market and Customs Union is a core element of our economic model – including in attracting inward investment, both over the decades and more recently.
The best response to Brexit, which risks disrupting access to our nearest market, is for Ireland to be ever more open to the opportunities of the Single Market.
Ireland will retain our openness to trade, to investment, to ideas and to talent that represents one of our key strengths.
We will continue to explore new markets for our businesses and promote our international profile through our Global Ireland strategy, which aims to double Ireland’s global footprint.
We do not face these challenges alone. We do it as a member of a family of 27 Member States and all the inherent strengths those relationships bring.
Financial services culture
Moving to today’s conference, which is focused on the Senior Executive Accountability Regime – or SEAR for short.
This is one of a number of provisions that will be implemented through the forthcoming Central Bank (Amendment) Bill.
Through its provisions, it will roll out an Individual Accountability Framework across the financial sector to achieve two key interlinked objectives:
- To improve the culture of the financial sector; and
- To restore public trust in the sector.
Firstly, ensuring good culture in all walks of life is vital as good culture in an organisation allows us as citizens to put our trust in that organisation.
I have previously described culture as ‘what people do when they think no one is looking’.
Given the importance of the financial system, and the potential risks that the poses to the wider economy and society, it is vital that those working in it are doing the right thing for their customers and wider society when they are, now on the rare occasion, not being watched by the Central Bank.
Secondly, the restoration of public trust in the financial sector is vital in the longer term, so that businesses and citizens are confident in relying on the sector’s products, services, and advices, to enable them to move quickly to seize opportunities to grow and invest.
In an increasingly competitive global economy where Brexit is one of the challenges we face, it is vital that Irish businesses and consumers do not incur additional costs through delays and unnecessary checking of financial products and services.
Reforming banking culture through the Central Bank (Amendment) Bill
This process of reform should already be well underway, but no one should be under any illusion that there is not still some considerable distance to go.
The Central Bank (Amendment) Bill has its roots in the Central Bank’s 2018 report, Behaviour and Culture of the Irish Retail Banks.
This Report was prepared at my request in order to address serious failures in the Irish banks that came to light as a result of the Tracker Mortgage Examination.
Over 40,000 customers have been affected by these serious failures in relation to tracker mortgages.
The Tracker Mortgage scandal – for that is what it was – illustrated unacceptable practices that led to real suffering for those who lost their homes and were struggling to make ends meet.
The loss of trust and confidence in the banks as a result of this is hardly surprising.
It is a matter of serious concern, and it will take considerable time and effort to restore this broken trust.
Focus on individual accountability
The Government agreed on 18th June last to the drafting of the Central Bank (Amendment) Bill 2019 in order to introduce greater accountability in the financial sector.
We see this accountability regime as the key driver in achieving the objective of cultural change across the financial services sector.
Greater levels of accountability will lead to better outcomes for all across the financial sector:
- Customers will benefit from financial service providers that are fully accountable for the level of service and advice they provide;
- Employees of financial institutions will benefit from having greater clarity of their exact role and responsibilities, and will be empowered to speak up when they see failings;
- Firms and their shareholders will benefit through the creation of real accountability for senior executives by making them personally accountable for their actions and inaction, so the cost does not fall solely on the firm itself; and
- The wider economy and society will benefit from a more stable financial system by reducing the ability of senior decision makers to make risky decisions for which they will be unaccountable and will pay no cost.
Businesses’ social contract with wider society
Stronger accountability also creates a long-term view of the customer – firm – economy/society relationship.
This generates deeper levels of trust between businesses and the citizens they serve, which allows them to interact without onerous checking and transaction costs.
It also shifts the balance from a purely short-term focus on completing individual sales and transactions, and moves towards a model of relationships where each side invests and grows in the longer term, which benefits all.
I would point you to the writing of Dame Onora O’Neill, who has written extensively on the need for financial sector firms, and their shareholders, to prioritise their customers’ longer term interests so as to create a longer term sustainable and ultimately more profitable business relationship, which is built on trust.
Approach to the drafting of the Central Bank (Amendment) Bill
In preparing the Central Bank (Amendment) Bill, my officials, in consultation with the Central Bank, have undertaken extensive preparatory work.
This has included consideration of lessons learnt from the UK’s Senior Managers Regime and Conduct Standards.
The UK regime has generally been considered a success based on the recent responses to the Financial Conduct Authority public consultation.
The UK regime is also particularly instructive given the influence it has on many of the regimes in other jurisdictions, the close relationship between the financial sectors in the UK and Ireland, and our similar common law legal system.
It clearly makes sense to learn what lessons we can from the UK experience.
However, in learning these lessons, we must also take account of a major difference between ourselves and the UK, which has become even more apparent in recent months in the context of Brexit – the existence of a written constitution.
Our Constitution establishes clear individual rights, such as the right to earn a livelihood, and clear provisions on the administration of justice.
Therefore, a careful balance must be struck between giving the Central Bank the powers it needs to do its job effectively, and the protection of these individual constitutional rights.
I am absolutely determined to ensure that the final legislation is robust, fit for purpose, and legally sound, because no doubt, some of those who have not been responsible in their actions, will seek to challenge it.
Subject to the constraints of Brexit and other Oireachtas business, it is my intention to bring draft heads of Bill to Government for approval before the end of this year and then to progress the Bill for debate in the Oireachtas.
Senior Executive Accountability Regime (SEAR)
The centrepiece of the new legislation, and the aspect to which today’s events are devoted is the Senior Executive Accountability Regime (SEAR).
At present my officials are working with the Central Bank and the Attorney-General’s office to provide a regime with the following provisions:
- Specific senior executives in firms will be designated as carrying out Senior Executive Functions;
- The firms will be required to provide Statements of Responsibilities to the Central Bank which will clearly set out the roles and responsibilities of senior executives;
- The firms will also have to produce Management Responsibility Maps documenting key management and governance arrangements in a comprehensive and accessible way;
I await final material from my officials, the Central Bank and the Attorney General’s Office before making my decision on the exact sectors and firms to be covered by SEAR.
However, the effect of these measures will be to ensure that there is absolute clarity as to who is responsible for what.
This will foster a culture of personal accountability, and also safeguard against scapegoating if something goes wrong.
Every senior executive will be obliged, in the area for which he or she is responsible, to take such steps as could reasonably be expected to avoid a contravention of financial services legislation.
Conduct Standards
The primary legislation will also set out Conduct Standards, which will be clearly understandable behaviours that not only the Central Bank, but wider society, expects of people in positions of power.
These conduct standards will be sufficiently straightforward that no-one could plausibly claim to have breached them unwittingly.
They will require those to whom they apply to act with honesty, integrity, and due skill; to cooperate with the Central Bank as regulator; and to pay due regard to the interests of customers and treat them fairly.
In short, there is nothing that anyone could reasonably object to, and nothing that anyone taking up a position of responsibility in a financial services provider would not reasonably expect.
Breaking the Participation Link
In order to make it possible to hold individuals to account for their actions, the legislation will also remove the existing requirement that for the Central Bank to pursue enforcement action against an individual it must prove that the individual has participated in a breach committed by a regulated firm.
The need to prove this participation runs counter to the principle of individual accountability.
Breaking the “participation link” also acknowledges that wrongdoing by the firm and wrongdoing by an individual are not necessarily aligned.
The breaking of the “participation link” and the wider improvements to the Central Bank’s enforcement process have a twofold objective.
Firstly, to incentivise improved behaviour by senior executives in the financial services industry, and secondly, to strengthen the hand of the Central Bank in situations where enforcement action may be required.
Effective and proportionate regulation in the consumer’s interest
The Irish people paid dearly for the consequences of the “light touch” regulation that was a key factor in facilitating and magnifying the financial crisis over ten years ago.
There is a danger, of course, that the reaction to this would be to construct a regulatory regime through this forthcoming Bill that goes to the other extreme and is overly onerous and restrictive.
This is not what the planned regime is about.
We will strike the correct balance, so as to ensure that Irish financial service consumers do not pay higher interest rates and charges than other European consumers, due to excessive and inefficient regulatory and consumer protections.
It is important for national competitiveness that interest rates on many households’ most significant outgoing, their mortgage, are kept as low as possible.
It is the Government’s intention that the financial services industry in Ireland should thrive, prosper, and grow, and that Ireland should continue to be an attractive location for international financial firms to do business.
As I have already mentioned, the feedback to the UK’s Financial Conduct Authority shows how a properly constructed individual accountability regime can improve outcomes for consumers but also for management and the financial sector firms themselves.
Process of cultural change
It is the Government’s expectation that the financial services industry will recognise the urgency of working to regain public confidence, and will engage fully and enthusiastically with the work that needs to be done in that regard.
The reform, indeed the transformation, of the culture in the banking industry will involve the cultivation and embedding of an ethos within each firm that prioritises the legitimate interests of customers, and where honesty and integrity can be taken as read.
Inevitably, the responsibility for practically fostering such a culture falls primarily on the senior executives in a firm by setting a clear example, with the support and encouragement of their boards.
The renewal of culture must be an internal process for which firms take responsibility themselves.
As firms come increasingly to recognise that it is in their interests to have a culture based on honesty and fair dealing, they will take the steps necessary to reinforce this on a regular basis.
It should not be necessary for the regulatory authorities to micromanage junior staff in this regard as it must be the firms themselves, in the first instance, that are responsible for their corporate culture, and for the behaviour of their staff.
Experience of the banking sector is a lesson to others
I should take this opportunity to say that there are other sectors in our society that could learn from the banking sector’s experience.
I am currently taking the Finance Bill through the Oireachtas and much of its provisions are focused on curtailing aggressive tax avoidance schemes designed by professional advisers.
Edmund Burke wrote extensively on corporate tyranny and the risks that it posed to undermining widespread acceptance of laws, citing the example of the British East India Company and its exploitation of the law for its own ends.
Similar exploitation of differences in international tax systems through aggressive tax avoidance falls short of what Edmund Burke would describe as the social obligations that flow from participation in the commercial life of a society.
It also sunders the social licence which underpins market activity.
For markets to function properly, they must be embedded in the social norms and rules of the society they operate in.
Aggressive use of the law to avoid making a fair contribution to the wider society that enforces these common rules and norms ultimately damages public acceptance for markets and commercial activity, to the detriment of all.
Conclusion
Restoring public trust in the banking sector is essential, not least for the sector itself.
But as the Culture Report observed, there is a difference between seeking people’s trust and actually establishing trustworthiness and it is crucial that banks understand this.
Given the fact that most of the egregious behaviour by banks in relation to tracker mortgages occurred after the banks had been bailed out by the taxpayer, and the fact that the Central Bank has found that those failings continued beyond the scandal, with some firms ignoring the Stop the Harm principles that were established to limit the damage to identified customers, is astonishing.
It is incumbent on Boards to take responsibility and ownership of the culture of their organisation to ensure that the right culture is embedded in its firm so that the trust of the Irish people can be regained. This trust will not be regained easily or quickly, it will have to be earned.
And it will have to be earned.
The SEAR, and the Central Bank (Amendment) Bill more generally, will provide an effective framework, and will help to reassure the public that meaningful cultural change is underway.
It is for the banks and other financial service providers to make the most of this opportunity.
Thank you for your attention this morning. I look forward to what I am sure will be an interesting discussion.
ENDS