Wednesday, April 15, 2009

Going Dutch?

Here we go again. Despite talk of strong regulation and effective enforcement, last week saw the same old softly softly approach to regulation that got us into the current sorry mess. Davy Stockbrokers were found to have breached rules governing the sale of perpetual bonds to credit unions. The Irish Stock Exchange issued a carefully worded statement, which confirmed that Davys had breached stock market rules, but there was no mention of resignations or fines. This deal has been a disaster for the credit unions, it is estimated that they have lost about 100m euro. Davys have only offered 35m in compensation, so ultimately it will be the credit unions members who will suffer with higher loan repayments charges and reduced or no dividends on their shares to meet the massive losses.

These are the same Davys stockbrokers who in league with two other stockbroking firms called for a cut to social welfare. I would say that senior figures in Government must have been fuming because whatever hope there was of a rate cut before the stockbrokers intervened, there was no hope after this, as the credibility of these people is so low. They have projected deflation of 3% this year, so they say social welfare should be cut by 3%. I wouldn't put too much faith into their projections since they have been wrong so many times. I think Fintan O'Toole summed it up perfectly.

Beware the sweet talking Stockbrokers!!!

There has been a lot of talk about the need for radical reform of financial services regulation. A lot of the focus has been on the model. We have heard of the Canadian model of regulation and now the Dutch model is being mentioned. Yes we can learn from other countries, but focusing on models completely misses the main point. The key problem in Ireland was not the model of regulation, but the culture. The financial regulator was not willing to take strong decisive action against reckless and feckless behaviour by banks and bankers. They issued warnings about 100% mortgages, but did nothing to stop them being issued. They also had powers which it would appear they were reluctant to use. The light touch approach was more like the soft touch approach.

I met an official from the Australian regulator a few years ago. He told me how in Australia the regulator there regularly takes CEOs and senior officials to court for breaking the law and rules. When I spoke with him in 2006, they had jailed 17 people in the Financial Services sector. In doing so they sent a very strong message that they wouldn't tolerate any behaviour which puts consumer, the economy and their overall reputation at risk.

The Government does appear to be serious about a radical reform of financial services legislation. I am just concerned that they rushing into changes for the sake of change that may create more problems that they will solve. For example, I am worried about the proposal to separate the consumer protection function out from the new Central Banking Commission. They plan to create a Financial Services Consumer Agency by merging the existing consumer directorate of the Financial Regulator and the Office of the Financial Services Ombudsman. In my view prudential supervision and consumer protection are intertwined and having two agencies will just confuse the consumer and industry.

Apart from the structure, we need to recruit people of international standing with no connections with the industry here, who will take no prisoners and can withstand the financial lobby and act in the public and consumers interest. And while the focus has rightly been on the banks, I think it is also high time we had a shakeup of how the stockbroking companies are regulated.

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