Friday, February 6, 2009

Sharing the pain equally? Fat chance!

Blogging had to take a back seat these last few weeks. I represent NYCI at the social partnership talks and the negotiations on a plan to address the perilous state of our public finances were quite intense up until last Tuesday. The rather snappily titled (not) document "Draft Framework for a Pact for Stabilisation, Social Solidarity and Economic Renewal" was concentrating all our minds. The public perception may be that the talks collapsed completely, however while the Government and the Trade Unions failed to agree on the issue of the pensions levy, this document has been agreed and will be important in the coming months and years.

Some of the discussions at the talks were interesting, people expressing anger at how the bankers, builders, stockbrokers etc who got us into this mess were getting away Scot free. There is an expectation at the few dozen people who contributed greatly to the rapid descent in our economy must pay the price. People talked about a criminal assets bureau for the financial sector. One story was recounted about how Sean Fitzpatrick was asked to leave a pub, because the owner didn't want his sort around the place. I am not surprised, people are losing their jobs, their homes, dreams and sanity and these guys get millions in payoffs and can retire to the golf course. Indeed it was galling to read Rossa White over in the very smug Davy's stockbrokers lecturing us on how to deal with the crisis, when he and his kind have talked up the housing market and contributed so much to our current problems. And as for their analysis, they can keep it, they have been so wrong so often, they have the credibility of used car salesmen. As recently as March 2006, the so called "analysts" were telling us the boom would last for another 15 years.

Exclusive recording of the Cabinet meeting!

I see the Times in London came up with a list of the 10 people most responsible for the credit crunch. Would be interesting to do a similar exercise here on the ten people responsible for the near collapse of the banking system. Sean Fitzpatrick and Pat Neary may be obvious choices, but they are not solely to blame, there are many people still holding powerful positions in this state who have a lot to answer for as well.

There was an interesting story in the Sunday Tribune last week that didn't get much coverage. It dealt with contracts for difference (CFD) and how they played such a crucial role in the collapse of Anglo Irish and the reputational damage to our financial service sector here. It is alleged that through CFDs Sean Quinn and his family built up a huge stake, almost 25% in Anglo Irish Bank, unknown to many investors. Slowly though international investors got wind of what was happening and confidence in the bank and shares began to collapse. As the article states here, both the Financial Regulator and Irish Stock Exchange come out badly from this fiasco. But will there be any real change so that the lessons learned cannot be repeated?

There is a really interesting section in the article on how a 1% tax could have prevented the problems at Anglo Irish, but how the powerful Dublin stockbrokers scuppered that;

"It could have been different. In March 2006, the Revenue Commissioners, responding to a query about a tax treatment from a Dublin broker issued guidance that tax-free CFDs should be taxed at the 1% that applied to traditional share purchases. All hell broke lose. "It was like a tsunami had hit," recalls a tax expert with close knowledge of what happened at the time. "The brokers kicked up a storm," he said.The storm confirmed the importance of the CFD trades to the profits of the main Dublin stockbrokers, despite the fact that the Irish stock exchange was being dangerously speculated on. Within days, the then finance minister, Brian Cowen, bowed to pressure and pledged to amend the Finance Bill to maintain the tax-free status of CFD trading. The 1% stamp duty levy would continue to be levied only on traditional purchases of shares"

I am sure the files on the correspondence between the main stockbrokers and the Department of Finance would make for interesting reading. But will we see radical change at the Financial Regulator and will the Irish Stock Exchange investigate what went on here to avoid a repeat, which has done so much damage to our financial services sector and has contributed greatly to our economic and public finance woes? I am also concerned at the lack of apparent urgency or sense we need a radical overhaul of the financial services regulatory system. In the Dáil this week the Minister said this in a response to a question on reform;

Financial Services Regulation.
"Deputy Joan Burton
asked the Minister for Finance the measures and actions he will take to examine the reasons behind the regulatory failure in the financial services sector here to determine the changes that are required; if he will give a commitment to engage a broad range of stakeholders, such as academics, consumer representatives and social partners; and if he will make a statement on the matter.

Minister for Finance (Deputy Brian Lenihan): Any change to the regulatory framework in Ireland must have regard to EU and international developments. In relation to the EU, there are a number of proposals being developed for adoption this year, including improvements to the Capital Requirements Directive to further strengthen the existing banking prudential framework. Furthermore, the role and mandates of national regulators has been the subject of in-depth consideration by the Ecofin Council. Common reporting standards for financial institutions will enable greater EU wide consistency in supervision. An initial report on this matter is due to be submitted to the Spring European Council and any reform of our Financial Regulator’s structures will be consistent with EU developments. Arising from recent events, there are a number of reviews underway within the Financial Regulator with a view to identifying any shortcomings in the Financial Regulator’s strategic regulatory approach, its structures and its capacity to respond. I await with interest the outcomes of these reviews and will be working with the Regulatory Authority to bring about improvements in our system of financial regulation. Stakeholders will have an involvement in this process through the independent statutory Consultative Panels which will be making an important input to the review process. I will bring proposals to Government if, arising from these reviews, I consider that a change in legislation is required. As the Deputy will also appreciate, under the Credit Institutions (Financial Support) Scheme, the oversight of the banks concerned has already been greatly intensified.

This response is a bit alarming, as if nothing much has happened and some tweaking may be required! For my sins I have been re-appointed to the Financial Regulator's Consumer Consultative Panel. I am proud of the work the last panel did on the Consumer Protection Code, which was an advance for consumers. My view is that the Financial Regulator failed not because it did not have the powers to act, but because it was too timid and unwilling to act against the big players, something which I stated publicly in December 2007. The financial services sector in Dublin was a small cosy club, where the top bankers, stockbrokers, audit firms, government officials and central bank regulators were and those still standing are still very chummy. No one will rock the boat!

I would hope that the Consumer Panel will have some input and influence on reforms, but what we really need is a broader public debate and discussion about the role of banks and the financial services sector. We need the sector to return to basic banking and to serve the needs of the economy and our society and not be the slave of the equity analysts! On top of trying to protect consumers rights in the areas of mortgage repossession and attempts by banks to pass on their mistakes in higher charges and fees, I will be following up on some of the issues raised here and looking in particular at the how we can make the system work for consumers and citizens.