Upsetting the apple tart!

I was listening to our former leader Bertie Ahern on the radio last week plugging his new autobiography. Bertie was always a great man for what the experts call a malatropism, in laypersons terms getting his words and meanings mangled. One of the famous lines a few years ago was his exhortation to us that we shouldn't "upset the apple tart". Although some of us thought there was method in his malatropism!

Anyhow in the course of his interview with Pat Kenny he was asked about mistakes he made during this tenure. He was slow to admit any, except....and I drew my breath, at last some real insights....but no his only real mistake was the establishment of the Financial Regulator. He said that if he had the choice again he would never have removed the regulation of the banks from the Central Bank and that basically the Financial Regulator was too focused on "the consumer" because of all the overcharging scandals and ignored its prudential superivsion role. Now that comment I must say really did upset my applet tart for the rest of the day!

This was a line being spun by the Irish Bankers Federation during the summer as well, that the Financial Regulator was too busy on consumer issues and producing the "I don't know what a tracker mortgage is " adverts to notice that the banks were heading for the abyss. Now that is such a load of baloney. Of course that is a convenient because it allows the Government, the banks, the developers and sections of the media off the hook.




Now that is what I call a bank digout!

The demise of the Irish banking system resulted from a combination of factors, such as a very strong pro-construction policy by Government with tax reliefs for developers and investors, the insistence by the banks, stockbrokers, etc for "light touch" regulation which meant that the financial regulator got lots of meaningless data, but not any really useful information, the dependence of the banks on inter-bank funds, low interest rates and a flood of cheap credit money being shovelled out to consumers. On top of that you had a phalanx of economists and commentators in the banks and stockbroking firms and egged on by some politicians and sections of the media who added fuel to an already overheated market by telling us all to buy before it was too late and lashing out at anyone who questioned what was going on.

And given all that it is amazing, yet not surprising that some would try and say the edifice came crashing down because Pat Neary and co were too busy writing a consumer protection code and making adverts. While I welcomed the increase focus on consumer issues in the early years, progress has been very slow. No one could argue that Ireland is some sort of utopia for financial consumers! Ask anyone who is in debt, ask anyone who got bad advice, ask anyone who got ripped off, ask people who is struggling to find the next instalment of their loan or mortgage payment.

Yes mistakes were made in the establishment of the Financial Regulator, primarily the failure to put in strong people who would stand up to Government and the vested interests and their insistence on "light touch" regulation which hampered the ability of the institution to have any idea what was going on! And even when they did they appeared very slow to use the powers they did have.

Churchill once said "Those that fail to learn from history are doomed to repeat it." Therefore if we don't conduct a proper enquiry into how the banking crisis occured then we could be back in the same place within a generation. The Public Accounts Committee indicated that they would discuss the establishment of such an enquiry in September, but I am not sure what has happened to that. It may have been delayed by NAMA, but it does need to happen.

However as Bertie would say lets not be throwing red herrings and white elephants into the mix by blaming the banking crisis on the consumer. They are central players alright but only as the people who will pay for the sins of others.

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.

Financial Reform-Shame to waste a crisis!

I have survived the Christmas, thanks to the good weather did not eat or drink as much and watch as much bad TV. The dry and fine weather meant I could get out on the farm down home in Borrisokane and do some long overdue work cutting some ditches and clearing scrub. Like every other sector farmers have been hit by the recession and I am expecting interesting negotiations with those renting my land in the coming weeks on prices for this year. On a positive note I got a letter from Tipperary GAA letting me know I had won €200 in the weekly lotto draw. Would be great now if the Premier followed that up with an All-Ireland in 2009 as well!

The fresh air gave me some time to reflect on 2008 and of course the 2 big stories of the year were the collapse of our banking system and big shift in consumer spending and habits. So in this blog and the next will look at those issues in depth. But as well as looking at the problem I will try and come up with some possible solutions.

We need a radical overhaul of the financial services sector, people talk of regulatory reform but the fundamental issue is that the system is sales and commission driven and shareholder value trumps everything else. Of course it makes sense to incentivise people, but there have to be some limits and safeguards in place. Unlike buying a pint of milk, consumer protection for consumers purchasing a mortgage needs to be strong and effective, because if things go wrong its very serious for the individual. And as we have seen in recent months, if things go wrong on a grand scale, its very serious for all of us. We have seen this at its worst in the US. Sub prime lenders employed people on a commission basis who went out and sold mortgages to people to buy houses they couldn't afford. The salespeople didn't care whether people could afford the mortgages or not, they got paid for selling them. The sub-prime lenders didn't really care either because they repackaged these mortgages and sold them onto respectable financial institutions who are now dealing with these toxic assets and the fallout. It says a lot about the sharp suits in these institutions with their MBAs that they paid good money for such lousy assets.

The only difference here is that the sub-prime market was only getting going when the bubble burst, things could have been a lot worse if the credit crunch started now instead of August 2007. But a lot of other things were going on here, banks were shovelling out money on personal loans, mortgages, credit cards. I know of cases where people got huge bonuses and holidays for selling products that were definitely not in the interests of the customer. The salesperson didn't care, they got the bonus and if there is a problem it's the customers problem. The Financial Ombudsman has done excellent work on exposing some of the worst cases, but I suspect these are just the tip of the iceberg. I accept that customers have responsibility too, but for many people financial products and services are mind boggling and they are quite literally at the mercy of the salesperson.

At another level banks as we have seen shovelled out money to property developers and builders as if they felt they could defy logic and the premise that what goes up must come down. Like sheep the banks cheered on by stockbrokers, economists and other "experts" lent billions. That policy came home to roost for all the banks, especially Anglo Irish which is most exposed and we are all suffering as a result. No one has taken responsibility for this, Sean Fitzpatrick and David Drumm in Anglo did resign, but their resignations were related to concealment of directors loans. I am sure their resignations will be temporary hiccup, they will take comfort from other high fliers such as Kryan McLoughlin who had to resign as a director of Davys a decade ago due to embarrassing personal tax issues, but is now more powerful than ever. Indeed as Deputy Chairman of Davys which is heavily involved in the Aer Lingus takeover bid on behalf of Ryanair and as a director of Ryanair itself, he will be playing a crucial behind the scenes role in 2009. (The Ryanair takeover of Aer Lingus would be a disaster for consumers in my view, this is something I plan to return to in early 2009)


An apology for only $59.95!

So what can be done? Well Barack Obama's new Chief of Staff Rahm Emanuel is on record as saying, "never waste a crisis" That idea that our current difficulties present opportunities to reform the system in a way that was unthinkable a year ago to prevent a repeat of what has happened.

It might have been necessary initially given the urgency of the situation for the Government to engage solely with the banks, but now there is no excuse. If we are to reform the financial services system, the Government needs to engage with all the stakeholders including consumer organisations, rather than just the banks. Secondly all need to accept that "principles based" or light touch regulation has failed (or as I would refer to it soft touch regulation) and we need a rules based system. Thirdly the Government needs to carry out the review of the effectiveness of the financial regulator in its consumer protection role as promised in the report of the Consumer Strategy Group. Fourthly we need to investigate the possibility of a free impartial financial advice for consumers along the lines being discussed in the UK and that's just for starters. This is one of the issues which the Carnegie Commission on Civil Society is looking at as part of our work and we plan to hold an event in London in February to look at reform of the financial services sector for the benefit of all. So after that I may even have more ideas.