Financial Regulator accused of treating bankers with “deference” and “diffidence” — a tendancy not uncommon among Irish regulators
Â Colm Rapple
Irish Mail on Sunday, 13th June 2010
The Financial Regulator and his staff tended to treat bankers with both â€œdeferenceâ€ and â€œdiffidenceâ€ according to the new Central Bank governor, Patrick Honohan. During the week he cited it as one of the prime causes of the regulatory failures that prepared the way for the collapse of our banking system.
â€œDeferenceâ€ is the willingness to accept the judgement of others in preference to your own, while â€œdiffidenceâ€ entails a lack of self-confidence and assertiveness. They are the very attributes that regulators should avoid and are certain to be eschewed in the new financial regulatory regime being put in place by Dr Honohan but what about the other State appointed regulators.Â How well are they regulating their charges?
We seldom get anything other than cursory, minimalist reports.
At last count there were 213 regulatory bodies of which 205 were public sector regulators. That includes 114 local authorities. The way in which they exercise their regulatory powers can have a major impact on the economy and society, perhaps not on the same scale as the shortcomings in financial regulation, but sizeable non-the-less.
Many of the regulated groups expect to be treated with deference and diffidence, just as the financial institutions were. Unfortunately the evidence is that they all too often are so treated. They include many professionals particularly in the medical and legal spheres who have managed to defend their self-regulatory regimes that ensure that they are treated with a large degree of deference.
The elevated status that many of them aspire to, and often achieve, may have something to do with our colonial past. But as far back as 1842, in a book describing his journeys through Ireland, J. Stirling Coyne wrote that since the Act of Union in 1800, â€œphysicians and the professors of law and medicine may be said to form the (Irish) aristocracyâ€. Old habits die hard.
The lessons to be learnt from this weekâ€™s reports on banking regulation have wide application far beyond the banking and financial services sector. The Government is committed to reforming the regulatory regime but the only firm policy statement on the issues involved, published as a White Paper, in 2004 was compiled when the concept of light touch regulation was very much in vogue. The stress was on reducing the burden of regulation in order to improve competitiveness.Â In a foreword the then Taoiseach, Bertie Ahern warned that â€œbad or cumbersome regulation created barriers to efficient markets, thereby discouraging competition and innovationâ€.
But what some people view as bad or cumbersome, others see as absolutely necessary. The question is where to draw the line and it is clear from the now well documented experience of financial regulation, that it is not only the letter of the law that is important but also its application.
The Government is still very concerned about the cost of regulation on business. Earlier this year a report by the Economist Intelligence Unit was presented to a newly established Regulatory Forum that is to meet once a year. A Government statement issued at the time promised legislation to force energy, communications, and transport regulators to review their strategies and produce annual output statements. There was also a promise to make them more accountable to the Oireachtas.
In the light of the failures of the financial regulator to foresee the potential doomsday scenario, the other regulators were also told to ensure that their regulatory frameworks are sufficiently robust to be able to respond to major sectoral or economic shocks.
So we may be moving in the right direction. But the failures outlined in this weekâ€™s reports are unlikely to have been confined to one regulatory body. So who is overseeing the regulators? There is a lack of accountability according to the Economist Intelligence Unit report.
Oireachtas scrutiny is ineffective. Government departments donâ€™t, in many cases, have the expertise to supervise the regulators and there is little accountability for wrong regulatory decisions. The report also criticised the appeals processes operated by some regulators.
More recently there has been criticism of the cumbersome procedures facing regulators who want to prosecute offenders. At a recent conference barrister Remy Farrell outlined how regulators could only prosecute in the District Court where penalties were low. Prosecutions on indictment can only be taken by the Director of Public Prosecutions.Â Change was needed, he said, to promote more robust regulation.
Itâ€™s clear that, in addition to rooting out any tendency on the part of regulators to deference and diffidence, our whole regulatory framework needs an urgent review.Â A good start would be to introduce much more transparency and accountability.