The woman leading Ireland’s drive to restore its reputation for effective financial regulation says the country is “a long way down the road” in cleaning up the worst excesses of the Celtic Tiger lending boom that ended in collapse and near-bankruptcy eight years ago.
Derville Rowland, director of enforcement at the Central Bank, says record fines and public humiliation for some of Ireland's biggest lenders are forcing them to account for the mistakes and misconduct that have come to light since the Irish financial crisis erupted in 2008.
The Central Bank is also trying to show its regulatory competence after its failure to manage a credit and house-price bubble in the mid-2000s. That failure played a crucial part in the country's economic collapse, which led to an emergency bailout by the International Monetary Fund.
“The banking crisis had a terrible impact on Ireland and the Central Bank was part of that,” Ms Rowland said in a rare interview, referring to the weakness of the “principles-based” regulatory approach the bank adopted at the time. “The regulators trusted what they were told by the bankers. There was nothing wrong with the principles. The problem was with the trust.”
Ireland's financial crisis is mostly known for the close ties between banks and property developers, which led to the collapse of Anglo Irish Bank and the taxpayer-funded rescue of Allied Irish Banks, Bank of Ireland and other high street names. The total cost was €64 billion, which sent Ireland's debt as a proportion of its economic output soaring over 100 per cent.
Parallel problem
A parallel problem that has emerged in the sector has been the mispricing of some mortgage products and the absence of money-laundering safeguards. The Central Bank is addressing these armed with new powers it acquired in 2013.
Last year the Central Bank imposed a record €12 million in fines on institutions ranging from high street banks to specialist mortgage lenders. While small by the standards of fines levied on UK and US banks, the amount is significant in Ireland, where no fines were imposed in 2006, at the peak of the Celtic Tiger’s reckless lending.
For Ms Rowland, a London-trained barrister, the fines are important, but so is the public disclosure that accompanies them. Institutions and sometimes individuals are identified, malpractice is outlined in detail, and its consequences are laid bare.
“Fines alone are not sufficient,” she says. “It’s the detailed information about the case that tells the story of what happened.” What she calls the “signalling” effect of such public disclosure “can often be the most uncomfortable for firms and individuals. It is the key to successful enforcement.”
This is especially important, she believes, in cases where mortgage customers were ripped off by banks as they fiddled with interest rates to try to boost profitability. Much of the Central Bank's attention for the next two years is likely to be consumed by the resolution of continuing problems in the mortgage lending market, in particular the case of "tracker" mortgages, where interest rates follow those of the European Central Bank.
Large fines
In November Ms Rowland stunned the market by fining Springboard Mortgages, a defunct subprime lender, €4.5 million for mispricing mortgages that in some cases meant customers repaid tens of thousands of euro they did not owe.
It was the largest fine the Central Bank has imposed for business conduct or operational failures by a financial institution. The Central Bank estimates that up to 15,000 tracker mortgages may be affected by mispricing. That is 2 per cent of the total number of Irish mortgage accounts, but it has become a burning political issue in light of the taxpayer-funded rescue of the banks. Mispriced tracker mortgages have in some cases led to great distress for borrowers. “Some people lost their homes – that’s the heart of this issue,” Ms Rowland says.
As it battles back to respectability in the eyes of the Irish public, the Central Bank is facing a significant hurdle – limits on public sector pay brought in during Ireland’s years of austerity mean it is finding it hard to attract and keep key staff. That puts it at a crucial disadvantage, Ms Rowland says: “When we bring cases [to court] the banks always field their best teams. We must do the same.”
