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IFSRA Bill should be withdrawn Back  
Responding to the publication of the IFSRA Bill which allows for a single regulatory structure in Ireland, Ray Kinsella says that the institutional structure and mandate of the regulatory arrangements envisaged in the Bill are fatally flawed and therefore the Bill should be shelved.
The Central Bank and Financial Services Authority Bill 2002 will, effectively, implement a single regulatory structure for Ireland, encompassing prudential supervision, consumer protection, and monetary policy. The structure and remit of the Bill were agreed in substance by the Minister for Finance and the Tanaiste as long ago as February 2001. There is a compelling - indeed an overwhelming - case for the view that the institutional structure and mandate of the regulatory arrangements envisaged in the Bill are fatally flawed and that the Bill should be withdrawn.

Background and proposed structure of Single Regulator
The proposed Single Regulator was born of scandals within the Irish financial services sector during the 1990s. Following the Report of the Implementation Advisory Group on the Establishment of the Single Regulatory Authority (the McDowell report) in 1999, there was an extensive period of trench warfare as key institutional stakeholders fought over location, remit and structure of the proposed Single Regulator. In February 2000, the Tanaiste and the Minister for Finance, Mr McCreevy, reached agreement on a structure and indicated that the Government would be putting forward proposals for legislation.
Essentially what is proposed in the Bill is a regulatory structure - the Central Bank of Ireland and Financial Services Authority (CBIFSA). This will encompass a new authority - the Irish Financial Services Regulatory Authority (IFSRA) - that will be responsible for prudential regulation of banking and insurance and also for consumer protection. The proposals also envisage an interim board, which will appoint a chief executive and a director of consumer protection. On the establishment of the IFSRA, the latter will take over the functions of the director of consumer affairs. The new structure will also include an Irish Monetary Authority (IMA) whose job it will be to ‘carry out the administrative functions required by the role of the Governor within the ESCB and to manage the external reserves’. Simple it’s not.
It’s important to make the point that some rationalisation of financial regulation - to correspond with changes in the marketplace - makes sense. Specifically, it makes sense to bring banking, insurance and securities within the single regulatory regime. Equally - while international practices vary across different countries - there is a strong case for constituting the Central Bank as this single prudential regulator. This is especially the case in Ireland, where the Bank has evolved over the last ten or fifteen years as the de facto single regulator (except for insurance). The crux of the matter relates to bringing responsibility for consumer protection, including conduct of business arrangements, within these arrangements. That is what the Bill proposes. That is where it is flawed.

Systemic dangers
It’s important to be clear what we are talking about here; that is, the capacity of the Central Bank to respond quickly and effectively to a systemic shock (whether of domestic or international origin), which threatens to undermine the stability of the financial system and, thereby, undermine the real economy. How likely, in practise, is this to happen? During the 1980s and 90s there were a series of financial crises right across the developed and transitional economies. Some of the largest global financial institutions - Daiwa, Sumitomo, Morgan Granville, Barings… the list goes on. They did not threaten the wider system.
An authoritative study by the ‘Group of 30’ into the management and supervision of global financial institutions and the potential for systemic risk, argued that 1
‘The growth in size, velocity and complexity of international transactions, and the higher concentration of trading activity in a relatively small number of institutions that play a leading role in multiple markets, suggest that regulators will find it increasingly difficult to improvise effective crisis-management in the event of a shock occurring.’
The threshold of concern for the study group was a shock that would not only threaten a major financial institution, but could cascade through the international financial system threatening additional major institutions, and, in turn, the financial infrastructure of the entire international system itself. While past shocks and crises have not risen to this level, those in the study group agreed that such a situation could not be ruled out.

The case against the legislation
The case against proceeding with this legislation - and specifically the integration of prudential supervision with consumer protection, including conduct of business rules, rests on the following arguments.
• The complexity of the institutional arrangements, which are proposed in the Bill.
As noted above, what is envisaged is an amalgamation of diverse functions and an alphabet soup of anagrams that is so uniquely opaque as to militate against any prospect of efficient and transparent regulation.
• More specifically, the proposed integration of prudential regulation with consumer protection will involve bringing together, within a single highly complex institutional structure, quite distinct policy objectives. It is worth pointing out that the whole thrust of the Central Bank over the last 20 years or so has been to shed responsibility for consumer protection to a more appropriate institution, so that it can focus on its main monetary policy and the stability of the bank system.
The net effect of the proposals in the Bill will be a weakening of Ireland’s albeit already limited capacity to respond to a major systemic shock. At the same time, consumers of financial services and products would be considerably disadvantaged, compared with alternative institutional arrangements: namely an enlarged Director of Consumer Affairs which could ensure timely redress for consumers across an ever-widening spectrum of financial services. This is a huge agenda for consumers and one infinitely better handled in an existing, experienced institution - the Director for Consumer Affairs - than in a set of argument transposed to a wholly different Institution, the Central Bank.
• Then there is the issue of timing in regard to the bringing forward of this Bill. The timing is inexplicable - other than simply an exercise in ‘clearing the decks’ prior to the election. Internal controls are at the heart of the supervisory process. There are enormously important lessons to be learned from the failure of Internal Controls and Risk Management procedures in Allfirst / AIB. The Ludwig Report provides substantive insights into areas that may need further strengthening in terms of existing legislation. But there has been no systematic public evaluation of any of the Ludwig findings. Nor has the Central Bank’s own report been published. Nor is there any indication of when the Reports of the FBI, the US Federal Reserve, and the Maryland Regulatory Authorities will be available.
• At the level of the EU, the most important point to be made is that the European Central Bank (ECB) lacks a substantive regulatory and supervisory role. This deficiency was built into the Treaty. The idea was, effectively, to leave financial regulation within the control of national (Home Country) authorities. And so the provisions of the Treaty are - in sharp contrast with the Delors model - labyrinthine. They were meant to impede, rather than to facilitate, progress towards a single system of EU financial regulation. This made no sense in the early 1990s: it makes even less sense now when national borders have been wholly redundant by the growth of global financial service providers.
These considerations are not grandiose or removed from the reality of the Irish financial services marketplace. Quite the contrary. It is precisely because we have a highly open financial sector; it is precisely because the IFSC is a microcosm of global financial markets, that we had really better take into account developments in the broader international context in which the proposed Bill is being brought forward and expected to work.
The real problem with the Bill is, of course, well known. It embodies a structure, which was prescribed at the outset - i.e. a single regulatory authority for prudential supervision and consumer protection - rather than one that emerged from an open-ended and EU-informed discussion.
In summary, can it seriously be suggested that the proposed regulatory arrangements in the Bill - encompassing an organisational structure that is elephantine to put it kindly - could possibly deal effectively with a sudden systemic crisis either within the Irish financial system or in the wider European and global markets of which Ireland is now a small subset?
The Bill should be withdrawn. The reality is that prudential supervision and consumer protection have a very different focus. They deal with different issues and require very different skills and competencies. It simply makes no sense whatsoever to lump them together within a single organisation. There is a very real possibility of a conflict of interest leading to one gaining ascendancy or ‘crowding out’ the other. To put this more positively, it makes far more sense to have one institution - the Central Bank - focussing on prudential and solvency issues - which feed directly into its role in implementing monetary policy within the ECB; and a separate institution with a clear and undiluted focus on consumer protection. Such a structure would allow each agency to get on with its respective responsibilities.
But perhaps, most of all, what is needed is time to reflect; to absorb the lessons of recent domestic and international events; to develop a set of proposals that reflect the challenges of a global financial environment that is characterised by unprecedented complexity and uncertainty; and to consider what should be the European (and, in this regard, the Irish) contribution to a new system of international regulatory governance. All of this is a very long way from the proposed Bill. It should be shelved.

Professor Ray Kinsella is director of the Centre for Insurance Studies at UCD Smurfit Graduate School of Business. The above is an extract from his paper entitled, ‘EU and International Regulatory Arrangements and the case against the Central Bank and Financial Services Authority Bill 2002’ which was given out at the annual Finance Dublin conference.

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