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Reshaping the role of the banking regulator Back  
William Johnston says that the success of the new single regulator in generating a stable financial regulatory environment will depend on whether it can maintain independent of outside influences and how well senior personnel involved in the Central Bank and IFSRA manage the interaction between the two entities.
The Central Bank of Ireland was established 60 years ago following the majority and three minority reports of the Commission of Inquiry into Banking, Currency and Credit. The manner in which the Central Bank has discharged its functions has given Ireland a stable financial regulatory environment for financial services providers. Relatively few banking failures are testimony to the Central Bank’s supervisory and licensing performance.

The much awaited Central Bank and Financial Services Authority of Ireland Bill redefines the role of the Central Bank, as well as establishing (1) the Irish Financial Services Regulatory Authority (IFSRA), (2) the Consumer Director, (3) the Registrar of Credit Unions and (4) the Irish Financial Services Appeals Tribunal. What will prove to be particularly interesting in practice is the manner in which different entities and persons interact with each other.

Although the Bill has lapsed with the dissolution of Dail Eireann, it can be expected that it will be re-introduced before the summer recess with the same title and content, albeit as the No.2 Bill. The Companies Act 1990 started its life as the Companies Bill 1987 before being reintroduced in the same form, on the formation of a new government, as the Companies (No. 2) Bill 1987. We can expect also a No. 3 Bill later in the year, which will implement other proposals of the 1999 Report of the Implementation Advisory Group on the establishment of a Single Regulatory Authority.

The constant and predominant aim of the Central Bank under its establishment legislation of 1942 was ‘the welfare of the people as a whole’. The 1998 Central Bank Act changed the emphasis so that ‘the primary objective of the Bank shall be to maintain price stability’. The Bill proposes the Central Bank ‘support the general economic policies of the European Union,’ although this is not to affect the objective of maintaining price stability. The Central Bank’s view of price stability, or what may affect it, will give it an opportunity to maintain some independence. Furthermore, the requirement to support the EU economic policies gives the Central Bank a licence to publicly criticise the government where it perceives the government’s economic policies diverging from those of the European Union.

IFSRA will be taking over the role that the Central Bank discharged best, but in doing so will discharge its functions with respect to financial service providers in the wider sense rather than simply banks. The emphasis here though is more along the lines of the welfare of the people that underpinned the 1942 Act, namely that IFSRA is required ‘to promote the best interests of users of financial services’. One of the more challenging aspects of the legislation for IFSRA is the requirement that it take whatever action it considers appropriate ‘to increase awareness among members of the public of available financial services and the costs, risks and benefits associated with the provision of those services’. The thought process of IFSRA as to the future will be open to public debate by the requirement that IFSRA prepare an annual strategic plan, which the Minister must submit to the Oireachtas.

Although IFSRA is a constituent part of the Central Bank (which is to be re-named the Central Bank and Financial Services Authority of Ireland), the Bill provides that where performance of a function or the exercise of a power by the Central Bank is dependent on its opinion, belief or state of mind, and the function or power is, to be performed by IFSRA, IFSRA is required to perform the function or exercise the power on the basis of its own opinion, belief or state of mind. The Bill provides that any act, matter or thing done in the name of, or on behalf of, the Central Bank by IFSRA in the performance or exercise of the functions or powers of IFSRA is taken to be done by the Central Bank. Thus, although the Central Bank has responsibility for the performance of a function or exercise of a power, the performance or exercise of it will be done in a manner thought fit by IFSRA. This could give rise to uncomfortable times for the Central Bank.
Not only is the newly appointed consumer director to be responsible for managing the performance and exercise of certain functions and powers of the Central Bank, he is to be responsible also for ‘monitoring the provision of financial services to consumers of those services having regard to the public interest and to the interest of those consumers’. Much will be expected from the consumer director in this regard. However the director of consumer affairs maintains her other roles. Some teeth is given to the consumer director who is empowered to issue codes or impose requirements. Clearly the consumer director will be under public scrutiny as the annual report of the consumer director must specify how far the consumer director has promoted the interests of consumers of relevant financial services during the particular year and what steps have been taken by IFSRA to increase the awareness of consumers of relevant financial services of the costs, risks and benefits involved in using those services.

A disappointing feature of the Bill is the scissors and paste job, which is proposed for the Central Bank Act of 1942. The 1942 Act has been largely amended and updated by the Central Bank Acts of 1964, 1971, 1989, 1997 and 1998. While the jigsaw puzzle approach offers an opportunity for a publishing house, it is time consuming and irritating for those who are required to review and comply with its provisions.

The compliance culture environment in which financial institutions operate has been increased in recent years by the money laundering regulations followed by the detailed requirements of consumer credit law agreements and more recently by dealing with special requests from authorities arising out of the Public Accounts Committee Report and the Ludwig Report. Financial institutions will need to resource up to be able to maintain full compliance. Part of these costs will necessarily form part of the cost of providing financial services, and therefore will be borne by the beneficiaries of those services namely, large, medium and small businesses as well as consumers.

The success of the IFSC has been due to many factors, one of which is the manner in which the Central Bank have exercised its licensing and supervision functions. The financial services industry in Ireland will hope and expect that the manner in which the Central Bank has operated to date will continue, whether it is through the Central Bank or IFSRA, and above all the regulatory authorities will remain independent of outside influences. Much will depend upon the senior personnel involved in managing the operations of the Central Bank and IFSRA as to how well in practice the interaction between the two entities will generate a stable financial regulatory environment. The dissolution of Dail Eireann offers a breathing space for institutions to review the very detailed Bill and make submissions to the new government prior to its anticipated reintroduction to Dail Eireann.

William Johnston is head of the banking and financial services group in Arthur Cox.

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