Address by Director of Enforcement, Peter Oakes to Central Bank Enforcement Conference

Delivering a credible threat: Now and in the future

Good morning. Thank you to Matthew for opening the Central Bank’s first Enforcement Conference and for his comments on the role of enforcement within the Bank and more widely in society. Judging by the number of people attending today, almost 200, it is fair to say that in the relatively short time since the formation of the unitary central bank and financial regulator, the function and activities of the Enforcement Directorate has generated a lot of attention.

This morning I will also, in the short time available, address how we seek to deliver the credible threat of enforcement, both now and in the future and, given that we have a captive audience, I will take the opportunity to discuss the important role of senior management of firms in helping ensure that the special trust placed in regulated institutions by consumers, investors and the public must remain at the forefront of your minds. In business it is a well-known fact that if you fail to look after the interests of your customers, someone else will: this is a constant competitive threat. If you operate in the regulated world of financial services, should these failures give rise to breaches of regulatory requirements and professional standards, then one must expect close scrutiny by regulators, including the threat of enforcement against both the firm and its individuals.

The statutory objective, mission and high level goals

Many of you know the structure of the Bank and who does what in terms of both senior management and accountability for the five directorates¹ which are overseen by Matthew Elderfield, Deputy Governor for Financial Regulation. However I think it important to remind that the responsibility for enforcement in the Bank has been organisationally separated from supervision.²  The separation of supervisory and enforcement functions within a regulatory structure is a key feature of leading regulators and is vital to the Bank achieving one of its statutory objectives, that being “the proper and effective regulation of financial service providers and markets, while ensuring that the best interests of consumers of financial services are protected”³. This statutory objective is supported by two of the Bank’s eight high level goals, i.e. HLG 3 and HLG 5 published last month under the Bank’s Strategic Plan 2013-2015. Credible enforcement is a stated strategic deliverable for achieving HLG 3 (proper and effective regulation of financial institutions and markets) and will also play an important role in delivering HLG 5 (protection of consumers of financial services). Collectively our eight HLGs are designed to achieve the Bank’s mission of Safeguarding Stability, Protecting Consumers. It should therefore be obvious, notwithstanding the Deputy Governor’s clear announcement this morning that ‘enforcement in the financial sector in Ireland is here to stay’.

As you will hear from my colleagues later today, to continue achieving the credible enforcement deterrent, both now and in the future, we took decisive steps at the time the Enforcement Directorate was established to: adopt an Enforcement Strategy to support the Bank’s assertive risk based supervisory approach; exercise our powers in a proportionate, consistent, targeted and transparent manner⁴; build expertise by adopting a multi-disciplinary skills and teams approach; and set a number of clear enforcement priorities while leaving us the flexibility to deal with reactive enforcement issues. I am very pleased by the commitment and dedication of the enforcement professionals we have been fortunate to secure.

Increased levels of enforcement activity

At the time our first Enforcement Strategy was written - just over two years ago - we said that you can expect increased levels of enforcement activity in conjunction with a more robust attitude towards enforcement, which in turn will promote better corporate governance and more effective compliance by regulated entities. The first enforcement action by the Bank under its administrative sanction's procedures occurred in 2006. Between 2006 and the end of 2009 the Bank concluded 26 settlement agreements, averaging 6.5 a year. Between 2010 and year to date, we have concluded 30 settlement agreements, averaging just over 10 a year. This year we have concluded 12 settlement agreements, our highest annual figure thus far and the year is not over yet. In terms of financial penalties, 65% or €13.3m of the total amount of penalties issued were imposed in the past 3 years ⁵. Public enforcement action is not the only tool in the enforcement toolkit. As an update to my comments in May this year ⁶, in addition to the seven supervisory warnings, which are non-statutory devices, issued in the first four months of 2012, a further seven supervisory warnings have issued year to date. Together with the 14 supervisory warnings issued in 2011, the total number of supervisory warnings issued by the Enforcement Directorate is 28.

Outcomes of enforcement action

These statistical outcomes, although informative, are not the only consideration for determining the efficacy of an enforcement program. Enforcement actions may be taken for a number of reasons and the outcomes of enforcement actions may include (in no particular order):

• to hold persons accountable for wrongdoing
• to deter others from behaving in a similar fashion
• to protect stakeholders (including consumers, investors and of course the public)
• to educate and signal the intention of regulators
• to improve behaviours
• to improve the current state/level of compliance
• to improve the standards we expect of regulated persons
• allow for more efficient and effective supervision (i.e. help with the deployment of scarce
• supervisory resources to areas where the return on policy initiatives is greatest, e.g. PRISM ⁷)
• to improve reputation (of Ireland, firms and industries)
• to compensate harmed investors
• to restore the special trust consumers, investors and the public place in firms and markets

Enforcement actions and investigations

Our enforcement actions have covered a diverse population of firms and senior management while covering a broad spread of topics and themes. All sectors of the regulated market may be subject to enforcement action and we have pursued action against firms operating in the international financial services sector, banks, insurers, re-insurers, retail intermediaries (including those operating in the insurance, mortgage and investment sectors), stockbrokers, specialist MiFID firms, a listed entity not otherwise regulated by the Bank, a fund administrator and investment managers. As diversified as is the population of firms we have pursued, so too are the range of matters we investigate, including concerns about prudential requirements, client assets, complaints handling, securities lending, transaction reporting, AML/CFT, systems and controls, payment protection insurance, specific retail intermediaries issues and timeliness & accuracy of information reported to the Bank to name just a few. Unfortunately a number of these cases have involved some of the most serious breaches of consumer protection, systems and controls and prudential issues encountered by the Bank. These types of poor behaviours have led us, in the past three years, to impose precedent setting fines on Allied Irish Bank plc (€2million), Combined Insurance Company of Europe Limited (€3.35m), Ulster Bank Ireland Limited (€1.96million) and Alico Life International Limited (€3.2million).

In addition to the cases and investigations above, the Bank is also continuing its investigations into the affairs of the three financial crisis cases.⁸  Again, further detail on enforcement work will be covered by my colleagues in the upcoming sessions.

I am sure that many of you are aware of our risk based framework for the supervision of regulated firms, otherwise known as PRISM. My colleagues will touch on PRISM today in terms of enforcement interaction. Yet I should take this brief opportunity to remind that although higher impact firms or those systemically important are generally prioritised by our supervisors to a greater degree than those with a lower impact profile, enforcement action has a powerful deterrent effect amongst the population of lower impact firms where the Bank does not have an active supervisory relationship. We have said previously that a substantial portion of low impact firms must improve basic compliance. This is a clear signal that, as in the past, lower impact firms / smaller entities will continue to be a feature of our enforcement programme.

It is all well and good to be an active enforcer, however if the key stakeholders are unaware of the matters we pursue, then we risk making little impact by way of (not) engendering a wider range of enforcement outcomes. Accordingly you are now seeing fuller and more detailed publicity statements, setting out the nature and facts of the prescribed contraventions, the sanctioning factors taken into consideration and the sanction's imposed to help ensure that the public, consumers and industry professionals are appreciative of the outcomes that flow from our enforcement actions. As I have said previously, publicity of enforcement actions is a core feature of the enforcement process and we will take the opportunity to insert a market commentary which clearly explains the importance of the enforcement action to the Bank by connecting the outcome, in a holistic way as is appropriate, to our mission statement, statutory objectives, HLGs and priorities to inform and educate key stakeholders.

Settlements

To deliver on our mandate we have tried to be as efficient and effective as is possible with our enforcement actions. This approach has, to date, resulted in all administrative sanction's, including securities markets cases, being resolved by settlement. This also includes the settlement of the disqualifications of nine individuals. We think it important to promote the option of early settlement once an administrative sanction's procedure has commenced.

There are many benefits in reaching an appropriate settlement; these include quicker resolution of matters and the immediacy of a strong message of deterrence to the market and public at a point in time when the misconduct is relatively fresh in the minds of users. Another positive is that consumers of financial services should receive greater protection because the likelihood that the firm (and others operating in the same field) will continue to breach regulatory requirements is reduced. Of course settlement is also an expeditious and effective use of the scarce resources of both the firm and the Bank. Entry into a voluntary settlement early in the procedure may lead to a discount on the penalties which the Bank proposes to apply. The discount is in respect of the saving in time, resources and money which results from an early settlement. I have heard a lot of talk from industry about one particular line in the Enforcement Strategy which reads “We usually facilitate only one settlement meeting in each case.”⁹. Firstly, when this line is repeated to me the word ‘usually’ has usually and mysteriously disappeared and secondly, it’s quoted in isolation. Without stealing the thunder of the administrative sanction's procedure session of later today, it is only fair of me to remind that we need to ensure that resources are utilised as efficiently and effectively as possible. And quoting from the Enforcement Strategy, “[a]s an enforcement case progresses, our valuable resources are best applied to pursuing the enforcement case to a more formal conclusion rather than engaging in attempts to settle the case”.¹⁰

Furthermore, when deciding to settle, the Bank must exercise this option responsibly. There is little incentive to settle a matter if we perceive the likelihood of a better outcome at Inquiry. At the end of the day we need to act in the public interest.

Individuals / persons concerned in the management

The Bank is prepared for the day when settlement is not the correct path for either the firm / the person concerned in the management or the Bank, leading us to enter into the Inquiry (or Assessment) forum. Our enforcement role, like that of our UK counterpart and other regulators, is to help change behaviours by making clear that there are real and meaningful consequences for firms who disregard their obligations and break the rules. The same applies to individuals. As mentioned earlier today, individuals tend to fight their corner. Without giving anything away, we are prepared for the driver of our first Inquiry to be an individual (i.e. person concerned in the management) who we consider to have participated in a prescribed contravention.

As I have said elsewhere, actions against individuals, especially those charged with oversight of key functions, enhances the credibility of markets, the reputation of Ireland and the protection of consumers. Such action is a strong deterrent to others and is aimed at improving behaviours expected from such persons. Deputy Governor Elderfield extrapolated this issue in his speech this morning and I am very appreciative of his direct interest in, and open questioning of, whether the triggers and enforceability for white collar crime in Ireland are calibrated correctly, by noting two particular matters: (i) criminal and/or civil offence for reckless trading of a financial services company, and (ii) presumptive liability or sanction's for bank directors which failed. On point (i) see the White Paper on Crime Consultation Process ¹¹ with particular reference to what appears to be successful use of an Australian company law provision in this area by the local regulator; and point (ii) see Sanction's for the Directors of Failed Banks ¹² for a discussion on a “rebuttable presumption” that the director of a failed bank is not suitable to be approved by the regulator to hold a position as a senior executive in a bank and separately the introduction of criminal sanction's for serious misconduct in the management of a bank.

Another area on the minds of those in controlled functions regarding their personal obligations is the new fitness and probity powers and my colleagues will cover this topic later today in a manner that I am sure you will find informative on our work in this area.

Before leaving this forward looking piece on regulation, it would be remiss not to touch upon the remit and resourcing of the regulatory bodies and law enforcement agencies dealing with white collar crime. There are strong arguments for further investment in the enforcement of laws and regulations aimed at detecting and preventing economic crime. The recapitalisation of Irish banks arising from the unprecedented financial crisis has cost the Irish taxpayer some €64 billion and has left this country and its people facing many many difficult years of austerity. Of course it is not just Ireland; it is difficult to think of any country in the developed world which has not been impacted by the global financial crisis. However much of Ireland’s woos may be attributed to institutions and people far closer to home. There has been a political backlash against the deregulatory impulse of governance which has occurred across the globe over the past 20 years or so. Regulators in the U.S., U.K., continental Europe and elsewhere have spoken out, albeit too late, about the elephant in the room. The populist view that better regulation equated somehow to less regulation is now recognised to have been a costly fallacy. We now face into world of more regulation. In Ireland, a small and open economy, we need to be smart and resourceful in addressing our needs and this includes our approach to ensuring that new regulations and regulatory structures do not unintentionally and unnecessarily hamper economic growth as we return to a sustainable future. In this space, we should also look at managing our scarce white collar crime resources by reference to overseas models. For example, the U.S. Financial Fraud Enforcement Task Force and the U.K. National Crime Agency. A key objective of the Taskforce is improving efforts across the US government and with state and local partners for the investigation and prosecution of significant financial crimes, ensuring just and effective punishment for those who perpetrate financial crimes, recovering proceeds for victims and addressing financial discrimination in the lending and financial markets. Under the U.K. model, the Agency will set the national operational agenda for fighting serious and complex crime and organised criminality. The Agency will be comprised of five distinct Commands including an Economic Crime Command. The FSA is an active and supportive participant in the precursor to the Economic Crime Command.

These exact models may not necessarily be suitable outside the U.S. and the U.K., however any concept which would help coordinate white collar crime actions in Ireland in ways which extract the best value for the Irish taxpayer while paying dividends in terms of securing white collar convictions deserved to be discussed and debated.

Risks and uncertainties – to be considered a credible enforcer, one must be prepared to lose

Returning to matters closer to home, entering into an Inquiry will be a new experience for the Bank and the regulated firm and/or individual. Even the strongest case may suffer unexpected outcomes outside the settlement environment, creating risk and uncertainty. Such risk and uncertainty may include not just a negative outcome for the Bank but lesser sanction's at the end of an Inquiry than might have been obtained by way of settlement. Equally, at the end of an Inquiry, the firm / individual might suffer greater sanction's than it otherwise thought likely at the time of a settlement proposal. These issues will no doubt be considered by all parties at the relevant junction in an enforcement investigation.

Although not directly relevant to the Inquiry procedure, I would remind that we also appreciate that exercising our criminal powers will place us before the courts to prove our case beyond reasonable doubt. That too is a challenge we accept.

Regardless of whether the forum is civil or criminal (or somewhere in between), to be considered a credible enforcer, one must be prepared to lose. This does not mean that we will be reckless or wanton when exercising our powers and discretions. Rather we will act decisively, on an informed basis and with full regard to our statutory duties, so that when the enforcement throttle is opened, the Bank is prepared to take-on the uncertainty and risks inherent in new fora.

AML/CFT supervisory role

I wish to turn briefly to the Bank’s important role as competent authority for the purposes of both the third anti-money laundering directive and our international obligations extending from membership of Financial Action Task Force. Many of you will have received a ‘Dear CEO Letter’ from the Enforcement Directorate. Today’s event is not about our AML/CFT and Financial Sanction's work. However I wish to remind that this specialist supervisory unit – which is the area responsible for the findings supporting the ‘Dear CEO Letter’ – is just that: i.e. a specialist AML/CTF supervisory and policy unit which happens to sit within the structure of the Enforcement Directorate (as too does the unauthorised providers unit). Many will be familiar with this structure at other regulators, i.e. an AML/CTF supervisory unit being located in an enforcement department. It is not unique to the Bank. Where there are concerns about a firm’s compliance with the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, referrals from the AML/CTF supervisory team can, just like referrals from banking, insurance, markets and consumer supervisory divisions, be made to the enforcement activity teams for enforcement investigation. Regardless of the source of a referral to the enforcement teams, a rigorous, independent and consistent approach is adopted by the enforcement teams when considering and accepting a referral for enforcement attention.

New enforcement powers on the horizon

The last area I will address before handing over to my colleagues is our future enforcement powers. The key powers I have touched on this morning relate to our well-established administrative sanction process. We have, relatively recently, taken on new fitness and probity powers pursuant to Part 3 of the Central Bank Reform Act 2010. However this is not the end of the build-up of our enforcement powers. We will soon have a broader range of supervisory and enforcement tools to implement desired outcomes which plug certain gaps in our powers to safeguard stability, to effectively regulate markets and financial firms and to protect consumers. We are looking forward to the passing of the Central Bank (Supervision and Enforcement) Bill which will amongst other things doubles the current administrative sanction's penalties taking the maximum fine for individuals and bodies corporate to €1 million and €10 million (or 10% of annual turnover) respectively. This is just one important change to the suite of regulatory tools which will bolster our toolkit. Further detail on the Bill will be presented later today.

Conclusion

In summary, although we are a young Directorate I hope that I have provided you a flavour of the scale and volume of our work to date. I trust that when we look back on the Bank and the Enforcement Directorate in the years to come there will be a strong appreciation of the inroads made to deliver effective enforcement, enhance the effectiveness of our supervisory efforts and advance our mission of safeguarding stability and protecting consumers.

As I noted earlier, important outcomes of the threat of enforcement include improving the behaviours and standards we expect of those we regulate. It is in this space that I reach out to you, the senior management of regulated institutions to ask you to do your bit to ensure that the actions, messages and signalling of the Bank are heard loud and clear in your firms. I ask that you embrace your personal accountability for the decisions you make and/or oversee at your firms; the very decisions which may benefit and adversely affect numerous stakeholders. Collectively we are all in this together, albeit with differing roles and responsibilities; the reputation of Ireland Inc has taken a battering of late. Finishing as I started, I take this opportunity to again say that the senior management, including the boards, of firms must help ensure that: the special trust placed in regulated institutions by consumers, investors and the public remains at the forefront your minds, is an accepted basic tenet of good corporate governance and shines brightly in all your business dealings. And when our expectations are ignored and persons fall below the standards required of them, whether an institution or an individual, the Bank will act and we will deploy our enforcement resources to address our concerns, including taking enforcement action.

I am conscious of the time and appreciate that you will have questions on the issues addressed this morning thus far. In concluding, I wish to thank my Enforcement Directorate colleagues for all their planning and effort to make our first Enforcement Conference a resounding success. Thank you very much for your time and I look forward to your questions.

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¹ Credit Institutions and Insurance Supervision Directorate; Policy and Risk Directorate, Consumer Protection Directorate; Markets Directorate; and the Enforcement Directorate.

² See closing remarks by Governor Patrick Honohan, at the Central Bank of Ireland Stakeholder Conference, 27 April 2012  

³ Section 6A(2)(b) Central Bank Reform Act 2010

⁴ Section 3.3, Enforcement Strategy

⁵ Total amount of monetary penalties year to date equals €20,673,100.

⁶ Address by Peter Oakes, Director of Enforcement to the Association of Compliance Officers in Ireland, 8 May 2012 

⁷ Probability Risk and Impact SysteM (PRISM)

⁸ Irish Nationwide Building Society, Quinn Insurance and the former Anglo Irish Bank.

⁹ See page 21 (section 3.4.4) of Enforcement Strategy 2011 - 2012

¹⁰ ibid

¹¹ See page 8 White Paper on Crime Consultation, Discussion Document 3, Organised and White Collar Crime, Overview of Written Submissions Received (April 2011)

¹² HM Treasury, Sanction's for the directors of failed banks (July 2012)