“Our culture assessments will analyse the leadership behaviour of management in banks” – Director General Derville Rowland

Address by Derville Rowland, Director General, Financial Conduct, Central Bank of Ireland to The European Consumer Protection Conference in Prague, 22nd March 2018

Good Morning Ladies and Gentlemen, I am delighted to be with you in Prague today to talk to you about the evolution of the Irish Consumer Protection Framework.

I will describe the institutional framework for delivering consumer protection in Ireland; the role that the Central Bank of Ireland plays in protecting consumers through our regulatory and supervisory activities, particularly in the area of insurance; and our increasing focus on requiring financial institutions to promote cultures and behaviour that put customers at heart of their business models.

Safeguarding Stability, Protecting Consumers

Excessive risk-taking by financial firms and governance failures were central causes of the global financial crisis which had a very significant impact on Ireland – a small open economy.

Informed by lessons learned from the crisis, the institutional framework of the Central Bank of Ireland was strengthened so that the statutory mandates of financial stability, prudential regulation and consumer protection are the core focus.

This integrated structure recognises that consumers are best protected in a financial system that is stable - consisting of firms that are financially sound where consumers’ interests are protected.

The context in which the Central Bank of Ireland operates is that we are a systemic regulator which aims to safeguard stability and protect consumers, while other agencies are charged with information, education, competition matters and adjudicating consumer complaints.

Our vision is for a financial services system underpinned by a strong culture of compliance, with firms and the people working in those firms acting in the best interests of their customers.

This vision is backed up by comprehensive and enforceable legislation, rigorous supervision, a credible threat of enforcement including powers of redress when consumers have suffered detriment.

To give you an idea of the scale of the task, we regulate more than 10,000 firms providing financial services in Ireland and overseas.

In our role of authorising financial services firms to operate in the Irish market, we act as a strong gatekeeper by requiring firms established in Ireland to comply with the obligations imposed through the regulatory framework and act in the best interests of consumers.

For example, we assess the fitness and probity of individual directors and senior management; the adequacy of the firms’ capital; their internal controls and risk management systems; and the level of resources and expertise of staff.

We operate an assertive risk based approach to supervision. This means the higher the risks, the higher the intensity and intrusiveness of the attention we pay those firms in our supervisory work.

International Co-operation

We seek to incorporate best international consumer protection practice in to our supervisory activities and to influence international consumer protection initiatives by sharing our expertise with others.

We work closely with the three Supervisory Authorities - the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).

We also engage with other international organisations that work to protect consumers. We were one of the founding members of FinCoNet, an international organisation of supervisory authorities with responsibility for financial consumer protection; we chaired the EBA Standing Committee on Consumer Protection and Financial Innovation for two years; and we participated on the OECD Task Force on Consumer Protection.

We subscribe to the ten high-level principles on Financial Consumer Protection endorsed by the G20 Finance Ministers and Central Bank Governors in 2011.

These non-binding principles include that financial consumer protection should be an integral part of the legal, regulatory and supervisory framework; that consumers should be treated equitably, honestly and fairly at all stages of their relationship with financial services providers; and that consumers should be given key information about the fundamental benefits, risks and terms of the products they buy.

Consumer Protection and Minimum Competency Codes

The Central Bank of Ireland has a number of statutory codes of conduct with which all firms must comply. Our Consumer Protection Code, first launched in 2006, was pioneering and first of its kind in its directional approach for firms, prescribing how products should be sold, the information that should be provided to consumers, how complaints should be dealt with and other overarching expectations of how firms should engage with consumers. 

The aim is to ensure a similar level of protection for consumers regardless of the type of financial services provider with which they engage.

Our Minimum Competency Code, launched in 2006, sets minimum professional standards for financial services providers, with particular emphasis on consumer-facing roles. It aims to ensure that the people selling financial products and offering advice to consumers on behalf of regulated entities have a minimum acceptable level of competency.

Enhancing our Consumer Risk Assessment Model

In 2017, the Central Bank restructured its financial regulation functions into two distinct pillars: one dedicated to the regulation of financial conduct and the other to prudential regulation. The restructuring is designed both to strengthen our approach to conduct supervision and our commitment to consumer protection.

Last year also, we enhanced our Consumer Protection Risk Assessment (CPRA) model by establishing a new and more intrusive approach for supervisory assessments of regulated firms in relation to how they identify and manage conduct and consumer protection risks.

Our new model enables supervisors to assess how firms’ consumer protection risk management frameworks are designed and governed and, importantly, how effective they are in practice at delivering fair consumer outcomes.

We introduced the model following a pilot testing exercise which found that, in general, firms were unable to provide sufficient evidence of a strong link between performance management and firms’ stated consumer protection values.

Product Oversight and Governance (POG) is an integral part of this new model. This means that in addition to assessing consumer protection risk governance, controls and culture in regulated firms, the model also assesses the consumer protection risks in the product life cycle, from product development through to sales.

Behavioural Economics – preventing “Evil Nudges’’

The Wall Street Journal reported earlier this year that Wells Fargo, the US bank at the centre of a scandal involving opening unauthorised accounts, was offering to reimburse 110,000 customers who were improperly charged monthly fees. Wells Fargo mailed customers letters asking them to opt in to receive repayment. The Journal reported that Wells Fargo expected that only “half or fewer” of the people to whom it owed the money would take the bank up on the refund offer.

Nobel prize-winning behavioural economist Richard Thaler described the offer as “slimy’’ as it was effectively nudging consumers to make the wrong choice by relying on their likely inertia in terms of responding to the letters.

Conscious of the information asymmetry between consumers and financial services providers, the Central Bank is increasingly using insights from behavioural economics to help us identify how we can strengthen regulatory requirements to ensure firms help consumers make better choices. We want to prevent so-called “evil nudges’’ that push consumers to make poor choices.

We recognise the importance of behavioural economics in informing regulatory requirements and preventing firms taking unfair advantage of consumers. A core part of our work in consumer protection is informing ourselves - both through our own research and by reviewing the work of other leaders in the field - to identify examples of firms knowingly taking advantage of consumer behaviours and biases.

The aim is to prevent practices which should not be used when designing or selling products to consumers. We have found issues relating to teaser rates and hidden fees on credit cards with companies taking advantage of some consumers who were not fully informed about such fees.

We have also found strong “extrapolation bias’’ when it comes to the purchase of mutual funds, where past performance is used overtly as a guide to indicate future performance.
We plan to publish this research later this year.
I have explained some of the theory behind our consumer protection efforts, now let me tell you a little about how this works in practice.

Thematic Inspections and Consultations

The Central Bank uses thematic inspections as its primary tool to assess sectoral conduct risks. These inspections focus on a specific activity, product or delivery channel across a number of firms which allows us to determine standards at an industry level and to assess whether further action is required.

The supervisory and inspection approach is currently predicated on sectoral assessments supported by reactive work when issues are detected. But the framework for consumer protection should continually evolve in order to deliver maximum effectiveness for consumers. In that regard, we are considering supplementing our supervisory approach with firm level engagements for high impact firms or products in order to better protect consumers.

Many of you here today work in the insurance sector and provide very important financial services to consumers and businesses including motor insurance, life insurance and health insurance which help protect them from costs that may arise from a range of risks including personal injuries, damage to their health or property.

We believe that effective regulation and supervision of insurance companies is key so that policyholders clearly understand the products they buy and can have confidence that the insurer will have the financial strength to pay out on valid claims in the future.
We conduct regular themed inspections in the insurance sector, including the broker sector. Many of these inspections are supported by bespoke consumer research.

For example, last December we published a report on the consumer experience of purchasing gadget insurance, which was undertaken to examine consumers’ attitudes, behaviours and experiences when buying insurance for gadgets such as smartphones and tablets.

The research also sought to understand the impact of any potential behavioural biases and identify potential risks in this area. We found a majority of consumers did not understand their cover and thought it covered more than it did, while some consumers may be paying for cover they do not need.

When we published the research, we took the opportunity to remind insurers of the requirement to have strong product oversight and governance arrangements in place for the manufacture and distribution of these insurance products, in order to ensure that the best interests of consumers are protected.

The Central Bank also routinely publishes Consultation Papers which set out our thinking on particular issues. Last November, for example, we published a paper on Intermediary Inducements: Enhanced Consumer Protection Measures. The paper contains proposals to enhance the protections for consumers when seeking advice or services from financial intermediaries including proposals for stricter rules on how financial intermediaries can be paid commission (or other inducements) by the firms whose products they sell.

The proposed measures require firms to avoid conflicts of interest created by poorly designed inducement arrangements and provide greater transparency for consumers about how a financial intermediary, whose advice they are relying on, is getting paid. For example, we are proposing that it is unacceptable to offer inducements linked to targets that do not consider the consumer’s best interests, such as volume, profit, or business retention targets.

Culture and Behaviour at Financial Institutions

It is often said that culture eats strategy for breakfast. In the years since the financial crisis there have been significant misconduct issues identified at financial institutions both at home and abroad. Global banks’ misconduct costs have now reached over $320 billion – capital that could otherwise have supported up to $5 trillion of lending to households and businesses.

Amid concern that such misconduct can threaten to undermine the safety of financial institutions, there is an emerging trend towards more intensive regulatory focus on governance, conduct and culture issues.

The Governor of the Bank of England remarked last year that repeated episodes of misconduct have called the social licence of finance into question and recommended greater focus on improving the culture at financial services firms.

In Ireland, too, the Central Bank has intervened to secure redress and compensation for customers wrongly denied tracker mortgage products or put on the wrong rate. We have required lenders to pay out €316m to affected customers so far - with more to follow.
Sorting out this overcharging problem has come at a big financial and reputational cost to the lenders who have made combined provisions of about €900m in respect of the Examination, broken down as approximately €600m for redress and compensation and €300m for costs.

The overcharging has also raised serious questions about the culture in our lending institutions and the extent to which the boards and senior management of those institutions are really living up to their promises of putting the customer at the heart of their business.

In that regard, we are currently undertaking behaviour and culture assessments of each of the five main lenders. We are supported in this work by the Dutch Central Bank, recognised leaders in the supervision of behaviour and culture.

These assessments will identify behavioural and structural patterns that affect the way consumer needs are considered and protected. The assessments will analyse the leadership behaviour of the management board and any potential risks related to the behaviour and culture of management boards that might impact the stability of the banks and, in particular, cause further detriment to consumers.

This review will shape our future supervisory and engagement strategy. Depending on what we uncover, we may require certain mitigating actions at our lending institutions. These could include, for example, requiring the lenders to conduct an annual internal audit of culture; requiring the boards of the lenders to set up ethics sub-committees; and linking incentivisation to appropriate behaviours.

We are also considering the merits of a Senior Managers Regime similar to the one in the United Kingdom. Such a regime would permit the Central Bank to require senior managers to submit a statement of responsibilities that clearly states the matters for which they are responsible and accountable. These requirements would assist in assigning responsibility to individuals in a regulatory context and decrease the ability of individuals to claim that the blame for wrongdoing lay elsewhere.

Getting the culture right is important not just for consumers, but also for shareholders who are faced with the substantial costs of paying for the misconduct of the institutions in which they invest.

In short, we expect the boards and senior management at our lending institutions to take the lead in rebuilding trust with their customers, their shareholders and the wider public by ensuring that they create a culture which puts the long term interests of the business, its customers and shareholders ahead of short-term gains.

Enforcement

Turning now to the question of enforcement, we strongly believe in the need for a regulatory framework that is supported by public enforcement outcomes.
We have an important gatekeeping role to ensure that senior management in our financial institutions comply with our fit and proper regime, that legal and regulatory breaches are investigated and sanctions are administered.

Since 2012, for example, following fitness and/or probity concerns raised by supervisors in relation to proposed appointments to Pre-Approval Controlled Functions in regulated firms, we robustly challenged those applications, and 45 proposed appointments were subsequently withdrawn.

Our supervision of individuals has also proven to be robust: the Central Bank has issued and published three prohibition notices following fitness and probity investigations.
This assertive risk-based supervision of firms and individuals is backed up by a credible threat of enforcement. Since 2006, the Central Bank has concluded 117 enforcement cases under its Administrative Sanctions Procedure and imposed over €61.6 million in fines.

It is clear from the outcomes I have mentioned that the Central Bank’s regulatory reach extends to individuals as well as to firms. We take individual accountability very seriously and our fitness and probity investigations demonstrate our resolve to act where an individual’s conduct falls below expected standards.

Importantly, the facts of our enforcement outcomes against individuals and firms are the subject of public statements on the Central Bank’s website.

Conclusion

Let me conclude by saying that the Central Bank of Ireland has learned a lot in the ten years since the markets crashed in 2008. We are now increasingly insisting that firms comply not only with our regulations and codes, but also that the people who lead those firms set about building a culture that serves their customers, their shareholders and the wider economy in in which we license them to operate.
It has been a pleasure to attend this conference in Prague today and I look forward to the rest of our discussions.

Thank you