Performance Review of the Financial Regulator 07/08
25 September 2008
The Panel has had regard to the published strategy of the Regulator, the interaction it has had with the
Regulator, market developments, and regulatory principles within the conceptual domain of consumer
financial regulation. The Panel wishes to express its appreciation for the professionalism and courtesy
shown by the Regulator to it in the past year. The review of performance is designed to assist the
Regulator in its own reflection on performance, to stimulate changes in performance by the Regulator
and by regulated firms and to serve as a milestone in capturing a consumer perspective on the progress
made in the orientation and achievements of regulatory intervention.
The conclusions we have formed may be summarised in the following table:
1. Consumer Standards A foundation is in place for effective regulation.
2. Standards for regulated firms Positive active supervision: worthwhile examining further the
3. Consumer information Continued welcome progress with some gaps.
4. Innovation & Competition Further reflection and action needed on potential performance
and welfare contribution.
5. Operations Tightening economic circumstances bring this more to the
High Level Goals
1. Set and monitor standards for financial service providers in dealing with their customers
A major milestone in financial regulation was reached with the launch of the Consumer Protection
Code. This sets the bar for how consumers can expect to be treated by regulated businesses. Securing
compliance and rigorously enforcing it represents a major challenge to the Regulator. As the Code
only went fully live in recent months it would be premature to conclude on the relative effectiveness of
the Regulator’s efforts to date but the messages emerging from the record of a statutory agency such as
the Financial Services Ombudsman and more informal sources such as the Consumers Association
suggest that vim and vigour should be the hallmark of the Regulator’s efforts. Within its panoply of
powers, the Regulator must find ways of moving quickly to intervene where breaches occur and where
there is suggestion of breaches, it must similarly move to gather empirical evidence as a prelude to
In previous performance reviews we have stressed the importance of preparing for a down turn. This is
now upon us. In credit markets, this is especially the case. The Regulator needs to have integrated data
with respect to credit exposures, loan defaults, and default processes and also communicate with
consumers regarding the sensible steps that individuals can take in conjunction with their lenders to
manage financial pressures in an orderly manner. Consumers would wish that the regulator be both
seen and heard on these issues in the coming months.
2. Set and monitor standards for the running of sound financial service providers
The market landscape has altered considerably since our last report. We are pleased to endorse the
performance of the Regulator in adopting a hands-on approach to monitoring the financial institutions
and by appraising them of their responsibilities to an orderly market. This work has been undertaken
quietly, regularly, confidentially and firmly. This reflects well on the authority of the Regulator and the
respect which it commands on these issues. Consumers realise that a safe and fair market is predicated
upon such exchanges and interventions, and appreciate that the manner as well as the substance of
interventions are important in this domain.
The turbulence in wholesale money markets and the flattening of the yield curve has sent shocks
throughout the financial system. Issues associated with protection funds crystallised. The Regulator’s
intervention with the UK authorities on behalf of Irish depositors avoided financial losses and restored
confidence in retail markets. We commend the Regulator for the initiative and the success in securing
this outcome and we acknowledge the honourable role played by the UK authorities in their response.
More widely, the issue of deposit and investment protection in the event of failure in a financial
institution has highlighted the need for protection to be extended beyond the current set of institutions.
The Panel has made a submission to the European Commission in that regard and we would look
forward to either a national or EU wide initiative to increase coverage of amounts and institutions as
an aid to consumer protection.
The Consumer Code and the Fitness and Probity guidelines for financial service providers are critical
documents in framing the consumer experience in financial services markets. Where breaches of the
consumer code by a financial service provider represent a pattern, this must raise questions about the
fitness and probity of those charged with responsibility for running that entity. We would wish that the
Regulator would make this connection and show evidence of taking commensurate actions against the
entities where this occurs. Overcharging, mortgage protection insurance, data mishandling, and miss-
selling, are symptomatic of a lack of care for customers rather than isolated incidents. The Panel
believes the Regulator can be more forthright in its procedures for ensuring a high level of compliance
in this regard.
The Panel recognises the efforts made by the Registrar of Credit Unions to help the credit union
movement deal with the challenges it faces particularly through the issue of guidance notes on
important topics such as credit, credit control and accounting for investments. The Panel also
commends the Registrar’s efforts to establish a Consumer Protection Code for Credit Unions.
However, the Panel continues to be concerned about the lack of progress in establishing a statutory
Savings Protection Scheme for Credit Unions.
3. Provide relevant information to consumers
The Panel believes that relevant information includes
- Details on transgression of the consumer code by financial service providers
- Comparative information on the relative attractiveness of the major element of consumer
spending on financial products and services as included in the consumer price index and also
on forms of spending such as mortgage credit or investment charges which have been
- Guides to the purchase of financial service products and in particular to new products which
present complex purchase decisions for consumers
- Details of actual product events post purchase which would allow consumers to learn from
their decisions and make judgements regarding product performance versus the product
The Regulator has increased to some degree its transparency with respect to issues such as
overcharging but remains quite secretive regarding the lessons obtained from inspections or other
exchanges with particular sectors. We believe that sometimes rather than increasing confidence in the
sector it can create suspicion amongst consumers. The Regulator needs to be more mindful of the risks
it takes in pursuing a secretive path and ensure that consumers are appropriately informed regarding
the parties they transact with in the financial services market.
The matter of educating consumers has been highlighted domestically and internationally. Discussions
have been held with stakeholders and there has been Irish participation in international working groups
dealing with this topic. The time is now upon us when a firm plan should be adopted here involving
the Regulator and others so that concrete action can commence immediately.
The Regulator has made great efforts to promote itself as an accessible, reliable and independent
source of information for consumers on financial services. We commend its use of media, its
geographical dissemination and its willingness to engage in public fora. The website has improved
immeasurably, the national advertising campaign has contributed to consumer awareness and the range
of written material has expanded into most of the major product categories sold by regulated firms.
The Regulator needs to demonstrate who is actually availing of its services directly and to identify
those groups which to date have been unable to benefit from its activities. This should offer both
endorsement as well as insight for realigning its outputs with the intended beneficiaries’ needs and
4. Facilitate innovation and competitiveness
There are a number of ways that the Regulator can facilitate innovation. It can frame regulation so that
it does not give rise to barriers to entry. It can publicise areas of the market where competition is weak
or failing. It can refrain from intervention where it is unclear that intervention would not achieve the
desired market outcome. It can adopt and/or support regulatory policy which achieves a high degree of
harmonisation with our EU partners. It can conduct regulatory administration in a way that is
consistent with ‘lean thinking’. It can adapt regulation to changed social and economic patterns. It can
intervene quickly where regulated activity falls below acceptable standards. It can work within its
regulatory policy network to close emerging gaps in the regulatory regime. The Panel believes that the
Regulator has scope for improvement in this area though it has had some significant successes,
including its actions with respect to sub prime lenders, reinsurance and equity release schemes. The
Regulator’s stakeholders contributed significantly to these successes.
We would like to see the Regulator examine whether the actions it takes improve the value capture
achieved by consumers in the market place. It is also possible that the effect of the regulatory action
merely results in greater value capture by financial service providers with little or no gain by
consumers. An awareness of this issue will be particularly important in the context of policy moves to
increase electronic payment and reduce cash and cheque payments.
Consumers are constantly told that regulation leads to higher costs being passed on to them. Yet
consumers’ opinions are rarely sought regarding all other costs incurred by financial service providers.
Some sectors of the industry may have a better record than others in absorbing regulatory costs. This
means firms have displaced some other costs in order to satisfy their compliance obligations. The
Financial Regulator and its European counterparts need to use the data they have available to them to
make visible what occurs in this arena. Any projections used in Regulatory Impact Assessments may
be relevant here. Good customer focused practices, especially when they replace practices or processes
that do not have this quality, could well result in a combination of lower costs, lower prices, better
value and better service.
The Regulator has a record of moving relatively quickly in maintaining the attractiveness of Ireland as
a base of international financial service activity. This includes being in the vanguard of adopting and
implementing European Directives. This shows good commercial awareness and a facility to work
closely with other stakeholders including the Department of Finance, Trade Associations and
individual firms. The Panel recognises the strategic importance of the sector to the Irish economy. It
also believes that the presence of a cohort of internationally competitive firms has positive spill-over
effects for the domestic market.
The Regulator’s responsibility for competition is expressed as a monitoring role with the Competition
Authority having the intervention role. The current synthetic measures are not very helpful neither as a
basis for comprehension nor action. We are surprised that any measure of competition used did not
take into account profitability or cost structures, as these parameters would also be suggested by
conventional economic thought. The Regulator’s position with respect to competition is undermined
by its approach to measurement and it should revisit and revise this.
The Panel has expressed concern about the variable nature of much long term residential mortgages
and does not accept at face value the arguments why this type of loan dominates the Irish market. Our
view is that this represents a form of market failure and one which extends beyond the Regulator in
this domain. The Panel wishes that an investigation is conducted to examine the impediments in
operation here and that the various stakeholders who control the levers in the market should seek to
remove those impediments. The lack of a vibrant fixed rate mortgage market exacerbates the pressures
experienced as credit markets tighten and interest rates rise. This has implications for the real economy
and not just financial markets.
The cost effectiveness of electronic transactions relative to manual based equivalents is widely
recognised. The necessary conditions for embracing the electronic alternative are not fully present
across the country. These include fast, affordable and secure systems with an extremely high threshold
for data protection. Progress towards increasing the penetration of electronic platforms is dependent on
these prerequisites being in place. There may also need to be an entry level facility that accommodates
simple payment and receipt needs, and the Panel is undertaking some research in this area. The
Regulator should reflect these preconditions in any policy engagement it has with stakeholders in this
Some consumers invest directly in the stock market and are encouraged to do so using electronic rather
than paper based title. A stockbroker failure crystallised issues with respect to consumer protection.
Not all fall under the aegis of the Regulator but consumers expect that the Regulator would use its
energy and authority to drive consumer policy in this arena.
The Panel suggests that a useful exercise that could be included in future strategy would be to examine
the consumer product offerings across the major sectors in Ireland to see if the Irish portfolio matches
those available in other advanced economies, especially those with which we share size and maturity
5. Maximise operational efficiency and cost effectiveness.
The Financial Regulator has experienced above inflation increases over the past few years against a
backdrop of increased regulatory responsibilities and a buoyant labour market. Capacity management
is central to securing cost effectiveness where labour costs are by far the largest element of the
resource base. The use of technology can enhance labour productivity if predicated by good design,
training and integrated use across functions and operational units. There is an economic and
operational imperative for more effective use of technology in this context
The Regulator in line with many other public service organisations deals with strategy and operations
at some remove from its financial planning. This could prejudice more satisfactory outcomes from its
resource planning and from the achievement of performance in line with its strategic mandate. We
would expect this issue will be addressed by the Authority and by the executive
The Regulator has a challenge in presenting its performance. It is difficult to measure it directly in
terms of outcomes for the financial market and there is a temptation to rely on input measures or
external evaluations conducted by peer type organisations. From a consumer perspective, the
Regulator needs to determine what the impact has been on those who are intended to benefit from its
activities. This means whether consumers are quantitatively and qualitatively better off as result of
regulatory endeavour. All regulatory costs are borne ultimately by consumers, Irish and overseas, as
they are passed on by regulated firms through the price mechanism. Considerable progress is needed
on this front in order to support confidence in the regulatory trajectory, as well as contributing
something to the regulatory disposition of Irish society as a whole.