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Remarks by Director of Enforcement Derville Rowland for the Compliance Ireland Seminar

12 December 2014 Speech

Enforcement at the Central Bank of Ireland

Introduction

Good morning ladies and gentlemen, it is my pleasure to be here this morning and to address you on the theme of ‘Enforcement at the Central Bank’ as part of the ‘Central Bank Enforcement Seminar’, organised by Compliance Ireland.

As I talk to you this morning, it has been over four years since the Enforcement Directorate was established as a separate and distinct directorate within the Central Bank organisational structure. As we are all aware, this period has witnessed unprecedented and sustained change in the regulatory landscape, not only in terms of the volume of legislative requirements imposed industry wide, but also in the fundamental reassessment of the importance of enforcement in the wider regulatory framework, which began with the establishment of the directorate in 2010. The main focus of my talk this morning will relate to the importance of enforcement in the wider regulatory framework.

In this regard, I would like to begin by outlining the work of the Enforcement Directorate of the Central Bank with reference to the number of cases taken to date and our enforcement strategies and priorities. I will also outline how key messages and themes for industry stakeholders are publicly available in the settlement agreements published by the Central Bank.

I will then address the role of enforcement in the regulatory landscape. I will highlight the functions it performs in the broader regulatory structure and its evolving nature. I will also refer to enforcement’s limitations and that for real cultural change to occur, commitment is required from all stakeholders, regulators and regulated alike, to ensure we have a vibrant and sustainable financial services industry in Ireland. Finally, I will consider some areas of development, along with some of the challenges that the Directorate will face in 2015.

Administrative sanctions procedure cases

This year, to date, we have settled and publicised 11 administrative sanctions procedure cases, imposing monetary sanctions of approximately €5.4 million. Since 2010 we have concluded a total of 62 administrative sanctions procedure cases, against entities across the regulated industry, imposing approximately €27.5 million in monetary sanctions. These cases have arisen from a mix of pre-defined themes and reactive actions and relate to breaches of both prudential and consumer obligations.

As you will be aware, since 2011 we have published annual enforcement priorities, highlighting pre-defined themes which are the areas of greatest concern to the Central Bank. In 2014 we set out our enforcement priorities by industry sector. We focus enforcement resources on these priority themes to help promote compliance in the areas that are of greatest importance to the Central Bank. Our enforcement actions do not however relate solely to these ‘pre-defined’ enforcement priorities. We also make provision in our resourcing to allow us to take ‘reactive actions’ in response to serious issues identified through day-to-day supervisory work and from other information sources for example, whistleblowing.

For transparency, we issue detailed publicity statements upon the conclusion of an administrative sanctions procedure case. These publicity statements offer guidance for all entities irrespective of the industry sector and demonstrate what we care about and what entities should care about. They allow an entity to examine their own business and remedy similar issues before things go wrong.

The role of enforcement

The establishment of a standalone Directorate in 2010 has significantly contributed to the resolution of one of the inherent weaknesses in the pre-crisis regulatory framework, namely the lack of use and lack of value placed on the role of enforcement as a necessary component of an efficient and effective regulatory framework. The Central Bank is committed to utilising, where appropriate, the range of enforcement options available as part of an overall enforcement strategy, with the aim of deterring poor behaviours, achieving compliance and promoting the behaviours and high standards we expect. While we recognise the role of enforcement as a key element of an effective regulatory system, we also acknowledge the inherent limitations in the system. The reality is that no amount of regulation, supervision or enforcement, however robust, can prevent, identify, or deter every breach nor can they change behaviours on their own. To achieve real behavioural change, in tandem with a robust regulatory infrastructure, there must be real and substantive industry-wide cultural change. This recognition is not new, however it may be timely, as we move further away from the crisis agenda, which affords us the opportunity to consider the type of industry we want going forward. Of course, in the wake of past mistakes, the restoration of public trust and confidence in the regulator’s ability to do their job effectively and efficiently is also an important factor.

The Central Bank has strived to initiate change in this regard through our policy initiatives. For example, we developed the Fitness and Probity Standards introduced in 2011 together with accompanying regulations and guidance governing fitness and probity investigations, in order to ensure that those working in the industry are subject to robust and regular oversight. The Fitness and Probity regime requires that an individual performing a pre-approval controlled function or controlled function is: (i) competent and capable; (ii) honest, ethical and acts with integrity; and is (iii) financially sound. In 2010, we also introduced a Corporate Governance Code for Credit Institutions and Insurance Undertakings, setting out the minimum requirements that an institution shall meet in the interests of promoting strong and effective governance. As you will be aware, this Code was revised in 2013 and this revised version is due to come into effect in January 2015.

I think you will agree that the objective of changing behaviours is one for us all to share. A vibrant and sustainable financial services industry is only possible if all entities and the individuals in them commit to change.

The Central Bank (Supervision and Enforcement) Act 2013

In line with the expansion of the regulatory agenda in Ireland in recent years, the Central Bank acquired significantly enhanced supervisory and enforcement powers under the Central Bank (Supervision and Enforcement) Act 2013. Since the commencement of the 2013 Act, the Central Bank may impose a monetary sanction upon an entity of the greater of €10 million or an amount equal to 10 per cent of the turnover of an entity or €1 million on a natural person. Prior to the commencement of the 2013 Act, and in respect of all cases to date, the maximum penalty that the Central Bank could impose on an entity was €5 million and €500,000 on natural persons. While we acknowledge the importance of marking the seriousness of a breach by imposing an appropriate monetary sanction, we do not consider the amount of the sanction to be the only relevant factor in the sanctioning process. As outlined above, the publication of settlement agreements and the attendant publicity are also important in this regard.

In addition to the increased monetary sanctions, the 2013 Act provides the Central Bank with the power, upon finding that an entity is committing or has committed a prescribed contravention, to suspend their authorisation, in respect of one or more of its activities, where appropriate. The Central Bank also has the power to revoke the authorisation of an entity.

The 2013 Act also provides powers to require that appropriate redress be made to customers that have suffered or will suffer loss as a result of widespread or regular defaults by an entity. The Central Bank is committed to utilising these powers in a manner that is both effective and appropriate.

Developments

Turning my attention to some developing areas I would like to address you briefly in relation to firstly, the credit union sector, secondly, the Directorate’s work in relation to anti-money laundering, and finally the impact of the introduction of the Single Supervisory Mechanism in November on our work.

  • Credit Unions

As many of you are no doubt aware, last year, the credit union sector was brought within the ambit of our administrative sanctioning powers. These powers are important in underpinning our risk-based supervision approach, and will be used where appropriate. We will be proportionate in our approach, understanding the efforts that credit unions are making. However, where enforcement action with respect to a credit union is necessary, the Central Bank will be firm and robust in its approach.

  • Anti-Money Laundering

A further significant area of responsibility in the Enforcement Directorate is anti-money laundering (AML). The Anti-Money Laundering Division in the Central Bank is responsible for the supervision of credit and financial institutions’ compliance with AML and financial sanctions legislation.

The Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 introduced an AML framework in line with EU law and the recommendations of the Financial Action Task Force (FATF), the international AML standard setting body. Ireland, as a member of the FATF, adheres to and implements the supervision standards set by the FATF. The Central Bank is currently preparing for the next peer review of Ireland by the FATF which is due to take place in 2016. It is important that Ireland gets a positive review by the FATF in 2016 to show that Ireland takes its AML regulatory obligations seriously and that its financial system is not susceptible to being used for money laundering or terrorist financing purposes.

At European level, the fourth EU directive which will increase AML regulatory obligations is at an advanced stage of negotiation. We expect this directive to be adopted shortly. The AML Division continues to engage with the European Supervisory Authorities and the FATF to ensure that the Central Bank provides appropriate input at an international level.

It is recognised that there are a number of challenges in the area of AML and financial sanctions for both regulators, such as the Central Bank, and for industry. The regulatory framework for AML is continuing to evolve at the international and domestic levels, with the focus shifting from ensuring that the financial sector has preventative measures in place to ensuring that those preventative measures are effective. At the centre of AML regulation is the need for proper risk assessment to be conducted and implemented effectively with participants having a clear understanding of the risks faced and ensuring that they take steps to mitigate those risks.

The Central Bank, for its part, acknowledges the challenges faced by the financial sector in the changing world of AML. We are committed to ensuring that we communicate to industry and the public the reasons for AML regulation, any changes being made to the AML regulatory framework and our own AML inspection findings. In that regard, the Central Bank continues to engage with the various sectors’ representative bodies on an on-going basis and it is planned to increase the level of engagement with money laundering reporting officers in 2015. We have also recently updated information on the Central Bank’s website to give more information about AML legal requirements and the forthcoming FATF review. We are also planning to publish in the coming months sectoral reports that will highlight issues identified during recent AML inspections.

  • Single Supervisory Mechanism

2014 has been a year of significant change for the Central Bank with the commencement of the Single Supervisory Mechanism in November and the transfer of a number of supervisory responsibilities and decision-making powers in respect of credit institutions to the European Central Bank. Notwithstanding this shift in responsibility, the Central Bank retains certain responsibilities in respect of enforcement, and as such when it comes to enforcing the credit institution regulations through administrative actions such as fines – whether against institutions, or individuals – we will approach this role with vigour. In certain instances, the Central Bank, through Enforcement, will pursue these cases of its own initiative. In other cases, the Central Bank will do so on the instruction of, and in conjunction with, the Enforcement and Sanctioning Division of the European Central Bank. In all cases, the Central Bank may use its investigative and information-gathering powers.

Conclusion

As you are all no doubt aware, to date, all of our administrative sanctions procedure cases have settled, with the various firms accepting the Central Bank’s findings and agreeing to the imposition of various sanctions including monetary sanctions and disqualifications.

Looking forward to next year, we anticipate that this position will change in 2015 and administrative sanctions procedure cases will be referred to Inquiry. We recently published the list of our Inquiry members, drawn from industry, the judiciary, legal practitioners and internal Central Bank employees. We acknowledge that as the Inquiry process is rolled out, it will inevitably be challenged. Indeed, we consider this to be an unavoidable part of the refining and maturing of the procedure.

Ultimately, we expect to have an administrative sanctions procedure that is settled, efficient, transparent, routinely used and which gives rise to outcomes that are both predictable and appropriate.

As we move into this new phase, we will continue to need an inflow of highly skilled, motivated industry professionals who are committed to making a meaningful contribution in the public sector.

Repairing consumer trust and confidence in the industry and the regulator is not an easy task, nor should it be. However, a sincere and concerted effort, from all stakeholders, regulated and regulators alike, to embed a culture of compliance and the expectation of higher standards generally will no doubt assist in this process. As we progress on this journey, it is vital that we do so in the recognition that a more ethical, accountable and transparent financial sector benefits Ireland as a whole.

Thank you for your kind attention.

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