Opening Statement by Bernard Sheridan, Director of Consumer Protection, to the Joint Committee on Finance, Public Expenditure and Reform

04 July 2012 Speech
Chairman and members of the Committee, I am joined by my colleagues, Mr. Paul Molumby, Head of Payments and Securities Settlement, and Mr. Shane O’Neill, Head of Banking Supervision, to discuss the issues that have arisen at Ulster Bank in recent weeks, as requested in your letter inviting us to appear here today. I have a short opening statement, after which we are happy to take questions from the Committee.

Let me be very clear - the Central Bank views the matters that have arisen in Ulster Bank extremely seriously. This type of disruption for customers is unprecedented in Irish banking. While everyone can understand that IT failures can occur from time-to-time, the contingency planning of RBS and Ulster Bank has self-evidently been appalling and the approach to customer communication has, at times, been exasperating.

We are very concerned about the impact this disruption is having on customers and with the delay in restoring normal banking services for them. We have already described this situation, in public, as unacceptable and it remains so today. We have articulated these concerns directly, and repeatedly, to the most senior executives in Ulster Bank and its parent, RBS. The failure of the RBS contingency plans to restore normal service to customers of Ulster Bank in a reasonable timeframe is clearly inexcusable. Our immediate priority is that Ulster Bank and RBS fix this while ensuring that they provide all necessary assistance to each and every customer impacted. Ulster Bank and RBS have many serious questions to answer as to how they allowed such a situation to emerge and develop. We have instituted our own investigation of these events and we are also working with the UK authorities as they investigate the root causes. It is only at that point will we be able to verify the cause of the disruption and the response of RBS and Ulster Bank to it.

While it is not proposed to get into too much detail in this short opening statement, during the course of the hearing this afternoon we would like to have an opportunity to discuss the respective supervisory and oversight arrangements that are in place for RBS, Ulster Bank and the payments system.

As regards this specific incident, the Central Bank was first informed by Ulster Bank of their problems on Wednesday 20 June. The initial review by RBS indicates that this incident emanated from a technical failure on 19 June in the overnight central batch processing which is managed and operated by RBS in Edinburgh. This resulted in a failure with the scheduled batch processing on this date for RBS, NatWest and Ulster Bank. The initial attempts by RBS to restore normal service to Ulster Bank customers were unsuccessful, and this led to further delays and an increase in the backlog. Since then RBS has experienced considerable difficulty in working through this backlog.

The Central Bank has, since 20 June, been heavily engaged, not only with Ulster Bank but also RBS, in trying to ensure that the problem is resolved by RBS. We have also been working with the UK authorities responsible for regulating RBS to ensure that they are doing everything possible to resolve the difficulties. While it is not possible at this stage to discuss the specific technical reasons for the failure, as this will only emerge in time following detailed investigation, we would be happy in the course of the hearing to give you an overview of what we have been informed of to date.

Our immediate concern from the outset and throughout the incident has been to ensure that Ulster Bank provide as much assistance as possible to their impacted customers, that arrangements be put in place to ensure that those customers can carry on their business with the least possible disruption, and that communications to those customers are sufficient to keep them fully informed as to the facilities that are available.

Ulster Bank had a very poor first touch on this. Their communications to customers and the arrangements initially put in place were not, in our view, at all adequate. We continue to press them to ensure that sufficient and consistent arrangements are in place across the branch network to provide customers with timely and accurate information, access to funds and support and advice particularly for those customers facing financial difficulties and hardship as a result of their systems failure.

As soon as normal banking service is restored we will be requiring Ulster Bank to put in place a comprehensive restitution plan for impacted customers. We are insisting that their customers, and those of other institutions affected by this, are compensated for costs and charges they may have incurred. This will need to take into account the delay that has been experienced, and continues, in restoring service to normal. It has to be recognised by Ulster Bank in designing this restitution plan that their customers have been seriously inconvenienced by these events. This extends to the small and medium business customers as well as personal customers. We will expect this plan to be implemented effectively and efficiently and we will be monitoring it throughout, not only for Ulster Bank customers, but also for customers of other banks who have been affected.

The system failure at RBS in the UK has had a major downstream impact on Ulster Bank’s payments systems. Our national payments system has responded to this incident quickly and effectively, by putting in place arrangements and measures to ensure that certain transactions were re-routed through a contingency payment gateway for electronic clearing to facilitate bulk payments such as large corporate payrolls and social welfare payments, on behalf of Ulster Bank. Aspects of the national payments system contingency plans, established on direction of the Central Bank last year, were invoked and proved effective and some of these measures will remain in place until the resolution of the Ulster Bank incident allows for a full return to normal operations.

The precise details of what happened, how and why it occurred, and the manner in which this technical failure at RBS was able to have such a damaging impact on the customers of Ulster Bank, have yet to be established. Through the requirements we are putting on Ulster Bank and through our own work and that of the UK authorities, a full incident report will be produced. It is only through establishing the detailed facts behind this failure that we can fully assess what needs to be done, both at Ulster Bank and, as necessary, at other banks in the system, to ensure that such an incident does not re-occur and if it does, that it will not have the impact that this particular case has resulted in.

However, it is clear that the arrangements for an IT systems failure have not operated as expected at Ulster Bank, and as a first step the Central Bank has instructed all banks in the Irish clearing system to review their contingency plans and to formally reconfirm that a robust recovery capability is in place. These will be reviewed in light of the lessons learned from this experience.

There is a risk assessment process in place for the Irish payments system. The process is co-ordinated by the Irish Payments Services Organisation (IPSO) and is overseen by the Central Bank. In light of the on-going incident at Ulster Bank the IPSO board has agreed, at our request, that an independent review of the risk assessment methodology be conducted by an independent risk management firm to ensure it is as robust as possible. The recommendations from this review, in conjunction with the findings from the RBS investigation, will drive a number of actions to mitigate the risk of recurrence.

The Central Bank has worked proactively to ensure that appropriate actions have been taken to minimise the impact of this external shock to the national payments system. There has been strong industry support and collaboration to provide contingency payment processing solutions for Ulster Bank. The Central Bank has ensured that the national payments system and the other banks that participate within it stand ready to offer further support to Ulster Bank if this is required.

In conclusion, I would like to assure the Committee that the Central Bank has taken the most serious view of this matter and is acting accordingly. Our focus in the comings days will continue to be on ensuring that Ulster Bank and RBS resolve their payments backlog as quickly as possible. We will remain engaged at the highest levels in Ulster Bank and RBS on this matter. Our immediate priority is that everything possible should be done to facilitate and accommodate customers until normal service resumes. We will seek full and proper restitution for those customers from Ulster Bank. The Central Bank will continue with its own examination of this and will also continue to work closely with the UK authorities in order to fully expose the causes and downstream effects of this incident. We will remain engaged with all Irish banks and IPSO regarding contingency planning and risk management to mitigate the risk of recurrence and to avoid any repeat of this in the Irish market.

Thank you for your attention. We are now happy to take your questions.