Transcript of Director General, Derville Rowland, interview with Dearbhail McDonald, Group Business Editor, Independent News and Media

14 July 2018 Interview

Derville Rowland

Dearbhail McDonald, Group Business Editor, INM (DMcD): The Tracker Mortgage Examination is the largest, most complex, most significant consumer protection the Central Bank has ever undertaken. Where are we now in terms of that?

Director General, Derville Rowland (DR): So, I’ll just confirm, it's true that the tracker mortgage examination is the largest piece of consumer protection supervisory work ever undertaken by the Central Bank of Ireland. More than two million mortgage accounts were considered in scope for this examination to see if people had received their tracker mortgage products or at the right margin, whether the dealings with them had been fair and transparent and it should never have happened. But having said that, it's been my key priority since I moved into my new role on the 1st of September to ensure that the Tracker Mortgage Examination progressed as quickly as possible, given the scale.

It's huge and all identified customers were incorporated and they received compensation and redress. Enormous progress has been made since last year and the up-to-date figures are that 37,800 customers have been affected by this and the up-to-date figure is €557.3 million has actually been paid out to date. Now the last time we reported, which was only in March, there was about €459 million paid out, so you can see the pace of pay out is moving along. We won't be satisfied until all the money is paid out but I'd like to think that we’re moving towards more the closing down end of this but this has cost the Irish banks an enormous amount of money.

DMcD: In terms of the provision they’ve set aside?

DR: Yes about €1 billion, which in any scale, in any jurisdiction is a huge amount. But, of course, we all know it has cost them and the system in terms of trust and confidence, people in Ireland just aren’t trustful of the banks.

DMcD: Do you blame them?

DR: No I don’t blame them. I certainly know that in my experience, moving from being the Director of Enforcement over to take up the new role to head the conduct pillar, I was conscious that you're not just dealing with the problem of lack of trust in the Irish financial services system, it's a global phenomenon.

Do you know that since the crisis that €270 billion worth of fines and penalties have been levelled on financial services institutions on a worldwide basis? So you have enormous mis-selling scandals - Wells Fargo where staff were actually incentivised to sell maximum numbers of products to customers whether they needed them or not, opening up multiple bank accounts and bringing misconduct issues to light in the US. In the UK you had the LIBOR scandal, you’ve had payment protection scandals, so it's sad to say that on a worldwide basis there’s been a realisation that the behaviour of financial services towards their customers is very far away from where it should be. And the Central Bank, I guess, recognised that by setting up a particular focus on financial conduct on the 1st of September by setting up a pillar to really focus and drive out the behaviour of the banks and the other financial services entities to a higher standard, which is where it should be.

DMcD: Are they [the banks] a law unto themselves perhaps? Are financial institutions ungovernable? It's not an issue that’s unique to Ireland, it has happened elsewhere but we have seen persistent financial misconduct. These are not just one-off events, it just seems that they come in cycles.

DR: I don’t believe for a moment anybody or anything is ungovernable and enormous steps forward have been made since the crisis to strengthen regulatory frameworks, to strengthen the approach to regulation, to strengthen the resilience and the prudential regulation frameworks. An awful lot of good work was done in Ireland in terms of consumer protection, we were at the forefront actually of consumer protection with bringing into place the Consumer Protection Code and Europe has brought an awful lot of requirements in place since then. There’s requirements on remuneration but I'm not sitting here telling you that it's fine because clearly it isn’t.

Financial services really matter, they're the lifeblood of economies and they play a huge role in everybody’s lives, we all get mortgages if we’re lucky enough to be in a position to get a family home for ourselves, we have a car and need insurance and we could be buying health insurance. We have huge interaction and it's really important that that interaction works for us. Clearly we've heard some talk about being consumer focussed but my number one priority is to demand that all the important institutions that sell financial services to the people in this country don’t just talk about that, that they demonstrate that to us.

So I’ve clearly communicated my expectation in tracker, that they have fully articulated, fully embedded conduct risk frameworks in their businesses that they live by. And by that I mean, when they design and sell a product to a customer such as a mortgage, it's not focussed on the product that they have that they sell it's the product that the customer needs. And they’ve identified the need that it fulfils for the customer and they can demonstrate that it's operating fairly in their customer’s interest and the way that it's sold. It is absolutely unacceptable to sell a product to a customer, for example some kind of an insurance that they have no prospect of ever claiming on later, that’s not right and it's not acceptable.

DMcD: Will you interrogate the product lines? And the role of brokers and other intermediaries?

 DR: Certainly. We already spent a fair amount of our supervisory efforts looking at intermediaries and brokers and because that’s important we’ll continue to do so. But something that is new that we’re rolling out is with respect to the larger firms that will have the most impact on consumers- we certainly will look extremely closely at the way they design their products and sell them to customers right through the lifecycle of a product in a firm. So the way it's designed, the governance, the thinking around that. But it's really important to know that comes from the top, the way that the boardrooms lead out on the way customers are valued and how that’s transmitted through the middle-ranking right through to the frontline. We need to see an echo from the bottom, ensuring that customer thinking is embedded through every stage of the way that firms think and actually operate. So I don’t want to hear people talk the talk, I want to see them walk the walk and we’re going to do firm level supervision to make sure we hold them to account to deliver for customers.

DMcD: Before we go onto the new strategy and the new focus, just on the tracker mortgage scandal like I mean obviously six lenders are being investigated, did the you know had it been one bank or two banks you know perhaps we might have taken a view but the fact that it was systemic-wide, did that surprise you and are we any closer to individual accountability in respect of your investigations?

DR: As a former Director of Enforcement I completely fundamentally believe that every system has to be backed up by effective enforcement. In the Tracker Mortgage Examination, there are six enforcement cases open, all running at the same time, they're really detailed forensic examinations where we acquire email drives, huge amounts of data, interview present and former employees of the businesses, to get a full evidential picture.

DMcD: Will that include Board members?

DR: And certainly I’m not going to get into the individual interview plans but we’ll interview all the relevant people that can tell us what happened and the teams are doing that. We have a lot of staff working on that and we’ll follow that through wherever it takes us. Our commitment to bringing enforcement cases is unquestioned.

We’ve brought more than 116 cases to date, we’ve been at the High Court defending the powers to make sure that we can use them effectively and we’re holding enquiries right now with individuals to make sure that all cases are brought through to completion regardless. So that’s very important and I’ll leave that to one side because I don’t want to talk about the cases.

DMcD: To go into that.

DR: But because we had a concern about the behaviour in general, not being where it should be, we took a different kind of an initiative, a culture review, which wouldn’t be something very familiar to a lot of people.

It's not like an enforcement tool where you're checking to see if there’s been wrongdoing and holding people to account with penalties. The culture review we did with our Dutch colleagues, who are leading world experts in the field, actually looks at some of the more recent decisions in the last 12 months because you have to make sure this is up to date. It looks at the senior leadership team because they're so influential in the way a business thinks and the way a business is run and it really scrutinised if you like, ‘how things are done around here’, the values. If you and I were working in an organisation and we were at the water cooler and you were giving me advice about what passes for the things that my boss would promote me for, what's not written down, it's that kind of a look and…

DMcD: What does this culture review involve, of the top five lenders that you’ve gone into?

DR: So we’ll be producing a culture report in the next week or two and it's a report to the Minister but it scrutinises the attitude of the main lenders towards their consumers and looks to see do they pose risk to their consumers. It then asks of the Central Bank to make recommendations if there are risks to consumers, how we can best make sure that they're addressed and certainly it's been no secret that I proposed before I took up this new role a senior manager’s regime.

DMcD: Yeah a UK style.

DR: A UK style regime with stronger individual accountability for senior managers to make sure that well run businesses are well organised with clear lines of accountability and responsibility and certainly I favour universal standards - very ordinary things but ever so important - of integrity and fair dealings with customers.

DMcD: So many financial institutions, almost like a tick box culture, had governance “ ticked off”. Anglo and other banks gave themselves a clean bill of health when it came to precisely those issues, is that enough? The Central Bank has gone further, proposing - to the Law Reform Commission - a new criminal offence of, egregious recklessness. So how do you bridge the gap between banks stating that they sign up to all of these things but in fact as the tracker examination scandal and other issue have shown there is a massive gap?

DR: That’s a really great question and it's one we spend a lot of time thinking about because that’s the difference between tick box and effectiveness. We’ve heard talk of consumer focussed cultures before where everything is fine and subsequently problems arise. What I know is that trust is low in the Irish banking sector and that’s for the businesses to fix, they're the ones who drive their own culture. As a regulator, I can be really clear and this organisation can be really clear about the characteristics that we see must be present in a good quality consumer focussed culture, that’s got to have integrity, it's got to think about the needs of the customer and it has to value fair outcomes for them, that can't be talk.

Christine Lagarde was here a couple of weeks ago on a visit and she said that, ‘Financial services firms have got to be as serious about values as they are about valuation’. Now it has to be said, it will be no surprise to think that there’s work, significant work that has to be done to drive this out and to change the culture isn't something that can be done overnight. So I heard a wonderful description of this which is, ‘It's less of a New Year’s Eve resolution and more of a lifestyle change’, so this is actually going to take time and it is something that, make no mistake, the financial services firms are full square responsible for the way they treat their customers. But what everybody will expect of the regulator is that we scrutinise them closely and hold them to account.

DMcD: So what do you have in the toolbox at present and what do you think that you need so that it isn’t a case that you know that in another couple of years time we’ve another controversy or scandal? So what do you have and what do you need or what would you like if you’d a wish list?

DR: Well if I had a wish list I would say that the key change would be the firms themselves embed a consumer focussed culture in the work that they do. And there’s some green shoots with regard to that, outside of tracker, in the last four years €164 million has been paid back to customers. About€89 million of that was because the Central Bank got onto the firms and made that happen. That’s not the way these things should happen. The rest of it was that firms self-identified their own problems and fixed it themselves. Mistakes will happen, we regulate more than 10,000 firms, there’s millions of transactions going on.

We’re a systemic regulator, we can't stand on the shoulders of every transaction, so mistakes will happen but what you’d expect to see as firms come out quickly, completely and fairly to deal with them so that people trust them. So if that isn’t the place that we’re in then you quite rightly will expect us to supervise firms and products that present the highest potential consumer detriment far more closely, that we look at the way the products are structured, designed and sold. I call it the key consumer risk transmission points in the lifecycle of the selling of a product to a customer. These are looked at very closely by us, for example, incentives, things like that, where things can go wrong, where there may be commissions on the one hand driving behaviour in one direction and then the best interests of the customer in another.

DMcD: Is that something would almost require a dedicated line of work, looking at incentives or commissions and their role in driving behaviour?

DR: So we are looking at that more closely and you’ll notice that we’ve done recently a fair bit of work in improving. For example, switching measures for customers demanding that proactively banks inform customers of better deals that are available for them within their own product offering or indeed pointing to them where they get good quality information about switching so that people can save themselves money. So there’s nudges that can be put into the regulatory framework as well as more firm specific supervision which is something that we’re definitely intent on doing.

DMcD: How did the banks that ye sort of interrogated as part of the culture review, how did they accept your presence or the fact of that examination?

DR: Actually in order for a culture review to work, you have to build trust because after all it's the culture of the firms. The people who work in financial services firms are members of a community. They play on the GAA teams, they're neighbours of the customers, they’re good people. They actually want to do right by their customers, so there’s a lot of opportunity to build well on this, so it was done in a very thorough, competent, comprehensive way and when we released the information you’d be surprised at the many, many hours of interviews and 360 style checking that were done. So I think it was a good piece of work that was well received by the banks. But of course I’ve already said to you, it's now an opportunity for them to do something really deep with respect to the culture work and to demonstrate to us that they have a consumer focus and drive that forward and that’s not something you talk about, It's something you demonstrate to us over a long period of time and that’s the opportunity for them to take up that challenge and rebuild the trust in the system.

DMcD: What about the conduct of vulture funds or non-banking entities? Is there enough, given that the Minister has looked for a review of these entities, is there enough consumer protection for people? Especially with regard to the sale of loan books that may involve residential homes, is there enough protection? We hear that there is but is there enough protection for those consumers?

DR: So I know there’s an awful lot of concern for people who might be in arrears or worried about going into arrears. When the idea of the sale of loan books came into play a number of years ago, in fact it was the Central Bank that was most worried about this and the Code of Conduct on Mortgage Arrears offers protection to everybody in the system who may be at risk of going into arrears. And because the Central Bank was worried about those loans being sold and the protections not travelling, we made sure that when the new law came into place that actually the protection of the Code of Conduct on Mortgage Arrears travelled with the loan, really important.

DMcD: Does it [regulation] travel to the ultimate decision makers though? Because obviously you’ve got the credit service providers but does it travel to the ultimate decision makers?

DR: The current framework is that anybody who interacts with a customer has got to obey, to the same full extent, the Code of Conduct on Mortgage Arrears. And that’s really important so you are as protected if your loan is owned by a bank that’s regulated or a unregulated loan owner. The unregulated loan owner is not allowed to interact directly with the customer. They can only do so through a regulated firm and all the customers have the full equal protection of the Code of Conduct on Mortgage Arrears.

We have been asked to look at it by the Minister and to report to him. We’re working on this at the moment to see if that framework to protect customers can be strengthened in any way and we’re looking at some information about that and also we’re talking to organisations like the Insolvency Service and MABS to see have they got insights because it's important to keep frameworks up to date.

DMcD: you be speaking to the non-banking funds, to the so-called vulture funds as part of that?

DR: So we’re looking at all the relevant information and we’ve gone out and supervised the biggest credit servicing firms to see how they're treating their customers, how they're complying with the CCMA.

DMcD: have you any early indication of how that is?

DR: We’ll have to report to the Minister on that but we’re doing a thorough piece of work to see, can there be any extra protections afforded to people or what is the situation that we’re seeing. Certainly we will report back and that’s a priority for us, to make sure that people are as fully protected as they can be within that framework.

DMcD: Obviously non-performing loans are nonetheless a strategic problem for the banking system as a whole, do you have some sympathy for the banks who are saying, ‘Look we’re under pressure for Europe you know this is you know we’re kind of under the cosh to bring down these numbers’, where is the balance between for example the almost 30,000 people who are long term arrears or you know I know that’s dropping over time but we still have a significant problem with non-performing loans.

DR: I wouldn’t represent it as a balance or a trade-off. It's really important for all of us that we have a resilient financial system and you’ll often hear the phrase about this, ‘You should repair the roof when the sun is shining’. It’s important that our system is strong and we know better than many other countries what happens when that’s not the case but all of the lenders have choice on how to drive down their non-performing loans.

There’s no question of it being an ‘either or’ scenario that it's at the expense of consumers versus something else, they have lots of choice in how they choose to do that. Certainly, from my point of view, leading the conduct pillar, there’s no question but consumers should be fully protected within the context of the CCMA but of course in tandem with that, not in conflict but in tandem with that, the banks have got to protect the resilience of the financial system. That also operates in the best interest of all of us as consumers of that financial system but they can do that in very many ways. It's my job to make sure that the protection of the CCMA follows to all consumers equally and to look to see if we can strengthen that too.

DMcD: There’s an aspect of the financial system that can on occasion expose Ireland to reputational risk that doesn’t fall under the regulation of the Central Bank and that is the IFSC and funds and you know we’re talking about companies that in other jurisdictions might be subject to sanctions, is that something the IFSC and the huge volumes of money that are coming in through entities that you don’t regulate such as special purpose vehicles, is that something that concerns you even though it's not part of your remit, is it something that should be in your view?

DR: I just want to make two points, which is the funds industry is very well regulated in this jurisdiction. I take part in ESMA, who adds to the strength of that regulation and we are full participants in the European system of regulation and we have a very strong funds industry here and strong supervision and regulation of them.

But separately there are companies and entities in Ireland who are not regulated through the Central Bank of Ireland and there is some discussion around that. But actually, because we believe that transparency is really important, we've been leading out on gathering information and publishing it and making analysis available so the understanding can be improved, precisely about what those sectors are about. That’s something that the Governor has been at pains to make sure that we play our full part in bringing forward the information about that. I would go so far as to say that we really are leaders in that field, so that’s the maximum that we can do on that and certainly it's a continued commitment to bring transparency with regard to what information there is available with respect to those companies.

DMcD: No discussion about the Irish economy or bank is complete without mentioned the B word - Brexit. What are your views on that and the risks that it poses for the Central Bank under the conduct pillar and more generally just about the prospect of a hard or a no-deal Brexit for Ireland? Professor Lane has said previously that there’s a risk that small open economies like Ireland might get punished for its exposure for example to the multinational sector, so how are you feeling about the B word?

DR: Well on a lot of levels we’re very engaged as a regulator with Brexit. If we think about it we have been engaging with our firms to make sure that they're taking all the steps that they should to protect their customers by making plans to be ready in the event of a hard Brexit. We see then a huge amount of work being done right across the EU for firms to transfer portfolios, to apply for authorisations, to make sure that they continue to service their customers and we’re focussed on demanding that they are.

We’re also engaging with our colleagues in the European Supervisory Agencies, in ESMA that I’ve mentioned, in EIOPA and the EBA to make sure that we’re working with our international colleagues to collect the data about the firms, to look at their preparedness and to pool our efforts together to make sure as a regulatory system we’re ready for that. But that means that the firms need to get ready so we’re very focussed on demanding that they are and demanding that they can clearly communicate with their customers. And of course we’re also working very hard on a practical level dealing with the authorisation applications to make sure that we’re ready.

We’ll continue to keep dealing with Brexit as a key priority on all of these fronts to make sure that customers are protected through the firms taking the actions that they should do and we’re continually working on that.

DMcD: In the early part of your career, what were you doing?

DR: I spent the early part of my legal career in the UK. So my first six months was in a common law setting (civil only). So I did a lot of chancery tortious work, regulatory work and landlord/tenant. My second six months was in Middle Temple Lane in London with a big focus on white-collar crime. So a junior like me would expect to do two trials a day in the District Court, morning and afternoon, or a clutch of pleas et cetera, pre and post trial. So by the time I'd finished my second six months I'd done my first jury trial. I probably had done 300 court appearances, I had been even in the Court of Appeal.

DMcD: What was your first jury trial?

DR: Car theft.

DMcD: Did you win?

DR: Yes. But then as you move up the scale I became the junior to my master on a whole wide range of frauds, thefts, so I was in a set that did a lot of VAT fraud, lots of other types of work and then you begin to start representing professionals who are in trouble. Gradually I began to prosecute more and more, you can do that in England earlier than you can here, so then I began to prosecute all sorts of work and again a lot of conduct related work.

I was then standing counsel for the police in Sussex, where I was prosecuting for the police for professional misconduct of policemen and women. Quite juicy, serious work then because that doesn’t go easy, I was standing counsel for a lot of the councils, lots of frauds, benefit frauds, an awful lot to do with human behaviour. And then gradually moving off into accountants, lawyers, I became head of professional conduct for ACCA in London, so a lot of endowment mis-selling work and disqualification of accountants.

DMcD: Yeah, so what brought you home?

DR: What brought me home? I didn’t intend to stay in the UK quite as long as I had and I wanted to come home to Ireland because it's where my heart was. When I came back my disappointment was that I had developed a specialism in London in regulatory work, a sub-specialism informed by the white collar crime work and it didn’t seem to exist here in a fully developed way.

I was offered the opportunity to build enforcement in the Central Bank of Ireland because in the post DIRT enquiry scenario it had been given these powers but it didn’t have a habit or a practice of doing it [enforcement].

DMcD: Are we any different from other jurisdictions? Like when there’s obviously one of the big trials has concluded and it's kind of weird that I was myself was at the start of those, that it's over 10 years ago in a different role but you know are we any different from the UK or America you know because that public confidence that there isn’t in the kind of, the criminal justice system to kind of get through you know it's easier to prosecute a car theft than.

DR: White-collar crime is difficult to prosecute. It's different.

When I started, you could produce a thousand pieces of paper and prosecute a case on it. And you would think that was reasonably complicated.

Now we’re into hundreds of thousands of pieces of paper, so you need to be data- enabled, data-informed, you need to have scale approaches to this so you can find out the information that’s available to you from a whole body of documents. For example the minutes of meetings, the board packs, you need to look at clustering approaches with regard to email, who’s talking to who, who’s not talking to who, who you would expect to talk to who, through data enquiry tools and you need to go through a whole range of other documents and piece all of that together. So it actually takes quite a structured scale approach and to be good at those things. That is what is needed and all of that needs really good heavy IT tools.