Introduction

In light of a series of very successful enforcement actions, most notably the staggering €100,520,000.00 fine imposed against the Governor and Company of the Bank of Ireland on 29 September 2022, it is worth considering how did we get to this stage.

The three government reports commissioned after the financial crisis all pointed towards the crisis being in many ways “homemade” (Regling and Watson, A Preliminary Report on the Sources of Ireland’s Banking Crisis, ii). Whilst the principal cause was the bursting of the property bubble due to excessive lending of money to the property market, alongside a credit boom fuelled by joining the eurozone, the widespread failure of the financial regulatory system along with a soft enforcement regime enabled the property bubble to blow out of proportion.

Walk softly and carry no stick

Prior to the financial crisis, Ireland’s enforcement regime was characterised as “walk softly and carry no stick” (Honohan, The Irish Banking Crisis: Regulatory and Financial Stability Policy: 2003-2008 (2010), p. 55): the regulator would identify concerns with a credit institution, an action plan would be drawn up to address the identified breaches of principles and regulations, the credit institution would later convince the regulator that it had implemented the action plan and the regulator would take its word for it. The prime example identified in the Honohan report was “Case (i)” where “tough action” was recommended, repeated assurances were given by the bank as to compliance, some corrective action was undertaken, then the same issues would crop up. Ultimately, eight years of this cycle would lead to a negligible result and no considerable enforcement action undertaken. Simply put, Case (i) displayed that this model of enforcement placed too much trust in the banking institutions and effectively relied upon bona fide voluntary compliance as the preferred enforcement strategy.

The Banking Inquiry ultimately concluded that the problem with the enforcement regime was not caused by absence of law, but rather an absence of enforcement (Joint Committee of Inquiry into the Banking Crisis, p. 158). Honohan identified that the legal framework behind the enforcement regime in principle possessed the sufficient tools for adequate enforcement. These tools included an administrative sanctions regime, the ability to impose conditions on banking licences, and the removal of a director or chief executive officer. These would have enabled the financial regulator to supervise the banking sector in an intrusive manner. Unfortunately, there was a reluctance to exercise these tools as “appetite for legal risk was very limited” (Honohan, p. 75) which meant that regulated entities were not challenged as they should have been. Nyberg attributed this to fear of legal costs and reputational damage (Nyberg, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, Reports of the  Commission of Investigation into the Banking Sector in Ireland, p.62). Regrettably, no administrative sanctions had been imposed on credit institutions prior to the financial crisis (Honohan, p. 58). This resulted in a perceived lack of credible threat of action by the Financial Regulator, and thus lead to a lack of urgency in dealing with issues on the part of the banking sector and resulted in poor financial practices which lead to the Financial Crisis.

Conclusion

It is clear that that one of the fatal flaws within the Irish financial regulatory system pre-financial crisis stemmed from the absence of an effective enforcement regime.  The ability of a financial regulator to enforce regulatory principles is crucial for the provision of a healthy regulatory system. The mere threat of effective enforcement pushes entities to be prudent and incentivises them to be compliant. Unfortunately, the regulatory system did not breed this culture and extensive reforms were required to rehabilitate the financial regulatory system. This came in the form of substantial legislative changes which increased the regulatory, supervisory and enforcement powers of the Central Bank of Ireland.