Information Release 26 March 09
The Chairman of the Financial Regulator today (26 March 2009) wrote to the Chairman of the Joint Committee on Economic Regulatory Affairs responding to issues raised in discussions of the Committee on 24 March 2009, with a former internal auditor of Allied Irish Banks plc (AIB). At the committee hearing, Mr McErlean raised a number of issues in relation to the Central Bank and the Financial Regulator in his opening statement to the Committee on 24 March 2009 and in responses to questions raised by Committee members.
In his response to the Chairman of the Committee, Mr Michael Moynihan, TD, the Chairman of the Financial Regulator, Jim Farrell, clarified that for the period up to 1 May 2003 the Central Bank (the Bank) was the relevant competent supervisory authority for banks and the Office of the Director of Consumer Affairs (ODCA) had responsibility for approval and monitoring of bank charges. These responsibilities transferred to the Financial Regulator on its establishment on 1 May 2003.
In his correspondence to the committee, Mr Farrell addressed the following issues and roles of the relevant regulatory authorities during the period:
“1. ‘The allegation that the Financial Regulator knew about overcharging in AIB in 2001, conducted its own investigation in 2002 and failed to act to protect consumers.’
The Financial Regulator was established on 1 May 2003. In April 2001, following allegations in the media of overcharging by AIB in relation to administrative time charges for certain customers, the Bank sought explanations from AIB to establish the facts and ascertain the steps that AIB were taking to address the matter. This process involved meetings with AIB which included Group Compliance and Group Internal Audit (headed by Mr McErlean up until early 2002). Regular contact by the Bank with AIB on this issue continued from April 2001 up to the conclusion of this matter at end-February 2003. This follow-up included meetings and correspondence with AIB. As part of this process AIB was instructed by the Bank to report the matter to the ODCA, which had specific responsibility for bank charges at that time.
The matter concluded in February 2003 by which time refunds of €255,000 were paid to the affected customers. Our files indicate that the ODCA welcomed the fact that AIB had completed the process of refunding affected customers. This charge had been abolished by AIB in 2001
2. ‘Reference to withdrawal of allegations made.’
In October 2002, following his settlement with AIB, Mr McErlean was requested to attend a meeting at the Bank’s offices to clarify the position regarding his allegations against AIB, which he had brought to the Bank’s attention earlier that year. The Bank’s record of the meeting shows that Mr McErlean advised that he had withdrawn the allegations in relation to his legal proceedings against AIB. In relation to the 2001 overcharging issue and the Goodbody Stockbrokers/trading in AIB shares matter, the Bank’s record of the meeting shows that Mr McErlean agreed that these had been or were being addressed by AIB.
3. ‘The allegation that in 2005 the Financial Regulator failed to inform an Oireachtas Inquiry about their investigation and in fact gave the false impression that they were unaware of overcharging until 2004.’
It is important to distinguish between matters which Mr McErlean discussed with the Bank in 2002 and subsequent foreign exchange overcharging issues which were first brought to the attention of the Financial Regulator in 2004 (as outlined below). The overcharging matters discussed with Mr McErlean in 2002 were known to the Bank from 2001 and were investigated and concluded in February 2003, as set out above.
AIB Charging issues 2004 onwards
In April 2004, the Financial Regulator became aware, through an anonymous call, of allegations of overcharging by AIB regarding the notification of charges for certain retail foreign exchange (FX) transactions[1]. An investigation was instigated by the Financial Regulator, which included an on-site inspection of AIB that commenced on 7 May 2004. When the issues in relation to the FX charges emerged, the Financial Regulator widened the investigation to cover all other major charges. At the time the events occurred the Financial Regulator had no powers to sanction or to publish information.
To assist the Financial Regulator in its investigation, Mr. Lauri McDonnell, former Comptroller and Auditor General was appointed to assure the integrity and independence of the investigation. Deloitte & Touche LLP was appointed as independent investigating accountants on all Section 149 notification issues i.e. those charges for which AIB had to seek prior approval from the Financial Regulator (and pre-May 2003 the ODCA) and it reported to the Financial Regulator and AIB.
The Financial Regulator published two reports on these overcharging issues, in July and December of 2004, which focused on the investigations into foreign exchange and other charging issues within AIB. The report which issued on 23 July 2004 was a progress report, and focused on the priority at that time, which was to identify the amounts involved, the number of customers affected and an appropriate method for repaying those customers. The findings of this report identified that the total amount of excess charges identified was €34.2 million, that AIB failed to comply with Section 149 of the Consumer Credit Act, 1995 and that it failed to bring these breaches to the attention of the Regulator. These matters were also disclosed in the Financial Regulator’s May 2003/December 2004 Annual Report. The Financial Regulator’s subsequent 2005 and 2006 Annual Reports gave updates on the reimbursement programmes.
The final report prepared by the Financial Regulator was published on 7 December 2004 and focussed on when the discrepancies came to light, how they were handled within AIB, how they persisted over an extended period of time and why the Financial Regulator was not informed. This report found that from 1996 onwards, certain staff and management within certain areas of AIB appeared to have been aware of the fact that AIB were charging over the amount notified to the ODCA (the then regulator) in relation to foreign exchange transactions and that on at least seven occasions, these could have been identified and/or disclosed to the regulators. In addition, deliberate measures were taken to reduce the relevant charge in April 2004 to the level notified to the ODCA in 1996 without the Financial Regulator being informed. The Report found that procedures for reporting up the line within AIB proved inadequate and resulted in the matter not being resolved and that controls within AIB were weak in relation to monitoring customer charges.
Arising from the issues identified in 2004 and raised in the two reports referred to above, the Financial Regulator agreed a strong programme of remedial action with AIB to refund customers with interest, to rectify its systems and control weaknesses revealed by the investigations and strengthen the environment for staff to deal with regulatory issues in an ethical, consumer and compliance-focused manner. As part of this process, AIB was tasked by the Financial Regulator to undertake an action programme to deal with the issues identified. The implementation of this programme was closely monitored by the Financial Regulator. In addition, with regard to repayment to customers, the priority was to identify, refund and inform customers and where this was not possible, to ensure that AIB did not benefit from any case of overcharging. The number, complexity and time spans involved in respect of the various overcharging issues identified meant that the restitution process was very lengthy in many cases.
In September 2006 AIB issued a statement that related to investigations completed in 2006, into specific instances of the application of incorrect margins or overcharging on foreign exchange transactions which occurred in the early 1990s and other instances related to overcharging which arose in the late 1980s. The investigation was actively monitored by the Financial Regulator and culminated in additional payments totalling €31.6 million[2] to be made by AIB.
Following on from the investigation into the charging issues identified in AIB, an industry-wide review was initiated by the Financial Regulator in 2004 into compliance with Sections 149 and 149A of the Consumer Credit Act. All institutions were required to examine their systems and from this and other reviews carried out, by the Financial Regulator, a number of charging issues were identified.
4. ‘Concerns related to Goodbody Stockbrokers and trading in AIB shares.’
On 19 October 2001 AIB Capital Markets plc in accordance with the obligations imposed in the Bank’s Handbook for Investment and Stockbroking firms, submitted to the Bank a copy of an AIB Group Internal Report entitled “Special Investigation Goodbody Stockbrokers – Trading in AIB Shares” and a copy of a management letter addressed to the Internal Audit Committee of the Board of AIB. The work related to this report had been undertaken from May to September 2001.
It is appropriate to say that the report articulated that the arrangements that Goodbody Stockbrokers (Goodbody) had put in place to allow them to trade in AIB shares had not operated in accordance with those previously communicated to the Bank and the Irish Stock Exchange. The original arrangements presented were designed to allow Goodbody, as a stockbroker, to trade in AIB shares in compliance with the provisions of the Companies Act, 1990 which restricted trading by a company in its own shares. The Companies Acts were subsequently amended with effect from 4 August 2001 enabling Goodbody, as stockbroking subsidiary of AIB, to trade AIB shares.
Subsequent to the submission of the report the Bank met with senior personnel in AIB, as part of its examination of this matter. Ultimately significant personnel changes took place in Goodbody.
The procedure at the time, in accordance with the provisions of the Criminal Justice Act, 1994, was for suspicions of money laundering identified by the Bank to be reported to the Gardai. Having reviewed the relevant files we can confirm that all reporting obligations were met by the Bank.
5. ‘Concerns expressed by Mr McErlean in relation to a request to access personal data under the Data Protection Acts.’
On the 24 May 2006, the Financial Regulator received a request for access to personal data, within the meaning of the Data Protection Acts 1988 and 2003, from Mr Eugene McErlean. On 18 August 2006 the Financial Regulator provided some personal data relevant to Mr. McErlean but withheld other information on certain specified grounds. Mr McErlean subsequently made a complaint to the Data Protection Commissioner (the Commissioner).
After further consultation with the Office of the Commissioner, the Financial Regulator disclosed, on a discretionary basis, additional information to Mr McErlean on 4 April 2007 and 9 July 2007.
The Commissioner issued his final decision on Mr McErlean’s complaint on 5 October 2007 in which the Commissioner expressed his satisfaction that the Financial Regulator had provided Mr McErlean with copies of all the personal data to which he was entitled under the Data Protection Acts.
Mr McErlean appealed this decision to the Circuit Court and the Financial Regulator applied to be joined as notice party to the proceedings. On 10 June 2008, Judge Linnane dismissed Mr McErlean’s appeal and held, inter alia, that the Commissioner had not erred in his decision and that the additional information sought from the Financial Regulator by Mr McErlean did not constitute personal data.”