We need to build business we can trust

The presidential campaign surfaced a need to reconnect the economy with society and ethics.

President elect Michael D Higgins believes there is a need to “recognise the need for a reflection on those values and assumptions, that had brought us to such a sorry pass in social and economic terms, for which such a high price has been paid and is being paid”

In reminding us of what goes so badly wrong when individualism married to a facilitating political elite pursues wealth creation without consideration for wider society, Higgins believes we need to reconnect the economy, society and ethics.

Never again should small groups of influential insiders be allowed to garner wealth at the expense of society. The powerful influence of business people seeking to exploit position to further their own aims must be tempered for the greater good. After all the freedom afforded business to operate within a system that advances and facilitates ease of enterprise-creation exists only as citizens through elected representatives permit it. When public representatives become captive of sectional interests and are influenced by cheque book lobbying, democracy is usurped to benefit the few and disenfranchise the many.  

Recasting the legitimate and ethical role of business and crafting a new economic model will take more than talking up the national advantage of a young educated population, the best of who are once again emigrating. Any new economic model must exist within a society that exposes values of decency, integrity, egalitarianism and equality. And it must be a society where ethical business behaviour does not simply mean mere legal compliance.

The shallow narrative and imagery promoted by some presidential candidates failed to grasp that authentic leadership requires messages rooted in the values Higgins and those who elected him espouse. Riven with deliberately ambiguous messages, spun to garner votes from as broad a population as possible, other candidates’ leadership aspirations were rejected.

Sean Gallagher’s hope inspiring narrative threatened to become a triumph of style over substance until this time last week when his carefully crafted independent status was undone, largely by his own hand. Best described as a motivational brand image, his message was cleverly communicated to win votes. A disingenuous melange of enticing promises that no president could ever have delivered on also contained a leadership blind spot.    

Gallagher’s blind spot was his failure to respond to the powerful imagery created by his use of the word “envelope”, faltering recollection, his subsequent “bagman” denial and obfuscation in explaining business accounting transactions.  

Once the thin veneer of motivational wallpaper was stripped back, people saw an unreconstructed, unrepentant businessman and member of the Fianna Fail’s boom time elite. Gallagher was caught in that grey area between politics and business. People sensed he was an unrepentant boom-time journeyman and promoter of materialistic individualism.

During his interview with Mike Murphy last week, journeyman-in-chief Bertie Ahern enunciated his own unrepentant construct that Ireland’s economic collapse wasn’t down to his leadership failings but others inability to open his mind to what was going so badly wrong. Hubris, that belief in self-image and vision are the hallmarks of poor leadership, as is a lack of humility in accepting responsibility and accountability for things when they go wrong. 

Unfortunately for Gallagher, he seemed to represent the same unquestioning commitment to individualism that was so responsible for the destruction of national wealth.

Perhaps we should be thankful to Gallagher as he unwittingly shone a light on a dark place others would prefer to keep hidden. We should also be thankful that the media forced into the open a past that must never again be repeated.

The lingering concern is that wealthy people continue to have greater access to politicians based on the value of their bank accounts. If this is so, then all talk of reform is meaningless unless the lessons starkly illustrated by Gallagher’s undoing are learned by this Government.

Higgins’ election represents a triumph of substance over style, deep wisdom over shallow individualism. It illustrates how ordinary people realise that out of the chaos of an economic collapse we must craft a better society. One built on what we are good at and one intolerant of unfettered individualism and political clientelism.

The ability of business to be a force for the good requires that trust be rebuilt in business. The same is true for politics. This means honest, open repentant acknowledgement of what went so badly wrong and a demonstrable commitment to achieving higher ethical standards today. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 31st October 2011.

'Muddle through 'approach must cease

Anyone interested in appreciating how the Government needs to urgently come up with a national strategic response to the consumer debt crisis should read an important contribution made last week in a statement on “Personal and Mortgage Debt” published by a group of legitimate, expert consumer representative organisations, New Beginning and leading academics.  

Available on www.flac.ie, the FLAC (Free Legal Aid Centres) website, the statement “urgently calls for a national strategy to be put in place to resolve over-indebtedness and to foster a responsible credit market that would prevent a similar crisis from occurring for future generations”.

Correctly arguing for an “All Debt” approach, FLAC and others set out nine important principles. They want to see a national Debt Resolution Agency and nationwide network of expert consumer advocates who will work with people to arrange debt settlement solutions for all their debts. 

By including for mortgage and other debts, they say that people should be provided with a legally robust mechanism to establish sustainable mortgages and pay what they can afford off other debt for a defined period of time, after which the balance would be written off.  Pragmatically, the group recognises that for unsustainable mortgages, people may need to become tenants rather than owners.

The statement leaves no wriggle room for moral hazard hawks - those who hold that decent, honest people will deliberately render themselves insolvent to benefit from debt settlement writedowns. 

The group says that Government’s “muddling along in the hope that things will get better” is no longer acceptable as the social costs are “potentially enormous as families and communities disintegrate under the weight of financial pressure and the uncertainty of what the future will bring”. From an economic perspective “the lack of a plan of action and a sense of the state assuming responsibility hampers consumer spending and fresh lending”

By adopting the same minimalist “muddle through” approach as the last administration, this Government has so far failed to appreciate and meaningfully respond to magnitude of the consumer debt crisis.  

The penny appears to have dropped somewhat once the Keane mortgage arrears report was seen as being as ineffective as its predecessor the Cooney report. But by inviting other solutions, Taoiseach Enda Kenny seems not to have understood the scope and depth of what is a long term unaffordability crisis and not just a temporary mortgage arrears problem.

Government’s response can no longer rely on a conveniently packaged bundle of “extend and pretend” sticky plaster solutions to be supervised by the Central Bank. 

The bank’s primary mandate to ensure banking system stability and regulate and prudentially supervise individual banks conflicts with its mandate to protect consumers. No matter how many consumer protection codes of conduct it publishes and polices, it will always be captive of its primary mandate. The bigger issue is that the bank cannot impose solutions and cannot cover non-bank consumer debts such as rent, utility and revenues arrears.

It is clear from Oireachtas committee testimony last week that the Cooney and Keane reports failed to accommodate the views of legitimate consumer representatives. 

Consumerists’ language and narrative is all about affording people a fresh start earned over time through an organised just and fair debt settlement process. They see this as providing for two alternative pathways. 

The first allows for non-judicial, legally binding debt settlement agreements organised through expert consumer advocate advisors; the second, a quick bankruptcy process for hopelessly insolvent people and complex high value cases. 

These pathways are also recommended by the Law Reform Commission in its report on personal debt management and enforcement.  

While new insolvency laws are in the works, if Government is serious about responding it shouldn't wait for legislation to slowly wind through the political system. It can respond today by establishing an interim Debt Resolution Agency. Using existing regulatory and legal frameworks and working with all consumer protection regulators it could oversee, direct and synergise an inter-agency focus on consumer debt resolution. It could also start building the national network of expert advocates so urgently needed to provide people with the professional representation they deserve.

A good starting point would be to appoint people with the credibility and expertise to design and deliver on such a just and fair national debt resolution strategy. People like FLAC’s Paul Joyce and Noeleen Blackwell, experienced consumer advocates and others like them who are likewise committed to consumer representation, simply must be involved from now on. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 24th October 2011

No credit due to the credit union sector

The publication of the interim report of the Commission on Credit Unions is the first phase of a major effort to transform the viability of the sector.

The credit union regulator is finally about to get the powers it needs to properly regulate and supervise credit unions. Recommendations contained in the credit union commission’s interim report if implemented in full will establish the type of modern regulatory framework that ensured credit unions elsewhere evolved as robust financial service firms.

Comprising academics, the credit union regulator, trade association representatives and other individual expertise, the commission’s recommendations should create an effective modern credit union regulatory system and improve credit union governance and risk management capabilities. It is the first phase in what will be a major transformation programme to transition credit unions to a new operating model and network structure.

With over 200 operating under regulatory direction restricting lending - over 100 of which are no longer fully functioning credit institutions as they cannot pay a dividend- can credit unions ever become efficient mobilisers of household savings using their existing business model?

The commission is silent on this key question, as it will consider a strategy for the future of the sector in its next instalment. However, its interim report includes financial performance data, publically made available for the first time, confirming analysts’ predictions that significant consolidation will be required if credit unions are to fulfil their function as savings and loans institutions.

While the aggregate data indicates reasonable levels of capital reserves which the commission puts down to regulatory leadership, the outcome of Central Bank’s PCAR stress tests and Grant Thornton’s review is not given. It’s likely the state recapitalisation requirement of €500m-€1b recently announced by Minister Noonan is derived from these tests, as financial performance continues to trend downwards across all sizes of credit unions.

In this instalment, the commission’s recommendations are focussed on the immediate and urgent need to resolve non-viable credit unions, stabilise troubled but viable ones, strengthen the regulatory stabilisation and resolution framework and make significant improvements in credit union governance and risk management capabilities.

While it says its report “does not impact on the independence of the Central Bank in the performance of its statutory functions” and is “without prejudice to the performance by the Central Bank of its statutory functions”, the authors confirm the effectiveness of the regulatory interventions pursued to date, and support the strategy proposed by the bank in its recent communications and seen in recent amendments to banking resolution legislation.

Conscious of the need for urgent remedial action, it wants the Central Bank’s new resolution powers to be applied to non-viable credit unions. These powers include appointment of special managers, enforced mergers and liquidation. It also wants the bank to set up and manage a stabilisation mechanism and fund for viable credit unions and wants credit unions to pay into the fund. It’s likely that this will be the mechanism through which up to €1bn in state recapitalisation funding could be made available.

The report however is silent on what happens to the controversial ILCU stabilisation scheme and current stabilisation assistance.

In what is a watershed recommendation, in keeping with robust regulatory systems elsewhere, the commission says the bank should introduce a prudential rule book which would set out in detail what is required of credit unions with rules derived from its new regulation making powers.

Other recommendations include a fitness and probity regime, risk management framework, new internal audit functions and minimum competency requirements. These are clearly designed to improve governance and management capacities.

As credit union trade bodies have strenuously resisted the widening of regulatory powers and insisted that the setting of regulatory rules be a matter for the Oireachtas and not their regulator, it remains to be seen if they are fully supportive of these recommendations.  

ILCU’s more recent denial of credit union financial fragility and its accusations that the Central Bank is driving people into the arms of moneylenders only serve to undermine public confidence. The Taoiseach’s and Minister for Finance forthright rebuttal of these accusations and support for the Central Bank along with the commission’s position mean the era of light touch credit union regulation is over.

When implemented in full, the commission’s recommendations will bring to an end a decade of governmental ambiguity and indifference to the credit union sector and in particular its regulation and supervision. 

In comparison to their international peers, Irish credit unionists were quite reckless during the boom. For nearly a decade most they engaged in imprudent decision making and exposed balance sheets to increasing risks. When appointed in 2003, the credit union registrar, emasculated by inadequate legal powers, civil servant indifference and trade body political lobbying did what he could to reign in credit union risk taking.

While banking regulators were asleep at the wheel, he was trying to get then Finance Minister, Brian Cowen and his officials to wake up to systemic risks. Efforts to reign in investment risk were frustrated by trade body lobbying against their regulators proposed investment code.

When they were eventually published, the registrar’s voluntary investment guidelines came too late and credit unions lost tens of millions when their high risk investments plummeted in value in 2008.

Similarly in 2006, the registrars’ promotion of a deposit guarantee and stabilisation system which would have provided the wherewithal to minimise lending risks, was rebuffed by Cowen and his officials and he was told to talk to ILCU about approving its self-regulatory system.

Had Cowen supported his regulator and acted on others warnings, including mine, credit unions may not have destroyed so much community capital.

Such is the background and context for government and Central Bank intervention and reason why so much public money will be made available to recapitalise them.

A public policy response in recognising the importance of credit unions may finally provide the wherewithal to the credit union regulator to ensure the right thing is done. It’s a pity it’s taken an economic crisis to do so. 

A version of this article appeared in the Sunday Business Post, Markets Section, Sunday 16th October 2011

Temporary Debt Solutions Not Enough

The Government needs to realistically respond to the biggest economic and social issue facing the country – the consumer debt crisis.

Banks are dragging their heels on dealing with it, the central bank hasn’t the powers to get them to behave themselves, and the mortgage modification programme is no more than an “extend and pretend” mechanism to protect bank capital. The Central Bank’s threat to look for powers to cap interest rates on variable rate mortgages was reported on as a consumer protection initiative. It could equally be considered a bank capital protection measure.

Mortgage lenders loan pricing behaviour is just one of many anti-consumer issues that have been conveniently ignored within a process carefully calibrated and designed to protect bank balance sheets. Both the “Cooney” and “Keane” mortgage arrears groups, which the central bank participated in, did not raise mortgage pricing behaviour as a policy issue.

There are other “kick the can” examples. In response to a MABS’ proposal on the voluntary surrender of family homes, the central bank said that as it had given the banks an undertaking not to review the mortgage arrears consumer protection code for a year and a half, it would not consult on the MABS recommendation until 2012. It seems consumer protection clocks in Dame Street tick as slow as they always have done. 

The Government’s policy response in insisting that mortgages are repaid in full totally conflicts with its policy on insisting that homeowners are not turfed out of their homes. That conflict can only be resolved by either permitting wholesale repossessions or implementing a proper loan modification programme including debt forgiveness solutions.

But modifying mortgages is a solution to one half of the consumer debt problem – the other half includes personal loans, investment property loans, personally guaranteed small business and commercial property loans, revenue and utility debt. 

If the Central Banks’ stress test is applied to all categories of consumer lending then under benign economic conditions, lender’s loan losses could amount to €5.5bn in home owner mortgages and €7.7bn in other loans of about €175bn in total consumer debt. While excluding other personally guaranteed loans that morph into personal debts once called in, the numbers are useful as they illustrate the size of a problem that no one has overarching responsibility for. Dealing with it piecemeal by focussing solely on home owner mortgages won’t work.

The Keane mortgage group report was not disappointing if what you were expecting was a five humped camel – a camel of course being a horse designed by a committee. The earlier Cooney report on mortgage arrears, a cousin of the Keane five humped camel, completely ignored personal loans which are just as distressing for indebted householders and just as toxic on bank balance sheets.

The most glaring omission of the Government’s “Cooney/Keane” approach has been the concept of debt forgiveness. Cooney/Keane harps on about moral hazard. Yet the Law Reform Commissions proposals which are built on the debt forgiveness concept, clearly and unambiguously set out how moral hazard can be minimised.

Why is organised debt forgiveness being ruled out? The problem for bankers is once the concept of debt forgiveness is introduced then they will have to deal with the loan losses they are hiding within their forbearance programmes. It seems that insolvency legislation is another can being kicked down the road to protect bank balance sheets.

Last Thursday, at the Central Bank’s conference on mortgage arrears, Blackrock Solutions presented on international mortgage modification programmes. It believes that certain types of loan modifications seem to work better than others and that U.S. experience suggests that principal forgiveness is more effective that other types of loan modifications. It also maintains that house prices are significant driver of defaults in “non-recourse” and recourse markets and that negative equity matters in all the markets it’s studied. It also observed that European loan modifications seem to be driven by accounting or capital preservation.

Called debt forgiveness here, principal forgiveness is an inevitable consequence of loan unaffordability and negative equity. While Blackrock leans towards negative equity as the key driver of loan defaults, the central bank leans towards affordability. Given the scale of distressed, unaffordable mortgages, impact of negative equity and negative long term impact on affordability it’s as clear as a pikestaff that principal forgiveness will have to be factored into loan modification programmes here.

How this is done is also important as any mortgage modification programme cannot be considered in isolation to other distressed consumer debt. Principal forgiveness and not capital preservation simply has to become a policy response to dealing with the consumer debt crisis. What’s more responding to mortgages on their own without dealing with other loans at the same time won’t work. It will take a complete solution including non-judicial debt settlement agreements and empowered consumer protector to oversee the totality of consumer debt – not just bank debt. 

A version f this article appeared in the Irish Examiner, Business Section, Monday 17th October 2011

Credit union restriction was warranted

Had credit unions been regulated, governed and managed to standards found elsewhere they would not need to be bailed out by the state. Recent criticism of the Central Bank’s intervention to stabilise credit unions is both unfounded and unwarranted.

About one hundred credit unions - one in every four- are no longer fully functioning credit institution as they are unable to pay dividends. Along with two hundred others they have had their lending restricted by their regulator.

When credit unions can no longer function they are either closed down or their business is transferred to viable operations.  And as it costs money to do this, if credit unions don’t have it, the state typically funds the costs.

For some reason the Irish League of Credit Unions (ILCU), a trade body considered by many partly responsible for the distressed financial fragility of so many credit unions, maintains that no credit unions at present are in financial difficulty or trouble. 

About this time last year I wrote that state support of about €650m would be needed. Last week Minister Michael Noonan confirmed this analysis when he referred to a taxpayer bail-out fund of between €500m and €1bn. Taking to the airwaves, ILCU said there are “no credit unions at present who are in financial difficulty” and the bailout is a restructuring fund.

Maybe it’s concerned that despite a guarantee of €100,000 should savers lose confidence in their credit union they may move their money elsewhere en-mass and cause local runs. But this hardly squares with accusing the Central Bank of driving people to moneylenders as it only serves to undermine public confidence in their credit union.

It could have been different had regulatory attempts to reign in risk taking not been emasculated by civil servant indifference and trade body political lobbying.

Since established in 2003, the registrar of credit unions has struggled with limited powers to reign in risk taking. Between 2005 and 2007, concerns raised by the regulator and others to then finance minister, Brian Cowen, and his senior civil servants were discounted and ignored.

The Central Bank, which considers only 46 credit unions “low risk”, is finally to be given the powers it needs to properly regulate and supervise credit unions. 

Initially, close to 90 non-viable credit unions will have their business transferred to viable operations. Using new resolution powers, the bank will manage state funding to stabilise post-merger balance sheets.  In time consolidation may see the network consolidate down to less than 100 larger, sustainable credit unions, while maintaining most of the existing branch footprint. Wisely used, state funding could restructure credit unions into a modern credit co-operative system and be repaid in time.

In recent weeks there has been a concerted campaign to portray the Central Bank’s lending restriction imposed on three out of four credit unions as a primary cause of their problems.

Local politicians have accused Mathew Elderfield of driving people into the arms of loan sharks.  Perhaps they should consider why lending has been restricted.  It is important to distinguish between a credit union and the people who govern and manage them.

If all credit unions face the same challenges what are the other one- in- four doing that they haven’t been restricted?  Addressing this, in a recent speech, the credit union regulator said “it might be convenient to put stresses now evident in many credit unions down to difficult macro-economic environment we are now experiencing and there is much truth in that. However, this is only partly the reason.

For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by their supervisory committees has been non-existent”

Credit union activists here would have people believe they are heavily regulated. The truth is they are not regulated anything like credit unions in other advanced countries where they are subject to regulations and supervision every bit as robust as banks.

Were it not for regulatory leadership and intervention since 2008, hundreds of credit unions would have been forced to close their doors by now. Had the regulator the powers it is now getting, it could and would have prevented credit union boards and management imprudent risk taking and prevented the destruction of so much community capital.

Before local politicians criticise the Central Bank for doing its job maybe they should consider why so many credit unions are in financial trouble and why others are not.

A version of this article appeared in the Irish Examiner, Business Section, Monday 10th October, 2011

Time to regulate commercial debt management firms

The collapse of Home Payments Ltd highlighted the urgent need to regulate commercial fee-charging debt management firms.

Highly controversial, these firms sell products called debt management plans to distressed, vulnerable consumers. Like Home Payments, they provide a payment service in handling and distributing people’s money to their creditors.

Since 2009, any firm making payment services available to consumers has to be authorised and regulated by the Central Bank under the European Payment Services Directive. Regulations require firms to establish whether or not they should be authorised.

Should the Central Bank hold that debt managers must be authorised firms, they could be instructed to cease making payments on behalf of consumers. It’s a move that would undermine their profit model which is entirely dependent on hefty fees deducted from money handled for consumers. Firms operating from Britain would also have to cease handling money, unless authorised by the British Financial Services Authority.

Asked of its position, the Irish Bankers Federation, which is on record for some time in calling for the regulation of commercial debt management companies, said it believes they “should be regulated as payment institutions under the Payment Services Directive where appropriate and this position was made known to the Central Bank in the past.”

The sector is heavily populated by British/Irish joint venture firms and firms operating directly from Britain where they have come in for stinging criticism from the OFT (Office of Fair Trading) which licenses them as high risk consumer protection operations.

Since the Home Payments scandal broke, the Central Bank has sought to clarify the debt manager business model. It says it “has written to banks and insurers seeking details on firms that may be acting as payment agents for customers and to advise their customers that any money held by such firms are not covered by the Deposit Protection Scheme.”  Having identified a list of “approximately a dozen companies” that appear to be offering debt management/debt advice type services to consumers, it is writing to inform them “that they need to establish whether their activities require authorisation under the PSD, and if such activities are undertaken by the firms they will have to cease immediately.”

When contacted, Moneyvillage Ltd, a domestic joint venture operation set up in January last year, said that it has responded to the bank saying its position is that it does not have to be authorised. The company which  handles and distributes consumer’s money, is a founding member the Debt Managers Association of Ireland, a trade body set up last year to advocate for regulation.

A spokesman for Irish Mortgage Corporation, which recently closed down its stand alone debt management firm Credycare, believes that debt managers should be regulated and people’s money protected.

He explained Credycare closed as it found it couldn’t charge the level of fees required to become profitable. It’s a move that begs questions of the viability of other operations. If it’s the case that these firms cannot achieve commercial viability then they may not pass muster with the Central Bank’s stringent authorisation criteria.

MABS also wants to see commercial debt managers regulated. As they only deal with unsecured debt and not the totality of consumer indebtedness, it believes they risk making problems worse and not better for people. The Consumer Affairs Association, seriously concerned at the lack of consumer protection said “the way is clear for struggling consumers to be burned severely and yet the danger is being ignored” 

The Central Bank may have a quite effective mechanism to respond to calls for regulation without the need for new legislation or regulations. By requiring commercial debt managers to be authorised payment service agents, they would be regulated and supervised for solvency, fitness and probity and commercial viability. Working with the National Consumer Agency, the bank could issue strict guidelines on other consumer protection aspects such as misleading advertising and unfair terms. This approach was brought to the attention of both bodies by me in February 2010.

It seems that with a little bit of lateral thinking, fee-charging commercial debt mangers could be regulated and a glaring gap in consumer protection closed off.  

A version of this article appeared in the Irish Examiner, Business Section, Monday 3rd October 2011