How did the Central Bank’s enforcement regime go from “walk softly and carry no stick” to “walk softly but carry a big stick”: Part 2

Introduction

 The enforcement regime was completely overhauled after the financial crisis due to the recognition that although sufficient tools existed to enforce principles-based regulation, the reluctance to use those tools led to financial institutions ignoring regulations knowing that there was a limited threat of action.  It was hoped that with the overhaul of the enforcement regime, there would be a significant boost in confidence and increase in mandate to apply the enforcement tools that were already present.

 Walk softly but carry a big stick

 The passing of the Central Bank Reform Act 2010 and the Central Bank (Supervision and Enforcement) Act 2013 vastly bolstered the enforcement regime. Part 8 of the 2013 Act expands the Central Bank’s law-making powers; section 48(1) of the Act provides the ability of the Central Bank to issue new regulations for the “proper and effective” control of financial services institutions. This delegated legislation may be sectoral wide or sectoral specific regulations and apply in areas such as accounting or auditing. The creation of the Enforcement Directorate in 2010 displayed a shift in tone and marked the beginning of the enforcement division's readiness to employ its enforcement powers.

The Administrative Sanctions Procedure is the shining example of the success of the Central Bank’s enforcement division post financial crisis. The key to this regime is that it enables the regulator to issue severe financial penalties without having to go through the time consuming and expensive courts system. As a result, they are highly effective and efficient at quickly sanctioning regulated entities and individuals. The 2013 Act has doubled the potential fine amount to €1 million for individuals and €10 million for regulated entities. Crucially, it now enables the Central Bank to fine regulated entities 10% of their annual turnover, which only first occurred in May 2019 against PTSB which was fined €21 million for their tracker mortgage scandal. Whilst the €21 million fine for PTSB was significant and four times the old €5 million maximum, the recent €100 million fine imposed against Bank of Ireland truly displays the game-changing difference in the Central Bank’s enforcement regime. In fact, the Central Bank determined that the fine should be €143 million but it was reduced by 30% on the basis that Bank of Ireland had cooperated with the investigation; thus displaying the Central Bank’s willingness to promote early settlements, to better utilise its resources and to close investigations. The size of these fines are a considerable deterrent, and must be in order to avoid situations whereby institutions are able to shoulder the damage of fines, make a profit and consider the fine as a cost of doing business.

The Central Bank regulatory toolkit is not just limited to the administrative sanctions procedure. The Central Bank enforcement powers now include the ability to apply to the High Court for a restitution order in cases of unjust enrichment or a loss suffered. Additionally, it is now able to revoke or suspend the authorisation of a financial institution for up to 12 months where there is a prescribed contravention. Further, it has substantial investigatory powers where it can compel the production of documents, individuals to attend interviews, and on-site inspections. Finally, these are applied in conjunction with the fitness and probity regime which has the power to suspend, fine and prohibit individuals from working in regulated financial services.

The visible change to the Central Bank’s enforcement culture is further displayed through the Central Bank's willingness to engage with legal action challenging its administrative sanctions regime as a natural part of the process of developing its powers. In this regard, the successful defence of the constitutionality of the Central Bank Act 1942 in Purcell v Central Bank and Others [2016] IEHC 514, whereby the High Court affirmed the constitutionality of the Administrative Sanctions Procedure is a testament to the confidence that the Central Bank now has.

Conclusion

Over 152 enforcement sanctions and €400 million in fines later (as of today’s date), it truly is clear that the enforcement system has evolved from “walk softly and carry no stick” to “walk softly but carry a big stick”. The Central Bank now possesses a powerful arsenal in which it is able to punish financial institutions for unsatisfactory regulatory behaviour. Banks and directors are now held accountable in a very public fashion and incur damaging reputational costs for breaching regulatory rules. As a result, financial institutions can no longer ignore the regulator and instead have to take active steps to abide by the regulatory rules in place. If this had been done in the first place, the global financial crisis would have never hit Ireland as hard as it did.