Gentle persuasion has failed us again – it’s time the Central Bank loaded up the big guns
POLITICIANS are calling for a criminal investigation into Irish banks for their role in the recent tracker mortgage scam and the Central Bank has confirmed that it is working with gardaí on this matter.
At first sight, however, it might not be immediately clear that any criminal offences have actually been committed.
In general terms, the issue at the heart of this scam is that consumers appear to have been led to believe that they could opt to retain their tracker mortgages when they concluded a period of repayments on a fixed rate.
Instead, at the end of the fixed period, they were given a variablerate mortgage, resulting in much higher mortgage repayments.
On its face, this appears to be a misrepresentation of a contractual term, a private civil wrong.
Nevertheless, it is possible that the banks have potentially exposed themselves to both punitive civil sanctions and criminal liability.
In terms of civil sanctions, this misrepresentation is potentially a breach of the ‘know your customer’ rules in the Consumer Protection Code. This is a two-part obligation: banks must know their customer and then ensure the product that they are providing maps on to the customer’s needs.
Clearly, customers did not need to be sold a product that manifestly disadvantaged them.
The Central Bank can impose fines for breaching the code of up to a maximum of €5m on financial institutions, or 10pc of its turnover, and individuals may be fined
€500,000. These fines increased to
€10m and €1m respectively under the Central Bank (Supervision and Enforcement Act) 2013, but wrongdoing which predates this act will attract the lower maximum fine. Fines imposed on institutions will ultimately be paid by shareholders, which in some cases may include the State.
From a criminal perspective, while asserting that all parties have the right to be presumed innocent until proven guilty, prosecutors may choose to review the wrongdoing for the offence of deception.
This is a particularly broad offence that is committed when one party dishonestly intends to make a gain or cause a loss to another, as specified by Section 6 of the Criminal Justice (Theft and Fraud Offences) Act 2001.
In addition, prosecutors may consider whether there was a conspiracy to defraud customers, an offence at common law, either by individuals within the same bank, or between institutions, given that the practice has been widespread across the Irish banking sector.
Furthermore, if evidence has gone ‘missing’, as appears to have occurred in some cases, prosecutors may consider whether there have been attempts to obstruct justice or pervert the course of justice.
This is not an exhaustive list; it merely reflects some avenues of inquiry that seem most suitable, given the information currently in the public domain.
Nevertheless, it is difficult to hold senior individuals responsible in large corporate organisations like banks. High-level managers may determine corporate policy but only issue vague instructions on how to achieve these goals. As a practical matter, wrongdoing is executed by lower-level employees, which relieves senior managers of guilty knowledge and often liability.
The Senior Managers Regime (SMR) in the UK may provide the template for reforming Irish law to secure individual accountability. Banks should be statutorily required to assign responsibility for specific areas of business to designated individuals.
These designated individuals would then be charged with the responsibility to take all reasonable steps to prevent regulatory breaches. This would heighten considerably the likelihood of enforcement against individual senior managers.
The question now is whether such options will be considered. Ireland does not have a strong history of escalating its regulatory responses to sanction banks.
The Honohan Report concluded that the Irish approach to financial regulation was characterised by timidity; regulators “spoke softly and carried no stick”. The Regling-Watson Report similarly concluded that regulators were too deferential to financial institutions, moving very far in the direction not just of “principles-based” but of “lighttouch” supervision.
In the wake of the financial crisis,
the Central Bank promised it would mend its ways and take a more intrusive, assertive approach to financial regulation.
In a document from 2010, entitled ‘Our New Approach’, it promised to adopt a “challenging, and where necessary, intrusive stance”.
The Central Bank’s ‘Enforcement Strategy 2011-2012’ also pledged “a more vigorous application of enforcement effort backed by sufficient resources to represent a credible threat of action”.
At present, however, the Central Bank continues to rely on compliance-orientated strategies by attempting to persuade banks to give customers the mortgages to which they are already legally entitled and to offer prompt compensation. Compliance strategies are important but enforcers must, when necessary, be willing to invoke sanctions, or “fire the big gun”.
This is especially important in cases where they know they will win, thereby appearing invincible. Otherwise, they lose credibility.
At some point, the Central Bank must move from persuasion to punishment and it must be given the effective legal tools to make this possible.
Dr Joe McGrath is a law lecturer at UCD and author of the book: ‘Corporate and White Collar Crime in Ireland’ (Manchester University Press)