Pat Neary asks 26 credit unions to review their loan books, keeps a weather eye on the mortgage market, and defends IFSRA's role in the Cologne Re affair. Arthur Beesley, Senior Business Correspondent, reports

Pat Neary took charge of the Irish Financial Services Regulatory Authority last February. Like many others, he has worries about the massive growth in Irish mortgage lending. But for the moment at least, a prime concern is the regulator's supervision of the credit union movement.

Serious questions about the quality of the movement's loan book burst into the open last month when an internal report in the Irish League of Credit Unions (Ilcu) said some of its members could go bust because clients were not repaying their loans. Thanks to a system of quarterly prudential reporting, the regulator was already alive to the issue.

On the strength of these reports, the regulator has written to the boards of 26 credit unions asking them to review their loan books to see if "remedial action" is required. He won't name the credit unions in question, but says they come from a group of 179 that represent 80 per cent of all credit union assets.

Neary says the issues are "serious enough for us to start to ask questions" of credit union boards. "I don't want to raise any great sense of panic, but in the sense that there would appear to be outliers from the averages I think questions have to be asked, and they [ Ilcu] have to ask the boards what actions they are going to take to bring their credit unions back into line," he says.

"What we are saying to them is that the information you have sent to us suggests that your credit union figures are not as robust as the norm, that you are an outlier in some way.

"It could well be that you have indicated that you have a higher level of non-performing loans, however defined, and that the level of provision that may be against those loans seems to be lower than the others, or that the number of loans in arrears as a percentage of your total loans seems to be higher than the others. That's at a first look."

Neary says the information the regulator has to hand is "nothing more than a lead". Still, the regulator is obliged to respond.

"The next thing is you set out this information to the credit unions concerned and express concerns that they are an outlier and ask the board of management to address this concern by:

review the figures;

review the components of the figures;

see if any remedial action is necessary;

and give a timeline for putting the remedial action in place.

"Alternatively, declare that no remedial action is necessary and you're satisfied with the figures under review for the following reasons, simply to gain an explanation."

This process takes place against the backdrop of sustained problems at Monaghan Credit Union, whose bad debts of €11 million led to the regulator instructing the withholding of its dividend in April. In spite of the warnings in its own internal report, the league insisted the situation in Monaghan was unique.

Was that an adequate response? "We are the regulator," says Neary. "We have to ask these questions. Under the Act we have to try and make sure that the boards of credit unions are acting in the best interests of their members. We've set about that in a systematic way. Until such time as we establish the facts, I wouldn't want to make any comment on what the Irish League were saying."

If that's hardly an endorsement of the league's stance, Neary doesn't go any further than that.

He has plenty to say, however, about the regulator's scrutiny of the reinsurance sector, where financial misdeeds involving an IFSC company called Cologne Re Dublin and the US insurance giant AIG led to Ireland being cast in an unflattering light as a "Wild West" for errant financiers who could make rogue deals without sanction.

Neary disputes that strongly. Indeed, he says that much of e-mail and telephone transcript evidence now being used in US criminal proceedings against former AIG and Cologne Re executives was provided by the regulator in Dublin. Phone records were provided by the company voluntarily, he says.

Questions about Cologne Re first surfaced during an official investigation into the collapse of an Australian insurer called HIH. That led the Australian regulators in October 2004 to bar two Dublin-based Cologne Re executives from doing business there, one of them being John Houldsworth, former chief executive of the Dublin company.

Several months later, Houldsworth and the other person were still working for the Dublin company, and the company's website described them as holding prominent positions. However, Neary says the regulator had in fact taken action. He also says the issue concerned advice that was offered by Houldsworth. Because there was no contract with the Irish company - "it had nothing whatsoever to do with the company in Dublin apart from this individual" - he says the issue could not have come to the attention of the regulator in Dublin.

"When this came to light in Australia, immediately we took steps to ensure that Mr Houldsworth stood down. Cologne Re Dublin were there before us. They had him stood down as a director, stood down as an approved person and he had agreed to assist in helping the Australian regulators and all the other regulators involved in what had been happening in Australia," he says.

"His underwriting capacities were withdrawn from him and he could only advise and help the Australian regulators. Anything that he was involved in was only under written approval of his superiors. John Houldsworth is not an approved person in this jurisdiction, full stop."

Still, the regulator never said publicly that it had taken action against Houldsworth. Was that a mistake, given the public action against him in Australia? "I think we probably should have been more clear," says Neary. "We should endeavour to make it public where possible, I think."

The AIG transactions involved $500 million (€396 million) contracts for finite reinsurance in which the US group took on no risk from Cologne Re.

This prompted a massive regulatory clampdown in the US. There was huge media coverage to boot, much of it focusing on the central role in the case of the New York attorney general Eliot Spitzer.

So why did this issue not come to the attention of the regulator in Dublin in the first instance? "The American deal was booked here, half of the transaction, but it was booked here properly," he says.

"There's nothing to suggest that there was anything improper about the way in which those deals were transacted and recorded here. What's at issue is the intent of people.

"It was a loan made by the reinsurer here to AIG. It was misrepresented by AIG in their accounts. They pretended it was a reinsurance deal when it wasn't. The company here in Dublin recorded it correctly. There wouldn't have been anything to suggest to the auditors or to the other members of management here in Dublin that there was anything untoward about the transaction because they wouldn't have been aware of the intent behind the transaction."

Neary says the Irish regulator immediately went to Cologne Re when the US regulators took action.

"It emerged that there were a number of telephone conversations between an individual and some of his counterparts in AIG and also in GenRe in the US [ Cologne Re's parent], " he says.

"Essentially it came to light that John Houldsworth knew the significance of this deal and knew he was facilitating concealment of the real purpose of the deal from the American authorities. It was we, through our interventions here, that brought all this evidence, the phone calls and the e-mails, to light, that formed part of the case."

He says the case is being pursued in the US courts because that was where the illegal side of the contracts took effect.

"That's where all the evidence is of wrongdoing. That's the locus of the evidence of wrongdoing. The evidence of the wrongdoing does not reside here because we had a transaction, that we've all had a look atand that was properly recorded. There is no evidence, other than what was in the head of John Houldsworth. Remember that John Houldsworth is not an approved person here," he says.

"The important thing is that the likes of John Houldsworth should be held to account somewhere... All the evidence resides in America. The most effective evidence resides there. As a regulatory college, the most important thing is that these guys are taken out."

While Cologne Re is winding down its Dublin operation, Neary indicates that the Irish regulator's scrutiny of the company is not yet complete. "Our investigations on issues relating to Cologne Re are still ongoing. We are still working with a number of international regulators in relation to certain contracts," he says.

When publicity about this case was at its height, the Irish regulator asked all other reinsurers in the IFSC to provide information about their activities. "We are following up on some issues arising from that. They are small in number," he says.

Neary won't provide details, but central to the Cologne Re case was that the Irish reinsurance market, like all others in the EU, was unregulated at the time. This is set to change. The sector will come within the ambit of new EU regulations that are to be transposed into domestic legislation in the next few weeks.

Elsewhere, Neary says he has concerns about the huge rise in mortgage lending. "Most commentators will say that the underlying drivers are robust. There is full employment and up to this certainly the interest rate environment was conducive to putting a lot of mortgages on the books," he says.

"My concern would lie more in the future and I would be concerned about the impact on the repayment capacity that higher mortgage rates would have. That's kind of double-edged in the sense that higher interest rates may have the effect if they occur gradually of dampening down the growth, so there can be a positive in that.

"The downside of that could be that people who have variable rates and have a very significant mortgage would be pushed up to their limit on repayment capacity. That's one element. The second element, of course, is that if the economic climate did kind of get a little bit tighter and if there was any hint of a growth in unemployment that would also have a negative impact on repayment capacity. Those two elements would be the issues that would be troubling me."

For all that, he says the normal market indicators are "very comforting". As a central banker since 1971, he remembers well the times when Dame Street could control lending with the interest rate. Neary says he's not nostalgic about that. "The machinery is different now," he says.

"We are a very open jurisdiction here. The measures that we impose could unduly affect the competitive positioning of our own industry.

"If we put up obstacles against our own competing for this business, providing the service, others throughout the EU can come in here on a passport basis and take the business. You have to be mindful of those competitive realities while we go about our day-to-day business as well. What we have to rely on is proper risk-assessment standards. That's the key."