Irish Nationwide Building Society (INBS) failed to check the profit figures of its large developer clients in deals that involved shared gains, an inquiry into the now-defunct lender heard on Wednesday.
Loans with profit-share arrangements amounted to €6 billion at INBS in 2008 and the long-running inquiry into several alleged regulatory breaches before the financial crash is currently looking into claims that the society failed to set any formal credit risk policy for such lending.
INBS’s former internal auditor, Killian McMahon, confirmed at the hearing that he had found in a review of the society’s commercial loans in 2007 that it did not have detailed accounts from developers on gains made on any project. The society stood to share between 25 per cent and 50 per cent of the profits from such arrangements, the inquiry previously heard.
"Is it fair to characterise the summary of your report in the following way: that the most you saw during this audit in 2007 on documentation standing up the profits were one-page profit and loss accounts summaries and, in some cases, you didn't have that?" asked Brian O'Moore SC, of the legal team assisting the inquiry.
“That’s correct,” said Mr McMahon.
The inquiry previously heard that a 2004 KPMG review of INBS's commercial property lending found the society relied on the word of developers for project profit figures to avoid losing relationships with borrowers. The KPMG exercise was carried out at the request of financial regulators.
Mr McMahon recommended in two internal audit reports, in 2004 and 2006, that INBS set up formal policies for the granting and monitoring of profit-share agreements, which the society relied on increasingly during the boom, especially in the London market. However, these recommendations were not acted upon, he said.
Profit shares “became a significant element of the society’s lending strategy, so the lack of a policy meant that internal audit couldn’t audit against such a policy”, he said.
Lending policies
The inquiry has heard that profit-share loans usually breached INBS’s broader commercial lending policies that loans should not exceed 75 per cent of the value of a project, and that guarantors should back all such borrowings. The society routinely offered 100 per cent loan-to-value facilities to borrowers willing to share project profits, while the borrowing entity, often a special purpose vehicle (SPV), did not provide guarantees.
These features – and the fact that borrowers did not have to make repayments until projects were completed – made profit-share loans riskier, a number of witnesses have told the inquiry.
Meanwhile, the inquiry also heard on Wednesday that Martin Philips, a senior solicitor and consultant with London-based law firm Howard Kennedy, which acted for INBS on large UK commercial property loans before the crash, has refused to make a witness statement or appear to give evidence to the inquiry. He was officially scheduled to give testimony on Wednesday, the inquiry's final session before the summer break.
Mr O'Moore said Howard Kennedy had refused to help the investigation, citing client confidentiality, even though Irish Bank Resolution Corporation (IBRC), into which INBS was folded in 2011, had released it from its duty of confidentiality in this instance.
Howard Kennedy also claimed that if Mr Philips gave a statement or evidence, it might undermine the confidentiality of other clients. In addition, the London firm had told the inquiry that it had no legal basis to compel a person outside of the Irish jurisdiction to engage with it.
Mr O’Moore also noted that Howard Kennedy has now asked the inquiry to stop trying to contact Mr Philips.
“Condescending, Howard Kennedy suggests to the statutory inquiry of the State that we should not trouble him again,” Mr O’Moore said, adding that the inquiry is being “effectively treated like an annoying pen pal”.
