OPINION:The light-touch approach has proven utterly unsuited to the culture of Irish banking, writes John McManus

PATRICK NEARY is the latest casualty of the credit crunch and more specifically the loans to directors controversy at Anglo Irish Bank. There will be others, but Neary's departure is particularly significant as it can be seen as a repudiation of the whole approach adopted to financial regulation by successive administrations here.

Ireland - through Neary and his predecessors both in the Irish Financial Services Regulatory Authority (Ifsra) and the Central Bank proper - has adopted what is known as a principles-based or light-touch approach to regulation. Instead of laying down and then enforcing a vast amount of rules the regulator has instead set out principles by which it expects the industry to abide.

The idea is to put the focus on encouraging good behaviour by financial institutions rather than simply foster a culture of compliance. The rationale being, in part, that it's better to have a relatively small amount of rules followed in spirit rather than a raft of legislation that is followed to the letter, with loopholes being routinely sought and exploited.

It was a particularly attractive approach in the context of the concerted effort to build an international financial services industry that has gone on here for the last 30 years. Light-touch regulation is low cost, because the regulator is lean and, ideally, nimble. It is also responsive to industry needs.

It is a sophisticated approach and relies on a great deal of trust and integrity, both on the part of the regulator and also the institutions and intermediaries involved, such as accountants and lawyers. It is not without risks. There will of course always be a few bad apples. But if the vast majority of the industry buys into the concept then the regulatory load would be light and everybody would benefit.

Principles-based regulation is for grown ups and unfortunately completely unsuited to the culture of Irish banking as exemplified by what happened at Anglo Irish Bank.

How could a principles-based system work in an industry where the chairman of the country's third-largest bank seemed so devoid of basic morals that he was prepared routinely to mislead his shareholders and the regulator about the extent of his indebtedness to the bank.

And he was not some rogue operator. He was facilitated by the second-biggest building society in the State - Irish Nationwide.

Seán FitzPatrick and Anglo Irish Bank behaved in exactly the opposite fashion to how they were supposed to under their part of the light-touch regulatory bargain. FitzPatrick may have been correct when he says that what he did was not illegal but he must take us for fools if he thinks for one minute that anyone believes he was acting in the spirit of the regulations.

Not only was the principles-based approach wrong for the Irish financial services market - and probably for financial services generally - it has also resulted in a regulator that is arguably not fit for purpose.

One of the more extraordinary aspects of the whole Anglo Irish business is that the significance of what FitzPatrick was up to seems to have been lost on the individuals in the regulator who dealt with it.

If there was an issue that merited being brought to the attention of the top management, this was surely it. And it should have been done in a formal manner. Instead it appears that if escalation took place at all, it was by way of some informal channel, although Neary disputes that even this took place. The committee that investigated the affair was not able to reconcile the evidence, but made it clear that in doing so they did not mean to suggest that Neary and his prudential director were told what was going on at Anglo.

What is clear is that a number of things that should have happened did not happen, including informing the bank's own auditors and the Director of Corporate Enforcement about what was going on.

The summary of the committee's report published by Ifsra plays up the pressure that the organisation was under because of the liquidity crisis as a significant factor in why the regulator dropped the ball.

That was no doubt an issue, but the fundamental problem was that the culture engendered in the regulator by its principles-based approach meant that Anglo Irish got a mild telling off and was made promise to do better next time when it should have been clear to everyone involved that nothing short of FitzPatrick's resignation would suffice.

The penny appears to have dropped with Ifsra, which noted in its statement last Friday that the principles-based approach was now under review. Nonetheless, it seems still to think the main problem is the global financial crisis rather than the moral ambivalence and greed at the heart of our financial services industry.

It also took a dig at Neary, pointing out that he played a big part in the adoption of the principles-based approach here. It seems a bit gratuitous and comes across as a rather pathetic attempt by Ifsra to distance itself from what has turned out to be a strategic mistake by the whole organisation over several decades

The Anglo Irish business does not reflect well on anyone, but at least Neary has shown that he for one understands the principles of accountability and responsibility. It is more than can be said for his peers.