Inculcating higher ethical standards in the financial sector requires credible supervision and a manifest willingness to prosecute, writes Justin O'Brien
The chief executive of the Financial Regulator asks us to accept that the oversight of the reinsurance industry is not just effective but matches, if not exceeds, international best practices (Opinion, January 16th).
Dr Liam O'Reilly bases his assertion on the fact that Ireland will shortly transpose into domestic law a European directive on reinsurance. He argues "regulation must be robust and appropriate and that the watchwords must continue to be reputation, integrity and transparency".
These are lofty and indeed laudable ambitions.
The problem is that no tangible evidence is offered to support the claim. Inculcating higher ethical standards and accountability requires much more than rhetorical commitment. It also requires credible supervision and a demonstrable willingness to prosecute.
To date this has been notable by its absence.
The controversy comes at an exceptionally difficult time for the reinsurance industry and oversight system. Both have been subject to withering international criticism. A scandal facilitated by one of the largest reinsurance companies operating in Dublin has led to growing international perception of regulatory failure.
My reporting of this reality (Agenda, January 9th) attracted the ire of both Dr O'Reilly and Sarah Goddard, the chief executive of the Dublin International Insurance and Management Association (DIMA). Ms Goddard maintained that it was inappropriate to place the "wild west" appellation on the regulation of the finite reinsurance market because of the behaviour of one firm, Cologne Re, that is no longer active (letters, January 13th).
Dr O'Reilly concurred. He suggested it was misleading not to highlight that Cologne Re's collusion in the manipulation of share prices in New York and Sydney were "orchestrated" overseas. This is not true. The transactions were orchestrated and executed through the Dublin office. Is Dr O'Reilly seriously suggesting that the activities of a firm intermediating with the international markets through Dublin are beyond the IFSRA's purview?
Furthermore, the Australian transaction involved the FAI general insurance not, as Dr O'Reilly suggests, the HIH insurance group. It is also inaccurate to suggest that the Irish authority "publicly and forcefully" dealt with the criminal activity of John Houldsworth, a former senior executive of Cologne Re in Dublin who pleaded guilty in a US court last June to securities fraud. Until now, there has been silence.
Is it not time that the Financial Regulator explains publicly what form its own investigation has taken, the extent of its remit and the remedial measures introduced? Given the centrality of Dublin to the scandal it is surely imperative that structured changes are publicly announced and adequately debated.
The credibility threat facing the Dublin International Insurance and Management Association makes its stance even more remarkable. Houldsworth, whose activities formed the central focus of my article, is its former chairman. He continued operating in Dublin long after a Royal Commission of Inquiry in Australia, which he refused to attend, critically examined his transactions. Indeed, he remained in place after the Australian authorities banned him from operating in its markets.
It should not have escaped Ms Goddard's attention that this ban raised fundamental questions. Even if it did, should his guilty plea before a US federal court not have prompted open discussion of industry and regulatory failure? Yet there is no evidence whatsoever that this is the case.
On the day that The Irish Times published DIMA's response to my article, media reports from the United States suggested that federal and state authorities were close to sealing a settlement with the insurer American International Group Inc (AIG).
The settlement arises out of AIG fraudulently overstating its accounts directly because of what the company got up to through Dublin. If approved by the Securities and Exchange Commission, AIG will have to disgorge over $1 billion dollars - the largest regulatory fine in history. This cannot be brushed aside as an event in a faraway land.
What is now at issue is whether the rapid transposition of an EU framework directive will guarantee more effective regulation? Article 45 gives specific clearance to vary crucial terms, including internal control mechanisms, risk management, and accounting, prudential and statistical information requirements.
This gives substantial latitude to regulatory regimes attempting to engage with and retain business in an increasingly competitive marketplace. Transparency is limited to communicating the end result of national law, not the process by which it is constructed.
Dr O'Reilly suggests we can have confidence because the new Irish structure will go further than the directive, "in line with IAIS standards". It is unclear what International Association of Insurance Supervisors standards he is actually referring to. The IAIS has avoided a prescriptive stance. It provides guidance that ranges from self-policing to a ban on finite reinsurance.
The draft Irish Statutory Instrument states only that the Central Bank "may from time to time make rules". Regulated entities "shall comply with the rules (if any)" - in other words 'we may make some rules and if we do, you have to obey them'.
DIMA says it has not been lobbying the government. In a bulletin released last week, however, Ms Goddard suggested that the organisation "has been working closely with Government and the Irish financial regulator over the course of 2005 to ensure that a comprehensive regulatory regime will be implemented in 2006".
We could divine, perhaps, intentions from DIMA's website. Curiously, this week, however, the site itself was closed for "redesign". The old website linked competitive advantage to a pro-business regulatory environment. The prominent placement of the IDA logo gives this tacit governmental approval.
The archive contains a remarkable opinion piece. Written by Houldsworth while chairman, he salivates at the prospect of Dublin becoming the next Bermuda. While accepting the inevitability of regulation, he suggested that a responsive regulatory environment gave Dublin a unique edge. "Strong corporate governance can help avoid abdications of management responsibilities," opined the executive we now know was orchestrating securities fraud on a global basis.
Despite the evidence of systemic failure DIMA remains wedded to an approach that demonstrably failed. "The existence of strong regulation does not automatically prevent all problems. Conversely, less onerous regulatory regimes can encourage innovations which ultimately benefit the market as a whole," Ms Goddard said last week. Without wishing to question the integrity of Dr O'Reilly or Ms Goddard, fast-tracking a statutory instrument so lacking in detail without adequate public debate and accountability could prove counter-productive.