20 May 2019 Interview
Siobhan Riding: First of all, I wanted to ask about your new role as the Head of the Financial Conduct pillar. And that’s more or less a year old now, isn’t it?
Derville Rowland: It is, actually. Where will I start? I took up the role, I think, in September 2017, and I had been the Director of Enforcement in the Central Bank before that. And because the Central Bank of Ireland is an integrated regulator, I don’t know if we’re unique, but we must be one amongst the very few. We have a really wide financial regulatory mandate. We are charged with responsibility as a Central Bank for financial stability and for consumer protection. And as part of our financial regulation mandate, we are the responsible supervisor for banking, insurance, asset management. We’re the markets’ regulatory authority, we have oversight responsibility for securities markets and, as you will probably be more familiar with, our investor protection mandate. We authorise and supervise the funds industry, and we also, very importantly for us, have a consumer protection mandate.
With all of that, the part of financial regulation had grown enormously over time and the legislative mandates and the different regulatory areas that we supervised, so it made sense to us to split that in two, because it had just become too large for one person to lead all of that. I work in lock step with my colleague, Ed Sibley, who heads up the prudential pillar of financial regulation and I head up the conduct pillar of financial regulation.
Our key objective in the conduct pillar is to ensure the best interests of consumers and investors are protected and that the market operates in a fair, orderly, and transparent manner. I’m particularly charged with the duties of oversight of our Consumer Protection Directorate, our Securities and Stock Market Directorate, where you will see fund supervision, oversight of the markets and, now, with the advent of Brexit there’s an increased complexity and diversity in the size and scale of our markets. I guess authorised firms. I also have anti-money laundering reporting to me as part of our role, that’s right across the system, and enforcement. Also, then, the teams that formulate our policy at risk work report to me. That’s my part of financial regulation and Ed heads up, very importantly, banking, insurance, and some of our asset management, but we work together.
I sit on ESMA, the Board of Supervisors, and I’m also on the Management Board, and I’ve also taken a seat on the board of IOSCO in recent times. Our vision is for a trustworthy financial system that supports the wider economy, where firms and individuals adhere to a culture of fairness and high standards. In that context we work closely with our European and international colleagues to shape those regulatory standards. In terms of banking, we’re part of SSM, which you’ll know sits in Frankfurt, and we also sit on EIOPA in the insurance context, and I sit on ESMA. But we take a uniformly clear approach to our regulatory philosophy, which is one of rigour and high standards right across all of what we do, and we’re quite driven by our desire for high-quality outcomes to be delivered for investor protection and market integrity. I hope that gives you a flavour. For a small country, we’ve placed all of our regulatory mandates inside the one authority.
Siobhan Riding: Just to focus specifically on the funds industry; your responsibility there is quite unique in that you’re responsible for international consumer protection. So tell me a bit about how you approach that.
Derville Rowland: That’s really important. When we think about our regulatory obligations, we’re very clear that the standard that we’re operating to is in fact the same, whether we’re thinking about consumer protection in our own jurisdiction, or investor protection in a wider context. The standard that we expect of financial services firms that are authorised in this jurisdiction, we hold them to the same high standards, notwithstanding wherever they intend to sell their products or supply their customers. Because we’re conscious that that is an important feature of regulation and it’s necessary for you to effectively discharge the mandate that we have been entrusted with. A key part for us: being a trusted portal in Europe when we recognise that the customers may be located in other jurisdictions. We take a very rigorous approach to our authorisations and we’re very transparent and clear about the standards that are required. We apply those in an even-handed way, regardless of the sectors or the locations of where those customers may arise.
Siobhan Riding: What are your priorities for the oversight of conduct in the fund industry at the moment?
Derville Rowland: That’s an interesting question because I think for us, in this jurisdiction, Brexit has produced a key priority for us right across all of our work, including the funds industry. And it’s in one of our strategic priorities is the Brexit challenge that is has brought to us. In an over-arching sense, Brexit brings a negative outcome to this jurisdiction but in a particular focus on financial services we have had a significant increase in applications for authorisation from firms that are making their own arrangements in terms of Brexit preparedness.
We’ve been open about this, that we’ve had more than 100 applications. I think in terms of funds particularly we’ve had the highest number of funds authorisations in the past year. We certainly have granted maybe 1,117 new funds authorisations in 2018, which is certainly more than any previous year, and we think that’s as a result of Brexit. We also see a widening of the types of firms and entities that are making applications in this jurisdiction. You asked me about funds focus in particular, but it has to be across the board. We have taken an approach that, in authorisation, in predictable, rigorous, and transparent.
We had a concern with the advent of Brexit that there may be a risk of regulatory arbitrage in the European context so, we were a very strong voice in ESMA, to work with our colleagues in other regulatory authorities across Europe to devise an approach whereby we avoided that race to the bottom and that risk of arbitrage. It’s our aim that if a firm applies to Ireland for authorisation the motivations are not regulatory arbitrage, that they will be met here with the same level playing field standard across Europe. Whatever reasons are motivating their choice, such as English-speaking population, common law jurisdiction, maybe proximity to London. In fact what we see is a lot of firms, if they choose jurisdictions, they’re choosing jurisdictions because of reasons such as already having relationships there, or businesses there. Our priority was to deal with Brexit in a predictable, consistent way, applying high standards and we worked in ESMA, with our colleagues, to achieve that outcome.
In fact, ESMA, I think with Steven Maijoor’s leadership, did a very good job in promoting convergence. I don’t know if you’d heard of a group called the SCM, the Supervisory Convergence Network, where we were very active participants in that context, where on a no-names basis cases or proposals for authorisation in a Brexit context were brought forward for general discussion, for norms to be discussed, various approaches. We found that really constructive and very beneficial in order to make sure that a good-quality approach was being taken. And I think it’s worked well.
In funds, we have a pretty full agenda in terms of our investor protection focus in fees and disclosure. We have an important piece of work ongoing in terms of performance fees, where we’re making sure in terms of the thematic reviews that we have done that investors are getting what they pay for and they’re not being charged more than they should be. We’re working through supervisory engagement with certain funds, to make sure that where they’ve got it wrong. We published an industry letter in 2018, detailing our findings, that things are made whole and good for investors.
We also have a very important piece of work on closet indexing ongoing. That was actually a hugely data-driven piece of work; we’ve analysed the performance of more than 200 Irish domiciled funds. You’ll know very well if they’re charging for active management but in fact are tracking indices, and we’ve benchmarked the behaviour of those funds against more than 2,500 different indices. We wouldn’t be able to do this piece of work if we weren’t a data-driven supervisor.
Siobhan Riding: What is the number of closet tracker funds that that you’ve narrowed down in the subset?
Derville Rowland: That’s not public information yet, because we’re working through that. We haven’t arrived at the total number yet, but it’s a work in progress. We’ve been having extremely good work with ESMA as part of the closet indexing work. Because, as you will know, I’m sure, that it’s a very complex task and can have a degree of subjectivity in it, on whether you establish as a matter of fact that closet indexing is occurring.
ESMA set up a hugely productive workshop where all the techniques and approaches right across Europe were being shared by the different regulatory authorities with a view to establishing the best of the approaches that could be applied to [and this] supported the work right across the different jurisdictions enormously. Our approach is perfectly consistent and aligned with the best practice that can be observed in the ESMA context. But we’re taking that work further now, ourselves, and I certainly think that part of the way forward will be another best practice sharing with ESMA, right across the jurisdiction so all of the competent authorities can divine the highest quality forensic techniques, if you like, that are the most effective.
Siobhan Riding: But what’s the reason to return to the topic of fees and disclosures now? I know you’ve looked at it in the past.
Derville Rowland: I think, from an investor protection point of view, this is a high priority. It’s a priority that we’ve been advocating for as the ESMA agenda and it’s a perennial part of our own agenda. I think you’ll see it right across the number of jurisdictions, including the UK jurisdiction, that a focus on performance and fees to deliver high-quality outcomes for investors is a key topic. I don’t think that fees will be adequately dealt with in a one-year initiative; there will be multi-year initiatives. And certainly I think in terms of deepening of capital markets union in the EU, making sure that the products and services that investors can avail of deliver good performance and quality for them will be of good support in ensuring that the capital markets in the European Union continue to develop. That will be of great benefit to all investors, and in their best interests. Continuing the focus on that is something that I see remaining as a priority. And, indeed, I think you’ll see, too, with cross-border provision of funds and any more the legislative agenda there will produce a higher focus on this, with more information on fees and charges being collected by ESMA, who will then be in a position with data-driven approaches to analyse this further. So it’s going to remain a priority.
Siobhan Riding: And what kind of action do you envisage taking if you do find cases of funds that were misleading?
Derville Rowland: All options will be open to us, all of our regulatory outcomes, from supervisory actions, certainly in all instances where we see issues arising, we’ll expect the issue to be made good. But all the regulatory options available to us will be considered.
Siobhan Riding: Including fines for management companies?
Derville Rowland: Of course.
Siobhan Riding: And compensation for investors?
Derville Rowland: Redress, and all of the options available to us will certainly be considered. We wouldn’t accept any situation where charges were improperly applied that anything other than redress to the investor would occur.
Siobhan Riding: Why wasn’t redress and compensation awarded before, when ESMA did its initial study of closet tracking in 2016?
Derville Rowland: I can’t speak for ESMA.
Siobhan Riding: Did the Central Bank do a study? Because at the time I remember ESMA asked all of the national competent authorities to look in their own jurisdictions.
Derville Rowland: I think that’s right, and the jurisdictions have followed that up. But the techniques for closet tracking are quite complex and it’s important that when you pursue the course of action that you do that with the benefit of the best practice approaches, which we’re doing.
Siobhan Riding: Is it fair to say that the original studies that yourselves and the other national competent authorities did originally weren’t conclusive enough?
Derville Rowland: I think it’s fair to say that when those studies occur they point to a problem, but what’s important then, when you go to address it, you have to do that in an evidence-based way in order to yield the accurate answer with regard to what’s in fact happening. That requires a degree of rigour and forensic detail that’s being applied to this.
Siobhan Riding: What you’re doing now is much more comprehensive?
Derville Rowland: Of necessity it’s forensic in its approach because you’re getting right down to the individual funds and the behaviours, rather than a market assessment that’s telling you it’s a risk indicator that something may be occurring that’s at a much higher level. Then you’ve got to do the work to bring that down to specific levels.
Siobhan Riding: I know in your broader work in regulating the banking industry and the tracker mortgage mis-selling investigation, lots of compensation has been awarded. So there will be people that campaign for fund investors who will ask why hasn’t compensation been awarded for these kinds of mis-selling scandals.
Derville Rowland: The tracker mortgage scandal that you refer to is a really good case in point where that was the biggest. That was actually one of the first challenges I dealt with when I took up this role. It involved more than two million domestic mortgage accounts and it’s been the most intrusive and largest piece of conduct supervisory work that we have done. It’s, in terms of redress and compensation, cost the banking sector here more than I think €640m, and in terms of aggregate amounts, more than one billion in terms of costs and charges. There was a redress and compensation programme built on the back of very clear principles, but the rigour that had to occur between the first concern regarding whether there was an issue and taking it right down through to the effective delivery of compensation and charges took precisely what I was talking about in the context of performance fees.
It took a very detailed supervisory exercise, going right down through to the individual groups that were affected by it. That’s just the necessity of going through the detail, which was done. My point is that from first blush indicators that there may be an issue, right down through delivery of outcomes, it requires us to go through a high degree of rigour which we’re following and did follow in the tracker mortgage examination.
What was interesting about that is, as part of that, we noticed that the behaviour of the banks was quite poor in terms of listening to us about what we saw the problems to be. We undertook a culture and behaviour review of the conduct of the banks which was very informative. It’s part of what we’re incorporating now, into our wider supervisory approach because it’s one thing to observe behaviours that have a pattern of being repeated, but it’s very important to get underneath the motivation as to why they’re behaving like that. Because in your supervisory engagement what we really want to see is if a problem arises, and it will do from time to time in all sectors and all areas, but our expectation, including in the markets’ area, is that if there’s a problem, that firms move to fix it proactively, to make sure that they’re behaving in a way that they have their own customers, those investors, at the centre of their consideration.
Our focus in our supervisory approach is to make sure that we see and have set expectations for a culture of fairness. If they have a problem they should make good their customers, they shouldn’t be waiting for regulators to tell them to do so, we want to see that proactivity. Now that we have more and diverse firms coming to Ireland as part of that Brexit process, we expect in the wholesale conduct work that we’re developing out and right across all of our work, we’ll be embedding culture supervision into that.
When we wrote to the CEOs of the new firms and the venues that are coming here, to set out our conduct expectations. We were very clear that we expect them all to have comprehensive risk frameworks in place so that when they’re designing products for customers, that they are looking at the benefits conferred by their product on their customers, and the risks to their customers. That proactive customer-centric point of view is part of what we expect to embed right across our conduct work, and have a systematic, consistent approach to conduct supervision where we look at the market, the venues, the various platforms, and the products, and that firm’s obligations to do the right thing by their own customers is embedded in the way that they pick and that they have that as part of their governance, product design, the way that they think about complaints channels, about remediation. It feeds into what we would see as that virtuous circle in terms of outcomes for investors.
Siobhan Riding: You alluded, before, to the challenges of the diversity and increased numbers of firms supplying here; what challenges has it presented for you? Have you also had to increase your teams of staff here?
Derville Rowland: Ireland traditionally certainly has had a funds industry that we’ve been very conscious of our regulatory mandate in that regard and we have a lot of experience built up in that part of our work. We also have a well-developed consumer protection approach, where we have a well-developed approach built up in that respect too.
A new challenge for us has been an increase in the diverse types of firms that have made authorisation applications to this jurisdiction, the increased complexity of those firms, and the increased size and scale. Systematic internalisers are new to us in this jurisdiction and we have multilateral and organised trading facilities, broker-dealers have come to the jurisdiction. We have more depositories, maybe size and scale has increased, so that has demanded that we really look to our conduct frameworks, and particularly to develop out our wholesale conduct supervisory approach.
Because we’re conscious that some of these firms have, quite frankly, questionable previous records in terms of their behaviours, in conduct, and things can go wrong at a large scale when it’s not properly supervised. We definitely prioritised putting our experience and best staff on a lot of the new Brexit work. A big initiative and challenge for us is to build up our skill set ourselves and our capacity to be effective supervisors of wholesale conduct behaviours. That’s something we’re very focused on doing.
A key priority for us will be to build up our own wholesale conduct framework. I’ve alluded to it earlier, where we look in a systematic way at the risk across the landscape in terms of at an entity level, at the venues, and in the different trading platforms. Then look at the market in aggregate and those wider considerations, to make sure that we have a high-quality supervisory strategy developed, that we have identified the key risks, and that we supervise intrusively those firms. The gatekeeper role and the degree of assertive supervision that they’re met with is an important part of the regulatory framework. That’s work that we’re doing, it’s an ongoing basis. We have set up a new wholesale conduct team to develop that out.
Siobhan Riding: Are you still recruiting, then? Are you going to increase the workforce?
Derville Rowland: The Central Bank of Ireland has been increasing its workforce significantly over time, and that continues. We see that stabilising, really, in the period ahead, because we’ve already upscaled significantly. We have, I think, nearly 2,000 staff. That’s a significant increase, actually, in recent times.
Siobhan Riding: Regarding the discussion paper you put out on outsourcing, what are the particular risks that you see in the funds industry in terms of the use of outsourcing by management companies and other funds’ industry participants?
Derville Rowland: Outsourcing is a really important topic, not just in the funds industry but right across all regulated industries because it’s becoming more and more prevalent. We see the benefits as we said, I think, in the outsourcing papers, where you can get expertise in a complex world, can look to outsource a task and get greater expertise. Perhaps they don’t even have that competence in-house.
We also see complexity in fintech, regtech, cloud, brings a need for outsourcing; but of course the key message for outsourcing is that task can be outsourced, but never responsibility. If we look particularly in the funds industry, outsourcing, of course, is permitted, and that’s perfectly acceptable so long as all outsourcing, notwithstanding what specific area it relates to, the firm who conducts that outsourcing arrangement is very clear about their role and responsibility in oversight, governance, and in fact they are the responsible entity. If we touch on, for a moment, the particular issue of delegation in funds, I think the ESMA MOU that was signed between, I think, all of the EU27 NCAs and the UK, means that it’s clear that delegation can occur, of investment management to the UK in the event of a hard Brexit and that’s perfectly acceptable and is permitted.
Steven Maijoor made a speech, a number of years ago, being clear that delegation is permitted but it’s in the context of outsourcing and responsibility being with the regulated entity to make sure that they’re clear about the responsibilities in that regard, and their duty for ownership of the issue, and oversight.
Siobhan Riding; Are there other types of outsourcing that you’re concerned about in the fund industry? Outsourcing of fund administration or those types of things?
Derville Rowland: We certainly are concerned generally about outsourcing as a phenomenon and we have looked at the funds industry but right across industry. And what we have found is that it’s increasing in prevalence and it’s present in very many dimensions of a business and the different parts of those businesses are engaging in outsourcing. Chain outsourcing is very prevalent as an issue in cloud computing and various other areas. What we did find, as part of our general outsourcing work, was the standard to which the outsourcing was operating to was significantly below that which we expected. We certainly are concerned that outsourcing is not being overseen, managed, and controlled in the way that we would expect as regulators. It is on our radar as a concern and a problem. We will be doing a piece of work with respect to outsourcing, to follow that up, because it’s very important.
Siobhan Riding: What type of work is that going to be?
Derville Rowland: We held a discussion conference yesterday, and we will be furthering it in different sectors, looking at outsourcing and the risks that it poses. In the funds industry, we certainly will be doing a piece of work to make sure that what we expect to see in the fund service providers in terms of the standards they’re working to, and any outsourcing arrangements are where we want them to be.
Siobhan Riding: So there will be a further thematic survey?
Derville Rowland: Yes, we’ll be doing thematic work in the funds industry, about the standards of our expectations and, where outsourcing exists, that that’s being done to the requisite standard.
Siobhan Riding: Will that involve going into firms?
Derville Rowland: The first thing that would happen is that we’ll do desktop analytics, we will also issue questionnaires. Of course the next phase would be on-sites and, after that, we’ll assess all of the information that we have, and we’ll take a view of what it is that we’ve found. Once we reach that stage, we’ll then take a decision about the next steps.
Siobhan Riding: That final stage, in terms of the next steps, is that when you would consider enforcement action if need be?
Derville Rowland: We could issue risk remediation programmes to firms, to demand that they fix issues that we have found. We could take an option of clarifying regulations or codes and standards to which they could operate. If we found egregious breaches, of course, we are a risk-based supervisor supported by a credible threat of enforcement, that’s part of our work where that’s appropriate to do so. We have a range of regulatory and supervisory tools that we can use, depending on the circumstances that we find, and we deploy and apply them.
Siobhan Riding: Does that include fines and sanctions?
Derville Rowland: Of course, that’s part of the regulatory approach. They’re part of the tools that the Central Bank has available to it.
Siobhan Riding: Has the performance fee inspection that you carried out resulted in any compensation being paid to investors?
Derville Rowland: Yes. It’s resulted in certainly more than €1m being paid back, to date. We’ve required, where we find them making charges outside of our expectations, we require that to be made good. We would see that as their need to redress the issue to the underlying investor.
Siobhan Riding: After the Brexit referendum, there were criticisms about regulatory arbitrage and that some jurisdictions were potentially applying lower standards than what was required of management companies that delegate back to the UK. This ultimately prompted ESMA to issue three sector-specific opinions in 2017. Do you think those criticisms were justified? And are you satisfied with the situation now, or is regulatory arbitrage a continued risk?
Derville Rowland: As an integrated regulator, I had my 15-year anniversary as an employee of the Central Bank, and I’ve come through the ranks as a barrister who joined to do a specialist task. But the crisis had a really significant impact in this jurisdiction, obviously across Europe, across the world, but we take our approach to regulation and the standards very seriously in this jurisdiction, particularly informed by the terrible experience that we all had in the financial crisis.
We’re absolutely committed to the standard of supervision, authorisation, and regulation here being of a high quality. We are a committed part of the Single Supervisory Mechanism in banking supervision, and our approach to regulation across all of our mandates is singular. It is focused on high-quality regulation. We’ve no interest or desire in being a low-standards regulator.
Precisely because we were motivated to avoid any concerns about arbitrage and a race to the bottom, we were really proactive, and one of the key advocates for a uniform European approach that made sure we all moved in lock step together to employ a common standard so that we had that level playing field. We were really proactive in the Brexit opinions, not just in ESMA but across the board, to make sure that we work to avoid that. It’s not an outcome we sought, it was an outcome that we wanted to avoid, and I think we’ve been part of the solution in that. Our approach, we’re of the view, is absolutely consistent with that. In fact, we were somewhat criticised, we heard, in the early days, for the standard here being high.
Siobhan Riding: Criticised by whom?
Derville Rowland: Feedback from some firms, that the standard in Ireland was rigorous. We don’t apologise for that because we’re totally committed to the standard here being something that is not relevant to a firm’s decision-making factors. That we are on par with all the correct standards in Europe. When a firm is to make a decision about locating to this jurisdiction they will be met with a competent, predictable, regulatory standard and they can make their decision based on common law jurisdiction, links to the jurisdiction, which is in fact something that we see as a driver for firms to choose a jurisdiction, is to do with what business relationships they have there before the Brexit issue prompted them to have to re-think.
We don’t accept that our standards are anything other than high-quality, at the correct standard in a European context, and we’re completely committed to a collaborative dialogue with our European colleagues, to make sure that we work in lock step with others to produce high-quality supervisory outcomes and that investors are protected.
Siobhan Riding: So did the Central Bank submit examples of fund industry authorisations to the ESMA supervisory coordination network?
Derville Rowland: Yes, we certainly did. In fact, we were one of the active contributors. Because you will find that there are some jurisdictions that had more authorisations of a particular type than others. And we were very open, proactive, and we found a lot of benefit, actually, in that experience with our colleagues. And certainly I think the new ESMA proposals for coordination groups will further convergence. Which is to the good.
Siobhan Riding: The original proposals, as part of the ESAs review, were trying to push through a more centralised role for ESMA in checking delegation.
Derville Rowland: That’s right. As the financial regulator, we don’t play a part in that political legislative process, but as a financial regulator we certainly are fully committed to a strong ESMA that plays a directional and strong role in supervisory coordination and in terms of furthering convergence. We will be fully participative in that agenda because we can see the benefit of common approaches and common standards, particularly in areas that we all work together on to identify the key risks.
Siobhan Riding: But was that a concern for you at the time, the idea of ESMA having a veto over delegation authorisations?
Derville Rowland: No, as a financial regulator that wasn’t of a particular concern to us. But we were always concerned to make sure that any system of European supervision is effective and works well, and that it’s not unworkable or complex in a way that wouldn’t produce efficient and effective outcomes. And that’s our primary focus: to make sure that we deliver to our mission, investor protection, consumer protection, integrity of the market, and financial stability.
It’s in that context that we review any particular proposal to make sure that it works well. I think the ESA reforms, as they’re currently proposed, have a great opportunity for ESMA and all of the NCAs who are participants in ESMA to work together to further the convergence agenda which is undoubtedly part of the priority focus for ESMA in the coming cycle. As it has been, but I think doing more on convergence. You’ll see ESMA move in that direction.
Siobhan Riding: What is the risk of Brexit for financial regulation and the work of ESMA, beyond the things you’ve already talked about in terms of authorisations and getting a level playing field? What’s your view on the absence of the UK, of the FCA, on the ESMA Management Board, for example?
Derville Rowland: Since I’ve joined ESMA I think Brexit has been an issue. The UK’s full participation in all of the different dimensions of ESMA can’t be, because they can’t participate in those, the Brexit perspective. I certainly know that from our point of view as a common law jurisdiction, our close neighbour, and London is a huge international financial services sector, that we often are of the view that they’ve brought a depth and breadth of experience to the debate that was welcome, well-informed. And certainly the absence of that voice is something that will be felt. But then again, as part of the decision for the UK to leave the EU27, that’s perfectly consistent with that desire to be outside of that discussion. What will be important is that the EU27 continue the debate effectively, to deliver for investor protection and market oversight and integrity. And that we see how we further the interests for European investors and European consumers of those financial services products.
Siobhan Riding: Would you be in favour of the FCA having an associate role in ESMA?
Derville Rowland: That will be a matter for ESMA to determine the appropriate contribution for any third country. And after the EU and the UK determine its future relationship. The voice for the UK and its role in that will be determined consistently with whatever that new relationship is.
Siobhan Riding: But do you see this as an opportunity for the Central Bank to play a more active role in ESMA?
Derville Rowland: Certainly we’re conscious, as the last common law jurisdiction in Europe, that we have a particular perspective. More importantly for us, if the size of our financial services system increases as a result of Brexit, it’s right that we play our appropriate part in Europe in terms of advocating for good investor outcomes and bringing to bear our experience.
We’re conscious of that, we see it as our duty to participate effectively and bring our perspectives. I think we do have something to share with our colleagues because of our integrated regulatory approach here. We recognise that we’re a small country, we’re a small open economy, but we are anticipating an increase in the size and scale of the complexity of the financial services industry that we regulate. As a result of that it’s important that we share our knowledge, concerns, expertise, and commitment to high-quality outcomes for investors, and participate effectively and support ESMA in its work.
Siobhan Riding: On Brexit, are you comfortable with firms with people who hold designated persons roles [in management companies] flying in and then flying out?
Derville Rowland: Well what we’re concerned about, and there’s actually a piece of work that we’ll be doing, is that any firm set up here must discharge to the standard required as regulatory obligations. CP86 set out for us very clearly and specifically the competencies and the various requirements that we would expect. We certainly also required that there was a designated person, I think that’s what you were referring to earlier, to make sure that there was oversight of the firm’s delivery on those obligations. That would be part of a supervisory part of work that we are doing to make sure that those firms are performing to the standard that we expect.
When you reference people flying in and flying out, that’s not the key issue for us. The key issue for us is that the hearts and minds directing the firm are here, that that firm has the requisite substance and it’s discharging its obligations to the standards required. CP86 is quite a prescriptive piece of work, very clear on the different areas that we expect the firm to demonstrate to us that they’re working to the right standards. And we will definitely be looking to see if our expectations are being met. So it’s up to the firms to make sure that they are operating to the right standard. And we certainly expect them to be here, doing the work that’s required.
Siobhan Riding: Just to go back to a bit about you and your career, you originally joined the Central Bank to do a project. What was that?
Derville Rowland: I went to the Inns of Court School of Law, in London, and I was a barrister in Chambers in London and the South East for a number of years. I was working at a time when regulation and regulatory law was developing more and more in the UK, and a lot of my colleagues and my friends actually moved into various regulators and regulatory authorities in the UK, pensions regulator, the FCA. I had done a lot of professional standards misconduct regulatory work, also done a lot of white-collar crime work, and I moved into accountancy regulation in the UK.
When I moved back to Ireland, I first came on board, if you like, as a barrister specialist in enforcement and regulatory matters. The organisation was fairly newly set up as a regulator, so they didn’t have that competence developed in the organisation. I came in with the brief to set up enforcement process, procedure, approaches, fair procedures, the hearings, various approaches like that.
I was here at the time that the crisis happened so it really puts it up to you to stand up and be part of the solution, to build the post-crisis infrastructure and make sure that the regulation is built to the standard that you would wish it to. Part of the challenge that I had to deal with was, along with very many others, was to make sure that we rebuild the regulatory architecture in a European context and in a domestic context and supervise in a way that delivers good outcomes. I had to investigate all of the particularly awful behaviours that happened in this jurisdiction, and deal with the police, and bring our first enforcement cases through to the courts and make sure that we survive all of the litigation challenges, which we did. I set up enforcement, saw the cases through, and then worked with others to bring in the fitness and probity requirements in here, and take the first cases through.
Then I moved role, into heading up the directorate, and I got responsibility for anti-money laundering, and we brought our approach through to FATF, which is the Financial Action Task Force that scrutinises you at country level, to see that your anti-money laundering procedures meet the required standards. We had a good outcome for financial regulation supervision in FATF, and that led me then to getting the opportunity to head up conduct regulation, which is where we are today.
Siobhan Riding: So which enforcement cases did you work on during the crisis?
Derville Rowland: In the aftermath of the crisis we supported the Garda Sίochána, the police service here, in Anglo, and helping make all the disclosures for the criminal trials that ensued. And I guess, over time, all of the various cases that we worked on in the aftermath, some of them touched Madoff issues in the funds area, you’ll be familiar with, but some of the building societies that failed here, Irish Nationwide Building Society. For us, that was one of the longest-running investigations that we have had because part of the work in enforcement is to bring your own cases through but to collaborate with the other agencies so that you support them in bringing their cases through.
We’re not the criminal authority, we’re the regulatory competent authority, and I guess I brought our first markets cases through as well. I guess I’m saying I’ve brought hundreds and hundreds of cases. We went from no powers, not being used here at all, to, at this stage, more than €60m in fines have been levelled across many, many cases. I can’t recall the numbers of cases. Over time, what we have done is we have developed a demonstrable track record in supporting our risk-based supervisors with a credible threat of enforcement. And, also, effecting redress and compensation where needs be, where it’s appropriate to do so.
Siobhan Riding: But it must be a challenging task, with the big legal teams that banks have?
Derville Rowland: It’s true. It is a challenging task with the big legal teams. The change for me over time was operating at scale that you need to operate in terms of financial services. Because these are document-heavy or data-rich issues that you will never bring through to completion successfully unless you adapt your approach to operate at that scale, to deal with the volumes of documents or be data-enabled to be able to interrogate issues through data analysis or clustering techniques, where you can look and see where people in the firm, who sends most emails?
You can actually map traffic and there are different techniques that help you triangulate down to get closer to an issue, because you can’t look at everything. Informing your approach with data analytics and with document management and ways to interrogate that is necessary if you’re going to bring forward outcomes. But that, too, is part of the challenge of supervision, that when you’re operating in any of the jobs that we were talking about earlier, when you want to get down close to an issue, to say did it in fact happen in this instance, you’ve got to be able to have techniques to help you be data-enabled and manage documents at scale so that you can navigate through to holding firms and individuals to account, no matter what the issue is. I think that experience helps me in this role.
Siobhan Riding: What lessons did you take from your earlier experience as a barrister and in the white-collar crime cases you worked on? How did they influence your work?
Derville Rowland: I think I come with a slightly different background than others, but it means that I follow the evidence. I have experience of challenging circumstances and staying on course to follow through to conclusion. I also think it gives you a huge appreciation for integrity; doing the right thing can never be underestimated. I think spending a lot of time listening to issues being discussed in court gives you a huge appreciation for the importance of integrity and delivering the right outcomes. You watch the outcome, not what people tell you. And you can stay the course. Of course, it give you experience in challenging firms when you need to.
I think we used that to good effect, actually, in the tracker mortgage examination because I started by telling him we had an experience where only about 13,000 customers were accepted by the banks as having been affected, and therefore eligible for compensation and redress. I can’t recall the amount of compensation and redress at that time, but it was really very low. We didn’t accept that that was actually the position that should be taken so I think certainly the barrister’s skill of marshalling an argument, seeing the evidence, being clear about a position, helped us challenge them. The position moved from 13,000 customers being accepted to about 40,000, which delivers very appreciable benefits for those people who were included in the compensation and redress programme without them having to go and chase it. The compensation and redress, we had to argue with them many, many times, about the level of compensation and redress, and it certainly was really unacceptable, the levels that they were offering. We challenged them, and it increased substantially as a result of the work we did. And, as I’ve said, it resulted in about €640m in compensation and redress being returned to customers. We’re a small country, that’s an enormous return or outcome in this jurisdiction.
Siobhan Riding: When you were a barrister in London, were you both defending and prosecuting?
Derville Rowland: Yes, I worked across a wide range. I did lots of defence work, which gives you insight from one perspective, and I prosecuted, and I also actually was disciplinary counsel for a number of different authorities, including the police, for police misconduct. I worked for a variety of agencies and did judicial review work as well, so across a range of industries and sectors. I began to have a particular specialism in professional conduct and professional standards, which is what led me into financial services regulation.
Siobhan Riding: When you mentioned integrity, what did you mean by that? Is it when you were listening to accounts and trying to probe the truth?
Derville Rowland: I’m saying about for me integrity is doing the right thing. So in some of the work that we’ve done we’ve heard proposals about what a contract term means or what it allows, but it doesn’t appear to me, sometimes, to deliver an outcome that is good for consumers or investors. I think a perfectly consistent view with the obligation of financial services firms and the regulator is when you have a contract or a position, that you should make sure it delivers a good outcome for the investor. Simply relying on terms that say something but don’t actually deliver an appreciable outcome couldn’t possibly be consistent with our vision for firms and individuals operating in them who operate a culture of fairness and high standards with the best interests of consumers and investors in mind. That’s how I view that guiding light of integrity.
Siobhan Riding: As a senior woman in financial services, what do you see as your role as a regulator in terms of helping to prompt the financial services industry to become more diverse?
Derville Rowland: I’m really glad you asked me that question because, as part of that culture review work that we did into the Irish banking sector, we did a particular culture review into each of the five main lending institutions here. One of the parts of our work that we were particularly focused on doing was a diversity look at them and we think they fell short in that regard. We, as an organisation, are extremely committed to encouraging diversity, both inside of our own organisation and in the regulated financial services community. We publish some information about that on an annual basis. I’m fully committed, as this organisation is, to seeing a more diverse group of people working in and leading financial services institutions.
We’ve seen some increased diversity in the banking sector; I think the asset management sector, it would be to its benefit to be as diverse as it could be, and to continue to improve that. I think women are part of that diversity agenda, but so too are people from different ethnic backgrounds. Just as important are people from different educational backgrounds, different social backgrounds, different schools, so that you have diversity of gender, diversity of thought, diversity of perspective. We see that that kind of diversity improves challenge and therefore helps the quality of decision-making and avoids a big risk that certainly we would be concerned about in this jurisdiction, which is group think. If everybody is from the same school, the same university, the same discipline, and the same gender, you don’t see the different perspectives in the board room, or in the running of the business, that you would wish to see, which would result, in the long run, in more rounded decision-making and better outcomes.
We’re very strong advocates of diversity but we think there’s a distance to travel in financial service industries to achieve the level of diversity that we would wish to see. We continue to push for that to increase. We haven’t set targets, but we certainly have structured demand in conversations with firms about their diversity approaches, and we’ve required them to set agendas for themselves, but it’s a focus for us. Even by setting a leadership role in this, it puts it on the table and it’s not going away. And in fact I think it’s gathering more and more momentum all the time.