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Extract: 'The Financial Regulator investigating what went wrong at Irish Nationwide is a unique piece of Irish irony'

Michael Fingleton’s autonomous powers in Irish Nationwide should have been picked up on by the Financial Regulator – why weren’t they? asks Tom Lyons and Richard Curran.

Image: Gareth Chaney/Photocall Ireland

In their new book, Fingers: The Man Who Brought Down Irish Nationwide and Cost Us €5.4bn, Tom Lyons and Richard Curran investigate the building society’s downfall and the regulatory authorities failings. In this extract they question why Fingleton’s autonomy was never questioned…

‘CORPORATE GOVERNANCE’ IS a broad term that reflects the way an organisation conducts its business in relation to probity, honesty, checks and balances, transparency, accountability and legality. It can also be used as a formula for going on what might be called a ‘fishing expedition’, with broad terms of reference.

Fingleton was gone. Irish Nationwide was essentially collapsing, and the state had taken it over. Gerry McGinn’s job was to manage the meltdown, tidy up the balance sheet as best he could and manage the society in line with government policy. The rationale for the Ernst and Young investigation was obvious. The society had lost hundreds of millions and would go on to lose a total of more than €5.4 billion. This was on foot of loans sanctioned by Michael Fingleton. Basic questions had to be answered. How did this happen? Was the board weak? Were there adequate structures for ensuring that Fingleton did not have undue influence and control? Where did all the money go?

Investigation report

The sub-text of the investigation was to try to find out if Fingleton, other executives or board members had broken the law, or any society rules, or had been in breach of their fiduciary duty as directors. The report looked at several areas. It examined Fingleton’s authority and power within the society and whether it was legitimately granted or not. It looked at the banking relationships with clients. It also looked at how the society conducted its affairs on such issues as the traceability of funds, payment of invoices, ensuring adequate security or charges on loans. It also probed some aspects of Fingleton’s personal finances, including an investment he had made in a hotel project in Montenegro. Fingleton’s partner in the venture, the Dublin businessman Louis Maguire, had gone to the Financial Regulator the previous year and made several allegations about Fingleton’s role in that venture, raising questions about the origin of the funds Fingleton had provided for it.

What the investigators uncovered was truly shocking.

Special powers

The accountants found that Michael Fingleton had been granted special powers by the board of the society as far back as 1981. These powers were reinforced by the board in December 1994 and again in August 1997. The measures empowered him to set, vary or alter interest rates and fees, and to make arrangements with individual members. This meant he could charge different people different rates of interest. He could structure a commercial or residential loan with one customer on certain conditions, such as interest-only for a decade, and on completely different terms with others. He could change the rates or the conditions attached to the loan at will. So, having lent out €1 million at a certain rate and repayable at a certain time in the future, he could then alter those conditions at any stage as he saw fit. He did not need to consult the board, or anyone else, in order to do this. The board must have felt at the time that Fingleton could do no wrong.

In reality by granting these powers they were giving the chief executive personal autonomy to do special deals with friends, change any deal he wanted, and run the society as he saw fit, without necessarily breaking the society’s rules. The ordinary checks and balances of having a chairman, a board, an audit committee, a credit committee, could become de facto irrelevant. It was the most extraordinary handing over of power in Irish financial services. It undermined and even eliminated any accountability by Fingleton for his actions within the society.

Nobody knew?

Yet nobody seemed to know about it. Newspapers didn’t report it at the time, and while people inside the organisation and in the wider business community knew that Fingleton ran things his way, they didn’t necessarily realise that he had been formally given the powers to do practically whatever he wanted. Con Power, a non-executive director of Irish Nationwide at the time, has said that he knew nothing about these powers. He sat at the boardroom table for six years and was never told that Fingleton had been granted these powers.

He said it was never raised or discussed by the board or in any meeting with the Central Bank or the Financial Regulator.

Power says that the rules of the society empowered the board to delegate certain responsibilities to the chief executive, but in his view it would never have been intended to hand over that kind of discretionary power to one person. The existence of the powers should have been a red flag to the Financial Regulator. The first big question is whether the Central Bank and later the Financial Regulator even knew about them. The society was originally regulated by the Registrar of Friendly Societies, but the duty fell on the Central Bank in 1989 and then the Financial Regulator in 2004.

Where was the Financial Regulator?

The second big question is, If the regulatory authorities didn’t know, then why not? Surely they should have access to this kind of information, either automatically or by requesting it. Could it have been the case that the Central Bank was informed of all this through regulatory submissions but they were simply not read, ignored, or viewed as quite acceptable? The office of the Financial Regulator is not telling us. They are not answering these kinds of questions. They may form part of the subject of an investigation by an Oireachtas committee in the future; but in the  meantime the Financial Regulator is leading the investigation into what went wrong at Irish Nationwide, in a unique piece of Irish irony.

Whether the regulator knew or not, too much power had been given to one man. After all, he didn’t own the society, and a lack of accountability on that scale could cause a registered lender of money to end up in disaster. And so it did. This should also have been obvious to the board.

Ernst and Young looked right down inside the corporate structure of Irish Nationwide under Michael Fingleton. Through interviews and an analysis of thousands of documents and e-mail messages the accountants discovered an organisation that was a corporate governance disaster area.

Chain of command

It emerged that Fingleton had twelve different people reporting directly to him. This was a most unusual way of doing things. Typically, even in enormous multi-billion companies, the business is divided into units or divisions; the further up the chain of command, the fewer the numbers. Businesses are usually classic pyramid structures. It would not be unusual to have as few as three or four people reporting directly to the chief executive, even in a much bigger organisation.

The Irish Nationwide structure revealed two things: firstly, how unorthodox the society was and, secondly, how Fingleton was all-powerful. One of the net effects of this structure was that no proper senior management team, familiar with different parts of the business, emerged. Fingleton was the only one who knew everything. Others knew a lot about their own patch, but not much else. This was another warning sign, that a business with a loan book of nearly €12 billion could rely so much on one person. Clearly, that was how Fingleton liked it. It was up to the board to exert pressure to change it.

Fingers: The Man Who Brought Down Irish Nationwide and Cost Us €5.4bn is written by Tom Lyons and Richard Curran. It is published by Gill and Macmillan and is available to buy now.

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Tom Lyons and Richard Curran

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