Financial Regulator

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www.itsyourmoney.ie

Information Centre: 6-8 College Green, Dublin 2

© Irish Financial Services Regulatory Authority.

Annual R

eport of the Financial Regulator 2007 | Five Year A

nniversary

Annual Report of the Financial Regulator 2007

Five Year Anniversary


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Contents

Introduction 3

Financial Regulator - 2007 at a glance 4

Chairman's Statement 6

Chief Executive's Report 8

Chapter 1 - Consumer Protection and Information 13

Chapter 2 - Promoting Sound Financial Service Providers and Fair Markets 35

Chapter 3 - Promoting a Stable Credit Union Sector 57

Chapter 4 - Organisational Review 65

Chapter 5 - Corporate Governance 79

Appendix 1 - Progress Report on 2007 Strategy 85

Appendix 2 - Financial Regulator Organisation Chart 103

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Strategic Approach

This Annual Report outlines how the Irish Financial Services Regulatory Authority (FinancialRegulator) performed its functions and exercised its powers during 2007 as well as reviewing themain developments in its first five years in operation. It incorporates the Consumer Director's andRegistrar of Credit Unions' Annual Reports to the Authority. It also incorporates the Annual Reportsrequired under the Unit Trust Act 1990, Consumer Credit Act 1995, Prospectus Regulations 2005and Market Abuse Regulations 2005.

The Chairman's statements relating to corporate governance and our system of internal financialcontrols, which are required in order to comply with the various legislative codes and regulations, arecontained in Chapter 5 - Corporate Governance. The 2007 Financial Review of the FinancialRegulator is not included in this Annual Report and will be published separately in July.


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Introduction

Gerard DanaherJim FarrellCon Horan(Prudential Director)

John DunneAlan GrayMartin Moloney(Secretary)

Deirdre Purcell

Brian Patterson(Chairman)

Dermot Quigley Patrick Neary (Chief Executive)

Mary O’Dea(Consumer Director)

Alan AsheBrendan Logue (Registrar of Credit Unions)

Members of the Authority and Senior Executives

• Implementation of statutory Consumer Protection Codecovering the sale of financial products to consumers.

• Implementation of Minimum Competency Requirements.

• Themed inspections examining such areas as sales processesof mortgage lenders, charges and premium rebates ininsurance intermediaries.

• Redevelopment of our personal finance website,www.itsyourmoney.ie - almost 520,000 online users' visits in2007, up 59% on 2006.

• Introduction of pilot financial education programme fortransition year in schools, in partnership with the MABS.

• Helping over 41,500 consumers with queries.

• Over 420,000 publications requested - up 28% on 2006.

• Provisions to facilitate access included in ConsumerProtection Code.

• 4,216 firms and funds authorised, an increase of over 43% on2006. Total number of regulated financial service providersstood at almost 13,000 at end-2007.

• Implementation of Markets in Financial Instruments Directive(MiFID), Market Abuse and Transparency Directives.

• Application of Capital Requirements Directive.

• Implementation of revised Fitness and Probity Regime.

• US Visit undertaken to showcase Ireland's regulatoryapproach.

• 449 Inspections and Review Meetings undertaken.

• 64,984 returns received and analysed.

• New measures put in place to counter market turbulence.

• Continued preparatory work on implementation of Third EUDirective on Anti-Money Laundering/Terrorist Financing.

Industry

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Financial Regulator - 2007 at a glance

Consumers

Key AchievementsSector

• 104 inspections/visits undertaken.

• 17 credit union seminars and meetings attended and/oraddressed.

• 34 meetings held with credit union representative bodies.

• 1,908 returns received and analysed.

• 17 applications by credit unions to provide additional servicesapproved.

• New increased lending limits approved where appropriate.

• Issued Guidance Note on Credit and Credit Control.

• Ongoing discussions on new Savings Protection Scheme.

Credit Unions

• Implementation of Stakeholder Protocol.

• Facilitated the Comptroller and Auditor General's Value forMoney assessment of the Financial Regulator.

• Earlier issue of industry funding levy notices and significantimprovements in the debt collection process.

• Supported and participated in the work programme of EU andother International Committees. 171 Meetings attended.

• Initiation of major Business Process Review.

• Commenced development of curriculum-based trainingprogramme for staff.

• Commenced rollout of tailored Management Developmentprogramme.

• Published 2008 - 2010 Strategic Plan.

Our Organisation


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Key AchievementsSector

On the establishment of the Financial Regulator on 1 May 2003, we were set with a dual challenge:

• To help consumers make informed and responsible decisions on their financial affairs in a safe and

fair market, and

• To foster sound and solvent financial institutions which gives depositors and other consumers of

financial products confidence that their deposits and investments are safe.

I believe that, since our establishment, we have managed to meet both of these challenges while still

maintaining high prudential standards. Five years on, we have, and continue to, put consumers of

financial services at the heart of what we do through direct consumer protection initiatives, providing

accessible information for consumers and promoting a safe and sound financial system. In all our

work to date, we have shown that this can be done in a cohesive and complementary manner. The

recent market turbulence and its impact on a number of notable international entities already

illustrates how prudential supervision and consumer protection are inextricably linked. Where we

have had to make hard decisions, they are always made in the public interest.

There have been many successes during the last five years, which are outlined throughout this

report. It has been a great privilege for me to be involved in creating and embedding the new

institutional arrangements for financial regulation in Ireland, not just at the initial stages but also with

the many additional functions given to us since our establishment. In this demanding but exciting

experience, it has been a particular privilege to enjoy the wisdom and support of the Governor of the

Central Bank and Financial Services Authority of Ireland, John Hurley. We value our links with the

Central Bank - through the cohesive structure of the Central Bank and Financial Services Authority of

Ireland - and this relationship is especially important for ongoing vigilance on financial stability.

We have managed all aspects of our work through the development of a strategic planning approach

- an approach which I strongly affirm. In each of the years since our establishment, we have

published a Strategic Plan, grounded in our six core values to serve the public interest. The Strategic

Plan clearly sets out where we intend to focus our efforts in an open, transparent and measurable way

but is flexible enough to take account of any surprise or unexpected events. All our stakeholders are

consulted during the planning process.

None of the achievements of the Financial Regulator over the last five years could have been possible

without the commitment and support of all those who have supported our mandate:

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Chairman's Statement Brian Patterson

Chairman

• The Minister for Finance, his officials and the various Government Departments and State

Agencies;

• Fellow members of the Authority who have contributed so much in terms of time, effort and

experience;

• The Chief Executive, his management team and all staff of the Financial Regulator for their

continued dedication, support and professionalism toward the achievement of our mandate;

• The Governor, Director General, management and staff of the Central Bank, and

• The Chairmen and members of both the Consultative Consumer and Industry Panels as well as

the executives of all representative bodies with whom we engage.

Finally, I wish my successor every success as the organisation moves on from its establishment phase.

The new Chair will take on this role with the assurance of strong, ethical and professional support

from management and staff dedicated to the public interest and confident of the support of everyone

working in financial services in this country.

Brian Patterson

Chairman


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We were established as a single regulator for all financial services in Ireland to put consumer interests

at the heart of financial regulation. It is with great satisfaction that I can report that, five years on, we

have made significant strides in delivering on our mandate both to protect consumers by helping

them to make informed financial decisions in a safe and fair market and also to foster sound and

dynamic financial institutions.

So, how successful have we been in delivering on these objectives since our establishment? I believe

that we now have a first-class regulatory system that provides an integrated and consistent approach

to consumer protection and prudential supervision across all sectors of the financial services industry.

• We have built today's regulator from the expertise developed over many years in the Central

Bank, the Department of Enterprise Trade and Employment, the Office of the Director of

Consumer Affairs and the Registrar of Friendly Societies in the areas of prudential supervision

and consumer protection and have successfully brought together and enhanced these

regulatory systems;

• We have articulated and embedded our principles-led and risk-based approach to regulation, in

line with the Government's Better Regulation principles. With this approach, responsibility for

the proper management and control of a financial service provider and the integrity of its systems

now rests squarely with its board of directors and senior management. Ethical behaviour in all

business dealings is a feature we expect to see in all financial service providers under our

regulation. Our prudential activities underpin this approach;

• The new Consumer Division was established with two particular aims. First, to provide impartial

user-friendly information on financial products, which helps consumers make informed choices

in terms of the products they choose, the amount of risk they take on and the cost of financial

products. Second, to ensure that the market for financial products is safe and fair. This has

resulted in the development and implementation of the Consumer Protection Code which

provides for a level playing field for almost all financial service providers in how they deal with

their customers;

• We are one of a small number of regulators internationally who commit to developing our

mandates in a strategic, business like way. We now publish a three-year rolling plan, which

clearly sets out our strategies and actions in a transparent and measurable way. Our latest

Strategic Plan covers the period 2008 - 2010;

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Chief Executive's Report Patrick Neary

Chief Executive

• Over the past five years, we have taken on significant additional regulatory responsibilities, in

particular those arising from new EU directives in the markets, capital requirements, reinsurance,

funds and investment management areas;

• We have tailored our regulatory approach to accommodate the special character of the credit

union sector, recognising its volunteer and community-based dimension;

• We have developed an administrative sanctions process, under the powers given to us in the

Central Bank and Financial Services Authority of Ireland Act 2004;

• Throughout this time, we have invested heavily on building relationships, at home and abroad,

working with our key stakeholders for our mutual outcomes, including the Consultative

Consumer and Industry Panels and relevant Government Departments, and

• Over the period, we have operated with maximum transparency through the publication of our

annual reports and our rolling strategic plans, our attendance at Dáil committees, the

introduction of our Stakeholder Protocol and through our websites.

2007 - The Year in Review

As we look back on 2007, the year could be seen as something of a watershed in our short history

being marked by a number of significant regulatory developments including the full implementation

of the Consumer Protection Code, the implementation of the Markets in Financial Instruments

Directive (MiFID) and the other markets directives, the application of the Capital Requirements

Directive to credit institutions, continued work to prepare for the Solvency II Directive for insurance

companies, the process for the regulation of reinsurance business and new initiatives relating to the

lending policies of credit unions. These and our many other achievements are expanded on in the

following chapters of this report. Of particular interest will be the various regulatory actions taken

across the organisation during the year, which can be summarised in the table below. Many of these

will be expanded on throughout the report.


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Undoubtedly, the most notable regulatory challenge during 2007 was the onset of the turbulence in

the financial markets, which began in August and is still continuing. Before the global crisis emerged

we had been engaged with Irish licensed banks in developing a range of measures, which proved

beneficial in assisting banks in these recent months.

In particular, the new liquidity arrangements that we introduced in July of last year enhanced the

existing qualitative requirements with a new emphasis on internal controls and systems, stress testing

and contingency plans. These arrangements combined with other earlier actions such as the higher

capital requirements for speculative land development, high loan to value mortgages, residential

investment property lending as well as stress testing at 2.75 per cent above ECB rates, have helped

Irish banks to respond to the various market issues that emerged in the latter half of 2007.

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Regulatory Actions taken in 2007

Type Number of Actions

2006 2007

Administrative Sanction Settlement Agreements 2 4

Markets Sanctions Settlement Agreement - 1

Warning Notices issued regarding unauthorised activity 4 1

Issue of post inspection or other letter with at least one

significant matter to be addressed112 143

Authorisation/Licence/Registration refused 1 1

Direction/requirement imposed under legislation 12 13

Appointment of independent auditor/inspector required 4 9

Advertising issues investigated 84 133

Warning Notices under Consumer Credit Act 26 51

Sub Total 245 356

Disclosure of Information to other enforcement authorities 38 23

Total 283 379


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Commencing in September, we required banks to submit weekly, instead of quarterly, liquidityreports. The facility for more frequent liquidity reporting was already allowed for in the overallregulatory framework we had put in place and we believe it proved valuable in ensuring that we hadup-to-date information on the liquidity position of Irish banks and the Irish banking sector. We alsomonitored potential exposures across the firms we regulate, from insurance to funds and given thevolatility in the stock market, we increased our vigilance over the stock-broking sector to assess theimpact on profitability and also adherence to conduct of business requirements. I believe our actionsand increased vigilance and monitoring have provided useful supports to a strong system ofsupervision which has enabled the industry in Ireland, which had no sub-prime exposure to anydegree, to withstand this prolonged period of serious turmoil in the international financial markets.

The arrangements for financial regulation in Ireland were also validated over this period. In particularour integrated relationship with the Central Bank enabled the organisation to share all necessaryinformation, to ensure that all risks likely to contribute to financial instability at institutional orsystemic level, especially funding and liquidity risks, were kept to the very forefront of our sharedagenda. We maintained frequent contact with senior management in the regulated institutions inaddition to daily contact at other levels. Strong co-operation among cross-border regulators was alsocritical where groups have operations in a number of jurisdictions. This contact is ongoing into 2008and discussions are expected at European level around how such cross-border relationships can bestrengthened further. As regulators we have co-operated by keeping each other informed about theactivities of institutions both directly and through our membership of the various European regulatorycommittees on which we actively participate.

Conclusion

This Annual Report provides an account of the work carried out by the Financial Regulator during2007 and, in particular, reports on the achievements against our 2007 stated strategic actions. Noneof the work undertaken to date could have been achieved without the hard work, dedication andprofessionalism of our staff. I want to thank them all for their continued commitment and support. Ialso want to convey my appreciation to the members of the Authority and to the Governor and theBoard of the Central Bank and Financial Services Authority of Ireland.

Most especially I must pay particular tribute to our Chairman, Brian Patterson, as he ends his tenureof office. His energy, enthusiasm, ethical and authentic leadership and vision as Chairman havecontributed so much to the success of the new financial regulatory structure in Ireland. I want toexpress deep gratitude and appreciation to him on behalf of the management and staff of theFinancial Regulator. On a personal note, I want to thank him for all the generous support andguidance he gave me and wish him really well in the future years.

Patrick Neary

Chief Executive

Chapter 1Consumer Protection

and Information

Helping consumers to make informed decisions in a fair marketplace was the challenge I accepted

when I took on the role of Consumer Director. Five years later, I am confident that consumers are

more informed and the market is fairer. This can be demonstrated in three key ways. First,

consumers are now protected by a strong statutory Code. Second, there are new requirements for

financial service providers to have competence in the products they sell. Finally, consumers can

come directly to us for independent information on their financial questions and all our information is

easy to understand.

Our approach to protecting consumers is risk based. This means we identify the issues which are

most important for consumers and work on these first. We ask consumers for their views and

priorities and are guided by their feedback. Our work therefore is driven by market research and

focus group work with consumers. We supplement this information with intelligence gathered from

our on-site inspections, from other regulators, from the Financial Services Ombudsman, the Pensions

Ombudsman and from other sources. The input of the Consultative Consumer Panel is a very

important element of this process. On the basis of all this information, we decide which issues need

to be tackled first for consumers. We consult on these matters and publish them in our Strategic Plan

so it is clear what our priorities are. In our Annual Report, we provide an account of how we

performed against our set objectives.

The finalisation of the Consumer Protection Code in 2007 is a landmark development for consumers.

The Code requires firms to act in the best interests of their customers by selling them products that

are suitable, explaining why the products offered are suitable and treating customers fairly if things

go wrong. The Code is unique in providing statutory provisions to protect consumers who are

considering taking out a loan, including a requirement to assess their ability to repay, before a loan

can be advanced. The Code also makes provisions to assist those who are in debt. Firms are not

allowed to offer pre-approved credit or increase a consumer's credit card limit unless the consumer

requests it. We know the Code is working. Before these provisions were introduced, the average

number of monthly credit card limit increases processed automatically was approximately 42,000.

Consumers who are considering debt-consolidation must be given a comparison of the total cost of

continuing with their existing loans compared with the total cost of the consolidated loan. This is

important because consumers may believe that a lower monthly payment leads to a lower overall

cost. This is not the case where the loan takes longer to pay off.

We monitor compliance with our consumer protection requirements through themed inspections of

financial service providers, reviews, mystery shopping and examination of specific

issues/requirements. Our themed inspections for 2007 included an examination of mortgage sales

processes and serious illness cover, certain aspects of credit card compliance, third party motor

insurance injury claims and a review of charges and rebates in the intermediary sector. We also

14

Consumer Director's StatementMary O’Dea

Consumer

Director

reviewed the licensed moneylending industry and carried out a mystery shopping exercise on

foreign exchange charges. To promote compliance, we provided feedback on all these themed

inspections and published the main issues on our website. Issues of a serious nature were dealt with

in accordance with our Administrative Sanctions procedure. Information on these cases is published

on our website and is set out in this report.

Throughout this period we have provided independent information in plain English on our website

and through our helpline, publications, campaigns, information seminars and attendance at

exhibitions. In the time since we were set-up, we dealt with over 138,000 queries from consumers

and our recently redeveloped personal finance website www.itsyourmoney.ie continued to grow in

popularity.

We were delighted to be awarded the EU Best Consumer Campaign for Financial Services for the

information campaign used to promote our redeveloped personal finance website. Consumers who

use our cost comparisons together with our publications know the questions to ask and can shop

around for the best product or service for their own particular needs. As well as producing

information for consumers, we worked to let consumers know what we had to offer through an

extensive public awareness campaign. Our TV advertisement “I don't know what a tracker mortgage

is” resulted in a significant increase in awareness and up-take of our services and information

resources. It also was the subject of amateur remakes on YouTube, and copycat enactments on

buses, trains and at sporting and music events! A new generation of young financial consumers now

know who we are and what we offer and will also benefit in full from the protections we have put in

place and the standards we have imposed. We continued to progress financial education through

the National Steering Group for Financial Education and through the development of materials for

teaching personal finance in schools.

Charging has been a significant issue over the years since our establishment. In 2004, we published

a report on foreign exchange and other charging issues in AIB, which followed an investigation into

certain charges imposed by that institution. We also instigated a general review of the charges

imposed by the main providers of retail banking and foreign exchange services. This review entailed

a look-back exercise stretching over a number of decades in some instances. We also established a

set of General Principles in relation to charging issues. The aim of these Principles was to ensure that

firms made all reasonable efforts to refund (with appropriate interest) all affected customers and that

the firms did not benefit from any such charging issues. These look-back exercises have continued

in line with the Principles, and have resulted in significant amounts of money being refunded to

customers. These charging instances arose prior to the introduction of the Consumer Protection

Code and the establishment of our enforcement powers under the Administrative Sanctions

procedure. In effect, the refunds were achieved through the use of moral suasion and the


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acceptance by regulated firms that action had to be taken in the interest of their customers. Our

policy approach is to publicise maximum information on charging issues that arise and how they have

been dealt with, both in aggregate terms and in respect of individual institutions, subject to

respecting confidentiality obligations deriving from the EU Directives.

The number of new charging errors being reported to us now has declined, as expected, and the

remaining issues are in the course of being resolved. We will monitor these to completion. The Code

now requires firms to correct speedily, efficiently, and fairly, a charging or pricing error, to report

material errors identified to us without delay and, in respect of material errors, to notify consumers

affected in a timely manner.

When I was appointed as the first Consumer Director in the newly established Financial Regulator

back in 2003, I set out to develop a framework that would provide protection for consumers along

with clear information to help them to manage their own financial affairs. To develop the new

Consumer Directorate we looked at best practice in a number of countries with a strong tradition of

consumer protection. Then we set about building the consensus necessary to implement a consumer

protection model that would provide results for consumers. Through a process of widespread

consultation and discussion with all the stakeholders involved, we have built a robust consumer

protection model which we continue to benchmark against international best practice and which has

achieved a positive international reputation. We have welcomed delegations from a number of

countries that have come here to learn from our achievements and have also met with

representatives of other domestic regulatory agencies and other bodies who have been keen to

examine and potentially replicate our model.

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EU Best Consumer Campaign for Financial Services in 2007 - Pictured at the awards ceremony held inBrussels where the Financial Regulator won the EU Best Consumer Campaign for Financial Services in2007 are Helen Kearns, Member of Commissioner Kuneva's Cabinet; Shane Sutherland, Member ofCommissioner McCreevy's Cabinet; Commissioner Kuneva, European Commissioner for Consumers; Mary O'Dea, Consumer Director, Financial Regulator and John Bell, Head of Cabinet to CommissionerKuneva.

As I approach the end of my first five years in the role of Consumer Director, I am confident that we

have gone a long way towards achieving the goals set in 2003. Consumers of financial services now

have a statutory Consumer Protection Code. Financial service providers must comply with minimum

competency requirements. Compliance is monitored against the requirements to provide clear and

appropriate information for consumers. Consumers have been reimbursed for past overcharging

and firms understand how these matters must now be dealt with. Consumers also have access to

direct redress through the Financial Services Ombudsman and the Pensions Ombudsman and there

is an excellent working relationship between our offices. More significantly, I believe that, over the

period, there has been a shift in the culture within many financial services firms with a much stronger

focus on compliance and on the consumer attributable in large measure to the various initiatives we

have undertaken. It is clear, however, that despite good progress, many challenges remain.

This initial period has been both exciting and rewarding. I have been fortunate enough to work with

people who place a high value on the public interest. This permeates discussions with my colleagues

on the Authority, the management team and each and every member of my staff. I thank you all for

your support and for making it all so rewarding while keeping the outcomes for consumers as the

primary consideration.

Mary O'Dea

Consumer Director


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1.1 Consumer Protection Framework

In 2007, the implementation of a number of key consumer protection initiatives was completed.

These initiatives have established a very strong consumer protection framework in Ireland.

The Minimum Competency Requirements ('Requirements') came into effect on 1 January 2007. The

Requirements introduce a basic competency framework that is designed to establish minimum

standards for financial service providers, with particular emphasis on individuals dealing with

consumers. Firms are required to ensure that individuals who provide advice or sell retail financial

products, or who undertake certain specified activities on behalf of their customers acquire the

competencies set out in the Requirements. The Requirements set out specific knowledge

requirements for specific categories of retail financial products and also set out a number of

qualifications that currently meet those knowledge requirements. In addition, individuals are

required to undertake a programme of Continuing Professional Development ('CPD').

The Consumer Protection Code ('Code') came into full effect on 1 July 2007. The Code is a legally

binding document comprising of a set of general principles supplemented by more detailed rules,

which regulated financial service providers must adhere to when providing financial services to

consumers. The Code seeks to ensure that firms act in the best interests of their customers by selling

them suitable products in an open and transparent manner.

On 1 November 2007 we assumed responsibility for regulating the conduct of business of

stockbrokers and other investment firms under the Markets in Financial Instruments Directive

('MiFID'). The MiFID introduces a range of consumer protection measures in areas such as best

execution (i.e. taking all reasonable steps to deliver the best possible result for clients), suitability and

appropriateness, inducements and conflicts of interest. As part of the preparation, we set up an

industry working group to highlight issues of concern to industry. This group, which comprised of

industry representatives and the Financial Regulator, met regularly throughout 2007 and, following

its deliberations, published two feedback documents in July and October in a questions and answers

format. The group also considered the overlapping requirements between MiFID and the Code and

agreed a clear and pragmatic approach to this overlap.

1.2 Monitoring and Enforcing Compliance

Monitoring and enforcing compliance with the various consumer protection requirements is critical

in ensuring that the consumer protection framework is working for consumers. During 2007, we

undertook a number of themed inspections and reviews of a number of important consumer issues.

We provided feedback on good practice and any areas of concern to the industry sector were

examined. In order to bring greater transparency to our work in this area we also published the main

findings on our website.

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Mortgage suitability review: The introduction of the requirement in the Code that all products

sold must be suitable for the needs of the consumer is one of the key consumer protection measures

introduced. This requirement is a new provision in the area of lending practices and we decided to

examine how the main regulated mortgage lenders were progressing its implementation. Overall the

findings showed that the firms surveyed were well advanced in implementing changes to their

systems and processes in order to comply with the Code provisions. We highlighted a number of

issues in relation to affordability and suitability, suitability statements and sales incentives for front-

line sales staff.

Credit cards: We examined the main credit card providers on two issues in relation to credit cards,

i.e., the charges imposed on non-euro transactions and the prohibition in the Code on increasing

credit card limits unless the customer requests it. No issues arose in respect of the charges imposed.

We also found that all credit card providers inspected had ceased the practice of automatically

increasing the limits.

Sales and claims handling of serious illness policies: We examined this issue as we were

concerned that consumers may not fully understand the nature of the cover provided by this type of

insurance. Our feedback to the firms highlighted the need to fully inform consumers of the key

aspects of the product including the restrictions and exclusions. It also pointed out the need to be

clear about what illnesses are covered and encouraged firms to stress the importance of full

disclosure to the customer at the point of sale.

Third party motor insurance personal injury claims: The Code introduces rules regarding

how insurance companies must deal with claims including informing policyholders of settlements and

paying agreed settlements on time. While all firms were moving towards full compliance at the time

of the inspections (prior to the full implementation of the Code) we highlighted a number of areas

where the Code requirements were not being fully complied with. We also highlighted the need to

focus on the Code requirement, which requires firms to give full details of the Personal Injuries

Assessment Board process, implementation of which varied from firm to firm.

Review of charges and premium rebates in the insurance intermediary sector: We

believe the issue of transparency of charges imposed on consumers is important both for the

consumer and also for confidence in the industry. We inspected a number of intermediaries to

examine how clearly charges were being disclosed and also to examine if rebates due back to

customers were being returned in full and on time. We found compliance levels to be good in the

majority of firms. However, a number of serious issues were noted in some firms. The level of

disclosure varied from firm to firm and a number of instances were identified where fees charged to

consumers appeared to be in excess of those stated in the terms of business document. It also

appeared that in a number of instances deductions had been made to rebates, which had not been

fully disclosed to the customer.


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SSIA Maturity Campaign: The final month for maturing SSIAs was April 2007. Over half of all

SSIAs, which were taken out by consumers, matured in this one month alone. We continued to

monitor the SSIA maturity process right up until the end of July 2007 (three months after the final

batch of SSIAs had matured). We kept in regular contact with the relevant firms and reviewed

complaints logs. The monitoring of the SSIA maturities did not reveal any serious or systemic issues.

1.3 Advertising

We actively monitor the media for advertisements of financial services and products, which are

subject to certain codes and requirements. On 12 June 2007, we wrote to all regulated entities

regarding the advertising provisions contained in the Consumer Protection Code. The aim of this

letter was twofold: to assist firms with the interpretation of the principles set out in the Code and to

improve the level of compliance with advertising requirements.

The number of issues investigated during 2007 is set out in Table 1.1 (in some instances issues were

identified in the form of complaints received as well as through internal monitoring). Typical issues,

which arose in 2007, were omissions of regulatory disclosures or incorrect regulatory disclosures;

issues in relation to incorrect disclosure of APR; failure to include warnings as required by the Code

and issues arising regarding other requirements of the Code.

Note: The total figure for the outcomes of advertising issues investigated is lower than the total figure of advertising issues, as a number

of issues which were identified by internal monitoring were also raised in complaints.

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Table 1.1 - Advertising issues

Source Number of Issues

2006 2007

Financial Regulator Monitoring 40 76

Complaints 44 57

Total 84 133

Table 1.2 - Outcome of advertising issues investigated

Advertisement Amended Advert Withdrawn No Action Required

93 10 22

An example of the type of monitoring undertaken is outlined below:

During the course of the year, a bank launched a campaign of television advertisements to

promote the interest rate that could be obtained by consumers who switched to its current

account. This interest rate was an introductory offer, which was due to expire after two months.

A complaint was received that the limited availability of this promotional interest rate was not

sufficiently prominent. Chapter 7(8) of the Code provides that the expiry date of promotional

or introductory interest rates must be clearly stated. We contacted the bank and the

advertisement was amended with immediate effect.

1.4 Foreign Exchange Mystery Shop

In June 2007, we conducted a nationwide survey of foreign exchange charges being imposed by

credit institutions and bureau de change on consumers for retail foreign exchange transactions. The

purpose of the survey was to confirm whether these providers of foreign exchange facilities imposed

these charges in accordance with relevant legislation.

A total of 75 outlets of 10 foreign exchange providers (5 credit institutions and 5 bureau de change)

were visited. The survey focused primarily on the costs imposed by these financial service providers

on consumers when converting euro denominations to Sterling, US Dollars, Polish Zloty and Czech

Koruna and conversely when converting these currencies to Euro.

Overall the findings showed a high level of compliance among foreign exchange providers. Where

issues were identified, we followed them up with the relevant institutions. These issues included:

• Foreign exchange rate boards were either not on display, not clearly visible or were not being

regularly updated to reflect current exchange rates;

• The commission associated with a transaction was not disclosed to the consumer in advance, and

• In a small number of cases the margins being imposed slightly exceeded what the service

provider was entitled to impose and in these instances we ensured that the relevant firms have

not benefited as a result (in line with our General Principles in relation to charging issues).


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1.5 Enforcement Actions

Matters of a more serious nature, which raise specific compliance issues, are addressed directly with

the firm. We have power to impose sanctions on firms in respect of such breaches of requirements.

Once a sanctions case has commenced, we offer the option of early settlement with the firm or

individual in order to achieve the most effective resolution.

1.6 Bank Charges

The Consumer Credit Act 1995 requires financial service providers (credit institutions, bureau de

change and money transmission businesses) to notify us of any proposal to introduce new, or

increased charges, for certain financial services.

In 2007, we issued letters of direction on foot of 46 notifications from credit institutions, bureau de

change and money transmission businesses. The submissions received from these financial service

providers ranged from an individual charge, charges in respect of new products launched and entire

suites of charges for credit institutions. We are required under the legislation to consider each

notification using a range of criteria, which include the commercial justification, impact on the

relevant consumers and on competition in the sector. Of the 46 notifications, 25 were approved in

full and 21 were partially rejected.

In 2007, the processes and procedures for notifications were amended, resulting in an improved

streamlined notification process.

22

Enforcement Actions in 2007

During 2007, we entered into four Settlement Agreements, in respect of consumerprotection, with regulated entities under our Administrative Sanctions Procedures. The most significant issues which arose in one or more of these cases related to:

• Facilitating unauthorised business and lack of information on client files;• Non-compliance with Section 30 of the Consumer Credit Act 1995;• Failure to have and employ effectively, resources and procedures necessary for the

proper performance of activities;• Failure to seek sufficient information from clients in relation to their financial situation

and objectives;• Failure to submit accounts to the Financial Regulator, and/or• Failure to disclose fees payable.

The Administrative Sanctions imposed included disqualification of individuals, voluntaryrevocation of authorisation and reprimands.

Information on the individual settlements is available on our websitewww.financialregulator.ie.

1.7 Charging/Reimbursement Programmes

As outlined in previous annual reports, we have been monitoring a number of reimbursementprogrammes in respect of charging errors, which occurred prior to our establishment and prior to thefull introduction of the statutory Consumer Protection Code on 1 July 2007. Table 1.3 below reflectsan estimate of the total of these charging errors notified. All these charging issues are now beingbrought to a conclusion.

The Code now contains requirements for regulated financial service providers to correct speedily,efficiently and fairly, any error in any charge, to report material errors to us and to notify all affectedconsumers in a timely manner. Any further issues relating to charging will be investigated under theAdministrative Sanctions process and will be reported accordingly from now on.

1.8 Switching

We continue to monitor the implementation of the voluntary code of practice on switching accountsfor individual customers, which was issued by the Irish Banking Federation (IBF) and becameoperational on 31 January 2005 and the voluntary code for switching for business customers whichwas fully implemented by the IBF in June 2006. The numbers of customers switching accounts hasnow risen to over 45,000 approximately for personal customers and over 1,300 approximately forbusiness customers. Monitoring of these codes is carried out through mystery-shopping exercisesand from enquiries to our consumer Helpline.

1.9 Review of Intermediaries Market

We have commenced a project to carry out a review of the insurance intermediary market. Thescope of this project covers two main areas: intermediary categorisation and transparency for theconsumer. A review of the classification/categorisation of mortgage intermediaries will also beconsidered as part of this project.

We have established a High Level Forum and a joint Financial Regulator/Industry Working Groupconsisting of members from relevant financial representative bodies, to consider the issues inmore detail.


23

Table 1.3 - Charging errors in the period prior to the introduction of the ConsumerProtection Code (early 1990s to June 2007)

CreditInstitutions Insurance Total

Number of financial service providers 24 14 38

Number of charging issues 469 179 648

Cumulative total value of estimated charging issues

¤136m ¤45m ¤181m

1.10 Informing and Empowering Consumers

During 2007, we continued to produce free, independent information about the costs, risks andbenefits of financial products and services to inform and empower consumers. We answered queriesfrom consumers who called our Helpline or visited our Information Centre and our stands at tradeshows and exhibitions around the country. We provided information seminars on aspects of financialservices to interested groups. We also redeveloped our personal finance website and conductedtopical consumer information campaigns.

Producing Information Resources

We provide information to consumers about the costs, risks and benefits of financial products andservices through our website, our publications and campaigns on topical issues of concern to consumers.

Our personal finance website is an important element of our communications. In the period April -June 2007, we saw the highest number of quarterly visits to the site to date - over 160,000. Thiscoincided with the maturity date of the bulk of the SSIA accounts when consumers were looking forindependent information on their options.

We redeveloped www.itsyourmoney.ie and launched it in September 2007. Feedback fromconsumers, including in user testing, has been positive to date and the site has been shortlisted for anumber of awards. This new site provides visitors with online interactive features such as a budgetplanner, loan calculators and polls. As part of the redevelopment of www.itsyourmoney.ie we movedour cost comparisons to an online format. This allows us to maintain the current account, credit card

24

Pictured with the Financial Regulator's booklet “Getting Financial Advice” are Sharon Donnery, Head ofConsumer Information, Financial Regulator and Pat O'Sullivan, Director - Financial Services, IrishBrokers Association.

and personal loans cost comparisons on an always-up-to-date basis and to update the insurance onesmore regularly. We also produced a new cost comparison on lump sum deposits and made a numberof enhancements to others. Consumers downloaded over 139,000 of our cost comparisons from ourwebsite during the first nine months of 2007, at which stage we introduced our new online format.There were almost 22,000 views (similar to downloads) on our online format from then until the endof the year, giving an overall increase in consumer access of our cost comparisons of over 46% whencompared to the previous year.

Publications are also a key source of information for consumers. Many titles within our publicationssuite were updated and a number of new publications were produced including the 'ConsumerProtection Code - Your little red book' and a booklet on equity release. See Table 1.4 ConsumerPublications below for full details.

Promoting our Services and Resources

As well as producing information resources, we must increase consumers' awareness of theseresources and of the services we offer. Throughout 2007, we co-ordinated extensive publicawareness, advertising and publicity campaigns to promote our Information Centre, Helpline andonline cost comparisons. Our main priority for 2007 was the launch and promotion of our newpersonal finance website www.itsyourmoney.ie. The number of visitors to the site topped the half amillion mark for the first time.

Our highly successful 'I don't know what a tracker mortgage is' TV advert continued to buildmomentum in 2007 and resulted in follow up online and viral activity. Radio, print, outdoor andonline activity were also used to complement campaigns.


25

Table 1.4 - Consumer Publications

New and Revised Publications Top five downloads from website

New and Revised Publications Top five downloads from website

Consumer Protection Code booklet (new) Lump sum deposit cost comparison

Credit cards booklet (new, also revised) Savings and investments guide

Equity release booklet (new, also revised) Credit card cost comparison

Income protection insurance leaflet (revised) Motor insurance cost comparison

Serious illness insurance leaflet (revised) Personal current account charges

Managing your money booklet (revised)

Moneylenders factsheet (revised)

Mortgages made easy guide (revised)

Our list of publications factsheet (revised) Most popular printed publications

Getting financial advice booklet (revised) Personal loans and credit guide

Financial Regulator, about us factsheet (revised) You and your credit rating factsheet

Life insurance made easy guide (revised)

Personal loans and credit guide (revised)

Money tips for students factsheet (revised)

Your choices at retirement booklet (revised)

Developing Campaigns of Topical Interest

Our campaigns helped raise awareness of relevant issues. They also played a secondary function incontributing to awareness levels of our consumer information and protection role. Our SSIAcampaign was shortlisted for a PR Excellence Award (Public Relations Consultants Association andthe Public Relations Institute of Ireland).

Our campaign to inform consumers of their rights under the Consumer Protection Code started in2007, with the launch of the 'Consumer Protection Code - Your little red book'. This was followed bya dedicated section on the 'Your rights' area of www.itsyourmoney.ie.

The 2007 campaigns included:

• SSIAs (deposit rates/getting advice) - January to April 2007; • Equity release - January/February 2007;• Current accounts (cost comparison) - January 2007;• Life insurance (cost comparison and new guide) - January/November and June 2007 respectively; • Home insurance (cost comparison) - February 2007;• Credit cards (borrowing/debt) - March 2007; • Information for consumers in relation to Northern Rock -September 2007; • Student current accounts (cost comparison) - October 2007;• Consumer Protection Code - started October/November 2007, and • Motor insurance (cost comparison) - November 2007.

26

Pictured at the launch of the Financial Regulator's new personal finance consumer website in September areAidan Jordan and Noelle Brown who both currently appear on the Financial Regulator's 'I don't know whata tracker mortgage is' advertisement.

Researching Issues and Awareness Levels

We commissioned research to evaluate the awareness and perception of the Financial Regulator.Unprompted awareness of who regulates financial services now stands at almost 50% (all adults 15+)and is up 118% since 2005 (see chart below).

(Source: Ipsos MORI awareness survey, November 2007)

Recall of our advertising is also significant, with almost 90% of consumers saying they definitely sawour advertisement.


27

An Information seminar was held by the Financial Regulator on equity releasefollowing the publication of its Equity Release booklet. Organisations that attendedthe forum included Age Action, ALONE, Active Retirement Ireland, the Irish SeniorCitizens' Parliament and MABS (Money Advice and Budgeting Services).

The perception of the Financial Regulator is also positive, as outlined in the chart below.

(Source: Ipsos MORI awareness survey, November 2007)

Preliminary tests of our new personal finance website www.itsyourmoney.ie to ensure the site metuser needs showed that reactions were positive and it was well received.

Answering Consumer Queries

In 2007 we dealt with over 41,500 consumer queries. Table 1.5 below provides details of consumer

contacts by channel. We met consumers at 6 exhibitions and gave 24 information seminars - a full

breakdown of these events by county is available in the map entitled Regional Information Visits and

Special Events. We also forwarded, on behalf of consumers, 137 complaints to the Financial Services

Ombudsman in 2007.

28

The FinancialRegulator is

acting in the interests of

Irish consumers

The FinancialRegulator acts

independently ofbanks and

building societies

In general, I trust what

the Financial Regulator says

61%

57%

46%

33%

31%

37%

3%

6%

12%

2%

5%

4%

1%

1%

2%

Agree strongly

Agree slightly

Neither Disagree slightly

Disagree strongly

Table 1.5 - Consumer Contacts by Channel

Channel 2006 2007

Website visits 324,632 517,161

Helpline 1890 77 77 77 29,233 29,279

Direct Calls 2,080 1,753

Information Centre visits 6,515 5,527

Emails 2,453 3,211

Letters 639 542

Attendees at InformationSeminars

429 1,275

Total 365,981 558,748

Location of Consumer Regional Information Visits and Special Events

1.11 Advocacy and Education

Advocacy

At the end of 2007 we formalised our advocacy function on behalf of consumers to co-ordinate and

prioritise advocacy activity and allow the Financial Regulator to take a more proactive and forward-

looking approach on key issues affecting consumers of financial products and services. Issues which

we highlighted during the year included the need for information for consumers who may find it

difficult or impossible to use Chip and PIN (following the full roll-out of Chip and PIN in March 2007)

and equity release. We published a new booklet on equity release entitled 'Equity Release - Using

Your Home to get a Cash Sum'. Attendees at the launch of the booklet included representatives from

organisations such as Age Action, Active Retirement Ireland, the Irish Senior Citizens' Parliament and

Money Advice and Budgeting Service (MABS). The launch of the new booklet followed research

carried out on our behalf on equity release and consumers' knowledge of the products on the market.


29

County 2007

Carlow 1

Clare 1

Cork 3

Dublin 16

Galway 1

Kildare 1

Limerick 1

Louth 1

Meath 1

Offaly 1

Westmeath 3

TOTAL 30

Financial Access

We brought access and financial inclusion issues to the attention of the Money Laundering Steering

Committee (which is chaired by the Department of Finance) and gave detailed observations on the

early drafts of the revised Guidance Notes on Money Laundering, including a recommendation that

there be a specific section on financial inclusion.

National Steering Group for Financial Education

We continued to drive the work of the National Steering Group for Financial Education - hosting 4

meetings during the year. The Steering Group set up four Working Groups during 2007, dealing with:

• The education needs of disadvantaged groups;

• International practice in financial education;

• Audit of existing financial education resources in Ireland, and

• Competency framework for financial education.

Each working group made significant progress in developing policies and programmes under the

above headings during the year and it is expected that the Steering Group will issue a report in

2008.

Education Resources for Schools

We also piloted two school programmes. The 'Money Matters' programme consisted of materials

that supported the Leaving Certificate Applied (LCA) syllabus for Social Education and introduced

students to the account options open to them.

'Get smart with your money' was developed and piloted in conjunction with MABS and targeted

transition year students. The materials brought students in touch with issues surrounding

budgeting and the role money plays in their lives. Following further evaluation of both resources,

broader rollouts are planned for 2008.

30

1.12 Market Issues

Private Motor Insurance Statistics

During 2007, we published the Private Motor Insurance Statistics for 2005. The statistics showed

that average premium income for comprehensive and third party fire and theft fell by 12 per cent and

10 per cent respectively. Meanwhile accident frequency for both categories of cover continued to

rise in 2005 with 6.7 accidents per 100 policies for comprehensive cover recorded and 4.9 accidents

per 100 policies for third party fire and theft cover. The report also indicated that the Personal Injuries

Assessment Board (PIAB), which had its first full year of operation in 2005, appears to have had a

beneficial impact on the legal component of insurers' claim costs and on the speed of settlements.

Competition

As in previous years, we have calculated five-firm concentration ratios and Herfindahl-Hirschman

(HH) indices to measure industry concentration (and by inference, the degree of market power

exercised by the largest firms in key segments of the banking and insurance industries).

The five-firm concentration ratio measures the percentage of total market share held by the

five largest firms. Concentration ratios can fall into low, medium, and high concentration.


31

Low Concentration: A concentration ratio of 0 to 50 per cent is commonly interpreted as a

competitive industry with many market participants, resulting in limited opportunities to

exercise market power.

Medium Concentration: A concentration ratio of 50 to 80 per cent is considered an industry

with medium concentration displaying modest levels of competition.

High Concentration: An industry with a concentration ratio of 80 to 100 per cent is commonly

viewed as a highly concentrated, uncompetitive market in which price rises may be easier to

sustain.

Herfindahl-Hirschman Indices (HHI) are calculated by squaring the market share of each

participant in a market and then summing the results. The higher the HH number, the more

concentrated is market power. Increases in the index occur as the number of competitors in a

market decreases and/or the disparity in size between firms increases. Markets in which the

HHI is between 1000 and 1800 points are considered to be moderately concentrated, and those

in which the HHI is in excess of 1800 points are considered to be concentrated.

Source: Calculations based on figures quoted in the Insurance Annual Reports 2000 - 2002 and Insurance Statistical Reviews 2003 - 2006As at the date of publication of this report data for 2007 are not available.

Source: Calculations based on figures quoted in the Insurance Annual Reports 2000 - 2002 and Insurance Statistical Reviews 2003 - 2006As at the date of publication of this report data for 2007 are not available.

The marked increase in the concentration of the liability market; both the five-firm concentration ratio

and the HH index have an increase of almost twice the size of any previous increase (6 per cent and

100 points respectively) is mainly attributable to a corporate restructuring which is technical in

nature. Allowing for this, competition in the market is broadly unchanged.

The three other insurance markets saw slight increases in the HH indices, which could indicate an

increase in the market shares of the dominant firms in the market. The increase in the concentration

ratios provides further evidence for this assertion.

32

Five Firm Concentration Ratios in Key Segments in the Insurance Industry

2000 2001 2002 2003 2004 2005 2006

MotorInsurance

70.15 76.96 73.98 80.60 81.92 81.72 81.67

PropertyInsurance

77.86 87.66 79.46 77.52 78.86 76.99 80.17

LiabilityInsurance

62.14 65.96 62.68 64.38 65.26 66.77 72.20

Life Insurance 64.79 61.33 69.92 71.50 74.61 78.61 79.88

Herfindahl-Hirschman Indices in Key Segments in the Insurance Industry

2000 2001 2002 2003 2004 2005 2006

Motor

Insurance1,439.01 1,671.05 1,747.12 1,681.77 1,658.92 1,544.57 1,549.51

Property

Insurance1,654.88 1,658.69 1,593.03 1,521.99 1,546.03 1,504.60 1,546.00

Liability

Insurance1,067.37 1,134.84 1,104.54 1,098.20 1,097.23 1,136.55 1,233.21

Life Insurance 1,444.04 1,008.69 1,369.90 1,433.25 1,869.26 1,845.72 1,866.56


33

CR5 figures for credit cards are not available for 2000 and 2001

After last year's increase in concentration in the credit card market, there was a small increase in

competition this year with a 1.5 per cent reduction in concentration and a drop of almost 100 points

in the HH index. However, the market remains highly concentrated.

The term/revolving loan market showed some consolidation as evidenced by the increase of over

150 points in the HH index and a 2.5 per cent increase in concentration.

After five consecutive years of increased competition in the residential mortgage market, there was

a slight increase in its concentration last year. However, it remains only moderately concentrated.

Herfindahl-Hirschman Indices in Key Segments in the Banking Industry

2000 2001 2002 2003 2004 2005 2006 2007

Credit Cards 2,734.82 2,744.31 2,584.08 2,516.41 2,468.38 2,450.45 2,575.86 2,481.16

Terms/Revolving Loans

1,493.31 1,375.40 1,331.23 1,527.52 1,653.93 1,719.96 1,869.26 2,026.92

Residential Mortgages

1,095.21 1,327.40 1,295.71 1,282.07 1,162.75 1,135.58 1,098.08 1,150.98

Current Accounts 2,728.80 2,516.96 2,728.80 2,654.71 2,760.01 2,236.93 2,535.29 2,603.11

Five Firm Concentration Ratios in Key Segments in the Banking Industry

2000 2001 2002 2003 2004 2005 2006 2007

Credit Cards - - 94.3 94.5 94.9 94.8 96.95 95.18

Terms/RevolvingLoans

76.82 75.28 74.39 76.86 78.15 79.77 83.58 86.1

R e s i d e n t i a lMortgages

66.00 72.68 72.77 72.23 67.72 67.29 66.96 68.8

CurrentAccounts

89.39 86.92 90.03 88.88 90.92 87.69 92.07 92.35

1.13 Challenges for 2008

In light of more constrained economic circumstances in 2008, some consumers may find it

increasingly difficult to manage their money and to cope with unanticipated events. This is especially

challenging in the case of particular consumers who may have high levels of debt. We will endeavour

to ensure that current consumer protection measures continue to be relevant, appropriate and

effective in an evolving economic environment. We will also continue to review the information

resources that we provide to meet the needs of consumers and we will work with key stakeholders

to develop a co-ordinated national strategy for financial education.

34

Chapter 2Promoting Sound Financial

Service Providers and Fair Markets

Since our establishment in May 2003, our fundamental approach to prudential supervision has not

changed. However, in terms of scope, complexity and challenges, prudential supervision is

significantly different to that which existed in May 2003. In the Progress Report of June 2004, our

first year in operation, we noted that the approach to the prudential supervision of the Irish financial

services industry had three distinct aims:

• “Firstly, we wish to foster sound dynamic institutions in Ireland and, in so doing, protect

consumers and contribute to financial stability;

• Secondly, we wish to foster an internationally competitive and successful financial services

industry, and

• Thirdly, we want to operate a cost effective and responsive regulatory system that facilitates

innovation, competitiveness and growth.”

Towards achieving these aims, we adopted a principles-led approach to supervision which

encouraged adherence to sound regulatory practices and standards. In this system, we sought to

ensure that all regulated financial service providers met their responsibilities to have strong

management, internal control and compliance procedures in place, and have people of integrity and

competence at all levels in their organisations. This general approach has given us a robust system

of supervision, which has gained support domestically and at an international level.

Within this framework, there have been many changes in the scope of supervision and the internal

structure of the Prudential Directorate to cope with these changes. The most challenging issue

facing us on establishment was the integration of supervisory functions which until then had been

spread over a number of agencies. Since then, and in order to take account of our expanding

mandate, and to streamline our organisation structure, a new department - Markets Supervision - was

created to regulate the stock exchange and related activities. In addition, a dedicated authorisation

department - Financial Institutions and Funds Authorisation (FIFA) - was established to harness

expertise in this area, thereby increasing efficiencies in the authorisation process.

During the period, the EU continued, at an accelerating pace, to shape the form and scope of our

supervisory regime. We played and continue to play a major role at all levels in the drafting and

subsequent implementation of these Directives at national level. This involved participating in EU

Council and Commission deliberations as well as in the EU Committees established under the

Lamfalussy Process to oversee the broad implementation of the Directives, e.g., Committee of

European Banking Supervisors (CEBS), Committee of European Securities Supervisors (CESR) and

Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). This

participation, which is essential, has added greatly to the tasks facing us. However, to have

delivered on improvements in the operation of the single market has resulted in substantial benefits

for all stakeholders.

36

Prudential Director's StatementCon Horan

Prudential

Director

At national level, the work of transposition of the Directives into Irish Law and their subsequent

implementation involved extensive public consultations as well as consultations with the Consultative

Consumer and Industry Panels. In general, these Directives developed and refined existing

supervisory processes and broadened the regulatory scope to include categories not previously

supervised, e.g., reinsurance companies, UCITS management companies, certain types of

investment activities (e.g., financial spread betting) and certain types of insurance intermediaries.

Some have introduced fundamental changes to how financial institutions operate and the manner in

which they are regulated, e.g., CRD, MiFID, Solvency I and UCITS III. As part of the implementation

of these Directives, we have been working on, and successfully implemented, a number of electronic

reporting projects, in conjunction with our IT colleagues in the Central Bank. Apart from these new

activities introduced on foot of EU Directives, domestic legislation provided for the supervision of

financial service providers not previously regulated, e.g., money transmitters, non-deposit taking

lenders (including home reversion firms), asset covered securities banks.

The advances in supervisory structures, which we have made domestically, as well as these

emanating from EU and other international sources, have materially improved the system of financial

supervision in the last five years. It is now far more sophisticated and reflects the nature of the

industry. However, it is clear that the process of change will continue. The stresses in financial

markets since mid-2007 will give rise to a review of the events which have occurred and the

responses, including the supervisory responses, that are necessary to minimise the possibility of

these events recurring and leave the system better placed to address future challenges.

We have a highly qualified workforce, which has shown its ability to adapt to both organisation and

business change over the last five years as well as great commitment in dealing with the stresses that

have existed in the financial markets over the last year. I have no doubt that the challenges we will

face over the next period will require the continued dedication and commitment of all.

Con Horan

Prudential Director


37

2.1 Overview of Activities

The ongoing prudential supervisory role involves a range of activities, including authorisations,inspections, review of financial returns and dealing with compliance issues as they arise. ThePrudential Directorate is organised across five Departments as follows:

i) Financial Institutions and Funds Authorisation;ii) Banking Supervision;iii) Insurance Supervision;iv) Investment Service Providers Supervision, andv) Markets Supervision.

A Prudential Supervision Committee is in place, chaired by the Prudential Director and comprising theHeads of each of the five Departments, at which issues of common interest are considered. Amongthe matters considered in 2007 were (i) the review and extension of the inspection proceduresmanual, (ii) further development of the risk rating assessment of regulated entities for supervisorypurposes and (iii) our approach to the outsourcing of certain functions by regulated entities.

We actively participate in the IFSC Clearing House Group initiative “Building on Success” whichprovides the framework for the further development of the international financial services industry inIreland. Within that framework, we have both committed to and delivered on a number of targetsacross our remit.

Following extensive consultation a new 'fit and proper' regime for directors and senior managers ofregulated entities was introduced in January 2007 and is implemented by all supervisory departments.

Whenever new legislative provisions are being introduced (e.g., MiFID) which affect more than onearea of supervision, working groups with representatives from the areas concerned are set up toensure consistent application of the provisions.

The Sections below outline in detail the activities of each of the above Departments during 2007.

38

Participants at a MiFID seminar hosted by the Financial Regulator in October.

2.2 Sector Specific

FINANCIAL INSTITUTIONS AND FUNDS AUTHORISATION

During 2007, we finalised a standard application form and guidance note for banking licenceapplications. Similar documentation was also completed for investment firms following thetransposition into Irish law of the MiFID on 1 November. An application form and guidance are at anadvanced stage of completion for insurance and reinsurance undertakings. All these are preparedfollowing consultation with the relevant industry sector and when completed are posted on ourwebsite. An authorisation regime was also established for retail non-deposit taking lenders(including home reversion firms), which will fall to be supervised from 1 February 2008.

In February 2007, we introduced a new authorisation regime for Qualifying Investor Funds (QIFs),i.e., funds targeted at institutional and sophisticated investors, whereby we would authorise QIFswithout a detailed review of the application documentation subject, inter alia, to obtainingsatisfactory confirmation from the funds' operators regarding compliance with our requirements.Once these conditions are met, we undertake to authorise the QIF within 24 hours of receipt of theapplication. Separately in the funds area, we reviewed and issued guidance on a broad range ofissues including investments in real estate, financial indices, structured and complex products, thevaluation of over-the-counter (OTC) derivatives and the use of stock lending.

In addition, we successfully met the EU transitional deadline of February 2007, whereby all existingUCITS and UCITS management companies were required to conform to new authorisationrequirements.


39

Highlights

• Transposition into Irish law of the Markets in Financial Instruments Directive (MiFID) on1 November.

• Authorisation processes reviewed/introduced for all regulated entities with a view toimproving effectiveness and efficiencies.

• New fitness and probity regime incorporated into authorisation processes.

• Commitment to authorisation timeframes under Stakeholder Protocol.

• Publication of authorisations Registers on website.

• Introduced new 24-hour authorisation regime for Qualifying Investor Funds.

• Extension of authorisation period from 1 year to 5 or 10 years for mortgageintermediaries.

• Active participation in international and, particularly, EU forum in funds area.

Five new banks were authorised during 2007 (Wachovia Bank International, Postbank Ireland

Limited, PFPC Bank Limited, Goldman Sachs Bank (Europe) plc and Goldman Sachs Private Bank

Limited); three bank licences were revoked at the licence holders' request (AIB Finance Limited,

National Irish Bank Limited and Intesa Bank Ireland Plc), bringing to 50, the number of credit

institutions authorised by us, operating in Ireland at end-2007. This includes four designated credit

institutions, which operate in the asset covered securities market.

40

Table 2.1 - Number of Authorisations Granted in 2006 and 2007

2006 2007

Credit Institutions 2 5

Life Insurance Companies 3 1

Non Life Insurance Companies 5 5

Reinsurance Companies 5 3

Investment Business Firms 7 15

Retail Intermediaries• Multi Agency Intermediaries• Authorised Advisers• Insurance/Reinsurance Intermediaries

11315

291

10015

1,7431

Mortgage Intermediaries authorisations granted/renewed 1,633 1,1732

Collective Investment Schemes (including sub funds) 738 1,0823

Fund Service Providers 744 18

Credit Unions 0 0

Money Transmitters & Bureaux de Change 9 4

Moneylenders5 48 51

Stock Exchange/Market Operators 0 1

Members of the Irish Stock Exchange 0 0

Moneybrokers 0 0

Total 2,943 4,216

1 The increase in the level of insurance/reinsurance intermediaries registered is due to the commencement of a project in 2007 to ensure allinvestment intermediaries authorised by the Financial Regulator are also registered as insurance intermediaries, where applicable, inaccordance with the terms of the Insurance Mediation Regulations.

2 The Financial Regulator now grants authorisations to the majority of mortgage intermediaries for a period of five or ten years, rather than fora one-year period as was previously the case.

3 The net asset value of Irish authorised collective investment schemes at 31 December 2007 was ¤806.4 billion compared to ¤730 billion atend 2006.

4 The level of authorisations for fund service providers in 2006 is high relative to 2007 due to the large number of conversions by fund managersto UCITS III status at the CESR transitional deadline date of 30 April 2006.

5 Subject to annual renewal of licence.

Refusal of Authorisation

In March 2007, we refused to grant an authorisation to a firm to trade as a money transmissionbusiness. The reasons for the refusal to grant an authorisation were mainly grounded on the beliefthat the application had sought to mislead us on important matters. In particular, the application failedto inform us that it had illegally operated a money transmission business in Germany. In addition, webelieved that the application sought to mislead us with regard to its relationship with anothercompany in the money transmission business.


41

6 The 2007 figure represents companies which, at 10 December 2007, met authorisation requirements introduced by new ReinsuranceRegulations in 2006.

7 In 2006, the figure for Investment Firms (MiFID)/Investment Business Firms also included a number of Funds Service Providers(Administrators and Trustees) which were also included in the Fund Service Providers category. For 2007, the figure is net of Fund ServiceProviders.

8 In 2007 Members of the Irish Stock Exchange are included with Investment Firms (MiFID).

Table 2.2 - Total number of Regulated Financial Service Providers

2006 2007

Credit Institutions (including branches of overseas credit insititutions) 79 82

Life Insurance Companies 54 54

Non Life Insurance Companies 133 134

Reinsurance Companies6 168 116

Investment Firms (MiFID)/Investment Business Firms7 199 150

Retail Intermediaries

• Multi Agency Intermediaries

• Authorised Advisers

• Insurance/Reinsurance Intermediaries

2,043431813

2,041429

2,507

Mortgage Intermediaries authorisations granted/renewed 1,633 1,893

Collective Investment Schemes (including sub funds) 4,090 4,780

Fund Service Providers 220 228

Credit Unions 428 422

Money Transmitters and Bureau de Change 21 23

Moneylenders5 48 51

Stock Exchange/Market Operators 1 1

Members of the Irish Stock Exchange8 11 0

Futures and Options Exchanges 2 1

Moneybrokers 6 6

Total 10,380 12,918

In May 2007, the applicant appealed the decision to refuse its application for authorisation to the Irish

Financial Services Appeals Tribunal ('Appeals Tribunal'). On 31 August 2007, the Appeals Tribunal

affirmed our decision to refuse the application. A copy of the Appeal Tribunal's decision is available

on its website at www.ifsat.ie. The Appeals Tribunal commended us on our regulatory process and

for our robust and equitable process in dealing with the application.

BANKING SUPERVISION

Revised Capital Regime

The Capital Requirements Directive (CRD) came into force for credit institutions and investment firms on

1 January 2007. The revised capital adequacy framework is based on three pillars. Pillar I aligns minimum

capital requirements more closely to institutions' actual risk of economic loss; Pillar II (supervisory review)

requires institutions to assess their capital needs and to consider the adequacy of their internal

governance and risk management arrangement (which is then subject to supervisory review and

evaluation), and Pillar III (market discipline) requires greater disclosure to foster market discipline.

The main planned focus of the year was the implementation of the CRD following publication of our

Implementation Notice on 28 December 2006.

This detailed the exercise of discretions available to us (pursuant to SI 660 and SI 661 of 2006), fortreatment of certain items, requirements and guidelines for institutions wishing to apply for the useof internal models for the calculation of regulatory capital together with guidance on operational risk,specialised lending, the Internal Capital Adequacy Assessment Process and Pillar III disclosures. TheCRD offers a menu of risk sensitive approaches and incentives for better risk management for creditinstitutions and investment firms. The implementation of the CRD brings with it a major change in theway banking supervision is conducted as well as increasing the sophistication of supervision.

Pillar II of the CRD recognises the necessity of effective supervisory review of credit institutions'internal assessments of risks. A significant amount of our work during 2007 was taken up with the

42

Highlights

• Implementation of the Capital Requirement Directive for Credit Institutions.

• Implementation of new liquidity regime for Credit Institutions.

• Introduction of new web-based electronic reporting system for Credit Institutions.

• Issue secondary legislation under the Asset Covered Securities (Amendment) Act 2007.

review and assessment of various aspects of credit institutions' internal capital adequacy assessmentprocess (ICAAP). In the context of the Supervisory Review Evaluation Process (SREP), this involvessignificant multi-level engagement with Irish credit institutions and with their parent regulators asappropriate. Pending finalisation of ICAAP reviews in 2008, credit institutions have been requiredto maintain capital at least comparable with those under the Capital Adequacy Directive.

Model Validation Reviews

During 2007, a number of credit institutions applied to us for regulatory recognition of their internalratings based approach (IRBA) for use in determining their credit risk capital requirements. Wecompleted bilateral on-site visits with institutions to assess the readiness of each institution applyingfor IRBA prior to submission of their formal applications.

On receipt of applications, formal reviews commenced consisting of an assessment of the institution'sIRBA application pack and additional documentation relating to the rating systems and processes,followed by formal themed on-site visits. The on-site visit consisted of an analysis of each CRDproject and implementation plan for both Pillar I and II; an analysis of the key principles and risksunderlying the IRBA at a high level; and in-depth case-studies to see the degree to which projecttargets were being achieved. All applications were reviewed and a “joint decision” taken, with otherregulatory authorities where appropriate, within a six-month period.

Supervisory Disclosure

In January 2007, data was uploaded to our website to meet the Supervisory Disclosure requirements of theCommittee of European Banking Supervisors (CEBS). The aim of Supervisory Disclosure is to makeinformation related to prudential supervision available in a timely manner to all interested parties, includingcredit institutions, investment firms, other market participants, other supervisors and consumers. We willdisplay and provide access to information regarding the laws, regulations, administrative rules and generalguidance adopted by Ireland. This framework is updated on an ongoing basis.

Electronic Reporting

As part of the implementation of CRD, we have successfully introduced a new supervisory reporting

framework with submission via a web-based electronic reporting platform. The new reporting

framework (COREP and FINREP), which follows guidelines on a EU-wide CRD common reporting

framework developed by the CEBS, replaces the Prudential Return. All credit institutions are

required to report using the on-line system and COREP and FINREP framework from Quarter 1 2008.


43

On-site Visits

Fifteen on-site inspections and 86 review meetings were held with authorised credit institutions in2007. The increased number of review meetings is largely attributable to increased engagement withinstitutions in the context of the transition to the new regulatory framework, CRD, and related impacton each institution's business model. As a result of developing market conditions, there was alsosignificant engagement with credit institutions in the context of liquidity planning and funding. Therewere more than 70 further meetings held with Irish institutions on diverse topics such as futurebusiness plans and strategic developments.

Asset Covered Securities

Statutory Instruments and regulatory notices, which brought into operational effect necessarysecondary legislation required under the Asset Covered Securities (Amendment) Act 2007 weresigned on 31 August 2007. This secondary legislation was developed in consultation with keyindustry stakeholders. Asset Covered Securities (ACS) are Irish covered bonds, which are highlyrated (all triple-A-rated to date) debt instruments. They are issued by specialist banks (designatedcredit institutions (DCIs)), of which there are four in Ireland, and are backed by, or secured on, a ring-fenced pool of eligible assets of high credit quality. Investors in covered bonds have a preferentialclaim over these assets in the event of default.

44

Patrick Neary, Chief Executive, and Marion Ryan from Banking Supervision, Financial Regulator picturedsigning the Statutory Instruments and Regulatory Notices which brought into operational effect the keysecondary legislation required under the Asset Covered Securities (Amendment) Act 2007.

Market Turmoil and Liquidity Crisis

In view of the market turbulence in the second half of 2007, we instituted weekly reporting of the

liquidity position of credit institutions with effect from September 2007. This combined with

frequent follow-up and detailed discussion on market conditions with individual institutions has

greatly enhanced our day-to-day understanding of activities in the main domestic institutions.

The unprecedented global market conditions resulted in increased work both in terms of reviews and

analysis domestically, by CEBS and within other fora. Clearly this has led to extensive dialogue with

credit institutions, other competent authorities and increased involvement in the European agenda.


45

9 Included in the 2007 data are weekly mortgage returns and weekly liquidity returns.

Table 2.3 - Number of returns from Financial Service Providers received in 2007

2006 2007

Banks and Building Societies

Weekly returns 512 1,1739

Monthly returns 488 470

Quarterly returns 542 622

Annual returns (Audited Accounts) 47 47

Insurance

Audited Annual Returns• Non Life• Life

12855

13253

Quarterly Returns• Non Life• Life

226101

236104

Investment/Stockbroking Firms• Weekly• Monthly• Quarterly• Semi-Annual• Annual Audited Accounts

351300425

44283

480271421

35134

Fund Service Providers• Monthly• Quarterly• Semi-Annual• Annual Audited Accounts

-186972

-217376

Retail Intermediaries• Semi-Annual• Annual

-1,117

-1,132

Exchanges• Monthly• Annual Audited Accounts

242

242

FundsMonthly Net Asset Value ReturnsAnnual and Interim Accounts

48,8406,836

52,4986,980

Total 60,480 64,984

46

Table 2.4 - Number of On-Site Inspections and Review Meetings

2006 2007

Banks and Building Societies

Inspections 13 15

Review Meetings 47 86

Total 60 101

Insurance

Inspections 4 11


Total 199 149

Investment/Stockbroking firms

Inspections 9 9

Review meetings 78 85

Total 87 94

Fund Service Providers

Inspections 10 17

Review meetings 66 76

Total 76 93

Retail Intermediaries

Inspections 1 7

Review meetings 3 2

Total 4 9

Bureau de Change

Meetings 0 1

Total 0 1

Exchanges

Review Meetings 0 2

Total 0 2

Overall Total 426 449

INSURANCE SUPERVISION

Insurance Supervision was restructured into specialised teams at end-2006 with a view to improvingthe quality of supervision, better use of expertise and increased efficiencies. This new structure wasbedded down and developed further during 2007, leading successfully to the intergration anddevelopment of Insurance Supervision.

The primary international policy development during 2007 was the proposed EU Solvency IIDirective. We have been heavily involved in devising the proposed Directive, with a member of ourstaff chairing a sub-committee of the CEIOPS. This new Directive, a draft of which was published inmid-2007, will have a fundamental impact on how insurance companies will evaluate their risk andcapital needs, as well as how they are supervised. The Reinsurance Regulations, which wereadopted in December 2007, provide for the supervision of reinsurance companies in Ireland.

A new streamlined approach to the supervision of captive insurance companies was also introduced in2007, the effect of which was to enhance the competitiveness of Ireland as a captive insurance centre.

Reorganisation of the Insurance Department and Development of Methodology

This was a major theme for the Department during 2007 and reflected in two key outcomes.

Firstly, the procedures and methods for all teams were streamlined and documented, with themethodology for the newly created Financial Analysis, Administration and Business DevelopmentUnits being newly developed.

Secondly, there have been significant operational improvements in our supervision of regulatedentities through the active implementation of a risk-based approach to supervision. This facilitatedan intensification of the annual review process and the completion of a programme of 11 targetedinspections, up from 4 in 2006, covering captive insurers and a number of larger firms.

The practical outcome of this initiative is that a number of firms have made changes to improve theirinternal control and management structures.


47

Highlights

• Continued integration and organisational development of the Department during 2007.

• Development of a risk based approach to supervision.

• The EU Directive on Reinsurance was transposed into Irish law in 2006, with the newregime going live in 2007.

• Eight policy papers issued.

Reinsurance Directive

The EU Directive on Reinsurance was transposed into Irish law by the signing of S.I. No 380 of 2006

- the European Communities (Reinsurance) Regulations, which introduced formal regulation of

reinsurance undertakings. The Regulations included specific regulations dealing with Finite

Reinsurance and Special Purpose Reinsurance Vehicles.

Existing reinsurance companies were deemed authorised under these Regulations and were requiredto demonstrate compliance, through the submission of a Statement of Compliance. As a result, 110statements from existing companies were examined and a further 6 companies were authorised byFinancial Institutions and Funds Authorisation.

The register of 116 companies, which were in compliance with relevant requirements and subject tothe new regulatory regime on 10 December 2007, was published on the website.

Eight policy papers, clarifying important issues of the new regime, were published. Engagement withthe industry on the practical applications of the requirements is ongoing.

Solvency II

Solvency II, is an EU project to modernise the regulation and supervision of insurance companies. Itis based on a three-pillar approach, which is similar to the banking sector (CRD) but adapted forinsurance. The first pillar (Pillar I) contains risk-based, quantitative capital requirements and makesprovision for insurers to use either internal models or a prescribed standard formula.

The second pillar (Pillar II) contains qualitative requirements on undertakings such as riskmanagement as well as supervisory activities. It prescribes a formal framework for supervisoryscrutiny of insurers' own risk and solvency assessments.

The third pillar (Pillar III) covers disclosure and supervisory reporting. Firms will need to disclosecertain information publicly, which will bring in market discipline and help to ensure the stability ofinsurers and reinsurers. In addition, firms will be required to report greater amounts of information totheir supervisors.

In addition, Solvency II will also streamline the way that insurance groups are supervised and willrecognise the economic reality of how groups operate. Proposals are currently under considerationregarding the role and powers of the group supervisor, greater cooperation between supervisors, the useof group-wide capital models and how groups could take advantage of group diversification benefits.

48

The Solvency II Directive Proposal was adopted by the European Commission and published in July2007. It is currently being examined by the European Parliament and the European Council. In themeantime, CEIOPS has been requested by the European Commission to start working on thedevelopment of further advice on future implementing measures. The Commission will subject theimplementing measurers to a full impact assessment, as was the case for the Directive proposal.

During 2007, we participated actively in CEIOPS and its working groups. This work covered thedevelopment of responses to calls for advice from the European Commission and the developmentof the regular quantitative impact studies.

On Pillar I, we were actively involved in the development of Quantitative Impact Study 3 (QIS3),

which examined the impact of the current proposals on insurers solvency position and was carried

out between April and June 2007. We conducted a number of industry workshops for potential QIS3

participants, spoke at a number of conferences and also communicated directly with companies in

attempts to ensure good Irish participation in the QIS3 exercise. Irish participation in QIS3 showed a

large increase over previous QIS, with 39 full submissions. These formed the basis of our National

Report on QIS3 results to CEIOPS in August 2007, which in turn assisted Working Groups develop

further advice and prepare QIS4 specifications. This exercise revealed that the proposals need

further calibration and fine tuning, which will be the focus of QIS4. We continued our efforts to

ensure significant participation by Irish companies (insurers and reinsurers) in QIS4.

On Pillar II, the CEIOPS Pillar II working group completed six papers providing advice to the European

Commission in relation to Solvency II. These papers covered the issues relevant for reinsurance;

capital add-ons for solo and group undertakings; supervisory powers; limit rules for assets; risk and

corporate management issues and Own Risk and Solvency Assessment (ORSA).

The last item, the ORSA, is a key element of Pillar II and sets out a broad framework within which

insurance and reinsurance undertakings would assess the inherent risks in their business so as to

maintain sufficient solvency to cover those risks. It is intended that the results of the ORSA will be

submitted to the supervisory authority for use as part of the supervisory review process.

We were particularly active in the discussions on group supervision in CEIOPS and provided

extensive support to the Department of Finance for their participation in the European Insurance and

Occupational Pensions Committee (EIOPC). This is an area of particular interest for Ireland due to the

structure whereby a significant proportion of the insurers operating in this jurisdiction are part of

larger international groups.


49

INVESTMENT SERVICE PROVIDERS SUPERVISION

In April 2007, following a detailed review of the work of the Department, management revised the

Department's organisation structure and team workloads to allow for staff from the supervisory teams

to be assigned to a dedicated inspection team. The inspection team, in addition to regular

inspections, also undertook a themed inspection of a number of financial service providers that

provide “back office” services for funds authorised in Ireland. The focus of the inspections was to

examine the systems and controls in place to ensure that valuation of complex instruments met

international best practice. Following the themed inspection, consultants were appointed to analyse

in depth the valuations of a sample of such complex instruments. This work is being finalised in the

first quarter of 2008 and will be reported on in the second quarter of 2008.

In tandem with reallocation of staff resources to establish a dedicated inspection team, we also

undertook a reassessment of the risks associated with entity types to allow more efficient and

effective use of staff resources. This permitted the Department to focus resources on the areas of

highest risk.

Preparation for implementation of MiFID from January through to October 2007 involved the

Department in a significant programme of work. We published the new Client Asset Requirements

in October 2007. These were introduced to reflect provisions of the MiFID but were not materially

different from the rules that had existed. It was necessary, in order to protect the interests of clients

of MiFID firms that hold client money, to retain aspects of the rules that went beyond the strict

requirements of the MiFID itself. As required by the MiFID, we notified the European Commission

of our retention of these aspects.

50

Highlights

• Establishment of dedicated inspection team.

• Reassessment of risk and allocation of resources.

• Preparation for and Implementation of MiFID for Investment Firms.

• Implementation of CRD for Investment Firms.

• Introduction of new web-based electronic reporting system for Investment Firms.

• Establishment of Prudential Supervisory Regime for UCITS III Self Managed InvestmentCompanies (SMICS).

• Best practice review of prudential supervision of Fund Service Providers.

The MiFID requires the Boards of Directors of MiFID firms to have appropriate governance andcontrols in place and to keep compliance under regular review. A working group comprisingrepresentatives from the Financial Regulator and industry agreed that guidelines in respect of theserequirements could be deemed “goldplating” of the MiFID and therefore inappropriate. A possibleapproach to compliance with these requirements was outlined to industry representatives at aseminar held by the Financial Regulator in October 2007.

Investment firms that had been authorised under the Investment Intermediaries Act were from 1November 2007 entitled to authorisation under the MiFID. Accordingly, we issued updated MiFIDauthorisations to some 140 existing firms in October 2007.

We implemented CRD from 1 January 2007 and web-based electronic reporting was available forrelevant firms. No firms opted to report from January 2007. However a small number beganreporting electronically in September 2007.

In June 2007, we established a prudential supervisory regime to include capital, fitness and probity,reporting and general supervisory requirements for UCITS III Self Managed Investment Companies(SMICS).

We undertook a best practice review of the prudential supervision of Fund Service Providers during2007 that included consultation with Securities and Exchange Commission (SEC) in August 2007.The recommendations are for implementation in 2008.


51

Pictured in March 2007 at the Financial Regulator briefing on the Capital Requirements Directive forinvestment firms hosted by the Irish Banking Federation were, left to right: Paul O'Connor, Head ofWholesale Banking and Risk, Irish Banking Federation; Trish O'Dowd, Investec Ireland Ltd; TommyNielson, Independent Trustee Company Ltd and Tom Meade, Deputy Head of Investment ServiceProviders Supervision, Financial Regulator.

MARKETS SUPERVISION

In 2007, the new Department focused on two key tasks:

• Building a securities transaction reporting system, and

• Identifying the appropriate model for prospectus review in Ireland.

Transaction Reporting System

The MiFID includes an ambitious target of requiring each investment firm in every country in the EU

to send a report about each transaction in every market in securities to a competent authority within

24 hours of the transaction being done.

In August 2006, we called representatives of investment firms together to discuss the challenges

involved in building a system to report transactions. Initial meetings were concerned with

establishing whether it would be possible to use the existing systems for reporting trades to the Irish

Stock Exchange or for settling transactions through CREST in order to get the reports to the Financial

Regulator. It took some time to work through these options, in particular the CREST option, but in

time it became clear that it would be best for each firm to report directly to us.

During the same period, we visited a range of other securities markets regulators across Europe to

inform ourselves as to best practice in transaction reporting and monitoring. I.T. staff from the

Central Bank also worked with our colleagues in other European securities regulators to develop

protocols for the exchange of information between regulators. When these protocols became

available, we published the technical and regulatory requirements. Only then were investment firms

able to begin building the I.T. systems necessary to report directly.

52

Highlights

• New department established to deal with the fundamental changes brought about by EUlegislation on the supervision of the securities markets.

• The main Directives are:• Prospectus Directive;• Market Abuse Directive;• Transparency Directive, and• Market in Financial Instruments Directive (MiFID).

• The purpose of these directives taken as a whole is to create a single framework across theEU for the issuance of securities, the reporting of trades, the publication of information byissuers about the securities they have issued and the prevention of market abuse withinsecurities markets.

Between May and October 2007, we successfully built our website reporting system and individual

investment firms built the systems they required to make the reports to us. Investment firms

responded extremely well, building systems very quickly to meet the statutory deadline. After a test

period in October, the system went live in November 2007 and from that time we were in a position

to receive and transmit transaction data. Some other regulators across Europe still have work to do

to complete their systems and the reporting system should be fully operational in 2008.

It had been planned originally to begin to develop transaction monitoring systems based on the

transaction data being received from November 2007. However, the relevant staff and some of the

systems could not be put in place by that date and the next phase of the project is delayed by some

months as a result. The intervening period is being used to improve the quality of the data. During

2008 further refinements will be made to the transaction reporting and monitoring functions and staff

will be trained in the use of the system with a view to ending, in 2009, the current delegation to the

Irish Stock Exchange of market abuse monitoring.

Prospectus Review

During 2007, with assistance from consultants, Promontory Financial, we carried out a review of the

options for changing the way prospectus documents are reviewed in Ireland. We consulted closely

with the Irish Stock Exchange in relation to this. As at the end of the year, this review was not yet

complete. We plan to finalise this work in 2008.

In addition to the two key tasks above, the bulk of the daily work in this area involves the supervision

of the delegation agreement with the Irish Stock Exchange for carrying out the early stages of the

Prospectus Review process and the final decisions to approve Prospectus documents. See the

relevant statistics in Table 2.5 below.


53

Table 2.5 - Performance of functions under the Prospectus Regulations

2006 2007

Number of documents approved 2,687 3,116

Number of documents/notifications published 3,940 5,417

Passport certificates prepared10 189 405

Inward passporting notifications processed 340 431

Number of applications being scrutinised as at period end 585 799

The difference between the number of documents that have been approved to date and the number of documents that have beenpublished on our website relates to (i) Registration Documents that have been approved by us but which will not be published until suchtime as we receive and approve accompanying Securities Notes (ii) Final Terms, Final Offer Price and Amount of Securities Announcementsand Annual Information Reports (which do not require approval) that have been filed with us and published on our website and (iii)notifications in respect of prospectuses which have been approved by the Competent Authority of another Member State and which arethen passported into Ireland and do not require the approval of the Financial Regulator.

10 In 2006, a passport notification sent to, for example, 4 Member States counted as 4 notifications (a figure of 362 was reported in our 2006Annual Report). Following guidance provided by CESR in 2007, it was considered more appropriate to count a passport notification sent to,for example, 4 Member States as 1 notification only.

MiFID Implementation

2007 also saw the implementation of the MiFID. This required the Financial Regulator to satisfy itself

that the Irish Stock Exchange, among others, complied with a range of requirements in the directive.

Market Abuse

A start was made in 2007 in training a team to take over the tasks involved in market abuse

investigation from the Irish Stock Exchange.

We identified the publication of anonymous research on securities in publications circulating to retail

investors as a significant risk area as the law forbids the publication of anonymous recommendations

concerning which shares to buy, sell or hold. A survey was initiated to identify publications engaged

in the high-risk activity of publishing anonymous research on shares. One fine in relation to market

abuse was imposed during 2007. In 2008, we will complete that survey, continue to monitor

practices in this area and investigate possible breaches. We will also broaden out our market abuse

work to continue our preparations for ending the delegation to the Irish Stock Exchange in 2009.

54

Table 2.6 - Performance of functions under the Market Abuse Regulations

2006 2007

Enquiries initiated regarding possible contraventions 16 15

Suspicious Transaction Reports submitted to the FinancialRegulator by persons professionally arranging transactions

4 1

Suspicious Transaction Reports submitted to the FinancialRegulator by other EU Competent Authorities.

1 4

Suspicious Transaction Reports transmitted by the FinancialRegulator to EU Competent Authorities.

2 1

Assistance rendered to other EU Competent Authorities 21 23

Stabilisation notifications submitted to the Financial Regulator 12 8

Settlement Agreements concluded 0 1


55

2.3 Prevention of Money Laundering and Terrorist Financing

At domestic level, we continued our preparatory work for the implementation of the Third EU

Directive on the Prevention of the use of Financial System for purpose of Money Laundering and

Terrorist Financing (the Third Directive). This work included participating in the work of the Money

Laundering Steering Committee, chaired by the Department of Finance, and attending meetings of

the Industry Working Group, which is drafting Revised Industry Guidance Notes.

Our internal working group continued work on preparing for the implementation of the Third

Directive, including reviewing internal processes and carrying out best practice visits to 3 EU member

states (Belgium, Netherlands, Sweden) to ascertain details of their supervisory approaches to anti-

money laundering.

At international level, we continued to participate in the work programmes and regular meetings of

the Financial Action Task Force, the CEBS, CESR,CEIOPS Anti-Money Laundering Task Force and the

EU Committee on the Prevention of Money Laundering and Terrorist Financing.

2.4 Accounting Issues

On the accounting front, we provided assistance to the Institute of Chartered Accountants on the

drafting of practice notes for banks (PN19(11)) and credit unions (PN 27(11)) which were published

by the Auditing Practices Board (APB) for informal consultation in November 2007. We also assisted

in the development of prudential filters with a view to reconciling accounts prepared under the

International Financial Reporting Standards (IFRS) with those required for capital adequacy purposes.

2.5 Challenges Ahead

The main challenge facing the Prudential Directorate is to continue to meet its statutory obligations

in the most efficient and effective manner possible using a risk-based approach. Beyond that it faces

many challenges common to all its activities, some of which are sector specific. In the wake of the

current unprecedented global market conditions, one of our main areas of focus in 2008 will be to

maintain our increased vigilance over the various sectors. While this is particularly the case for

liquidity in banks and building societies, market conditions are such that they could raise issues in any

area of the regulated sector. In this respect, the EU has set out a detailed 'roadmap' of actions, already

underway, to enhance financial stability arrangements and the ability of authorities to respond to

serious disturbances in EU financial markets. We are fully participating in this work.

Another general challenge is the need to keep abreast of developments and innovations in the

market place, particularly the ever-increasing complexity of financial instruments. We continue to be

committed to facilitating innovations that will enhance the sound development of institutions

operating here while taking account of difficulties that have arisen in the international markets. We

will always, however, ensure proper assessment of risk by the institutions concerned.

The further enhancement of our website, particularly with regard to the publication of the searchable

Registers of authorised entities will be a particular focus for 2008, as will the enhancement of

electronic reporting to us of relevant data from regulated entities. Considerable resources will also

be expended on assisting the Department of Finance and the Advisory Forum on Financial Legislation

with the project on the consolidation and modernisation of financial services legislation.

56

Chapter 3Promoting a Stable

Credit Union Sector

The five-year period since May 2003 has been one of considerable development of the regulatory

structure and much change in the business of credit unions. The assets of the sector have increased

by 46% and stood at ¤14.4 billion as at 31 December 2007. Much of this increase arose from growth

in the value of investments held by credit unions, which grew by 72% to ¤7.1 billion, while loans to

members increased by 31% to ¤6.9 billion.

Our strategy over the past five years, developed through full and extensive consultation with the

sector itself as well as the Consultative Consumer and Industry Panels, has been to focus our

resources on enhancing the safety and security of members' savings.

Since 2003, a new regulatory team has been recruited bringing the staff complement of the

Registrar's office to 21. A new quarterly web-based system of Prudential Returns has been created

and the Annual Return submitted by credit unions has been simplified. Considerable developments

in the range of services which credit unions are approved to provide have been achieved in co-

operation with the Department of Finance and the movement's representative associations.

In the period since our establishment, we have placed considerable emphasis on the need for regular

and open communication with credit unions and their representative associations. In this regard we

would acknowledge the commitment of the following bodies with whom we consult regularly; the Irish

League of Credit Unions, the Credit Union Development Association, the National Supervisors Forum,

the Credit Union Managers Association and the Credit Union Technology Suppliers Forum. In addition,

the committee, which advises the Minister for Finance on credit union matters, the Credit Union

Advisory Committee, has played an important supportive role. We keep all credit unions fully informed

of regulatory developments through our newsletter, RCU News, which we publish twice a year.

During the initial five years we have been active in getting to know individual credit unions directly.

We have carried out over 700 on-site inspections and visits since our establishment and we have met

with every credit union in the country. The inspections covered a wide range of credit union activities

such as lending, investments, and governance and these topics have also been the subject of

Guidance Notes for credit union boards and supervisors. We have intervened, where necessary, to

support boards of directors where difficulties of a financial or governance nature have arisen.

Looking to the future, our primary focus will remain the protection of members' interests and

particularly those of savers, which can only be maintained by prudent governance and risk

management by boards and management of each credit union. We believe it would be beneficial to

underpin prudent financial management with an appropriate framework of stabilisation support and

saver protection. We are committed to working with the sector to put such arrangements in place.

Brendan F Logue

Registrar of Credit Unions

58

Registrar of Credit Unions’Statement

Brendan Logue

Registrar of Credit

Unions

3.1 Inspection of Credit Unions

At the end of 2007, there were 422 registered credit unions. Of these 420 are active, the remaining

2 are currently in the process of dissolution. Following the completion of the Prudential Return rollout

in 2006, no further Prudential Return development meetings were required in 2007. Along with the

valuable information provided by the Prudential Return, our inspection programme is a key element

of our supervisory process. During 2007, we conducted inspections in 52 credit unions and held

meetings with a further 52 credit unions (Table 3.1 refers). We continued our focus on the inspection

of arrears and provisioning against possible loan losses. Arising from these inspections, several credit

unions were required to make additional provisions for bad and doubtful debts in their accounts for

the year ended 30 September 2007.


59

Table 3.1 Credit Union Inspections/Meetings

Theme 2006 2007

Corporate Governance Inspections 22 -

Arrears and Provisioning Inspections 11 30

General Inspections - 9

Special/Unscheduled Inspections 8 13


Other Meetings - 13

Prudential Return Development Meetings 243 -

Total 289 104

3.2 Communicating with Credit Unions

We continue to meet with credit union representative associations and advisory bodies on an

ongoing basis through a series of meetings, presentations, conferences and seminars. Table 3.2

summarises the formal meetings held with the credit union representative bodies.

In addition, the Registrar and his staff attended and/or addressed 17 credit union seminars and

meetings. These included the Consultative General Meeting of the ILCU, the Annual General

Meetings of CUDA, the NSF, CUMA and a meeting of the Credit Union Technology Suppliers Forum.

The Registrar also made a presentation to credit union delegates attending the UCC Summer School.

In July, the Registrar and his deputies attended the annual World Council of Credit Unions

Conference. At the Regulators' Round Table preceding the conference James O'Brien, Deputy

Registrar, was appointed to the steering committee of the International Credit Union Regulators'

Network.

We also hosted visits from foreign delegations from Uganda, Albania and Romania and provided

them with an insight into the regulatory model for credit unions in Ireland.

Two editions of our newsletter, RCU News, were published during the year in June and December.

The publication of RCU News helps us inform credit unions about recent and upcoming regulatory

developments. Our website is updated with all relevant publications including Guidance Notes,

Application Forms and recent editions of RCU News.

60

Table 3.2 Meetings with Credit Union Representative Bodies

Association/Group 2006 2007

Irish League of Credit Unions (ILCU) 19 20

Credit Union Development Association (CUDA) 5 5

National Supervisors Forum (NSF) 3 3

Credit Union Managers Association (CUMA) 1 2

Credit Union Advisory Committee (CUAC) 3 4

Total 31 34

3.3 Building Compliance

Credit unions now submit the web based Prudential Return and the streamlined Annual Return. We

received and analysed over 1,900 returns in 2007 (Table 3.3 refers). The Prudential Return is firmly

established as part of each credit union's ongoing reporting requirements. This regular submission

and analysis of key financial information is one of the primary methods we use to ensure that credit

unions are discharging their statutory obligations. We continue to monitor closely credit unions'

compliance with reporting requirements. Credit unions with a poor record of compliance are subject

to increased regulatory oversight.


61

Table 3.3 - Credit Union Returns Received and Analysed

Return Type 2006 2007

Prudential Return 1,092 1,483

Annual Return 424 425

Total 1,516 1,908

Pictured at the meeting with the Federation of Romanian Credit Unions are Left to Right :Gerry Thompson (ILCU Foundation); Florin Simion (Federation of Romanian Credit Unions); Aoife Langford(Registry of Credit Unions); Nicoleta Capdefier (FAUR Credit Union, Romania); Eva Kadar (Federation ofRomanian Credit Unions); Alan Moore (ILCU Foundation) and Donal Coghlan (Registry of Credit Unions).

3.4 Additional Services

In 2007, we approved 17 applications by credit unions to provide additional services. 15 of the

applications related to the provision of mortgage services in association with one contracting

mortgage lender. The remaining two applications were to provide life insurance and pensions in

association with a product producer.

Statutory Instrument (SI) 107, which was issued in March 2007, provides credit unions with an

exemption from applying to the Registrar for approval if they wish to introduce their members to a

PRSA provider. By the end of the year 41 credit unions had written to the Registrar, as required under

the SI, to notify him of their intention to enter into such an arrangement with a PRSA Provider.

In December 2007, following consultation with the Registrar and other relevant stakeholders, the

Minister for Finance signed into law SI 838 which provides credit unions with an exemption from

applying to the Registrar for approval under Additional Services legislation when providing third

party payments. This SI allows credit unions provide a service to their members whereby members

can arrange to have third party payments transferred to or from their accounts by electronic funds

transfer or otherwise.

3.5 Longer Term Lending

Longer term lending limits for credit unions are set out in Section 35(2) of the Credit Union Act 1997

(as amended) ("the Act"). On 26 April 2007, the Minister for Finance issued a Statutory Instrument

(SI 193 of 2007) which amends Section 35(2) and implements new longer term lending limits for

credit unions that have appropriate safeguards and controls in place and have received approval from

us. These lending regulations were later confirmed in primary legislation through a provision in the

Markets in Financial Instruments and Miscellaneous Provisions Act 2007. The new increased lending

limits are as follows:

• loans over five years increase from 20 per cent to 40 per cent of total loans outstanding, and

• loans over ten years increase from 10 per cent to 15 per cent of total loans outstanding.

In consultation with the representative bodies and auditors, we developed an application form and

explanatory note to assist credit unions that wish to apply to the Registrar for such an approval. By 31

December 2007, 18 credit unions had been approved to lend in accordance with the new limits

subject to amendment of their rules.

62


63

Following consultation with the Registrar and the representative bodies, the Minister further

amended Section 35(2) of the Act on 1 November 2007. The amendment, contained in the Markets

in Financial Instruments and Miscellaneous Provisions Act 2007, changes the basis of calculation of

the total amount of loans outstanding for loans over 5 and 10 years. This amount is now calculated

based on the time remaining to the final repayment date and not the original loan duration.

3.6 Guidance on Credit and Credit Control

In November 2007, the Registrar issued a Guidance Note on Credit and Credit Control for Credit

Unions. This Guidance Note was issued in response to the changing nature of the credit function and

the more competitive lending environment in which credit unions now operate. The Guidance Note,

which was subject to extensive consultation, sets out the framework required for credit unions to

have an effective and efficient lending function in order to protect members' savings.

3.7 Investments

In October 2006, the Registrar issued a Guidance Note on Investments for Credit Unions. The

Guidance Note contained a proposal that it would be subject to regular review by the Registrar in

consultation with the sector. In October 2007, we commenced the review process by visiting a

sample of credit unions to assess the impact of the Guidance Note on credit unions' investment

activities and the experience of credit unions in complying with the investment framework set out in

the Guidance Note. Following on from these initial visits, we will be conducting further work in this

area in 2008.

3.8 Amendment of the Savings Protection Scheme

Discussions between the Registrar and the ILCU regarding the ILCU's proposal to amend their

existing Savings Protection Scheme continued during 2007. The discussions focused on the

elements that would need to be addressed to allow the Registrar and the Authority to approve the

proposal in accordance with the provisions of Section 46 of the Credit Union Act 1997 (as amended).

Discussions also took place with other credit union bodies and with the Department of Finance.

64

Chapter 4Organisational

Review

4.1 Organisational Development and Change

At the time of the establishment of the Financial Regulator in 2003, we embarked on a major

programme of organisational development and change in association with the Central Bank in order

to develop an integrated and cohesive organisation. The main elements of this programme were as

follows:

Organisational Development

• Integrating the existing regulatory staff and processes into the new Financial Regulator;

• Developing and embedding a strategic and work planning process. Strategic plans were

published for periods 2004-2006, 2007-2009 and 2008-2010 together with annual updates, as

required by legislation;

• Developing our purpose, vision and core values. While our purpose and vision statements were

re-evaluated as part of our second three-year Strategic Plan, we continue to embed our core

values across all levels of the organisation and use them as a guide to our work and decisions;

• Reviewing on a regular basis the allocation of resources to ensure that the organisation is

efficient, adaptable and reflects current work priorities, and

• Developing an improved public accountability framework to enable us to report in a clear and

transparent manner on our performance. The Consultative Panels have endorsed our approach

to performance reporting.

Regulatory Policy

• Developing and articulating our approach to financial services regulation. We are committed to

a principles-led approach to regulation. This requires the boards and senior management of the

industry we regulate being fully committed to a culture of compliance, integrity, competence

and best practice;

• Assisting the Department of an Taoiseach formulate Better Regulation initiatives, relating to

public consultation, regulatory impact analysis and mapping the regulatory system, and

• Cooperating with the Consultative Panels which were established in 2004 to provide advice to

the Financial Regulator on a range of issues, including strategy and funding.

66

Organisational Review

Performance Benchmarking

• Undertaking Best Practice reviews with comparable regulators to ensure that our approach to

prudential supervision and consumer protection is appropriate and in line with international best

practice, and

• Facilitating the Comptroller and Auditor General's Value for Money assessment of the Financial

Regulator.

Four independent assessments of our performance were published since our establishment, all of

whose findings were generally positive:

• Comptroller and Auditor General's Value for Money assessment;

• The International Monetary Fund's (IMF) assessment of our prudential supervision system;

• The IMF and World Bank's assessment of the stability of the Irish financial system, and

• The Financial Action Task Force's report on our anti-money laundering controls.

An IMF Research Paper, published in February 2007, ranked the Irish system and structure of

financial regulation first in the world in terms of its accountability and independence arrangements.

Process Improvement

• Establishing a process for more efficient application of the funding levy on regulated entities;

• Developing a Stakeholder Protocol, which sets out the quantitative and qualitative standards

consumers and financial service providers can expect when dealing with the organisation in

relation to certain key processes;

• Improving the processes in relation to the efficiency of the authorisation of financial service

providers;

• Implementing agreed procedures for engaging with the Consultative Panels prior to the

submission of the Annual Budget and Annual Strategic Plan to the Minister for Finance and prior

to the signing of the Statutory Instrument imposing the levy;

• Establishing a process for monitoring costs incurred and the provision of management

information;

• Publishing registers of regulated financial service providers on our website, which will be further

improved with the development of a searchable register system in 2008;

• Leading initiatives to improve the cost efficiency and effectiveness of corporate publishing and

translation, and

• Initiation of a significant overall Business Process Review to benchmark our processes and costs

against those of other regulators.


67

4.2 2007 Activities

EU and International Co-ordination

In early 2007, recognising the importance of maintaining an overview of EU and International policy

developments, an EU and International Co-ordinator was appointed. Our Co-ordinator operates

across the Consumer and Prudential Directorates, whilst also working with our Consultative Panels.

The Industry Panel's establishment of its EU and International Industry Advisory Group, composed of

contacts in key sectors, to assist increased industry engagement with EU and international priorities,

has also been a very welcome initiative in 2007.

EU Regulation

We have been very active in the area of EU Retail Financial Services legislative development by

submitting our comments on various EU consultation documents, for example, the EU Green Paper

on Retail Financial Services and the Bank Account Expert Group Report. Table 4.1 lists the main EU

Directives/Proposals in whose development we have been involved and their current status.

68

Table 4.1 - New Regulatory Legislation

Directive/Proposal Status

Transparency Directive Transposed 13 June 2007

Markets in Financial Instruments Act 2007Transposed 15 February 2007 - effective 1 November2007

European Communities (Insurance and ReinsuranceGroups Supplementary Supervision) Regulations 2007

Regulations signed on 31 May 2007

Asset Covered Securities (Amendment) Act 2007 Legislation signed 31 August 2007

Capital Requirements Directive Implemented 1 January 2007

Eligible Assets Published 19 March 2007

Unfair Commercial Practices Transposed on 1 May 2007

Solvency II Under negotiation at Council Level

Reinsurance Directive Implemented in December 2007

UCITS IV Directive

Proposals to amend UCITS Directive were publishedby European Commission in March 2007. A recastDirective will be presented to the European Counciland Parliament in 2008.

Third Anti-Money Laundering Directive Preparatory work ongoing

We continue to contribute to other international fora concerned with the development and co-

ordination of regulatory policy. It is now clearer than ever before that effective regulation of the

financial services industry requires very close international collaboration. Table 4.2 outlines the

number of such meetings attended. In addition bilateral meetings with other international regulatory

bodies were held as necessary.


69

Table 4.2 - Participation at EU and other International Committees

CommitteeNumber of meetingsattended by FinancialRegulator staff

2006 2007

EU

Committee of European Banking Supervisors (CEBS) and otherEU Banking committees

33 58

European Banking Committee - 4

Committee of European Insurance and Occupational PensionsSupervisors (CEIOPS) and other EU Insurance committees

71 12

Committee of European Securities Regulators (CESR) and otherEU Securities committees

64 51

Financial Action Task Force on Money Laundering, Anti- MoneyLaundering Task Force and other EU Money Launderingcommittees

15 12

EU Consumer Protection 15 8

European Central Bank 3 8

Other EU 22 3

International

International Association of Insurance Supervisors 2 4

International Organisation of Securities Commissions 5 5

World Council of Credit Unions 3 1

Other 1 5

Total 234 171

International Visits

In March 2007, the Chairman, Chief Executive, Prudential and Consumer Directors visited the United

States. The purpose of the visit was to confirm that Ireland is a well-regulated and attractive location

for international financial services business to a wide audience of key US regulators and significant

US financial institutions. A number of meetings were held with the Chairman of the Federal Reserve

and senior American financial services executives from major banks, insurers, fund managers and the

New York Stock Exchange (NYSE) as well as senior regulatory officials at the New York Federal

Reserve, Securities and Exchanges Commission (SEC) and the Commodity Futures Trading

Commission (CFTC).

In December 2007, the Consumer Director and her senior team visited Brussels. The main objectives

of this visit included:

• Fostering a greater awareness of the Irish regulatory approach vis-à-vis retail financial services;

• Identification of potential conflicts in approach as early in the regulatory process as possible, and

• Discussion of regulatory issues of mutual interest.

An intensive schedule included meetings with Commissioner McCreevy (Internal Market

Commissioner), Head of Cabinet of the Commissioner for Consumer Protection, Officials from the

Commission's Internal Market Directorate, Ireland's Permanent Representation and Director General

of BEUC (The European Consumers' Organisation).

70

Pictured at the IBF Conference which was addressed by Patrick Neary in September are, left to right-Pat Farrell, Chief Executive, Irish Banking Federation; Patrick Neary, Chief Executive, FinancialRegulator; and Daniele Nouy, Chair, Committee European Banking Supervisors (CEBS).

Value for Money

The report of the Comptroller and Auditor General on a Value for Money Examination of the Financial

Regulator was published in July 2007. Overall the results of the study were favourable and

highlighted the progress we have made since our establishment in 2003.

In particular, we welcomed the following positive findings:

• That we are generally prompt in issuing rules and guidance for financial service providers;

• That in developing standards, regulatory policies and administrative procedures, we

systematically consult with stakeholders and publish related documentation on our website;

• That since our establishment, we have devoted considerable effort to developing a formal risk-

rating model, and significant progress in achieving risk-based supervision has been made, and

• That we have been developing our capacity to assess the relative costs and benefits of new

regulation where we have discretion in how legislation is to be implemented.

Some of the recommendations where we could improve our efficiency were already being addressed

as part of our Strategic Plan for 2007-2009. The rest have been included in our 2008 Strategic Plan

and the Authority has approved an action plan to ensure appropriate follow-up.

Industry Funding Levy

We continued to improve the timeliness of issuing industry funding levy notices by issuing them in

June 2007, a two-month improvement on 2006.

We have established a clearly defined policy for providing for levy debts outstanding as at year-end

and made significant improvements in debt collection process. A major debt collection exercise took

place in the last quarter of 2007, which resulted in a 65 per cent reduction in the level of levies

outstanding as at the end of the financial year.

Public Accountability

In accordance with the 2003 Act, the Annual Report 2006 and Strategic Plan 2008 - 2010 were

published in July 2007 and November 2007 respectively. This annual report describes our

performance and the exercise of our powers during 2007. Appendix 1 provides details of the

progress we have made in delivering on our stated 2007 strategic actions.


71

Oireachtas and EU Hearings

During 2007, we appeared before the Oireachtas Committee on European Scrutiny on the Solvency

II Directive for Insurance. Senior executives and staff also participated in external conferences and

made presentations to industry, consumer groups and international delegations on a range of

regulatory issues. Presentations were also given to schools about the Financial Regulator during pupil

visits to our premises.

Staffing

Permanent staff numbers increased by 14.5 (4.4 per cent) to reach 343.5 at end-December 2007. This

compares with an approved complement for 2007 of 355. We are working with the Human Resources

Department of the Central Bank and Financial Services Authority of Ireland to fill the resulting 11.5

vacancies. It is a top priority of the organisation to retain and recruit expert staff for all areas of our work.

The allocation of serving staff to departments is shown in Table 4.3 below. Staff turnover in the

Financial Regulator continues to compare favourably with turnover rates in the financial services

industry. In 2007, turnover of permanent staff in the Financial Regulator was 9.4 per cent compared

to 27.5 per cent11 for the financial services industry generally.

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Table 4.3 - Staff Numbers

2006 2007

Department

Senior Management 3 3

Registrar of Credit Unions 19 21

Legal and Enforcement 13 11

Consumer Directorate

Consumer Information 32 32

Consumer Protection and Codes 50 48

Planning and Finance Department 15 18.5

Prudential Directorate

Banking Supervision 49.5 48

Insurance Supervision 30 33

Financial Institutions and Funds Authorisation 64 67.5

Investment Service Providers Supervision 37 46

Markets Supervision 16.5 15.5

Overall Total 329 343.5

11 2006 comparative as 2007 figure is not yet available

Training and Development

We attach great importance to developing an adaptable, flexible and efficient organisation with

motivated and skilled staff. In 2007, we engaged PricewaterhouseCoopers (PWC) to review our

technical training requirements and to design a curriculum-based training programme based on

findings and other available information. The curriculum will reflect current regulatory practice both

in Ireland and in the EU and also future training and development requirements.

Acquisition of technical skills was a major focus of the training programme and the Academic and

Professional Training Scheme (APTS) continues to provide staff with the opportunity to pursue

further studies.

Staff exchanges

A number of staff exchanges took place in 2007 between the financial services industry and

international regulators. The number of staff exchanges is expected to increase in 2008 to include

some shorter study visits as well as secondments.


73

Table 4.4 - Training Statistics 2007

Staff who hold 3rd level qualification 319

Of which, qualifications held are at degree level or higher 263

Staff pursuing 3rd level qualifications 23

Staff pursuing technical certificates 100

Total training hours 6,722

Training Hours per full time equivalent 19.4

Media Relations

A total of 727 media queries were handled. 102 interviews were undertaken. 49 news items and

press releases were published on our website. Other communication initiatives undertaken during

the year included the launches of our Strategic Plan for 2008-2010, the new www.itsyourmoney.ie

consumer website and the rollout of the Consumer Protection Code.

Regulatory policy initiatives and announcements were detailed in four issues of our industry

publication, Regulatory Connection and two issues of the credit union newsletter, RCU News.

Official Languages Act

The primary objective of our Scheme under the Official Languages Act is to ensure better availability

and a higher standard of our public services through Irish. Throughout the course of 2007 we have

made good progress in fulfilling our commitments. Many of our services are now available in Irish

including our consumer Helpline and certain press releases. Irish language training is also being

provided in-house to staff. Details of our Scheme are available in the publications area of

www.financialregulator.ie.

74

Table 4.5 - Media Contact

Category 2006 2007

Media Queries Handled 766 727

Media Interviews 131 102

Press Releases/News items published 52 49

Total 949 878


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Table 4.6 - Meetings with Stakeholders

Meetings involving the Chief Executive, Consumerand Prudential Directors

2006 2007

Financial Service Providers 64 94

Representative Bodies (Consumer and Industry) 76 113

Government and other Regulators 20 39

Consultative Consumer and Industry Panels 28 13

IFSC Clearing House Group 4 3

Total 192 262

Of which conferences 11 11

Building Relationships with Stakeholders

We value our relationships with our stakeholders and are open and accessible to those who wish to

discuss issues with us. During the year, senior executives met with representative bodies, other

regulators, members of the media and financial service providers. The meetings are detailed below.

Stakeholder Protocol

Authorisations

Prospectuses

Consumer Contacts

26 targets forAuthorisations across

12 categories - a very highlevel of those targets were

100% achieved.

16 targets for Prospectusesacross four categories -almost all were 100%

achieved.

Consumer contactsincreased significantly in

September due primarily tothe Northern Rock affair.

% target achieved

% target achieved

Measurable activity % target achieved

100

80

60

40

20

0

100 3500

3000

2500

2000

1500

1000

500

0

80

60

40

20

0

0 500 1000 1500 2000 2500

In July 2007, and following extensive consultation with relevant stakeholders, we introduced ourStakeholder Protocol on a pilot basis. The Protocol contains fifty five performance targets across all areasof the organisation. It includes targets for contacts by consumers, financial service providers and otherstakeholders in addition to targets relating to the authorisation, inspection and consultation processes.The Protocol is available on our website. A summary of performance against the stated targets for thesecond half of 2007 is set out below.

Approval of Persons

Inspections & Consultations

Written Information Queries (WIQs)

Approval of Persons -targets achieved on

average 85%.

Consultations targetachieved 100%. Very hightarget achievement rate for

Inspections. (Note: Themed Inspections not included

in Stakeholder Protocol).

In excess of 6,500 WIQswere processed betweenJuly and December 2007.

% target achieved

Measurable Activity

% target achieved

1500

1200

900

600

300

0

100 300

200

100

0

80

60

40

20

0

0 20 40 60 80 100

Chapter 5Corporate

Governance

5.1 Authority membership

The decision-making power of the Financial Regulator lies generally with the members of the Authority

which comprises the Chairman, Chief Executive, Consumer Director and seven other non-executive

members appointed by the Minister for Finance after consultation with the Minister for Enterprise,

Trade and Employment. As at 31 December 2007 the members of the Authority were as follows:

The Chairman, Chief Executive and Consumer Director were each appointed for a term of 5 years.

They may be reappointed.

The non-executive members of the Authority are appointed by the Minister for Finance and may hold

office for an indefinite period, subject to a maximum of 15 years. Two of the appointed members

must retire on, or before, the fifth anniversary of the establishment of the Financial Regulator, and on,

or before, every subsequent anniversary. The retiring members are eligible for reappointment

subject to the 15-year limitation. The Chairman, Chief Executive and four non-executive Authority

members (Gerard Danaher, John Dunne, Alan Gray and Deirdre Purcell) are also members of the

CBFSAI Board.

There were no changes in the composition of the Authority membership during 2007.

This chapter also contains two statements by the Chairman required to comply with various

legislatives codes and regulations.

80

Name

Brian Patterson

Alan Ashe

Gerard Danaher

John Dunne

Jim Farrell

Alan Gray

Patrick Neary

Mary O'Dea

Deirdre Purcell

Dermot Quigley

Other Attendees:

Con Horan

Martin Moloney

Date Appointed

May 2003

May 2003

May 2003

May 2003

May 2003

Dec 2006

Feb 2006

May 2003

May 2003

May 2003

Position

Chairman

Non Executive Member





Chief Executive

Consumer Director



Prudential Director

Secretary

5.2 Corporate Governance Compliance

Authority Procedures

The Authority meets on a monthly basis with the exception of August. The Chairman decides the

Agenda for Authority meetings after consultation with the Chief Executive and the Secretary.

Members are free to suggest items for inclusion. The quorum for a meeting of the Authority is a

majority of the members. The Chairperson may exercise a casting vote. The Secretary maintains

minutes of Authority meetings.

Each member of the Authority is provided with a handbook to assist them in carrying out their

functions.

Delegation of Powers

The Authority has delegated specific responsibilities to two Authority committees:

i) Audit and Risk Management Committee

The role of the Committee is to review and advise the Authority on internal audit and efficiency

matters, risk management policies and the Statement of Income and Expenditure. The members of

the Committee are Alan Ashe (Chair), Deirdre Purcell and Jim Farrell.

ii) Budget and Remuneration Committee

The key responsibilities of this Committee are to examine and make recommendations to the

Authority on the annual manpower and budgetary requirements of the Authority including levies on

industry; to monitor significant changes in expenditure in the course of the year; to examine and

advise the Authority on the remuneration of Officers of the Authority. The members of the

Committee are Dermot Quigley (Chair), John Dunne and Alan Ashe.

The Authority has also delegated certain operational powers and responsibilities associated with the

day-to-day running of the Authority to the Chief Executive. In addition, in accordance with Section

33 S of the Central Bank Act 1942 (as inserted by the 2003 Act) the Authority has delegated certain

responsibilities and powers to the Consumer Director. Under Section 33 AA of the Central Bank Act

1942, the Registrar of Credit Unions carries out the functions of the Authority in relation to the Credit

Union Act 1997 under arrangements set out in the 1942 Act.


81

Remuneration

Total remuneration paid to the Chairman for services during the year ended 31 December 2007 for

his work as Chairman and as a member of the Authority was ¤52,500. Total remuneration paid to the

Chief Executive for service during the year ended 31 December 2007 was ¤260,857. Superannuation

benefits attaching to the Chief Executive's salary are in accordance with the terms of the Civil Service

Superannuation Scheme.

Total fees paid to other non-executive members of the Authority in the year ended 31 December

2007 amounted to ¤122,500. Executive members of the Authority do not receive any additional

remuneration in respect of their membership of the Authority.

Ethics in Public Office Act 1995 and Standards in Public Office Act 2001

In accordance with the Ethics in Public Office Act 1995 (as amended) and the Standards in Public

Office Act 2001 (as amended), Members of the Authority furnish their statements of interest to the

Secretary of the Authority and to the Standards in Public Office Commission.

In addition, staff of the Financial Regulator holding designated positions comply with both Acts.

Authority Code of Conduct

In January 2004, the Authority adopted a Code of Conduct for Members which records the standards

of conduct and integrity expected of each member in the performance of his or her functions as a

member of the Authority.

The Authority has also adopted its own internal Code of Conduct for Disclosure of Interests. This

Code places certain obligations on the members of the Authority to advise the Secretary to the

Authority of business interests. The Code also sets out the procedures to be followed should a

material conflict of interest arise.

Staff Code of Conduct

Staff employed by the CBFSAI are assigned to the Financial Regulator in accordance with Section 6E

of the Central Bank Act 1942. The CBFSAI has a written code of conduct, which applies to staff

working in the Financial Regulator.

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Procurement Procedures

The Financial Regulator has adopted the approach to purchasing applied generally in the CBFSAI and

which the Board of the CBFSAI has approved. Procurement procedures in relation to assets did not

arise.

5.3 Statement on the System of Internal Financial Controls

On behalf of the Authority, I acknowledge the Authority's responsibility for ensuring that the Financial

Regulator maintains effective systems of internal financial control and reviews their effectiveness on

an ongoing basis. Board level committee structures have been designed to ensure that the Board of

the CBFSAI and the Authority work closely together to ensure that their respective obligations in

relation to the control of expenditure and the management of operational risk are managed within a

consistent and complete framework.

The systems of control in place provide reasonable but not absolute assurance of the maintenance of

proper financial records and the reliability of the financial information provided and published. In

essence, these systems are designed to manage rather than eliminate inherent financial risks.

The systems of control include:

• A clearly defined organisation structure with specified authorisation limits and reporting

requirements to senior management and the Authority;

• Appropriate terms of reference for the Authority and management committees with

responsibility for core policy areas;

• A comprehensive financial and budgeting management information system which

incorporates:

• approval of annual plan and detailed expenditure budgets by the Authority;

• regular reporting to the Authority on financial and budgetary performance, and

• detailed policies and procedures relating to financial controls of the CBFSAI.


83

An operational risk framework has been developed for the whole organisation. Each business area

is responsible for the management of risk and the implementation of appropriate controls and

procedures aimed at minimising and monitoring such risks. An Operational Risk Committee,

comprising senior management of the CBFSAI, including the Financial Regulator, has responsibility

for the oversight of the management of operational risk. A review of operational risk was undertaken

in 2007 and considered on behalf of the Authority by the Audit and Risk Management Committee.

This review will take place on a regular basis. To assist departments in the ongoing assessment of

risk, an operational risk database has been developed.

Our Audit and Risk Management Sub-Committee advises the Authority on the control and reporting

arising from the exercise of the statutory functions of the Authority. The Chief Executive of the

Financial Regulator and the Chairman of the Sub-Committee receive regular reports from the Head

of Internal Audit. The Chairman of the Audit and Risk Management Sub-Committee reports to the

Authority on a regular basis on significant matters arising from the work of the Committee.

Brian Patterson

Chairman

84

Appendix 112

12 Appendices normally included in our Annual Reports (which are not included in this, the 2007 Annual Report) will be published on ourwebsite only.

86

Appendix 1 - Progress Report on 2007 Strategy

1.1: Seek to ensure that financial service providers act fairly.

Actions Target Date Updated Position

Rollout the Consumer Protection Code toIndustry.

Jun 2007 Full implementation from July 2007. 4 Industry presentations made during2007.

Monitor and enforce compliance with theConsumer Protection Code.

Ongoing 43 inspections, 5 themed inspections, 5 top ten letters issued, 51 reviewmeetings undertaken.

Rollout the Minimum CompetencyRequirements.

Jan 2007 Effective from January 2007 - 438queries addressed.

Continue to process notifications received inrespect of bank charges under the ConsumerCredit Act.

Ongoing 46 notifications processed in 2007.

Undertake review of the SSIA maturityprocess as part of our 'themed inspection'programme.

Sep 2007 Completed July 2007.No major issues were raised.

1.2: Take initiatives to improve the transparency of the market.


Identify the banking and insurance productswhere greater transparency is needed:

-Simplification of Life Insurance Regulations.

Detailedprogramme to beagreed withstakeholders byNov 2007

Market research conducted inNovember 2007. Pre-consultationongoing.

Undertake a review of the intermediariesmarket.

Agree scope bySep 2007

Scope of project agreed. Externalconsultation undertaken. WorkingGroup established.

Consult credit unions on an appropriateconsumer protection framework for itsmembers, in respect of their core business.

Consultationinitiated 2007

Initial round of consultation completed -28 meetings held.

Strategies

HLG1We will set and monitor standards for financial service providers in dealingwith their customers.


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1.3: Monitor the provision of financial services and report on competition.


Monitor effectiveness of switching code forretail customers and SMEs.

Ongoing Level of switching at end 2007:Personal - over 45,000Business - 1,300.

Monitor the provision of financial services toconsumers.

Ongoing Report included in Chapter 1 -Consumer Protection and Information.

Report on the extent to which competitionexists among financial service providers in sofar as it affects consumers.

To be reported inAnnual Report

Report included in Chapter 1 -Consumer Protection and Information.

Continue to work closely with theCompetition Authority in relation tocompetition in financial services.

Ongoing Two official liaison meetings held in2007. A number of issues alsodiscussed between both Authorities,during the year.

Examine and address recommendationsmade to us by the Competition Authority andother agencies and reports.

Ongoing Reported regularly to Executive Board,Consumer and Prudential Committee.

Continue to seek to foster access to financialservices by working with relevant agenciesand Government Departments.

Ongoingthroughout 2007

Worked to foster access throughproposed new Anti-Money LaunderingGuidance Notes and work of the NationalPayments Implementation Group.

Strategies

HLG2We will set and monitor standards for the running of sound financial serviceproviders and fair markets.

2.1: Continue to refine the authorisation process for financial service providers.


Refine procedures for the authorisation ofbanks.

Jan 2007 New application form and guidancenotes developed in March 2007.

Review authorisation procedures for non-retail investment companies.

Jan 2007 Legislation reviewed. Revisedapplication form and guidance note inplace - June 2007.

Complete authorisation process for existingfund management companies.

Feb 2007 All authorised by February 2007.

88

2.2: Implement our programme of prudential supervision.


Monitor and enforce compliance withprudential standards.

- Insurance

- Investment Service Providers

- Banking.

Ongoing

11 Inspections138 Review meetings

33 Inspections,164 Review meetings

15 Inspections86 Review meetings.

Apply the new Fitness and Probity framework. From 1 Jan 2007 New Individual Questionnaire (IQ)developed in line with revised Fitnessand Probity framework.

Refine our risk-based approach tosupervision.

Ongoing Revised version of Risk-Rating Systemdeveloped in 2007.

Co-operate with international regulators asrequired.


Participated in all relevant internationalfora - see table 4.2.

Complete consultation on compliancestatement for regulated financial serviceproviders and auditor's report thereon.

Proposaldeveloped - Nov2007

On hold pending review of financialservices legislation.

Participate in the development of revisedGuidance Notes on Prevention of MoneyLaundering and Terrorist Financing.


Attended meetings of industry workinggroup which is drafting core andsectoral guidance notes.

Plans in place for consultation during2008.

Assist the Central Bank to discharge itsresponsibilities relating to the overall stabilityof the financial system.

Ongoing Regular meetings of Financial StabilityCommittee held. Crisis simulatedexercise conducted in December 2007.


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Banking

Manage changeover to new CapitalRequirements regime in collaboration withindustry.


Ongoing, including:-Assessment of various aspects of creditinstitutions internal capital adequacyassessment process;-Model validation reviews;- Introduction of a new supervisoryreporting framework with submissionvia a web-based electronic reportingplatform.

Review and update Administrative Notices asrequired, arising from market and legislativechanges:- Complex Groups - (Supervision of

Banking Groups)

- Licensing and SupervisionRequirements and Standards for CreditInstitutions

- Asset Covered Securities Act 2001

- Funding and Sectoral Exposure Papers

- Financial Conglomerates.

2007

- Practical implementation is ongoing.

- Review in progress.

-Phase 1 completed. Phase 2 inprogress.

Work in progress.

Work in progress.

Insurance

Improve scope and intensity of on-sitesupervision.

Dec 2007 Implemented.

Review Disclosure requirements. Dec 2008 Provisional system developed andintroduced. Formal reporting systemprepared for consultation.

Develop and implement a run-off scheme forreinsurers not falling within the newregulatory regime.

Dec 2007 Reprioritised until June 2008.

Develop and implement the regulatoryregime for reinsurers in line with the 2006Statutory Instrument and appropriateguidance.

Implemented by2009

Implemented. Guidance papers issuedin 2007 and available on website.Reporting framework now in place.

Sector Specific Actions:

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Investment Service Providers

Implement in collaboration with industry theMarkets in Financial Instruments Directive.

Nov 2007 Implemented. Revised MiFIDauthorisations issued to 140 firmsduring October 2007.

Implement new Capital Requirements regimefor investment and stock broking firms.

Nov 2007 Implemented.

Review of UCITS and non-UCITS MinimumActivity requirements.

Mar 2007 Reprioritised due to developments atEU level re-management firm passport.

Supervise the Investor Compensation Ongoing Ongoing.

Funds

Complete implementation of UCITSManagement Fund and ProspectusDirectives.

Feb 2007 Implemented.

Review implementation of UCITS FinancialDerivatives Instruments.

Mar 2007 Complete. Guidance Notes issued infinal form in July 2007.

Update UCITS and non-UCITS notices andguidelines.

Ongoing Consultation held in August 2007. Finaldocuments issued to Industry on UCITSManagement Company Directive inNovember 2007. Guidance note andrelated notice amendment on OTCDerivative Valuation, issued July 2007.

Assess proposal from industry for new fundcategory suitable for institutional investors.

- Amend regime for authorisation ofQualifying Investor Funds (“QIFs”)

- Implement SuperQIF regime

Feb 2007

New QIF regime implemented on 14February 2007.

Implemented 14 February 2007.

Authorised Exchanges

Monitor the financial soundness of authorised exchanges.

Annual Review Completed.


91

2.3: Promote an efficient and fair securities market to protect investors.


Examine suspicious transactions relating toMarket Abuse.

Ongoing Reports examined or transmitted torelevant competent authority.

Issue the rules for the continuing reportingobligations of issuers.

Jan 2007 Rules issued in June 2007 aftertransposition of the TransparencyDirective in Ireland.

Set up transitional delegated arrangementswith the Irish Stock Exchange for monitoringcompliance with continuing reportingobligations.

Jan 2007 Arrangements operational from June2007 after transposition of TransparencyDirective.

Finalise administrative sanctions proceduresfor market abuse, prospectus and continuingreporting obligations.

Jun 2007 Completed - operational from August2007.

Establish regime for the reporting oftransactions in securities.

Nov 2007 Regime implemented November 2007.

Develop mechanism for funding our newmarket supervision activities.

Mechanismdeveloped - 2007

Work ongoing. Proposals to be broughtforward in 2008.

2.4: Promote a financially stable credit union sector that operates in a transparent and fair manner and safeguards its members' funds.


Continue to enhance our supervisoryoversight by more focused off-site analysisand on-site inspections.

Ongoing 52 inspections39 review meetings425 annual returnsreceived and analysed.

1,483 prudential returns received andanalysed.

Issue guidance notes to ensure compliance bycredit unions with their legal and regulatoryobligations.

During 2007 Guidance note on Credit and CreditControl issued: October 2007.

Auditing Practices Board issued draftpractice note: November 2007.

Participate in discussions on appropriatesavings protection for credit unions.

Ongoing Ongoing consultative meetings withILCU and Department of Finance.

Facilitate, where appropriate, the expansionof the range of services provided by creditunions.

Ongoing Provided input on legislation providingexemptions for provision of PersonalRetirement Savings Accounts andElectronic Funds Transfer.

17 additional services applicationsapproved.

Participate in the modernisation of theorganisational structures and technology ofcredit unions.

Jun 2007 Longer term lending approval processdeveloped and implemented. Ongoingdiscussions on modernisation.

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2.5: Support the development of domestic legislation and implement EUregulations and international standards.


Assist Government with the development ofnew or amended legislation:

• Consolidation and simplification offinancial services legislation.

• Review of Credit Union legislation.

Ongoing Building Societies Act 1989 - Section 19completed.Amendments to Asset CoveredSecurities Act 2001 - phase 1completed.

Internal working group established andworking with Advisory Forumestablished in late 2007.

Participated in the government's reviewgroup on Longer Term Lending.

Assisted with amendments to creditunion legislation contained in relation toAdditional Services exemptions.

Held initial exploratory discussions withcredit union representative bodies onlegislative reform agenda. Attendedmeetings with the Department ofFinance to discuss approach to CreditUnion legislation reform.

Assist Government with the transposition ofEU Directives:

• Markets in Financial Instruments.

• Prevention of Money Laundering andTerrorist Financing.

• Transparency.

Nov 2007

Dec 2007

Jun 2007

New MiFID bill transposed.Participation in steering committee andin-house working groups.

Scheme of Bill published on 12 February2008.

Legislation expected to be enactedduring 2008.

Assistance provided on transposition ofTransparency Directive.


93


Influence the development of EU Directivesand policies:

• Credit Agreements for Consumers.

• Insurance Guarantee Scheme.

• Insurance Mediation (review of).

• Large Exposures.

• Payment Services.

• Solvency II.

• Transparency.

• Markets in Financial Instruments.

• Mortgage credit.

• Own Funds.

Ongoing

Nov 2007

Dec 2007

Dec 2007

Submissions made on a number of EUconsultations; stakeholder visits toBrussels in December 2007.

Insurance Dept participation in workinggroup.

European Commission Report issuedJan 2008.

Participation at both CEBS and CEBSWorking Group level in relation to areview of the large exposures regime, inresponse to the European Commission'scall for advice on large exposures.Review published on the CEBS websiteon 6 November 2007.

2 meetings of EU Commission PaymentSystems Government Expert Groupattended.

Participated in Level 2 working groups.

Implemented in June 2007.

MiFID implemented.11 working group meetings and 5 CESR meetingsattended.

Government Expert Group meetingattended. Currently providingassistance to the Commission in respectof some studies proposed in theMortgage Credit White Paper.

Consultative paper issued on whetherfurther convergence can be achieved inthe regulatory treatment of hybridcapital instruments.

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Strategies

HLG3We will provide relevant information to consumers.

3.1: Provide consumers with clear and appropriate information about the

costs, risks and benefits of financial services.


Provide information on financial products toconsumers through a number of channelsincluding: lo-call Help line, website,Information Centre, external visits andanswering written queries.

Ongoing 41,587 consumer contacts includesHelp-line calls, direct calls, letters,emails and attendees at informationseminars. 517,161 website visits; 30regional and special events.

Promote the availability of our informationresources by targeted advertising, PR andpromotional activity.

Ongoing Advertising, marketing and publicitycampaigns for: website, InformationCentre/Helpline and online costcomparisons.

Continue to conduct and develop costsurveys and comparative tables.

Phase 1: Jun - SepPhase 2: Sep - Dec

Cost comparisons migrated to an onlineformat.

Review and update our existing informationresources and channels as required andproduce new information where appropriate.

Ongoing Reviewed and revised a number ofpublications and produced newinformation as required.

Comply with the requirements of the OfficialLanguages Act and our commitments underthe Scheme as agreed with the Departmentof Community, Rural and Gaeltacht Affairs.

Ongoing All consumer information posters bi-lingual. Developedwww.itsyourmoney.ie websiteframework with bi-lingual capability.Translation of Irish guides ongoing.

Issue information and/or run campaigns ontopical matters of interest to consumers(including completion of SSIA campaign in2007).

Ongoing Campaigns for 2007 - SSIAs, EquityRelease, credit cards and Chip and PIN.Other topics addressed in editorials andthrough interactive features onwww.itsyourmoney.ie.

Conduct a campaign to inform consumers oftheir rights in relation to financial productsand services (including elements of theConsumer Protection Codes).

During 2007 Produced/launched ConsumerProtection Code - Your little red book(for consumers). Developed Codespublicity campaign (ongoing into 2008).Produced related online information.


95

3.2: Undertake Consumer Research to assess the financial

capability of consumers.


Conduct regular research to track awarenessof the Financial Regulator, to test advertisingrecall and to measure effectiveness ofcampaigns.

Surveys in Apr, Sepand Dec 2007

Research completed in July 2007 and inDecember 2007. Campaign evaluationscompleted.

Evaluate the quality of our informationresources and channels.

By end 2008 Pilot mystery shop completed ofHelpline February/March. Websiteevaluated in October 2007. Advertisingtested in regular tracking research.

Undertake in-depth, face-to-face research tomeasure the financial capability of consumersto assist us in broadening our knowledge ofconsumer behaviour, attitudes and needs.

Research to beconducted in Dec2007

Fieldwork commenced.

3.3: Develop financial literacy / competency education.


Work in partnership with other agencies toincrease the level of financialliteracy/competency among:

• Students by developing programmes forthe primary, post-primary and third levelsectors;

• General public through adult/continuingand community education initiatives, and

• Vulnerable groups including non-nationals.

Dec 2007

Educational Resources for TransitionYear and Leaving Cert Appliedprogressed.

Progressed work with Steering Groupmembers and related working groups.

Leaving Cert Applied pilot started April2007, evaluated July 2007.

Establish a National Steering Group forFinancial Education to act as an overarchingbody comprising key stakeholders.

Established - Dec2006

4 meetings held in 2007. 4 workinggroups established and task/researchgoals set.

Develop links with education stakeholders/partners.

Ongoing Ongoing. New contacts established.

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3.4: Maintain good working relationships with Ombudsman schemes and

other agencies.


Continue to assist consumers who wish tomake a complaint and forward any complaintsreceived to the Financial ServicesOmbudsman.

Ongoing Consumers assisted with information,guidance and publications. 137complaints forwarded to the FinancialServices Ombudsman.

Develop our working relationships with theFinancial Services and Pensions Ombudsmen.

Ongoing Regular meetings held with the FinancialServices Ombudsman. Contacts builtwith both Ombudsmen and exchangesof information took place, as necessary.

Review the Memorandum of Understandingwe have with the Financial ServicesOmbudsman and the Pensions Ombudsman.

2008 Completed in 2007. All parties agreedthat it was operating as intended andwas satisfactory.

4.1: Foster competitiveness and innovation through the adoption ofinternational best practice and the Government’s better regulationprinciples.


Undertake a programme of best practicereviews.

Dec 2007 Best Practice Reviews completed: FundService Providers. Visits to three EUmember states to research Anti-MoneyLaundering Best Practice. Visitsundertaken to other securitiesregulators to inform ourselves as to bestpractice in transaction reporting.

Implement our commitments in theGovernment’s strategy ‘Building on Success’for future development of the internationalfinancial services industry in Ireland.

By end 2008 Commitments with finite dates-implemented.

Other actions committed to on anongoing basis.

Strategies

HLG4Our regulatory approach will facilitate innovation and competitiveness.


97

Implement the applicable recommendationsof the Financial Action Task Force’s MutualEvaluation of the Prevention of MoneyLaundering and Terrorist Financing.

By end 2008 Provided material for follow up report tothe Financial Action Task Force.

Attended meetings of the MoneyLaundering Steering Committee.

Implement the applicable recommendationsof the International Monetary Fund’sFinancial System Stability Assessment.

By 2009 Dedicated Insurance inspection unit inplace. Full assessment of theInternational Association of InsuranceSupervisors Core Principles followingimplementation of the ReinsuranceDirective.

Conduct Regulatory Impact Analyses (RIAs)on significant regulatory initiatives (exceptwhere this has been done by the EU or aGovernment Department).

Ongoing No RIA’s conducted in 2007.

Undertake public consultations on significantnew regulatory requirements to beintroduced.

Ongoing Programme of public consultationspublished in Regulatory Connection on1 March 2007. 7 consultation papersissued in 2007.

Invite the Consultative Panels to identify andprioritise regulatory requirements that theybelieve are unnecessary (and open toamendment by the Financial Regulator).

By 2009 Work commenced. Consultantsappointed to assist Panels’ work.

4.2: Develop Service Protocols for interaction with stakeholders.Actions Target Date Updated Position

Develop a Stakeholder Protocol for ourprincipal interactions with industry andconsumers.

1st Quarter 2007 Implemented July 2007.

Develop Stakeholder Protocols to includecommitments on publication of prospectusdocuments.

Apr 2007 Implemented July 2007.

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5.1: Improve our organisation to be more efficient and adaptable.


Undertake critical review of our organisationstructure.

Ongoing External Consultants appointed toundertake a review of key businessprocesses, and a benchmarking of theFinancial Regulator against comparatorregulators. Outcome of this work willinfluence a review of the organisationstructure.

Continuous review of our allocation ofresources.

Ongoing Reviewed as part of annual budgetaryprocess.

Undertake business process reviews. By 2008 Incorporated within the businessprocess review project above.

Facilitate a programme of internal audits. During 2007 Audit programmes agreed. Assistancegiven as necessary to internal auditsconducted.

Review finance and funding processes. 2007 Feasibility study completed.

Establish in conjunction with the CentralBank a partnership structure to promoteinternal dialogue and consultation with staffon key issues in the process of change andimprovement.

Jun 2007 In progress with CBFSAI. Progress iscontinuing towards the development ofa Partnership Model aimed at increasingstaff participation in key organisationissues of change and improvement.

Plan for future accommodation needs. To commence in2007

Additional premises identified.

Enhance our capability for projectmanagement.

Ongoing Two project management coursesorganised in 2007.

Consider the recommendations of C&AGValue for Money report, when published.

Jan 2007 Action plan prepared to implementfindings of C&AG Report.To be implemented by end 2008.

Strategies

HLG5We will maximise our operational efficiency and cost effectiveness.


99

5.2: Have a highly motivated and well-trained workforce and continuallydevelop the skills necessary to oversee the internationally competingfinancial services industry.


Attract, develop and retain skilled andenthusiastic staff.

Ongoing Graduate Recruitment: Scheduled forimplementation in 2009.

External recruitment underway.

Internal competitions underway.

Staff training organised as necessary.

Development of technical trainingcurriculum underway.

Professional training underway: 102current students, of which 49 startedand 46 completed studies in 2007.

Review level of staff resources. Annually Review undertaken as part of budgetaryprocess. Approved complementincreased to 380 for 2008.

Enhance our Performance Managementsystem to align with our competencyframework and strategic goals.

2007 In progress.

Organise staff exchanges with other financialregulators.

Ongoing 2 staff members seconded to EuropeanCommission; 1 staff member secondedto IMF;2 staff members seconded to otherregulators.

Consider feasibility of industry proposal forsecondments of Financial Regulator staff toindustry.

Ongoing 2 staff members seconded to industry. 1person seconded from industry toFinancial Regulator.

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5.3: Use technology based solutions to improve operations and processes.


Examine how we can maximise the use ofinformation technology.

Ongoing Initiatives to be identified as part ofwork outlined at Strategy 5.1.

Upgrade our websiteswww.financialregulator.ie andwww.itsyourmoney.ie as key communicationstools.

Websitesredesigned Dec2007

Registers – Mar2007

Personal finance websitewww.itsyourmoney.ie redeveloped andlaunched September 2007.Project commenced to re-developcorporate website.

Registers now published on FinancialRegulator website.

Implement Electronic Reporting. Apr 2007

Nov 2007

New Capital Requirements ReportingFramework submitted via on-line system– Phase 1 – completed. Phase 2scheduled for completion Q2 2008.

MiFID:– Financial Instrument TransactionReports, Exchanges with Regulators in CESR –completed.

Other projects to commence to extendelectronic reporting to other sectors.

Implement funding changes for 2007 levy. May 2007 Implemented.

5.4: Meet high standards of public accountability.


Prepare Strategic Plan, Annual Report andannual estimate of income and expenditure.


Strategic Plan 2008 - 10 published -November 2007.Annual Report 2006 - submitted toMinister for Finance and published July2007. Budget submitted to Minister forFinance in October 2007.

Put in place a comprehensive set ofindicators of progress (including financialindicators).

Not specified Project to be undertaken in 2008.

Report to Oireachtas Committees. As required Appearance before Joint OireachtasCommittee on European Scrutiny onSolvency II.

Examine and address recommendationsmade to us by Joint Oireachtas Committees.

As required Reported quarterly to Executive Board.

Provide the Office of the Comptroller andAuditor General with the informationrequired to perform its functions.

As required All requests dealt with in a timelymanner.


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5.5: Enhance relations with our key stakeholders.


Maintain a good working relationship with theConsultative Consumer and Industry Panels.

Ongoing Meetings attended as necessary.

Maintain a good working relationship withthe Credit Union Advisory Committee.

Ongoing Meetings and discussions held with theCredit Union Advisory Committee on aregular basis.

Maintain a good working relationship withthe representative bodies of the financialservices industry, credit unions, consumerand community groups.

Ongoing Regular meetings attended withrelevant Government groups.Regular meetings held with financialservice representative groups.

85 meetings held with credit unionrepresentative bodies and other creditunion stakeholders.

17 credit union seminars and meetingsattended and/or addressed.

Prepare and implement a corporatecommunications strategy, with particularfocus on broader stakeholdercommunications.

Ongoing 2 issues of RCU News published.4 issues of Regulatory Connectionissued.

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PO BOX NO 9138COLLEGE GREEN,DUBLIN 2, IRELAND

T +353 1 410 4000Consumer help-linelo call 1890 77 77 77Register of Financial Service Providers help-line lo call 1890 20 04 69F +353 1 410 4900www.financialregulator.ie

www.itsyourmoney.ie

Information Centre: 6-8 College Green, Dublin 2

© Irish Financial Services Regulatory Authority.

Annual R

eport of the Financial Regulator 2007 | Five Year A

nniversary


Five Year Anniversary

Financial Regulator

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