The sub-text of the investigation was to try to find out if Fingleton, other executives or board members had broken the law, or any society rules, or had been in breach of their fiduciary duty as directors.
The report looked at several areas. It examined Fingleton’s authority and power within the society and whether it was legitimately granted or not. It looked at the banking relationships with clients. It also looked at how the society conducted its affairs on such issues as the traceability of funds, payment of invoices, ensuring adequate security or charges on loans. It also probed some aspects of Fingleton’s personal finances, including an investment he had made in a hotel project in Montenegro. Fingleton’s partner in the venture, the Dublin businessman Louis Maguire, had gone to the Financial Regulator the previous year and made several allegations about Fingleton’s role in that venture, raising questions about the origin of the funds Fingleton had provided for it.
What the investigators uncovered was truly shocking.
The accountants found that Michael Fingleton had been granted special powers by the board of the society as far back as 1981. These powers were reinforced by the board in December 1994 and again in August 1997. The measures empowered him to set, vary or alter interest rates and fees, and to make arrangements with individual members. This meant he could charge different people different rates of interest. He could structure a commercial or residential loan with one customer on certain conditions, such as interest-only for a decade, and on completely different terms with others. He could change the rates or the conditions attached to the loan at will. So, having lent out €1 million at a certain rate and repayable at a certain time in the future, he could then alter those conditions at any stage as he saw fit. He did not need to consult the board, or anyone else, in order to do this.
The board must have felt at the time that Fingleton could do no wrong. In reality by granting these powers they were giving the chief executive personal autonomy to do special deals with friends, change any deal he wanted, and run the society as he saw fit, without necessarily breaking the society’s rules.
The ordinary checks and balances of having a chairman, a board, an audit committee, a credit committee, could become de facto irrelevant. It was the most extraordinary handing over of power in Irish financial services. It undermined and even eliminated any accountability by Fingleton for his actions within the society.
Yet nobody seemed to know about it. Newspapers didn’t report it at the time, and while people inside the organisation and in the wider business community knew that Fingleton ran things his way, they didn’t necessarily realise that he had been formally given the powers to do practically whatever he wanted.
Con Power, a non-executive director of Irish Nationwide at the time, has said that he knew nothing about these powers. He sat at the boardroom table for six years and was never told that Fingleton had been granted these powers. He said it was never raised or discussed by the board or in any meeting with the Central Bank or the Financial Regulator.
Power says that the rules of the society empowered the board to delegate certain responsibilities to the chief executive, but in his view it would never have been intended to hand over that kind of discretionary power to one person.
The existence of the powers should have been a red flag to the Financial Regulator. The first big question is whether the Central Bank and later the Financial Regulator even knew about them. The society was originally regulated by the Registrar of Friendly Societies, but the duty fell on the Central Bank in 1989 and then the Financial Regulator in 2004.
The second big question is, If the regulatory authorities didn’t know, then why not? Surely they should have access to this kind of information, either automatically or by requesting it. Could it have been the case that the Central Bank was informed of all this through regulatory submissions but they were simply not read, ignored, or viewed as quite acceptable?
The office of the Financial Regulator is not telling us. They are not answering these kinds of questions. They may form part of the subject of an investigation by an Oireachtas committee in the future; but in the meantime the Financial Regulator is leading the investigation into what went wrong at Irish Nationwide, in a unique piece of Irish irony.
Whether the regulator knew or not, too much power had been given to one man. After all, he didn’t own the society, and a lack of accountability on that scale could cause a registered lender of money to end up in disaster. And so it did. This should also have been obvious to the board.
Ernst and Young looked right down inside the corporate structure of Irish Nationwide under Michael Fingleton. Through interviews and an analysis of thousands of documents and e-mail messages the accountants discovered an organisation that was a corporate governance disaster area.
It emerged that Fingleton had twelve different people reporting directly to him. This was a most unusual way of doing things. Typically, even in enormous multi-billion companies, the business is divided into units or divisions; the further up the chain of command, the fewer the numbers. Businesses are usually classic pyramid structures. It would not be unusual to have as few as three or four people reporting directly to the chief executive, even in a much bigger organisation.
The Irish Nationwide structure revealed two things: firstly, how unorthodox the society was and, secondly, how Fingleton was all-powerful. One of the net effects of this structure was that no proper senior management team, familiar with different parts of the business, emerged. Fingleton was the only one who knew everything. Others knew a lot about their own patch, but not much else.
This was another warning sign, that a business with a loan book of nearly €12 billion could rely so much on one person. Clearly, that was how Fingleton liked it. It was up to the board to exert pressure to change it.
The accountants also built up a picture of who Fingleton was friendly with and how those people were treated commercially. One such was Louis Scully. A relatively unknown estate agent turned property developer, Scully was a personal friend of Fingleton. After Fingleton left, it emerged that loans connected to Scully, primarily for development land, amounted to approximately €130 million. The new management at Irish Nationwide had queried the status of these loans and whether they were recourse to Scully or not. A senior executive who had been there in Fingleton’s time said the loans were on a profit-share joint-venture basis and therefore non-recourse. The new management had queried this. Fingleton then wrote to the society in March 2010 saying the loans were non-recourse. In other words, Scully was not personally liable for the debts in the event that he couldn’t pay up. Six plots of land bought in Co. Meath had cost more than €50 million; they are now worth about €5 million.
The report found that Fingleton’s letter absolved his friend Scully of all personal liability on a collection of loans, with various partners, totalling €130 million. They found evidence of Irish Nationwide paying deposits for property purchases that Scully was doing before approval of the loans by the credit committee. For example, an offer letter relating to the purchase of 36 acres in Clonee, Co. Meath, was dated 29 November 2005, a day before the credit application was approved. Two draw-downs totalling €6.9 million took place before board approval, and mortgage documents were completed on 20 December 2005.
Initial loans for the purchase of lands at Ratoath (€3.2 million) and Windtown (€0.5 million) were made to ‘Stan Purcell in trust.’ Purcell was chief financial officer, and he told the accountants that this was done on the instruction of Michael Fingleton. Purcell also signed a release of Irish Nationwide’s charge over 17 of the 54 acres in Ratoath without the loan being repaid or any clear document on file explaining why. The balance of the loan was €15.3 million in June 2009. Purcell said this was done on the instruction of Michael Fingleton.
Irish Nationwide had a joint venture with the house-builder and developer Gerry Gannon. Its 50 per cent stake in the venture was held through a subsidiary it set up, called Vernia Ltd. The aim was to assemble a num
ber of sites at Drinan in north Co. Dublin. It would then develop services on the land and acquire planning permission. The sites have since been sold. Vernia’s registered address on the company returns for 1998 to 2000 is the home address of Stan Purcell, Irish Nationwide’s chief financial officer at the time.
There were a number of payments to various individuals in relation to this venture, including Gerry Gannon, Louis Scully and the estate agent Arthur French, all three of whom were borrowers from the society. Ernst and Young said there was limited evidence to support what services had been provided in return for the payments by Scully, who received €609,000, described as for ‘legal fees’, and French, who received €529,000, described as for ‘auctioneer fees’.
Purcell stated that Scully and French were paid these fees for introducing the property developers Séamus Ross of Menolly Homes and David Daly to the project. The society also invoiced for fees from the project relating to services for the same land sale. The accountants concluded that it was not clear what these services were.
Gannon Homes was responsible for progressing the project, in servicing works and obtaining rezoning and planning permission. The transactions appear to Ernst and Young’s team to have been with Gerry Gannon personally and various companies controlled by him. Purcell told Ernst and Young that Gannon personally and Gannon Homes Ltd took fees for services provided with regard to servicing the sites. ‘These fees do not appear to have a contractual basis,’ Ernst and Young said, ‘and the former CFO [Purcell] stated that the former CEO [Fingleton] negotiated personally with Gerry Gannon.’
The accountants also found evidence of a €2 million increase, to €20 million, marked on the sales contract on the day the parcel of land was purchased from Gannon in 2000. Purcell signed the contract on behalf of Vernia Ltd. ‘There is no indication as to what the increase related,’ the report concluded. ‘When asked the CFO indicated that he had no knowledge about the increase in the price.’
Separately they found evidence of an increase in price of €1 million to Gerry Gannon personally for the sale of land to Vernia Ltd. The letter, dated November 2002 and signed by Purcell, states that the increase related to a right of way. ‘No documents can be provided to support this,’ they said.
All this is highly unusual for a regulated financial entity engaged in multi-million deals. There may be explanations for all these payments that would reflect well on those individuals who were doing business with Vernia at that time; but the complete lack of supporting documents and the lack of clarity and accountability regarding the purpose of the payment of the society’s funds is an appalling indictment of how Irish Nationwide and Michael Fingleton did business.
In a way it has little to do with individuals like Gerry Gannon or Arthur French. Surely, if things were being run properly, Michael Fingleton would have absented himself from all financial decisions or loans involving Louis Scully, because of the obvious conflict of interest arising from the fact that they were personal friends. Surely the fact that Michael Fingleton personally invested in a business venture with Gerry Gannon on the purchase of lands elsewhere, in Clongriffin, Co. Dublin, in the late 1990s, should have precluded him from making any lending or commercial decisions involving Gerry Gannon. Here was another direct conflict of interest reflecting badly on Fingleton and Irish Nationwide. It was not a conflict of interest for Scully or Gannon: they were just businessmen doing business deals. But the situation regarding a regulated financial institution is totally different.
But the Ernst and Young report went on to make other extraordinary discoveries about how Irish Nationwide was run. Take the simple conclusion it came to that when the new management went into Fingleton’s office, following his exit in 2009, they found that after thirty-seven years with the society, and having had no access to a computer, Fingleton left no paperwork in his office at the time of his resignation (with the exception of a number of files relating to a personnel matter).
Access to information in Irish Nationwide was a very sensitive issue. The British operation, which was increasing lending and risk at an alarming rate, was perhaps the most secretive place of all. Former executives say they were never told anything about what was going on in Belfast or London, where Gary McCollum and Michael Fingleton junior alone ran a €5+ billion loan book.
Fingleton junior may have been a chip off the old block in many ways, but he did use a computer. Ernst and Young found that he used his own personal computer for business purposes and refused to provide access to the IT staff. The report also found that he had made what it described as an ‘inappropriate approach’ to the Ernst and Young staff, seeking information in relation to investigations into the conduct of the former head of British commercial lending, his former boss, Gary McCollum.
This was the real reason why McCollum had been suspended by the new chief executive, Gerry McGinn. The Ernst and Young report had triggered a series of follow-up investigations. However, McCollum never came back to the job, so the outcome of any internal inquiries is not known.
Just before he resigned as chief executive Michael Fingleton wrote a letter, dated 3 April 2009. It sought to indemnify the then head of branches, Meryl Foster, against all possible actions or claims by any person connected with Irish Nationwide in relation to the various jobs she held within the society. Foster had been Fingleton’s personal assistant but in later years had been promoted to cover various duties within the society, including the very important position of head of branches. The letter also stated that ‘all costs incurred therein will be the sole responsibility of the society.’ So, after Fingleton’s departure, if the society or anyone connected with it decided to sue her, the society would have to bear the cost and any pay-out that might ensue.
Ernst and Young also found that Fingleton had acted in relation to an Irish Nationwide account in the Isle of Man while not formally mandated to do so. The accountants revealed what they called ‘unusual activity’ concerning this account and sought further details about it from the board of the society in the Isle of Man.
They also found that there were ten occasions when Gary McCollum, then head of lending for Britain and Europe, asked for a board resolution to be signed post facto.
Fingleton also ran a special account within the society called the No. 3 Account. This account, which consisted of Irish Nationwide money, was used when there was a need for immediate disbursement of funds. It was jointly controlled by Fingleton and Purcell between 2002 and 2008. It could make payments without limit and was used for such things as a loan to a politically sensitive figure or for the settlement of disputes. Fast-tracked mortgage loans, of the kind advanced to the former Minister for Finance, Charlie McCreevy, came out of this type of account. McCreevy borrowed €1.6 million from Irish Nationwide to buy a house that was valued at the time at €1.5 million.
When it came to lending practices, the Ernst and Young report goes through a litany of failures. The report shows that Fingleton was able to use the special powers granted to him by the board to circumvent the credit committee. ‘There is evidence that the credit committee could be circumvented by obtaining the approval of the CEO, due to the delegation of extraordinary powers by the board,’ it reported. ‘Allowing such discretion to one individual is highly unusual and contrary to normal practice.’ Among its discoveries were:
• Lending files were brief and gave little understanding of the background, rationale or performance of the facilities. There was no supporting information behind section tabs in most of the files.
• Loans were poorly structured. Many loan cases were approved on the basis of 100 per cent of security value and outlay costs (fees and stamp duty), with profit-share elements rather than cross-collateralisation or recourse to the borrower. The society’s own policy typically guided 70 per cent loan-to-value for such loans.
• Facility letters were poorly drafted, as the ‘purpose of loan’ clauses were non-restrictive and gave the society limited opportunity to demand repayment. There wasn�
��t even a standard template for the letters confirming and outlining a commercial loan facility. This meant that some were simply better than others.
• Minimal evidence was found of any challenge to the original credit application at meetings of the credit committee. This suggests that the credit committee was not active in questioning aspects of loan applications and seeking amendments to how the loan would be issued and repaid.
• There was evidence of loans granted before approval by the credit committee or for amounts different from those approved.
• Funds were frequently drawn in excess of the approved limit or without preconditions being satisfied. There was also evidence of funds being issued to related companies rather than to the entity for which limits were approved.
• A lack of supporting documents was noted for certain draw-downs identified.
• There was no formal process for extending loan terms.
Certain issues were identified in an internal audit report in 2007 but they still kept happening, according to the three subsequent reviews conducted by Deloitte during the ten months to February 2009. The Financial Regulator was trying to ‘butch up’ and make itself look tough eight days after Fingleton announced on 1 April 2009 that he was retiring at the end of the month. A letter from the regulator dated 9 April 2009 referred to the shortcoming identified by Deloitte.
Deloitte made a presentation to the audit committee a month earlier. It wasn’t pretty.
• Not all commercial loans were subject to regular review by the credit risk department.
• Adherence to the credit committee’s terms of reference was not fully met.
• The quarterly reporting pack on credit risk management was not produced since September 2007.
• External valuations were not always obtained for facilities above €1 million.
• The society operated without an arrears management system.
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