Central Bank of Ireland : Public statement relating to enforcement action against Gary McCollum

Enforcement Action

The Central Bank of Ireland

and

Gary McCollum

Mr William Garfield ("Gary") McCollum, a Person Concerned in the Management of Irish Nationwide Building Society, fined €200,000 and disqualified for a period of 15 years by the Central Bank of Ireland for his admitted participation in breaches of financial services law relating to commercial lending and credit risk.

On 10 June 2021, the Central Bank of Ireland (the Central Bank) imposed a fine of €200,000 on Mr McCollum, disqualified him from being a person concerned in the management of a Central Bank regulated financial service provider for a period of 15 years, and reprimanded him for his admitted participation in breaches of financial services law in relation to commercial lending and credit risk by Irish Nationwide Building Society (INBS) that occurred between 1 August 2004 to 30 September 2008 (the Relevant Period).

Mr McCollum was Head of Commercial Lending (UK) and UK Branch Manager (Belfast and London) during the Relevant Period. He has admitted to participating in significant failures by INBS to adhere to its own policies at each stage of the commercial lending and credit risk processes, resulting in poor risk management, ineffective governance and high risk lending.

Mr McCollum joined INBS in 1997, at a relatively early stage in its entry into the development finance market. INBS's strategy at the time was to build its commercial lending through repeat business with high net worth individuals with whom it already had strong relationships. Fast growth strategies and rapid credit decisions were the backdrop against which INBS's commercial loan book grew by 128% in value from around €3.6bn at the end of 2004 to around €8.2bn at the end of 2008. A significant percentage of this exponential growth was related to increased commercial lending in the UK through the branches for which Mr McCollum was responsible. INBS's UK commercial lending grew from €2.957bn in 2005 to €5.186bn in 2007 and comprised over 50% of the value of INBS's commercial loan book in that period.

This expansion into development finance, which carried with it a much higher credit risk1 for INBS than its traditional residential lending, proceeded with insufficient checks and balances during the Relevant Period. While policies and procedures existed on paper, there was a systemic failure to ensure they were implemented or followed in practice. Mr McCollum, as the person responsible for INBS's UK commercial lending, has admitted that he participated in significant failings by INBS, which included: (i) a failure to ensure that commercial loan applications were processed in accordance with internal policy; (ii) not following loan approval processes or requirements in relation to commercial mortgage offers; (iii) failures in relation to the taking of security, obtaining valuations and adhering to policy requirements concerning maximum loan to value ratios; and (iv) failing to ensure that loans were effectively monitored. In this respect, his actions and/or omissions whilst reckless, were not deliberate or dishonest.

Ultimately, the makeup of INBS's loan portfolio left it exposed during the global financial downturn. Between 2008 and 2010, INBS suffered financial losses in excess of €6 billion, primarily arising from the impairment of its commercial loan book. This in turn resulted in the collapse of INBS. The cost to the Irish taxpayer for INBS was €5.4bn.

This settlement concludes the Central Bank's Inquiry into Mr McCollum. The Central Bank emphasises that the settlement relates to Mr McCollum alone and has no effect on the ongoing Inquiry into another person concerned in the management of INBS.

The Central Bank's Director of Enforcement and Anti-Money Laundering, Seána Cunningham, stated:

"This enforcement action against Mr McCollum concludes one of a number of complex financial crisis related cases that the Central Bank has taken against senior individuals concerned in the management of financial services firms. The context of this case is important. Over a relatively short period, and with insufficient checks and balances, INBS's business model changed from being primarily a provider of residential mortgages to one which has been described as "in some ways closer to that of a venture- capital financier"2 than that of a building society.

Mr McCollum, in his role as Head of Commercial Lending (UK), has admitted that through his action and inaction, he participated in significant breaches by INBS relating to commercial lending practices and credit risk in the period immediately preceding INBS's collapse. These breaches amounted to a

1. Credit risk is the risk of a borrower defaulting on a loan. Financial institutions use credit risk modelling to calculate the amount of capital to hold against credit losses.
2. Nyberg Commission, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland (2011)

consistent failure to ensure compliance with INBS's policies and procedures with a complete disregard for the consequences.

The Central Bank has highlighted on many previous occasions the potential risks that may arise for a firm, its customers and the wider financial market, when robust systems of internal control and procedures are not put in place and followed. This case serves to underscore a further fundamental point - robust systems of internal control are only as effective as the individuals implementing them. It falls to senior role holders to lead by example, so that a culture of compliance is the norm.

The sanctions imposed on Mr McCollum reflect the serious nature of his conduct. The Central Bank will not shy away from using the full extent of its powers, including referring cases to Inquiry, in order to hold senior individuals in financial services accountable for their actions when serious failures like this occur."

The Admitted Prescribed Contraventions

As part of its investigation into INBS and the persons concerned in its management, the Central Bank gathered hundreds of thousands of documents. The Central Bank conducted a detailed examination of the documentation and electronic data underpinning a sample of 98 loans extended to specific INBS commercial lending customers during the Relevant Period, a significant proportion of which originated in the Belfast Branch, under the management of Mr McCollum. The Central Bank identified systematic failings, admitted to by INBS, at each stage of the commercial lending process, as demonstrated by the examination of the loan sample, reports prepared by INBS's internal audit function and external consultants engaged by INBS during the Relevant Period, electronic data (including emails) taken from INBS's systems and sworn witness interviews.

The admissions by Mr McCollum concern his participation during the Relevant Period, in multiple breaches of financial services law and regulation (admitted by INBS), namely:

• Regulation 16(1) of the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 (SI 395/1992) (as amended);
• Section 76(1) of the Building Societies Act, 1989 (as amended); and
• Part 1 of the Credit Institutions Regulatory Document titled "Impairment Provisions for Credit Exposures", dated 26 October 2005, which was imposed as a condition on INBS's authorisation under Section 17 of the 1989 Act (by way of a notice dated 6 July 2006).

Mr McCollum has admitted participation in breaches by INBS relating to the management of commercial loans and credit risk, in particular:

1. A failure to ensure that commercial loan applications were processed in accordance with internal policy;
2. A failure to ensure that commercial loans and variations were approved in accordance with internal policy and that commercial mortgage offers (CMOs) (the legal agreement between INBS and a borrower which set out the terms and conditions of the loan), complied with policy;
3. A failure to ensure that security (including personal guarantees) for commercial loans was obtained, that valuation reports on the assets used as security for commercial loans were received before all or part of the loan was advanced and that loan-to-value limits were adhered to in accordance with INBS's internal policies or otherwise approved as exceptions; and
4. A failure to ensure that commercial lending was effectively monitored in accordance with INBS's internal policies.

Mr McCollum's Participation

Mr McCollum has admitted to participating in a sustained practice of recklessly disregarding INBS's internal policies and procedures with respect to commercial lending and credit risk.

Mr McCollum held a senior role in INBS during the Relevant Period. As UK Branch Manager, he had responsibility for the Belfast and London branches as a whole, including management of UK staff, directing all UK commercial lending and managing UK customer relationships. He was also a member of INBS's Credit Committee from December 2007 to the end of the Relevant Period. This committee had a key role in assessing and approving, declining or recommending commercial loans as well as a role in the review and consideration of certain reports, information and matters pertaining to the monitoring of commercial lending.

It was Mr McCollum's overall responsibility as Head of Commercial Lending (UK) to ensure that all commercial loans originating under his remit were processed and managed in compliance with INBS's internal policies and procedures in force throughout the Relevant Period. Those policies outlined his responsibilities both by reference to his name specifically and to the roles he held. Furthermore, reports prepared by INBS's internal audit function during the Relevant Period specifically identified Mr McCollum as one of the people responsible for implementing recommendations contained in those reports to resolve issues arising in respect of commercial lending and credit risk management.

Mr McCollum accepts that by virtue of his role and his responsibilities, and his position on the Credit Committee, he knew or ought to have known of the controls contained in INBS's

commercial lending and credit risk policies and procedures. He accepts that that he participated in lending practices that persistently ignored INBS's internal policies and procedures and that he failed to implement recommendations to resolves these practices. These failures by Mr McCollum are all the more serious given his position on INBS's Credit Committee.

Mr McCollum has admitted being directly involved in, and responsible for, INBS UK loans (including loans ranging between STG£650,000 and in excess of STG£200 million) in respect of which:

• funds were extended without a commercial loan application ever being prepared. Mr McCollum was also responsible for loans where relevant information, such as audited accounts, business plans or cash flow analyses were not obtained from borrowers (which would have enabled INBS to assess the borrower's repayment capacity). Further, Mr McCollum oversaw loans where a credit grade was not assigned as part of the credit decision-making process (hampering INBS's ability to assess the borrower's credit worthiness);
• funds were extended without, or before, recommendation/approval from the Credit Committee and/or approval by the Board of Directors (including instances where additional advances were made on loans without approval). For a number of loans, Mr McCollum signed off on the CMO to the borrower, thereby concluding a legal contract, without internal approval having been obtained for the loan. Mr McCollum was also involved in the variation of loans without appropriate approval, including instances where he signed off on CMOs which contained explicit terms and conditions different to those recommended/approved by the Credit Committee and/or Board of Directors. A number of these CMOs signed by Mr McCollum were, in themselves, deficient and failed to adhere to INBS's internal requirements;
• no security at all was taken and funds were therefore extended on an unsecured basis and signed off on by Mr McCollum. In numerous instances Mr McCollum failed to ensure that, in the context of borrowers that were private companies, personal guarantees were obtained. A number of loans under Mr McCollum's management were granted where the maximum loan-to-value limit permitted by internal INBS policy was clearly exceeded and these were not approved as an exception to policy;
• no evidence at all was identified to indicate that the loans had been monitored after funds had been extended. Mr McCollum failed, as a commercial lender, to monitor loans within his own loan portfolio (for example, through regular contact with the borrower)