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Regulatory failure and regulatory capture were two separate but related problems with the LFB. In this section it will be argued that regulatory failure was caused by the institutional structure of the LFB, which was mainly due to the fact that it lacked powers to be an effective regulatory agency. Secondly, it will be argued that due to the way in which the LFB was financed it was susceptible to regulatory capture.

The regulatory powers of the LFB were left unchanged from the acts in the pre- famine period, and its initial powers proved inadequate quite early in its existence to perform its tasks. The LFB had continually pleaded for further legislation in many of its post-famine annual reports to rectify the problems with the LFB system, as the system in the post-famine period was faced with different conditions to those that prevailed when the original legislation was passed. An example of this can be seen in the following statement from 1863:

In preceding reports, the Board have expressed their opinion that some improvement in the present machinery of the local management of Loan Funds, and in the existing legislative control over the Institution, was required, with a view to the more adequate protection of the savings of the industrious poor, and the promotion of the main objects of the Institution, and are still of opinion the necessity for such improvement still exists.136

The above citation came in 1863, a number of years after the 1855 inquiry into loan funds had recommended legislative reform, but no reforms were forthcoming. Reform was absent practically for the remainder of the LFB’s existence. Although legislation was passed relating to loan funds in the early twentieth century, discussed below, it only addressed the legal issues surrounding the recovery of debt. In the sixty-ninth report of the LFB for 1906, it was stated that:

…the recent loan fund legislation hereinbefore mentioned cannot be regarded as adequate. The grievance of which they complain is of longstanding. They are supposed to control the operations of societies throughout Ireland holding certificates from them

135 _{Copy of the fifty-eight annual report of the Loan Fund Board of Ireland, (243) H.C. 1896, xxiv, 363.} 136

Twenty-fifth annual report of the Commissioners of the Loan Fund Board of Ireland, p. 5. [3169], H.C. 1863, xxviii, 493.

under 6 & 7 Vic. C 91, but their statutory powers are quite inadequate to enable them to do this, except in a general way.137

The initial acts gave the LFB some statutory powers, but these powers were inadequate to regulate loan fund societies. For example, the LFB had drawn up model rules for loan fund societies, and the 1897 report drew up new model rules, but the LFB did not have the power to compel loan funds to adopt such rules.

The LFB regularly issued communiqués to loan funds, something which was referred to in the 1897 report, but it seems that these were either followed or ignored depending on the preferences of the individual loan societies. For example, when the LFB authorised a rate of discount above the legal rate this advice was followed. By contrast, when it advised societies against issuing renewals, or to reduce the interest rate on debentures, these circulars were ignored. A number of concerns were raised about the activities of loan funds in the north of Ireland in particular. Swift-MacNeill, an Irish nationalist M.P. representing county Donegal,138 raised the issue of the number of loan funds operating in licensed premises,139 and asked whether this was a factor in the increasing charges of intoxication in Fermanagh. Swift-MacNeill asked:

... [had] it come under his [Chief Secretary’s] notice that it is notorious to the police and local magistrates that loan funds under present working are the occasion of much loss of time to borrowers and bailsmen, and an unusual amount of intoxication, resulting in prosecutions at petty sessions…140

The Chief Secretary, Gerald Balfour, replied that the LFB was aware of the case of a loan fund’s office being held in close proximity to a licensed premise, but that the LFB inspector had reported that a different door was used so that borrowers did not have to enter the pub.141 When Arthur O’Connor, an Irish Nationalist M.P. representing east Donegal,142 asked in June 1896 whether or not the practice of loan renewals was legal, the Chief Secretary replied that it was illegal and that the LFB had issued a circular in 1893 informing societies of such illegality.143 Arthur O’Connor

137

Sixty-ninth Annual Report of the Loan Fund Board of Ireland for 1906, p.3. [Cd. 3463], H.C. 1907, xix, 407.

138 _{Michael Stenton and Stephen Lees, Who’s who of British members of Parliament: vol ii, 1885-1918}

(Sussex, 1978), p. 236.

139

Premises licensed to sell alcohol.

140 _{Hansard 4, xli, (11 June 1896), pp 841-842.} 141 _{Ibid, p. 842.}

142 _{Michael Stenton and Stephen Lees, Who’s who of British members of Parliament: vol ii, 1885-1918}

(Sussex, 1978), p. 270.

followed up with a question regarding the overlapping boundaries that the LFB had permitted.144 Balfour responded, saying that:

To guard against simultaneous indebtedness by the same persons to different loan funds in the same neighbourhood, the Board, some years ago, issued instructions to managers requiring them to have their lists of borrowers and sureties compared three or four times yearly.145

What followed Balfour’s answer is worth reproducing, as it gives an indication as to what the role of the LFB was within the government.

Mr Arthur O’Connor inquired how it was the Loan Fund Board had permitted such a state of things to arise.

Mr Gerald Balfour [Chief Secretary for Ireland] said he was making inquiries as to whether the instructions had really been carried out.

Mr Arthur O’Connor asked if it was not the duty of the Loan Fund Board to see that their instructions were carried out.

Mr Gerald Balfour thought that it was.146

Making recommendations was all that the LFB could do, as it did not possess powers to enforce any of its recommendations, and the collapse post-1896 was not due to any changes in the regulatory atmosphere.

The LFB’s ultimate sanction as regulator was to gazette147 and order the dissolution of loan funds. From 1847 to 1896 the LFB had ordered the dissolution of 47 loan funds. Of this number 64 per cent of dissolutions came in the period 1847 to 1860, whereas 36 per cent of the dissolutions were from 1860 to 1896.148 In the same period 250 societies voluntarily ceased their operations, ‘in many cases, as shown by the Board’s reports, owing to defalcations by officials’.149 Given that the LFB annually inspected the loan societies, and 250 societies closed owing in many cases to defalcation in the same period, this would suggest that perhaps 47 dissolutions is too small a number and not reflective of the scale of suspect practices in the LFB system. Evidence given to committee to inquire into Irish industries in 1885 alleged that the LFB did not actually do anything, with one of the witnesses advocating that it should be converted into a government-run investment bank.150

144 _{Ibid, p. 842.} 145 _{Ibid, p. 842.} 146 _{Ibid, p. 844.} 147

Put a notice in a public journal.

148 _{Calculated from appendix B in Report on charitable loan societies, 1897.} 149 _{Report on charitable loan societies, 1897, paragraph 169, p. 25.}

150 _{Report from the Select Committee on Industries (Ireland); together with the proceedings of the} committee, minutes of evidence, and appendix. , questions 2415-2423, p. 120. H. C. 1884-85 (288), ix,

The main problem arose from how the LFB was funded. Unlike contemporary government departments, the LFB did not receive a parliamentary grant. Instead the LFB received its income from a monopoly it was granted on the sale of documents and stationery related to loan fund activity. As was discussed in chapter 1, the issue of financing the LFB was not included in the initial loan fund acts that created the LFB, and it was only in the 1843 act that reference was made to its finances. In the 1898 report of the LFB reference was made to the financial arrangements of the LFB:

The Board next beg to direct attention to the condition of the annual income at their disposal for purposes of administration. This income is derived from two sources – (1) the sale to loan societies of certain forms requisite for the making of loans; (2) the interest of sums accumulated (after meeting current expenditure) in the past from such sales, and invested by the Board.151

The arrangements outlined in the 1843 act were that the LFB would receive 1d for each promissory note sold to a society. Or to rephrase, that the LFB’s income was dependent on loan funds making loans. The LFB was also to receive 2s for every debenture form sold, which meant that the LFB’s income was dependent on the number of debenture holders. This structure, introduced before the famine, was for a regulatory agency to regulate an industry on which it was dependent for its income. The LFB was therefore given an incentive to encourage loan funds to lend more, or to accept more debenture holders, as the more loans the loan funds made the greater the income of the LFB. This was before the LFB system was truncated by the famine. The result of the famine era was to reduce the number of loans issued by loan funds, and as a by-product reduce the income of the LFB. In its reports from the 1860s to 1872 the LFB continually highlighted the fact that it was under-funded. But when the 1843 loan fund act was amended the only significant change was an increase in the price of LFB stationery.152 The amendment did not address, or even question, the fact that the LFB was dependent on the sector it was regulating for its income. In effect it was creating an ideal situation for regulatory capture.

A model of regulatory capture was outlined by Laffont and Tirole. In their model they explained how it was possible for interest groups to capture the regulatory apparatus of an industry.153 Laffont and Tirole used a two-tiered agency structure, with Congress being the principal, the agent to Congress being the supervisory body

151 _{Sixtieth annul report of the Loan Fund Board of Ireland, p. 3. [C.8920], H.C. 1898, xx, 375.} 152 _{Loan Societies (Ireland) Act, 1843, Amendment Act, 1872 (35 & 36 Vict.).}

153

Jean-Jacques Laffont and Jean Tirole, ‘The politics of government decision-making: A theory of regulatory capture’ in The Quarterly Journal of Economics, cvi, 4 (November 1991), pp 1089-1127.

in the first tier; the supervisory body is the principal and the regulated firms are agents in the second tier. This structure is applicable to the Irish LFB system, with Parliament replacing Congress, the supervisory body being the LFB, and the regulated firms being the individual loan funds.

The LFB system differs from this model in that parliament was dismissive of the LFB and did not want to fund it.154 Also, in the Laffont and Tirole model, they assumed that the supervisory body would receive its income from the principal in the first tier; but the opposite was the case under the LFB system with the LFB receiving its income from the agents in the second tier. From their model, Laffont and Tirole believed that ‘Congress optimally offers the agency a constant income equal to its reservation income… [therefore the] agency has no incentive to misreport the signal.’155 Laffont and Tirole outlined how collusion could occur in their model, stating that ‘collusion occurs when the agency has an incentive to hide information from Congress…collusion can arise only if the retention of information benefits the firm.’156 Although it is difficult to prove that there was any explicit collusion taking place between the LFB and the loan funds, the income of the LFB was structured in a way that would give an incentive for implicit collusion. But whether collusion was explicit or implicit, the loan funds were hurt by their own actions. The persistence of renewals, the excessive use of fines, and the over-charging of discount would not have been feasible in the long run. This is in line with Laffont and Tirole who observed that an ‘interest group may be hurt by its own power’.157

One of the problems with the loan funds, as was stated above, was that of overlapping boundaries. The LFB had to sanction any new loan fund that wished to register under the 1843 act, so it is hard to see how the Board could not have been aware that the boundaries of societies were overlapping. But the actions of the LFB in allowing overlapping societies to establish falls into the model of regulatory capture. Given what we know of how the LFB’s incentives were structured, it is not hard to imagine a cash-strapped regulatory agency attempting to encourage the establishment of new loan funds. In Thom’s Directory, over a number of years, the following notice was printed:

154 _{Evidence of this is seen in section 2.3.c.}

155_{Jean-Jacques Laffont and Jean Tirole, ‘The politics of government decision-making: A theory of}

regulatory capture’ in The Quarterly Journal of Economics, cvi, 4 (November 1991), p. 1098.

156

Ibid, pp 1102-1103.

There are no Loan Fund Societies in the counties of Armagh, Clare, Down, Dublin, Galway, Kerry, Louth, Mayo and Monaghan, but the Loan Fund Board will gladly co- operate with local gentlemen who desire to have the benefits of the public loan fund system extended to their districts.158

This notice was reprinted several times until 1900 when the LFB ceased to openly encourage the establishment of new loan funds on the island. In its fifty-eighth report, for 1896, the LFB acknowledged the fact that it had failed to establish loan funds in the counties where there were no loan fund societies, but it still believed that loan funds should be established in those counties.159 When the LFB was lobbying for a parliamentary grant in 1912, a witness associated with the LFB gave evidence to a committee suggesting that the LFB intended to use any grant to hire a loan fund ‘organiser’ to establish new loan funds. The LFB’s application for a parliamentary grant was rejected on the basis of this proposal, and it subsequently disowned itself from having any knowledge of the proposal.160

Evidence from the 1897 report suggests that the people applying to establish new loan funds were individuals from outside the locality of the loan fund, suggesting that these were people who would not be expected to establish a loan fund for the sake of helping the industrious poor. The 1897 report stated that:

In many cases the Committee is appointed from a list of non-resident Debenture holders who manifest no interest in the efficient working of the Societies or the welfare of the poor of the locality, and in these cases no attempt would appear to have been made to obtain the co-operation of the clergy and local representative gentlemen as members of committees.161

The importance of debenture holders in the loan fund set up was that they were supposed to monitor the actions of the loan fund in a way akin to the role of depositors in credit co-ops as theoretically outlined by Banerjee, Besley and Guinnane.162 But if debenture holders were non-resident, then the monitoring power of debenture holders is lost.

The regulatory capture of the LFB had adverse affects on both depositors and borrowers from loan funds. In terms of borrowers, in many cases they were subjected

158

Thom’s Directory, 1889, p. 718.

159 _{Copy of the fifty-eight annual report of the Loan Fund Board of Ireland, p. 3. (243) H.C. 1896, xxiv,}

363. 160

Seventy-fifth Annual Report of the Loan Fund Board of Ireland for 1912, pp 3-4. [Cd. 6835], H.C.

1913, xxxviii, 933.

161

Report on charitable loan societies, 1897, paragraph 18, p. 8. 162

Abhijit V. Banerjee, Timothy Besley, Timothy W. Guinnane, ‘Thy neighbours keeper: The design of a credit cooperation with theory and a test’ in The Quarterly Journal of Economics, cix, no. 2 (May, 1994), pp 491-515.

to excessive fines and were perpetually in debt. This in effect enabled debt peonage to exist. The existence of regulatory capture it seems may have altered depositor incentives.163 The LFB stamp164 and the LFB’s association with Dublin Castle gave a misleading signal to savers. Savers, or rather investors, believed that the loan funds had a form of government guarantee. The significance of a Dublin Castle address should not be underrated as Dublin Castle, the administrative centre of the Irish government, represented the state in the eyes of many. The LFB even received a mention in R. Barry O’Brien’s, Dublin Castle and the Irish people. O’Brien stated that:

The Board inspects the affairs of a number of local voluntary loan societies who report their proceedings periodically to parliament. The Board itself makes an annual report to parliament. It is appointed by the Lord Lieutenant, and the members are unpaid.165

But the British government was adamant that the LFB was not a government department.166 It seems to have been an anachronistic relic of the pre-famine political structure. It must also be noted that the 1897 committee report stated that the loan funds did not encourage thrift and made no effort to mobilise microsavings,167 evidence that is in conflict with the views of Hollis and Sweetman regarding the role of loan funds as financial intermediaries in the pre-famine period.168