The Central Bank of Ireland has fined Bank of Ireland and Bank of Ireland Mortgage Bank Eu120,000 for breaches of the country’s Asset Covered Securities Act because it exceeded a limit on certain assets outside the cover pool, although it noted investors were not affected.

The central bank said yesterday in the period from 4 April 2011 to 20 December 2011 BoI exceeded a 10% limit on “credit transaction assets”. Irish legislation gives specialist covered bond issuers limited leeway to engage in other activities besides issuing ACS, and credit transactions are one class of these. As part of the limit on non-ACS-issuing activity, these are capped at 10% of a firm’s total assets.

The central bank said that the breach resulted from a downgrade of Bank of Ireland’s long term credit rating in April 2011.

“The Firm’s credit transaction assets consisted of deposits in Bank of Ireland,” it said yesterday (Thursday). “This downgrade in Bank of Ireland’s rating led to certain deposits held by the Firm in Bank of Ireland being reclassified as credit transaction assets.

“The result of this was that the percentage of credit transaction assets held by the Firm (being assets held outside the Pool) exceeded the 10% cap set out in Section 31(3). This breach of the legislation continued from 4 April 2011 to 20 December 2011.”

BoI immediately took steps to return to compliance when notified by the central bank of the breach on 21 December 2011.

“The penalties imposed in this case reflect the importance the Central Bank places on compliance with all aspects of the Asset Covered Securities legislation and adequate systems and controls to ensure such compliance,” it said.

Among factors taken into account by the central bank, it said, were no investors being affected by the breach, the cover-assets monitor confirming that at all time the pool remained in compliance with the ACS Act, and BoI co-operating with the investigation and taking steps to prevent similar incidents.

“Breaches of Asset Covered Securities legislation have the potential to undermine confidence in the Asset Covered Securities market,” said Peter Oakes, director of enforcement at the Central Bank of Ireland. “The cornerstone of the Asset Covered Securities market is the confidence that investors can take from the primary legislation which affords them preferential creditor status and restricts the activities, and the risks, that Asset Covered Securities issuers can take on.”

A spokesperson for Bank of Ireland told The Covered Bond Report that the breach had been “inadvertent”.

“Once we were made aware of the breach we immediately took steps to return ourselves to being in compliance,” she said. “The key thing is that no investors were affected in any way.

The Central Bank of Ireland noted that it was the second breach of ACS legislation for which a fine has been imposed: last December the Financial Regulator reprimanded Depfa ACS Bank and fined it Eu250,000 in relation to breaches of ACS Act regulatory requirements.

According to the central bank, there was reasonable cause to suspect that Depfa ACS Bank failed on a number of occasions to obtain the approval of its cover-assets monitor or the Financial Regulator prior to making or amending an entry in its register of public credit covered securities business, which is required under the ACS Act.

The central bank said that no investors suffered a financial loss, while Depfa ACS Bank brought the matter to the Financial Regulator’s attention and introduced improved controls.

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