I wish to make two points in regard to the Bill and to substantiate them. The first point is that we need a new financial services Bill covering the whole range of financial institutions, including building societies. The second point is that unless the national economic situation is taken in hand very shortly the availability of funds, not just for building societies but for all institutions, will be so short as to possibly create a mortgage famine during the next six months. I will substantiate that statement later on.
The Bill is seen in too narrow a context, it must be seen in a broader context of a background of major changes in the financial marketplace and in financial services generally. We only have to look at what went on in London with the so called "Big Bang" on Monday to see the radical changes which have taken place in financial institutions and in the financial marketplace generally. If people are still not convinced that revolutionary changes are taking place in the financial world, they only have to consider that the EC in 1990 will be attempting to introduce an open free marketplace for financial services throughout the Community. If you put what is happening in London side by side with events in Brussels it is quite clear that within the next couple of years we will be faced with substantial, revolutionary changes in the whole financial services industry. That is why I called for the publication of a financial services Bill covering the whole range of financial services generally.
There are three aspects to all these changes. First, deregulation, the breaking down of differences between building societies and banks, banks and insurance companies and insurance companies and stockbroking houses. Such deregulation has taken place massively in London in recent days and is a feature of a modern financial services industry throughout the world today. Secondly, there is increased competition for deposits between the various institutions which is getting extraordinarily keen and has good and bad effects. There is also very rapid innovation, the application of new technology to the financial services area and the development of new financial products offered to the public under all sorts of guises. They are the dramatic and revolutionary changes which have taken place and they are all relevant to the legislation before the House today. The Bill should be looked at in the context of the dramatic changes taking place in the financial services industry both in the UK and here.
I am convinced that the consumers will gain from the current revolution in that they will probably get cheaper, more efficient and more flexible services because competition between the institutions will make them sharper which will, I hope, enable them to pass on more benefits to the consumer. I do not have any great worries about the deregulation of financial institutions generally or building societies particularly but, having said that, the country must make sure that it gains — apart from the individual investor — through increased employment and earnings in foreign exchange. All this requires a sense of direction and a strategic view of the role of building societies. My main criticism of the Bill is that it does not have a sense of direction or a strategic view of where building societies fit in. A hint of what is possible was given by the Minister for Industry and Commerce recently in his announcement about Shannon Airport and the possibility of attracting offshore institutions to that area. In making the announcement, which I applaud, the Minister gave us a hint of what is possible. However, the broader view of the financial world is missing from this Bill and the vision attached to trying to open up international banking in Ireland does not come through.
I welcome a number of aspects of the Bill, abolishing restrictive practices, redemption fees, the requirement to use a particular insurance company and particular solicitors. These reforms are useful and one should not quibble unduly about them but they are marginal, minor changes. As long as we do not pretend the Bill is a major reform of financial institutions or the building society movement, then some of the measures are welcome although I retain the right to quibble about some details and to seek to amend certain sections. The attempt to abolish restrictive practices is welcome and that aspect of the Bill is consistent with the notion of deregulating financial institutions. It is an attempt to level the playing pitch between institutions and is consistent with the philosophy of what is going on in the financial world, the advent of more open and even competition for deposits between various financial institutions such as building societies, banks and so on. I have no problem in welcoming those aspects of the Bill, provided it is recognised that it deals with minor items. It does not do anything about interest rates or reforming the financial sector generally. It does not do anything about clearing up the difficulties between building societies and banks. They are small detailed changes which are welcome but they do not tackle the root problem of charting a strategic course for the financial services industry.
I also welcome the decision to allow new loans to be made by the building societies, although I suggest that the Minister should put a limit on this. Section 3 does not mention the amount of the total funds they can spend on new loans; it just says they may give non-mortgage loans. Perhaps it would be more sensible to allow them to do this up to 10 per cent or 20 per cent of their total funding and put a certain limit on the amount of non-mortgage activity in which they can participate. That suggestion might be worth looking at in a positive sense because it is important that the building societies — whatever other areas they eventually end up in, banking, stockbroking or whatever — should retain the provision of housing finance as their main business. That is still a major and important requirement.
Over the last five years the share of mortgages financed by building societies has fallen from 68 per cent to 62 per cent of total mortgages. Their share of new savings has also fallen significantly as a percentage of the total. For example, the Bank of Ireland have recently taken over the Irish Civil Service Building Society and now provide certain banking services. The building society movement is decreasingly the provider of funds for house building. I called for a financial services Bill instead of this marginal one because a major question is involved. Banks are moving into the territory of building societies, for example, the Bank of Ireland bought the ICS and the ICS provide cash cards and are proceeding in the direction of opening banking services. Does it mean that if building societies become banks our banks will become building societies? Will they all be in the business of insurance and competing for deposits? Will the legislators be asked to act as referees while all that goes on?
The Government of the UK recently published a financial services Bill in which they tried to tackle the fundamental question as to who will do what in the financial world. The building societies in the UK are issuing cheque books, doing foreign exchanges and selling stocks and shares. If all that is happening in Britain I can see it beginning to occur here, given the close financial relationship between the two nations. It poses the fundamental question that is not referred to in the Bill, the relationship between building societies, banks and so on. The key question is, if banks are starting to gobble up building societies can they really object if the opposite starts to occur? Can we then say that they must fix interest rates in line with Government directives? That might be grand in theory but in practice, with the international money market as it is, it would be difficult to see how any Government could do something like that.
Within a few years we will see British and EC building societies operating here. That again is not mentioned in the Bill. Foreign building societies will have to be allowed to operate here under EC regulations. If they start here in a serious way can we still attempt to regulate building societies in a real sense, given the intense competition?
These issues raise two questions: do the provisions in the Bill go far enough to permit the Irish societies to meet the challenges they will have to face or will they crumble under international competition; two, will there be enough supervisory controls there to protect the consumer from the winds of international money markets?
My conclusion is that the Bill is only a marginal one which does not address those fundamental issues — it only fiddles around the periphery of the building society movement. What we need is a financial services Act into which new banking institutions, building societies, the whole investment banking industry and stockbroking will be tied up by comprehensive legislation so that we can chart a course for all those institutions and bring them together in some form of industry. I estimate there are between 8,000 and 10,000 jobs possible in a financial services industry in Dublin alone provided we tidy up our act and pull the financial institutions together, so that instead of working against each other as at present we can get them to work for the nation and attract foreign financial institutions to establish bases here on our terms, obeying the regulations of the Irish Government.
In that way we can build in Dublin and the country generally a financial services sector which will provide employment. Why is it that Singapore, the Isle of Man and Switzerland have had and are rapidly developing major financial centres whereas we are languishing as an outpost to which capital would not dream of coming from other countries. Indeed some of our cash-flow, instead of coming has been leaving the country in recent months. It would be far more intelligent if we developed a proper financial services industry so that we would be attracting money to the country instead of having it running out to areas that have attempted to build a financial industry.
The Bill is a major disappointment in that respect. There is a suggestion abroad that the Bill is doing something fundamental to tackle the financial services area, whereas it tackles only minor elements like solicitors fees and redemption fees.
I wonder about the supervisory powers of financial institutions generally. Should we start to tidy that up? For example, the building societies come under a number of different regulatory authorities. A building society in Ireland has to answer to the Department of the Environment, the Department of Industry and Commerce, the Central Bank, the Registrar of Friendly Societies and the Minister for Finance. There should be a streamlined way in which that could be handled. If we are to develop a proper financial industry here we must sort out that mess. It would be far more sensible to have one agency dealing with financial institutions instead of five.
The Honohan report, or some newspaper reports of what is supposed to be in it, refers to this and states that it is difficult and should be sorted out. Unfortunately, none of these issues is addressed in the Bill. Therefore, the Bill is a major disappointment. I have called for a financial services Bill to tackle all of those areas.
Such a Bill would give us an opportunity to benefit by the London deregulation known as the Big Bang. There are many opportunities there for Ireland. For instance, we could develop here as a base for international software, servicing the building of the financial centre in London which is becoming the third major financial centre after Tokyo and New York. We are close to London physically and financially and our Stock Exchange is connected with it. We should try to find out how we could move in association with recent developments in London. I ask the Government to establish a special group to see how we can benefit from these opportunities in the financial services industry, one of the major growth industries. We should stop putting up cul-de-sac signs like the DIRT, the resident requirement for building societies and the resident property and wealth taxes. If you add these up they bring less money to the country than they drive out of it. Though they seem to fill some ideological niche, as national economic measures they are simply suicide because they say to international capitalists that they are not welcome here. International capital does not have to come here, it does not owe us a living, and it will not come if the wrong signs are up.
If the right signs are up indicating that we do not fiddle around with some of that ideological stuff, that we are interested in building a financially secure stable economy, that kind of money will come and we will be in a much better position to provide the kind of equality and equity we need. At present, in striving for some type of equality we are scaring away so much investment that we will all be equally poor and sorry to live here.
As a result of what Irish Nationwide have done in breaking ranks, the building societies will now be more dependent on the inter-bank market in setting their interest rates whereas until now they were not dependent on the open market in the same way. In regard to unit linked funds, gilts, and shares the competition for scarce deposits will become intense and in theory that should mean lower interest rates. In reality, if the institutions have to chase all the deposits they will be putting up their deposit rates to try to attract funds. That will be passed on to the household borrower as happened with the Irish Nationwide today. I am convinced there will be a mortgage famine in this country in the next six months. Without being alarmist in any way as that only makes the situation worse I want to say as calmly as I can that I am convinced that by January or February next there will be a substantial mortgage famine in this country. I will be very surprised if there is little or any mortgage finance available. What has happened is that £1.5 billion has been chased out of the country by regressive legislation and unimaginative approaches to the financial marketplace by Government sources. That amount of money leaving the country means there is little or no money left at home to borrow. What are the financial institutions going to start doing at the end of this year if the outflow continues? They are going to start chasing the money at home. The only way they can get a bigger slice of deposits is by putting up their deposit interest rates. If they keep putting up their deposit interest rates they will have to pass on higher interest rates to the householder or investor. That is inevitable.
It is all very well to scream at building societies and accuse them of opening up offices all over the country, having lavish furnishing and too much advertising on RTE but it is marginal. It is at the very fringe of the fundamental argument about financial services. The real problem is that we have lost £1.5 billion and that loss is continuing. If money continues to flow out, the only way Irish financial institutions can get money in is to compete for the money that is left in the country. How are they going to compete for it? By putting up their interest rates. What are they then going to do? They are going to pass it on to the person who takes out a loan. The only solution is to stop that money leaving the country and the only way to do that is to take some imaginative steps. First, get rid of DIRT. Second, liberalise exchange control regulations. Third, develop a financial services industry by publishing a financial services Bill. We have got to show people that we want to keep that £1.5 billion here and that we are not scaring it off.
In reply to a question on the residential property tax, I was told that it cost £4 million to take in £3 million. DIRT might bring in £75 million. How much of the £1.5 billion was that responsible for scaring off? I dare say a lot more than £75 million. Let us look at the national interest and not at some sectional interest where those with houses valued at over £65,000 pay an extra 1 per cent and let us sell the message to international capital and our own capital that it is welcome here. If that money stays here there will not be intense competition for deposits and if there is no intense competition for deposits, interest rates will come down. If interest rates come down, building societies will not be putting them up by 3 per cent as happened today.
The response to the crisis on interest rates does not lie in this Bill. It lies in a more sensible understanding of what goes on in the financial marketplaces. We will have a mortgage famine in this country in the next six months if we do not get action in the financial services area and the only solution is to produce in this House a financial services Bill.