Dáil Éireann debate -
Thursday, 12 Dec 1974

Vol. 276 No. 10

Trustee (Authorised Investments) Order, 1974: Motion.

Minister for Finance (Mr. R. Ryan)

I move:

That Dáil Éireann approves the following Order in draft:—

Trustee (Authorised Investments) Order, 1974,

a copy of which Order in draft has been laid before the House.

The Trustee (Authorised Investments) Act, 1958, defines the investments in which trustees may invest trust funds unless expressly forbidden by the instrument, if any, creating the trust.

The Minister for Finance may vary the authorised investments by order. The primary qualification for trustee investments is that they should be secure, and, subject to this, that they should give a favourable income to the life tenant.

The purpose of the order before the House for approval, is to add Bank of Ireland loan stock 1991-96 to the list of trustee authorised investments. The loan stock was issued to raise additional capital to provide for the future growth of the bank. It will be repayable at par between 31st March, 1991, and 31st March, 1996. In addition to interest at 10 per cent per annum, it carries subscription rights to capital stock of the Bank of Ireland. The capital stock of the bank has been a trustee security here and in Britain for over a century and the 7 per cent loan stock 1986-91 issued by the bank in 1966 was added to the list of trustee investments by the Trustee (Authorised Investments) Order, 1967 (S.I. No. 285 of 1967). The new loan stock is quoted on the stock exchange and I am satisfied that it is a suitable stock for addition to the authorised trustee investments in this country.

The Minister for Finance is obliged under the Act to consult with the following persons in regard to the terms of any order he proposes to make to vary the list of authorised investments —a judge of the High Court nominated by the Chief Justice, the Governor of the Central Bank, the Public Trustee, the Chairman of the Irish Banks' Standing Committee, the President of the Incorporated Law Society of Ireland and the President of the Stock Exchange (Irish). I have consulted these persons and they have welcomed the proposal and raised no objections to the proposed order.

As Deputies may be aware, I am considering some further widening of the investment powers of trustees. There is a strong body of opinion in favour of adding building societies to the list. I hope to reach agreement with the Irish Building Societies Association in the near future on suitable qualifying conditions. The other main area where change is desirable concerns banks authorised to accept trust funds on deposit. Since the 1958 Act was passed there has been a considerable increase in the number of banking institutions operating here and there is now in force a comprehensive system of bank licensing and supervision under the aegis of the Central Bank. I am satisfied that the list of banks should be widened subject to a suitable arrangement being worked out to take account of the position of the Central Bank as the banking supervisory authority.

It is my intention also to have a more wide-ranging review of the operation of the 1958 Act to see if there is a need for amending legislation. This will take some time. I would point out to the House, however, that the Act does not affect trustees where the trust deed specifically provides wider powers than those set out in the Act. I understand that this is now the general practice. Charity trusts also are covered by separate legislation— the Charities Acts.

I am satisfied that the Bank of Ireland loan stock is a suitable security to be added to the list of authorised investments and that it is desirable that trustees should have power to invest trust funds in it. I, therefore, commend the motion for the approval of the House.

Mr. Colley

We on this side of the House are satisfied that the Bank of Ireland loan is a suitable security to be added to the list of authorised investments, and for that reason we are supporting this motion by the Minister for Finance. There are, however, one or two general observations I would like to make.

I note that the Minister refers, as he has referred previously, to the proposal to extend trustee status to Irish building societies. We on this side have been urging this for some time, and I am somewhat disappointed that the negotiations to which the Minister refers have not yet been completed. All I can do at the moment is to urge the Minister to do everything within his power to complete those negotiations as fast as possible. While it is not by any means the complete answer, it would be of assistance in providing a greater flow of funds to building societies, and that, of course, is a very necessary development at this time. I do not want to develop that theme, because it might well be irrelevant to the matter before us.

While we are satisfied that the Bank of Ireland loan stock is a suitable security to be added to the list of authorised investments—indeed, just as suitable as any other which is already on the list—there is no doubt that at present the basic concept behind trustee securities is threatened, to say the least. The Minister said:

The primary qualification for trustee investments is that they should be secure, and, subject to this, that they should give a favourable income to the life tenant.

Having regard to the raging inflation and to the disastrous fall in the value of virtually all kinds of securities, it is difficult to say that any security now meets that requirement; in so far as any security does, the Bank of Ireland loan stock certainly will do so. If things continue as they are going at the moment, it may be necessary to look again at the whole concept of authorised trustee securities. We have seen, fortunately not in this country but in Britain, a number of what were described as fringe banks, substantial institutions, in considerable difficulties and saved only by the intervention of larger institutions, sometimes State institutions. The return on investment from most securities does not keep pace with inflation. For that reason, if the situation continues as it has been going it may be necessary to take another look at the basic concept of trustee securities. However, that is not a matter I could expect the Minister to do across the floor of the House today.

I want to draw his attention to the fact that he ought to be keeping an eye on this matter if present arrangements continue. There is no reason why the House should not agree to include the Bank of Ireland loan stock referred to in this proposed order. I repeat it is not enough for us to continue simply adding suitable securities to that list because the whole basic concept in the light of the present financial and economic situation is out of date and may be misleading in suggesting that in authorised trustee securities there is a degree of security and return of investment which is not there, a degree that was there in the past but which is not there now in regard to income. Indeed, it is secure in the sense that if one waits for redemption with, say, the Bank of Ireland or similar bodies whose securities are included in this list, of course, the investment can be redeemed at cost.

In the meantime the value of the trustee investments we envisage here will probably be below par in many cases, not necessarily in this case, which are included in the list. In regard to national loans, the value is way below par. Therefore, until redemption, to talk of security in authorised investments may be misleading and as I have already said for that reason it may be necessary to take a look at the whole situation. Given that the system of trustee authorised investments continues, there is no reason why the House should not agree wholeheartedly to the inclusion of the Bank of Ireland loan stock.

Mr. Esmonde

I welcome this move by the Minister for Finance. It seems to indicate the trend in the thinking abroad that one does not necessarily invest in something with a fixed coupon title to it and that there are better prospects for those people who want to get involved in the capital of an enterprise such as the Bank of Ireland which is as sound as any financial institution in the world. I appreciate what Deputy Colley said about inflation. Fixed interest coupons are an irrelevant aspect with the type of inflation we have in the western world.

I should like to discuss building societies. If these societies are to be brought into the category of trustee investments and considered as a depository of trustee moneys, it is only right that they should be brought under the control of the aegis of the Central Bank like any other banking or financial institution. The majority of financial institutions in this country are controlled. There are arguments for and against this. We have seen rather traumatic times recently in reference to the situation of building societies. They do not have any right or claim to be in a privileged position in that regard. There may be other formulae for controlling building societies that emanate from the Department of Industry and Commerce under the Registrar of Friendly Societies and Provident Societies, but I do not think that that is sufficient in this day and age. I feel very strongly that building societies should be brought under the same control as banks.

I should like to deal with some of the difficulties which lawyers experience when dealing with funds loaned by building societies. These societies were established as small investment co-operative clubs to provide a certain service for the not well off sections of our society. The character and nature of these societies have greatly changed over the years. One of the difficulties experienced by lawyers is the fact that these societies were prohibited by Act of Parliament from advancing moneys where there was a prior charge. In other words, they could not advance money on security of property where there was a prior charge. This has given rise to considerable difficulties where people tender their property and documents of title as security for a building society loan and the lawyer for the society must turn down the application on the ground until the charge, be it large or small, has been released and cleared for the title. This has given rise to very unrealistic situations. The section which gives this trouble is section 13 of the Building Societies Act, 1896. The only charge allowed, because there is a decision to that effect, is a Land Commission annuity.

Latent charges in reference to estate and succession duties have given rise to considerable difficulties and congestion in the pipeline for money being advanced by building societies. I am speaking from experience as I had the duty of advising one of our larger building societies on this matter.

It has been a traumatic experience for a young married couple who have bridging finance to suddenly find some wretched charge or annuity that is fully indemnified by other property and they cannot get the loan because the Act specifically prohibts a building society from giving money on that property. As the Minister is discussing building societies and trustee investments this is an opportune moment to look at this very needy reform.

Minister for Finance (Mr. R. Ryan)

I would like to thank the House for the manner in which they received my recommendation and to comment briefly on the two topics which have arisen in the course of the debate. I want to assure the House that as far as I am concerned there is no delay whatsoever in completing the necessary steps to make building societies a trustee security but the law and prudence require consultations with a number of people, not merely building societies but also the Central Bank and the judiciary.

Several months ago we submitted to the building societies what were considered to be the rules which should be observed by them before they could enjoy trustee status. These rules are such as to protect the public interest, which must be paramount as far as any trustee investment is concerned. The rules are such that some of the more recent arrivals on the building society scene may not be able to conform with them but that need not cause any public worry. In fact, I think it might be very much to the public good if there was a tidying up of the whole building society situation.

That will have to be dealt with primarily through legislation which the Minister for Local Government will shortly be promoting in the House, in the form of the Building Societies Bill. In the meantime, as long as the disciplines necessary to protect the public interest are observed by building societies, and they indicate their willingness to observe them, then we will be able to confer trustee status on them which should make them a more attractive investment than they are at the moment. They are a very attractive investment, having regard to the fact that a person will always be able to recover any money lodged with them at par. They might be regarded as even more attractive than trustee investment and some of the other investments which Deputy Colley correctly pointed out might not be in some cases secured against loss in these traumatic days, to use Deputy Esmonde's words, in which we now live.

The great thing about the stock exchange is that it never remains the same and a period of bear conduct is invariably replaced by foolish conduct and vice versa. We should take some confidence out of the fact that the Irish Stock Exchange has behaved more sensibly than stock exchanges elsewhere including some of the major financial markets in the world.

Mr. Colley

That would not be very difficult.

Mr. R. Ryan

It would not. We all know how much stock exchanges react. They react even more irresponsibily at times than almost any other sector of the community. They either are suffering from excess of depression or excess of optimism. The Irish Stock Exchange has maintained quite a degree of equilbrium in very difficult times and it is very much to its credit that it has done so. This particular investment on which we are seeking to have trustee status conferred is one which, as Deputies generally accept, is deserving of that status and of full public confidence.

The points raised by Deputy Esmonde will fall to be dealt with in the Building Societies Bill rather than under any of the immediate responsibilities of the Minister for Finance but I want to assure him that the provisions in relation to trustee status will require the consent of the Minister for Finance to the interest rates which they offer and charge and will also require that he lay down the liquidity ratios which have to be observed. I am sure these will be found to be sensible. If they have to be modified, in accordance with disciplines of the money market at any time this can certainly be done.

Needless to say, the Minister for Finance will, in the course of coming to decisions in this matter, be consulting with the Central Bank so it will ensure that the whole investment sector in this country will be properly supervised in the public interest. This can be done in a way which will restore the degree of confidence which the building society movement deserves. Deputy Esmonde was quite right in saying that building societies are now entirely different from what they started out to be. They were at one time mutual benefit societies with a comparatively small number of people who collected their own savings together and lent them out to members. Nowadays they are like any other money agency competing against other financial agencies for money in the public market and then redistributing it again on a public basis, certainly not on a mutual trust basis which was the norm when the building society movement was originally founded. They are playing a very useful part in collecting money in our community and investing it in one of the most necessary investments for the betterment of our society, that is in housing. The steps we propose taking will ensure there will be public confidence in this highly desirable activity.

Question put and agreed to.