The motion before the House calls on the Government to take "immediate action" to protect the interests of depositors in finance houses, provident societies and similar institutions. The inspiration for this motion is a number of reports in recent months of failures of businesses involved in financial dealings. I use these words with some deliberation because it is not evident from the reports or from the information available to me or to my colleague, the Minister for Industry, Trade, Commerce and Tourism, that all these businesses were engaged in taking deposits from the public nor that their clients were in all cases depositors.
It is proper that the House should wish to express its concern about these events. It is a concern which the Government and I readily share. Deputy O'Kennedy in his remarks on moving the motion last evening expanded on the motion's rather generalised wording. He confirmed that its primary motivations are concern that members of the public should have been put at risk of substantial losses and that investors' confidence should be maintained.
In my view, the motion needs specification for three reasons. Firstly, too much could be read into it. It could be interpreted as calling on the Government to do things they cannot do and ought not to do, or to incur expenditure that, while it might bring relief to a limited number of people, would not be conducive to the proper development and regulation of our financial institutions in the longer term. Secondly, for the House to adopt this motion could give the people at risk in these failures unjustified expectations. Thirdly, approval of the motion in the terms in which it is put down might give the false impression that the regulation of our financial institutions is somehow less than adequate and that depositors are at some degree of risk. It is for those three reasons, which are very specific and have to do with the impressions people would get, that the Minister for Industry, Trade, Commerce and Tourism and I have tabled an amendment while making it very clear that we fully agree with the concern expressed in the motion and in the speeches made by Fianna Fáil last evening.
The amendment we put down asks the House to note that deposit-taking institutions are subject to regulation and that it is the Government's intention to take such steps as may be necessary to strengthen that regulation. This is the area that can be properly addressed. The taking of deposits from the public in the sense of banking business — but of course not all the institutions involved are actually licensed banks — has long been subject to official control in varying degrees. That control was exercised lightly when the main outlets for savers were the associated banks and the Post Office Savings Bank. The situation changed in the sixties. Rising living standards and rapid economic growth made it possible for many more people to save. Old institutions became more active, new ones came on the scene and the range of financial services on offer to the general public expanded and became more sophisticated.
Official control in the public interest had to move with the times. In the mid-sixties legislation was passed to confer a legal status on and to provide a regulatory framework for the rapidly growing credit unions. The Central Bank Act, 1971, instituted a new and tighter system of control over deposit-takers. This was supplemented by the Building Societies Act, 1976, which modernised the law regulating building societies, institutions which had become, and remain, major repositories of the community's savings and a key force in the housing programme. Finally, the Industrial and Provident Socities (Amendment) Act was enacted in 1978 to control and, ultimately, to ensure the termination of the banking activities of provident societies. Unfortunately, that control and termination have not been achieved in as orderly a manner as was hoped, but nevertheless the Act will ensure that this group of deposit takers will cease to exist in the not too distant future. The Minister, Deputy J. Bruton, spoke in more detail on the situation with regard to those particular institutions last evening and illustrated very clearly that the concerns which gave rise to the Act and the system provided in that Act, are still real and that the objectives of the Act are very much the objectives of the Government today.
As a result of these measures the main private sector deposit-taking businesses were brought under active supervision in the public interest. By and large these legislative measures have achieved their objectives. The regulatory authorities, that is, the Central Bank and the Registrar of Friendly Societies, have used the powers vested in them to ensure as far as possible that the institutions in their care are safe repositories for the community's savings. In the banking sector, for example, there have been substantial dynamic changes and there are now over 40 licensed banks, yet the difficulties that have arisen in the banking systems of some other countries have largely been avoided. The building society movement has co-operated with the Registrar of Friendly Societies to ensure that investors have been protected.
I have thought it well to recall these events in order to place on record the fact that there are modern arrangements for the supervision of deposit-taking institutions, arrangements promoted over a period by successive Governments and which it would be appropriate to develop further, should that be found to be necessary. When I answered a parliamentary question last week related to the subject of this debate I observed that the controls exercised over banks were cited in the question as an indicator of what is necessary in the area of deposit-taking generally. That in itself seems to me to be an eloquent testimonial to the way the Central Bank have carried out their functions, to the licensed banks for the manner in which they conduct their business, and to the controls themselves.
The basis for the regulation of deposit-taking businesses is in the Central Bank Act, 1971. Under that Act, the soliciting and taking of repayable deposits from the public without a licence from the Central Bank is generally prohibited. There are some exemptions, notably the building societies, the savings banks and public sector institutions such as the ACC and ICC. As a result of regulations made in 1979 for the purpose of giving effect to an EEC Directive, the prohibition of unlicensed deposit-taking now applies also to the taking of other repayable moneys from the public.
A new Central Bank Bill is being prepared in my Department. The system of licensing and supervision set up in 1971 has worked well but inevitably practices and ideas change. Major technological developments are in train, the range of services is constantly being expanded and new groups of the population are becoming bank customers. Harmonisation and the progressive internationalisation of banking are changing the parameters within which the Central Bank and the banking system must function. The new Central Bank Bill will be a comprehensive measure dealing with many aspects of banking and currency law. I appreciate that this legislation has been a long time in the making — it was originally announced in 1977. Since I became Minister for Finance I have taken steps to expedite the measure and I expect to bring proposals to the Government in the near future. As I have said, this will be a comprehensive measure in a very important field. Subject to the completion of consultations and the exigencies of drafting, I hope to be in a position to introduce a Bill towards the end of this year.
I think it is generally known that the Bill will provide for a limited scheme of deposit protection, that is for some degree of compensation for depositors in banks that fail. I shall return to that matter in a moment. There will also be provision to strengthen the Central Bank's powers to regulate banks and to take timely action to safeguard the interests of depositors. The House will appreciate that I am not in a position to be specific at this stage. I can say, however, that one of the issues my Department and the Central Bank are addressing is the raising of repayable funds from the public in forms other than repayable deposits. It is necessary to "flesh out" the prohibition on the raising of moneys in such forms. This is pertinent to our present discussion because reports on some of the recent failures suggest that funds have been solicited from the public, for example, by the issue of short-term bonds, and the proceeds were then applied for investment purposes. I think there would be general agreement in the House that there is a gap which should be closed. However, I would have to say that the matter is somewhat complicated and I must be careful not to bring forward legislation that might unduly restrict the raising of capital by businesses in the productive and non-financial service sectors. Therefore, there would be a question of defining fairly clearly and tightly the particular target of this measure so that it will have the effect we want it to have in terms of the protection of the general public without adverse effects on the legitimate raising of capital by businesses and by enterprises involved in the non-financial service areas.
At present the penalty on conviction for an offence under the Central Bank Act is low. For a summary offence it is only £100. I intend to recommend to the Government that the penalties should be increased substantially. I propose also to consider whether the penalty for unlawful deposit-taking should include a term of imprisonment.
I said at the beginning of my remarks that it was not evident that all the institutions that had collapsed were deposit-takers or that all their clients were depositors. Certain businesses raise money from the public for a variety of purposes and largely escape official regulation at present. They may be insurance intermediaries or providers of financial or property investment services. The Minister for Industry, Trade, Commerce and Tourism, when he spoke in the debate last night, referred to these bodies and informed the House that he was re-examining the possible need to subject them to some degree of official regulation. What I want to add to that is that if any of these people are taking deposits or raising funds from the public on their account in the manner of banks, rather than as agents providing a service, then they are acting illegally. I want to make that perfectly clear so that there is no doubt in the minds of Members of this House or in those of the general public that this is the case. I am looking at this area in that context but the nature of the activity is not always easy to establish. Some care is required, otherwise we could move into the area of regulating not deposit-taking but investment business. I would not like the House to draw the conclusion that I think investment business may not require some regulation. I simply want to make the point that the philosophy that might underlie any action in that area might be quite different from that which applies to legislation in relation to deposit-taking.
I said that the proposed Central Bank Bill would include provision for a scheme for the protection of depositors on the basis of part compensation for any loss they might sustain in the event of the failure of a licensed bank. What I have in mind is an arrangement financed by the banks which would provide part compensation of depositors with a fairly low "cut-off" point. The scheme would apply to licensed banks only and there would be no retrospective application. It is wise to provide for a scheme of that kind although I am convinced that, given the success we have had so far in control legislation and my expectation that our controls will be able to keep up with further developments in banking as we foresee them, the necessity to invoke the scheme will hardly ever arise. Indeed I hope it would never arise. Nevertheless I think it prudent to make this kind of provision.
I am mentioning these points because I do not think it would be fair to allow any suggestion to develop that this proposal, which has been common knowledge now for some time, might be adapted or modified in some way to cover those people caught up in the recent collapses. I would see the strongest objections to associating the licensed banking sector with other institutions, some of which were set up to evade the obligations of the Central Bank Act.
As my colleague, the Minister for Industry, Trade, Commerce and Tourism, pointed out last evening, this Government are not going to repeat the Irish Trust Bank precedent and provide public moneys to repay depositors. I acknowledge that recourse to the public purse has not been advocated in this debate but I feel it necessary at this point to make the Government's position absolutely clear.
A point that might reasonably be advanced is that two Ministers, the Minister for Industry, Trade, Commerce and Tourism and myself, have responsibilities in relation to deposit-taking institutions. That might be used to argue that there is room for greater co-ordination to ensure greater uniformity of supervision. I am aware that in other countries with larger economies and a wider range of financial activities the barriers between institutions are tending to break down. It is becoming less easy to classify some businesses as banks and others as something else, say, securities houses or thrift institutions. The pace of technological change will probably accelerate this tendency. In response to these emerging trends there is a view that supervision should be related more to function than to the category of institution.
It may be that in time this is the road we will have to follow. However, the position here is that we still have a diversity of financial institutions with their own specific forms, businesses and traditions. Some are companies. Others have mutual or co-operative types of organisation. Others still are closely linked to the public sector. They all perform important functions. We should be slow to force all deposit-takers to conform to one mould or one particular model. There is co-operation between the relevant Government Departments and the supervisory authorities. This will be continued and expanded as necessary to ensure that a high standard of supervision is constantly applied to all such institutions.
I would like briefly to touch on a number of points made earlier during this debate. The position of depositors as unsecured creditors arose. That is a well-established principle of law. Depositors rank ahead of ordinary shareholders but in general they have no priority claim on any part of the assets. There is a limited exception to this legal principle. Licensed banks and building societies are required to keep a statutory sum related to the size of their business on deposit in the Central Bank. Should the institution fail, that deposit would be reserved for the benefit of depositors. When I remind the House that this deposit may be as small as £20,000 and that the maximum for the largest bank is only £500,000, it will be seen that these arrangements are little more than a token acknowledgment that depositors are exposed to risk. It is for this reason that a compensation fund in relation to licensed banks is envisaged in the context of the new Central Bank Bill. That is, in my view, the proper way to cushion depositors.
That arrangement would not have been feasible in the case of provident societies. It requires that the businesses should be reasonably cohesive and well-run. It is fairly clear at this stage with hindsight that many of the provident societies did not fulfil those criteria. They lacked a solid foundation and their collapse could not be prevented despite the strict measures enacted in the 1978 Provident Societies Act.
The question of publicity was also referred to. I agree that not everybody is in a position to appreciate the distinctions between different types of businesses. Less sophisticated savers may find it difficult to resist attractively presented offers and to identify inherent weaknesses in a business. There are limits to what can be done to help such people. Members on both sides have spoken on this problem at different times. Only last week in replying to a parliamentary question I advised people to be careful. That was a sentiment echoed at the other side of the House. Last night my colleague, the Minister for Trade, Commerce and Tourism demonstrated to the degree to which people were warned about investing in provident societies. We would also have to acknowledge that the media in general have taken a very responsible line in this matter. In numerous articles and advice columns they have consistently advised their readers to be on their guard in approaching institutions of this kind. The National Savings Committee, for example, also perform a useful function in this regard, with publicity and savings campaigns which consist partly of advising people on how to invest their savings in safety.
The fact is that there are many safe ways to invest. The State itself provides a number of attractive savings media, such as the Post Office Savings Bank, Trustee Savings Bank accounts, savings certificates, national instalment savings and index-linked bonds. The small saver who wants a safe home for his savings with a good return need look no further than those institutions and he has the satisfaction of knowing that his money will be put to good use in the public capital programme.
In so far as gilt edged securities are concerned, while it is true that prices fluctuate from time to time in line with interest rates and other considerations, these movements are generally of a short-term nature and are part and parcel of the normal operation of the gilt market which in no way take from the basic solidity of Government paper. I would conclude from that that there are a number of avenues open to small savers who want a high degree of security on their savings without having recourse to institutions such as those which have created a problem recently and which have given rise to the motion which we are discussing this evening. Deputy O'Kennedy indicated that one of his reasons for putting down the motion was to create a reassuring climate for investors generally and to restore confidence in the investment climate. He referred also to the need to present a reassuring front to the outside world. I would like to acknowledge the careful way in which the Deputy presented the motion. We are all in agreement in our wish to promote investment. It is particularly necessary to encourage productive investments that will enhance output and enable more employment to be created. I feel therefore that it might have been a little unfortunate to associate the failure of bodies such as those which have given rise to this motion with confidence in investment generally or with our appearance in this respect to the outside world. I would think it essential that the idea should not go out from this debate that the demise of some minor financial concerns whose operations can only be regarded as speculative has affected in any way the overall investment situation in this country.
I know that to the people affected the failure of the enterprises which we are discussing is not a small matter, but in the totality of our financial sector they were minor operations. As I have said, it would be wrong to let the impression gain currency that they have in any way brought about any kind of qualitative change in the investment scene in this country.
We must maintain a sense of proportion. There is over £10,000 million invested on deposit in Irish financial institutions. Very large sums are invested in our insurance companies and there are a great many responsible intermediaries operating in the stock exchange and other sectors. The message is that all these moneys are being managed responsibly. Investors at home and abroad can rest assured that this country is a safe location for their funds. The Government intend to maintain our excellent reputation in that respect.
I would like to repeat my appreciation of the responsible way in which the debate has been approached. I feel that Deputy O'Kennedy and his colleagues would agree that they have elicited a positive response through the Minister for Industry, Trade, Commerce and Tourism and myself. The Government are firmly committed to doing whatever may be necessary to maintain and enhance public confidence in our financial institutions.
Reference was made during the course of the debate last evening to the situation of particular individuals who have suffered losses as a result of the events which we are discussing. Those were given as illustrations and to put on the record the effect of these events which, while they are very small in the total financial scene, are nevertheless ones which concern those individuals very closely. The best protection that the State can offer to individuals, whatever their level of savings, is to ensure that our financial institutions of whatever kind and under whatever statute they are founded or organised are regulated on lines designed to protect the public interest. The public interest clearly must have regard to the interest of depositors and of those who use the funds which are put on deposit.
I pointed out this evening a number of measures which we are now developing and, indeed, which have been developed over a period of years since the mid-sixties to provide for the proper control and regulation of these institutions. I have indicated some of the measures which will figure in the Central Bank Bill, which is one of the instruments that we have at our disposal to ensure that this regulation is properly carried out. That Bill, which is the area of my particular responsibility as far as the substance of this debate is concerned, is one which, by the time it is presented to this House, will have been very carefully considered and the measures in it carefully worked out with both the regulators and the regulated. When we come to discussing that Bill in this House, we will be in a position to clearly assume that most of the angles of the Bill have been covered from a technical point of view and we in this House can concern ourselves principally with the overall regulations of these activities in the public interest. That is an important point because of the essential character of financial institutions towards the further growth and development of our economy. My colleague, the Minister for Trade, Commerce and Tourism, last week indicated the action which he is taking in the area which is his responsibility, particularly with regard to provident societies. There again, it is clear that it is, has been and always will be a major concern of Government policy here to ensure the solidity of these institutions so that those who place money in their management or on deposit with them can feel that they have found a secure home for their funds and that those who end up borrowing money from these institutions will know that they are borrowing from a well regulated source.
In view of all that, we have put down an amendment to the motion, the concern of which is to make the motion more precise and to express more clearly the nature of our concern with the events which we are discussing and what our intentions are in relation to the institutions which we are now examining. I hope my belief will be shared generally in the House that the present debate has enabled us to make clear our priorities in relation to the regulatory approach to these agencies. As a result of this debate, we will have made it very clear, both to the general public and to those involved in running the institutions, that our primary concern is with solidity and the continuance of promoting and ensuring the strength of the foundation of our financial system. That has been the reason for putting forward this amendment. It reflects a further clarification of the level of agreement which exists in this House on the matter.
