Dáil Éireann debate -
Wednesday, 19 Oct 1994

Vol. 446 No. 1

Stock Exchange Bill, 1994: Second Stage (Resumed).

Question again proposed: "That the Bill be now read a Second Time".

Éamon Ó Cuív

It gives me great pleasure to speak on this Bill which affords us an opportunity to talk about money, the money system and the investment of funds. I am delighted that old legislation dating back to 1799 is now being replaced with a modern regulatory procedure. I have felt for a long time that all pre-Independence laws should be systematically replaced by Irish statutes so that all laws governing us are ones that have been passed by an independent Irish Parliament.

It is welcome that are are at last taking control of another sector of our financial affairs. It amazes me that it has taken until 1994 to set up an independent Stock Exchange. I know there are historic reasons for the present set-up. In the 1970s the London Stock Exchange was changed to make it the main Stock Exchange in a federation of stock exchanges. It is important in an independent State with an independent currency to have a Stock Exchange of our own and I am glad EC Directives have ensured this will happen.

Questions have been raised in the debate as to why the Central Bank should become the regulatory authority. To date the Central Bank probably has not had great expertise in the matter of the Stock Exchange, but there is no reason it could not build up or buy in the expertise to become an effective regulatory authority. The group or body regulating the Stock Exchange must be totally independent of the exchange and it is sensible to provide that the Central Bank regulates the new Stock Exchange.

I notice in the brief circulated that the board of the Stock Exchange will include independent members representing the public interest, but I hope they will not be drawn exclusively from the business community. Everybody has an interest in the Stock Exchange, it is important that the independent members are seen to be in a position of public trust and take a public interest approach to their position on the board of the Stock Exchange. I hope an effort will be made to appoint people from outside the small circle of big business to represent public interest on the exchange.

I have a reservation about the mechanism in the Bill which provides that the Stock Exchange will carry out investigations in the initial stages into breaches of its rules. Self-regulation may cause problems. I accept that all reports of such investigation will have to be submitted to the Central Bank, but I am a little uneasy about the position where alleged breaches will be investigated by the Stock Exchange itself.

On the operation of the Stock Exchange, we must consider some of the trends that have developed over the years. I will deal later with the role of institutional investors on the Stock Exchange. Speculation in shares is still prevalent and that is all right in its own way. The Stock Exchange is self-fulfilling in its prophecies. In other words money is made on the basis of rumour and expectations. For example, if it is believed the market is good, people buy and as a result the market improves. The expectation reinforces the reality. I do not know if we can prevent that and there are inherent dangers in this practice as the price of shares can increase beyond their real value based purely on sympathy. Similarly, when people sell shares the price goes down, thereby encouraging others to sell. It is a self-reinforcing system where prices are far in excess of those warranted by the changes in the outside world.

In times of rapid movement on the Stock Exchange fortunes are made and lost. For those with information, particularly private investors who make a business of investing in the Stock Exchange and the movement of shares, fortunes are made. Making money in those circumstances does not generate wealth in society. Those who speculate on the Stock Exchange for the purpose of making money do not create wealth.

Another question raised by a previous speaker is that of insider trading. In view of what I said about the self-reinforcing prophecies on the Stock Exchange, the question of legitimate knowledge as opposed to insider trading is of great importance. Strict rules should be enforced to prevent insider trading. However, I foresee difficulties in distinguishing between legitimate knowledge and inside information which could be used to unfair advantage. For example, it could be common knowledge that the demand for timber will increase rapidly in future years and in those circumstances it would be fair for people to invest in the expectation that there will be huge growth in that industry. However, there are also instances where people make large amounts of money as a result of gaining knowledge within companies. It is important for confidence in the Stock Exchange that there is strict implementation of the rules and regulations to ensure that inside knowledge is not used.

A vast amount of money is invested in shares on the Stock Exchange on behalf of ordinary citizens who would never dream of investing directly in the exchange—I refer to institutional investors. Taking into account pension and life insurance funds and other funds operated through banks and so on, by far the largest amount of money on the Stock Exchange is transacted through institutional investors. There is an obligation on institutional investors to maximise the return, irrespective of how they get that return. These people obviously work on a world market and this issue raises many questions regarding the rights of people buying into pension or life insurance funds to have some say in where their money is spent and in what it is invested. It is in this area that huge sums of money come into play. Pension funds and life insurance policies may be used, unknown to the people who take out those policies, for exploitative purposes in this country or the Third World.

Some of us would be curious to know where our money is invested; we would like to think it is being put to good use. While I accept this runs counter to the maximisation of profits, that should not be the sole criterion for investment fund managers. That is their remit at present.

In the future — there has been some movement in this direction — a person will be able to invest in a life insurance policy under which a certain pecentage or all of the funds will be invested in an environmentally friendly programme rather than in a programme to fund cutting down the rain forests in the Third World. There should be widespread investment to ensure not alone profits but that funds will be invested for environmental purposes. This should be considered by investment fund managers. If I was offered the choice I would prefer to invest in a life insurance policy or a pension fund under which the money would be used for environmental purposes or a proportion, 20 per cent to 30 per cent, would be invested in companies in the west. I would be willing to accept a lower dividend in the knowledge that the funds would be used to support projects acceptable to me.

Investment fund managers should provide more information to those who buy policies; people will demand to know where their money is being invested and a wider choice so that they will be able to make informed choices as to the purposes for which their money will be used. There is scope for widening the choice of policies available to the purchaser given the huge sums involved and that money invested here can be used throughout the globe. We have no say in the way this money is used by investment fund managers on our behalf. It is time the consumer had greater choice in these matters.

On the way in which small businesses are financed, the Stock Exchange is not a mechanism for raising funds except funding for major businesses and the larger of the unlisted businesses in this country. If we accept that most businesses here are small employing between five and 35 people, we need a mechanism whereby funding can be made readily available to small businesses. A certain proportion of investment funds should be allocated for this purpose. This could be done by way of tax incentives. One will find that few small businesses have raised capital through the mechanism of the Stock Exchange. It is a fallacy to believe the Stock Exchange helps small businesses, rather Stock Exchange investors act in a prudent manner and tend to invest in banks and major corporations as they carry a lower risk. In investing in a life insurance policy or pension fund the consumer should have a choice and should have the option to invest a certain proportion perhaps 5 per cent, in small businesses. In return he would receive a lower dividend. Ba mhaith liom míle fáilte a chur roimh an mBille seo. Tá sé thar am go mbeadh malartán stoic dár gcuid féin againn sa tír seo. Cuireann sé go hiomlán leis an rud a rinneadh sna seachtóidí, nuair a cuireadh córas airgid dár gcuid féin ar bun, agus an rud a rinneadh sna tríochaidí, nuair a cuireadh an Banc Ceannais ar bun.

Mr. Bell

I am grateful to have the opportunity to speak on this important Bill which has not been presented before its time; it is over 200 years since the last legislation relating to the Stock Exchange was introduced. The Stock Exchange is in need of reform and I welcome the Government's decision to introduce legislation to modernise it. During the past 50 years there has been a revolution in the financial and investment markets both here and throughout the world. The previous speaker raised the use to which finance should be put and the lack of support for small businesses in particular. We should support moves at European level towards a single European currency as this would prevent speculation in the financial markets. A small percentage of people have made huge profits in this way although it is the ordinary man in the street who has to foot the bill.

Since the early eighties the financial markets have changed. Technology, in the form of computers, has had a major effect. Today financial markets throughout the world do not close; as the Dow Jones market in America closes the Japanese market begins to trade. This legislation is necessary to assist the Irish Stock Exchange deal with the changing nature of the world's financial markets by placing responsibility on the Central Bank and the Irish Stock Exchange. The Bill has been prompted also by the introduction of two European directives, the Investment Service Directive and the Capital Adequacy Directive.

The Central Bank is the most important and powerful body in terms of the regulation of banks and financial institutions in Ireland and it makes complete sense for the Government to charge it with the responsibility of regulating the Stock Exchange and its member firms. In short, the Central Bank has the knowledge, the experience and the expertise to do the job. It will take over the regulation of the Stock Exchange and its member firms in Ireland. There is one Stock Exchange in Ireland which is part of the International Stock Exchange of Great Britain and Ireland.

Some people will argue that giving the Central Bank such a role will create a new layer of bureaucracy for the Stock Exchange. I do not agree as the Central Bank's primary role is a supervisory one. The Stock Exchange will regulate its own affairs on a day to day basis and the Central Bank will simply lay down the rules and step in if difficulties arise. I believe the Central Bank must ensure that the Irish Stock Exchange operates to the highest and most scrupulous standards. This Bill demands that it does and so too do the public. The Irish Stock Exchange has been given the required powers to maintain and enforce such standards. Above all the Central Bank must carry out its duties in a manner which ensures that the new regime operates with openness, transparency and most important of all, accountability.

Much play has been made by some Opposition Deputies about the measures in this Bill to deal with insider trading. The Central Bank must ensure that the Irish Stock Exchange operates to the highest standards and I would expect that it would deal very particularly with insider trading. Insider trading is adequately dealt with in the 1990 Companies Act, a very lengthy and cumbersome Act.

The Stock Exchange, which splits from the International Exchange next April together with its ten member firms, will have to apply to the Central Bank for approval to operate. The Irish Stock Exchange will have to become a limited company and appoint a new board — replacing the existing council — which will be made up of the representatives of the member firms and independent directors, whose appointments have to be approved by the Central Bank. I ask the Minister to ensure that the composition of this board reflects equally all of the groups and interests who should be represented on such a board. I suggest also that the board should be set certain tasks and standards strictly in accordance with the new legislation and that it should be charged with ensuring that the public is given information in simple terms on the operation of the Stock Exchange. In many respects the Stock Exchange is a mysterious organisation with only those who are involved in it knowing about it. We must get the balance right between the interests of member firms and institutions and the general public.

The Central Bank will be able to impose conditions and regulations on the Stock Exchange and its member firms. This is a welcome step. The Central Bank will be able also to appoint inspectors to investigate breaches of conditions and regulations by the Stock Exchange and its member firms and also breaches of the Stock Exchange rules. To ensure that the Central Bank can carry out its duties and ensure the Stock Exchange operates within defined parameters, the Bill outlines a very comprehensive procedure in the event of any institution breaking the law. All breaches of the Stock Exchange rules will be investigated by the exchange in the first instance and a report of the outcome of the investigation will be made to the Central Bank. The Ministers for Enterprise and Employment and Finance will be able to obtain and publish the reports. I urge the Ministers to do just that because the Stock Exchange is shrouded in mystery. The general public sees pictures on television of huge dealing rooms full of computers with people buying and selling all over the world. At the end of the day it is the general public who has to pay. I hope those reports will be laid before the Houses of the Oireachtas so that Members can debate and discuss them. It is very rare that we get such an opportunity, hence the lack of interest in this type of financial activity and in the Bill.

I will be supporting the general thrust of this Bill but in doing so I wish to outline some general remarks, query certain matters and indicate my considerable reservations on one or two aspects. I look forward to the Committee Stage debate when we will have a more detailed discussion. I shall listen with interest to the Minister's concluding address on Second Stage.

This Bill provides a mechanism for the severing of the relationship between the Dublin and London exchanges and makes the Central Bank the supervisor of the Irish Stock Exchange. That is the way it should be. It always appeared to me, and I am sure to others, that while we had political independence, financially we were still dependent on London. Some of us are old enough to remember that the Dublin unit joined the London exchange with a fanfare of trumpets. The Bill provides for the future. It was not too long ago that there existed two exchanges, one in Dublin and the other in Cork. Today the Dublin Centre for Commercial Law Studies is running a seminar on this Bill with a panel of the usual speakers addressing various aspects. I assume we shall be reading reports of the expert advice offered. I hope that reports of this type of seminar will provide the general public with information it can understand on the Stock Exchange.

I am conscious that this Bill is one from a menu of important commercial law issues presented to this House in recent months and it will shortly be joined by the Foreign Trusts Bill from the same stable. I suppose we cannot be too far away from a revised Unit Trusts Bill and other important Bills which will tighten up and control financial dealings and company law itself.

As I understand it there are two essential purposes for a stock exchange, to raise funds for industry and to provide a method of matching buyers and sellers to their mutual advantage. With regard to raising capital for industry I have to question seriously whether the exchange is acting as the principal agent for such funding. In recent years the number of prospectuses lodged with the Companies Office does not show any evidence that the providers of capital see the Stock Exchange as the principal source of funding. If the business expansion scheme was not available I wonder whether substantial funding would go towards productive industry and, more importantly, to job creation. In saying that I am aware that three of the largest providers of jobs in County Louth are quoted on the Stock Exchange, namely, Fyffes, Flogas and Cement Roadstone.

I ask the Minister to define what he sees as the principal role of the Stock Exchange. If it is as I indicated earlier, perhaps he will engage in meaningful dialogue with the exchange to ensure it performs that role. Sections of industry, the trade unions and the general public do not believe it is doing so. In many cases the general public's view of the Stock Exchange is that of a huge money lending organisation; others see it as a glorified gambling casino where people make or lose millions of pounds.

It is quite expensive to become quoted on the Stock Exchange and there are many regulations which might daunt an entrepreneur from seeking funding from investors. Historically, those who deposit money, notwithstanding inflation, get the lowest rate of interest. With a little creative impulse I am sure investors would support exchange quoted companies but the current number of Irish listings would not be to anyone's advantage

The second role of the exchange is that of a market provider. I appreciate that many of the issues relating to listed companies are provided for under the Companies Act. However, the exchange has a decided impact on the operations of listed companies by means of its own rules. In this regard I must admit considerable scepticism about how the exchange governs its activities. Insider trading, for example, is contrary to the Companies Act, 1990 and the exchange must report on compliance with that Act to my colleague, the Minister for Enterprise and Employment, Deputy Quinn.

I am aware that two listed companies are currently suspended from trading on the Exchange. These are not recent suspensions and they have the consequence of locking in unfortunate shareholders. It is shareholders whose life savings and pensions have been earned over 40 or 50 years who are the main victims of these activities. One of the companies suspended had a court inspector's report on its activities presented to the High Court within the past few days. What will be done about this? Will it be allowed to drag on without any prosecution if there has been a default or if the law has been broken? It certainly appears to the public that people who break the law in this regard can get away with anything, but if an itinerant steals a bag of groceries he or she will probably be imprisoned for six months. Why has this problem not been investigated?

I have a number of important questions in relation to various sections of the Bill but it would be more appropriate to raise those questions on Committee Stage. In general the Bill represents a move forward. It has been too long since any attempt was made to upgrade legislation governing the main financial institution of the State. I commend the Bill to the House and congratulate the Minister on bringing forward such important legislation.

Mr. Broughan

I also welcome the Bill. My colleague outlined the necessity for markets of this kind in a modern economy, particularly in a small economy such as ours, to raise funding for Government borrowing, to provide much needed equity for industry and services and also to provide a general barometer of economic performance.

The extraordinary aspect of the Bill — and I congratulate the Minister on bringing it forward — is that it took so long to bring it before the House. It could be argued that this is the type of Bill that should have been drafted in the early 1920s or which certainly should have accompanied the Central Bank Act in 1942 or, at the very latest, in 1971. It is extraordinary that at this late stage the archaic and often hidden world of the Irish Stock Exchange is at last being made subject to regulation and to the full glare of this House.

The general public has had a negative impression of this area, whether from fictional accounts or real abuses on Wall Street and in London and the kind of extraordinary activity that takes place on the new exchanges in eastern Europe. For the ordinary small investor and for the many millions of people who indirectly invest on the Stock Exchange through pension funds, it is critical that we bring forward this legislation.

No matter what area we are dealing with, whether it is our colleagues in the Four Courts, ourselves as politicians or perhaps the accountancy profession, with which we dealt in a recent debate, self-regulation simply does not work. At a recent meeting of the Committee of Public Accounts we had a discussion about events earlier this year in relation to Davy Stockbrokers. It seemed to me that we were led a merry dance from the Dublin Stock Exchange to the London Stock Exchange and back again to Dublin over many months, during which time it was difficult to see what action, under their own rules, the London and the Irish Stock Exchange were prepared to take.

To the ordinary observer it seems that there were clear conflicts of interest in this area. Misleading information and insider information was often provided. There was a recent famous example on the London Stock Exchange which highlighted the fact that its activities are very open to this type of abuse. There was extreme reluctance on the part of the authorities concerned to recognise when an abuse was taking place, whether directly in the trading of shares, in underwriting or in the other activities of the exchange. Self-regulation simply does not work and the Minister is right to bring this institution within the remit of our Central Bank legislation.

One could examine the whole role of the Stock Exchange in Irish history over the past 200 years. The Minister or his colleague referred to the economic life of Ireland 200 years ago and the way the Act we are now repealing was simply rushed in before the Act of Union when we entered into the long, dark shadow of direct English rule in the 19th century up to 1922. During the past 200 years, and particularly during the last 75 years of independence, the fundamental role of raising capital for Irish business has not been very well fulfilled by the Stock Exchange. Far from fulfilling this role, the Stock Exchange tries to avoid it at all costs and, as a result, many firms such as Dunnes Stores felt they were better off raising capital privately.

The development of the Central Bank and the increased role given to it in 1971 may well be related to the fact that in 1973, with fanfare, the Irish Stock Exchange became part of the international Stock Exchange of the United Kingdom and the Republic of Ireland. We looked forward to a new era. Insider trading in London was legal and there were few resources to provide the necessary capital in this market. If we have a properly regulated market and dealers, managers and boards acting with a due sense of probity and particularly concerned for the small investor, we can be hopeful that Irish business will have greater confidence in the Stock Exchange.

The Minister has power under the Bill to bring reports, formations of boards and so on before the House. Will he — and the Minister for Enterprise and Employment — look at the level of Stock Exchange charges and fees and see if they are an impediment to small Irish companies utilising the resources of the market for development?

The big bang had a fundamental effect on efficiency and competition on the London market. However, there seems to be a 19th century modus operandi in Anglesea Street. The Minister was probably interested in the Conference of Religious of Ireland which examined areas where socially responsible investment could be made. My party would like to see the Central Bank encouraging the market to invest in those areas. Many observers feel the connection between the major banks and the stockbroking firms is overly close and unhealthy. Perhaps under the new structure and methods of regulation this will be examined.

In some respects Frankfurt will become, ever so slightly, the financial centre of this country. It is interesting that the Bill implements the investment services directive which will ensure a common standard for all investment firms and brings forward methods of supervision. Once again we have been prodded into action on something we were loath to tackle by the determination of our European colleagues. The Bill also gives effect to the capital adequacy directive. We can set out the adequate levels of capital which investment firms must have. The Central Bank will have a key determining role to play in this area. Self regulation does not work and I look forward to the implementation of section 9 regarding the Central Bank's ability to vet the Stock Exchange or any potential Stock Exchange before it is approved. I also welcome the provisions regarding the boards of Stock Exchanges. The Minister has taken an interesting initiative in insisting that not only the operators of Stock Exchanges but the users and representatives of the public interest, particularly the small investor, must be on those boards before they are approved. This will bring the Stock Exchange into the domain of public debate. From time to time the Minister will lay reports on the Stock Exchange before the House. Perhaps a representative from local government should be on the board of the Irish Stock Exchange because it is a key economic element in the life of the country.

I welcome the provisions regarding the Central Bank in section 9 and the special role given to the Minister and the Minister for Enterprise and Employment. If a stock exchange disagrees with any of the Central Bank judgements it may appeal to the Minister and he will make a decision on the matter. That is a useful approach and will restore control over the Stock Exchange to this House. The Minister has inserted strong powers in the Bill. A stock exchange may have its licence revoked. In Part III I welcome the similar provisions regarding member firms and the proposal to publish a register of firms which will be freely available and open to public scrutiny.

Section 4 gives a careful synopsis of the central elements the bank will pursue to supervise and regulate the Stock Exchange. Advertising is often a critical element of the operation of stock exchanges and dealers. There is provision for any instructions the bank or the Minister want to insert being prominently displayed and published.

There is lengthy coverage in the Bill of the role of auditors in supervising the accounts of stock exchanges and member firms. In section 36 there is provision for a second audit if the bank is not happy with the information it receives from the Stock Exchange or member firms' own audit. The Minister has laid down other important measures and standards whereby that can be rigorously pursued.

It is stated that the Central Bank may be happy where codes of conduct have been drawn up by the Stock Exchange or a member firm. The phrase "making a reasonable effort to avoid a conflict of interest" is too loose as it is open to abuse by unscrupulous people. However, we can deal with that on Committee Stage.

I welcome the initiatives by the Minister in this area. It is not his fault it has taken 67 years to introduce this legislation. Since he took up office he has been considering such legislation and I welcome the thorough way in which he has dealt with this area. As my colleague said, under the legal system some people are punished very severely for minor crimes. At long last we have an outline of the major punishments which may be inflicted on the transgressors of the provisions of this Bill. In terms of the Irish financial services sector, I hope the Bill will bring the stock exchange out of the early 19th century and into the 20th century and that stock exchange firms will examine the severe criticisms of their failure to provide the equity capital necessary for the development of a dynamic economy. I ask the Minister to consider at some stage the fees and charges in the market. I commend the Bill to the House.

Minister for Finance (Mr. B. Ahern)

I thank the Deputies who contributed to the debate this morning and last Thursday afternoon and welcome the opportunity to reply to the debate. The Stock Exchange Bill will make substantial changes in the regulation of stock exchanges and member firms and I am glad to have heard the views of Members on what it proposes. I am also glad there is broad support for the Bill, as indicated by the Opposition spokespersons, Deputies Yates and McDowell. It is fair to say this support has been reflected in the contributions of Deputies Broughan and Bell and other Deputies.

The main points of the Bill can be quickly described. The Bill marks a radical departure from the Stock Exchange (Dublin) Act, 1799, the basic legislation in this area which has survived for nearly 200 years. The main requirements of that Act are that individuals selling gilts on commission have a licence to do so — in modern times this requirement is met where a stockbroking firm employs a person who holds a gilt licence — and that stock exchange rules be approved by the Minister for Finance, who has, however, no power to initiate changes in such rules. The Bill proposes to establish the Central Bank as the regulatory authority for stock exchanges and their member firms, require exchanges and member firms to get authorisation from the Central Bank and equip the bank with powers to monitor and supervise an exchange's surveillance of its member firms and to set down requirements and conditions which exchanges and member firms must meet.

The Bill will also give significant powers to the two Ministers who are closely involved in this area, the Minister for Finance and the Minister for Enterprise and Employment. The Minister for Finance, with the consent of his colleague, will have power to set down guidelines to assist the Central Bank in administering the system of regulation. He will also, again with the consent of his colleague, be able to obtain reports of stock exchange disciplinary proceedings and to publish them where the Ministers think it proper to do so having regard to the public good and the rights of any person referred to in the reports. This, represents a considerable advance on the present situation and I am sure the House will agree it is proper that Ministers should have this power and the other powers provided for them in the Bill.

The Bill proposes to make the Stock Exchange more transparent in other ways also. It obliges the Exchange to have a board of directors which is broadly based and which strikes a balance between the interests of the member firms and users of the Exchange and the public interest. Moreover, the board will have to include enough independent members to promote the protection of investors and the maintenance of proper standards. While these provisions are aimed at ensuring openness and transparency, I am confident that over time they will also be seen as having benefited stock exchanges and their member firms. This is because they will produce greater accountability, and this in turn will increase investor confidence.

The Bill reflects the provisions of two European Union directives. The Investment Services Directive, which must be provided for in national legislation by 1 July 1995, obliges member states to ensure a common standard of regulation for investment firms, while the Capital Adequacy Directive sets out the levels of capital which investment firms must have in their business. My Department, in consultation with the Central Bank and the Department of Enterprise and Employment, is preparing legislation to implement these directives in respect of non-stock-exchange investment intermediaries and I will introduce that legislation in the House in due course. In the meantime, the Bill will meet our obligations in respect of stock exchange member firms arising from the two directives.

I will now deal with the points made by Deputies during the debate. A common point, raised by Deputies Yates, McDowell, Rabbitte and Kemmy, was the level of the Central Bank's experience and expertise to act as the regulatory authority for stock exchanges and member firms. I am satisfied that the bank has the necessary skills and experience to carry out its functions. The bank's supervisory responsibilities for financial institutions began in 1971 when it assumed responsibility for the supervision of licensed banks. It has been inspecting the activities of banks since the mid-1970s. These activities include highly-sophisticated treasury and investment operations. The bank was given responsibility for the regulation of building societies in 1989.

Recent years have seen significant developments in the area of supervision, particularly in respect of non-deposit-taking financial institutions. For example, the bank supervises approximately 60 firms in the International Financial Services Centre ranging from large securities houses to smaller intermediaries. These firms are engaged in a wide range of investment business, much of which involves trading and investing in international securities and derivatives. The instruments of supervision used in respect of these firms include risk based capital requirements, segregation of client funds, frequent reporting, review meetings and regular inspections.

In 1989, the bank was given responsibility for regulating the Irish Futures and Options Exchange, IFOX, which has been subject to detailed supervision by the bank since then. More recently FINEX Europe, a branch of the Financial Instrument Exchange, FINEX, which is a division of the New York Cotton Exchange, NYCE, was set up at the Irish Financial Service Centre. The bank has established a mechanism for the supervision of members operating in FINEX Europe and for approving Exchange rules. Since FINEX is supervised in the US by the Commodity Futures Trading Commission, CFTC, the bank has developed a close relationship with this regulator to ensure that common standards are applied in Dublin and New York. This process entails training of staff and a continuing dialogue with the members of the commission on matters of mutual interest.

In 1989, the bank was appointed as the competent authority in respect of Undertakings for Collective Investment in Transferrable Securities, UCITS. At the end of 1990, the bank was appointed supervisor in the area of unit trusts. At around the same time the Companies Act, 1990, gave the bank responsibility for the authorisation of collective investment schemes in a company structure. More recently, the Government introduced the Investment Limited Partnerships Act, 1994, which allows collective investment schemes to be established in the form of limited partnerships. The bank is now responsible for the supervision of some 220 collective investment schemes in Ireland which have in excess of £10 billion under management. If anyone doubted its ability to carry out this new role they will change their mind now.

The bank's supervisory approach involves considerable interaction with supervised institutions through regular review meetings and inspections. The bank has developed a considerable body of supervisory experience over the period, much of it in activities not dissimilar to stockbroking such as treasury and investment dealing. The bank, through its banking supervision role, is currently indirectly responsible for the prudential supervision of the stockbroking arms of the Irish banks and as part of this role already carries out prudential inspection of these firms. In addition, the bank regularly meets international supervisory bodies and has contact with overseas regulations either to give or seek assistance or to exchange views on current regulatory practice. The bank attended all meetings of technical experts in drawing up the EU Investment Services Directive and the Capital Adequacy Directive and attends implementation meetings on these Directives and other relevant EU fora. The bank is also a member of the International Organisation of Securities Commission, the international umbrella organisation for supervisors of investment firms.

Staff of the relevant department of the bank have considerable regulatory experience and the substantial majority have relevant graduate, post-graduate or professional qualifications. The qualifications of staff have been supplemented by a strong emphasis on external technical training in the financial area in recent years. The bank will continue to develop its resources through internal training and external recruitment.

It is abundantly clear from all of this that the bank has indeed the experience, expertise and trained staff it needs to carry out successfully its functions under this Bill. This is the type of expertise this House would wish it to have so that it can carry out its functions in a growing complex area of the financial world. I should add that the bank will include a statement of how it has exercised these functions in its annual report, which is required to be laid before the Oireachtas under the Central Bank Act, 1989. This will ensure that the House is kept informed of developments in the bank's functions when the Bill has been enacted. This covers Deputy Bell's query concerning our contact with what is happening.

On a related point, Deputy Yates claimed that while the Central Bank has extensive powers of supervision the provisions granting these powers were enabling rather than obligatory, and argued that they should be made obligatory. The Deputy will see that I cannot agree with this approach. Section 28 lays on the bank a clear obligation to administer the system of regulation and supervision of stock exchanges and their member firms in accordance with the provisions of the Act in order to promote the maintenance of proper and orderly regulation and the protection of investors. In addition, the Bank will have the duty of authorising stock exchanges and member firms; in that process it will have to be satisfied with the rules and Memorandum and Articles of Association of the exchange, and these determine how the exchange members carry out their business. Deputies will also note that under section 16, the bank will be the competent authority for the purposes of the Investment Services Directive, an important component of which is the establishment of rules of conduct so that similar high standards of conduct of business by member firms apply in all member states. Apart from this, I assure the House that the bank will be taking very seriously its functions and will be rigorous in carrying them out; I also assure the House that the bank will include a report on the exercise of its functions in its annual report, so that the Deputy will be able to judge for himself whether they have been carried out. The Governor of the bank will shortly come before a committee of the House and that will be all the more relevant as time goes by.

Both Deputies Yates and Rabbitte claimed that insider dealing should have been dealt with. I want to explain again why it is not. During the past two years as we prepared this legislation, and complementary legislation, we had much discussion on this issue and my mind has been changed in the process. I do not condemn the Deputy for raising the issue because it is relevant to much of the discussion but the fundamental reason for not dealing with it here is that insider dealing depends on access to sensitive commercial information, and such access is not the sole prerogative of Stock Exchange member firms. Recent comments and articles in the media suggest the first people to have such access are much more likely to be company managements and their advisers than Stock Exchange member firms. In saying this, I do not mean to cast aspersions on any individuals, companies, advisers, stock exchanges or member firms, I want to make it clear that the issue goes much deeper than simply stock exchanges and member firms. This is why it is proper that it should be dealt with, not by the Stock Exchange Bill, but rather by company law as is the case. The Companies Act, 1990 contains provisions on insider trading.

In addition a group called the company law review group operates under the aegis of the Department of Enterprise and Employment, which is responsible for company law. This group is currently considering a number of areas of company law, including insider dealing, one of the areas referred to it by the Minister for Enterprise and Employment. That Minister has asked the group to report to him by end-November 1994. If the group identifies changes necessary in company law in so far as it relates to insider dealing. I have no doubt the Minister for Enterprise and Employment will be anxious to bring forward legislation to provide for them as soon as possible.

Another matter currently under active consideration by the Department of Enterprise and Employment is a replacement for the takeover panel, a matter raised by Deputy Yates. The Deputy will be glad to hear that the Minister for Enterprise and Employment has undertaken to bring forward legislation in this area and legislation is being prepared by his Department.

Deputy Yates also asked when the Bill will be brought into effect and whether partnerships would continue to be allowed to be member firms of stock exchanges. I cannot give a definitive answer on the date, because the Bill's implementation will depend on when the Irish Stock Exchange separates from the London-based Exchange of which it is a part. The expectation is that the separation will be completed at the end of March 1995 and this is the date towards which everyone is working. However, I have been informed, in casual conversation with both sides, during the past few days that the date could well be 1 May. The answer to the partnership question is more definite: the Bill does permit member firms to be partnerships. The Stock Exchange however, will be required to be incorporated and I understand is making the necessary preparations for incorporation.

Another area on which questions were raised was the composition of the Stock Exchange board. I assure Deputy Yates that a deal has not been done on the 11 member board for the Irish Stock Exchange, with seven members being brokers and the other four being outsiders as he suggested. I have no doubt that somebody was trying to lead him in one or other direction.

Mr. Yates

What are the figures?

Mr. B. Ahern

The composition of the board has not yet been settled. We are setting down here what we see as the broad thrust of the guidelines which should represent member firms of investors and those outside. Many points have been made by Deputy Yates and others about the independence of that group. In that regard I have no doubt our colleagues in the Stock Exchange will be mindful of what is being said in the House. All Deputies who contributed have made the point about the need for the Stock Exchange to be conscious of the public interest.

I will pass on to the people in the exchange the remarks made by Members of all parties in that regard. While I cannot be certain what we will achieve as a result of the debate, I hope the Stock Exchange will be conscious of what has been said about the independence of the board, a major concern of most speakers. I will inform representatives of the Stock Exchange of the importance Members attach to this issue.

The composition of the board has not yet been agreed, but, in accordance with the provisions of the Bill, it will be a broadly based board with satisfactory representation of the users of the exchange as well as members, with the public interest represented and enough independent members to promote the protection of investors and the maintenance of proper standards. That is what I wish to achieve and, unlike the 1799 legislation, this Bill will ensure transparency.

The Deputy will appreciate that it would be difficult to go further than this in a Bill which necessarily deals with exchanges generally rather than with a particular exchange. I noted Deputy Rabbitte's suggestion that the Bill should require the chairperson of the Stock Exchange board to be an outsider and I will reflect further on that. The Deputies who spoke today were also of that view.

Deputies Kemmy, Rabbitte and Yates raised the question of the separation of the Irish Stock Exchange from the London based exchange of which it is currently a part. Deputy Rabbitte is correct in saying that there is no European Union directive requiring the London and Irish exchanges to separate, but I will set out the background to the position.

The Irish Stock Exchange became part of what is now the International Stock Exchange of the United Kingdom and the Republic of Ireland in 1973. Over the years two separate markets have in effect developed, with a common set of rules regulating brokers, but with additional rules applying to the regulation of the market in Dublin. The nature of the Irish Stock Exchange and its relationship with the bigger exchange of which it is a part have changed with the years, for example in 1984 when the Irish Stock Exchange was appointed as the competent authority under European Union directives for company listings in this country. A further change, of wider importance from the point of view of regulatory structures, came with the implementation of the financial services Act in the UK in 1988. This took the responsibility for regulating stockbroking firms away from the London Stock Exchange and gave it to what is now the Securities and Futures Authority. The effect of these changes over the years has been that the Irish and London exchanges are not as inextricably linked as one might imagine.

The Investment Services Directive which was finally adopted last year effectively requires stockbroking firms based in this country to be regulated by a national competent authority. This of course raised the question of how the exchange itself would be regulated. Clearly, the most satisfactory solution is to have both the Irish market and Irish stockbrokers regulated by a national competent authority and thus avoid any ambiguity about supervisory responsibilities.

The impending break with London has been a fact of life for some considerable time now and the Irish exchange has been preparing for it. It should also be remembered that the Irish Stock Exchange was independent until comparatively recently and that it has had to withstand and learn from the competitive pressures associated with being so close to one of the foremost markets in Europe. The future of the Irish Stock Exchange is tightly bound up with investor confidence and the Bill we have been discussing is designed to ensure the high standard of regulation which is essential for attracting investors to a market.

It will also be necessary for the exchange to operate with maximum efficiency and to the highest commercial standards. This is clearly a matter primarily for the Stock Exchange and its member firms. However, as already pointed out, the Irish Stock Exchange has shown a very considerable capacity for nearly 200 years to adapt to changing circumstances, and I have no doubt it should be able to organise itself to meet the coming challenges successfully. We may have to work hard in that regard, but it is obvious from the discussions in which I have participated over the past two years that there is a willingness on all sides to make it work. Following the separation of the two exchanges, I hope the board will be up and running by 1995.

Deputy Yates asked about the provisions on advertising in section 31 of the Bill. I should explain that the Bill is designed to cover only stock exchanges based in Ireland and their member firms. Stockbrokers and investment intermediaries from other countries will be dealt with in the investment intermediaries legislation currently being drafted under the aegis of my Department.

Deputies Yates and Rabbitte were anxious about whether the reports of Stock Exchange disciplinary hearings will be published. No doubt their concern springs from a certain celebrated case in which it was not possible for the Minister for Finance even to obtain such a report, let alone to publish it.

I am glad to tell the Deputies that I have addressed this matter in the Bill. Section 9 provides that a written report must be made of any disciplinary proceedings carried out by a stock exchange and that such a report must be made available to the Ministers for Finance and Enterprise and Employment where they request it. Further, provided the Ministers consider it proper to do so having regard to the public good and the rights of any person referred to in such a report, the report may be laid before the Oireachtas. I assure Deputy Rabbitte that where these conditions are met, I see no reason not to lay such a report before the House; and even where consideration for individual rights precluded that, the relevant Ministers will still be able to inform the House of the thrust of such a report. I am sure Deputies will agree that this represents a considerable advance on the situation which has obtained up to now, and a considerable step in the transparency and openness which Deputy Kemmy wanted to see. It is fair to say that past experiences prompted this legislative change. Otherwise, we might have re-enacted what has been the practice for a few hundred years, but I am sure we are all aware of the benefits of change.

Deputy Yates also raised the question of marketmaking in Government securities and how it would be regulated. Marketmaking has been proposed as a market structure for the gilt market by the National Treasury Management Agency, which is working out in discussions with the market how best it might operate. It would be premature to anticipate the result of these ongoing discussions.

Deputy Yates claimed that detailed provisions for compensation of investors should have been included in the Bill. Section 51 obliges member firms to tell clients or investors of any compensation arrangements available to them. It does not make specific provision for compensation because a draft EU directive on compensation for private clients of investment firms is still being discussed in Brussels. The Irish Stock Exchange currently operates a compensation scheme which offers compensation of up to 20,000 ECU to private clients of member firms which are in default. This is roughly equivalent to the levels being considered for the proposed EU investor compensation directive, now being discussed in Brussels. Assuming that the directive has been finalised in time, any necessary provision will be made in the investment intermediaries legislation which is being prepared in the Department of Finance.

The Bill before the House replaces legislation two centuries old with a modern regulatory framework. It establishes the Central Bank as the regulatory authority, and provides a significant role for the two Ministers closely involved in the Stock Exchange. It meets Ireland's obligations in respect of stock exchange member firms arising from the European Union investment services and capital adequacy directives.

Deputy Bell wanted to know, in simple terms, the role of the exchange. Its role will be to match buyers and sellers and to enable companies to raise capital from investors. That is what its function has been and will continue to be.

The Stock Exchange is not really a good vehicle for small businesses, as the raising of funds on the Stock Exchange tend to be costly. Over the years Governments have devised schemes to aid the funding of small businesses, such as the business enterprise scheme, the seed capital scheme, a scheme sponsored by the European Investment Bank and a scheme operated by ICC which I introduced in my last budget.

Deputy Rabbitte asked about the funds raised on the Stock Exchange. According to its annual report of last year some £879 million, including corporate bonds, were raised on the Stock Exchange for that year.

Deputy Broughan asked me and my colleague, the Minister for Enterprise and Employment to investigate fees and charges imposed by the Stock Exchange. Earlier this year I agreed to the removal of the Stock Exchange rule which stipulated minimum commissions for dealings in gilts following the finding of the competition authority that that rule was anti-competitive. Therefore, it is now an open market.

Mr. Yates

I would ask the Minister one final question. Last weekend, I came across a case where somebody with life savings of £60,000 deposited in a building society was persuaded to invest it with someone else. It now transpires that the intermediary person has done a bunk, leaving the investor without any prospect of recouping his moneys. This matter relates to the investment intermediaries legislation to which the Minister referred in the course of his introductory remarks. When does he envisage it being introduced? The investor concerned trusted the intermediary absolutely, got nothing in writing, and now the intermediary has left the country. Deputy Michael McDowell raised this matter in the course of his Second Stage contribution. Will the Minister say when we will have the heads of this Bill because we must recognise that people who trust intermediaries can be completely ripped off?

Mr. B. Ahern

Deputy Yates and a number of other Members raised this question in the House before. It has proved very difficult over a number of years to get this legislation drafted. However, legislation to cover these contingencies must be implemented by July 1995 which means that it must be enacted in the next nine months. Last year I established a working group — with which the Deputy is probably familiar — of all interest groups in an effort to bring them together on this issue. They agreed a report on which we are now working. I do not foresee the relevant legislation being introduced before Christmas, but I hope it will be introduced in the New Year.

In thanking Members for their support for this Bill I should say its provisions ensure that the Stock Exchange will be more open and transparent than it has been to date and that its board of directors will be representative of its users and the public interest in addition to its members.

I will highlight the point made by Deputy Rabbitte and others about the requirement that the Chairperson of the Stock Exchange board be an outsider. I hope it will appreciate the importance of ensuring that its members are seen to be independent. I will convey the wishes of the House to them in this respect.

I trust I have dealt with the points raised by Members and thank all who contributed.

Question put and agreed to.

Acting Chairman (Mr. McGrath)

I understand it is intended to refer the Bill to the Select Committee on Finance and General Affairs. Does the Minister wish to move the motion of referral?