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Dáil Éireann debate -
Wednesday, 7 Jun 1995

Vol. 454 No. 1

Investment Intermediaries Bill, 1995: Second Stage.

I move:

"That the Bill be now read a Second Time."

The Investment Intermediaries Bill is the latest in a long series of Acts required by the rapidly-changing nature of the financial services industry. Since 1989 the Oireachtas has enacted legislation in regard to the insurance industry, building societies, certain types of investment companies, the banking system and the Central Bank, as well as financial futures exchanges, Trustee Savings Bank, the ICC and ACC Banks, financial transactions of semi-State bodies, the National Treasury Management Agency and IFSC companies. The most recent in the series, the Stock Exchange Bill, was recently passed by both Houses.

This stream of legislation reflects the pace of change in financial markets and the financial services industry. These markets are becoming increasingly sophisticated and complex. In the past decade, the whole financial services sector has been subject to revolutionary change. Deregulation, the removal of exchange controls and rapid technological advances have been to the forefront in this revolution. Technology in particular has had a dramatic impact on the sector and it has facilitated the development of new and complex financial products. Understanding of some of these products requires a good honour in leaving certificate mathematics. In the European Union a new single market for financial services is being establised. The financial sector now operates on a global basis using instant communications. Financial supervision standards are being intensified.

This Bill reflects the need to provide regulatory structures to keep pace with these developments, as well as with developments in European law. It has much in common with the Stock Exchange Bill, 1994 and Deputies will already be familiar with many of its provisions. Both Bills provide for the implementation of the requirements of two closely-related EU directives, the Investment Services Directive and the Capital Adequacy Directive. These directives require particular standards of regulation for investment firms, which are defined as firms providing a range of services in relation to transferable securities. Transferable securities include stocks and shares, bonds and certificates of deposit, as well as a range of more esoteric financial instruments.

The Stock Exchange Bill provided for the regulation of stock exchange member firms to these standards. However, the vast bulk of investment firms are not stockbrokers and the present Bill provides for the regulation of investment firms covered by the Investment Services Directive which are not members of the stock exchange.

Implementing the Investment Services Directive is most important. The directive, as implemented by the Bill before the House, will allow investment firms based in Ireland to have the benefits of a single passport to operate in the European Union. In other words, once they have satisfied the Irish authorities that they are fit to do investment business, these firms will be able to operate in other EU member states without having to seek a separate authorisation. Therefore it is crucial that we put in place the mechanisms for authorising investment firms in accordance with the directive. The directive incorporates parallel measures to those contained in the first and second banking directives, namely conditions for granting authorisation to investment firms, vetting of main shareholders and provision for close collaboration among the supervisory authorities in the member states. Of course, firms trading in a member state other than their home member state will have to abide by local code of conduct rules.

Ireland is developing a growing reputation as a financial services centre, where modern infrastructure and skilled personnel combine to provide a high quality service and an innovative approach to business. Reputations are hard won and easily damaged, and it is essential that we put in place a regulatory system which meets European standards. Moreover, we must go further than merely meeting the requirements of the relevant EU directives, since there are gaps which must be filled in our domestic system of regulation in areas which are not within the scope of the directives.

Accordingly, the Government has also decided to take the opportunity to provide a regulatory framework for a wide range of investment business including, but not confined to, firms within the scope of the directive. The Bill therefore provides for a regulatory framework not just for firms covered by the directive, but also for investment intermediaries which act primarily as conduits for investment business to larger financial institutions but do not generally have any discretion in the management of clients' funds.

The Bill will also deal with the position of accountants and solicitors who may be involved in investment business. Those professional will be covered by the Bill in the same way as any other firm, unless any investment business they do is purely incidental to the practice of their profession. Where solicitors or accountants carry on investment business in an incidental manner only, they will be subject to regulation by their professional bodies. In the case of solicitors, the Law Society will perform this function under existing legislation: the recent Solicitors Act, 1994, already provides a regulatory framework for the Law Society's role in this regard. In the case of accountants, the accountancy bodies will have to apply to the Central Bank for approval to regulate their members' incidental investment business and will be subject to the bank's oversight in this regard.

Deposit agents and deposit brokers who act on behalf of credit institutions will also be dealt with by the Bill. In addition, firms which have discretion over client investments and which therefore act as managers of a client's investment portfolio will also be regulated under the Bill, as will firms involved in giving investment advice. This wide coverage means that the Bill is necessarily somewhat complex, but I think I can assure Deputies that in enacting it they will be doing a real service to the public, to investors and to the financial services industry in Ireland.

A large number of industry representatives have been consulted in the course of preparation of this Bill, as well as the National Treasury Management Agency, An Post, and the Director of Consumer Affairs, while the Department of Enterprise and Employment, the Central Bank of Ireland and the Department of Justice have collaborated closely with the Department of Finance in preparing the Bill. The Bill has been the subject of consultation with the European Monetary Institute, which has no difficulties with it. Copies of the institute's opinion are available.

I will shortly give the House a description of the basic structure of the Bill, but I want to mention two points before I do so. The first is that the Bill nominates two key regulators, the Minister for Enterprise and Employment and the Central Bank. The Minister for Enterprise and Employment is already the regulator for the insurance industry and many of the firms dealt with in the Bill will already be doing business as insurance intermediaries under the Insurance Act, 1989. The Central Bank is the other key regulator: it already regulates all Irish credit institutions as well as the two exchanges concerned with the selling of futures and options, the Irish Futures and Options Exchange and the Financial futures division of the New York Cotton Exchange, FINEX, which now operates in the IFSC. The bank also plays an important role in the regulation of financial services conducted from the highly successful International Financial Services Centre, and is the regulator for unit trusts and undertakings for collective investments in transferable securities — UCITS. The present Bill, therefore, builds on a very significant body of national law and expertise relating to the regulation of financial institutions and exchanges.

The second is that the Bill also provides for the Minister for Finance to give guidelines to the supervisory authorities, as is the case in the Stock Exchange Bill. This is important to ensure that in giving guidelines regarding the regulation of one group of investment firms — members of stock exchanges — the Minister can also provide similar guidelines, where appropriate, for other investment firms. Such guidelines will only be issued where there is a perceived need to issue them in the public interest, but I am not sure the House will agree that it is proper that the Minister should have a role in this area. Any such guidelines will, of course, be published in Iris Oifigiúil. There are also other sections of the Act which provide a role for the Minister for Finance and I will refer to these when I am discussing the details of the Bill.

I now turn to a description of the basic structure of the Bill. Two main categories of firm are to be regulated by the Bill; these categories are not mutually exclusive — there will be some overlap. The two categories are investment product intermediaries and other investment business firms.

Investment product intermediaries are firms which, for example, take and transmit orders for unit trusts to a unit trust provider, or orders for shares to a stockbroker or bank, or orders for prize bonds to the Prize Bond Company, or which act as deposit brokers, arranging for a client to make a deposit with a bank, for example or as deposit agent — the key example here is the building society agent, prominent in many smaller towns, who acts almost as a de facto branch of a building society. Almost always, these firms will be involved in some other business, particularly in insurance broking, for which they are regulated under the Insurance Act, 1989. Some solicitors and accountants will also fall into the category of investment product intermediaries.

All investment product intermediaries will be covered by what I will refer to as the "written appointments regime". In other words, each will require a written appointment from any institution to whom it passes orders. The written appointment means that where an intermediary takes funds on behalf of an institution, the institution will be responsible for honouring the payment, even if the intermediary absconds with the funds. This is an important protection for clients. Of course, the client must be in a position to show that a payment was made, and for that reason it will be an offence for an intermediary to fail to give a receipt for payment. This system is closely modelled on Part IV of the Insurance Act, 1989, which deals with insurance intermediaries.

Before an institution gives a written appointment to an intermediary, it must take steps to ensure that that intermediary is an appropriate person for such an appointment. The institution must therefore ensure that the intermediary is a member of an appropriate representative body with rules which require compliance with this Bill, or is regulated by an approved professional body, or that the person has an authorisation from and is regulated for investment business by one of the two supervisory authorities under the Bill — the Central Bank or the Department of Enterprise and Employment.

If the intermediary is not in any of these categories, then the institution giving it a written appointment must ensure that the intermediary is of good character and complies with the Bill.

The basic rule is that all firms covered by the Bill must have an authorisation from the Central Bank or the Department of Enterprise and Employment to do investment business. However, where a firm does not provide any investment services other than the services of an investment product intermediary, and where it does not handle client funds other than when acting as a deposit agent or exercise any discretionary powers over clients' portfolios of investments, it is called a restricted activity investment product intermediary. Because, of the restricted nature of its business, it will be allowed to operate without an authorisation from a supervisory authority, provided it has a written appointment. It will of course be subject to rules and codes of practice. The Department of Enterprise and Employment will, of course, have various powers to make rules and conduct inspections in relation to restricted activity investment product intermediaries.

I should add that there is a small category of firms, not far removed from the restricted intermediary type, which has a small amount of discretion in respect of switching clients' portfolios from one investment product to another product with the same institution. While they would not handle clients' cash, these firms will nonetheless have to get an authorisation from the Department of Enterprise and Employment to carry on their business, and will be subject to ongoing regulation by that Department.

All other investment business firms will come within the remit of the Central Bank, either directly or indirectly. The indirect sort mainly includes accountants who are members of professional bodies and who do investment business only in an incidental way. They may be exempted from the requirement to be authorised and regulated directly by the Central Bank, provided their professional body has been approved by the Central Bank. In this case the professional body regulates the accountant, and the Central Bank oversees the regulatory system of the professional body. This system applies only where the investment business being done by the accountant is incidental to his or her normal professional practice as an accountant: it will not apply where an accountant is heavily involved in investment business.

Otherwise, all investment business firms must be regulated directly by the Central Bank. This means they must get an authorisation from the bank to enable them to operate, and that the bank will monitor and supervise them on an ongoing basis. This category will include the fund management firms operating in the Irish market and in the IFSC, for example, those providing fund management services to large corporate clients. However, the directly-regulated category will also include small businesses or individuals who, on a professional basis, provide investment services to clients, where they have control or discretion over client funds. The bank will have discretion to vary its requirements to suit the firm — for example, an investment adviser who never takes client cash and does not get involved in transactions for clients will obviously be more lightly regulated than a firm which has a power of attorney over a client's whole investment portfolio. However, once a firm moves into the area of handling a client's cash or has discretionary power over a client's funds, the Investment Services Directive will require a certain minimum level of supervision and the Capital Adequacy Directive will require certain minimum levels of capital.

While the smaller firms may be more likely, perhaps, to fail it is of particular importance that the larger firms be properly regulated, as a failure in their case could have consequences for the financial system as a whole. A good many of such firms are subsidiaries of banks or insurance companies which are already regulated, but the Investment Services Directive requires separate regulation for these firms.

I have set out the categories of firms which are included in the Bill; I want now to mention certain types of firm which are exempt from the definition of investment business firm and, therefore, from most aspects of the Bill, though not necessarily from the requirements to hold a written appointment if acting as an investment product intermediary. These exemptions are mostly for technical reasons. The entities excluded include the bodies charged with the management of the public debt, that is, the Minister for Finance and the National Treasury Management Agency, and An Post, but only when it is acting on behalf of the State. Banks, insurance undertakings and certain collective investments, and member firms of stock exchanges, are also excluded from the definition of investment business firm: these are already regulated under existing legislation or, in the case of stock exchange member firms, under the Stock Exchange Bill just passed into law.

I have mentioned the position of solicitors vis-à-vis the Bill, and that they are covered by the Bill in the same way as any other investment firm if they do investment business in a manner other than incidental to their legal activities. However, solicitors are excluded from the definition of investment business firm in respect of investment activities arising on an incidental basis in the course of their profession, because the Oireachtas has recently reviewed the regulatory regime for solicitors — they are subject to Law Society regulation under various Solicitors Acts, particularly the Solicitors (Amendment) Act, 1994. The Department of Finance and the Department of Justice, together with the Central Bank and the Department of Enterprise and Employment, have engaged in detailed discussions with the Law Society and I am satisfied from those discussions that the Law Society is operating a substantial regulatory system, governed by legislation and backed up by a compensation scheme and appropriate professional indemnity protection. In these circumstances it was not considered necessary to include solicitors doing only incidental business in the definition of investment business firm.

The Law Society can be expected to continue to maintain an appropriate standard of protection of solicitors' clients, but if the Minister for Finance were to come to the view that the Law Society was not performing its functions adequately, the Bill provides that the Minister may, by regulation, bring solicitors doing incidental business within the definition of investment business firm.

The Bill will extend the definition of investment company within the meaning of the Companies Act, 1990, to include closed-ended investment companies. These are a type of collective investment fund. The effect of the change will be to bring such companies within the regulatory scope of the Central Bank, which already regulates other collective investments.

The Bill is divided into nine Parts. The first Part contains commencement provisions and definitions and designates supervisory responsibilities. Part II deals with the authorisation of investment business firms. Regulation and supervision of investment business firms are dealt with in Part III. The written appointments regime for investment product intermediaries, described earlier, is dealt with in Part IV. Parts V and VI concern the responsibilities of auditors, probity, codes of conduct and bonding, as well as the acquisition and disposal of significant shareholdings in authorised investment business firms. Part VII provides for a self-regulatory structure for firms of accountants and solicitors although, as mentioned above, this will not apply to solicitors unless the Minister for Finance makes regulations to bring them within the definition of investment business firm. Part VIII deals with enforcement, including the appointment of inspectors and other miscellaneous provisions. Part IX deals with amendments to the Companies Act, 1990, to cover closed-ended investment companies.

Part I contains standard general provisions about commencement, definitions and expenses. Section 2 sets out the definitions used in the Bill and is important because in so doing it effectively defines the scope of the Bill. Investment business firm is defined as a person providing investment advice or certain investment business services to third parties on a professional basis. Investment business services include a number of services provided in relation to investment instruments. The term "investment instruments" is defined to cover the range of securities and derivative instruments trade on domestic and international financial markets.

Section 4 defines the areas of responsibility of the Central Bank and the Department of Enterprise and Employment. It also allows for arrangements to be made between them for the supervision of particular firms or classes of firms, to ensure that there is no duplication of functions. The Investment Services Directive lays down certain cases in which the definitions contained within that directive can be changed by a Council decision. Section 5 gives the Minister for Finance power to extend definitions contained within this Bill, where necessary, pursuant to such a Council decision.

Part II deals with authorisation of investment business firms and related matters. It will be an offence, under section 9, for a firm to act as an investment business firm or to hold itself out to be one, unless authorised to do so by a supervisory authority in Ireland or by a competent authority in another member state or unless its activities are such that the Bill allows them to be carried on without such an authorisation. I have already described these cases.

Section 10 sets out the conditions which must be met by firms seeking an authorisation. An authorisation under this Act can be subject to conditions laid down by the supervisory authority and the supervisory authorities have various powers under sections 10 and 14, for example, to issue conditions or requirements or make directions in respect of investment business firms. There is also provision for appeal to the High Court against such imposition.

The Investment Services Directive, as already mentioned, provides that an investment firm authorised in the State wishing to establish a branch in another EU member state or to provide investment services within the EU on a cross-Border basis, will be able to do so provided that certain procedures are adhered to. Section 12 makes provision for these procedures.

Section 13 makes interim arrangements for firms already operating as investment business firms which will give them a reasonable amount of time to apply for authorisation.

Section 16 allows a supervisory authority to revoke the authorisation of an investment business firm in limited, technical circumstances. More importantly, a supervisory authority may apply to the High Court for an order revoking the authorisation of a firm if the firm has acted in a manner which it is felt should disqualify it from doing investment business. For example, the court may revoke an authorisation where the firm has been convicted on indictment of an offence under the Act or of an offence which involves fraud, dishonesty or breach of trust. Similarly, an authorisation can be revoked if circumstances have changed since the authorisation such that the supervisory authority would not now authorise the firm or if the firm appears to be insolvent.

It will, of course, be important for members of the public to be able to check the authorisation status of investment business firms offering services to them and section 17 obliges the supervisory authorities to maintain registers of authorised investment business firms and to provide for public access to them.

Section 18 enables a supervisory authority to require an investment business firm to maintain a proportion of its assets in liquid form and to maintain an asset: liability ration as specified by the supervisory authority. This is important in ensuring that the requirements of the Capital Adequacy Directive are met.

Part III of the Bill deals with various aspects of the regulation and supervision of investment business firms. Section 20 sets out the general principles for such regulations. It provides that supervisory authorities will administer the system of regulation and supervision of investment business firms in the interests of investor protection and of the proper and orderly regulation and supervision of investment business firms and that of financial markets, subject to any guidelines which may be issued by the Minister. The section also provides for co-operation both between the domestic supervisory authorities and between them and the competent authorities in other member states.

Section 21 equips the supervisory authorities with a general authority to issue directions to investment business firms, their directors and management in the interests of proper and orderly regulation of investment business firms or the protection of investors.

In addition, where the supervisory authority believes that an investment business firm is insolvent or is not maintaining adequate capital or where the supervisory authority is concerned about the stability or soundness of the investment business firm or where the firm is conducting business in a manner that jeopardises client funds, then the supervisory authority may direct that the investment business firm suspend trading for up to one year. There is, of course, provision for appeal to the High Court. The First Schedule to the Bill contains supplementary provisions in relation to directions under this section.

Section 22 enables a supervisory authority to apply to the court for an order to wind up an investment business firm, or a decree of dissolution in the case of a partnership or an order of bankruptcy in the case of a sole trader, if it believes, for example, the entity is — or is likely to become — unable to meet its obligations to its clients or creditors.

Section 23 and 24 make various provisions for restrictions on advertising. It will be an offence to advertise investment business services where the provision of such services would be an offence. An agreement entered into after the issue of such an advertisement, or of an advertisement which contravenes a direction given by a supervisory authority, will not be enforceable unless the High Court finds that the advertisement did not have a bearing on the agreement.

Part IV deals with the written appointment regime applicable to investment product intermediaries. As I mentioned earlier, this type of firm is engaged either in part or solely in a more limited form of investment consisting mainly of passing customers' orders to larger financial institutions — the definition is set out in section 25.

Where an intermediary provides only the services of an investment product intermediary and where it does not have any discretionary power over its clients' investments and does not hold clients' funds — except where taking deposits as a deposit agent — it is termed a restricted activity investment product intermediary, defined in section 26 and it may do business without a specific authorisation from a supervisory authority. Under section 29 such a firm must disclose to its clients that it may not take their cash or manage their funds on a discretionary basis.

I have already described the safeguards which protect the clients of firms operating under the written appointment regime and these are detailed in Part IV. I direct Deputies in particular to section 28 (4) which provides that where an intermediary takes a payment on behalf of a product producer, the payment is treated as if it had been made directly to the product producer. This ensures that the client is protected from the moment the intermediary takes a cheque or other payment. Of course, in the event of a dispute, it will be important that a client has evidence of a transaction and it will, therefore, be an offence under section 30 for an intermediary to fail to give a receipt to a client.

Part V makes various provisions in relation to auditors of investment business firms, in line with the corresponding provisions in the Stock Exchange Bill. Among other things, this Part obliges the auditor of an authorised investment business firm to report to the supervisory authority if he or she has reason to believe that there are circumstances which affect the investment business firm's ability to meet its financial obligations or that there are defects in its accounting systems or records or in its safeguards for client money or investment instruments. The auditor must also report to the supervisory authority if he or she has reason to believe that the investment business firm has breached the rules of any approved professional body of which it is a member.

It will be an offence for an officer or employee of an authorised investment business firm or of an associated or related undertaking to supply false, misleading or deceptive information to an auditor who requires it under this Bill. There is also provision for a second audit if, on the basis of an initial audit, the supervisory authority has a substantial concern about the accounts of an authorised investment business firm.

Part VI deals with probity and competence of persons involved in investment business firms, codes of conduct and provisions for regulating acquisition of significant shareholdings in investment firms, as well as with bonding for investment business firms and the protection of client's money.

Section 36 contains provisions relating to disqualification from employment. Where, on application by a supervisory authority, the High Court finds that a person is not suitable on grounds of probity to be an officer or employee of an investment business firm it may direct the employer to dismiss that person. Where the court finds that a person is incompetent it may direct that the person concerned be removed from a particular position, suspended or dismissed. These substantial powers mirror provisions in the Stock Exchange Bill and are important to ensure that persons who are entrusted with the safekeeping and prudent management of the funds of others are above reproach. Deputies will observe that a direction in respect of any such person will be for the courts to decide, and there are, of course, provisions for a person concerned to apply to the courts at any time for the direction to be revoked.

Section 37 sets out the broad parameters for codes of conduct which will govern how investment business firms do business with their clients. Codes of conduct will be drawn up by the supervisory authorities, which may require investment business firms to follow them. Where members of an approved professional body are concerned, the Central Bank may decide instead that the body's codes or rules of conduct are adequate. Codes of conduct will cover such issues as ensuring that firms deal honestly and fairly with clients, act with due skill and care, have adequate resources, seek enough information from clients to ensure they provide appropriate advice or services and they make adequate disclosure of relevant information to clients.

Sections 38 to 48 deal with acquiring transactions, that is major changes in the ownership or control of investment business firms. The purpose of these provisions is to enable a supervisory authority to prevent undue or excessive influence being gained over an investment business firms, unless that supervisory authority is satisfied that influence will not be harmful. These provisions meet the requirements of the Investment Services Directive in this regard.

Sections 50 and 51 deal with information about compensation and with bonding. While the Bill contains significant compensation provisions, it does not provide for a comprehensive compensation scheme across all investment business firms. A draft EU investor compensation directive is still under discussion at EU level and when this has been finalised the Department of Finance will put in hand preparation of the necessary legislation.

I have already explained the protection available for clients under the written appointments regime. In addition, section 50 provides that an investment business firm must inform a client of the details of any investor compensation scheme. Section 51 provides for a bonding arrangement for investment business firms on the model of the bonding arrangements which apply for insurance intermediaries. However, the minimum bond will be higher than that which applies at present in the insurance area — £50,000 rather than £25,000.

The Minister may prescribe exemptions from the bonding requirement where an appropriate compensation scheme exists or is set up or where a firm has a high level of capitalisation. However, the Minister does not intend to exempt the normal run of investment intermediaries from the bonding requirement unless it is clear that appropriate schemes providing a high level of protection for clients are in place.

Section 52 deals with a very important matter, the protection of client money and investment instruments. It empowers the supervisory authorities to impose requirements on investment business firms in respect of their rights, duties and responsibilities regarding the treatment of clients' money and instruments. Any breach of these requirements will be a matter for the High Court or for a committee appointed under section 74. In addition, section 52 makes it an offence to fail to keep proper books and records of client money or to fail to have them audited regularly, to hold client money with an institution other than one, specified by a supervisory authority and to fail to designate client money accounts as "section 52" accounts in the firm's records so as to enable client money to be easily traced. It will be, of course, an offence for a firm to misappropriate client funds. An important protection for clients is that in the event of insolvency of a firm, no liquidator or receiver or examiner or creditor of an investment firm will have any right of access to client's money or investment instruments, until the proper claims of clients have been satisfied in full.

Section 53 provides for an exemption from liability for the supervisory authorities, unless they act in bad faith, and for a disclaimer of warranty in respect of their approval of professional bodies or authorisation of investment business firms. Under section 54, where an investment business firm is unable to pay its debts and its failure to keep proper books and records, or to comply with client money obligations, has contributed to its insolvency, an officer of the firm may be held personally liable for the firm's debts, on a direction of the court. In addition, a director who fails to take reasonable steps to ensure his firm's compliance with obligations regarding client money, or books and records, will be guilty of a criminal offence. However, such a director may not be jailed unless the court believes he or she acted wilfully.

Accountants and solicitors doing investment business will be covered by the Bill in the same way as other investment business firms, unless any investment business they do is incidental to their professional practice. Part VII, which deals with approved professional bodies, is relevant to this incidental business. It provides that the supervisory authority may grant approval subject to conditions or otherwise, to a professional body of accountants or solicitors or of a similar profession to operate as an approved professional body. Such a body may then regulate its members in respect of investment business which is incidental to their professional activities and its members may then do incidental investment business without a specific authorisation from a supervisory authority. Solicitors doing incidental investment business will not be affected by this provision; as I have already explained, such solicitors will not be treated as investment business firms for the purposes of the Bill unless the Minister for Finance prescribes otherwise.

Under section 56 professional bodies must apply to the Central Bank for approval to operate as an approved professional body and the section sets out the conditions they must meet to get such approval. Section 58 gives the bank powers to impose conditions and requirements on approved professional bodies in the interests of their orderly regulation. Section 57 makes provision for interim approval to be given to allow existing bodies to operate for a period as approved bodies until such time as they get approval. Provision is also made in section 61 for the revocation of approval: except in certain purely technical circumstances, such revocation will be a matter for the High Court. An approved professional body will, of course, be obliged to keep proper books and records, and section 62 makes it an offence to fail to do so. Part VIII deals with inspections, offences and penalties and is closely based on the Stock Exchange Bill.

Sections 64 and 65 deal with the powers of authorised officers appointed by supervisory authorities to inspect investment business firms. These officers will be empowered, for example, to enter premises to inspect documents and to require explanations of documents. If a person refuses to comply with a request from an authorised officer, the court can be asked to make an order as to the information to be provided. This section also provides that a supervisory authority may require an investment business firm to supply specified information to it.

Sections 66 to 72 provide for the High Court, on the application of a supervisory authority, to appoint an inspector to investigate the affairs of an investment business firm. An inspector appointed by the court will have wide-ranging powers of investigation including, for example, powers to examine people on oath. The High Court may publish, with or without omissions, the report of an inspector appointed by it. A court inspector's report will be sent in full to the Ministers for Finance, and Enterprise and Employment, who may decide to lay it before the Houses of the Oireachtas. On receipt of an inspector's report, the court may make an order for winding up of the firm concerned or remedying damage done to any person by its conduct of its affairs.

Section 73 provides for the appointment of an inspector by a supervisory authority to investigate particular matters relating to an investment business firm, including their compliance with any requirements of this or any other Act. The bank may publish, in whole or in part, the report of an inspector appointed by it, and must forward any such report in full to the Ministers for Finance and Enterprise and Employment, who again may decide to lay it before the Oireachtas. The supervisory authority may, on foot of a report, present a petition for a firm to be wound up.

Section 74 enables a supervisory authority to set up a committee to determine whether there has been a breach by an investment business firm or professional body of conditions or requirements imposed by the supervisory authority. Such a committee will have three members, drawn from a panel of seven to be nominated by the Minister for Finance with the consent of the Minister for Enterprise and Employment. If it finds there has been a breach, the committee may issue a reprimand or require payment of up to £500,000 by the firm or professional body concerned to the supervisory authority. It should be noted that this mechanism will only apply where the firm agrees, and a firm may appeal the determination of a committee to the High Court. Where an investment business firm or professional body does not want the matter settled by a committee, the supervisory authority may apply to the court to make a determination, and the court may issue a reprimand or require payment of up to £500,000 to the supervisory authority. Detailed provisions relating to committees appointed under section 74 are contained in the Second Schedule of the Bill. Such committees offer a mechanism whereby breaches of conditions and requirements imposed by a supervisory authority can be speedily determined without the expense — on either side — of a High Court hearing.

Sections 75 and 76 provided for an application for a search and seizure warrant by an authorised officer and for the admissibility of an inspector's report as evidence in civil proceedings, while sections 77 and 78 provide for legal professional privilege and for confidentiality of documents. Section 79 sets out the penalties for offences committed under the Act. The maximum penalty will be £1,000,000 or ten years' imprisonment or both.

Part IX of the Bill consists of section 80 only and deals with the amendment of the Companies Act, 1990, which I have described earlier. Briefly, section 80 extends the definition of investment company in that Act to bring closed-ended investment companies within its scope. The effect will be to make the Central Bank the regulator of closed-ended companies.

To sum up, much of the Bill follows the model of the Stock Exchange Bill and this is entirely appropriate, since the two Bills share the common aim of ensuring that the relevant firms are properly authorised and regulated to the standards of the Investment Services Directive. In so far as it deals with investment product intermediaries, the Bill follows the general model of Part IV of the Insurance Act, 1989. Again this is appropriate since many, if not most, of these firms are probably already acting as life assurance brokers.

This Bill breaks new ground in the sense that for the first time it will ensure that when members of the public and large corporations invest in financial products they can be confident that the activities of the financial intermediaries they are dealing with are subject to regulation under the laws of this State. In ensuring this, Deputies can be happy that they are greatly improving the position of the public in the investment market, and that they are strengthening the foundations for the development of the financial services industry in Ireland.

I commend the Bill to the House and I look forward to hearing the contributions of Deputies.

I welcome the Bill. It has been long promised and has been in gestation for a considerable period. I compliment the officials in the various Departments who have contributed to it. The drafting of a technical Bill such as this takes an inordinate amount of time and many people have put much time and effort into it.

I realise that the order of the House is that we complete Second Stage and all remaining Stages today but this is a Bill which it would be appropriate to send to the select committee. When we dispose of Second Stage perhaps the House would agree that Committee Stage be taken in select committee. This is a technical Bill containing 80 sections and a number of schedules. I await views from some professional bodies and other outside experts before I will be in a position to give any great gravitas to the comments I wish to make. I suggest that Committee Stage be taken in select committee if that is agreeable to the Minister.

I thought it had already been agreed that the Bill would go through all Stages today. We are constrained by the fact that the Bill has to be in operation by 1 July.

I have no difficulty with the fact that it has to be in operation by 1 July but it would be no harm to send it to the select committee where we could deal with it in a day or so. We would still have it through by 1 July. There is a certain amount of confusion about the Bill being taken so early. It was only published on 23 May, two weeks ago.

I respectfully submit to the House that when we come to the end of the debate on Second Stage Deputies may then decide what precisely they wish to do with Committee Stage.

It is very difficult to legislate for goodness in any particular area. The compliant bodies and the professional firms will have no problem with the Bill. It is only the fly-by-night operators who set up overnight, with the intention of misappropriating clients' funds, who will get into difficulty. It is very difficult to draft legislation which will protect the public and the investor from all those types of shenanigans.

The Irish investor has shown considerable sophistication in recent years. One will see from the financial papers the level of investment products available and the new ideas and new types of investment coming on stream all the time. I am not talking about the big players on the financial market or the people who make it their business to watch the stocks and shares every day. The ordinary investor who gets a few pounds together and who may have some money saved or obtains it as a result of a redundancy has shown considerable expertise in ensuring the best return.

The Bill is welcome in that it gives the State more direct control over the operations of investment intermediaries. No supervisory body at whatever level will be able to supervise every investment body because an investigator would be needed there every day. I welcome the fact that the Bill gives some of the professional bodies the job of regulating the activities of their own profession, such as accountants. I welcome the hands-off approach at that level. It is about the best one can do.

So far as my own profession is concerned we had the displeasure of a misappropriation of funds case some years ago. The number of firms who will have responsibility for handling clients' funds will be very small. When that case arose all my friends in the accountancy bodies asked whether I ever had a chance of dealing with funds on that basis or whether any client ever gave me complete authority to do what I wished with their money and I said "no". There have been one or two cases since then which surprised me.

The Bill imposes a considerable onus on auditors whose function is to police the accounts of solicitors, for example, to find out what is going on. The reality is — I intend to raise this matter on Committee Stage — that if a rogue operator wants to mislead his auditor and hide from him clients' funds no auditor in the world will be able to discover them.

The Department of Finance has consulted with a wide range of interested bodies on this Bill which was a long time in gestation. It will take us some considerable distance in regulating an activity which is growing by the day. There are now a number of financial brokers in every town. I often wonder about their level of expertise, but they seem to be able to attract large sums from gullible people on occasion as evidenced by newspaper reports when a disaster occurs. I welcome the Bill and hope we will be able to tease out some of these matters on Committee Stage as it is quite complicated.

I welcome the Bill which is overdue. It is a long time since the warning lights began flashing on these matters, whether it was investment firms similar to the ones which collapsed in my constituency leaving many people, including constituents of mine, completely bereft of their life savings without any remedy, or members of the clergy who in some parts of the country acted as intermediaries and set up their own funds, sometimes with disastrous consequences, the reality is that we must have a proper regulatory framework.

In recent years I was alarmed to note that small advertisements appeared in the classified columns at the back of The Economist asking for international investments in Ireland by firms I had never heard of and which cut no dash on the Irish financial scene. I notice that a few newspapers followed up some of these investment intermediary companies operating from Ireland. I was worried that these firms were effectively soliciting funds in an unregulated market. I was worried about the consequences for potential investors if this country did not get its act together. It is sad that we have to rely on European directives to spur us into this type of legislative reaction but nonetheless the Bill is welcome.

I agree with Deputy McCreevy that one cannot legislate for goodness and there will always be rogue operators. It is essential that the Government does not make itself the guarantor of investment intermediaries in the long run. That is an important point.

Deputy McCreevy spoke about his own profession having had a few disasters. The legal profession has also had its fair share of disasters but it has a system for compensating solicitors' clients. Happily, the Bar has never handled a halfpenny of clients' money and this is probably the only thing that has saved us from even more squalid disasters than those the other professions have come across from time to time.

I have a simple and straightforward view: this Bill is long overdue and I am anxious that it goes through as quickly as possible but, like Deputy McCreevy, I am convinced that it is hardly perfect and might benefit from some amendment. With the greatest of respect to those who drafted it, if they had got it 100 per cent right — I note they have two amendments of their own — I would be the first to compliment them but, like Deputy McCreevy, I would like some time to obtain the views of concerned people and to consider each of the sections before saying that it is 100 per cent all right. I have no doubt it is 99.5 per cent correct. It might be useful for this House to refer it to a select committee and devote one day to it to go through each section carefully; to give the Opposition parties the opportunity, in a less formal setting, to tease out some of the implications and to see if anything useful could be said. I assume Deputy McCreevy would agree that if this is done we would be the first to say Report Stage would be disposed of quickly and we would not lose much time in going through the legislation in those circumstances. If the Whips can agree I would be fully in favour of such a step.

To respond to Deputy McCreevy's request, supported by Deputy McDowell, I understand that the Whips have agreed to devote two hours to this Bill next Wednesday, if that is acceptable.

I thank Deputies for their contributions. I am pleased there is broad support for the Bill in the House. I am sure Deputies will agree that, apart from its European context, it is a worth while Bill which will be important both for the integrity of the Irish financial system and for the reputation of Ireland as a centre for financial services.

There is nothing radically new in the approach in the Bill which is based in large part on the Stock Exchange Bill, 1994 and on insurance legislation. However it breaks some important new ground. It aims to ensure that for the first time potential investors can be assured that any investment intermediaries they approach will be subject to a level of outside regulation appropriate to the type of business being done. The intention is to ensure that life is made much more difficult for any person who is inclined to act unlawfully in the investment market but the old rule of let the buyer beware will still apply in this as in every other area. No legislation can protect people from all the ups and downs in the financial markets. This point was made by both Deputies sitting opposite. However this legislation will provide the consumers of investment products with a new set of rights while imposing an appropriate set of rules, duties and responsibilities on investment firms and intermediaries selling those products.

Deputy McCreevy referred to the large number of investment intermediaries who are to be regulated. This Bill will regulate a wide range of firms from the smallest investment intermediary to the fund management arms of large financial institutions. Since there has not been a similar regulatory system in the past it is difficult to estimate the exact numbers involved. These will only become clear when the regulatory system is in place and the registers of investment business firms required under section 17 are put in place. It is clear however that in some categories, in particular the investment product intermediary and certified person categories, the numbers are likely to be substantial. As an example, there are over 500 building society agents who would be deposit agents for the purposes of the Bill. Most of these will fall within the restricted activity investment intermediary category. There are also about 2,700 insurance brokers and insurance agents apart from tied insurance agents. A significant proportion of these insurance intermediaries might also act as investment intermediaries but the vast majority would again fall within the restricted activity investment intermediary category.

It is estimated that of the order of 1,000 accountancy firms might wish to avail of the opportunity to do incidental investments business under the aegis of their professional body. In addition to these there would be a small number of more substantial investment business firms, most of whom would fall to be regulated by the Central Bank — the number is not clear but it is probably fewer than 150, of whom many are already regulated as IFSC firms, but who are now required to be regulated to investment services directive standards.

Question put and agreed to.

When is it proposed to take Committee Stage?

On Wednesday next.

Committee Stage ordered for Wednesday, 14 June 1995.