Vol. 470 No. 4
12 Mr. Molloy asked the Minister for Enterprise and Employment the steps, if any, he has taken to improve the regulation and supervision of the insurance brokerage industry in the wake of revelations (details supplied). [19222/96]
There are two legislative provisions to regulate financial intermediaries: the Insurance Act, 1989, which regulates the activities of insurance brokers, and the Investment Intermediaries Act, 1995, which regulates the activities of investment intermediaries or investment brokers.
It is generally accepted that the Insurance Act has worked reasonably well. The Investment Intermediaries Act, which was only introduced in mid-1995, allowed my Department to take quick and effective action in relation to the activities of Mr. Tony Taylor and, in particular, to put in place mechanisms to protect existing investors' funds. Prior to the introduction of the Act last year no such action would have been possible. I made a detailed statement on this to the House recently when I appeared before the Select Committee on Enterprise and Economic Strategy which is investigating the affairs of the Taylor group of companies.
My Department's authorised officers are continuing their investigations into the activities at the Taylor group of companies. Clearly, the report of the authorised officers, when it becomes available, will provide important lessons for us in regard to the regulation of investment intermediaries. In addition, I have ordered a general review of the Investment Intermediaries Act, 1995 to see what improvements should or could be made to the approach to and method of regulation, and in particular with regard to self-regulation.
The authorised officers' report and my Department's review will provide a clear guide for improving the regulation and supervision of both investment and insurance intermediaries.
Did the accounting auditor of the company that is the subject of this question draw the Department's attention to serious financial irregularities in that company earlier last year and did the Department fail to act on that information?
This is the first time I heard that claim. I know nothing about it. To my knowledge no such information was brought to the attention of the Department.
Is the Minister of State aware that the attention of the Companies Office was drawn to the fact that there were serious financial irregularities in that company? If the Minister tells me it was not, I will accept it, but I have been told differently.
Three of the companies in this group were struck off by the Companies Office, but to my knowledge that did not happen because information was brought to its attention about financial impropriety.
Will the Minister make inquiries about what I said and inform me of the outcome? I have been led to believe that the accountant auditor drew attention to serious irregularities that were not acted upon because of a breakdown in communications or whatever, but I accept what the Minister said. I am not making an allegation. I have spoken to a person who knows a good deal about this.
Unlike insurance houses which accept liability for the activities of their insurance brokers, that is not the case in regard to investment houses. Does the Minister propose to amend part of the 1995 Act, which has not been brought into effect, to ensure that investment houses are made as liable as insurance houses for the activities of their intermediaries?
The Deputy is right in so far as section 28 (4) of the Investment Intermediaries Act provides the protection to which she referred. It makes the producer company liable in the event of something like the Taylor affair happening. It appears this was the subject of inadequate discussion in this and in the other House when my Ministerial colleague, Deputy Coveney, put through the Investment Intermediaries Bill. Trenchant representations about that section were made to him by Members of all parties. As a result it has not been implemented and it is being considered as part of the review I ordered. There are implications for the independent advisory sector that must be carefully examined. One of the main complaints of the industry was that if a producer company or a fund manager in Britain, Ireland or elsewhere were to be made responsible for the activities of a broker and that broker could conduct business with impunity and would bear no element of the costs of mistakes, not to mention fraud, then, according to the submissions made to him, it appears to most rational people that we would no longer have an independent advisory sector. The companies would make their arrangements to sell directly to the marketplace and the role of the independent advisory sector would no longer be required. There are some difficult questions that were not teased out sufficiently at that time and we are now considering them.
Unlike the accountancy or legal professions which have a long tradition of self regulation, does the Minister of State accept that is not the case in this sector? Does he consider self regulation is appropriate given what has happened or could happen?
The Deputy will be aware from the tenor of remarks I made on this affair that I am sceptical about whether self regulation in the Irish context in this regard can be made to work in a fashion that will attract the confidence of the public. There are serious questions about that because it did not work in the Taylor affair. We received the first report from the liquidator yesterday and the authorised officer's report will not be available for some weeks. I gave Deputy O'Rourke a date of end November at a meeting of the Select Committee. Therefore it is somewhat early for me to be prescriptive on this issue. If we were to implement a self regulatory system which would be as stringent and rigorous as it appears all sides of this House require, there may be questions about the capacity of the present regulator to put such a system in place and fund it. They will have to make up their minds on that. Discussions are taking place on a regular basis with the Department and sooner or later — it will be sooner if I have my way — they will have to state their position on this matter.
I share the Minister's doubts about self-regulation. However, we have not fully explored how a proper statutory framework could regulate the selling of financial products. That is the difficulty as regards self-regulation. In the Taylor case, although we are not dealing with that matter now, the IBA was not adequately informed about its duties under the self-regulatory framework and regulations were not put in place. It is still impossible to tightly curtail this area if people who have a will to do wrong proceed to do it. Perhaps we should consider self-regulation backed up by a proper statutory framework.
We are doing that. I remind the House that prior to the Investment Intermediaries Act, 1995, there was no regulation of any kind apart from the normal prescriptions of the companies legislation. Against a background of years of no regulation of the financial services sector, this Act is an imposition. If, as Deputy O'Rourke said, a tightly curtailed regime was imposed immediately in the wake of no regulation, there would be serious questions about the ability of the industry to adapt to it.
A limited number of options confront us. Probably at the heart of the matter is whether a compensation regime can be put in place to restore confidence in the broker system. I am not commenting on the particular case because the studies to which I referred may show that nothing could have been done legislatively, supervisory or regulatory wise to prevent the abuse which took place. I do not know if a compensation regime adequate to the circumstances can be put in place. This was examined by the Department at the time against the background of the compensation directive, which is being finalised in Europe. However, there is a ceiling on what compensation will be available under that directive and for investors who have large amounts of money at risk. Even if that directive became law, it would only provide a minimum reprieve for large scale investors. It would be a great source of comfort for small investors but it would not provide adequate compensation for large investors who, for reasons best known to themselves, make their own choices.
