Dáil Éireann debate -
Tuesday, 16 Jun 1998

Vol. 492 No. 4

Investor Compensation Bill, 1998: Second Stage.

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

Minister of State at the Department of Finance (Mr. Cullen)

This Bill has been passed by Seanad Éireann and does four things. First, it provides for compensation for clients of investment and insurance intermediaries, including Stock Exchange member firms and banks which provide investment services to customers. Second, it ensures that investors will be entitled to compensation equivalent to 20,000 ECU — about £15,500 at present — or 90 per cent of the amount lost, whichever is the lesser. Third, it implements the EU Investor Compensation Directive. Fourth, it provides for amendments to the Investment Intermediaries Act, 1995, the Stock Exchange Act, 1995, the Insurance Act, 1989, and the Solicitors (Amendment) Act, 1994.

The purpose of regulation is twofold, to protect investors and to promote confidence in the financial system. There have been a number of cases in recent years where investors have lost money, in some cases substantial amounts, through the default of intermediaries to whom they entrusted their savings. Let us be clear about one thing: no regulatory system can guarantee that a regulated entity will not fail. What we can do is put in place a system of regulation which is comparable with the best standards internationally, and this is what we have done in the retail sector with the Stock Exchange and Investment Intermediaries Acts, in particular. Now it is time to look at the question of compensation for investors who lose money because an investment intermediary is unable to meet its liabilities.

Compensation is, of course, desirable but it comes at a cost. In addition to the cost of compensation itself, there will inevitably be administrative overheads to be paid for and there will also be the cost of verifying investors' claims for compensation. While an argument can be made that investors should carry the associated risks themselves, the Government takes the view that the stronger argument is that individual investors are not generally well equipped to make an informed assessment of the risk that an investment intermediary will fail. In addition, people make mistakes. It can be easy, with the benefit of hindsight, to criticise people for believing promises of higher than normal returns on their investments, but in many cases the motive for believing the promises is not so much greed as a lack of the knowledge needed to appreciate the risks.

A further point is that the provision of a system of investor compensation should help to reduce the systemic risk that a single failure of an investment firm will trigger a wider loss of confidence in the rest of the financial sector.

Having looked at the broad principles of investor compensation, we now come to the details of what is needed in this Bill.

We must, in the first instance, implement the EU Investor Compensation Directive. This is a single market directive, intended to ensure that all investment firms which have the so-called "passport" to sell their services throughout the European Union will be covered by minimum compensation arrangements. This means that an investor will be able to entrust money to an investment firm located anywhere within the EU, knowing that compensation arrangements are in place to safeguard the funds involved.

The minimum we are required to do under the directive is to ensure investor compensation arrangements are in place for the minority of investment firms which are subject to it. This could broadly be described as the bigger firms, such as stockbrokers, portfolio managers and discretionary investment intermediaries. These are typically firms which handle or control investor funds and provide services in relation to a broad range of investment products, such as shares, units in collective investment undertakings and certain types of derivative product. About 100 firms are potentially subject to the directive at present. The directive, however, does not cover what might loosely be called the retail end of the market. An example would be an investment intermediary who sells packaged products such as unit trusts and who is not allowed to handle client funds. I might also add that the directive does not apply to insurance intermediaries.

The directive, therefore, applies only to a minority of investment firms. However, the Government has taken the opportunity provided by the directive to put in place a comprehensive system of compensation for the entire investment intermediary sector and, indeed, to extend investor compensation to insurance intermediaries as well.

The insurance industry continues to attract significant amounts of investment funds, particularly from private investors through single premium life insurance products. The Government felt it would not be right to introduce wide ranging investor compensation arrangements which ignored the insurance sector, particularly when many intermediaries are involved in both insurance and non-insurance investment business. The Bill also extends the compensation arrangements to any general insurance business, such as car and home insurance, placed with an insurance agent or broker. The Investor Compensation Bill will, therefore, cover both the life and non-life activities of insurance intermediaries as well as the business of what I might call "pure" investment intermediaries. Existing protections for insurance clients under the Insurance Acts, such as the provisions ensuring that a client is covered for insurance where the insurance company has invited renewal of a premium or accepted an order, once the client has paid the premium to the agent or broker, will remain in place.

Under the investor compensation directive, clients of investment firms are entitled to minimum compensation of the lesser of 20,000 ECU, which is about £15,500 at present, or 90 per cent of the amount lost, where an investment firm is unable to return funds or securities belonging those clients. The Government has decided this is an appropriate level at which to set the entitlement to investor compensation generally under this legislation. This provides a reasonable amount of compensation, while at the same time giving some recognition to the caveat emptor principle.

The directive also allows member states to limit entitlement to compensation to private investors and smaller companies, smaller companies in this context meaning companies which meet two out of the following three criteria: a balance sheet total of less than 2.5 million ECU — about £2 million — net turnover below 5 million ECU — about £4 million — and fewer than 50 employees. The Government takes the view that this is a reasonable approach, since the purpose of the directive and of this legislation is to protect the small investor, and has decided to limit compensation generally under this legislation to private investors and small companies only.

Let me turn now to how investor compensation arrangements will be established. The Central Bank will be the supervisory authority for investor compensation. The bank is already the supervisory authority for stockbrokers, credit institutions and investment business firms. It is also the proposed supervisory authority for insurance intermediaries under legislation which is being drafted by the Tánaiste and Minister for Enterprise, Trade and Employment.

The Bill provides for the establishment of a company called the Investor Compensation Company, which will oversee compensation arrangements for the majority of investment firms, including insurance intermediaries, with the exception of one group.

Accountants who provide investment services only as an incidental part of their professional activities as accountants can be regulated by their professional body under the Investment Intermediaries Act, 1995, under the overall supervision of the Central Bank. Building on this, the Investor Compensation Bill allows the accountancy bodies to run compensation schemes for their members. The compensation schemes for accountants will have to provide compensation cover to the standard required under the Bill and will have to be approved by the Central Bank. This approach is appropriate because the accountants who will be covered by such schemes will not be fully fledged investment firms.

The Investor Compensation Company will be established by the Central Bank. It will be a company limited by guarantee and the members of the company will be prescribed by the Minister for Finance, with the agreement of the Minister for Enterprise, Trade and Employment.

The company will have equal numbers of directors representing the financial services sector and consumer interests. This is a very important provision which will ensure that consumers, whose interests this Bill seeks to protect, will have a say in the policies of the Investor Compensation Company. The Minister for Finance will be responsible for the appointment of the directors representing the industry and consumer interests, again with the agreement of the Minister for Enterprise, Trade and Employment. The Governor of the Central Bank will appoint the chairperson and deputy chairperson of the board of the company.

As I said, the company will oversee investor compensation arrangements generally and will be responsible for paying compensation. The company will decide whether it should maintain a single compensation fund for all investment firms or whether there should be separate compensation funds for different categories of investment firm. The company will also decide the level of contributions to be paid by investment firms.

That is the broad outline of how investor compensation will be structured. I will now turn to the proposals included in the Bill for the payment of compensation.

Compensation will be payable where a client of an investment firm is unable to obtain the return of money or investment instruments from the investment firm. The Central Bank will first make a determination that an investment firm is unable to repay money or investment instruments. The company will then invite applications for compensation from clients of the investment firm and will place advertisements in the newspapers inviting applications. Claims will, of course, have to be verified. This will be done by the liquidator, where a liquidator has been appointed by the courts; otherwise, the bank can appoint an administrator to establish what is owed to clients of the firm.

When an investor's claim has been verified, the company must pay compensation within three months. This period can be extended to six months where the bank agrees.

In the case of non-life insurance, compensation will, within the limits provided for in the Bill, cover the premium paid or the loss suffered by an investor where a claim under an insurance policy arises.

Investor compensation will be met by the Investor Compensation Company in the first instance from the contributions paid by investment firms. I emphasise that the Exchequer will not be involved in funding investor compensation. In the case of compensation claims involving restricted activity investment product intermediaries and insurance intermediaries, the product producers involved will be responsible for some of the funding. "Product producers" here means banks, building societies, collective investment undertakings, insurance companies, etc., who are required by law to give intermediaries written appointments to sell their products. Each product producer will be required to reimburse the company for compensation payable to clients of its intermediaries where the intermediary has taken money for transmission to the product producer and this can be established.

That is the broad outline of what is proposed in relation to investor compensation. There are, of course, other provisions in the Act designed to flesh out the detail, to transpose specific requirements of the Investor Compensation Directive and so on. I might mention in particular the provisions in the Act relating to solicitors.

Solicitors are exempt from regulation under the Investment Intermediaries Act, 1995, if they provide only investment services which are incidental to their professional activities. The Law Society compensation fund covers clients of a solicitor in respect of legal services, including financial services. However, there was a doubt whether the society's compensation fund would cover financial services which did not arise from the provision of legal services. Accordingly, the Solicitors (Amendment) Act, 1994, is being amended to make it clear that the Law Society compensation fund will provide cover for investment and insurance services provided by solicitors where the solicitor is not covered for such services by compensation arrangements under the Investor Compensation Bill. In other words, the Law Society fund will provide cover for a solicitor who is not contributing to a fund maintained by the Investor Compensation Company. These provisions can be found in sections 44 to 47 of the Bill.

Section 2(5) of the Bill contains a provision exempting certain investment business firms in the International Financial Services Centre from the obligation to participate in investor compensation. The exemption will apply only to entities which are not subject to the Investor Compensation Directive and which do not provide investment services to domestic investors.

I am also proposing a substantial number of amendments to the Investment Intermediaries Act, 1995. Deputies will recall that the Select Committee on Enterprise and Economic Strategy compiled a report on the regulation of investment intermediaries following the collapse of the Taylor group of investment companies in August 1996. The committee's report recommended a number of amendments to the Investment Intermediaries Act and many of those recommendations form the basis for the amendments which I propose today.

I should emphasise that I do not propose to comment on each and every section, but rather to highlight for Deputies the main features of the Bill and the purpose underlying certain provisions.

The Bill is divided into five parts. The first part deals with general matters. Part II establishes the Investor Compensation Company Limited, which will have an important role in investor compensation, as I have already outlined, and provides that the accountancy bodies will be able to establish their own compensation arrangements. Part III deals with the payment of compensation to clients of investment firms. Part IV contains miscellaneous provisions, including the right of investors to information about compensation and technical sections arising from the terms of the Investor Compensation Directive, as well as provisions relating to solicitors. Part V contains amendments to the Insurance Act, 1989, the Investment Intermediaries Act, 1995 and the Stock Exchange Act, 1995.

Section 1 provides for the commencement of the provisions of the Act. The Minister for Finance will commence the provisions of the Act by regulation.

Section 2 sets out the definitions used in the Bill. As I mentioned earlier, the Bill covers the activities of investment business firms, stock exchange member firms, credit institutions and insurance intermediaries. These are collectively referred to as investment firms.

Section 7 provides for the repeal of certain provisions of the Insurance Act, 1989, the Investment Intermediaries Act, 1995, and the Stock Exchange Act, 1995, because they will be redundant when this legislation is in place. The sections being repealed include the bonding provisions in section 47 of the Insurance Act, 1989 and section 51 of the Investment Intermediaries Act, 1995, as well as section 28(4), of the Investment Intermediaries Act. These sections represent a patchwork of investor protection measures which will be replaced by the unified system of investor compensation proposed in this Bill.

Section 8 designates the bank as the supervisory authority for investor compensation schemes and as the competent authority for the purposes of the EU Investor Compensation Directive.

Part II of the Bill deals with the administration of investor compensation arrangements, the establishment of the Investor Compensation Company Limited and the approval of compensation schemes for certified persons, which in practice means accountants who provide investment services only as an incidental part of their professional activities.

Sections 10 to 20 provide for the establishment by the bank of the Investor Compensation Company Limited. The company will establish funds out of which clients of investment firms will be paid compensation under this legislation and will set out the amount of the contributions to be paid by investment firms to those funds. I have already dealt with how the company will be organised so I do not need to go into the details again.

Section 21 requires investment firms to make contributions to the compensation funds maintained by the company. An investment firm which does not pay its contribution in full on time will be subject to interest payments on the amount not paid. If the firm continues to ignore its obligations, it will lose its authorisation to do investment business or, in the case of an insurance intermediary, the insurance companies will be prohibited from doing business with the intermediary. The relevant provisions can be found further on in this Part, in sections 27 and 28.

Section 21 also provides that the company may, when setting the rates of contribution, take account of investment business done by investment firms before the legislation was commenced, in cases where the investment firm is subject to the Investor Compensation Directive. The reason for this provision is that compensation under the terms of the directive will be retrospective, in the sense that it will cover money and investment instruments given to the investment firm before the commencement of this Act. A retrospective provision such as this would not normally be acceptable in Irish law; however, our legal advice is that the directive is retrospective in this way. We are providing, accordingly, for the payment of compensation on a retrospective basis to the extent that this is required by the directive, in Part III of the Act. The section also allows the bank to impose conditions and requirements on investment firms.

Section 22 deals with the maintenance of funds by the company. The section specifies that the company will decide the contributions to be paid by investment firms and on the amount of the reserves to be maintained in a fund. The company must consult the bank before deciding the contributions to be paid, since the bank will be the supervisory authority and will have first-hand knowledge of the sector. It is proposed that funding of investor compensation will be prospective, in other words, that the company will build up reserves in order to meet claims for compensation, rather than collect contributions to pay claims as they arise. The company will be required to ensure that it is in a position to pay reasonably foreseeable claims for compensation and must take account of the funding capacity of investment firms when deciding the level of contributions and reserves.

Section 24 requires the company to have procedures in place to investigate complaints against it.

Section 25 provides for the approval by the bank of investor compensation schemes for certified persons under the Investment Intermediaries Act, 1995.

Section 26 allows the bank to apply to the High Court to revoke the approval of a compensation scheme for certified persons.

Section 27 provides for the issue of directions by the bank to investment firms which do not comply with their obligations under the Act. Those obligations would mainly relate to contributions, but could also include providing information needed to work out what contribution to compensation the firm should be paying. The bank is empowered to impose restrictions on the investment services provided by an investment firm which does not comply with those obligations.

The Second Schedule to the Act contains supplementary provisions in relation to a direction by the bank under this section and provides for appeals to the High Court against a direction.

Section 28 allows the bank to apply to the High Court, following consultation with the company, to have a direction given by it to an investment firm under section 27 confirmed.

If an investment firm continues to fail to comply with its obligations under the Act, the bank can move to revoke the authorisation of the investment firm to provide investment services or, in the case of an insurance intermediary, ensure that the intermediary is unable to act as an insurance intermediary on behalf of insurance companies. It will be an offence for a product producer to do business with an investment firm while a product producer has been informed that the firm has not complied with its obligations under this Act.

Part III of the Bill deals with the payment of compensation to clients of investment and insurance intermediaries.

Compensation will be payable in defined circumstances. There are two possible triggers: one is a court ruling which effectively prevents investors from recovering their funds from an intermediary for the time being. An example would be where the courts appoint a liquidator to an investment firm. The second trigger is where the Central Bank forms the view that an intermediary is unable to return client funds or investment instruments. In that case, the bank will make a determination that a firm is unable to meet its obligation.

Section 32 provides that where the bank has made a determination or a court has made a ruling, the company or compensation scheme must inform clients of the investment firm that they have a right to apply for compensation. Clients must be given at least five months within which to apply for compensation. However, this period may be extended in individual cases where the bank believes the client was unable, for good reason, to lodge a claim within the time allowed.

Section 33 deals with establishing investors' entitlement to compensation. Obviously, each claim for compensation will have to be clearly established: the mere existence of a receipt showing that a client entrusted funds to an intermediary does not show, for example, that the money was not subsequently returned. If a liquidator has been appointed to an investment firm by the courts, the liquidator will be required to establish what is owed to investors by the firm as a priority. If a liquidator has not been appointed, the bank will appoint an administrator to establish what is owed to investors claiming compensation.

Section 34 is a key section in the Bill. It provides for the actual payment of compensation to the client once the claim has been established. The compensation will be paid by the investor compensation company or, in the case of a certified person, which in practice means an accountant, by the compensation scheme of which the accountant was a member.

Section 35 covers the details of compensation payments. Compensation must be paid as soon as practical and at the latest within three months of the date when the amount lost by a client was established. This period may be extended for a further period, not greater than three months, with the agreement of the bank. The compensation scheme will be subrogated to the client of an investment firm in respect of the debt owed by the investment firm to the client and in respect of any payments from a bond or professional indemnity insurance held by the investment firm. This means that if there is still money in the investment firm after a client has been compensated by the investor compensation company or compensation scheme, the client will not be entitled to any of that money until the company or compensation scheme has recovered what it paid out in compensation. In a sense, compensation can be seen as a down payment on the money owed by the investment firm to the client.

Part IV contains miscellaneous provisions relating to investor compensation, including technical provisions arising from the investor compensation directive.

Section 41 provides that the bank may require investment firms to hold professional indemnity insurance in respect of investment services they provide. This will provide additional investor protection where, for instance, an investment firm loses client money through negligence.

Section 42 provides for the exemption from liability in damages for the bank, its employees, officers and authorised officers, and the company, the board of the company and its officers and employees in carrying out their functions under this Act, unless it is shown that an error or omission was in bad faith, and for a disclaimer of warranty in respect of compensation funds and schemes and investment firms arising from their supervision by the bank. The State, the company or the bank will not be liable arising out of the insolvency or default of performance of a compensation fund or compensation scheme.

Section 43 sets out the penalties for offences created under the Act. The maximum penalty will be a fine of £1 million and, in the case of an individual, imprisonment for up to ten years, or both, on conviction on indictment. On summary conviction, a maximum fine of £1,500 may be imposed and an individual may be sentenced to prison for up to one year.

Sections 44 to 47 deal with the provision of investment and insurance services by solicitors, an aspect of the Bill with which I have dealt already.

Part V contains a number of amendments to the Insurance Act, 1989, the Investment Intermediaries Act, 1995, and the Stock Exchange Act, 1995. Again, I do not propose to go into every section in detail. Deputies will find all the sections dealt with in the Explanatory Memorandum accompanying the draft Bill. Instead I will attempt to draw attention to the thinking behind some of the more significant amendments.

Section 51 inserts a number of amendments in section 2(1) of the Investment Intermediaries Act, 1995. Section 2(1) is the definitions section of the Intermediaries Act. The definitions of "investment advice", "investment business firm" and "investment instruments" are being amended in the light of experience gained in the implementation of the Act.

Section 54 amends section 14 of the Investment Intermediaries Act, 1995, to provide that the supervisory authority may impose conditions and requirements on investment business firms which are deemed to be authorised under section 26 of the Act as well as in respect of investment business firms which are authorised under section 10 of the Act.

Section 58 amends provisions in section 26 of the Investment Intermediaries Act, 1995, relating to restricted activity investment product intermediaries. It might be helpful if I recall what is meant by that term. Restricted intermediaries may only sell products such as unit trusts. They must not handle client funds, the only exception being where they have a written appointment as a deposit agent. Restricted intermediaries are deemed to be authorised on the basis of holding at least one written appointment from a product producer, in other words, they do not need to be formally authorised by the Central Bank. As a result of this amendment, any person who wishes to start up as a restricted activity investment product intermediary in future will have to be fully authorised by the bank.

Section 59 inserts a new subsection in section 28 of the Investment Intermediaries Act, 1995. Product producers are required to give a written appointment to any investment business firm through which they sell their products and are required to ensure that the investment business firm complies with the Act. This element of industry self-regulation is central to the supervisory regime for restricted intermediaries under Part IV of the Act. The new subsection reinforces this provision by making it an offence for a product producer to deal with an investment business firm without giving an appointment in writing to the firm and without checking that the investment business firm meets the authorisation requirements of the Act.

Section 60 amends section 31 of the Investment Intermediaries Act, 1995, by the insertion of a new subsection which provides that a product producer who withdraws an appointment in writing from an investment product intermediary must publish notice of the withdrawal of the appointment in writing in one or more newspapers circulating in the State.

Section 63 amends section 52 of the Investment Intermediaries Act, 1995. Section 52 is designed to protect client funds which are in the hands of an investment business firm when a liquidator is appointed to the firm. The client funds must be kept in separate accounts and the liquidator will not be entitled to use those funds to pay off creditors of the firm. However, there may be cases where it is justifiable to use client funds to meet a liquidator's costs because the clients will derive benefit from the actions of the liquidator. It is now proposed to allow such client funds to be used to meet the costs of a liquidator of an investment business firm where the liquidator carries out functions under the Investment Intermediaries Act or under the Investor Compensation Act or distributes the client money and investment instruments, where the firm has no assets from which those costs can be paid. The High Court will have to approve any such use of client funds.

Sections 69 to 81 amend various sections of the Stock Exchange Act, 1995. The Investment Intermediaries Act and the Stock Exchange Act contain virtually identical provisions for authorisation and supervision of stock exchange member firms and investment business firms. Accordingly, I am proposing these amendments to the Stock Exchange Act for the sake of consistency between the two pieces of legislation. I do not propose to bring the House through the Stock Exchange Act amendments individually.

I should mention that the text of the investor compensation directive is included as the Third Schedule to the Act.

I hope this legislation will never be called upon to do what it provides for, that is, to pay compensation to clients of a failed investment or insurance intermediary. Realistically, that is a forlorn hope. Human nature will always be there and so we are unlikely to achieve the perfect world. The least we can do is try to minimise the number of defaults and ensure that, where they occur, there is some alleviation of the hurt and misery that can result from them.

The provision of compensation to investors where an investment firm fails to meet its liabilities to its clients is another important step in putting in place a regulatory system for financial intermediaries and an essential element in protecting investors. The presence of investor compensation arrangements will play an important role in promoting confidence in the investment intermediary sector. This will in turn benefit the financial sector as a whole.

The Bill gives an important role in the operation of investor compensation to the investment services industry and to investors. I am confident they will discharge that role efficiently and well.

We have consulted widely in the preparation of the Bill with the financial services industry and consumer interests and I would like to thank all those who contributed to the development of this legislation.

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

Mr. Noonan

This Bill was introduced in the Seanad where Fine Gael welcomed it and I welcome it here. This is a minor measure. What the Minister is doing in the interests of the consumer is not very dramatic, but he is moving to fulfil the obligations of the EU investment compensation directive and is going somewhat beyond that in the manner in which he has cast the legislation. This is a small step forward, but we should not make too much of it. If it has a fault, as is the saying in the first constitutional language, "sé a lutch a laghad".

The Minister is implementing the EU directive by providing a compensation measure for clients of investment and insurance intermediaries, including Stock Exchange members, firms and banks which provide investment services to customers. He is taking it beyond the terms of the directive and applying it in general terms to the retail side of investment, including insurance companies. He is also taking the opportunity to load on other amendments in respect of other legislation to which he referred.

The proposed measure is minor, and that is my main argument with the Bill. While the Minister has extended the scope of the directive beyond what is required under EU law, he has not extended the terms of the compensation beyond what is required under EU law. The amount of compensation, 20,000 ecus, about £15,500, is very small. The intention of the Bill is to protect the small investor. People who put their savings into investment rather than into the post office or the bank will face a greater risk. It is difficult to say who the small investor is. I ask the Minister to increase substantially the amount of compensation payable under the Bill.

When we think in terms of the average public servant's lump sum on retirement, amounting to about £40,000 or £50,000, that is the nest egg that will be at risk. For the Minister to go to the trouble to guarantee such small amounts of money, relatively speaking, is a wasted effort. The Bill is dressed up very well and is very wide in its scope. It brings us fully into line with our obligations under EU law, but at the end of the day if an investment firm goes down the maximum an investor will get is £15,500 or 90 per cent of the amount lost, whichever is the lesser.

The Minister subtracts from this again by saying that we must envisage this as a down payment. If a liquidator or an administrator finds in winding up the affairs of a company that a residual amount is available for disbursement to persons who have been caught by the collapse of the investment company, as I understand the Minister's explanation, that amount will not apply to those who already received compensation. It will be returned in the first instance to the company the Minister is setting up under this Bill to provide compensation. The company rather than the investor will be compensated. The maximum anybody will get, regardless of their loss, will be £15,500. If residual amounts are available to a liquidator or an administrator on winding up a company, that money goes back into the main company to replenish the store of compensation available for further eventualities.

Such a well constructed vehicle is ill-served by the very limited load it carries. The Minister constructed a great vehicle, enacting EU directives, setting up a company to provide compensation, giving the Central Bank a supervisory role and responsibility for appointing the chairman and vice chairman of the company and giving the Minister for Finance power to appoint other directors of the company, including consumer representatives, but for what purpose? The day there is another financial scandal, a person will be protected to the extent of the first £15,500 of the money lost.

Mr. Cullen

About 80 per cent of small investors would be entitled to less than that figure.

Mr. Noonan

We can trick around with statistics, but in the real world investment firms have gone down — it happened recently in my city. One might question why people are in some of these investment companies in the first instance, and it is difficult to get the full facts. In the case of the company in Limerick, the sums in the local anecdotal exchange in Limerick city and county were significantly in excess of this amount. The Minister referred to the Tony Taylor case where the sums were significantly in excess of this amount. In the case of Finbarr Ross, who is the subject of extradition proceedings in the United States and of a book, copies of which were forwarded to all of us in recent years, the sums of money were significantly in excess of this amount.

It is a great pity that, when the Bill is so well constructed and meets the needs identified, in terms of monetary compensation the need being met is relatively small. While it will provide a safety net for the small saver, it will do very little for people who are seriously hit by the collapse of an investment company. I will take up this matter on Committee Stage because the amount of compensation provided is far too small.

The Minister may say the country is not made of money and the taxpayer cannot afford to compensate people who did not apply the principle of caveat emptor and who in prudence invested in dicky investment companies, but that would be to miss the point because it is not a charge on the taxpayer. The charges will be applied across the board to stockbrokers, investment companies and intermediaries who interface between the markets and the customer and provide financial investment services. It is not sufficient to say that Revenue and the Exchequer cannot afford a greater amount and that it would be a burden on the taxpayer. They are the standard answers one gets from the Minister for Finance. On this occasion the Minister is asking intermediaries to fund the investment company. I cannot see why, therefore, he is so reluctant to peg the amount at such a low level and why he cannot increase it. I ask him to consider this matter between now and Committee Stage.

I agree with the provision that either a lump sum or a percentage, whichever is the lesser, should be provided. This will mean investors will be entitled to 90 per cent of the amount invested or £15,500, whichever is the lesser.

The Minister of State referred to the principle of caveat emptor. In a free market and a democracy, people frequently make choices. A free market backed up by fully democratic institutions is the best way to run a State and many countries are beginning to realise this. Countries that are the most prosperous are also the most democratic. Democracy and the free market seem to be two sides of the same coin. In such circumstances, if people take risks they must do so with their eyes open.

While I agree with the caveat emptor principle, that is not what underpins this type of legislation. “Buyer beware” is great advice, but the very small saver, particularly the 80 per cent the Minister of State claims he is targeting under the limits of compensation in this Bill, by definition would not have the information necessary to enable them make free and full choices without risk on the range of financial intermediaries that are listed in the legislation. The Minister of State claimed the arguments under the caveat emptor principle are not conclusive and he is proceeding along the lines of compensation.

There must be a limit on the compensation provided, not for caveat emptor reasons, but to ensure investors are prudent with their money. There are many types of schemes through which people can get extravagant interest rates. If 100 per cent compensation were available up to any limit, investors could put their money anywhere because they would be guaranteed to get it back. The caveat emptor principle does not, therefore, underpin the limits of compensation in the legislation. In a society such as this we must encourage people to act prudently in their personal and financial affairs, and particularly in their investment affairs. I have no difficulty with that principle.

I also agree with the structure proposed in the Bill. It is important that the Central Bank should act as the supervisor. It is also important that the chairperson and vice-chairperson will be appointed by the Central Bank. However, this runs counter to the view expressed by the Governor of the Central Bank before a committee of the Oireachtas when he stated that the role of the Central Bank in consumer affairs is strictly prudential, that the solvency of the institution is its primary concern and that it protects the consumer by ensuring prudential control and supervision. In other words, the main protection provided by the Central Bank is an assurance that the institution will not go bust and investors' money is safe. He did not seem to believe it had a role beyond that in terms of protecting the consumer.

What level of consultation took place since to enable the Central Bank take a direct role in a compensation scheme for consumers? It will not only be the supervisor of the investment fund company, but the Governor may appoint the leading people. That is a total change of emphasis on the position he adopted several weeks ago before a committee of this House. At that time he seemed to think the concerns of consumers were vested in the Department of Enterprise, Trade and Employment, that the Director of Consumer Affairs, as an independent office holder, would effectively look after the interests of the consumer and the vehicle for transmitting new powers to him would be through the Tánaiste's Department. The Minister of State said the Central Bank will appoint the two leading people in the company and the Minister for Finance will appoint the other directors of the company, and not only those with the financial expertise but those representing consumer interests. Again, that is a change from what we were led to believe a few weeks' ago. The Director of Consumer Affairs or the Minister for Enterprise, Trade and Employment would be the appropriate person or persons to appoint directors specifically gauged to protect consumers' interests.

Mr. Cullen

That is what will happen. That is why the Minister for Enterprise, Trade and Employment will be consulted. She will be involved with the Minister for Finance for that reason

Mr. Noonan

How will that happen when the Bill states the Minister for Finance will appoint them? One can consult with anybody. We all know the procedures of Cabinet. When a board is being appointed everybody is consulted and, particularly in a coalition arrangement, consultations will take place. While a provision for consultation is included in the Bill, the Minister for Enterprise, Trade and Employment should at least appoint the people who will represent consumers' interests. Alternatively, Mr. Fagan's office could be given the role. Rather than challenging the manner in which the Minister of State is making the arrangement under the Bill, I am exploring the attitude or philosophy behind it. This seems to be totally different from what the Secretary General of the Department of Finance and the Governor of the Central Bank stated when they appeared before a committee of this House. The Governor, in particular, told us he saw the bank's role as prudential and that while the liquidity of the institutions, their solvency and consumer protection issues were important, they were not central to his remit. He went on to state that if the Houses of the Oireachtas decided consumer protection had to be beefed up, the primary function should be vested elsewhere.

Will the Minister of State inform the House of the status of the working party set up to examine consumer protection issues arising from the position in National Irish Bank? That body was set up specifically to deal with such issues, to recommend if extra consumer protection was required and, if so, where the responsibility should be vested. This reasonably significant legislation appears to have a life independent of the senior personages involved in a committee of this House. It also has a life independent of the thinking which prompted the Minister for Finance to set up a working party to examine these issues. Will the Minister of State respond to those matters later?

The Bill exempts solicitors and accountants from the provisions of the compensation investor fund on two grounds. The Minister of State claims the investment of their clients' funds is incidental to their primary business as professionals and because they are, in effect, self-regulating professional bodies with their own compensation schemes, those schemes should be liable for loss suffered by investment arising from malpractice or the crash of any investment portfolio put together by a solicitor or an accountant. I am not sure that is the best way to proceed. For too long we have exempted the higher professions.

The Minister of State may correct me if I misunderstand the position. Persons who go the route of the compensation scheme operated by the Law Society will not have their compensation within the timeframe laid down which states that once the claim is verified payment should be made within three months. The Law Society does not act that way or with such rapidity. A serious disadvantage may be incurred by persons who have lost their money due to the inadequacies of one of the higher professions, such as solicitors and accountants, as against a person who has lost money due to the inadequacies of the financial intermediaries which are the primary focus of the Bill. I want the Minister to justify the quasi exemptions of solicitors and accountants from the main provisions of the Bill. I understand and agree that the primary professional role of a solicitor and accountant is not investment. However, if they are involved in putting investment schemes together for clients without using an alternative financial intermediary, I do not understand why a separate regime should apply to them and why they should not be required to participate in contributing to the company which will compensate investors and from which their clients could subsequently benefit.

I welcome the Bill and my party will not oppose it on Second Stage. There is an interesting philosophy underpinning it which seems to be at variance with what has been said by the various people I have mentioned over the past two months. The actual amounts are relatively small. The Minister may be able to statistically prove to the House that 80 per cent of investment is less than £15,000.

Mr. Cullen

I will deal with that later.

Mr. Noonan

I know from my normal constituency work and from contact with people that this level of compensation is quite small. Some people have a couple of hundred pounds here and there and it does not matter if they lose it. However, such a loss would be significant for people who have invested their life savings or a lump sum payment from their pension. Some £15,000 compensation or 90 per cent, whichever is the lesser, is inadequate. The Minister should reconsider this, particularly in circumstances where it is a self-funding apparatus.

The company will operate on the basis of collecting contributions in normal times when no investment company has gone down the tubes and will not wait until the crisis occurs before it collects the funds. In other words, it will have an annual contribution on a weighted basis which will apply to different companies. Perhaps the Minister could tell us how the weighting will occur. Will it be weighted on the size of the company, in terms of the gross turnover of the particular stockbroking firm or on the basis of the number of clients a firm might have? If there is a crash in an area of investment in which a company is not involved, will the same liability apply to the financial intermediaries who are in a particular line of investment as to those who are in different lines of investment? Will difficulties in an insurance product, for example, apply equally to companies which are not involved in insurance?

The Minister's statement is inadequate in giving us an insight to how the fund will be aggregated and weighted and the type of money we are talking about. Is the Minister trying to put together a fund of £1 million or £100 million a year? He has given us no insight to what pool of money will be available at any particular time. When we examine the details of the legislation on Committee Stage, I presume all the normal provisions which would allow the company to borrow and so on are in place. I would like a reasonable amount of time to discuss and thoroughly examine this lengthy legislation on Committee Stage. I do not know if it is the Minister's intention to send this Bill to the select committee or to take Committee Stage in the House. Perhaps he could clarify that in his reply.

Mr. McDowell

I express a firm preference that we should deal with this Bill in the select committee rather than in the House as there is little time left before the recess and this is a sufficiently important and detailed Bill to require such treatment.

I am glad to have the opportunity to contribute to this debate as it is timely in many ways, not least because it comes at a time when the regulation of the entire financial services sector is under intense scrutiny. The Bill introduces a new system for investor compensation but it also seeks to amend the Investment Intermediaries Act, 1995, in a way which I assume is intended to make it more effective. There are two broad areas, therefore, we should address. We must look at the principle — Deputy Noonan called it the philosophy — and the practice of investor compensation, the way we regulate financial services generally and the way those services are provided to the public. I support the broad principle behind this Bill but I will not scream its merits from the rooftops.

I believe in enterprise and risk taking. Our society's record in these matters is probably less than persuasive. I readily accept this is changing but in the past we have not always been a risk taking people. We have been, for understandable and good reasons, greatly given to the easy bet, the short-term option. Any person in the 1970s who received money would most likely have done one of two or three things. They would have invested it in property, usually domestic houses, in blue chip shares in the financial institutions we are discussing today, or in deposit accounts in banks, building societies or the post office. They were carefully saving for the rainy day with little or no risk.

Mr. Rabbitte

Or in CMI.

Mr. McDowell

That would not be regulated by what we are doing here today.

Such safe investments served people well but they did little to contribute to the type of enterprise and risk taking which this country badly needs. The role of the blue chip investment is diminishing, the property market is overheated, the potential for profit is diminishing and the Government decided recently to eliminate some of the unnecessary tax incentives which are pushing up prices.

The Stock Exchange is also showing early signs of overheating. It seems clear that many people are investing in equities with a view to realising a capital gain from the disposal of those shares rather than to earn moneys by way of dividend as they hold the shares. This will not cause us problems immediately but we must keep an eye on it for the future.

The rate of interest which can be obtained from depositing moneys in a bank, building society or other financial institution is now so low that many people are looking for other options for investment purposes. The number of people willing to invest in unit trusts, insurance products and other financial instruments has increased substantially over the years and it is likely that this will continue. The willingness to explore other possibilities has led to a greater availability of financial products and a mushrooming in the number of people and firms seeking to advise people to invest in these products. Most investment intermediaries are not specifically interested in selling advice but in selling products, particularly those produced by a particular bank, insurance company or other institutions.

The kernel of this Bill is in Part III, particularly in sections 30 to 34 which set out the circumstances in which compensation will be paid. I have read these sections carefully but I am still unclear as to their scope and intent. To that extent I am unclear as to the scope and intention of the Bill. It seems clear that the Bill is primarily intended to cope with circumstances where an investment company or an intermediary goes bankrupt or insolvent, leaving some of its clients out of pocket. This is most likely to happen in circumstances where moneys are misused or misapplied either fraudulently or otherwise. I am assuming this because the Bill as formulated does not state it clearly. This test applied by the Bill seems very simple. As I read it, the Bill simply requires that moneys should be owed to a client in connection with the provision of investment business services by an investment firm. If that debt is established the entitlement to compensation applies. If I give £10,000 to a broker or some other intermediary or firm and he pockets it, clearly I am entitled to compensation in the event that it cannot be returned.

Let me put a few other scenarios to the Minister and perhaps he can tell me whether a compensation entitlement would arise. If I go to an adviser, broker, accountant or investment firm with £20,000 or £30,000, I am told I will be looked after, that the individual concerned with whom I am dealing has come across some wonderful investment possibilities which offer the prospect of a decent profit into the future. He then goes off and invests in good faith — I stress in good faith — in a newly floated company or unit trust which does not work out. There is no specific agreement or contract between the intermediary, the adviser, the broker and the client — me for the sake of argument — as to what should be done with the money. Nonetheless the money has been lost. In effect the client trusts the broker who makes a bad decision. In those circumstances does the client have an entitlement to compensation.

Mr. Cullen

No.

Mr. McDowell

In the example I have given the broker is acting in good faith. What is the position if the broker is acting recklessly and an investment does not work out? What happens if he acts negligently by investing the client's money without checking out the investment properly in the first instance? The point I am getting at is simply this: if I go into an investment company with £20,000 or £30,000, that money can go missing or be lost in many different ways. It can be lost by virtue of fraud on the part of the intermediary, recklessness, negligence, carelessness and a host of other different ways. Investors need to know in exactly what circumstances entitlement to compensation will arise. Surely it is not intended to compensate investors if they knowingly and consciously take a risk that goes wrong. Equally I assume it is intended to compensate investors where they are defrauded of money. There is a huge grey area in between which we need to address. Is it intended, for example, to provide compensation automatically if a court order is obtained against a particular business investment company?

The rationale behind the Bill relies on one central factor, namely, the inequality of the relationship between the investment company and the client. If I go into an investment company, I am entitled to assume that the person with whom I am dealing knows a great deal more about financial products than I do. In that sense it is or can be an unequal relationship. In fact, in many cases, the client will know little or nothing about the product in which they ultimately invest. This inequality of the relationship is the central factor in determining whether compensation should be paid. If the relationship is hugely unequal, for example the little old lady investing her life savings, then it is surely right that compensation should be available in the event of her trust being misplaced. In those circumstances I agree with Deputy Noonan that the limit of 20,000 ecus is far too low. On the other hand if a company employing ten, 20 or 30 people loses money in similar circumstances, it is difficult to see why they should be entitled to compensation. In that sense the definition of "eligible investor" seems to be over generous, in that it allows companies, which should be well able to look after themselves and to assess their agents, to claim compensation.

The role of product producers — banks, for the sake of argument — is obviously important. As I understand it, more than 80 per cent of investment business and intermediaries are tied to particular product producers. It is obviously right that these product producers should be obliged or encouraged to ensure that the people and companies acting on their behalf and selling their products are fit and proper people. It is also right in principle that these banks, product producers, should take the hit in the event that the agent does not match up.

The Bill specifically seeks to eliminate the existing bonding system which governs insurance companies. The Minister and the Minister of State, Deputy Treacy, debated this matter at some length in the Seanad. While I have read the records of the Seanad debates, I still have a difficulty here. The central argument appeared to be that bonding was ineffective, that it did not provide a sufficient level of compensation and that in any event a good deal of the money went towards administration costs and so on. If that is the case, given that this is just one consumer protection provision, does the same argument apply to other measures of bonding which are in place or which we are considering putting in place? For example, the Minister for Education and Science is considering putting in place a bonding system for private colleges. We have in place a system for stockbrokers and a system for travel agencies. Are those bonding systems subject to the same faults and deficiencies which the Minister of State mentioned during the Seanad debate? Are we codding ourselves and the public when we talk about bonding as being an adequate means of protection? I suppose the Minister has raised this particular issue and perhaps we need to explore it.

There is obviously a consumer protection element in this Bill. In fact this is by far the most important element in it and the Minister seeks to deal with it, in part at least, by having the Minister for Finance, in consultation with the Minister for Enterprise, Trade and Employment, appoint some of the board. There is still a difficulty here in so far as the company as set up under the Bill, is effectively a legal entity whose sole purpose is to rubber-stamp the decisions of the Central Bank. In order to discharge the two or three functions which it specifically has, it is required to consult with the Central Bank but it will not, as I understand it, have access to the information available to the Central Bank in the discharge of the Central Bank's supervisory role. In other words, if the Central Bank becomes aware of deficiencies in a particular investment company, during the course of the exercise of its supervisory role, it will not, in the normal course of events, share that information with the compensation company. If that is the case the compensation company will end up effectively rubberstamping decisions which are, in effect, being taken in Dame Street, presumably in the same building, by the Central Bank itself.

Many of the later sections in Part V were recommended by the Select Committee on Enterprise and Employment during the course of the last Dáil. Perhaps we can deal with those in greater detail on Committee Stage.

I wish to comment generally about banking regulation and about regulation of financial services. There is clearly a cogent case to be made for bringing the regulation of all financial services into one supervisory body. There are obvious reasons for doing this. We can build up a certain measure of expertise, some of which does not exist. It simplifies matters and ensures a certain consistency in the way in which particular bodies are regulated. I am not yet convinced that the Central Bank is the way to go. Clearly, this and the legislation which is envisaged from the Department of Enterprise and Employment is intended to bring all of this into the Central Bank.

The primary role of the Central Bank is the monetary system — managing the currency, interest rates and so on behalf of the Government. I appreciate it will not be doing that after the end of this year, at least, other than as an agent of the European Central Bank and so its role in that regard will be diminished.

I am interested to know whether we will simply transfer people out of the primary role, who are managing the currency into the regulatory authorities or whether we will employ people who have a specific expertise in this specific area, namely the one of regulation. It is important that we have a dedicated body, whose sole purpose is to regulate financial services. We know from the experience of the 1995 Act that there are many more people in firms doing this business than we imagined. There is a clear need to build up expertise over a period in a financial supervisory authority, which will allow us to deal consistently and properly with them.

I refer to the point raised by Deputy Noonan at the end of his contribution: the apparent contradiction which exists here between consumer protection on the one hand and regulation, from the prudential point of view, of the system on the other. Deputy Noonan and I had the opportunity to discuss in different parts of Europe last week the experience in other countries and how these matters are done.

Without wishing to pre-empt the decisions of the committee, one thing which I came back with is simply that we need to be clear about the defined and different functions. We need to set aside consumer protection and tax evasion, and deal with the regulation of financial services. We need to give independent bodies specific functions and the powers to do them with as much exchange of information as can be legally provided for.

There is much to be teased out on Committee Stage of the Bill but I welcome its thrust.

Debate adjourned.