I propose to share time with Deputy Noel O'Flynn.
Investor Compensation Bill, 1998: Second Stage (Resumed).
Question again proposed: "That the Bill be now read a Second Time".
Is that agreed? Agreed.
I welcome the Investor Compensation Bill, 1998. I see it as a confidence building measure for the banking and insurance industries. Recent years have not been a golden era for those industries and I hope this legislation will go some way to rectify that. I would prefer to see self-regulation in any industry, profession or business but it has been shown that the industry we are talking about needs regulation from the State.
It is important to have a system of investor compensation. If a financial scandal of the type we have seen in the past erupts again, we should ensure that confidence in the market is maintained and any possible run on a financial institution is prevented.
The figure of 20,000 ecu, which is equivalent to £15,500, will protect the small investor, the ordinary person and the majority of people who invest in the type of products pertinent to the Bill. Many of the constituents of Dublin South Central are elderly people who would have savings of approximately £10,000 so the 20,000 ecu will protect the majority of people who have investments with insurance companies. Other people may have invested hundreds of thousands of pounds but it is their responsibility to beware of what they are investing in and the dictum caveat emptor applies to them. As a nation we have become more sophisticated in our knowledge of financial instruments and it is the responsibility of people who have larger amounts to invest to ensure they invest in a reputable company.
To protect small investors consideration should be given to tying in the figure of 20,000 ecu to an increase in GNP because we expect increases of 7 per cent and 8 per cent over a number of years.
I am concerned about the question of accountability. The Central Bank has not been very forthcoming in relation to questions from the various Dáil committees. The Central Bank has its own agenda and must protect the economic health of the country, but it is not the best institution for giving information to a committee of this House.
If a major fraud occurred in the insurance industry involving hundreds of thousands of small investors, the institutions concerned should be answerable to this House, albeit through the finance committee. We should be able to get answers to specific questions without the bank being shielded by the law under which it is currently instituted. There should be a mechanism whereby this House can get a full account of any matter that is of major public interest.
I will refer to financial services offered on the Internet. We are now in the age of electronic banking. There is no need to have an account in any of the associated banks. One can have a bank account in a German, British or French bank. There is no longer any need to go to a bank to obtain money. Last Sunday, I went to the local shop to buy the newspapers, which cost me £3. I paid for them using my Laser card and got £40 cash back without any difficulty. The local shops are delighted to provide this service. I am not sure whether they get a commission on the amount they give back but it is now possible to get money from the smallest shop by using a Laser card.
Electronic banking, particularly with the advent of the euro, is very much in vogue. All the major banks in Europe have websites on the Internet and the services they offer will be taken up by Irish citizens, particularly if good interest rates are given on current accounts. How will the Bill impact on European or other residents who avail of financial services offered on the Internet from Ireland? How will it impact on Irish citizens who take up offers from the websites of European banks or banks in the Isle of Man or the Cayman Islands? That aspect needs to be examined.
Will the Investor Compensation Company Limited which will be set up by the Central Bank to gather the funds, have a watchdog role? Will it be able to investigate intermediaries who promise returns that do not stand up to normal criteria? I have not seen such advertisements recently but in the past, advertisements promised a return of 36 per cent in one year if people invested in certain shares. Some of the companies that went bust in Ireland recently engaged in advertising of a questionable standard. I would like the Investor Compensation Company Limited to have a watchdog role to ensure that intermediaries operate in a correct manner.
The certified persons under the Investment Intermediaries Act are generally accountants or other professionals. They will probably come under regulation through their own profession but a number of professions carry out practice inspection reviews. There should be some way to ensure that such inspections would include a review of the investment services of the particular profession.
The question of how the initial contribution will be made by the investment intermediaries intrigues me. If a calamity occurs in year two, will there be sufficient funds to pay out the appropriate compensation? The initial years' contributions should not be too onerous. An actuarial review of funding should be carried out from the beginning. In the early years the compensation company should have power to borrow from the Central Bank up to a level which the actuary estimates is capable of being paid back by the end of the initial period. In the event of a calamity I would be concerned about the period before the fund reaches a level at which, actuarially, it would be considered safe.
I am glad the Law Society compensation fund will cover, as well as moneys due under legal agreements, moneys which solicitors receive as investment intermediaries. With the advertising restrictions introduced by the Minister and the Law Society compensation fund, the rope seems to be tightening on legal eagles. That is a reflection of the way they regulated themselves and it is also a lesson that they must pull up their socks. This is excellent legislation which I hope will be enacted soon.
I compliment the Minister of State on the comprehensive nature of the Bill which is in line with the EU investor compensation directive. It will compensate clients who have incurred losses through investment intermediaries to the tune of £15,500, 20,000 ECUs, or 90 per cent of the loss, whichever is the lesser sum. The extension of regulation to the retail sector by the EU was inspired by the need for proper regulation within that sector. This legislation was needed to give people confidence in the institutions in which they invest. A new board will be set up. Control of the new investor compensation company will be in the hands of the Central Bank.
It is the Government's intention to provide increased protection for consumers. It has proven its concern under the terms of the Investment Intermediary Act, 1995, and this Bill will add to the existing powers. The board set up by statute will have an equal number of representatives from financial services and consumer interests and will be appointed jointly by the Minister for Finance and the Minister for Enterprise, Trade and Employment.
There have been a number of cases where investors lost substantial sums in the recent past through failures of the institutions they trusted. The Government perceives the need to protect the investor who loses through the failure of the institution with which he deals. There would have been no need for this Bill a decade or even two decades ago. Recent problems that surfaced in institutions have, however, lent an urgency to the demand for such a Bill. An investor may now safely make an investment with any firm located in the EU. He or she will know that compensation is in place to safeguard his or her funds to the tune of £15,500 or 90 per cent of the sum lost, whichever is lesser. Claims may be made against stockbrokers, banks, insurance agents, brokers and financial advisers. We are all aware of cases of financial advisers who packed their bags with old age pensioners' money and fled this jurisdiction.
An unorthodox scheme operated in Cork some years ago where the operator of an investment scheme took large sums of money from investors. His office was the foyer of the SIPTU union premises in Cork. While the case had nothing to do with SIPTU, a SIPTU employee took large sums of money, invested it unwisely and paid out large interest each month to investors, many of whom were astute and, one would think, would not have been caught in such a scheme. I am not sure whether the Minister will legislate for such circumstances where people outside of, or appointed by a financial institution take money.
The scheme is self-financing. The cost of compensation will be borne by the investment industry. All investment firms, big or small, will be obliged to contribute to the fund. There will be exceptions for solicitors who have their own fund and accountants who have Central Bank approval for their compensation fund. There will be substantial penalties for offences committed, with fines up to a maximum of £1 million and penalties of up to ten years in prison, depending on the offence.
I am sure the Bill will be welcomed by the small investor. Most small investors, including old age pensioners, suffered losses of hard earned savings and could not afford to take private actions against investment companies and individuals who defrauded them.
I welcome the Government's initiative which forms part of a laudable two-pronged strategy to provide increased protection for consumers. Stricter regulations should minimise the opportunities for intermediaries to defraud their clients. As a fall-back, the Government has decided to bring in legislation to provide for a scheme of investor compensation to clients who are unable to get their funds from an intermediary. The Government is confident that centralising responsibility for the regulation of financial intermediaries under the Central Bank and using the very extensive regulatory powers available to the bank under the Investment Intermediaries Act will provide a more effective system of regulation and will give greater protection to consumers.
The board of the investor compensation company will have an equal number of directors representing the financial services industry and consumer interests. The appointment of the board will be the responsibility of the Minister for Finance and the Minister for Enterprise, Trade and Employment.
I thank the Minister for bringing forward this legislation. I am sure people will be very much relieved when the Bill is passed and will feel safe in the knowledge that they can claim from the compensation board in the event of a failure. I support the Bill and congratulate the Minister on bringing it forward.
The core purpose of this Bill is to implement the EU investment compensation directive 97/9/EC. It establishes a framework for the compensation of investors or savers for loss of funds due to a collapse or failure, but up to a defined lesser of two limits. This directive is a Single Market measure, in other words, the directive being transposed into domestic law relates to the implementation of the Single Market programme. It is important to appreciate this nuance, the implication of which is that its focus is not the compensation of investors but rather the even playing field in the provision of certain financial services, investment services as defined, on an EU-wide basis. To the extent that investor compensation is an established and accepted principle in most of the European Union, it is recognised in consequence that the universal rule book must include rules that address, inter alia, the provision of compensation.
In addition to the core purpose, the occasion of the enactment into domestic law of the directive is being availed of to make additional provisions in respect of the protection of investors in the essentially domestic context. The scope of investor protection provisions in the Bill, as I understand it, is being extended to apply to smaller investment firms and to protect small investors with such firms, essentially domestic providers and savers or investors as well as to larger firms operating on an EU-wide basis.
The Single Market extends to services, including financial services, as much as to other sectors. Service companies, including companies providing financial services, banking, insurance, assurance and savings and investment services, are free to provide their services throughout the Union. Freedom to provide must, by implication, require member states' regulatory and supervisory authorities to establish a regime in respect of their activities, the effect of which would establish an even playing field across the European Union for those enterprises wishing to engage in European Union-wide trading.
There are three aspects to this obligation on supervisory and regulatory authorities. Supervisors and regulators in any member state essentially must recognise the rule of home country supervision. If, for example, a German insurance company wishes to offer its services in Ireland, the Irish authorities must accept that if the enterprise has been approved by the relevant German authority, it must be allowed to trade in Ireland. Equally, if an Irish firm wishes to operate in the German marketplace, the German authorities must accept its right to do so if it has been properly approved by the relevant Irish authority. Following from the home country rule, regulators and supervisors in all member states must have a minimum standard set of rules and requirements based on a principle of non-discrimination. In other words, the regulator or supervisor in one member state cannot operate a policy, the effect of which would de facto operate in a protective manner vis-á-vis the domestic population of enterprises it is required to regulate and supervise. The Commission and the other organs of the EU, including the European Court of Justice, must have competence in an overall supervisory and policing role to ensure protectionism does not operate within the Single Market.
The provisions of the directive extend to investors the protection of up to 90 per cent of the amount lost or 20,000 ECU, whichever is the lesser. The capping of compensation is intended as an acknowledgement of the caveat emptor rule. As is normal with such measures, the directive allows for individual member states to continue to operate provisions in excess of the minimum, where such provisions have been established. As I understand it, that means the ceiling could be higher than 20,000 ECU, but the Minister decided not to raise the ceiling. From the little experience I had as Minister of State with responsibility for commerce, I concur to a large extent with Deputy Noonan's remarks in this regard.
During the period of the Irish Presidency I was President of two councils, one of which was the Consumer Council. As chairman of that council it was forcibly brought home to me that the rights of consumers play second fiddle in the European order of things. There are many areas, including social ones, where one can point to the progressive influence European Union membership has had on our domestic law, but one area of primacy relates to the question of financial institutions and measures that may confer awkward rights on consumers or consumer bodies. Therefore, whereas we are putting in place a necessary and desirable structure, in modern day values the ceiling will not matter a great deal to the typical investor caught in the face of a collapse. I am sure the Minister of State will accept the recoupment is small. The Taylor affair erupted during my watch. While the caveat emptor principle may have been overridden by some investors in order to stay out of the sight of the Revenue authorities, a sum of £15,500 is not very significant.
An earlier speaker referred to the Finbar Ross collapse. I also had the experience of meeting small savers who lost their life savings in the collapse of the Finbar Ross International Investments Company. I recall, for example, meeting a deputation of such small savers led by the Larne MP, Roy Beggs, who wanted to know if it was possible to appoint an inspector at that late stage to examine the Ross débacle and to ascertain if there were assets that could have been distributed. That was a heart-rending meeting. I recall two building workers, in particular, who were with Mr. Beggs along with a number of people from Northern Ireland where the majority of savers lived. One of those builders had spent 39 years on the building sites in London and when he retired home to Castlebar found that every penny he had saved was gone, as Finbar Ross did a flit into the mountains, found God, and is allegedly administering to some sect. The man whom I met at that meeting was showing the arthritic signs of 39 years of physical work on building sites and all of his savings were gone.
I had to draw the conclusion, however, that it would be pointless to appoint an inspector because, in so far as I could establish, there were no assets to be distributed and while we might discover all the things we already knew and a small amount of new information, we would do nothing to recompense the people around the table. That case is extant in the sense that I understand the offender is being brought back to the Northern Ireland jurisdiction. Therefore, while this is a welcome structure in 1998, I am not sure £15,500 is meaningful. It demonstrates the power of other directorates in the Commission as distinct from being a major conferral of rights on consumers or, in this case, savers and investors.
The Bill provides for the extension of the investor protector scheme through the transposition of the directive into Irish law to savers and investors who would not normally be covered by the terms of the directive and who are not currently covered by an investor compensation scheme, or are covered to a debatable level. Clients of solicitors as investment intermediaries would be an example of this. The issue here is one of covering the existing Law Society compensation scheme in respect of solicitors in terms of investment services that are not simply incidental to their professional services. The provisions in the Bill purport to clarify, in favour of the investor, what is at present considered to be a moot point in respect of the extent of cover and protection provided by the Law Society scheme. The Bill proposes to enact provisions that will allow the Central Bank approve and oversee separate investor compensation schemes operated by certified persons, in this case accountants. I question the wisdom of exempting both solicitors and accountants in this manner.
Insurance intermediaries generally are to be brought within the scope of the provisions the Bill proposes to enact in respect of all of their business, life, non life and investment services. As the Minister of State said, the Minister for Enterprise, Trade and Employment will introduce a measure which will bring insurance intermediaries into regulation under the Investment Intermediaries Act, with the Central Bank as the supervisory authority. Clearly such a legislative provision is necessary from the point of view of consistency. However, we have not been given any indication as to the timescale for the introduction of the legislation. Will the Minister of State clarify that matter?
A further matter arises from the provisions of the Bill and a commitment to a Bill in respect of the supervision of insurance intermediaries generally by the bank. To fully appreciate the point I am raising, it is worth considering the proposals contained in the Bill on the interaction of intermediaries with product providers.
The Bill proposes to enact provisions that subject to the scope of the compensation provisions, the activities of insurance intermediaries in regard to all their services, both life and nonlife as well as investment and pensions. A promised Bill to be introduced by another Department will propose to subject intermediaries to the IIA and the Central Bank as the supervisory authority. This Bill proposes to impose a duty of care on product providers vis-á-vis the compliance of intermediaries with the terms of the compensation scheme, that is, the provisions of this enactment, in the distribution of their products by intermediaries through imposing on such product providers a formal system of written authorisation of intermediaries in respect of the selling or distribution of the products providers' products and services, further imposing on product providers an obligation to ensure that the intermediary is in compliance with the provisions contained in this Bill on its enactment and making failure on the part of a product provider to comply with this duty of care a criminal offence, subject to significant punishment.
The burden of the duty of care falls upon the product providers. I take it this will prove controversial from the point of view of the insurance companies. However, I am in favour of the provisions as far as they go. The duty of care extends only to a requirement to ensure compliance on the part of the intermediary with the terms of this proposed enactment. In other words, it appears that the duty imposed is one of compliance with the provisions of the compensation scheme, that is, the registration with and payment into the scheme. It appears that wider issues relating to mis-selling and provision of information to ensure informed decisions by prospective clients, what may be termed the consumerist agenda, are not dealt with.
It may be argued that the Bill's provisions relate only to the establishment and operation of the compensation scheme and not to the wider canvas. It may also be argued that the core purpose of transposing into domestic law the terms of the directive has a pressing deadline and that expanding the scope of the Bill further would overly complicate and extend the drafting exercise, raising the prospect of us failing to meet the deadline. I do not know if that is the Minister's explanation.
There is a certain amount of evidence of significant deficiencies and shortcomings in the general regulatory and supervisory regime for financial services in Ireland. Taylor and Reynolds are two examples and further examples were adduced by other Deputies. The Taylor affair, for example, was detected and flagged by a UK regulatory authority, not by an Irish authority.
The allegations which have been and continue to be made against the National Irish Bank group in respect of its selling and advisory activities are becoming more serious. The allegations made last Sunday on "This Week" are cases in point. These allegations come on top of what has already been discovered. Also relevant is the evidence on the issue of prudential and consumerist supervision given by the Governor of the Central Bank, the Secretary General of the Department of Finance and the Chairman of the Revenue Commissioners to the select committee on 1 April. It was acknowledged at that meeting by all three gentlemen that the Central Bank is preoccupied with prudential considerations, not the consumer agenda. That partly explains things which are now coming to light which are even more serious in terms of the independence of financial advice.
One of the most grave matters of concern from the interview last Sunday was that the bank seemed to be, through its senior personnel concerned, complicit in tax evasion. The depositors concerned said they wanted to bring their money back from Belfast and to avail of the tax amnesty, but they were told they could not do that. When they asked why, they were told it was because someone would want to know where they got it. So they were told the bank had a whiz kid who could tell them what to do with it. A financial adviser was dispatched to them and they were persuaded to put the money into the CMI scheme. That is also an important matter to consider in terms of our reputation which is one of the reasons the Minister gave for the introduction of this Bill. He said it was not just about compensation but about enhancing the reputation of the financial services industry.
The provisions in the Bill further fragment the general framework in respect of the allocation of responsibilities as between the commerce division of the Department of Enterprise, Trade and Employment and the Central Bank. At this stage it is relevant to ask whether the reducing rump of duties left in the Department of Enterprise, Trade and Employment should be transferred in toto to the Central Bank with the staff of the insurance section reassigned whether to other duties in the Department, to the Central Bank or to the Department of Finance, according to preference, need and requirements.
It is worth asking when considering these issues, if the time has come to bring forward a comprehensive single enactment which recognises a number of things, including the phenomenon of convergence in financial services generally, arising from, among other things, the adoption by the EU, through the banking directives, of the philosophy of allfinanz or bancassurance, as it is called in France, and the growth and development of the range of products and the resulting pressure being put on staff and intermediaries in financial services to sell these products and to drive up the share of fee based as opposed to interest margin services. That is an important point in a low inflation environment. Little money is now being made by the institutions in terms of the traditional loan. However, I am sure if anyone connected with the House defended this practice they would say it was being driven by the fee based system and the more clients they clocked up the more remuneration they got.
There is a need to establish a strong core of independent financial advisers and a proper statutory framework for the provision of financial advice on the basis of independence, transparency and comparability of information and professionalism. There is also an urgent need to establish a coherent supervisory and regulatory institutional structure for financial services that gives operational effect to a strong consumerist code, while also retaining and strengthening the traditional prudential framework of central banking.
I compliment the Minister for introducing this important legislation which helps to regulate our financial services and plays a part in consumer protection.
Last week Members of the Select Committee on Finance and the Public Service visited a number of European capital cities. I was part of the group which went to Austria, France and Holland. It was interesting to see how their law on consumer protection has developed. In France strict regulations apply to the extent that they claim to be over-regulated. In Austria the regulations are not quite as strict as regards consumer protection but the banking system is closely scrutinised. I have no doubt some good proposals will be put forward by the Finance and General Affairs Committee which will help the Minister to examine other aspects of consumer protection in the financial world. A number of speakers said this legislation had to be put in place because of the EU Investor Compensation Directive. It seeks to protect the Irish as well as the Community consumer. This Bill has been well debated here and in the Seanad and the Minister has given us a comprehensive account of its provisions.
On intermediaries and product producers, there will have to be a closer look at the aspect of intermediaries and how they operate. We are inclined to focus on the product producer but it seems they have no obligation to regulate how their intermediaries work and their code of practice with the customer. I have seen several examples of people being conned into taking out investment policies, insurance policies and various other types of investments. There is a vast array of products on offer to the consumer. Deputy Rabbitte did not mention that intermediaries are under pressure to produce the goods. There is also the ladder of achievement and they are given generous offers such as foreign holidays and so on but at the end of the day the consumer will be victimised. Elderly people in particular, people who may have been made redundant and may have a large redundancy payment and others who may have inherited money are victims and are preyed upon unscrupulously. The law as it stands does not provide sufficient protection for these people. When people realise their mistake it is too late. This Bill will help to some extent but compensation equivalent to £15,500 is very small and does not compensate them. Nevertheless, it is better than nothing. Rather than looking at the compensation we need to examine the legal penalties that can be applied to these people. How stringent are the penalties? What deterrents are there to ensure intermediaries treat the consumer fairly?
In several other areas of consumer protection, for example food, we are putting stringent controls in place but in the whole area of financial services anyone can get a licence to deal with vast amounts of money. I have seen some deal with millions of pounds. It seems there is nothing to prevent the intermediary from advising people where to invest their money, in instances where he may have no background or qualification in financial services. This area should be looked at closely. My impression may be totally wrong but it seems to be happening every day. It is rather like the racehorse industry here and the trainers who identify a victim, for example a rich American, who could be sold a dud horse. The same applies to intermediaries. They choose their victims and there is nothing to prevent them doing so. Perhaps the Minister will look at this area and refer to the protections, if any, which exist to protect the consumer.
The product producers distance themselves from their intermediaries although they should be held responsible for their action so intermediaries come and go. They get into the financial world and make quick killings. When their circle of friends, relatives, neighbours and associates is exhausted they move on to something else. The product provider remains. There should be an onus on him to monitor the activities of the intermediaries and ensure their products are responsibly and properly sold to the consumer.
The French bankers referred to under-selling, a matter referred to by Deputy Rabbitte. It is a question of how many customers one takes on rather than what service they will be given. Banks are there to make profits. The service provided must be paid, not the business of borrowing, lending and investing. We should be careful here to ensure we have proper standards. Given the competition between the various banks and investment agencies we must ensure there is no under-selling because this destabilises the market.
Deputy Rabbitte gave examples of customers being duped over the years. As a young boy I recall the famous scam known as Shanahan's stamps which no doubt was similar to the Ross and Taylor scandals. These people were allowed to prey on the consumer without restriction.
The Minister of State said:
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, for example, show 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 who are claiming compensation.
In the case of very small investors this is a cumbersome system. Given that intermediaries will be closely scrutinised I hope there will not be widescale collapses in future such as a recurrence of the Taylor and Ross cases. Nevertheless, for the small investor this is a cumbersome system. A simpler system should be put in place for investors of not more than £5,000. I realise it is much easier where a liquidator is involved. Where a bank has to appoint an administrator to establish what is owed to investors it is a cumbersome way of doing business. Many of these may be innocent victims of some intermediary and the idea of a bank appointing an administrator to assess what is owed could be a harrowing experience, especially if people have lost some of their savings.
The Minister rightly stated that section 34 is a key section because it provides for the payment of compensation to the client once a claim has been established. The Investment Compensation Company will pay it. From a cursory glance at the debate in the Seanad, I know Senators asked how much will be paid into the fund. No doubt the Investment Compensation Company will determine how much each company or agency must pay. How will this be calculated? In the case of individual intermediaries, for example, who will have to pay into the investment compensation fund? Will it be the company, the intermediaries or others?
I welcome the provision that compensation must be paid as soon as practicable and at the latest within three months of the date the amount lost by the client was established. I wonder what would be the outcome of a delay due to reasons such as litigation, where claims may be challenged where an investment group could claim legitimate reasons for a collapse in their business. If it went beyond three months, what is the fall-back then for the investor?
This Bill is welcome. I hope it is the first in a line of legislation which will genuinely protect the consumer. The Minister must accept that legislation to date has not protected the consumer. The Bills and provisions over the years going back to 1989 which were designed to protect the consumer have not been successful. For that reason, we must take a serious look at the protection provided in the regulations and supervision powers under existing legislation to see how more effective they can be made. Working with the Committee on Finance and the Public Service, we should be able to introduce strong proposals which will ensure the protection of the consumer.
I thank all the Deputies who contributed to the debate. I will endeavour to answer the points raised by the Deputies.
On the level of compensation, which Deputy Noonan dealt with at length and to which Deputy Rabbitte and nearly all Deputies referred, there was some concern at what they considered to be the low level of the compensation and they asked why this was to be the case. We are providing that investors will be entitled to claim the lesser of 20,000 ecu or 90 per cent of the amount lost. I agree that this is by no means a fortune. We did not set out to pretend that it was a fortune. However, our intention is to ensure that small investors are protected and we want to ensure that the compensation system we introduce will work. Therefore, the amount of compensation is a critical decision. If that amount is set too high, there is a danger that the compensation system will collapse under the weight of claims or that it will not get going properly in the first place. We cannot predict what the level of compensation payouts will be over the years. We can look back at the losses that have been suffered by investors in recent years and draw certain conclusions from that. However, we should not forget that a reasonably low level of fraud in the past is no guarantee that there will not be catastrophic claims in the future.
The cost of compensation must be borne by the financial services industry. There is absolutely no question of investor compensation being funded by the Exchequer. Inevitably, the cost to investment firms of their contributions to investor compensation will be passed back to investors. This is an important point to make, particularly in response to Deputy Noonan. Some or all of the cost will inevitably be passed back to the investors. If that cost is too high, investors will be discouraged from acting through investment intermediaries and the number of intermediaries will fall. That could have undesirable effects on investment. It might also not be in the best interests of investors because investors need a network of financial intermediaries to get the professional advice they need to make sound investment decisions. A further point to consider is that investors may well be price-sensitive when it comes to paying what will, in effect, be an insurance premium for compensation cover. The higher the level of compensation, the higher will be that premium.
We already have protection for bank deposits in place and the compensation there is the same, the lesser of 20,000 ecu or 90 per cent of the sum lost — EU Directive on deposit-guarantee schemes, transposed by European Communities (deposit Guarantee Schemes) Regulations, 1994.
I will go some way towards accommodating what the Deputies said. It is a point that I too considered. We want to get the scheme set up properly and we want it to work successfully. I will have no hesitation if I see this happening and we can increase the amount without putting an exceptional burden on the consumer, who will eventually pick up much of the cost to the industry. There was an obvious point at which to start because there are so many unpredictable elements in this. We should start on safe ground to ensure that the scheme commences and works successfully.
Deputy Noonan queried the provision that the compensation fund would get its money before the investor, where it emerged that the liquidator of an investment firm had funds to distribute. I was surprised at the context in which the Deputy raised this point. This subrogation provision is a requirement of the Investor Compensation Directive. While the directive does not bind us where investment firms which are not subject to the directive are concerned, it would make things very difficult if different rules applied depending on which investment firm one employed. We have tried to ensure that there will be a consistent entitlement to compensation across the board.
I also reject Deputy Noonan's statement that 20,000 ecu is the absolute maximum an investor can get back when an investment firm defaults. A sum of 20,000 ecu can be seen as a down-payment. If there is 20,000 ecu left in the firm, the compensation company will be recouped. The Deputy is quite correct on that. If there is more, the investor will be fully entitled to claim the balance. That comes back to the my earlier point.
Deputy Noonan also seemed to suggest that the Bill exempts accountants and solicitors. Solicitors are exempt from regulation under the Investment Intermediaries Act, 1995, where the investment services they provide are incidental to their professional activities as solicitors. The Law Society Compensation Fund provides for the payment of compensation to clients of a solicitor who lose money through the dishonesty of a solicitor. However, it is not clear that the fund will be obliged to pay compensation in respect of investment services provided by a solicitor where those investment services did not arise from professional activities. That solicitor is an investment firm and should participate in investor compensation arrangements under this legislation. However, because solicitors can legitimately provide investment services without being regulated by the Central Bank, there was a potential gap in the provision of investor compensation. Following discussions with the Law Society, it is now proposed to amend the Solicitors (Amendment) Act, 1994, to ensure that the Law Society Compensation Fund will be responsible for compensating clients of any solicitor in respect of investment and insurance business where the solicitor is not a contributor to a compensation fund managed by the Investor Compensation Company. The section also restricts somewhat the scope of the exemption for solicitors under section 2(7) of the Investment Intermediaries Act, 1995.
With regard to Deputy Noonan's point about the timely payment of compensation from the Law Society compensation fund, there does not appear to be a requirement in law that the fund must pay out within a set time. However, there can, for good reason, be quite a delay between the time when a default comes to light and the payment of compensation. One must simply establish whether a claim is good, otherwise one runs the risk that every fraudster will make a claim for compensation if there is any likelihood of a payout. The Investor Compensation Bill provides that compensation must be paid within three months of a claim being verified, not within three months of the default or of a claim being lodged.
We are making separate arrangements for accountants who provide investment services only as an incidental part of their accountancy business. In other words, accountancy practices which are not investment business firms or full-scale insurance intermediaries. Accountants already have a separate supervisory regime under the Investment Intermediaries Act, provided they are only involved in incidental investment business. They can be regulated by their professional bodies under the overall supervision of the Central Bank. The accountancy bodies have expressed interest in running their own schemes and we consider this appropriate because the investment business in question is incidental to their professional activities. However, we will continue to monitor the situation.
Deputy Noonan also asked what will be the level of contributions to compensation funds. The straight answer is that we do not yet know and we have not set out in the Bill what will be the level of contributions. This will be a matter for the investor compensation company to decide, in consultation with the Central Bank. Obviously the amount of contributions will depend on the amount of compensation that must be paid out. There will have to be a formula which will attribute the costs of compensation fairly across investment firms.
I understood that before any default occurs, intermediaries will be obliged to make contributions to the company. How then can the level of contribution be contingent on the amount of the default?
It is not. I did not mean to give that impression, I was simply using the argument that we are not in a position to pick a figure out of the sky in respect of the number of claims that will be made. That was one of the reasons we wanted to establish the investor compensation company to try to work out the different formulas. For example, we want to know the level at which the scale should be set in respect of different types of operators in the business or new companies that might not have a track record.
The Deputy is correct that the fund will be established immediately, in advance of the receipt of claims. However, I must inform him that we just do not know what will be the level of claims. If a substantial number of claims are received, this will affect the level of charges to the various firms in respect of funding the compensation fund. The position will have to be considered in that context. That is my understanding of the situation, which, I believe, is correct.
It is likely that no one formula will suit all firms and it is also likely that a number of different funds will be established. The Bill requires the company to build up compensation funds against future claims, in other words, compensation will be pre-funded.
With regard to Deputy Noonan's query about how investor compensation will be structured let me say the following. Accountants will be able to set up their own compensation schemes. The number will depend on how many of the accountancy bodies decide to run investor compensation schemes for their members and, if they so decide, whether they can satisfy the Central Bank that what they are proposing will protect their clients to the standards required by this Bill.
All other intermediaries will have to contribute to the compensation funds run by the company. It will be up to the company to decide how many different funds there should be. Obviously, size counts: the bigger the fund, the better the chance it will be able to meet compensation demands. That said, there are different categories of intermediary and it may be appropriate to break them up into a small number of homogeneous groups.
Deputies McDowell and Noonan asked about the Committee Stage of the Bill. I can confirm that the Investor Compensation Bill is scheduled to be considered by the Select Committee on Finance and the Public Service on Thursday week, 25 June.
Deputy McDowell asked who would be entitled to receive compensation under the legislation. Section 30 sets out the basic entitlements of clients of investment and insurance intermediaries. Compensation will be payable where an investment firm is unable to discharge its liabilities to clients in respect of the provision of investment or insurance services. The client will have to establish his or her position as a creditor of the firm. It will not be enough to produce a receipt, there must be a clear indication that business was carried out.
Investors will not be entitled to compensation simply because an investment does not work out. We are not providing for compensation on the basis of bad advice because we have no intention of becoming involved in that area in the foreseeable future. This will not prevent people from claiming compensation where they lose money because it was badly invested. It may be that the intermediary was at fault because he or she failed to follow the client's instructions and invested the money in the wrong place. The question then will be whether the firm is liable, or, whether it would be held liable to repay the money to the investor if the investor sued. If that is the case, the investor will have a valid claim for compensation. However, each claim will have to be judged on its merits and it will be the task of the administrator to establish whether the investor's claim is good. Much will depend the nature of the agreement or the details of the contract between the intermediary and the client — that is why the phrase "in accordance with the legal and contractual conditions applicable" is used in section 30.
I should point out again that it may well take some time to establish a client's entitlement to compensation. The collapse of an investment firm gives an opportunity to make fraudulent claims for compensation. Section 33 requires the liquidator or administrator to establish, as soon as practicable, the amount of compensation to which clients are entitled. I might also draw the attention of the Deputy to the provision in section 41 which allows the Central Bank to require investment firms to hold professional indemnity insurance. That will provide an additional layer of cover where a client loses money through negligence on the part of an investment firm.
Deputy McDowell also wondered why bonding could not be maintained alongside the investor compensation arrangements in the Bill. At present, there is a patchwork of protection measures for clients of investment and insurance intermediaries in place. For example, under the Insurance Act, 1989, some insurance intermediaries are required to hold a bond for £25,000 or 25 per cent of turnover. Under the Investment Intermediaries Act, 1995, investment business firms are required to hold a bond for £50,000 or 25 per cent of turnover. However, bonds are not a very satisfactory way of protecting investors. The biggest drawback is that you cannot guarantee a particular level of compensation with a bond: the proceeds of the bond, after allowing for the costs of administration, will simply be divided up between the eligible clients. A single eligible client will do well, but a client who has to share with perhaps 20 or 30 other claimants will most likely do badly. It is for this reason that we are replacing the present patchwork arrangement with a unified system of investor compensation. The idea is that clients of investment and insurance intermediaries will in the future have a statutory level of entitlement to compensation and that is what the Bill provides.
Deputy McDowell also indicated concern that the investor compensation company would merely rubber-stamp the decisions of the bank. We must be clear what will be the functions of the company. It is primarily a mechanism for ensuring that there are adequate funds available to compensate investors. The entitlement of investors to compensation will be a matter of law and the company's role in that regard is to ensure that the investor gets what he or she is due.
Other points raised by Deputies included a watchdog role for the investor compensation company over advertising by investment firms. This role has already been given to the Central Bank as the regulator of stockbrokers and investment intermediaries. There are detailed provisions in the Stock Exchange and Investment Intermediaries Acts to ensure that the bank has the necessary powers to prevent abuses of advertising.
It was also suggested that the compensation company should have the power to borrow from the Central Bank. I do not consider this to be appropriate. There must be no question of the taxpayers subventing investor compensation, accidentally or otherwise. However, section 13 provides that the company will have the power to borrow generally, subject to the approval of the Central Bank.
With regard to Deputy Noonan's point on appointments to the board of the investor compensation company, a matter on which I spoke at length, such appointments will be a matter for the Minister for Finance. However, the Minister must have the agreement of the Minister for Enterprise, Trade and Employment when arranging them. In this regard I was incorrect when I said earlier that the Minister for Finance must consult the Minister for Enterprise, Trade and Employment; he must get her agreement. Given this is a consumer oriented Bill, I expect there will be a proper balance in the makeup of the board to ensure that consumer interests are recognised.
Deputies Noonan and Rabbitte wondered if, given the discussion at the meeting of the Oireachtas Joint Committee on Finance and Public Affairs which members of the Central Bank attended, there had been a change of heart. While I was not present at the meeting, I do not believe there has been a change. The Governor of the Central Bank told the meeting he saw his role with regard to the regulation of the financial system as prudential. The Bill does not change that. While the bank has an important role to play in the operation of the compensation system incorporated in the Bill, the role of the bank is technical. This is almost an inevitable consequence of the fact that the bank is the regulator for investment business firms and is expected to be the regulator for insurance intermediaries in the foreseeable future.
It will be up to the bank to make a determination that an investment firm is unable to meet its liabilities that will trigger the payment of compensation. Making a determination is first and foremost a regulatory issue. When the bank has any evidence that an investment firm is unable, even temporarily, to meets its liabilities to clients, it will be obliged to make a determination. As soon as that determination is made, clients of the investment firm will be free to claim against the compensation company and the amount of compensation to which they are entitled will be a matter to be settled in accordance with the provisions of Part III of the Act. The role is a technical rather than a policy one in the area of consumer protection.
In this regard, Deputy Noonan mentioned the working group, which the Minister has established to examine the question of consumer protection in the area of financial services, and especially the roles of the Central Bank and the Director of Consumer Affairs in this regard, both in law and in practice. A considerable amount of work has been done by the group and a great deal of progress has been made. Complex legal issues with regard to domestic and EU law are required to be addressed and this facet of the work is ongoing. However, when these have been addressed I expect the group to be in a position to finalise its deliberations in the near future. Given the significance of the subject matter, it is important that whatever emerges from their considerations be the result of thorough examination.
Deputies raised the question of the single regulatory authority for the financial services area. At present the Central Bank is the principal regulatory authority in this area being responsible for credit institutions, the Irish Stock Exchange and its members, collective investment schemes, investment intermediaries and money brokers. The Minister for Enterprise, Trade and Employment has announced she is preparing legislation that will give the Central Bank responsibility for supervising insurance agents and brokers. When that legislation is in place very few elements of the financial services industry will not be under the eye of the bank. Insurance companies and credit unions are two examples.
There is much to be said in favour of a single regulator, including unified standards, a reduction in bureaucracy and no room for regulatory arbitrage. It is a brave man who would deny the benefits of this. Whether that single regulator should be the Central Bank or another body is a matter for discussion for another day.
Deputy Deenihan raised the question of ensuring that unauthorised intermediaries are not in a position to take money from investors. The Investment Intermediaries Act provides that any body providing investment services or advice must be authorised by the Central Bank — I dealt with this at length earlier — or must be deemed to be authorised on the basis of having a written appointment from a product producer. The Central Bank's powers are extensive; they extend beyond authorised investment business firms. The bank has power to issue directions, which are a powerful regulatory tool and which can be backed up by the High Court, not just to authorised but unauthorised investment business firms. Section 57 of the Bill increases this power by allowing the bank to impose directions on the directors and those responsible for the management of investment business firms which are not authorised.
I hope I have covered most, if not all, the issues raised by Deputies. The wish was expressed to tease matters out in greater detail on Committee Stage, which will take place next week. I thank everybody for their contributions.
Question put and agreed to.