The primary purpose of the Bill is to allocate responsibility for the authorisation and supervision of insurance intermediaries. The Central Bank has been chosen as the regulatory authority and the powers available to it under the Investment Intermediaries Act, 1995, are being extended for that purpose. Any legislation that sets out to provide greater openness, transparency and accountability in regard to the insurance sector has to be welcomed in principle, but there are a number of significant question marks about the Bill which will need to be examined closely on Committee Stage. Anything regarding insurance or assurance is complex and difficult to understand. We all know this from trying to interpret or understand our own insurance policies. Most consumers find life assurance products in particular to be opaque, unintelligible and difficult to make informed decisions on. There is no reason the consumer should not have the right to intelligible, pre-contractual and post-contractual information on the main features of any life assurance product. It would appear that the brokers regard it as being in their interests to maintain the mystery and to avoid simplifying the presentation to consumers. Why should there not be complete transparency on all charges and expenses? Since it would be a level playing field, why should it impact disproportionately on any brokering company? In what is surely a classic case of understatement, the explanatory memor andum for the Bill states that there is currently a lack of transparency and an information deficit associated with the sale of insurance policies. I do not believe that it is beyond the capacity of the industry to make policies and documents more accessible and understandable.
Considerable sums can be invested in insurance and assurance policies and people are entitled to know beyond doubt what they are required to pay, who gets what in terms of where their money will go and what their entitlements will be. While the vast majority of those involved in the insurance industry are honest and hard-working people committed to doing the best possible for their clients, there is no doubt that the industry has been seriously damaged by the unacceptable activities of some. People were shocked at disclosures regarding the practice known as churning or mis-selling of policies. Serious allegations were made against Irish Life which resulted in the company having to offer compensation to many of its clients. There have also been a number of cases of irregularities involving brokers and others involved in selling insurance policies.
The Central Bank has been selected as the regulatory authority. In itself, this decision makes sense. It is absurd to have a situation where investment intermediaries are supervised by the Central Bank while insurance intermediaries, to the extent that they are supervised at all, fall under the Minister's jurisdiction. Very few consumers would be able to tell whether the complex financial instruments now on offer as investment vehicles would fall to be classed as insurance policies. In many cases, there may be an insurance element as part of an overall package. However, this legislation, which is, of course, confined to the insurance industry, must be seen against the background of Government proposals, decisions and reports on the regulation of the financial services sector generally and the subsequent failure to proceed with the blueprint which the Tánaiste and the Minister for Finance jointly commissioned.
In October 1998 the Government agreed to the establishment, at the earliest opportunity, of a single regulatory authority for the financial services sector. It appointed an implementation advisory group to be chaired by the current Attorney General to progress the necessary work and this group reported in May last year. The group's point of departure was the decision, in principle, by the Government that there should be a single regulatory authority. In that context, it recommended that the single regulatory authority should be established as soon as possible through the minimum legislation necessary to effectively fulfil its remit.
Initially, therefore, the existing statutory basis for regulation in the various sectors should be maintained and simple amending legislation should transfer responsibility to the single regulatory authority. Consolidating legislation could be enacted afterwards. In this way the existing statutory basis for regulation would be main tained and the necessary amending legislation would simply transfer responsibility for its execution to the new single regulatory authority.
The group considered that, proceeding on such a basis, the establishment of the SRA could realistically be achieved within one year of a Government decision. It added that it would not be inconsistent with this approach to consider the appointment of an interim board of the SRA in advance of the enactment of the necessary legislation. There has been no decision by the Government regarding how to proceed on foot of this report. There is no pending or promised legislation dealing with the establishment of an SRA. No decision has been taken as to whether the Central Bank should be given this role or whether a green field authority should be established.
The McDowell advisory group was asked to advise the Government on the range of financial service providers to be overseen by the new authority. The group developed a set of criteria to be used in determining whether individual financial service providers should be overseen by this new body. It agrees that all financial service providers should, in principle, be dealt with by the SRA and that a compelling case would have to be made for the exclusion of any provider from its remit. The group decided that it should be guided by the twin needs of ensuring that sound prudential practices are followed throughout the financial services industry in order that the integrity of the financial system is protected and also ensuring that a proper regime is in place for the adequate and appropriate protection of consumers in relation to financial services provided to them.
The group agreed that, where possible, the SRA should offer a one stop shop service both to financial service providers and to consumers in respect of their dealings with that sector. The group, therefore, concluded that the remit of the SRA should encompass the full range of bodies currently regulated by the Central Bank with the exception of payment systems – namely, banks, building societies and other credit institutions, stock brokers, money brokers and so on – and also those regulated by the Department of Enterprise, Trade and Employment, which primarily covers financial services provided by the insurance industry. The Department supervises the financial behaviour of the industry from a prudential perspective and is also concerned with consumer protection matters which involve pursuing a fair conduct of business regime to ensure the maximum possible transparency for members of the public in relation to the marketing of insurance products.
It is clear that, consistent with the principles underlining the Government decision taken as its point of departure by the McDowell advisory group and with the criteria set out in its report, the yet to be established SRA should be the primary source of regulation of the insurance industry, both as prudential supervision and consumer protection. That group specifically recommended that insurance intermediaries, both agents and brokers, should be subject to regulation by the SRA.
As regards the structure and location of the SRA, the recommendations of the majority of the group are clear. The authority should be an entirely new independent organisation. It should have a public interest board, the non-executive members of which should be selected for their experience of legal, financial and consumer issues. The board should comprise nine members, six of whom, including the chairperson, should be appointed by the Minister for Finance following consultation with the Minister for Enterprise, Trade and Employment. The board should also include a chief executive officer, a consumer protection director and the Secretary General of the Department of Finance.
There was, however, a minority report along predictable lines and a turf war is now in progress. The alternative model provides for the establishment of an SRA, with consumer protection functions, within the Central Bank. It was argued that this model could provide for a high level of accountability to the Minister for Finance and the Oireachtas. The authors seemed to ignore the fact that it is the complete absence of any degree of accountability on the part of the Central Bank which led to the need for a review of financial regulation in the first instance.
The authors of the minority report believed that there could be operational autonomy for a commissioner of regulation working within the Central Bank and answerable to its board only in relation to policy matters. The model would preserve what is already working well. They stated that the track record of the Central Bank in regard to its regulatory functions is extremely good and that there is considerable support among entities already regulated by it for it to become the new regulator. The reality is that if a new body is to be established, a single financial regulator vested with functions previously exercised both by the Central Bank and the Department of Enterprise, Trade and Employment, with the loss of the Irish currency the bank will lose the main reason for its existence. The failure of the Government to resolve the principal issue surrounding the establishment of a new regulator has meant the collapse of the indicative timeframe set out in the McDowell report for the introduction of legislation. What we are considering now is legislation which should already be out of date.
Again, the explanatory memorandum states that self-regulation of insurance intermediaries has proved inadequate and is considered inappropriate to an area of fundamental importance to consumer welfare. The Labour Party would go further and state that self-regulation generally in the financial sector, particularly where the interests of consumers are at stake, is inappropriate. Given what we have learned in recent years from various tribunals, the DIRT inquiry and other disclosures, it is understandable that the faith of the public in the financial sector generally has been shaken and that it is no longer prepared to rely on self-regulation. It is disappointing to note, for example, that despite the revelations of the DIRT inquiry, organisations such as the Institute of Chartered Accountants in Ireland are still pleading the right to self-regulation and are resisting attempts to impose outside supervision. The insurance industry has not entirely escaped the questions, which have entered the public domain, affecting other areas of the financial sector. Given the proliferation of intermediary businesses, there is an even greater need to protect the consumer.
The McDowell group considered the bodies regulated by the Director of Consumer Affairs and the Registrar of Friendly Societies. It decided that, in principle, all bodies engaged in financial services should come under the SRA but that each of these categories would have to be examined on its merits. The role of the Director of Consumer Affairs arises from the Consumer Credit Act, 1995. Under that Act, the director has responsibility for the regulation of the types of service providers engaged in consumer credit transactions as well as general issues relating to fair trade.
The McDowell group agreed it was appropriate that the functions relating to the regulation of service providers, including the notification of charges, should be transferred to the SRA. However, what it described as the conduct of business role more closely linked to general consumer protection, should continue to be carried out by the Director of Consumer Affairs. This would encompass such matters as misleading advertising, unfair terms and unfair contracts. The group admitted that there was scope for confusion in relation to such a demarcation between the authority and the director in relation to consumer complaints. It recommended an agreed structure for addressing the issue by way of a memorandum of understanding providing for co-operation between the two bodies.
There seems to be no reason such a demarcation of responsibilities between the authority and the Director of Consumer Affairs should not apply equally to both investments by consumers and consumer credit transactions. However, there is no provision in the Bill for placing under the supervision of the Director of Consumer Affairs those consumer protection aspects of the statutory regime under which the insurance industry operates and which ought, more properly, to be regulated by the director. As the Minister points out, there is currently a lack of transparency and an information deficit associated with the sale of insurance products. I welcome the provision which enables the Minister, by regulation, to introduce provision of information requirements.
The Minister's stated objectives are to enhance and strengthen consumer disclosure measures, procure an end to over-complication in presentation of products, increase competition while maintaining a high level of consumer protection, address mis-selling and to create greater transparency of charges, expenses and prices. The achievement of these objectives requires not just a regulatory framework but an active and effective enforcement authority. These are matters which should fall within the remit of the Director of Consumer Affairs. Is it intended that the director will lose all responsibilities in the financial services area when and if the SRA is established?
Another area of concern which the Bill seeks to address is the operation of reinsurance companies located in this country, mainly in the International Financial Services Centre. Up to this there has been little or no supervision of this sector. The Sunday Tribune of 16 January last carried details of two reinsurance companies located in the IFSC which were being investigated not by the Irish authorities but by the serious fraud office in the UK.
The main justification for introducing new measures in this Bill regarding the operation of reinsurance companies is to protect the reputation of the Irish financial services sector. That is a desirable objective but there is also an obligation on us to provide protection for clients of firms who may be using Irish territory. In this regard it is surprising that the Minister has chosen to take the minimalist option in section 5 by simply increasing the notification requirements and reserving the right, in section 6, to make regulations providing for stronger supervision and regulation of reinsurance undertakings if the provisions of section 5 do not prove satisfactory. Given the problems highlighted in the Sunday
Tribune, there is a case for moving directly to the powers provided in section 6.
These companies are part of the wider problem of Irish registered non-resident companies about which we know remarkably little. What we know gives grounds for serious concern that these firms can do serious damage to the reputation and standing of this country. There are more than 40,000 Irish registered, non-resident companies incorporated in the State. Many of these, it is accepted, are being operated for the benefit of people involved in fraud, money laundering and possibly drug dealing. Many of them, nobody knows how many, are located in the IFSC.
As a result of the controversy about these companies, amendments were introduced in the 1999 Finance Act requiring them to register with the Revenue Commissioners. However, the Minister, Deputy McCreevy, recently revealed some startling figures when he told the Dáil that of the almost 40,000 companies written to by the Revenue Commissioners, just 5,512 had made returns. A total of 24,095 failed to reply and another 9,389 letters were sent back to the Revenue Commissioners indicating that the addressee was unknown. This suggests that there is still a serious problem with these companies which needs to be addressed in a more vigorous way. We were aggrieved at how places such as the Cayman Islands, Jersey and the Isle of Man were used to facilitate tax evasion and to hide the unacceptable activities of some members of our business sector. We should ensure, therefore, that our territory is not used to hide illegality or criminality.
The provisions in the Bill requiring full disclosure of information by insurance companies is also welcome, if much delayed. My colleague, Deputy Rabbitte, was strongly critical of the Minister of State's decision last October to lift the cap on commissions that insurance companies can pay brokers without simultaneously introducing regulations to require the disclosure of commission levels to consumers. The delay in introducing regulations requiring disclosure of commission levels is hard to understand. These regulations were prepared by Deputy Rabbitte before he left the Department of Enterprise, Trade and Employment more than two and a half years ago and there is no reason for them not to be given effect by the current Minister.
Life assurance policies are, of their nature, complicated and often barely comprehensible documents for members of the public. It is essential that there be procedures in place to provide information in the simplest possible form on all details of hidden charges and extras, especially when the Consumers' Association reports some instances of commission of up to 60% being charged. The draft regulations prepared by Deputy Rabbitte when he was Minister of State with responsibility for the industry were designed to do this and to ensure that consumers would be aware of commission payments, especially in light of the negative impact these can have on values in the early years of policies.
The Minister of State has proclaimed in the past that his preferred disclosure regime might have been vulnerable to constitutional challenge. He did not provide the House with the basis for this conclusion. It allowed him to put most of the contemplated measures on hold pending the enactment of this legislation. It now appears that he intends to start the interminable consultation process again. None of this, however, prevented the Minister from lifting the cap on commission paid.
The need for disclosure of payments of commission to brokers was accepted by the industry as inevitable as long as three years ago. Unfortunately, since the Minister of State took office, Deputy Treacy has given the impression that he is a virtual prisoner of the brokers with the needs and entitlements of consumers taking second place. He now has the opportunity to show that this is not the case by ensuring that regulations with real teeth are introduced and there is no time lag between the enactment of the Bill and the introduction of the regulations.
I presume the disclosure regime will be extended beyond the commission issue and sales remuneration. I am anxious to hear the Minister's comments on this. Presumably protection only policies will be included in the disclosure regime given the success of the disclosure of these mat ters in relation to policies connected to buying a house, as required under the Consumer Credit Act, 1995.
Clearly, a regulatory regime for insurance intermediaries in which the consumer can have confidence is a major issue. The allocation of this power to the Central Bank under the provisions of the Investment Intermediaries Act is welcome. However, it is odd that the House is required to enact this legislation when neither Deputies nor the Central Bank know whether it will continue to be the financial regulator. It is unfortunate that considerable uncertainty has been generated by the continuing conflict between the Minister for Finance and the Tánaiste. The Labour Party cannot see how such a dispute is amenable to the usual fudge. There is no halfway house and we are being asked to process this Bill in a vacuum.
I look forward to the speedy passing of the Bill.
