I move: "That the Bill be now read a Second Time."
It seems to me to be appropriate that we are considering a major financial services regulation Bill this year – the 60th anniversary of the passage of the Central Bank Act, 1942, which established the Central Bank of Ireland. Let me hasten to add that in the intervening years there have been several major Acts bearing on the banking and financial services sector and on the Central Bank's functions.
The world in which the Central Bank of Ireland operates has changed enormously since 1942. The Deputies of that time would not recognise the modern Irish financial industry. At the end of December, 2001 there were 55 holders of banking licences and 32 branches of EU banks operating in this country. These include the most important financial institutions in the world. In addition to the banks, there are literally thousands of investment firms and financial and investment intermediaries supervised by the Central Bank which the Oireachtas established 60 years ago. Outside the realm of current Central Bank supervision there are insurance companies, credit unions and so forth, adding to the complexity and sophistication of the financial services industry. The financial services industry plays a major role in the economy, as it provides direct employment to about 50,000 people and supplies a wide range of services and products that are vital in a modern economy. As this industry has changed and grown over the years, there have been considerable changes in the legal and regulatory framework.
I pay tribute to the unseen and largely unknown guardians of the public interest in the Central Bank, the Department of Enterprise, Trade and Employment and the Office of the Registrar of Friendly Societies. It is a tribute to their effectiveness that they are so rarely in the public eye. Failure of a financial institution has been a rare event in this country, although it is important that Deputies are aware that high standards of regulation do not provide an absolute assurance that difficulties will not arise in individual financial institutions. High quality regulation seeks to minimise the risk of serious problems in individual firms and, more widely, in the financial sector, while maintaining a climate in which the industry can continue to innovate and develop.
The main purposes of this Bill are to provide for the establishment of the Irish Financial Services Regulatory Authority – IFSRA – within the overall new structure of the Central Bank and Financial Services Authority of Ireland; to assign functions to the IFSRA as the single regulator for the financial services sector, thereby providing a one stop shop by having the regulation of insurance, banking and credit unions under one roof; to strengthen the consumer focus of regulation by giving the authority specific responsibilities in this regard and creating a statutory position of consumer director; and to establish the financial services appeals tribunal.
In this Bill I seek to improve on the solid foundation that exists in relation to the State's oversight of financial services. I wish to respond to the demand for a better service for consumers of financial services and greater accountability by financial institutions and the new regulatory authorities. A key objective of the Bill is to give a strong mandate to the regulatory authority with regard to the regulation of the conduct of financial services business while also providing a stronger framework for regulating the manner in which financial institutions deal with their customers – so-called "conduct of business" regulation – and also on consumer protection. While talking about protecting consumers of financial services, we should not forget that the most basic protection sought by consumers is a reasonable assurance that the institution to which they entrust their money is financially sound and that the financial system of which it is a part is fundamentally solid.
A second objective of the Bill is to redesign the structure of regulation to reflect changes in the market and the legislation governing it which have taken place during the last ten years. As different sectors of the wider financial services increasingly offer similar products, it makes sense that they be regulated by a single institution. It makes sense, especially for a small country like Ireland, that we make best use of the necessarily limited pool of regulatory expertise at our disposal. This approach has wide-ranging support and its case has been made by the Joint Committee on Finance and the Public Service. It has been accepted by Government and it has been reviewed and approved by the McDowell group.
I wish to take this opportunity to point out another advantage of the integration of financial services regulation. Not only is there increased integration of financial services within Ireland, but there is increased integration of financial services internationally, which leads to consolidation of services centres, administration, asset management and dealing activities. We compete internationally to be the location for such activities and one of the major factors in determining where such centres are located is the reputation and expertise of the regulator. I expect that a single integrated regulator and continued high standards will be positive elements in the context of attracting such investment to Ireland. These argu ments support the integration of prudential, consumer and conduct of business regulation for all sectors of financial services providers under one regulator.
Deputies are aware that the McDowell group recommended that the single regulatory authority should be an entirely new independent organisation. After long deliberation and discussion, I present in this Bill an arrangement which has been approved by the Government and which is fully in the spirit of the McDowell report. It accommodates the different views of the minority on the group in relation to the ideal structure for regulation of financial services in Ireland. The structure provided for in the Bill differs somewhat from the structure announced by the Government in February 2001. It provides for a monetary committee of the board, rather than a separate monetary authority, within the Central Bank and Financial Services Authority of Ireland. Following informal discussions with ECB officials last year, it was deemed desirable to make clear that there is no attempt to circumvent the institutional independence of the Central Bank or the Governor in carrying out European System of Central Banks related tasks. It has been agreed that the Governor will have a more direct role in relation to the budget and regulatory activities of the IFSRA to ensure that financial stability issues and ESCB tasks are dealt with in a co-ordinated fashion.
The establishment of a new entity, the Irish Financial Services Regulatory Authority, as a constituent part of a new bank structure is at the heart of this Bill's proposals. The authority will manage the regulation of financial institutions in Ireland. The IFSRA will take on and develop the financial services supervisory functions of the bank, as well as handling the regulation of credit unions and the insurance sector. The regulatory authority is to be established under section 33B of the principal Act and will operate as a constituent part of the new bank. It will have its own chairperson, chief executive and consumer director and will have independent functions. The chairperson, chief executive and some authority members will also be members of the board of the Central Bank and Financial Services Authority of Ireland. The post of consumer director is specifically provided for in the Bill and a separate statutory post of registrar of credit unions is also provided for, in recognition of the unique role played by credit unions in Irish society.
The regulatory authority will have two main sets of functions. It will be responsible for the licensing and prudential regulation of all financial services providers and for consumer protection across the sectors. It will consist of a chairperson, the chief executive, the consumer director and no fewer than six and no more than eight persons appointed by the Minister for Finance after consultation with the Minister for Enterprise, Trade and Employment. The chairperson of the authority will be appointed by the Minister for Finance. Deputies will be aware I appointed an interim board, on a non-statutory basis, on 16 April 2002. The chairperson of the interim board is Mr. Brian Patterson. The role of the interim board will include selecting a chief executive for the IFSRA and assisting the chief executive-designate, the Ministers and the Central Bank in preparing for the establishment of the IFSRA. The appointment of the interim board will help ensure that a smooth transition to the new regulatory arrangements takes place as soon as possible.
A steering committee and a support group have been established, drawn from officials of the Central Bank, the Department of Enterprise, Trade and Employment and my Department, to ensure that the chairperson and the interim board are assisted and supported to enable them to perform the tasks which the interim board was set up to do. I intend that the interim board will become the regulatory authority once it has been established under this legislation. It is essential that the regulatory authority is properly and adequately funded if it is to exercise fully its powers and functions. The McDowell group considered this issue and favoured funding by the industry. Accordingly, the Bill gives the chief executive of the authority, with the agreement of the authority, power to make regulations to impose levies. These regulations only come into effect, however, if they have been approved by the Minister for Finance. If the funds raised from the fees and levies imposed prove inadequate for the authority to perform its functions, the bank may provide the authority with funds to meet a shortfall.
Consumer protection is a vital issue. The McDowell group gave detailed consideration to the questions of prudential regulation and consumer protection. It recommended that the single regulatory authority – SRA – be given statutory responsibility for prudential regulation and for consumer issues relating to financial institutions. The group also recommended that responsibility for approval of bank charges be transferred to the SRA and that a statutory position of consumer protection director be established within the SRA.
It is intended that the consumer director will have a leading role in the exercise by the IFSRA of the consumer functions transferring from the Office of the Director of Consumer Affairs. The provisions contained in the Bill reflect this intention, particularly the requirement that the consumer director will be on the regulatory authority. The responsibilities of the consumer director are provided for in the Bill. In essence, they are to monitor the provision of financial services to consumers and to exercise important consumer protection powers under the Consumer Credit Act, 1995, the Investment Intermediaries Act, 1995, the Stock Exchange Act, 1995, and other legislation relating to the Central Bank and the insurance industry. The Bill also sets the reporting arrangements, etc, of the consumer director. In this regard, I draw the attention of Deputies to section 33V(6) of the Bill which provides that the consumer director can report directly to the regulatory authority on any matter.
I would now like to deal with the post of Registrar of Credit Unions. At the moment the Registrar of Friendly Societies has responsibility, inter alia, for the general regulation and financial supervision of credit unions. The McDowell group recognised the valuable contribution and the unique role of credit unions in society, with which I fully agree. The credit union movement is characterised by a large number of quite small, community-based credit unions providing fairly limited services to their members. However, some have grown into quite large operations which are now significant providers of services of a financial nature.
The McDowell group considered that all financial service providers should, in principle, be dealt with by a single regulatory authority, and that a compelling case would have to be made for the exclusion of any provider from its remit. In regard to the credit unions, the group recommended that the approach which would best address the unique characteristics of the credit union movement would be to have the existing functions of the Registrar of Friendly Societies in relation to credit unions brought into the single regulatory authority. The group considered that this should be done in a manner that would recognise and be supportive of the uniqueness of credit unions and also give comfort that their voluntary character would not be threatened by the establishment of a single regulatory authority while still addressing the appropriate regulatory and consumer protection requirements that arise. The McDowell group recommended that these concerns should be addressed by the establishment of a statutory position of credit unions within the single regulatory authority. The Bill provides for the implementation of the recommendations contained in the McDowell report.
I would now like to turn to another significant element of the package of recommendations contained in the McDowell report. The group agreed that where functions are being transferred to the single regulatory authority, relevant enforcement powers which relate to those functions should also be vested in the authority. The group considered that the ability of the single regulatory authority to regulate any financial market without it being able to impose civil sanction to enforce the same would result in ineffective regulation.
The group recommended that, in the first instance, the single regulatory authority should have power to impose sanctions on a financial services provider for breach of the relevant regulatory code. The group also identified a need to set up an appeals system for financial institutions which wished to appeal against the imposition of such sanctions. The group recommended that the tribunal should be established at the outset of the new regulatory arrangements and that this should be facilitated by the inclusion of the necessary provisions for the establishment of the tribunal in the legislation providing for the establishment of the SRA. Accordingly, the Bill contains provisions for the establishment and operation of the Financial Services Appeals Tribunal. The Bill provides also for procedures for hearing and determining appeals, for references and appeals to the High Court and for other miscellaneous matters relating to the tribunal.
I would now like to turn to staffing. It is intended that IFSRA will draw most of its initial staff from the regulatory departments of the Central Bank, which account for the great majority of the people currently engaged in supervision. Staff will also be drawn from the Department of Enterprise, Trade and Employment, including the offices of the Director of Consumer Affairs and the Registrar of Friendly Societies. The Bill includes provision for the permanent transfer of those staff, subject to their agreement, to the new authority. All the staff of the entity, whether working in IFSRA or elsewhere, will be employees of the re-organised bank, the Central Bank and Financial Services Authority of Ireland CBFSAI. At the same time the board is required, with the agreement of the chief executive of the regulatory authority, to arrange for employees of the bank to be assigned to the regulatory authority and to any divisions, branches or offices of the bank.
The Bill also provides for the mobility of staff, both existing and newly appointed, within the CBFSAI. The board of the CBFSAI is required to establish and operate a policy under which provision is made for employees of the CBFSAI to be given opportunities for training and experience in the various activities, and in the different constituent parts, of the overall organisation. These provisions should ensure that the regulatory authority will operate effectively and efficiently from the outset.
The broad structure of the Bill is as follows. Part I on page 5 of the Bill as initiated contains a Short Title and provisions for the commencement of the Act. Part II, which commences on page 5, provides for the amendment of the Central Bank Act, 1942 for the purposes of re-organising and renaming the Central Bank of Ireland. This part, in addition to amending and repealing the text of the 1942 Act, as appropriate, inserts additional parts and schedules into the 1942 Act.
The provisions relating to the IFSRA are set out in a new Part IIIA of the 1942 Act, to be inserted by section 27 of the Bill on page 26. Chapter 1 of this new part provides for the constitution, functions and powers of the authority. Chapter 2, which commences on page 38, provides for the establishment of the statutory position of Consumer Director and Chapter 3, on page 44, provides for the appointment of the Registrar of Credit Unions.
A new Part IIIB of the 1942 Act contains certain provisions relating to the Central Bank and Financial Services Authority of Ireland and its constituent parts. Part VIIA of the 1942 Act, as inserted by section 29 of the Bill on page 60, is divided into five chapters and deals with the Financial Services Appeals Tribunal. Section 30 on page 86 inserts a new Part VIIIA into the 1942 Act and sets out the provisions for making regulations and orders under the 1942 Act. As I said earlier, Part II of the Bill amends the 1942 Act by amending and inserting additional schedules. There are also three Schedules to the Bill.
Before concluding, I would like to refer to a number of procedural matters. Under European law, the Government is required to consult the European Central Bank on legislation of this type. Once this Bill was published, the ECB was formally consulted. It welcomed the proposed structure, while making some detailed comments on it. These will be examined before Committee Stage but I do not consider that any fundamental issues in relation to the new arrangements arise from the ECB views. It is my intention to lay the opinion of the ECB before both Houses, subject to any confidentiality issues, after the Government has considered the matter and before consideration of the Bill on Committee Stage. I will be bringing forward amendments to the Bill on Committee Stage. Some are technical and others arise from the ongoing consideration of this complex legislation. I will give Deputies details of these amendments in advance of Committee Stage and my officials will be available to brief Deputies on them if they so wish.
As Deputies will be aware, the McDowell report contained a package of recommendations in regard to financial regulation. This Bill deals mainly with the establishment of IFSRA. I intend to publish a second Bill later this year to implement the remainder of the recommendations contained in the McDowell report. The main provisions to be included in the second Bill are to establish a statutory financial services ombudsman; establish consultative panels of the financial services industry and of consumers; address issues arising from the recommendations contained in the report of the review group on auditing; and make provisions arising from a review of section 16 of the Central Bank Act, 1989 dealing with confidentiality of Central Bank information.
I must stress, therefore, that this Bill is, first, concerned essentially with structures and, second, is part of a package of measures rather than stand-alone legislation. As regards the basic structures for regulation, I am confident that the new structure provided for in this Bill gives us the best of all worlds. On the one hand, there is a new regulatory authority, IFSRA, with a clear consumer mandate and on the other there is an organic linkage to the authority responsible for stability and monetary issues. There is also a structure in the Central Bank and Financial Services Authority of Ireland which facilitates efficient use of resources and mobility of staff. The Bill also provides for clear accountability, both within the new structure and to the Oireachtas.
The measures incorporated in this Bill and the proposed second Bill will together lead to more efficient regulation, with a stronger consumer focus than heretofore. I commend the Bill to the House.