Can the Minister spell out the requirements being imposed in the Bill on non-deposit taking institutions? How do they compare with the list of requirements imposed on normal financial institutions which take deposits? Which requirements on that list are being applied and what are not being applied to non-deposit taking institutions? It is important that we have clarity as to the level of prudential supervision, authorisation and so on. The amendment lists seven requirements, listed (a) to (g) in section 31A, to be inserted after section 31 of the Central Bank Act 1997. What other powers that would normally be applied to a financial institution taking deposits are not being applied to these?
Markets in Financial Instruments and Miscellaneous Provisions Bill 2007: Committee Stage (Resumed) and Remaining Stages.
The regulatory requirements of retail credit and home reversion firms are different from those forbureau de change or money transmission businesses, particularly in relation to consumer protection and competency. As a result, the Financial Regulator may need to impose conditions or requirements on authorised firms which are not explicitly provided for in the 1997 Act. Accordingly, the amendment adds four new sections to that Act to deal with these concerns. All of these sections are based on provisions in other legislation, such as the Investment Intermediaries Act 1995.
Section 31A sets out in some detail the criteria which a firm will have to satisfy in order to obtain or retain authorisation. Section 32A enables the Financial Regulator to grant different classes of authorisations by reference to the business actually carried out, to conduct a thorough investigation of applicants and to have regard to any relevant supervisory requirement imposed on the firm or applicant in another EEA country.
Section 33A empowers the Financial Regulator to impose requirements on authorised firms in the interest of consumer protection and orderly regulation. It includes powers to oblige firms to provide specific information in relation to consumer credit and home reversion agreements and to extend the consumer protection code to retail credit and home reversion firms.
Section 34C covers commencement and transition. Firms currently engaged in retail credit and home reversion business will be taken to be authorised, provided they apply to the Financial Regulator within three months. The regulator will be empowered to impose conditions on them, or direct a temporary suspension of business if necessary. Many of these firms have actively sought regulation and claim to abide by the consumer protection code.
The Minister is not answering my question. What restrictions or regulations would apply to a deposit taking institution which are not being applied here? I am thinking, for example, of liquidity ratios, the type of financial instruments they buy and process and the prudential requirements of these institutions. The recent crisis was precipitated by the fact that many unregulated bodies, some of which this Bill proposes to regulate, have been engaged in practices which have generated contagion throughout the financial system. It is important that the House knows what restrictions could be applied which we have decided not to apply. What regulations which would apply to a bank are not being applied in the Bill and why is it limited to the areas cited by the Minister, that is, criteria for authorisation, conditions on the authorisation and some requirements relating to consumer protection? The Bill applies a limited form of supervision. Why has the Minister chosen a particular point on the spectrum of supervision and what is being left out? We should at least consider the possibility of prudential regulation being part of the Bill.
Because they are not taking money from the public and do not have deposits, prudential issues do not arise.
The failures have been among companies which were not taking deposits from the public. It was such failures which led to the recent difficulties.
Those companies were subject to regulation. The problem arose from the particular model they were utilising at a time when the inter-bank markets became illliquid. In a situation such as Deputy Bruton cites, the fundamental business of a bank remains in operation, it continues to do business and can trade its way out of difficulties. It was the failure to have access to funds, based on the model they were using, rather than any fundamental reason that caused the recent problem. There was not a business failure. There was no question of people being left out of funds. Where there is such an aggressive model, a financial regulator — as in the recent case in the UK — needs to know exactly what the situation is and whether a problem could be overcome if one arose. The turbulence in financial markets which caused the recent problem was so swift and widespread that it caused an unforeseeable situation to develop. That is a separate issue. The prudential question does not arise in that respect.
This section gives the Financial Regulator the necessary power to enable him to deal with any situation which might arise, although not in operations which take deposits from the public. That is the general point being made. These provisions are drawn from the experience of the Investment Intermediaries Act 1995 etcetera. The Financial Regulator is being provided with the means by which he can deal with these matters. The fact that they come under the regulatory framework and must, therefore, come under the consumer protection code and have authorisations and registrations means the Financial Regulator can, in coming to his decisions, obtain the information he needs to satisfy himself that these are entities which should be authorised on the basis they have a reputable business model to pursue.
Following on from Deputy Bruton's questions I wish to raise a number of issues with the Minister. I do not understand how the Minister is minded to approach the issue of regulation. He refers to these firms being non-deposit taking institutions as the reason they were not included in regulation when the law was first introduced. The Minister, from what I detected in his speech, appears to believe they are a different type of financial institution because they are non-deposit takers. I do not know, from what the Minister said, whether this view is based on advice he has received from the regulator or on the Central Bank's view of non-deposit taking institutions. We, on the Opposition side, are trying to point out to the Minister that although they may be non-deposit taking institutions and, therefore, not a traditional bank, the consequences for the people who use their products are the same — perhaps more severe — as would apply if they defaulted a loan, mortgage or some other financial product obtained from any of the high street banks.
A person who does not have regular dealings with other financial institutions or a person with a bad credit record — traditionally the type of person these institutions attack — will not know the bank with which they are dealing is a non-deposit taking institution that is not subject to the collective regulation to which other banks are traditionally subjected.
I want to come back to a point I made last night as it relates to a number of cases with which I have dealt as a constituency Deputy. An enormous barrage of advertising in respect of home reversion products is directed at older people in particular and encourages them to borrow on the strength of equity in their home based on the loan not having to be repaid until some time later or following their death. An issue arises in respect of solicitors advising older people buying into these products which involves their family homes. The Minister did not make clear in the advice he gave yesterday whether the concept of family home extends to the inclusion of a family business and, in particular, a family farm. What people need is a good solicitor, in terms of advice, more than a good accountant. These products are constantly advertised on radio and television as being tremendously attractive.
The chairman of the US Federal Reserve, Mr. Ben Bernanke, when speaking about these institutions referred to the dubious practice of loans being granted to people who are unable to pay them. As I said yesterday, it is not the Minister's role to save people from themselves. However, financial products which are so risky that the chance of substantial numbers of people defaulting on mortgage repayments is high can result in many sad stories. The Minister and the Governor of the Central Bank referred to loan applications being stress-tested. In other words, checks are made to ensure the information given by applicants is honest, reasonable and fairly reliable. People laugh when they hear this as it has become the custom and practice in some banking circles — this is particularly true in respect of some of the newer lenders — to take the most optimistic view, to put it charitably, of what people can repay. A person who owns a local authority house or recently purchased an affordable house can remortgage that property when its value increases.
Will the Minister expand on his definition in this regard? He stated that the Financial Regulator told him this is all the power he requires. Is this correct? Has the Financial Regulator sent submissions on this to the Minister? This new form of banking, which is the cause of the current turmoil in the financial markets, was warned about for three years in the United States. It has suffered enormously as a result, including a potential economic recession. The consequences of this for individuals and the economy are fairly startling.
Why can the Minister not be more specific in terms of how he describes these products? Also, why does he hold the view that as non-deposit taking institutions they are somehow or other not a bank? The Minister should remember that these products when sold are bundled together at the end of the week or month and sold on to other financial institutions which are deposit takers. These people make their money by selling a product, obtaining the fees on the sale and then bundling them and selling them on. Ormond Quay ended up with a great deal of worthless paper rather than solid investments because it bought bundles of such products. The Minister's approach to this is critical to the Irish market and the IFSC. I hope he can clarify this issue.
I wish to make a couple of observations on this section. On prudential measures, the Minister makes the point that these institutions are non-deposit takers. However, the subprime market is high risk. The Bill refers to the competency and organisational approach of the various institutions in the subprime market. Inherent in this should be the requirement to have sound financial backup. Those who do not have this backup will take more risks. Some of these institutions are currently lending at rates of upwards of 9% making it impossible for people to repay the loans.
It is critical that any institution operating in the subprime market is of good financial standing. The only way the Government and regulator can ensure this is the case is to put in place prudential measures. I do not believe it is possible to operate regulation in respect of non-deposit institutions without putting in place the required prudential measures.
I note that subprime lenders wishing to operate here will be required to apply for a licence within three months of the enactment of this legislation. How long will they be permitted to continue if they have not been granted a licence? Could it be for one year? These are important points.
The Minister spoke about retail credit firms and stated that the consumer protection code applies only to people with a turnover of up to €3 million. A business which starts out with a relatively low turnover could, within a relatively short period, increase its turnover to, say, €2.9 million and remain covered by the consumer protection code. However, if that turnover increases to €3.1 million the person will no longer be covered. Perhaps the Minister will consider looking at this again with a view to raising that limit.
I explained in my initial contribution that this section deals with the introduction of further legislative arrangements to cover these firms in respect of home reversion products and so on. We are adding to what is already provided for under Part V of the Central Bank Act 1997. Part V already provides the framework for the supervision of regulated businesses and applies tobureaux de change and money transmitters. The amendments will add home reversion and retail credit to the activities regulated under Part V by including them in the definition of regulated business, which they have not been up to now. We cover that point by defining home reversion and retail credit firms in the Bill.
The definitions of credit and some of the components of credit are also included as they are needed to support the definitions of retail credit firms and are based on existing statutory definitions or EU directives. For the purpose of regulation, a retail credit firm is defined as one which is not already regulated as a bank or other authorised lender and is in the business of making loans to persons who would fall within the protection offered by the consumer protection code if dealing with a regulated financial service provider.
Home reversion schemes involve the sale of a share in real property, usually a residence, which can only be realised by the purchaser on the death or vacation of the property by the vendor. Though not strictly speaking a credit product, they have a similar effect to equity release or lifetime mortgages and are offered by some of the same providers to a similar clientele so they should be subject to similar regulation. The regulatory requirements of retail credit and home reversion firms are different from those forbureaux de change or money transmission businesses, particularly in the area of consumer protection and competency. As a result, the Financial Regulator may impose conditions or requirements on authorised firms which are not explicitly provided for in the 1997 Act in respect of all the other regulated businesses so we are adding to the regulatory provisions, not just with Part V in respect of these operations, but with further requirements that can be imposed by the Financial Regulator, if necessary. That means adding four new sections to the Central Bank Act 1997 to deal with these concerns. Far from there being a reduced regulatory burden the Bill will provide more ammunition because the products and firms in question, which were previously outside the regulatory framework, are now inside where they can be dealt with accordingly.
The four new sections to which I referred are based on provisions in other legislation, such as the Investment Intermediaries Act 1995. I have referred on previous occasions to the extra flexibility and power these provisions give the Financial Regulator. For example, the regulator can grant different classes of authorisation, conduct a thorough investigation of applicants, set out in some detail the criteria a firm will have to satisfy to obtain or retain authorisation and have regard to the relevant supervisory requirement imposed on the firm. Other sections enable the Financial Regulator to impose requirements in the interests of consumer protection and orderly regulation, including powers to oblige firms to provide specific information in respect of consumer credit and home reversion agreements and to extend the consumer protection code to retail credit and home reversion firms.
We are making every effort to ensure these firms come under the regulatory regime in an effective way and to give the Financial Regulator the powers by which it can deal with issues as they arise so that when firms obtain regulatory approvals and authorisations they do so in a way that best ensures they conduct their business in accordance with the consumer protection codes that are in place.
The application of the consumer protection code will strengthen the initial relationship of due care and diligence. If securitisation or other funding mechanisms operated by a regulated retail credit firm are likely to adversely affect the consumer or the orderly conduct of financial service business, the provisions of the 1997 Act, together with the amendments now being introduced in this Bill, will enable the Financial Regulator to deal with them. I assume that is the concern which Deputies have with regard to the section.
Deputy Burton said that regulation needed to apply to lending offered to sectors such as farming and the definitions of "credit" and of "retail credit firm" are sufficient to capture this. Following the amendment, farmers and other unincorporated traders will be covered by the consumer protection code and the Financial Services Ombudsman scheme in their dealings with non-deposit-taking lenders, as they are in their dealings with all other regulated financial service providers.
The consumer protection code sets down both general principles and detailed rules in respect of the conduct of business by financial institutions. Its principles require such institutions to act fairly, honestly and professionally in the best interests of customers. Detailed rules cover matters such as advertising, identifying customers' needs and providing information. The Financial Regulator can investigate breaches of the code and impose sanctions under Part III of the Central Bank Act 1997 for any such breaches. The process of authorisation means that retail credit firms and home reversion firms will become, as I said, regulated financial service providers for the purposes of the code and therefore come within the umbrella of regulatory supervision which we believe to be in the public interest. We are trying in this Bill to provide the necessary regulation in view of matters which have occurred elsewhere, though they are not germane to this country.
I thank the Minister for his assurances and as I have not been able to tread my way through all the sections I will have to take his words in good faith. The bodies to which the Minister refers have three months to apply for authorisation. Is there any time limit for the Financial Regulator to make a decision either to grant or refuse authorisation? There should be a maximum time limit by which decisions will be made. The Minister seems to be suggesting that firms must apply within three months and wait for a decision but there should be a time limit on the Financial Regulator to make a decision.
The wording is too loose.
Will these regulations apply to entities offering financial products in the Republic, even if they are not registered in the Republic?
Yes. There are provisions in the 1997 Act requiring such firms to keep records here so that they can be inspected and these provisions apply to those firms. In answer to Deputy Bruton's question, I do not know the actual time limit involved but the Financial Regulator abides by its own code of conduct for the time it takes to consider claims and issue authorisations or registrations. I can obtain the details and let the Deputy know in writing.
The debate has been curtailed but the Minister did say he would provide certain information on Report Stage. However, there will not be a Report Stage, so can the Minister provide that information by letter?
I have received some notes relating to Report Stage, which I will circulate to spokespersons.
I move amendmentNo. 20:
In page 18, after line 15, to insert the following new section:
20.—The Freedom of Information Act 1997 is amended by inserting in Part 1 of the Third Schedule—
(a) in column (2), “Ordnance Survey Ireland Act 2001”,
(b) in column (1), opposite the reference to the Ordnance Survey Ireland Act 2001, “No. 43 of 2001”, and
(c) in column (3), opposite the reference to the Ordnance Survey Ireland Act 2001, “Section 23”.
This is a technical amendment in line with the recommendation of the Oireachtas Joint Committee on Finance and the Public Service. It allows disclosure under the terms of the Freedom of Information Act 1997, subject to the usual exemptions that apply to that Act, of confidential information obtained by a person while performing duties as a member of the board or as a member of staff of the Ordnance Survey.
I move amendmentNo. 21:
In page 18, after line 15, to insert the following new section:
21.—The Credit Union Act 1997 (Alteration of Financial Limits) Regulations 2007 (S.I. No. 193 of 2007) are revoked.
The purpose of this amendment is to revoke the Credit Union Act 1997 (Alteration of Financial Limits) Regulations 2007. I stated yesterday that SI 193 of 2007 was brought into force to implement recommendations of the review group on longer-term lending limits for credit unions. These reforms have now been confirmed by section 17 so the statutory instruments will be redundant once section 17 has commenced.
As it is now 12 noon I am required to put the following question in accordance with an order of the Dáil of this day: "That the amendments set down by the Tánaiste and Minister for Finance for Committee Stage and not disposed of are hereby made to the Bill, in respect of each of the sections undisposed of, that the section, or as appropriate the section, as amended, is hereby agreed to in Committee, the Title, as amended, is hereby agreed to in Committee, the Bill, as amended, is accordingly reported to the House, Fourth Stage is hereby completed and the Bill is hereby passed."