Vol. 670 No. 3
6 Deputy Joe Costello asked the Minister for Finance his views on whether persons appointed to the boards of banks covered by the bank guarantee to guard the public interest could contravene the legal requirement of company directors to act in the interests of the company’s shareholders at all times; if a legal mechanism is to be used to avoid such conflict of interest; and if he will make a statement on the matter. [45378/08]
21 Deputy James Reilly asked the Minister for Finance the mandate he has given to the public interest directors who he proposes the banks participating in the guarantee scheme appoint to their boards. [45217/08]
36 Deputy Willie Penrose asked the Minister for Finance if he has clarified the way in which the public interest directors being appointed to the boards of institutions covered by the bank guarantee scheme can exercise their public interest mandates in the context of company law requiring directors to act in the interests of shareholders; and if he will make a statement on the matter. [45348/08]
I propose to take Questions Nos. 6, 21 and 36 together.
These questions are concerned with the issue of possible conflicts of interest for non-executive directors appointed from the panel approved by me in safeguarding the public interest while delivering their obligations to shareholders under company law; the legal mechanisms in place to deal with conflicts of interest should they arise; and the directions they have been given by me so that they can exercise their public interest mandate in the context of company law. The panel of directors to be appointed in the public interest by the covered institutions are subject to the provisions of company law. In company law a director is bound to act in the best interests of the separate legal entity that is the company. The requirement to act in the interests of the company means to act in the interests of the members as a whole, both present and future. It is acceptable for those directors to draw upon their experience, public service interest and civic mindedness and to have regard to that experience when exercising their duties to the company and deciding what they believe is in the company's interests. It is for each director to decide what, in his or her opinion, is in the company's interests. To a great extent the public interest and the interests of the covered institutions are likely to coincide. A solvent, profitable institution which is a going concern and has the confidence of its stakeholders is as much in the public interest as it is in the interests of the covered institutions.
I have arranged for a briefing session for the panel before they take up their appointments so they are fully aware of their public interest mandate and their duties and responsibilities under company law.
Does the Minister not appreciate that there is a clear conflict of interest between a director's mandate under company law to act at all times in the interests of the shareholders and their public interest mandate which the Minister has outlined as assisting the banks to return to a more stable situation?
How much money are these directors to be paid and who will pick up the tab? Are they being paid by the banks and will that compromise their independence rather fundamentally? Will these directors have a mandate to ask the board to fire non-performing directors and non-performing chief executives who got the banks into the kind of trouble they are now in? In the public interest will these directors ask about the bonus culture in banks? I heard the chief executive of Anglo-Irish Bank, whose shares yesterday were 33 cent, boasting in an RTE interview that he was taking a pay cut, which included bonuses, from about €3 million to half of that amount, €1.5 million. What planet is that man living on and is he planning, as was implicit in his answer, to pay himself and his staff bonuses? I do not think any of them earned salaries approaching €1.5 million, for tax avoidance reasons, if for no other reason. I ask the Minister to comment.
The guarantee scheme provides that the institutions pay for the directors just like any other directors. I select a balanced panel——
Is that not heavily compromising them if they are paid by the bank?
When this matter was progressed through these Houses, there was considerable reservation expressed about the fact that the panel envisaged left to the financial institution an element of choice or discretion in the selection of the appointees. In the event, I constituted a panel of 12 persons. I requested their assignment to particular institutions and the institutions accepted the assignment made by the Minister. I can assure the Deputy that all the persons involved have my full confidence as persons who have a strong knowledge of what the public interest in this country requires and who are equally capable of performing their fiduciary duties as directors of the relevant institutions.
The Minister did not answer the question of whether there was a mandate which they were to execute in the public interest. I am concerned that if we put in these directors, who are all worthy people, with no public mandate as to their duties, with no banking experience apart from one of them, we are putting lambs in among wolves. Unless we equip people with a serious mandate that can give them the authority to ride shotgun in the public interest in respect of very clear issues, knowing what it was they are policing and pursuing, what will this really achieve? Do we not need the people who have a clear knowledge of what is at stake and who have a mandate as to what to do, to have some accountability to the Minister and through him to the House?
We know from our debate on the legislation that the guaranteed institutions are not nationalised institutions and the State does not have shareholdings in them. In the course of the enactment of the legislation and the preparation of the scheme, the banks agreed to the constitution of a panel of appointees and I decided, in consultation with the leaders of Fine Gael and the Labour Party, on the appointment of persons to this panel. My primary concern was to ensure these appointments were persons who, having regard to the particular characteristics of the institutions, would have an understanding of what the public interest entailed in these institutions. Were I to have used banking experience as an exclusive criterion, as Deputy Bruton appears to imply, I do not think I would have secured the public interest in the appointments. I do not wish to enter into details of personalities but it is inaccurate to suggest that the persons involved had very limited knowledge of banking. When one considers the positions held by many of these persons it is very clear that they have the kind of experience that brings a public interest dimension to the performance of their fiduciary duties as directors of the relevant institutions.
Will the Minister confirm that he has the power under the legislation to strengthen the role of these panel members who are about to be appointed directors of the banks? Is it his intention or is he considering taking a substantial shareholding in either a bank or banks? This would clearly deal with any conflict of interest which might arise.
Once these directors are appointed, they have a fiduciary obligation to the banking institution. I was somewhat in the position of a Taoiseach when he appoints his Ministers in that the most important time is the period prior to the appointment. This is the reason I took some time for reflection as to who should be appointed to these institutions because I believed it was important that whoever was appointed had a concept of the public interest and experience of what the public interest requires, prior to his or her appointment.
Will the Minister confirm the duties of the panel?
We do not have shareholdings in these institutions so once these directors are appointed, their primary obligation is to the institution itself in fiduciary terms.
On the other question of whether the State should take a shareholding in these institutions, I have made it clear that I have invited the banks to reflect on their own capital requirements. I have pointed out to them that the onus is on them as private institutions to capitalise themselves and I have also made it clear that in appropriate circumstances the State will invest in financial institutions by way of supplement to private investment or by way of co-investment with other interests.
The problems in the banking system arose because there were technical problems which required knowledge of derivatives and in-depth knowledge of banking. The people the Minister has appointed are excellent people in their own field but I question their lack of banking experience. Is the Minister satisfied they will have adequate knowledge to deal with issues?
On the question of their fiduciary duties, I refer to the situation in my constituency in Limerick, where the Government appointees to the board of Aer Lingus effectively were not worth the paper they were written on, so to speak.
These directors have been appointed for a specific public interest purpose. Is the Minister willing to change legislation dealing with company law to ensure these directors are there in the public interest? How often will they report back on progress in the banks to the Minister?
In the case of Aer Lingus, it is not an analogous position because the State retains a shareholding in Aer Lingus. The State does not have a shareholding in the financial institutions and for that reason, it is not possible to amend company law to elevate these directors to some peculiar status. I hope some day that Deputy O'Donnell will have the honour to sit in an Irish Government and he will realise that the public interest can be learned there and in some of the senior posts in our Administration far faster than in the private halls of commerce.
Is that an invitation to Deputy O'Donnell?
Please allow Deputy Burton.
Nobody has any query about the public interest credentials of all the people being offered for appointment to the banks. The Minister spoke about some kind of training course or briefing course being made available to these directors before they take up their appointment. What are they going to be trained or briefed on? Is this about the public interest or is it about modern financial products, the kind of products that have led to the crash? Will it carry a mandate of how they report back? The critical issue is whether those directors at their first meeting with the banks have a mandate from the Minister to say to some of those boards to get rid of the senior executives and directors who have failed in their duty. That is critical. On RTE last week one bank chief executive had the gall to talk about a reduction in salary, emoluments and bonuses. Will these directors agree to take no bonuses? Will the Minister give the appointees that mandate until the banks return to normal? The Labour Party has suggested that no banker should earn more than the salary of the Minister for Finance, approximately €250,000. It would probably be a modest salary by banking standards but large compensation by the standards of many ordinary people. Will the Minister just let them toddle off on their own like the FÁS directors, for us to only hear about it four years later? They are high quality individuals but if they do not have powers and a mandate, what are they to do?
I thank Deputy Burton for acknowledging the quality of the appointees. I am not in a position to give directions on the mandate to these individuals as to what they should or should not do in particular institutions.
The Minister is in a position to do so under the legislation.
We will have to differ on that.
The Minister is copping out then.
I am not copping out. That is the strict statutory position. However, I have every confidence in their ability to discharge their duties and to ensure the changes we all want to see in the banking sector take place.
The Minister misunderstood the questions. The gentlemen in question are excellent in their fields of expertise. However, this is an unprecedented situation. Will they be reporting to the Minister? Is he giving them a mandate for small businesses? It is of no benefit if directors are put on the boards in the public interest just for the sake of it.
I am not going to seek reports from the ladies and gentlemen in question. They are well aware, however, of the difficulties faced by small businesses.
Regarding another point raised by Deputy O'Donnell, and echoed by Deputy Burton, the problems in the Irish banking sector do not derive from the trading in derivatives or other such financial instruments. They arose from an excessive exposure to property lending, a much more old-fashioned form of exposure.
The contracts were different.
That is not quite the case.
7 Deputy Deirdre Clune asked the Minister for Finance his views on the adequacy of provision for pension liabilities in the public sector; and the policy options open to him. [45151/08]
Total expenditure on public service pensions in 2007 was €2.3 billion and the most recent projections carried out by the Department of Finance are for expenditure on public service pensions to increase from about 1.3% of GDP in 2007 to 2.1% in 2025 and to 2.6% by 2050.
The projected increase arises from the growth in public service employment in recent years and from increasing longevity. Measures to contain the cost of this increase in public service pensions have been put in place in recent years and policy options for further reform are outlined in the Green Paper on Pensions. These policy options are now being examined in the context of preparing a framework for comprehensively addressing the pensions agenda over the long term.
Ten years ago the value of the public service pension liability was €25 billion. In 2007, it had trebled to €75 billion, 50% of GNP. The Minister claims it will double again. By then, 100% of GNP will be tied up in pension liabilities to public servants who constitute 15% of total employment. Is that a sustainable model? We have defined benefit schemes which are being closed in other countries. Can we continue to sustain this model in the public service? If not, does the Minister believe there needs to be some action rather than report after report?
The growth in the public service provision will increase from 1.3% of GDP in 2007 to 2.1% in 2025. I do not believe it will encompass the whole of GDP.
No, I was referring to the liability being 50% of GNP. The Minister is referring to the annual payment on that liability which has trebled in a decade.
The Deputy is referring to the liability as a proportion of GNP while I am referring to the expenditure in proportion to GDP.
To address the issue, the State established the National Pensions Reserve Fund. Austria is the only other EU member state which has made such a provision. We also enacted legislation to extend the period of service for public servants, as the Deputy is aware. This Government and the previous Government have taken steps to address this issue. Strategic decisions will have to be taken if we wish to minimise this liability for the future.
The question raised by Deputy Bruton on the sustainability of public service pensions is a fair one. If pension rates are to grow in line with wages, total expenditure on social welfare and public sector pensions would, in the absence of policy changes, rise from 5% of GDP to 13% of GDP by 2050, as a result of the projected increases in the numbers qualifying for a pension. That would be an unsustainable position.
The sustainability, therefore, of the overall public pension system is a key policy question. It figured prominently in the Green Paper, published in October 2007. Options for addressing the sustainability issue are now being considered with the prospect of developing a framework for comprehensively addressing the pension agenda over the longer term.
Earlier in the summer we were told of the Minister's arrangement to take on the assets and liabilities of certain semi-State and public bodies, including universities. Has an actuarial analysis being carried out as to the extent of these assets and liabilities and the further liabilities the State may be taking on? Will legislation be necessary in this area?
In his Budget Statement, the Minister stated he was carrying out a review of the terms of reference for the National Pensions Reserve Fund. When is this report due? When will any necessary legislation be brought before the House? The Minister has not made it clear whether he intends to continue contributing 1% of GNP to the National Pensions Reserve Fund. From some of his more recent comments, I gather he does not intend to do so because it may force him to borrow.
The latest figures from the fund show that in the nine months to September 2008, it lost 17% in value. Is that a concern, given that it is an important element in meeting provision for certain public service and social welfare pension liabilities in 2025?
Legislation may be required for taking over the assets of semi-State and public bodies as announced over the summer. With regard to the liabilities, the position is that the State already undertakes them. This is why the State came to this arrangement.
I asked the former Governor of the Central Bank, Mr. Maurice O'Connell, to prepare a report on the operation of the National Pensions Reserve Fund. I recently received it and it is under consideration in my Department. I share Deputy Burton's concern that the fund has lost a substantial sum, 17% of its value, in the past year. That loss mirrors those which have occurred in stock markets across the world. As it is a pension fund, it is invested in accordance with commercial criteria, so a small proportion of the fund is invested in Ireland.
Borrowing for the 1% of GNP contribution to the fund was also examined by Mr. Maurice O'Connell's report. When I have finalised my consideration of the report, I will announce a decision in that regard.
From the dependency ratios published by the Minister, we will move from six workers for every dependant to two workers for every dependant. The Minister has already envisaged that the costs of pensions will double. The irresistible force and the immovable object are at stake here. These are trends that will cause major problems. While the Minister talks about reviews and funds, I do not see the plan or strategy to deal with this. The pension fund will be capped at a certain stage and will start to pay out. It will not be there forever as a bottomless pit to meet growing obligations. There must be some direction coming from Government on what we will do.
I agree that a pension strategy must be devised and the Government's intention is to build on the work already done by producing more definitive signposts on how we go forward in the coming months.
How many months?
In the coming months. We have enough difficulties with pension funds, as Deputy Bruton is well aware.
8 Deputy Seán Sherlock asked the Minister for Finance the way he has used, continues to use and intends to use Government leverage, arising from the granting of the bank guarantee; if as lead or supporting investor in a programme of bank recapitalisation, he will ensure that covered institutions on-lend appropriately to business and personal borrowers; and if he will make a statement on the matter. [45364/08]
The objective of the Credit Institutions (Financial Support) Scheme is to maintain financial stability in the best interests of the public and the economy of the State. To that end, the scheme provides for the regulation of the commercial conduct of covered institutions and, in particular, requires each covered institution to appropriately manage its balance sheet in a manner consistent with the overall purposes of the Credit Institutions (Financial Support) Act.
As regards lending, none of us wants to see a situation where viable businesses fail because banks will not lend them money. At my meetings with certain financial institutions over the last two weeks, I asked those institutions covered by the guarantee scheme to consider the contribution that they can make to the economy through appropriate credit initiatives for small and medium-sized businesses and otherwise. I welcome the fact that certain institutions have announced initiatives in this regard.
As I indicated earlier, I have been in regular contact with my colleague, the Tánaiste, at the Department of Enterprise Trade and Employment regarding the flow of lending to small business. I recently met Mr. Plutarchos Sakellaris, Vice President of the European Investment Bank, which recently announced that it was providing additional funding through its lending facility for SMEs in the European Union. Mr. Sakellaris confirmed that the bank has been in discussion with a number of Irish financial institutions about participating in this facility for SMEs and that the EIB hopes that agreements to provide such loan facilities can be finalised as soon as possible. I have urged Irish banks to utilise the facility to the maximum extent possible with a view to making the additional funding available to SMEs as soon as possible. It is pleasing to note that a number of banks have announced their intention to do so.
The scheme requires each covered institution to comply with the Irish Banking Federation code of practice on mortgage arrears and the Financial Regulator's consumer protection code. My Department and the Financial Regulator are monitoring the operation of the scheme.
As regards re-capitalisation, I said on 28 November that in certain circumstances it would be appropriate for the State to consider supplementing private investment with State participation, where in doing so the aim of securing the financial system can be better met.
Does the Minister acknowledge that many small and medium sized businesses around the country are in danger of shutting their doors after Christmas because there are no guarantees that the supply of credit to them will continue?
What strategy has the Minister in respect of the recapitalisation of the banks? Is the Minister's strategy to invite foreign private equity and hedge funds to take dominant or very large positions in Irish banks? Is the Minister aware that in the Mallabracca consortium, two of the entities are Carlyle, with extensive interests in the armaments worldwide, and JC Flowers? Both groups are noted for short-term positions. How does the Minister reconcile the stabilisation of banks with his apparent desire to make foreign private equity and foreign hedge funds the dominant forces in the recapitalisation of the banks? These funds normally invest for a quick buck and a quick turnover. Is the Minister still adverse to the State getting involved in the recapitalisation for the purposes of directing credit to businesses in Ireland that desperately need it?
In terms of the European Investment Bank funding, the banks have provided business plans. What measures does the Minister propose to ensure the banks access this funding? The critical issue is that funding is provided.
In line with what Deputy Burton has said on venture capitalists, has the Minister had discussions with institutional investors in Ireland regarding a consortium to invest in banks so that there is Irish input rather than venture capitalists coming in from worldwide with short-term measures?
Can the Minister give a timeframe for when cash might begin to flow from the European Investment Bank to the institutions here so that small business can access it? The Minister is not directly involved but can any indication be given?
Regarding the query of Deputies Burton and Morgan on timeframes and the urgency of loans to small and medium sized businesses, in all discussions with the institutions I have stressed that the core concern of the Government is that the banking sector should function as a motor for the economy. In particular I referred to the prospect that early next year many businesses will face grave difficulties if the financial institutions do not take a more lenient view on the extension of credit, the term of loans, the provision of overdraft facilities and the provision of stocking facilities. I have brought these concerns to the attention of all financial institutions.
Regarding the question of recapitalisation, raised by Deputies Burton and O'Donnell, I have always maintained that as the banks are private institutions there is an onus on them in the first instance to access private capital. I did not characterise any particular form of private capital as desirable in itself. I agree with Deputy O'Donnell that the recent initiative of the institutional investors is welcome.
Irish investors.
It is open to any private investor to approach a financial institution. If such private investors approach the State for co-investment, my policy is to refer them to the NTMA for assessment. Any such assessment will take into account the essential public interest, which must be respected, that any private participation does not seek the short-term gain referred to by Deputy Burton.
Is it weeks or months?
Written Answers follow Adjournment Debate.
