I am delighted to have the brief opportunity to contribute on the Markets in Financial Instruments Bill 2018. I particularly thank the Houses of the Oireachtas Library and Research Service as always for providing us with some very useful and important back-up information.
The Ceann Comhairle's former colleague, former Minister for Finance and European Commissioner, Charlie McCreevy, famously called the stock exchange a casino and warned of the dangers now and again, when he was in the Minister of State's seat, for ordinary consumers and for organisations trying to protect their savings, insurance, pensions and other financial products. Recently, we have seen widespread public revulsion at the phenomenon of family household mortgages being bought and sold and bundled into so-called financial instruments - the securitisation Deputy Burton referred to - to be traded on stock exchanges in the European Union, the US and Asia. There is a strong public perception that financial markets have never been properly regulated and that there has never been any real accountability. The former Minister and Commissioner, Charlie McCreevy, was right that they are casinos where the house always wins and the punter is always at a loss.
This perception is heightened by the horrors revealed in the financial crash of 2008 where leadership of banks such as Lehman Brothers in the US, Royal Bank of Scotland in the UK, Anglo Irish Bank and the Irish Nationwide Building Society in Ireland destroyed the credit and pensions of whole nations and in the case of the UK and Ireland had to be propped up at terrible and enduring cost to ordinary citizens. As a country we have been plagued for 40 or 50 years with a litany of insurance and financial scandals going right back to the 1970s, with the allied failure of the Central Bank and the Department of Finance to protect us as financial consumers throughout that period.
The Markets in Financial Instruments Directive 2004/39/EC, MiFID I, preceded the financial crash. MiFID I came into effect in Ireland on 1 November 2007 and was transposed via statutory instrument. MiFID I was the EU’s attempt to standardise regulation for investment services across EU member states but it was clearly a case of shutting the stable door after the horse had bolted. Certainly MiFID I seems to have had minimal effect in alleviating the wild-west banking and financial markets conditions which gave us a decade of austerity and poverty. It is also striking that it is only now, a decade later, that amendments are being made by this Bill to MiFID II, the revision of MiFID I, to respond to the disastrous global financial crisis since 2008.
MiFID II and its two linked pieces of EU legislation was transferred into Irish law by statutory instrument as the European Union (Markets in Financial Instruments) Regulations 2017, SI 357/2017, on 10 August 2017 and took effect on 3 January 2018. In Irish legislation, the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 permitted criminal sanctions to be imposed for breaches of MiFID I rules. The Bill before us, the Markets in Financial Instruments Bill 2018, provides for a continuation of the same regime of criminal sanctions for serious offences under MiFID rules. MiFID II was to be transposed by all member states by 3 January 2017 and it seems that fears that the industry could not adapt in time to the MiFID II rules has led to this delay in implementation. The Minister of State might respond on the issue of whether Germany and the UK have received long derogations of 30 months from last January. The UK will be a separate economic entity in March 2019 but Germany seems to have a special regime in this regard.
The financial markets industry has apparently complained that MiFID II with its 1.7 million paragraphs is onerous and hugely time consuming with big hidden costs. The complaints of industry regulators such as Steven Maijoor of ESMA, the European Securities and Markets Authority, suggests there is dragging of feet on implementing the new legislation. Information on so-called dark pools, which Deputy Doherty referred to, or trading in private venues with prices being disclosed only after trades are completed, which is greatly discouraged by MiFID II, seems to be totally deficient. Effects of the legislation that target conflicts of interest arising from how investment managers compensate brokers for research services have also been criticised by analysts who fear that investment managers will cut back on research from brokers and banks. The most important issue there is a conflict of interest. These types of concerns have been relayed to the Central Bank which has also heard that Irish firms which are part of international groups with broader group-wide MiFID II projects also have the additional responsibility of ensuring their Irish firms implement their own MiFID compliance steps at local level.
I echo the comments of Deputy Michael McGrath. We do not seem to get the benefit of the single EU market in financial services. We seem to have had much of the downside over the past decade. Where are the benefits in terms of the interest rates and so on that we pay?
I welcome the key elements of the Markets in Financial Instruments Bill 2018, in particular section 5 which defines these markets and provides that a person guilty of an offence under the MiFID II rules is liable on conviction on indictment to a maximum penalty of €10 million and-or imprisonment for ten years. Section 6 empowers the Central Bank to charge fees in respect of its function under the MiFID II regulations of 2017, and section 7 amends schedule 2 of the Central Bank Act 1942 to ensure that the Central Bank's powers will encompass EU legislation. Section 8, amending section 2 of the Credit Reporting Act 2013, is very important and extends the definition of credit to include trade credit in the Central Credit Register in areas of loans, deferred payments and so on. Section 9, on the expansion of the definition of "long-term financial service" to include life assurance products in line with the EU insurance regulations of 2015, is also noteworthy, and the statutory footing basis to enable the Financial Services and Pensions Ombudsman to respond to consumers' complaints is very timely.
Key elements of the MiFID regulations that are especially welcome include the extension of the pre and post-trade transparency rules provided for under MiFID I to include depository receipts, exchange-traded funds, ETFs, certificates and other similar financial instruments. The new high frequency trading rules are also critical in our era of almost instantaneous information technology, IT, systems. The Minister of State referred to algorithms and modern computer systems that are capable of real-time trading. The corporate and product governance rules in MiFID II are also vital aspects of any type of fair financial market. It is important that banking capital requirements provisions are now being extended to investment firms, that firms must have explicit arrangements for the governance of financial products and that staff incentives do not cause conflicts of interest. The new trade repository rules with early consolidated tape of trade reports and the so-called best execution model from MiFID I requiring firms to take what are referred to as "all reasonable steps" to obtain best execution of their clients' orders will also, it is hoped, make financial markets much less opaque.
A huge question over MiFID II and the legislation before us today is posed by Brexit. Concerns have been expressed in the European Parliament and elsewhere that Brexit risks reversing the impacts, such as they are, of MiFID I and MiFID II and about the idea that Brexiteers in particular have that the UK will become a huge offshore financial centre doing its own thing. When we discussed insurance companies here recently, we saw the extreme closeness between the UK financial market and our own. Kay Swinburne MEP, who helped to draft MiFID II, told a recent conference that, "All the work we've done over the last decade, fixing the financial crisis, making the global system work, making that regulatory co-operation a day-to-day activity, is in danger of being lost." A key part of the Brexit negotiations concerns the kind of access, and its cost, which London City firms will have to the EU after Brexit. We discussed what Britain's contributions would be post Brexit. They will have to be significant if it wants to passport its financial companies into the EU. We discussed this recently at the Oireachtas Select Committee on Budgetary Oversight. The EU has indicated it will seek enhanced so-called "equivalence", but it is difficult to say how this will be agreed and how Irish financial markets will be affected in any post-Brexit free-for-all. That is a heavy responsibility for the Minister of State and the Minister. There is a real worry now also that the next financial crisis may come from the non-banking financial sector where EU and US regulators have struggled to keep up with rapidly changing markets. The Irish Stock Exchange now trades as Euronext Dublin and is 100% owned by Euronext, the leading pan-European exchange in the eurozone. These worries about the impact of Brexit on MiFID II and this legislation are very real, and perhaps the Minister of State will give us the most up-to-date position in his reply.
There are other concerns also about the operation of MiFID II since January. The European Securities and Markets Authority, ESMA, reported yesterday that less than 1% of bonds in the EU today are subject to the live reporting requirements in MiFID II which I referred to. ESMA said yesterday that in the first quarter, just 220 of the 71,000 bonds it monitors or 0.3% were liquid or traded enough to be subjected to the MiFID II rules. This report echoes other comments by ESMA over the lack of data for other key MiFID initiatives, including the curbing of share trading on the anonymous venues known as dark pools.
Some analysts believe, however, that the number of bonds deemed liquid enough to be subject to MiFID II’s reporting requirements are likely to rise as the quality of data improves. The Minister of State might comment on these aspects of the likely efficacy of MiFID II given the generally poor performance, or non-performance, of MiFID I. Some analysts are fearful also that research is starting to be restricted in small and mid-cap markets due to MiFID II and small investors will have much less data on which to base their investment strategies. I echo Deputy Burton's comments on financial education for young people, particularly in light of the perception that, increasingly, people will be in charge of their own pension arrangements.
UK and German regulations have also given extensions up to 30 months from 1 January for the implementation of MiFID II, and the Minister of State might comment on how that has operated here since January. There have been many failures of financial regulation over the decades and we hope that this Bill and the attempt to bring accountability to this area will prove an important step in creating a situation such that we do not have to undergo this suffering again.
Without wanting to stray too far off the subject of debate, we were due to debate this Bill last night but we spent between 3.5 and four hours debating a Bill which we had expected to deal with in the House in three or four hours the previous week. In other words, seven or eight hours have been spent on the Road Traffic (Amendment) Bill 2017. I deeply respect the right of all colleagues to have their say on all matters that affect their constituencies and people have spoken at length because the Road Traffic (Amendment) Bill 2017 was recommitted.