JOINT COMMITTEE ON EUROPEAN AFFAIRS debate -
Tuesday, 31 Mar 2009

Vol. 679 No. 1

Working Group on EU Financial Supervision: Discussion with Department of Finance.

Chairman

Apologies have been received from Deputy Michael McGrath and Senator Prendergast.

Item No. 1 is the report of the high level working group on EU financial supervision and a statement on it by representatives of the Department of Finance who are present. We will discuss the report of the high level group on financial supervision and regulation in the European Union. Members will be aware that the high level group or the de Larosière group was established by the European Commission in response to the global financial crisis. A copy of the report was previously circulated to members. The report primarily covers the issues of how to organise the supervision of financial institutions and markets in the European Union, how to strengthen European co-operation on financial stability and oversight, early warning and crisis management and how EU supervisors should co-operate globally. It makes two main recommendations, namely, the establishment of a European systemic risk council under the ECB and a new system of financial supervision with three new European authorities, the European Banking Authority, the European Securities Authority and the European Insurance Authority. National regulators will remain in place to continue day-to-day supervision of the financial markets.

The committee agreed to invite representatives of the Department of Finance to discuss the report. I welcome Mr. Liam Beausang, Mr. Colm Breslin and Mr. John Moore who are all welcome. I draw their attention to the fact that while members of the committee have absolute privilege, this does not apply to witnesses appearing before the committee. Members are reminded of the parliamentary practice that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable. That is the normal warning given — pre-yellow card in case anybody goes off message.

I invite Mr. Beausang to make his presentation and remind members that this matter is of critical importance. This is the occasion on which Members of the Houses of the Oireachtas can comment on proposals from the European institutions, with particular reference to the financial regulatory system and the banking system generally. These issues have caused some angst, to say the least, in the past year or so. I emphasise that it is important for members to have their say, have an influence and make their presence felt. These are issues that will come back to visit somebody in this and other institutions in the future.

Deputy Billy Timmins

On a point of order, before Mr. Beausang makes his presentation, will we have an opportunity to discuss the document again or is this the only occasion on which we will have an opportunity to discuss it?

Chairman

We are quite short on time. Therefore, I propose, with the agreement of the committee, that we have an intensive discussion on the report today and that if we have to return to it again in a further session, we will do so, preferably this week. We do not have a great deal of time, given that the timescale is very tight. If we are to have an influence, the committee which is representative of the Houses of the Oireachtas should deal with the matters involved now. Is that agreed? Agreed. I call Mr. Beausang.

Mr. William Beausang

I thank the joint committee for giving us the opportunity to appear before it to discuss the very important report of the high level group on financial supervision in the European Union which was published on 25 February and which makes very important recommendations, in particular in regard to the future direction of financial regulation in the European Union. The Department of Finance has not yet finalised its position on the report and is consulting on its recommendations. However, our initial reaction is very positive. The report strikes the right balance in proposing extensive reform of financial supervisory arrangements in the European Union, while maintaining at the heart of the regulatory system national regulators in each member state. However, for the future it is clear that national regulators must work in a closely co-ordinated and integrated fashion on the basis of much greater trust and confidence within an EU system of financial regulation where a single rule book is in place and applied in a uniform way. Discussions at EU level on this issue are expected to progress quickly. The European Commission is consulting on the report. Its consultation period expires on 10 April and its intention is to move forward to develop proposals for implementation of the report.

In order to inform the Department's contribution to the Commission's consultation, we have asked stakeholders for their views on the 31 recommendations contained in the report. The Department has provided an initial reaction to each of these recommendations in its consultation document, a copy of which has been provided for the committee. At this stage, it is expected that draft Council conclusions will be considered at the ECOFIN Council meetings in April and May, with a view to agreeing reforms in the EU system of financial supervision at the June European Council.

Before commenting on the various recommendations contained in the report, it might be useful to provide some background information for the committee on the origins of the report. Last October the President of the Commission mandated the high level group, chaired by Jacques de Larosière, formerly of the French Central Bank and the IMF, to report on a number of issues, including the following: the causes of the current financial crisis; the organisation of European financial institutions to ensure prudential soundness; the orderly functioning of markets and stronger European co-operation on financial stability oversight; and early warning mechanisms and crisis management, including the management of cross-border and cross-sectoral risks.

The report provides a thorough analysis of and commentary on the causes of the current problems. On the basis of its analysis and assessment of the weaknesses in the current system, it presents a broad range of recommendations relating to important technical features of the existing regulatory regime and also for a phased and measured reconfiguration of the current system of financial supervision in the European Union. The recommendations relating, in particular, to what is described in the report as EU supervisory repair would have important implications for the whole of the European Union, including Ireland. In this context, I draw the committee's attention to the proposed creation of a European systemic risk council and the transformation of the existing level three committees of EU financial supervisors for the banking, insurance and investment services sectors into three new European authorities, with a legal role and responsibility for achieving convergence of supervisory standards and guaranteeing strong co-operation between national supervisors.

As I mentioned, the report contains 31 main recommendations, many of which contain a number of sub-recommendations. Therefore, the actual number of recommendations probably exceeds 100. It will require a major effort to work through all of the elements of the recommendations in order that there is a strong common understanding among all member states of the detailed design of the de Larosière report.

All of the recommendations are important for the development of an effective EU financial regulatory regime. Many of them are in regard to specific sectors, for instance, the solvency II proposals for insurance companies or credit rating agencies which were already under consideration by the EU institutions. Recommendations in regard to hedge funds are also very important and are being examined. However, others, especially with regard to the proposed new supervisory structures, are new and more radical. I would like to concentrate on the recommendations which refer to reform of the EU supervisory structures.

I draw the committee's attention to recommendations 16 to 24 which, in our view, are the most important in the report. In overall terms, they propose: the establishment of a new European systemic risk council under the auspices of the European Central Bank; that an effective risk warning system be put in place; and that a European system of financial supervisors be established. In the first stage, in 2009-10, the powers of national supervisors should be strengthened and aligned. A harmonised rule book should be developed which would comprise a single EU rule book for financial regulation. The work of the existing level 3 committees of EU financial supervisors, on which each member state's regulatory authorities are represented, should be placed on a firmer footing and benefit from EU funds. In the second stage, between 2011 and 2012, the level 3 committees should be transformed into authorities, with a specific legal basis and new legal powers which are not available to the existing committees. The new authorities would have binding powers on mediation, supervisory standards and technical decisions regarding specific financial institutions. The authorities would also be granted powers on colleges of supervisors and the licensing and supervision of EU wide entities such as credit rating agencies. National supervisors would continue to be responsible for the day-to-day supervision of firms in their jurisdictions.

These are very important issues. At this stage we would strongly support this type of approach subject to certainty, for example, on the legal basis for these changes and appropriate accountability arrangements. A significant amount of careful work will be required to align the role and responsibilities of the new bodies with the role and responsibilities of member states in such areas as crisis management and resolution. As ever, the details in any future European Commission proposals will be crucial.

Recommendations 16 and 17 should be considered together. In these, the group has proposed the establishment of a European systemic risk council, ESRC. It would be under the auspices of the ECB and it is proposed that it would be chaired by the President of the ECB. Its role would involve macro-prudential analysis and providing early warnings of financial risks. It could issue recommendations in the form of instructions to national supervisors. The proposed composition of the ESRC means that national supervisors would not be members of it — they would just be represented by the chairmen of their EU Level 3 Committees of EU Supervisors. The creation of the ESRC does not directly involve the transfer of national powers to a new body. However, it might be noted that the last indent of recommendation 17 appears to give the new body powers over national supervisors.

Recommendations 18 to 24 should also be considered together. The report envisages a two-stage process. In the first stage, national supervisors would be strengthened to upgrade the quality of supervision in the EU; as the committee will be aware, the Government is currently considering proposals for the reform of the institutional structures for financial regulation in Ireland. All national regulatory authorities should have attractive, modern personnel policies, facilitate staff exchanges with the private sector and align competences and powers on the basis of the most comprehensive system in place in the EU. The EU would work towards the harmonisation of financial regulation and consistent supervisory powers and sanctioning regimes.

In the second stage, between 2011 and 2012, the three level 3 committees would be transformed into three new European authorities, managed by a board comprised of the heads of the national supervisory bodies. The authorities would have a range of key competencies, including: the power of legally-binding mediation between national supervisors; the adoption of binding supervisory standards; the adoption of binding technical decisions applicable to individual financial institutions; and the oversight of colleges of supervisors.

The authorities would have the power to adopt interpretations of EU rules which would be legally binding for national supervisors. This aspect of their proposed role could raise some legal doubts which will require clarification as, in principle, it would override the exclusive competence of the European Court of Justice to interpret European law.

Recommendation 23 may already have been overtaken by events. It recommends the immediate establishment of a high-level group to come up with a detailed implementation plan for the second stage before end-2009. However, the Commission, in its communication of 4 March 2009, stated that it intends to opt for a one-stage process, not a two-stage one. It is fair to say that member states have differing views on this issue.

A harmonised rule book would remove many of the discretions or exemptions that currently exist in EU law. Member states have sometimes used these discretions other than when objectively warranted by specific national factors. However, there are occasions when discretion is required to take account of the different legal regimes that exist throughout the EU.

The report recommends that greater use be made by the EU institutions of regulations for enacting EU financial services legislation, which would not require transposition and would apply directly to all member states.

The existing committees of supervisors for the banking, insurance and investment services sectors, the so called "level 3 committees", would have their roles strengthened in the short term, with a view to replacing them within four years with new authorities with a legal foundation.

We support the establishment of the new authorities on the basis that the development and implementation of a single rule book could not be achieved otherwise. We would have to give very careful consideration to the type of powers that would be bestowed on them. Several member states have raised the question that if the authorities had powers to overrule national supervisors and the use of such powers resulted in, say, the collapse of an institution, who would bear the cost of that collapse? The binding nature of these new powers is a concern for many. The question has also been raised whether a single authority, rather than three, would be preferable in view of the large measure of overlap and co-ordination that will be required in any event.

The European Commission wants these new authorities to be established as soon as possible, whereas the report recommends a two-stage period of approximately four years. We would prefer the two-stage approach. We are concerned that a too hasty decision on an EU-wide architecture could have unintended consequences and might cause more harm than good. A period to allow for considered debate and evaluation of the options appears to us to be the most sensible approach. However, it is important to bear in mind that, in the interim, progress would be achieved by strengthening the existing level 3 committees. It is a phased implementation, which will also allow all the issues relating to the boundary between the roles of the authorities and that of member states to be examined and solutions found. The new authorities would also be responsible for supervising entities that operate on an EU-wide basis such as credit rating agencies. The European Commission's proposal for the regulation of credit rating agencies will, hopefully, be agreed in the near future and the new authorities would be ideally placed to be play a supervisory role for them.

I highlight the fact that this is a report which was prepared for the European Commission. Although the report contains many recommendations, no legislative proposals are on the table at this time. The European Commission has presented its initial positive reaction to the report and is expected to present a suite of legislative proposals in the coming months. The Department of Finance has a very positive view of the report and believes the recommendations cover the main areas that need to be addressed, in the short and in the medium term. We would be happy to answer any questions the committee might have.

Chairman

I thank Mr. Beausang. I propose that we have an initial discussion on this statement and we will then draw inspiration from the condensed report produced by our resident policy adviser, which is an excellent road map. We will come to both of those in due course.

Deputy Billy Timmins

Is it not possible for us to deal only with the broad concept because there is a significant crossover between Mr. Beausang's statement and the report?

Chairman

I seek the committee's preferred option as to how the policy body should have a bearing or influence on what our European colleagues propose. One of the experiences we should have learned from in the past is that where no input was made, we did not exist. If we do not exist, we have a problem and, therefore, it is up to ourselves.

Senator Cecilia Keaveney

I am not a member of the committee. This debate refers to the European dimension to financial institutions. The Belfast Telegraph is running a series of reports this week on illegal cross-Border transactions, one of which relates to money laundering. In addressing the supervision of financial institutions, are currency exchange bureaux, which are still in operation, covered? I am not sure whether this is pertinent to the debate. However, I must provide proof of my identity to deposit money in a bank, yet I can change any amount I wish in an exchange bureau. Did such bureaux come under the group’s remit?

Deputy Joe Costello

I thank the departmental officials for their presentation on the high-level working group. It is a timely document and appears to be a departure from the existing view of the Commission, in particular the view of Ireland's Commissioner, Mr. Charlie McCreevy, a great champion of light regulation and supervision. It sets out a complex and detailed set of structures in terms of regulation for the future in all key financial institutions, including the banking, insurance and credit sectors. I hope it signals a new departure in the European Union and within our national structures.

The proposal is for a tripartite approach to the issue. A single authority was mentioned. It appears to me that each national Government will be required to put its house in order arising from the provisions of this report and that the European Union will deal with a broader level of supervision. Whether a European Union regulator, a single entity similar to the European Central Bank, with overall responsibility in this area is required, the complexity of today's presentation in terms of the three levels of authority proposed would suggest that is not the case. Perhaps the delegation will set out its views on a European-wide regulator.

In the context of what is happening in terms of G20 and the forthcoming talks in London, is it possible this proposal will be moved up a peg to, say, a global regulator given President Obama has been speaking in those terms? Is this the type of structure envisaged as part and parcel of the overall structure? I like the idea of a harmonised rule book. Perhaps the delegation will say if it is true that there is no need for any legislation to be transposed and the reason for this is that no specific proposal has been put forward for an EU regulator that would impact in each member state in terms of supervision of existing and new regulatory frameworks established therein. It appears to me this type of development would be best dealt with through domestic legislation and at European level. An EU directive might be the way forward. Obviously, we want results and action fairly quickly.

Deputy Billy Timmins

Deputy Costello has covered a number of the points I wished to raise. I thank the delegation for their presentation.

On global regulation as referred to by Deputy Costello, is it realistic to expect a global regulator will be established and does the delegation believe there is need for such a body? Also, will Europe get agreement on the recommendations in this report? Is there much divergence between countries in this regard? The G20 summit will take place next Friday. On the requirement for a one-voice one-regulator approach, is this the agreed document to achieve this and if so, are we too late in making submissions on it?

Chairman

No.

Deputy Billy Timmins

How does the document agreed at the Council of Ministers meeting on 18-19 March, which will be presented at the G20 summit, differ from this document, if at all? Perhaps the delegation will also give us their view on our credit rating, which was reduced yesterday, in terms of its implications for Ireland. How do we compare with other European countries in terms of financial supervision?

I refer to recommendation 6, that the competent authorities must have sufficient supervisory powers. Do our competent authorities have sufficient regulatory powers? Is the Department or the Minister of the view that they do not have such powers? Is it a long-standing view that they do not have such powers or is this a view which follows on from the recent crisis? The recommendation refers to the compensation initiatives which must be aligned with shareholder interest. I ask for the delegation's views on this recommendation with respect to the capping of salaries in the banking institutions. It refers to an assessment of bonuses needing to reflect performances. What does this mean? Does the delegation think the current bonuses are too extreme? There is a reported difficulty with a replacement chief executive for Irish Nationwide because an individual would not take up the position because the remuneration was not sufficient. Recommendation 11 deals with this subject and I ask for the delegation's views.

With regard to recommendation 21, I ask the delegation to explain in more detail the concept of the supervisory college and the extension of this principle.

Deputy Timmy Dooley

I welcome the presentation by the Department of Finance. While I welcome the opportunity to discuss what Deputy Timmins referred to as the broad parameters behind ensuring that the European Community works cohesively towards the resolution of what is a hugely significant problem, I would want to know from the gentlemen concerned if there is an ongoing communication with the appropriate committee in this House which is the committee dealing with banking and finance. Has the delegation been before that committee? While this is of a European nature it is certainly not within my competency to deal with the in-depth financial regulatory points. I hope the Department and that committee will begin a process of interaction for dealing with the stakeholders. It has been identified that the Department is dealing with the stakeholders with regard to each of the individual recommendations. I do not think the Chairman suggests that this committee would discuss the meat, so to speak, of those deliberations. However, there is a requirement and perhaps a necessity for that level of interaction to take place in public. We could perhaps direct to that committee that a continuation of the discussions take place before the banking and finance committee to thrash out with the relevant stakeholders and the Department the views expressed in what appears to be a very comprehensive analysis of the recommendations.

I reiterate the point made by Deputy Costello with regard to the global nature and this may be outside the remit of the delegation but it needs to be said. While it is obvious the European Union is trying to put its house in order, the one thing this financial crisis has shown all of us is that it is neither a national nor a European issue but rather a world-wide issue and it is clear the European Union acting on our behalf, needs to address it in the context of the G20 summit later this week. I ask for the delegation's comments on those points.

Senator Déirdre de Búrca

I thank the speakers for the presentation which contains very interesting proposals in the summary. I wish to raise some broad points. The document refers to what is being discussed as a phased and measured reconfiguration of the current system of financial supervision in the EU. At a later stage it is stated that the EU would work towards the harmonisation of financial regulation and consistent supervisory powers and sanctioning regimes. It appears to me that this is quite substantial. We were talking about setting up three European authorities with the power to introduce EU rules that would be binding for national supervisory authorities, with the power to sanction national supervisory authorities. My understanding was that the fiscal competence was very much an area that rested with member states. It seems like the European Union is getting involved in financial regulation and supervision that borders on assuming a certain level of competence. Mr. Beausang mentioned that some of these changes would be agreed at the June Council. I assume, therefore, that the existing treaties allow this to happen. I would like him to deal with this issue. Would the Lisbon treaty have any implications for the changes being proposed?

Mr. Beausang talked about the level 3 committees being strengthened and the new European authorities emerging at a later stage. To whom will these authorities be answerable? He has mentioned they will be under the auspices of the European Central Bank. We are all aware of its independence. Are we agreeing that the new EU authorities will be independent of political control in the way that the European Central Bank is?

Mr. Beausang has mentioned the Department favours a two-stage approach. It seems that would be the most sensible approach. There is a danger in agreeing to something in the light of the unfolding economic crisis that may over time be seen as not being as beneficial at a national level as it might be. Taking time to do it and doing it in a measured way is a good idea.

Senator Paschal Donohoe

I welcome the presentation. I have three specific points to make on the report and one question.

The creation of more than one authority has been referred to as a tripartite set-up. My understanding of much of the analysis that has taken place regarding the regulatory failure in different economies up to this point is that we have had too many regulatory bodies, each of which has a small piece of knowledge and none of which is able to see the big picture. In Ireland the Financial Regulator oversees one aspect, while the Central Bank oversees something else. My understanding is that in Britain there is the Bank of England and the Financial Services Authority, each of which was reaching a different conclusion in looking at a different part of the picture. We should have one body doing all of this. Every time we come across a problem we seem to want to create more than one organisation to deal with it. We should have one body in place which sees the big picture and can respond to what is happening and pull all the levers or give politicians the options to pull all the levers.

My second point is about the valuation of financial instruments here. I refer to recommendations 4 and 8 that deal with derivative and securitised products. I am reminded about what I believe Warren Buffet said about the derivative industry. He described it as a weapon of mass destruction pointed at the global economy. We have derivatives worth multiples of the combined national incomes of the world. Nobody understands them, how they work or how they hook up with each other — or at least not enough people do. Recommendations 4 and 8 are pivotal to this. We need to accelerate this work in order that we know the value of the products available and understand them. We need to ensure we are not caught in a web of connections that nobody understands and that can pull the entire show down.

My final point concerns recommendation 11 on compensation incentives. The point is made that they should be better aligned with shareholder interests and principles regarding financial sector compensation. We also need a broader consideration. Some of the banks we are discussing are so important to the Irish and global economies that mere consideration of shareholder value and interests is not enough. Whether it is an Irish bank or a global bank, if it were to fall over — some already have — the considerations should not be for the shareholder but for broader society and the national or global economy. I strongly believe the way we pay people will have to reflect the fact that while the shareholders of the bank are important, the wider economy is our biggest concern.

I have made an input into this report, but I would like to ask a question about a slightly different matter. Is it the case that the working group was the first body of this type to be established without an Irish representative since last year's referendum on the Lisbon treaty? Did the lack of Irish representation on the group which produced the report have any effect on the recommendations made?

Deputy Thomas Byrne

I welcome the report and the Department's initial response to it. Following the Minister's interview with the Financial Times on St. Patrick’s Day, is there further scope for him to promote Ireland as a country interested in prudential regulation? We need to emphasise the need for good and strict banking regulation into the future. As Senator Donohoe said, Ireland should promote itself more effectively on the international market. We should be seen to be taking a lead, for example, by pushing the Commission to hasten the provision of the legislation that will be needed after the period of consultation has come to an end.

I understand there will be a harmonisation of deposit guarantee schemes. Is there scope for a unified European deposit guarantee scheme? If member states allow certain banks to avail of superior deposit protection schemes, they will be perceived to be giving such banks an advantage that is not consistent with the Single Market. I am aware that some Irish institutions have boasted in other countries about the forms of protection available to them here. Institutions in other countries are attracting deposits from this country. Perhaps they have an unfair advantage.

I suggest the credit rating agencies need to be subject to high levels of supervision. Some of them gave triple A ratings to the derivative products that caused many of the problems that led to the sub-prime mortgage scandal. I understand one of the rating agencies made a rather political comment today. I would not have thought it had such a role. I do not believe it should. The ability of the credit rating agencies to influence the markets should be regulated or controlled to a further extent. They have got things wrong in the past and I am sure they will get things wrong again.

Senator Feargal Quinn

I welcome Mr. Beausang and the group. I would like to ask about recommendations Nos. 16 and 17 which relate to the European systemic risk council. Some of those who supported the European Economic Community 20 or 30 years ago warned member states that they might lose some of their individual authority over time. In other words, they suggested that subsidiarity could disappear and that we could end up with a federal Europe. In that context, I am concerned about some of the trends evident in the report. Perhaps our guests could explain the recommendation that the European systemic risk council could "issue recommendations in the form of instructions to national supervisors". I do not understand the difference between the "recommendations" and "instructions". How can recommendations be issued in the form of instructions? I am not sure I understand. I would also like to ask about the proposal whereby national supervisors will not be members of the European systemic risk council — they will merely be represented by their chairpersons at EU level.

Senator de Búrca referred to the referendum on the Lisbon treaty. People who clearly supported the European project in the past are concerned about the overriding trend towards federalism and Ireland's inability to influence decisions that would normally be made much closer to home. This is one of those instances. Almost every year more and more authority is centralised within the European Union and moved away from the State. My query relates solely to a term used in recommendations Nos. 16 and 17. I have cited the recommendation that the European systemic risk council could "issue recommendations in the form of instructions to national supervisors". It seems that if they are recommendations, they are recommendations and if they are instructions, they are instructions. I am not sure that Ireland, as a nation, is not in danger of handing over far too much power in this respect. Perhaps our guests will put my mind at rest in this regard.

Ms Marian Harkin, MEP

My first question, while similar to Senator Quinn's, comes from a different perspective and relates to the legal basis which may be required for the proposed new authorities. Senator Quinn asked whether a further transfer of power will be required to establish these bodies, while Senator de Búrca asked whether the Lisbon treaty will have any impact on this issue.

In the absence of an overall structure different regulatory systems will be in place in Ireland, France, Germany, Latvia and across the European Union and co-ordination will be impossible. In many ways, this lack of co-ordination caused the current problem. I refer here only to Europe. As a number of speakers noted, however, we may be heading towards some form of global supervisory system. If we survive the current crisis and globalisation continues in some form or another, we will need global supervision, particularly when one considers the world in which we live and pace of globalisation.

I do not share Senator Quinn's view that the proposals require us to cede power. On the contrary, this would allow us to contribute to the decisions needed to allow globalisation to work effectively. We can be partners in this process. A question remains, however, about the legal basis for this in the treaties. It is probably safe to assume that if further powers were required, the position would be much different. I suspect, therefore, that proposals fall within the current legal framework. I ask the delegation to comment.

Senator O'Toole referred to the Commission's support for light touch regulation. The European Parliament has not agreed with the Commission's approach and it has, on more than one occasion prior to the current crisis, taken the Commission to task about developments.

The issue of cross-border transactions was raised. Given that we have a single rule book, rules are supposed to be applied in a uniform manner. Are member states generally in agreement in this regard? My reading of the matter, which is based on media reports rather than inside information, is that a number of member states had strong reservations about how the proposals would apply to cross-border transactions. Is that the case?

The G20 summit was raised and I am aware that we have not gone beyond a proposal for a structure. Surely the question arises as to how this will link in with what is being proposed by Timothy Geithner and others. There are certainly differences of approach.

As an outsider, a phased approach appears to be a reasonable course of action given that differences have already emerged between member states. We need to get this right because people are looking to politicians and the authorities to ensure the recent crisis is not repeated. Shareholders in various banks as well as others who have lost heavily in recent times want to be certain that whatever we put in place works effectively. If this takes a little time and must be done on phased basis, it will be worthwhile.

Deputy Timmins referred to recommendation 6, which states that the competent authorities in all member states must have sufficient supervisory powers to ensure compliance, including sanctions. The perception among people here is that while supervisory powers were available, the issue of sanctions was unheard of. I ask the witnesses to comment. Is there any equivalence between the supervisory powers available in different member states?

Senator Maurice Cummins

The Fine Gael Party recently announced proposals on remuneration for bankers. What is the position in other countries? Is uniformity a likely outcome? Are they in agreement with the levels we have set? The report before us contains recommendations. When are we likely to see legislative proposals being presented? Will it be at the June Council or how soon is it envisaged that agreement will be reached on firm legislation?

Deputy Lucinda Creighton

I see an enormous problem in terms of public and political opinion because we constantly hear complaints about over-regulation, bureaucracy and red tape at European level. At the same time people decry the fact that there has not been adequate regulation in the financial sector and banking system. There is something of a paradox and I do not know how it is to be overcome.

I have a specific question about the European Central Bank. During the Convention on the Future of Europe my understanding is that there was a proposal for the bank to be institutionalised within the framework of the European treaties, but the bank criticised this proposal and managed to convince member states that it was not a good idea. It therefore managed to maintain its special status outside the institutions of the European Union. I wonder whether that is considered to be a successful outcome or if perhaps that level of autonomy for the bank has, in fact, left the Union and its member states exposed. Was it a mistake to reverse that proposal in the final detail of both the proposed constitutional treaty and later the Lisbon treaty?

As regards recommendation No. 6 which seems to be generating some interest, is what is envisaged a criminal sanction that would be applicable across member states? It is a far-reaching proposal. It is not something to which I am adverse, but seeing that we do not even have meaningful criminal sanctions in this country in domestic legislation, is it feasible or foreseeable that it could happen at European level? How would this fit in with Ireland's approach to the justice and home affairs aspects of the Lisbon treaty? Is it advisable that we revise our position and opt in, if we are to look at meaningful criminal sanctions in relation to a breach of regulations and so on?

Senator John Hanafin

I welcome the report, although some aspects are possibly long overdue. One is the tightening of off-balance sheet lending. We would not have such a serious problem in the banks in this country had there been a restriction of off-balance sheet lending.

The second point I want to make concerns recommendation No. 11 which is entirely practical and states the principles in respect of the assessment of bonuses should be set out in a multi-year framework, spreading bonus payments over cycles. Had this happened, we might not have seen the extent of the greed and the bonuses available for short-term gains. Both recommendations are positive.

With that in mind, where there is a claimed competency in the European Union and it regulates for it and where, by virtue of the fact that there is a cross-over, it is very important that there is regulation also. I am thinking, in particular, of the major cause of the global downturn. The reality is that everybody had expected the economy to slow down, in particular, the building industry, and the hope was that there would be a soft landing. We had spoken about this for many months. What really threatened the stability of financial markets was sub-prime lending and the mis-selling of products without responsibility. As I understand it, in the original rapporteur report there was a recommendation that where securitised assets were being sold, a figure of 15% be retained. This was whittled down in further recommendations to a figure of 5%. The figure of 15% would ensure the financial body which sold the sub-prime lending product would retain sufficient interest such that, were the product to be mis-sold, it would have repercussions. I still believe 15% is the correct percentage to ensure future greed is offset against the risk involved.

Chairman

The points raised by members have recurred again and again in the discussions that have taken place in the past six months, as well as in the past couple of years when members of committees such as this raised questions which, unfortunately, were not dealt with at the time. I wish to add a couple of points.

The question of bonuses arises, in particular, how bonuses drive economies globally, at European level and nationally, and can have a huge and distorting effect on the way the markets operate. There should be some methodology, whether on a multi-annual basis or otherwise, in order that no bonus would be paid, unless good economic policies and banking criteria were followed. What is the sense of paying a bonus in selling a product which will undermine the economic foundations of the State, Europe or the world?

My second point concerns over-regulation, to which members made reference. In my experience, there is over-regulation in certain sectors but it applies mostly in the micro area at the grassroots, for example, to people cutting turf and such nonsense. However, it is in the macro area that regulation is required. If there are regulation pillars in the macro area to ensure definite and positive regulation which people can recognise and follow, not only will one not experience a bad reaction from the public but, more importantly, one will have necessary regulation at the level where it was intended to apply. If it is not applied at that level, on what basis is the European or Irish economy likely to proceed?

I thank the delegates for the explanatory document dealing with the de Larosière report, the initial position and further comments. It is ideally done in a very digestible fashion and has been useful for members in their assessment of the report. One point came to mind when I read it. There seems to be a doubt as to whether, at national level, politicians or committees of the Houses such as this or the Joint Committee on Finance and the Public Service will have an input that is worthwhile, or whether they will be bypassed completely. It is unclear as to whether they matter. Ms Harkin, MEP, has said the European Parliament's recommendations were ignored. If its recommendations in regard to matters of this nature were ignored, it was to the peril of all those who were involved and detrimentally affected by it.

With regard to the degree to which member state parliaments are likely to have any influence, or at least an opportunity to make a submission that can be taken on board, there seems to be a lack of reference to this to any extent that I would consider meaningful. Reference has been made several times in the past year to investors, namely, that the duty of a company, a body, a group, an agency or a bank is to the investors, which is a hugely important point. However, while it is correct that such institutions have a duty to the investors, they also have a duty to the wider economic and social environment. If everything is ignored, with the exception of the interests of the investor, we are likely to have a deviation from what might be politically and economically good for an economy. It is a dangerous route to follow and it is a question that should be very carefully considered.

Reference has been made to the three regulatory bodies. The points raised were well made. If there is a multiplicity of agencies allegedly working in unison — and the degree to which they would work in unison remains open to question — which is the superior authority? To whom will these bodies report? Will they undermine each other and will there be a clash of interests? There is evidence of this in the way the regulatory authorities have worked in this State in recent years. There should not be a situation where everybody has authority but nobody has responsibility. In this regard, there is a danger in having a multiplicity of authorities, each allegedly performing the same function.

I gave evidence last week in regard to a constituent whose house was being repossessed. Much discussion took place in recent years regarding the practice of lenders providing 100% mortgages, which was generally considered an unwise move on the part of the loan recipient. The unfortunate constituent to whom I referred did not receive a 100% loan. Rather, he received almost 200% of what his entitlement should have been on the basis of his income. This is an extreme case but it is not an isolated one. As we speak, the courts are granting repossession orders in favour of mortgage companies that provided loans above and beyond the ability of the recipients to meet repayments. Such lending practices were unsustainable. A business man remarked to me recently that lending should always be done on the basis of collateral and income, with a particular emphasis on the latter, that is, the recipient's spending power and ability to meet repayments.

Recommendation 6 deals with the powers of competent authorities within members states. What will happen if member states do not comply with this and other recommendations? For example, there may be situations whereby particular countries, depending on their state of development and their financial position, may find it necessary to customise some of the recommendations, applying some of them in full and others to a lesser extent. Will they be granted a derogation in those circumstances or will they be forced to comply with the arbitrary nature of the regulations? I note there is strong support for this recommendation.

Recommendation 12 refers to internal risk management. Ireland already has a proposal in this regard. This recommendation states that "proper due diligence must not be neglected by over-reliance on external ratings". The ratings issue has already been raised by members. Will the delegates provide some further elucidation on this matter?

Recommendation 14 relates to deposit guarantee schemes. The Department supports this recommendation, which reflects the recently adopted amendments to the deposit guarantee directive. Ireland has already introduced an increase in the maximum compensation available in line with the level required by the European directive. Will the delegates comment on any implications there may be for the State further down the road?

Several speakers referred to recommendation 17. The departmental note states that it supports recommendations 16 and 17 in principle although the full and broad implications of some of the detailed elements of the recommendations must be carefully examined to ensure that an effective risk warning system is put in place. However, there is no sense in having a warning system unless measures are taken immediately to cater for the concerns raised by that system. Will the delegates offer some further insight on this?

Recommendation 17 includes reference to all types of national bodies, financial bodies and regulatory systems but nothing in respect of national parliaments. Members will readily recognise that some people, for no reason that I can see, seem to blame the political system, saying politicians have failed. However, politicians did not make those rules; they were put in place by somebody else. Whether we like it or not, the systems failed. The requirement for engagement with politicians, for want of a better description, is glaringly obvious. To leave it out would be very dangerous.

With regard to recommendation 18, I have noted a lack of reference to parliamentary scrutiny, which might be beneficial. The reason I emphasise this is that members of all parliaments are working closely with business, the work force in their communities and various groups which have economic, financial and other interests throughout the community, and that it would be no harm to include them and occasionally defer to their views.

With regard to recommendation 19, what jumped out at me was the possibility of over-concentration on administration. The advisory report from the Department of Finance states:

This recommendation is acceptable and will be considered carefully in the context of our current national financial regulatory/supervisory reform agenda.

We agree that the EU should strive for regulatory "best practice".

That is correct and it should be applicable to each member state in its turn. However — this has been referred to by members — it should not affect, in a micro fashion, the lower scale of society at the bottom, where it does not matter. It is too late when it is applicable at that level. It is at the higher level of activity that it must be applied and the principles set down therein must be followed. I could go on forever, but members will be glad to know I do not propose to.

Incidentally, the committee may not be happy to have only this discussion today. Deputy Dooley referred to the Joint Committee on Finance and the Public Service, which also has a role. However, I emphasise that this committee, in the context of its role as a European affairs committee with regard to the formulation of European policy in so far as it affects the Irish consumer and the banking and regulatory systems, also has a role that it needs to fulfil as a matter of extreme urgency.

Mr. William Beausang

I thank the Chairman and members of the committee. With regard to Senator Keaveney's questions on bureaux de change, they are not part of this framework. The activities of such institutions are subject to domestic oversight by the Financial Regulator, but it is not part of what is envisaged.

The issue of money laundering reflects an important EU-wide directive, the third anti-money-laundering directive, which is currently being transposed into national law. That is the responsibility of our colleagues in the Department of Justice, Equality and Law Reform, with whom we are working closely because of the financial aspects. Identification requirements were mentioned. This has been a significant problem during the years and we are working hard to ensure the problems that have emerged are not exacerbated by the requirements of the directive.

Deputy Costello posed a number of questions about our regulatory approach which were picked up on by other members. There is significant diversity of regulatory arrangements across the European Union. Part of the challenge with regard to EU reforms is balancing as much as possible a convergent approach at EU level with the inevitable differences that arise in implementing these rules at national level. Some countries have single integrated regulators, including the United Kingdom, which has the Financial Services Authority and Ireland, while other countries will have a diversity of regulators for different sectors. There will be different regulatory philosophies. Members will be aware of the debate on the principles-led or rules-based approach to financial regulation. It is a major challenge, in arriving at a convergent EU approach, to make it real in terms of how it is operated at national level. It must be ensured the differences in regulatory philosophies at national level do not lead to further divergence, even though people might be working to a single rule book.

The issue of a single EU regulator has been debated at EU level for a number of years. Although arguments range on both sides, it is fair to say the consensus is that in the current legal framework, treaties simply do not allow for the establishment of a single regulator in the EU. Those looking at the need for reform at EU level say there is a case for evolution, not revolution. A balance must be struck, therefore, between ensuring there is the necessary convergence in the rule book and supervisory practice determined at EU level, and, subsequently, consistent with the principles of subsidiarity, that those rules are implemented in a uniform way at national level. The challenge heretofore has been to make sure this is the case. The reason our thinking has evolved on the need for a rule-making body at EU level is because of the difficulty, perhaps the impossibility, in otherwise achieving convergence and a co-ordinated approach.

That is certainly the case with regard to other member states which have approached the de Larosière report in a very constructive way as we have. The report maintains what we see as being integral to a fully functioning and effectively operating supervisory system. That is a clear identification of the responsibilities of home regulators and host regulators. In that way, a situation is avoided in which there is a lack of clarity, or in which a body is assigned a responsibility in respect of which, or from which, decisions can be made for which the responsibility belongs to another body. I mentioned that point in my presentation concerning an EU-wide entity being able to make individual decisions with regard to individual institutions operating in Europe. If such decisions were not in keeping with how national authorities view the problem, there could be a very serious problem, not least of accountability.

I shall ask Mr. Colm Breslin to talk on the point raised by Deputy Timmins, regarding global regulation and the co-operation already taking place between the EU and the United States.

Mr. Colm Breslin

Several members referred to the possibility or prospect of a global financial regulator. I do not believe there is any real prospect of that occurring in the near future, if only because, from my reading of the American media, I see very little prospect of the United States ever agreeing that American banks might ever be regulated by an external, non-American regulator. Among the G20 there is talk about increasing the resources available to the IMF to help countries in trouble but that is entirely different from having a global financial regulator.

There has been no consensus to date on the question of a single European financial regulator and this point was raised by several members. The de Larosière report made a point of not recommending a single European regulator. The last time this was discussed at the Council of Ministers, only Italy expressed an opinion in favour of that option. Under current European treaties it is permissible that the European Central Bank might be appointed as a single European regulator for the banking area. However, it could not be appointed a single European regulator for the insurance area because that would require an amendment of the European treaty in question. I would not see administrations in Europe approaching the electorate, or the member states, merely to amend the treaty to facilitate the possibility of allowing a single regulator take on the insurance area.

If a single regulator were to be established, it must be recognised that this would lead to a certain loss of sovereignty. The report, by and large, discusses trying to adopt a single rule book. When directives were adopted over the years, not so much lately, but in the 1980s and 1990s, there tended to be many optional provisions in different directives by which member states could pick and choose to allow for particular domestic circumstances. At present there can be circumstances whereby variations on a rule book apply in different member states. They are trying to get member states to review these legacy derogations and try to eliminate as many of them as possible. When the capital requirements directive was being adopted some years ago, several derogations were deleted but several dozen remain.

An amending directive related to the existing European deposit guarantee scheme was adopted earlier this month after going through the co-decision process in late 2008. It raises the €20,000 limit to €50,000. We are already ahead of that figure. There is reference to reviewing next year whether it should be raised to €100,000. Member states treat deposit guarantee schemes in diverse ways. In Ireland banks are obliged to contribute a deposit to the Central Bank, equivalent to 0.2% of the eligible deposit base. There is over €500 million in the deposit guarantee account. If a bank were to fail or be allowed to fail, which is probably not possible in the current climate, that would not be sufficient and the general fund of the Central Bank or the Exchequer would have to make up the balance in the short term, until the shortfall was recouped from the banks. The financial institutions, not member states, must fund the deposit guarantee scheme, otherwise, there would be a degree of state aid which would create an uneven playing field. Whereas our scheme is part pre-funded and part post-funded, many member states do not provide for pre-funding. If an institution were to fail, the fire brigade would come into action and banks would be asked to cough up to bail out the depositors affected by the failure. If a bank were to fail, it is likely that other banks would be in difficulty too. There is great diversity in Europe and different views on how this should be funded. It would be premature to talk about a single European deposit guarantee scheme. Many matters such as the appropriate rate and the contributors would have to be sorted out. The directive adopted under the co-decision process earlier this month provides for the Commission to engage in some research and consider that issue, among others. Given the diversity of pre-funded, post-funded and part pre and post-funded schemes in Europe, a unified system is probably a long way off.

There is a great deal of empty space to be filled in the establishment of the authorities such as under which authority they will be established. There are three financial areas, banking, insurance and securities and a level 3 committee for each, with talk about an authority for each. The level 3 committees are networks of the current supervisors and the authorities would be networks of the supervisors but with more powers over national actions, to direct people to do various things.

A question arises as to the basis for any power of sanction these new authorities might have. That is something many member states, including ourselves, will examine carefully to establish what legal basis they would have and if this is a way of, perhaps to some extent, circumventing some of the treaty requirements, which provide, for example, that if we want to have a single European regulatory system, we would have to amend the treaty because there is only provision for a banking regulatory system at present. We would have to carefully examine what is proposed in this context.

A number of contributors talked about sanctions. What they had in mind was that to have a level playing field across Europe, there should be a similar level of sanctions against wrongdoers in terms of financial regulation. However, as matters stand, if one breaches a provision in some member states, a maximum sanction under their laws of several thousand euro might apply while in another member state, the maximum sanction that would apply could run to several million euro. A financial institution considering establishing itself somewhere across the European Union might examine the sanction regime in place across member states, especially if it was a somewhat suspect entity, and consider establishing itself in, for example, member state X where low penalties apply. This could create what is called regulatory arbitrage. It could favour a low sanctioning member state as a location for financial services versus a member state where a high level of sanctioning applies. That would be unfair. Therefore, the intention is that the Commission would bring up low sanctioning to a generally more uniform rate across the Union such that similar offences should carry a somewhat similar sanction which would guard against creating an incentive for regulatory arbitrage. That is a major consideration it has in mind in this context.

Mr. William Beausang

Returning to Deputy Timmins's questions, it is important to emphasise that as we move forward a much greater level of co-operation will be needed between the EU and US, in the first instance, to ensure that measures taken in one jurisdiction relating to hedge funds or the shadow banking system, as it might be called, do not lead to the development of regulatory arbitrage into another jurisdiction, as Mr. Colm Breslin pointed out. How that would be structured would be a matter for discussion at the G20. There will be no easy solutions to it.

Deputy Timmins also raised a question regarding the timeframe for making a contribution in this context. The phase two issues are those which are probably most significant, as is clear from our discussions to date, to the accountability issues and to the parallel set of issues relating to national competences that need to be worked through. The phase one recommendation is a recognition or a strengthening — and a desirable one — of what was already under way. The more difficult issues to work through will arise in regard to how the phase two recommendation will work, taking account of the proposed authority or authorities and the work of the systemic risk council.

Deputy Timmins also raised the question of the quality of domestic financial regulation in the context of the work being done at EU level. The de Larosière report makes clear — this is an important point to make in overall terms — that we can have all the rules and regulations we like but the quality and intensity with which they are applied and enforced is what is crucial. This relates to recommendation six, namely, to make sure that national regulators have those powers and competences to enforce the rule book.

It is also important to make another point, particularly in the Irish context and taking account of the de Larosière report and the views of our EU partners. The question of the consensus forming around the report was raised. Many of the larger countries are, understandably, focused on the 45 cross-border banks with 70% of EU banking assets. What the European system is most concerned about is a systemic crisis that affects all EU member states at the same time on account of a problem in an individual institution which has its headquarters in one member state but subsidiaries or branches throughout the European Union. The major objective of the de Larosière report is to ensure a joined up approach across all member states in terms of how such an institution is supervised and the rules applied to it.

Deputy Timmins raised issues to do with remuneration. It is clear from the de Larosière report that the issues dealt with in the Credit Institutions (Financial Support) Act are a cause of concern for our EU partners. We believe the guarantee scheme and the manner in which it has been implemented through, in the first instance, the CIROC report and, in the second instance, the Government's recommendations on remuneration put us ahead of the curve in some respects in terms of how incentives in the financial system can lead to bad decision making, which while in the short term might have been in the interests of shareholders was not so in the long term. The point was made that such decision making was not in the broader public interest.

A question was asked about supervisory colleges. It is important to bear in mind that these are another element of the proposed regulatory system. As matters stand, a number of these colleges are in place for large cross-border financial groups. In this regard, regulators come together to ensure there is a whole of bank overview of an institution and proper information exchange and communication between regulators in member states in considering the financial institution in question. How national regulators will interface with supervisory colleges will be a critical factor in reform of the supervisory structures. For example, will the supervisory colleges have a lead role in regard to institutions or will they be subservient to the authorities? These are some of the important details that have to be worked out in implementation of the de Larosière report.

Deputy Dooley asked about our interaction with the Joint Committee on Finance and the Public Service. We shared a copy of the report with that committee and also sent it a copy of the consultation paper. We have tried to keep it apprised of developments. Given its specialist remit, it will have a particular interest in what is being proposed.

Senator de Búrca asked a number of questions about the presentation and the report, some of which Mr. Breslin may have addressed when speaking about the importance of ensuring there is legal competence to accommodate what is proposed in the de Larosière report. We would expect to be informed to a more significant extent than heretofore of from where these authorities will derive the power to ensure they have sufficient legal capacity for what is proposed. There is a risk. Examples have been presented of European agencies with specific responsibilities, including one in the aviation sector. It is important to have clarity on this point from the outset as obviously it would be unfavourable were these committees, which will have an ambitious and challenging mandate, be put in place and difficulties were to arise in terms of their legal capacity.

The issue of legal capacity and a strengthening of the role of level 3 committees and ensuring their recommendations, advice and standards are implemented by member states has been a significant factor in the discussions on reform of the supervisory system. We have arrived at a milestone in that there is consensus that these authorities should be given a formal legal status. However, it is important that it is clear what that status is and where the boundary between the activities of the authorities and the responsibilities of member states begin and end. Allied to this and mentioned by Senator de Búrca and others was the accountability of these committees. At the moment there is an accountability system in place for level three committees where they report to Council and the European Parliament and they take on board comments on their work programmes from those institutions. Looking to the role envisaged for the authorities in the future, it is fair to say that from our perspective we expect to see a deepening of accountability between the structures and the European Parliament and national parliaments as may arise.

Chairman

If I may interrupt, that point was made by some of the contributors. For instance, if the European Parliament is ignored, why should this be so? Is it not also possible and equally likely that national parliaments will be ignored? Is it not also possible that the national parliamentarians and members of the European Parliament might have a different perspective on some of the issues as to how regulation or lack of regulation or over-regulation or under-regulation or whatever, might affect their individual economies and with obvious consequences?

Mr. William Beausang

That is a very important question. The first point that needs to be made is that the European Parliament already has a very significant role in decision making on EU financial service legislation. A co-decision process is in place and the Department is acutely conscious of the role, authority and influence of the European Parliament in looking at proposals for regulatory change. For instance, the European Parliament has played a very significant role in important dossiers like Solvency Two. The institutional changes that have taken place at EU level have significantly strengthened the role of the European Parliament.

The other issue raised by the Chairman about the role and perspective of national parliaments is probably much more difficult to accommodate into this structure but it is an area that will need to be fleshed out in significantly more detail. This is the benefit of the two-phase process, that we have an opportunity to work through those issues and ensure we have a system that is accountable, particularly if there is an element of the work of these authorities impinging on member states and perhaps on issues that member states might be involved in when dealing with a crisis or a difficulty in a specific financial institution. Certainly, it is one of the issues on which we need much more clarity in our continuing examination of the de Laroisière report.

Senator Donohoe raised a point about recommendations 4 and 8 and those relating derivatives. We share the view that the proposals and other initiatives try to ensure that this sector of the financial system is subject to significantly more oversight and supervision. This is very important. It is interesting to note that in the review of financial regulation carried out by Lord Turner in the UK — and given London's role in the international financial system — he concluded that much of the financial innovation and financial engineering that has happened in recent years has turned out to be of very little value. There is a very deep re-thinking with regard to oversight and regulation and the attitude of regulatory bodies to future financial innovation, given the risks that have been demonstrated as being inherent in some of those more complex and more sophisticated instruments which have come into existence in recent years.

With regard to Senator Donohoe's point about whether there is a proliferation of regulatory bodies, I think that is an important risk. By the same token, it is important to bear in mind that different regulatory roles relate to different regulatory objectives. The one that is highlighted in the de Larosière report is the distinction between a prudential supervision objective and an objective relating to the conduct of business rules for financial institutions which would also include consumer protection. Countries have dealt with the possibility of conflicts — certainly conflicts between objectives — between prudential supervision and conduct of business rules. There is a third conflict, of which we have all become very aware, the possible conflict with the stability objective of, let us say, a central bank. Therefore, the systems in place in countries reflect the historical development of regulatory systems. They also reflect reform initiatives introduced during the years to try to ensure the financial supervisory system reconciles these possible conflicts. From the proposals made and announced by the Taoiseach at national level, it has been decided that for the future the Central Bank will have direct responsibility for both the macro-prudential supervision or stability objective and for micro-prudential supervision of individual institutions. Conduct of business responsibilities as they relate to consumer protection will be assigned to a separate agency.

The same debate on the appropriate design of the institutional structure of financial regulation is taking place in other member states and reflected in the de Larosière report which proposes not having three authorities but two, one with responsibility for prudential regulation and the other for conduct of business rules. The UK Chancellor of the Exchequer has proposed that the EU have a single authority, which reflects the UK preference for an integrated regulatory approach. It is an ongoing debate and the key point is to ensure, regardless of the number of authorities, that in the current model of EU supervision we will have at least one regulatory body in every member state. The challenge is to ensure there is appropriate co-ordination as well as effective co-operation and, above all, trust and confidence between national regulators in order that there will be appropriate communication and information exchange and that risks that reflect the entire group's activities will be identified at an early stage and responded to. Part of the role envisaged for the European systemic risk council, ESRC, reflects that objective.

Senator Paschal Donohoe

I emphasise a very important point in the discussion. The bodies we are trying to regulate, the banks and large commercial organisations, span many forms of economic activity. The major banks we have discussed are extremely strong in retail business, investment banking, trading derivatives, etc. It is very important for us to have a single or the minimum number of regulators in place in parallel with this. Mr. Beausang identified the need for information to enable work to be co-ordinated and information shared. That would be easier to do with fewer bodies, preferably one.

We should not delude ourselves. There is a shortage of regulators which understand the markets they are trying to regulate and which have the ability to match their technical expertise with the people they seek to regulate. Those who best understand what needs to be regulated are the bankers in many cases. We saw the difficulty when the British Government went to employ a banker and subsequently discovered that the person concerned had a more chequered history than was originally thought. The number of people who can fill these roles is very small. It is essential to harness their talents into as few bodies as possible. I understand where Mr. Beausang is coming from, but the fewer bodies we have doing this work, the better the chance of them working together.

Chairman

And the better the chance of ensuring accountability.

Mr. William Beausang

Taking into consideration the needs or capacity of regulators and the skills and expertise they require, along with the changes which will be made, undoubtedly, in financial institutions because of the risks that were allowed to grow within those institutions in recent years, the thrust of everything we see at European level and at domestic level is for more utility-type banking as it is described. That is not to say we do not need expert people who have good experience of the financial system and of the banks but there is definitely a major issue with regard to appointing people from the institutions, irrespective of the design of the system that may emerge. Obviously, there is always a temptation to play around at EU level with structures and process but it really comes back again to the point made in the de Larosière report, namely, that what matters is the quality and intensity of regulation on the ground. In Ireland there is a much stronger emphasis under the guarantee scheme on having greatly more intensified financial supervision. Without over-regulating, that is probably the key to ensuring that at an early stage there is proper identification of risk and of appropriate responses to those risks.

Deputy Byrne raised the question of the Commission's proposals for regulation of credit rating agencies. At national level, we have supported those initiatives. It is important for people to realise that the credit ratings are written into EU financial services legislation. They relate to important aspects of directives such as the capital requirements directive, and others. Given the flaws and weaknesses that have been identified in the ratings methodologies of credit rating agencies in recent years, it is an important objective at EU level to make sure that the entities given formal recognition in EU financial services law through their ratings operate in a transparent way. Their methodologies should be such that the prudent investor will have the opportunity to understand the basis on which the agencies have come to their assessments and will then be able to form his or her own assessment of risk when presented with investment opportunities.

The issue raised by Senator Quinn and others with regard to subsidiarity and the proposed role of the European Systemic Risk Council is a very important one and goes to the heart of the boundary issue between any new EU institutions and the activities of national regulators. The role envisaged for the ESRC is to collect data, and on that basis, to perform what is called macro-prudential analysis, namely, analysis of financial stability overall within the EU; to issue risk warnings to relevant competent authorities, namely, national supervisors; to give advice on appropriate measures to be taken and to ensure adequate follow up.

It was asked whether this advice was to be a direction in respect of adequate follow up, what might be involved, whether it was to be mandatory or whether there was a voluntary element. Our experience of EU structures, particularly the role of the level 3 committees that have a role at present similar to that envisaged for the ESRC, is that there is qualified majority voting at those committees. This is in contrast to operating by consensus, which often leads to a lowest common denominator type of advice or recommendation. Although there is always a risk of groups of countries coming together to argue a shared interest, QMV probably leads to getting a more rational and more transparent form of advice from such organisations. When level 3 committees issue an advice, a recommendation or a standard, reflecting recent changes in the operation of the Lamfalussy system, the level 3 system overall within the EU, it is necessary now for regulators to comply with those rules and requirements or explain why they will not. From an Irish perspective that is a strong determinant for national action because no member state, and certainly not a small one, would want to be at variance with what is advised as best practice at EU level, without a clear and objective basis. It is difficult to see how within the existing institutional structure in the treaty framework the European systemic risk council, ESRC, could enforce its recommendations against member states. It can have a significant influence on ensuring that early action is taken in response to risks identified in the EU and in individual member states on account of the moral suasion it would have and the position in which a member state would be if it did not follow advice of the ESRC.

The ESRC will have to operate within the principles of subsidiarity because the legal framework does not allow it to operate otherwise. There is no doubt that in linking the financial stability analysis with the assessment of the financial position of individual institutions, and those large cross-border banks, it will be an important and significant enhancement of the EU system. This goes hand-in-hand with the proposal for the three new authorities with legal powers because it joins in a coherent way the role of the regulators in assessing the stability of individual institutions and the badly-needed role of taking stock of the system as a whole to decide what actions may be required to ensure that risks identified do not materialise.

The ECB is outside the current institutional structure and all the available research and analysis suggest that an independent central bank makes better decisions in the monetary policy area to control inflation and ensure that the economy remains on a sustainable path. Various other channels and mechanisms have been put in place in the EU system to ensure that the ECB is advised, and in turn advises member states, of relevant issues and on the overall macro-economic environment. The ECB has played an important role in meeting the liquidity needs of individual financial institutions since the crisis first emerged in October 2007. The de Larosière report does not call into question the independence of the ECB but the proposals that it provide logistical support to the ESRC and that the president of the ECB chair the ESRC will more closely co-ordinate the advice of the ECB and the assessments and views of regulators and member states.

Mr. Breslin dealt with sanctions. As he said, the issue concerns the equivalence of administrative sanctions available to national regulators. Differences in the criminal justice systems in member states will lead to different forms of criminal proceedings and punishment. A broad convergence in the approach adopted would be desirable, reflecting the seriousness of the issues that might be involved.

Senator Hanafin also raised the issue of bonuses and the need for a multi-year line of sight, so to speak, and a link with the sustainability of institutions. The short-term focus on shareholder value has been identified across the board as a major factor in generating the wrong set of incentives for financial institutions across the world during the past few years. The Senator also raised the question of the so-called skin in the game element of the proposals to reform the capital requirements directive, whereby originating financial institutions which accumulated the highest debt would be responsible for honing a particular proportion of the risk. There was considerable debate on this issue at European level before the final 10% figure was arrived at. It may now have come down to 5%.

The Chairman also raised the issue of bonuses and the need for a multi-annual dimension and a focus on long-term sustainability which, as I mentioned, is very much in keeping with the approach adopted in the credit institutions financial support scheme and the work of the CIROC. Although there is a focus on putting in place a broad set of principles at EU level, it will fall to member states to regulate the detail of what they consider is required, given the diversity between large and small member states and so on. The approach taken in the guarantee scheme probably is ahead, in some respects, of the de Larosière report in putting in place a structure which seeks to ensure the remuneration systems in financial institutions relate to long-term sustainability and do not offer the bad incentives that have caused difficulties for those institutions in focusing inordinately on short-term performance.

The Chairman also raised the need to ensure there is a proper appreciation of the broader economic consequences for economies of the activities of financial institutions. Given the fiduciary duties of boards of financial institutions, it will be important to find mechanisms that properly balance the focus boards have on maximising shareholder value in the short and longer term and the broader public interests at stake. If banks can represent such a significant risk to overall financial stability and impact so significantly on economic performance, it raises the issue of ensuring the activities in which they are involved are consistent with the economy's long-term sustainable performance and the minimisation of risk to overall stability. This relates to the point discussed at length in the Turner review, to which I referred, distinguishing between utility banking and what was characterised as casino banking.

Chairman

"Casino" being the operative word.

Mr. William Beausang

On the point relating to recommendations Nos. 12 and 17, dealing with internal risk management in financial institutions, is that something the Chairman would like to deal with in the context of CRD?

Chairman

We are nearing the end of the meeting, given that the Order of Business will be taken shortly. Unfortunately, we will have to bring the meeting to a conclusion. We may have to seek further comments from the delegates arising from some of the points raised by members, in particular, on the systemic failures of regulatory institutions both here and elsewhere in Europe over a long period. In order to compete, all institutions will have to respond in a way which is not in accordance with the rules and regulations established during the years, that is, traditional banking and lending systems. Once an institution departs from regulation, for whatever purpose and by whatever means, it weakens the whole system. We know the delegates are well aware of this. Some of us were involved in the DIRT inquiry a number of years ago, during which we learned a great deal. All the fiduciary requirements, due diligence and accepted banking principles have been lost along the way. They were lost because we were in a new era when different rules applied. Unfortunately, they were wrong. We ask that these issues be borne in mind.

The committee secretariat and our special adviser will record the items raised and perhaps advise on how they can be referred to the European Commission by way of a commentary on the proposals made. Is that agreed? Agreed.

I thank the delegates. We very much appreciate the detail into which they went in producing the reference document.

Senator Paschal Donohoe

It is a pity the meeting is concluding with so few members present but, as the Chairman said, everyone is leaving to attend the other meeting. I was really impressed by the quality of material given. In recent months I have read about this issue in the media with great interest. The clarity of what was presented to us made it much easier to understand and comment on it. I thank the delegates for this and the work they have done on the issue.

The joint committee went into private session at 4 p.m. and adjourned at 4.10 p.m. until noon on Thursday, 9 April 2009.