Joint Committee on the Secondary Legislation of the European Communities debate -
Wednesday, 11 Jun 1980

Liberalisation of Capital Movement.

Senator Molony

This report is neither as interesting nor of the same immediate importance as the last two, so I will be very brief. We considered the Council Directive which proposes to amend for the second time the First Directive for the implementation of Article 67 of the EEC Treaty which deals with the liberalisation of capital movements. The aim of the proposal is to abolish exchange restrictions on the free movement of units in or securities issued by collective investment undertakings for transferable securities (CIUTS). They take two forms; primarily, as far as Ireland is concerned, unit trusts and similarly in the United Kingdom, and on the Continent open-ended investment companies or companies with variable capital. In 1976 the Commission submitted a draft directive to the Council for the co-ordination of national laws and administrative provisions in relation to CIUTS. The objective of that co-ordination directive, if you could call it that, is to secure uniform protection of investors and the approximation of conditions of competition between CIUTS, the ultimate purpose being to enable a CIUTS established in one member state to promote its objectives in the other member states without restrictions except market restrictions.

If we go on to paragraph 3, it sets out the history to the proposed Directive that we considered. Article 67 of the Treaty provided for the abolition of restrictions on the movement of capital within the EEC during the transitional period "to the extent necessary to ensure the proper functioning of the Common Market". Article 69 envisages the issue of Council Directives for the implementation of Article 67. So far there has been two such directives. These directives divided capital movements into four categories A, B, C and D as described here. Each category has a different status in the sense that in some instances the liberalisation of capital movement is insisted upon and in other areas some restrictions are allowed. A would be mandatory and B going to the stage where the restrictions—there can be quite a number of restrictions——

Chairman

To clarify that, do I understand what your Sub-Committee's report is saying is that, even though mandatory, it still will be subject to the exceptional treatment of exchange control on capital if there are special reasons justifying it under the provisions of the Treaty?

Senator Molony

Yes. We come to that later in my report. The proposal here is that the type of unit trusts we are talking about would be shifted from or changed in category from list C to list B. In paragraph 3 we list the various capital investments that come under each category. Under the Treaty of Accession Ireland was permitted to defer the liberalisation of different categories of capital movements for stated periods but these transition arrangements have now expired. However, under Article 108 of the Treaty Ireland has been permitted to maintain, subject to certain modifications, its restrictions on outward portfolio investment.

Chairman

That means everyone is entitled to, not merely Ireland?

Senator Molony

It varies from country to country. If it particularly affects us in certain ways we have rights. Paragraph 5 deals with the situation that occurred following our entry into the European Monetary System. In this instance we introduced controls in relation to transactions between Ireland and United Kingdom, the United Kingdom staying out of the EMS.

Paragraph 6 lists the Irish restrictions on outward portfolio investment. There is no need for me to go through them here because they were well publicised at the time they arose in relation to our outward portfolio investments, particularly in relation to the United Kingdom, following our entry into the EMS.

Chairman

You bring it all together here.

Senator Molony

Yes. The restrictions that we have now in relation to capital outward portfolio investments in the United Kingdom are the same as applied to outward portfolio investment to other EEC countries.

Paragraph 7 sets out the Commission's proposal. The proposed capital movements Directive would apply to those undertakings to which the proposed co-ordination Directive is to apply. These are unit trusts and open-ended investment companies which invest at least 95 per cent of their assets in transferable securities and liquid assets. The Irish undertakings affected would be certain unit trusts which are registered under the Unit Trusts Act of 1972. The Commission's proposal is that units of these unit trusts and securities of open-ended investment companies to which the co-ordination Directive is to apply—I should say here the co-ordination Directive is not actually adopted yet——

Chairman

Nor are they in any great hurry about it, are they?

Senator Molony

It will be some years before it will be adopted. The securities affected should be transferred from list C to list B. I have already referred to those lists.

Member states are obliged to grant general permission for the conclusion or performance of transactions and for transfers between residents of member states in respect of capital movements set out in list B. In the case of list C, on the other hand, a member state may maintain or reintroduce exchange restrictions which applied to them on the date of entry into force of the Directive (in the case of the United Kingdom, Ireland and Denmark, on the date of accession).

Chairman

Are they also included within our own exchange control direct list from list B? Is that not also subject to the business that if you have them you can switch them?

Senator Molony

I should repeat what I said on paragraph 8. In the case of list C on the other hand a member state may maintain or reintroduce exchange restrictions which applied to them on the date of entry into force of the Directive if free movement of capital might form an obstacle to the achievement of the economic policy objectives it is pursuing. Denmark, France, Italy, Ireland and the Netherlands have all exercised this right.

Operations in most securities dealt with on the stock exchange by being included in list B were liberalised by the first directive and the adoption of the Commission's proposal would put units of unit trusts in the same category. However, the provisions of the first Directive can be overridden by member states invoking safeguard clauses in the Treaty of Rome. Ireland, for example, is able to maintain the restrictions on outward portfolio investment referred to in paragraph 6 notwithstanding the provisions of the first Directive by virtue of such clauses.

The proposed capital movement Directive will have to be considered by the Financial Questions Group of the Council. However, the Sub-Committee understand that the majority of member states, including Ireland, consider that it would be premature to pronounce upon the proposed Directive until work on the co-ordination Directive is further advanced. The Committee understands that it is not likely that the co-ordinating Directive will be finalised for some years. At this stage it is not possible to say even when the discussions on the capital movements Directive will commence.

As far as outward investment is concerned the practical effect for Ireland of the adoption of the capital movement Directive depends on what exchange control restrictions, based on the overriding provisions of the EEC Treaty, are in operation at the time. The Sub-Committee are advised that if the present restrictions are still in force it is possible that the EEC authority allowing their retention will be sufficiently general in terms to apply automatically to the capital movements covered by the proposed Directive. If not, the Committee understand that it is likely that EEC sanction would be sought to extend such restrictions to the capital movements in question, because of the disruptive market and movements effects likely to arise from the liberalisation of transactions in such a limited range of securities.

Paragraph 12 deals with inward investment. As far as it is concerned Ireland is not at present operating any restrictions and it is not anticipated that this situation will have changed when the proposed Directive is adopted if in fact this happens.

Our own view is that one of the objectives of the proposed co-ordination directive is to enable CIUTS to market their units in member states other than their own without those member states being able to make the undertakings or their units subject to any provisions whatsoever other than marketing regulations. This objective, we feel, could be frustrated even if the Directive is adopted, by the restrictions on capital movements permitted at present by the First Directive of 11 May 1960 (as amended). Accordingly, we agree that if the co-ordination Directive, as proposed by the Commission, is adopted the first Directive should be amended in the manner proposed by the Commission. As we have already pointed out, even if this is done, the practical effect, as far as Ireland is concerned, will depend on the exchange control restrictions in operation and the Committee recognise that the continuance of these restrictions must depend on wider economic and financial considerations prevailing at the time.

Chairman

I should like to thank Senator Molony.

Senator Robinson

I have a problem. As I understand it, even if this proposed Directive were to be adopted we would be likely to be continuing our exchange control restrictions, having applied for derogation under Article 109. In other words, we are not particularly in favour of this Directive at this point in time. We do not say that explicitly here but I presume that we are not enthusiastic about it at this stage.

Chairman

It does not matter a damn to us.

Senator Robinson

Because we can seek a derogation under Article 109. Seeking a derogation is something that we can only do with the consent of the Commission. The Commission could, under paragraph 3 of Article 109——

Chairman

That is true as it stands at the moment.

Senator Robinson

The Article states that the State concerned shall amend, suspend or abolish the protective measures referred to above. Are we not in a better position not to be encouraging the enactment of this Directive rather than saying we do not mind if that Directive is enacted because we can always seek a derogation under Article 109. In effect we can be overruled by a qualified majority.

Chairman

I do not think we are in any different position than the UK were in in regard to its exchange control as a member of the EEC. It was merely expected to be checked under that provision. Our position, particularly in the last year and the current year, means that we will have an unmistakable right to it even under the International Monetary Fund, having regard to the state of our balance of payments. It seems to me logical that if there is a liberalisation going on in relation to stock exchange securities it should attach as well to unit trusts that conform with the co-ordination Directive which we have already approved. Logically, we should not object to it because it is merely saying whatever opposition we have in regard to the overall thing, nothing in this Directive will affect our attitude in relation to that. This particular Directive might add the size of an envelope to all our stationery as far as our foreign investments go. It would be a very modest item indeed. Whatever our rights may be with regard to exchange control, they stand on issues other than this one. That would be my understanding of it.

Paragraphs 1 to 14, inclusive, agreed to.

Draft Report agreed to.

Ordered: To report accordingly.