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Seanad Éireann debate -
Wednesday, 5 Jul 1989

Vol. 122 No. 22

Central Bank Bill, 1988: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

I thank Senators for giving me the opportunity to appear here today.

Central Bank Bills are rare events. The Bill is only the second major change proposed in banking legislation since the passing of the Central Bank Act, 1942, under which the Central Bank of Ireland were established. Much has changed in baking since then and indeed, since the last Central Bank Act in 1971. We are now addressing the need to equip the Irish financial sector with an up-to-date commercial code of law and regulation to meet the challenges of 1992. Given the fast pace of change in financial services, it is vital that we give as much flexibility as is reasonable to the bank in their supervisory task.

The Explanatory Memorandum indicates that the Bill covers a very wide area of financial services. Banking is the core element of the Bill but the Government are also proposing to give the Central Bank the power to regulate firms in the International Financial Services Centre, moneybrokers and financial futures and options exchanges.

The primary functions of the Central Bank; as set out in section 6 (1) of the 1942 Act, are to protect the domestic and external value of our currency and to control credit. The bank seek to achieve this principally by formulating and implementing monetary policy, having regard to national economic policy which is, of course, the responsibility of the Government.

The bank's other main functions are to ensure that there is a stable and efficient system for taking deposits, extending credit and making payments within the State and to act as an agent and banker for the Government.

The banking sector has developed apace in the last few years. The whole ethos of banking has changed radically. Banks generally have become more customer-oriented and have developed new financial services in response to the needs and demands of clients. Irish banks have shown their abilities in the new financial markets in competing with the best abroad. So, too, has our financial sector generally. The Government have build on these strengths in the successful development of the International Financial Services Centre.

Much has been written about the blurring of distinctions between different financial sectors. Clearly, the neat and simple distinctions between banks, building societies and, to an extent, life assurance no longer pertain. We must adapt our supervisory practice to this situation. The Government have decided that the Central Bank will be the sole supervisor for all the main deposit-taking institutions and legislation to this effect, such as the Building Societies Bill, which has just been passed, the Trustee Savings Bank Bill, has been brought forward.

The Government will also be keeping under review the supervisory arrangement for the financial services sector generally to ensure that a multiple layer of supervision and multiple supervisors is avoided where possible.

At EC level there has also been significant developments. The Second Bank Co-ordination Directive which is nearing adoption will remove the remaining barriers to freedom of establishment in the banking sector and provide for full freedom of banking services. Other directives propose to lay down harmonised rules for capital and solvency for banks within the Community. Irish institutions operating in the internal market will be required to meet these standards. This should not pose particular problems for the Irish financial sector as the regulation of banking here already conforms to required international levels.

This Bill entrusts wide powers to the Central Bank. During the debate in this House on the Central Bank Bill, 1942, the then Minister for Finance laid particular emphasis on the independent role of the bank in their relationship with the Government. It is generally acknowledged that the most important element in Central Bank-Government relationships is the degree of independence accorded to a Central Bank in the formulation and implementation of monetary policy. I make this point because most of the provisions in the Bill will fall to the bank to implement, in some cases at the bank's sole discretion.

I will now go briefly through the detailed proposals in this Bill. I do not propose to comment on each and every provision in the Bill. I will try, rather, to highlight the main features and the principal new elements being introduced.

The first few sections call for little comment except to note that the penalties for offences in this Bill are being substantially increased and provision is being made for penalising a continuing offence.

Section 13 of the Bill is new and provides for fees to be paid to the bank in respect of the costs of supervision. This is a necessary provision given the new areas of supervision which this and other Bills assign to the bank. The fees will be set after discussion with the parties who will pay the fees. Section 13 (3) specifically covers this.

Section 14 of the Bill removes the requirement that the Minister appoint two banking directors to the board of the bank. This requirement has existed in Central Bank legislation since the bank was set up in 1942. I think we should acknowledge that these directors have contributed valuable banking expertise to the direction of the bank and have helped establish and maintain the deserved reputation of the bank for professionalism and competence. However, I believe that in presentday circumstances, it is not appropriate to preserve in legislation a specific requirement that two places be reserved for the directors of a licensed bank. Expanded responsibilities for supervising financial institutions are being entrusted to the bank by this and other legislation and it would be invidious to have the representatives of one particular financial sector on the board of the bank as of right, to the exclusion of others.

Because of its pivotal role in financial and commercial affairs, it is important to protect the confidentiality of information which comes into the possession of the bank. At present, the officials of the bank are required to take an oath of secrecy not to disclose information. Section 16 will replace the oath by a general provision relating to all staff of the bank. This confidentiality provision will be no less binding than the existing requirement, but will allow for exemptions in specific circumstances.

As a result of the debate in the Dáil, I put down amendments to the section to improve the balance between the need for the bank to preserve confidentiality where this is necessary and the legitimate interest of allowing the bank to be able to discuss freely those matters which can be debated publicly. I think the section is a much better text now and I acknowledge the contribution of the Opposition spokesmen.

Section 23 removes a legal impediment to the issue of a £1 coin. The Government have decided to introduce such a coin next year. Changes to the existing coins are also being considered to improve their aesthetic and practical (such as weight) characteristics. Final decisions have not yet been taken but we do not plan to remove any of the existing coins. Under the Coinage Acts any such changes will have to be approved in advance by both Houses.

Chapter III of Part II of the Bill deals with the supervision of banks in the State. The current arrangements were introduced by the Central Bank Act, 1971. Experience has shown that the requirements have worked well, but this does not exclude the need for certain modifications and adjustments to meet particular problems that have arisen.

There are new powers included in the Bill in respect of auditors of banks. These are at one with similar provisions in the Insurance Act, 1989, and in the Building Societies Bill. An auditor of a licence holder will be required to report to the Central Bank on any specific shortcomings he comes across in the operations of a licence holder arising out of the exercise of his auditing function. It is not my wish to interfere in the auditor-client relationship. However, there is an extra dimension in the case of banks — the depositor, whose interests must be protected. I do not see the new provisions in the Bill as placing an unreasonable burden on the auditing profession. The practical implementation of the section can be worked out between the bank and the profession and suitable guidelines drawn up.

The Bill includes a provision to broaden the definition of banking business contained in the Central Bank Act, 1971, both to conform with the relevant definition in EC directives and to improve the protection of the public from unauthorised deposit-taking. In order not to disrupt the bona fide raising of capital by ordinary firms, a provision has been included in section 31 to allow the Central Bank to exempt particular classes of such activities from the requirement to hold a banking licence.

Because of the rapid evolution of financial markets and the introduction of new and unfamiliar financial techniques, I have included in the Bill a provision allowing me, by regulation, to apply the supervisory powers in this Bill to any new financial activities which, if left unregulated, would cause a loss to the investing public, or disrupt the operation of financial markets in the State. I believe it is wise to take these powers now rather than wait for the damage that unregulated financial markets might cause before seeking the necessary legal powers.

An important innovation is the introduction in this Bill of a scheme to protect bank depositors. This is aimed primarily at the small depositor. It is not a failsafe guarantee for all deposits. The dangers of providing for such a scheme are only too obvious when one looks at experience in some countries abroad.

Deposit protection schemes help preserve confidence in the integrity of the entire financial system. There is, however, a notable body of opinion which feels that deposit protection lessens the role of market discipline in deterring banks from undertaking unsound or risky policies. Proponents of this view can point to the cost of keeping insolvent banks from closing and the burden this can place on the financial system.

I recognise these concerns and the viewpoint of those who feel it unfair that well-run institutions should bear the costs of inefficient competitors who get into difficulty. The scheme being proposed in the Bill is, however, a modest one. The maximum compensation is £10,000 and not all types of deposits are being covered.

The Government examined the issues carefully before settling on what I believe is a reasonable and affordable system. I hope we never have to use these powers but it is best to have the tools available to cope with such a contingency should it arise. Many of the more developed countries have deposit protection schemes in place, for example, UK, France, Germany, USA, Canada, Japan and the Netherlands. The EC Commission has recommended that all member states introduce these arrangements and nearly all have complied or are in the process of complying.

The way in which the deposit protection scheme will work is set out in Chapter V of the Bill. I can go into detail on Committee Stage if desired. The principal feature is that the scheme will be funded by a levy of 0.2 per cent on Irish pound deposits. This will generate a fund of £18 million which is small in relation to total bank assets of £24 billion. The maximum compensation for depositors will be £10,000 based on a sliding scale set out in the Bill. Certain classes of depositors will be excluded, namely those connected with the bank or responsible for its collapse.

The bank is allowed under the scheme to use the deposit protection account to advance funds to a licence holder where it is in the interests of depositors to do so or where it is necessary to promote the orderly and proper regulation of banking. Let me say that the particular cases in which this power will be used will have to be weighed carefully by the bank. I would expect that if the bank saw that the application or funds would have a good chance of success, and would cost less than having to compensate depositors should the licence holder fail, then it would consider the use of this account in this way. The Bill leaves this decision entirely to the bank. The bank must set out in detail the principles which will guide it in the exercise of these powers. The holders of licences will have the right to make representations to the bank in relation to the application of these principles.

The provisions in Chapter VI of Part II of the Bill give statutory backing to the control already being exercised by the Central Bank over the ownership of licensed banks and acquisitions by licensed banks in both the banking and non-banking areas. The Central Bank has two concerns. The first is to secure an appropriate ownership structure in order to facilitate the maintenance of the capital adequacy of banks. The bank is also anxious to minimise the risk of appreciable holdings in a bank coming under the control of unsuitable persons or institutions. The second objective is crucial in the context of the orderly and proper regulation of banking.

Under the proposals in the Bill, the bank must be notified of proposed acquisitions in or by banks. The relevant minimum percentage holdings in the shares or voting rights which must be notified to the bank for approval is 10 per cent. I will be able, by order, to alter this figure, but any alteration will have to be approved beforehand by both Houses of the Oireachtas. The bank must also be notified of acquisitions of less than 10 per cent of shares if the shares confer any rights over the appointment of some or all of the directors of the undertaking concerned.

Ministerial approval will be required where the proposed acquisition would result in over 20 per cent of the assets of all licence holders in the State coming under the direct or indirect control of one person, whether that person is another licence holder or not.

The Minister may attach conditions to any approval which he may give. The bank, in addition, may prescribe its own conditions as it sees fit. These latter conditions can be applied to all cases and not just those acquiring transactions required to be approved by me.

To allay concern that certain proposals in the Bill would cause severe disruption to the ordinary commercial activities of banks and their associated companies the Dáil agreed to certain specific changes in section 75. These relate to the exclusion of associated enterprise of banks in certain cases and the granting of powers to the bank to exempt particular classes of share acquisitions.

I am sure that the House will find the powers being taken in this Part both necessary and reasonable. They will be applied in a fair and practical way with the aim of protecting the interests of depositors and the wider public good.

Chapters VII to IX of Part II of the Bill give the bank the responsibility for supervising IFSC companies, financial futures and options exchanges, money-brokers and related entities designated by the Minister for supervision by the bank. The broad terms of the supervisory provisions are similar in many respects. The purpose is to allow the bank to specify particular regulatory requirements to be followed by the financial institutions concerned.

The bank is at present undertaking the supervision of certain financial institutions which have been licensed to operate in the International Financial Services Centre. The provisions of Chapter VII place this supervision on a statutory footing. The Government are committed to the application of the appropriate regulatory standards to firms in the IFSC. It is important that the reputation of the centre should be safeguarded.

The establishment of financial futures and options exchanges in the State is a very recent development. The bank has already undertaken the informal surveillance of the rules and activities of the exchanges which has already set up here. I do not think that there will be any disagreement that this supervision is required. Futures and options exchanges transact significant financial dealings which, if unsupervised and unregulated, could have grave effects on the reputation of the State and on the operation of all financial sectors in the State.

The final provisions in this Bill are by way of up-dating miscellaneous Acts governing particular financial transactions. These are the Bankers' Books Evidence Act, 1879, the Bills of Exchange Act, 1882, the Moneylenders Acts, 1900-1933, the Trustee Acts, 1893 and 1958, and the Stock Transfer Act, 1963. The Explanatory Memorandum to the Bill explains the amendments which are being made. One noteable provision, however, is contained in section 128 which empowers the Minister for Finance to direct the closure of banks and other financial institutions or exchanges where the protection of the currency or the national interest so requires. These are very much emergency powers. They are not new in that the Government have always had the power to declare bank holidays. After this Bill is passed, bank holidays will be catered for under the Public Holidays Act, 1973.

New provisions have also been included in the Bills of Exchange Act, 1882, to allow the transmission of cheques between banks by electronic means. These changes are sensible given modern technology and are common practice in other EC states. I expect, however, to see that the consumer will benefit from the efficiency gains. I have no doubt that competition between the banks will see to that. The banks have indicated to me that these moves will help keep bank charges down.

The Dáil also included in the Bill two new sections which are related. One deals with the investigation of complaints by means of providing for the establishment of a bank ombudsman. I can go into detail on Committee Stage on the procedures, powers etc., involved. I envisage the type of complaints being mainly consumer-driven, for example, bad service, unfair practices, undue delay, non-itemising of charges, overcharging and so on.

The other new section empowers the bank to draw up and apply codes of practice to any bodies supervised by it. These powers are aimed at applying even requirements on competing financial institutions. To take an example, various allegations were made by life assurers and building societies about unacceptable practices by banks in selling life assurance. The Central Bank, as a result, drew up a code of conduct to ensure proper standards and transparency of conduct in this regard. I believe it is better to have a standard all can see and follow. The codes of practice section will copperfasten the Central Bank's powers in this regard.

I hope I have covered the essential elements of the Bill. If I have missed some important items I will be happy to cover these in my reply or on Committee Stage. I thank the House for its patience and attentiveness.

The Minister in his opening comments said that Central Bank Bills are rare. It is well known that parts of this legislation have in some form been with us for many years. I am very pleased that my constituency colleague, the Minister for Finance, is bringing forward this very important legislation. This is in keeping with his innovative style.

A series of Bills is being brought forward dealing with all kinds of financial services in the light of changes which are taking place throughout the world. A Bill dealing with the trustee savings banks has been drafted and earlier today we had the Building Societies Bill. Other Bills will also be forthcoming due to the changes in financial services. We must have appropriate legislation in these challenging and changing times.

The Bill before us is a further effort to strengthen and improve the law dealing with the role of the Central Bank. It is a highly technical Bill which received a fair amount of debate in the other House. The Bill sets out to strengthen the powers of the bank in relation to the licensing and supervision of the banking business, to provide for the introduction of a deposit protection scheme for bank depositors, to provide for the prior notification to and the approval by the bank and the Minister in certain cases of proposals to acquire a specific holding in a licensed bank in the State and of proposals by banks to acquire certain holdings in other corporate bodies. In addition, there is the extension of the bank's supervisory role in relation to money brokers, the financial services centre and financial futures and options exchanges. It is a timely Bill in view of the need for major reform and to augment the powers of the Central Bank. It has been there for a long time in some form or other and it is now presented in a package.

In relation to all legislation of this kind introduced by any Government, there will always be people who will ask whether it is comprehensive enough. The single European market will bring us within a jurisdiction which is well controlled by extensive and very comprehensive legislative measures. I am sure the Minister will claim that the measure before us is suitable for our purpose and I sincerely hope that is the case.

When one considers the need for a Bill of this type one recalls the famous Shanahan Stamps controversy and the heavy losses incurred by many investors. Another case which I recall very clearly is that of the Irish Trust Bank since I knew of people who had invested money in that undertaking. Many people forget that saga but in time matters were put right because a new Government took office and the then Minister, Mr. Colley, felt the credibility of banks generally was at stake and paid the investors in full. Clearly what was happening in that bank was wrong. They were offering rates 2 per cent or 3 per cent above those offered by other financial institutions, while also giving excessive introductory fees to accountants or solicitors or anybody who wanted to act in some way as an agent. They were giving them above the normal introductory fees. In situations like that one will have problems, and I hope there was a lesson learned from that. If one gives a lot over the normal rate one is heading for trouble. Perhaps the Minister would comment on whether there will be a role for the Central Bank in that situation? Can they carry out an examination to see if rates being given are far above the normal?

In the last few years we had the PMPS problem. Whether right or wrong, I have always felt that the Central Bank should have been asked to repay the unfortunate depositors in PMPS. There was also the saga of the ICI and AIB. The solution to that problem was arrived at through the good offices of the Central Bank and that problem was solved. Fortunately the credibility of the bank in question, and indeed the whole banking system, was not damaged. This was the worry at the time. The steps taken at that time ensured that the taxpayer did not have to pay anything and that the bank itself, through the Central Bank — and the other banks to a lesser degree — would finance the rescue operation.

This Bill seeks to bring coherent control to the whole banking sector. It might be argued that there is not sufficient financial protection for the most important player in the game, the consumer or the investor. While we would like more protection, the fact that the Minister has introduced the deposit insurance system is welcome. Incidentally, this is a feature of all Bills of this kind. The Building Societies Bill, which was passed here earlier today contains a section to enable the provisions of the bank deposit protection scheme, as contained in the Central Bank Bill, 1988, to be applied to building societies. I presume there will be something similar in the Trustee Savings Bank Bill, although I have not read it through. This deposit insurance scheme will encourage banks, by virtue of the additional money they may receive by way of deposits since people will know their deposits are safer, hopefully to offer a higher interest rate because they now know the position regarding the insurance. In some way it gives protection to the investor who, after all, is the important person.

The Minister made the point that this scheme is to help preserve confidence in the integrity of the financial system. I agree with that. I hope we never have to use the powers in this Bill. Nevertheless, as the Minister said, it is best to have the tools available to cope with any contingency that may arise. That section is one most consumers would welcome. While it is aimed primarily at the small depositor, it is certainly a welcome development.

The Central Bank is perceived, even by people who are working in the commercial banks, as some form of secret banking organisation. It is also perceived as an institution that requires updating and is known to be an institution that is vital to the economic life of this country. The Minister has referred to this. I am sure many people would be surprised to learn that officials of the bank are required to take an oath of secrecy not to disclose information. While confidentiality is extremely important, as a result of the debate, the Minister has brought about a better balance between the need to preserve confidentiality and allowing the bank to discuss freely matters that can be debated publicly. That is something we all welcome.

The role of the accountants is very important. That became obvious to me during the debate on the Insurance Bill. The Minister referred to the Ombudsman, life assurance, how far banks can go in this area and in other sectors of their business, and perhaps we might talk about these matters on Committee Stage. My hope would be that in updating and amending this legislation we will have a Bill that will serve the nation well over the next few years bringing us well beyond 1992, and help us to deal with the challenges facing the country after that date.

Obviously, it gives me pleasure to welcome the Bill, and I wish it success.

I thank Senator Fallon for his comments. He is right when he says that this Bill was absolutely necessary in the changing world and in the development of the financial services sector. It places us in the forefront in regard to those developments which have taken place in recent years, particularly the successful establishment of the International Financial Services Centre. When the second bank directive is completed in Europe, it will put us at an even better advantage in that once a bank sets up within the EC and meets the requirements of the supervisory authority within the home country, it can then offer services freely throughout the 12 member states. This is a big step forward in the freedom of establishment for financial services. It will make financial services even more attractive than they have been up to now because there is a major development of financial services and new products on the market. The fact that one can set up in any member state and freely trade out of that member state is a major step forward for the Community and augurs well for the completion of the internal market in 1992. Foreign banks, whether from Asia or the United States, were reluctant to come forward until this second banking directive was completed and they could see clearly where it would lead.

As regards the International Financial Services Centre we now have 63 projects approved in principle with associated job commitments for just under 1,500 people. These projects originate both domestically and from a wide variety of overseas firms from the United Kingdom, other EC states, the US, Japan, Australia and Canada. The list of those approved includes major international banks and financial institutions. The level of interest in the centre continues to be high, reflecting the considerable input and skills of the promotional agencies involved.

Everybody agrees that this legislation was long overdue having been promised at various times over the last few years. As I said in my opening remarks, we are trying to be flexible in this Bill to meet the situation that may arise because of rapid developments in financial markets and in the technology associated with financial markets. This is a wise and practical course to follow.

I now take the opportunity to respond to a few other points mentioned along the way. Senator Fallon welcomed the Bill. I am aware of the important role of the Seanad in discussing this Bill. The Senators have already considered the Building Societies Bill here today. That is another vital building block in legislating for the new environment of financial services. Senators will recall the important contribution they have made in shaping the Insurance Bill which was passed last March and they will recall the detailed consideration given to the Companies Bill introduced by me in this House. The record will show that we have recognised the importance of financial legislation and that Senators have played an important role in its adoption.

A notable feature of the Central Bank Bill is the span of activities it covers — the Central Bank itself, bank supervision, the regulation of new areas of financial services, bank takeovers and acquisitions, deposit protection, coinage, currency, bills of exchange, bankers' books and other technical financial matters. Senator Fallon said that the gestation period of the Bill has been far too long. I agree with him in that and that is one of the reasons for its size. Senator Fallon raised the issue of the smaller banks which failed in the past. This was one of the reasons for designing this scheme for protecting deposits. Some people may ask what about the very large depositors? If we had a similar scheme there it would be very costly to manage. Senators would agree that the people with large amounts of money to invest are better informed about financial markets and in relation to decisions they take but that small depositors are not so well informed. They are the people this legislation sets out to help. Everybody knows that people making large investments are capable of making judgments, calculating the risk and making their decisions about whether or not to invest money.

Senator Fallon also referred to excessive rates of interest being paid and what the Central Bank can do. The Central Bank will be extra vigilant in this regard. It is a normal part of the supervisory process. They have the authority to look at the rates of interest paid and their primary objective is to protect our currency. They are totally independent in their decisions, although they take Government policy into account when making their decisions. I am aware that some people feel that in relation to the deposit protection scheme there is an inherent risk that the existence of the scheme may lead to unsound practices by some banks. These fears are generally overstated.

The scheme is designed to afford a measure of protection primarily to small unsophisticated depositors. A ceiling has been incorporated whereby the maximum sum payable to any depositor is £10,000; thus, it is only in cases of deposits up to £15,000 that two-thirds or more of the deposit is protected. This relatively low ceiling will also reduce the likelihood of depositors seeking out higher and riskier returns for their savings. In the past we have seen that small depositors have been caught in that they have been attracted by very high interest rates although they were not in possession of all the financial knowledge necessary to make a proper judgment.

Under section 55 (9) (a), banks are prohibited from advertising that their deposits are protected under the scheme and, therefore, cannot attract deposits on that basis.

It has also been suggested that the fund for the deposit protection scheme should be based on a risk-related insurance scheme. While I agree that such a rating basis might be the ideal, examination of such schemes has shown that they present major practical problems. These problems were cited in the OECD report on prudential supervision in banking, and include the difficulty of assessing relative degrees of risk — how, for instance, is management ability to be evaluated, the difficulty in predicting how risks will develop in the future, and the difficulty of trying to apply actuarial methodology in areas where there is significant historical experience and lack of uniformity in the variables.

There is also the potential impact of the risk premium itself on the action of the bank. A risk premium can be a costly exercise and it might encourage an institution to seek higher profits from more risky investments to pay the insurance premium. Even in those countries which have adopted insurance-type schemes, the premium is only related to the amount of money at risk, rather than to the riskiness of the insured for the reasons I have already given. Another drawback is that the resultant grading of banks in this way carries an attendant risk of impairing confidence if, or rather when, the ratings become public knowledge. The scheme we have introduced here is modest, safe and reasonable. I hope these points will be of interest to the Senators and I thank them for their input into the Second Stage debate on the Bill.

Question put and agreed to.