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.
