The Investment Intermediaries Bill is the latest in a long series of legislation required by the rapidly changing nature of the financial services industry. The Seanad recently considered the Stock Exchange Bill, now enacted as the Stock Exchange Act, 1995. This Bill has much in common with that Act, so Senators will already be familiar with many of the Bill's provisions.
The Investment Intermediaries Bill reflects the need to provide regulatory structures to keep pace with developments in financial markets as well as with developments in European law. It provides for the implementation, in respect of non-Stock Exchange firms, of two closely related EU directives, the Investment Services Directive and the Capital Adequacy Directive. These directives require particular standards of regulation for investment firms, which are defined as firms providing a range of services in relation to transferable securities. Transferable securities include the whole gamut of financial instruments traded on capital markets, from ordinary stocks and shares to the more exotic financial instruments known as derivatives.
Implementing the Investment Services Directive is very important. That directive will allow investment firms based in Ireland to have the benefit of a single passport to operate in the European Union. In other words, once such firms have satisfied the Irish authorities that they are fit to do investment business, they will be able to operate in other EU member states without having to seek a separate authorisation. The Investment Services Directive requires that firms trading in a member state other than their home member state will have to abide by local code-of-conduct rules.
The Irish financial system is modern and sophisticated. The handling of huge sums of money and complex financial instruments is a daily activity for many participants in that system. State-of-the-art information technology and skilled personnel allow firms in Ireland to market their services around the world. We must ensure that the reputation of Ireland as a centre for financial services is maintained and enhanced. To do so, it is essential that we put in place a modern regulatory system which meets European standards. Moreover, we must go further than merely meeting the requirements of the relevant EU directives. This is because there are gaps which must be filled in our domestic system of regulation, in areas which are not within the scope of these directives.
Accordingly, this Bill provides a regulatory framework for a wide range of investment businesses, including not just firms covered by the directives, but also firms in the investment area which are not covered by them. For example, investment intermediaries which act primarily as conduits for business to larger financial institutions but which do not generally have any discretion in the management of clients' funds, are not covered by the directives but are dealt with in this Bill.
Deposit agents and deposit brokers who act on behalf of credit institutions will also be dealt with by the Bill. In addition, firms which have discretion over client investments and which therefore act as managers of clients' investment portfolios will also be regulated under the Bill. So will firms which only give investment advice and do not actually involve themselves in carrying out transactions for clients at all. I should mention that the Bill has been the subject of consultation with a wide range of interested bodies. These include the European Monetary Institute, which has provided a formal opinion indicating that it has no difficulties with the Bill. Copies of the institute's opinion are available.
The Bill nominates two key regulators, the Minister for Enterprise and Employment and the Central Bank. The Minister for Enterprise and Employment is already the regulator for the insurance industry and many of the firms dealt with in the Bill will already be doing business as insurance intermediaries under the Insurance Act, 1989. The Central Bank is the other key regulator: it already regulates the vast bulk of Irish credit institutions as well as a range of other financial undertakings.
I now turn to a description of the basic structure of the Bill. Two main categories of firms are to be regulated by the Bill. They are not mutually exclusive — there will be some overlap. The two categories are investment product intermediaries and other investment business firms. Investment product intermediaries are firms which, for example, take and transmit orders for unit trusts to a unit trust provider, or orders for shares to a stockbroker or bank, or orders for prize bonds to the Prize Bonds Company, or which act as deposit brokers, for example, arranging for a client to make a deposit with a bank, or as deposit agent. In this instance the key example is the building society agent, prominent in many smaller towns, who acts almost as a de facto branch of a building society. Some solicitors and accountants will also fall into the category of investment product intermediaries.
All investment product intermediaries will be covered by what I will refer to as the "written appointments regime", in other words, each will require a written appointment from any institution to whom it passes orders. The written appointment means that where an intermediary takes funds on behalf of an institution, the payment will be treated as having been made to the institution. This is an important protection for clients. The client must be in a position to show that a payment was made, and for that reason it will be an offence for an intermediary to fail to give a receipt for a payment.
Before an institution gives a written appointment to an intermediary, it must take steps to ensure that the intermediary is an appropriate person for such an appointment. The institution must, therefore, ensure that the intermediary is a member of an appropriate representative body with rules which require compliance with the Bill or is regulated by an approved professional body, or that the intermediary has an authorisation from and is regulated for investment business by one of the two supervisory authorities under the Bill, the Central Bank or the Department of Enterprise and Employment. If the intermediary is not in any of these categories, then the institution giving it a written appointment must itself ensure that the intermediary is of good character and complies with the terms of the Bill.
The investment industry very recently raised a concern about the unlimited liability in section 28(4) on institutions to honour payments made by clients to an intermediary they have appointed. As I have already indicated in the Dáil, the Bill will not be implemented all at once. It was always the intention that a number of sections of the Bill, including the written appointments regime in Part IV, would not come into effect for some time. This delay is unavoidable because it will take some time, for example, for intermediaries to arrange written appointments for the institutions on whose behalf they are acting.
While this is taking place, the Department of Finance will be exploring the difficulty raised by the industry with the relevant industry groups in the context of discussion on an overall system of compensation for clients of investment firms. Such discussion would have taken place at an early stage in any event, because the EU Investor Compensation Directive is nearing completion in Brussels and will have to be transposed into Irish law by means of a separate Bill.
If it is decided that an amendment of section 28(4) is appropriate, it will be included in that Bill and section 28(4) will not be brought into effect until a decision on that issue has been made. That Bill will take cognisance of the compensations provisions in the EU directive and will be brought before the Oireachtas as soon as possible. The Government's objective will naturally be to provide appropriate protection for investors in the context of a competitive financial sector.
The basic rule of the Bill is that all firms covered by the Bill must have an authorisation from the Central Bank or the Department of Enterprise and Employment to do investment business. However, where a firm does not provide any investment services other than the services of an investment product intermediary, and where it does not handle client funds other than when acting as a deposit agent or exercise any discretionary powers over clients' investment portfolios, it is called a restricted activity investment product intermediary. In view of the restricted nature of its business, such an intermediary will be allowed to operate without an authorisation from a supervisory authority provided it has a written appointment. It will, naturally, be subject to rules and codes of practice. The Department of Enterprise and Employment will, of course, have various powers to make rules for, and carry out inspections of, restricted activity product investment intermediaries.
There is a small category of firms not far removed from the restricted intermediary type, which has a small amount of discretion in respect of switching clients' portfolios from one investment product to another with the same institution. While these firms would not handle clients, cash, they will nonetheless have to get an authorisation from the Department of Enterprise and Employment to carry on their business, and will be subject to ongoing regulation by that Department.
All other investment business firms will come within the remit of the Central Bank, either directly or indirectly. The indirect sort includes accountants who are members of professional bodies and who do investment business only in an incidental way. These may be exempted from the requirement to be authorised and regulated directly by the Central Bank, provided their professional body has been approved by the Central Bank. In this case the professional body regulates the accountant, and the Central Bank overseas the regulatory system of the professional body. I emphasise, however, that this system will only apply where the investment business being done by the accountant is incidental to his or her normal professional practice as an accountant. It will not apply where an accountant is heavily involved in investment business.
Otherwise, all investment business firms must be regulated directly by the Central Bank. This means that they must get an authorisation from the bank to enable them to operate and that the bank will monitor and supervise them on an ongoing basis. This category will include the fund management firms operating in the Irish market and the IFSC, for example, those providing fund management services to large corporate clients. However, the directly regulated category will also include small businesses or individuals who, on a professional basis, provide investment services to clients where they have control or discretion over client funds.
I have set out the categories of firms which are included in the Bill. I now wish to mention certain types of firm which are exempt from the definition of investment business firm and, therefore, from most aspects of the Bill, though not necessarily from the requirement to hold a written appointment if acting as an investment product intermediary. These exemptions are mostly for technical reasons. They include the bodies charged with the management of public debt, the Minister for Finance, the National Treasury Management Agency and An Post, but only when the latter is acting on behalf of the State. Banks, insurance undertakings and certain collective investments, and member firms of stock exchanges, are also excluded from the definition of investment business firm; these are already catered for under existing legislation.
Solicitors are covered by the Bill in the same way as any other investment firm if they do investment business in a manner other than incidental to their legal activities. However, they are excluded from the definition of investment business firm if they carry on investment activities only on an incidental basis in the course of their profession. The reason for this is that the Law Society is already operating a substantial regulatory system under the Solicitors Acts, including the recent Solicitors (Amendment) Act, 1994. That system is also backed up by a compensation scheme and by appropriate professional indemnity protection. In these circumstances it was not considered necessary to include solicitors doing incidental business under the definition of investment business firm.
The Law Society can be expected to continue to maintain an appropriate standard of protection of solicitors' clients, but if the Minister for Finance were to come to the view that the Law Society was not performing its functions adequately, the Bill provides that the Minister may, by regulation and after appropriate consultation, bring solicitors doing incidental business within the definition of investment business firm.
One final thing the Bill will do is to extend the definition of investment company within the meaning of the Companies Act, 1990, to include closed ended investment companies. These are a type of collective investment fund. The effect of the change will be to bring such companies within the regulatory scope of the Central Bank, which already regulates other collective investments.
I now move on to a more detailed description of some key provisions of the Bill. Part I contains standard provisions about commencement, definitions and expenses. Section 2 sets out the definitions used in the Bill and is especially important because in so doing it effectively defines the scope of the Bill. "Investment business firm" is defined as a person providing investment advice or certain investment business services to a third party on a professional basis. "Investment business services" include a number of services provided with regard to investment instruments. The term "investment instruments" is defined to cover the range of securities and derivative instruments traded on domestic and international financial markets.
Part II deals with authorisation of investment business firms and related matters. Under section 9, it will be an offence for a firm to act as an investment business firm, or to claim to be one, unless it is authorised to do so by a supervisory authority in Ireland or by a competent authority in another member state, or unless its activities are such that the Bill allows them to be carried on without such an authorisation. A foreign firm which has neither a branch nor a subsidiary in Ireland may carry on investment business with Irish companies and institutions without an authorisation from the Irish authorities. However, such a firm providing investment business services or investment advice to Irish individuals, that is, other than investment professionals, will be regarded as operating in Ireland and will have to have an authorisation from the Irish authorities or from a competent authority elsewhere in the EU.
Section 10 sets out the conditions which must be met by firms seeking an authorisation. An authorisation under this Bill can be subject to conditions laid down by the supervisory authority, and the supervisory authorities will have various powers to issue conditions or requirements or make directions in respect of investment business firms.
Section 12 makes provision for Irish based investment business firms to operate in other EU countries on the basis of their Irish authorisations while section 13 makes transitional arrangements for firms already operating as investment business firms, giving them time to arrange the necessary authorisations, etc.
Section 16 allows a supervisory authority itself to revoke the authorisation of an investment business firm in limited, technical circumstances. More importantly, a supervisory authority may apply to the High Court for an order revoking the authorisation of a firm if the firm has acted in a manner which it is felt should disqualify it from doing investment business. This will allow the court to disqualify firms which can no longer be regarded as being fit and proper to be involved in investment activities.
Part III of the Bill deals with various aspects of the regulation and supervision of investment business firms. Section 20 sets out the general principles for such regulation. It provides that the supervisory authorities will administer the system of regulation and supervision of investment business firms in the interests of investor protection, the proper and orderly regulation and supervision of investment business firms and that of financial markets and subject to any guidelines which may be issued by the Minister.
Section 21 equips the supervisory authorities with a general authority to issue directions to investment business firms and their directors and management in the interests of proper and orderly regulation of investment business firms or the protection of investors. In certain circumstances these directions can extend as far as a direction that an investment business firm should cease trading. There is, of course, provision for appeal to the High Court. Section 22 enables a supervisory authority to apply to the court for an order to wind up an investment business firm if it believes, for example, that the firm is or is likely to become unable to meet its obligations to its clients or creditors.
Sections 23 and 24 make various provisions for restrictions in advertising. It will be an offence to advertise investment business services where the provision of such services would be an offence. Senators will realise, of course, that powers on advertising are an important aspect of the regulation of the activities of investment business firms.
Part IV deals with the written appointment regime applicable to investment product intermediaries. As mentioned earlier, this type of firm is engaged either in part or solely in a more limited form of investment, consisting mainly of passing customers' orders to larger financial institutions; the definition is set out in section 25.
A restricted activity investment product intermediary, defined in section 26, may do business without a specific authorisation from a supervisory authority because it is not generally allowed to take clients' cash or to have discretionary power over clients funds. I have already dealt with the position of clients of firms operating under the written appointments regime and these are detailed in Part IV.
Part V makes various provisions in relation to auditors of investment business firms in line with the corresponding provisions in the Stock Exchange Act. Among other things, this Part obliges the auditor of an authorised investment business firm to report to the supervisory authority if he or she has reason to believe that there are circumstances which affect the investment business firm's ability to meet its financial obligations or that there are defects in its accounting systems or records or in its safeguards for client money or investment instruments. The auditor must also report to the supervisory authority if he or she has reason to believe that the investment business firm has breached the rules of any approved professional body of which it is a member.
Part VI of the Bill deals with probity and the competence of persons involved in investment business firms, with codes of conduct and provisions for regulating acquisition of significant shareholdings in investment firms, as well as with bonding for investment business firms and the protection of clients' money.
Section 36 contains provisions relating to disqualification from employment. Where, on application by a supervisory authority, the High Court finds that a person is not suitable on grounds of probity to be an officer or employee of an investment business firm, it may direct the employer to dismiss that person. Where the court finds that a person is incompetent, it may direct that the person concerned be removed from a particular position, suspended or dismissed. These substantial powers mirror provisions in the Stock Exchange Act.
Section 37 sets out the broad parameters for codes of conduct which will govern how investment business firms do business with their clients. Codes of conduct will be drawn up by the supervisory authorities. The supervisory authorities may then require that investment business firms follow these codes of conduct. Codes of conduct will cover such issues as ensuring that firms deal honestly and fairly with clients, act with due skill and care, have adequate resources, seek enough information from clients to ensure that they provide appropriate advice or services and make adequate disclosure of relevant information to clients.
Sections 38 to 48 enable a supervisory authority to prevent undue or excessive influence being gained over an investment business firm by a person acquiring a significant shareholding. These provisions meet the requirements of the investment services directive in this regard.
Sections 50 and 51 deal with information about compensation and with bonding. While the Bill does contain a significant compensation provision, it does not provide for a comprehensive compensation scheme across all investment business firms. A draft investor compensation directive is nearing finalisation at EU level. The Department of Finance will be consulting industry interests about legislation for it as soon as possible.
I have already explained the protection available for clients under the written appointment regime. In addition, section 50 provides that an investment business firm must inform a client of the details of any investor compensation scheme. Section 51 then provides for a bonding arrangement for investment business firms on the model of the bonding arrangements which apply for insurance intermediaries. However, the minimum bond will be higher than that which applies at present in the insurance area — £50,000 rather than £25,000. The Minister may prescribe exemptions from the bonding requirement where an appropriate compensation scheme exists or is set up or where a firm has a high level of capitalisation.
Section 52 deals with an important matter, the protection of client money and investment instruments. The section empowers the supervisory authorities to impose requirements on investment business firms in respect of their rights, duties and responsibilities regarding the treatment of clients' money and instruments. This section also creates offences for failing to keep proper books and records on clients' money or failing to have them audited regularly. A failure to keep client money in a properly designated account will also be an offence. It will, of course, be an offence for a firm to misappropriate client funds.
An important protection for clients is that in the event of insolvency of a firm, no liquidator, receiver, examiner or creditor of an investment firm will have any right of access to clients' money or investment instruments until the proper claims of clients have been satisfied in full.
Section 53 provides for an exemption from liability for the supervisory authorities unless they act in bad faith and for a disclaimer of warranty in respect of their approval of professional bodies or authorisation of investment business firms. Under section 54, where an investment business firm is unable to pay its debts and its failure to keep proper books and records or to comply with client money obligations has contributed to its insolvency, an officer of the firm may be held personally liable for the firm's debts on a direction of the court. In addition, a director who fails to take reasonable steps to ensure his firm's compliance with obligations regarding client money or books and records will be guilty of a criminal offence. Such a director, however, may not be jailed unless the court believes that he or she acted wilfully.
As I mentioned earlier, accountants doing investment business will be covered by the Bill in the same way as other investment business firms, unless any investment business they do is incidental to their professional practice. Part VII of the Bill, which deals with approved professional bodies, is relevant only to this incidental business. It provides that the supervisory authority may grant approval, subject to conditions or otherwise, to a professional body of accountants to operate as an approved professional body. Such a body may then regulate its members in respect of investment business which is incidental to their professional activities. The members may then do such incidental investment business without a specific authorisation from a supervisory authority. Solicitors doing incidental investment business will not be affected by this provision. As I have already explained, such solicitors will not be treated as investment business firms for the purposes of the Bill unless the Minister for Finance prescribes otherwise.
Under section 56, professional bodies must apply to the Central Bank for approval to operate as an approved professional body and the section sets out the conditions they must meet to get such approval. Section 58 gives the bank powers to impose conditions and requirements on approved professional bodies in the interests of their orderly regulation. Provision is also made in section 61 for the revocation of approval. Except in certain purely technical circumstances, such revocation will be a matter for the High Court.
Part VIII of the Bill deals with inspections, offences and penalties. This Part of the Bill is closely based on the Stock Exchange Bill. Section 64 and section 65 deal with the powers of authorised officers appointed by supervisory authorities to inspect investment business firms. These officers will be empowered, for example, to enter premises, inspect documents and to require explanations of documents. This section also provides that a supervisory authority may require an investment business firm to supply specified information to it.
Section 66 to section 72 provide for the High Court, on the application of a supervisory authority, to appoint an inspector to investigate the affairs of an investment business firm. An inspector appointed by the court will have wide-ranging powers of investigation, including, for example, powers to examine people on oath. The High Court may publish, with or without omissions, the report of an inspector appointed by it. A court inspector's report will be sent in full to the Minister for Finance and the Minister for Enterprise and Employment, who may decide to lay it before the Houses of the Oireachtas. On receipt of an inspector's report, the court may make an order for winding up of the firm concerned or remedying damage done to any person by its conduct of its affairs.
Section 73 provides for the appointment of an inspector by a supervisory authority to investigate particular matters relating to an investment business firm, including their compliance with any requirements of this or any other Act. The bank may publish, in whole or in part, the report of an inspector appointed by it, and must forward any such report in full to the Minister for Finance and the Minister for Enterprise and Employment, who again may decide to lay it before the Oireachtas. The supervisory authority may, on foot of a report, present a petition for a firm to be wound up.
Section 74 enables a supervisory authority to set up a committee to determine whether there has been a breach by an investment business firm or professional body of conditions or requirements imposed by the supervisory authority. Such a committee will have three members, drawn from a panel of seven to be nominated by the Minister of Finance with the consent of the Minister for Enterprise and Employment. If it finds there has been a breach, the committee may issue a reprimand or require payment of up to £500,000 by the relevant firm or professional body to the supervisory authority. It should be noted that this mechanism will only apply where the firm agrees. A firm may appeal the determination of a committee to the High Court. Where an investment business firm or professional body does not want the matter settled by a committee, the supervisory authority may apply to the court to make a determination instead. Detailed provisions relating to committees appointed under section 74 are contained in the Second Schedule. Such committees offer a mechanism whereby breaches of conditions and requirements imposed by a supervisory authority can be speedily determined without the expense of a High Court hearing.
Section 75 and section 76 provide for an application for a search and seizure warrant by an authorised officer and for the admissibility of an inspector's report as evidence in civil proceedings. Section 77 and section 78 provide for legal professional privilege and for confidentiality of documents. Section 79 sets out the penalties for offences committed under the Act. The maximum penalty will be £1 million or ten years' imprisonment, or both.
Part IX of the Bill consists of section 80 only and deals with the amendment of the Companies Act, 1990, which I have described earlier. The effect will be to make the Central Bank the regulator of collective investment schemes structured as closed-ended companies.
The aim of this Bill is to ensure that the activities of investment intermediaries are made subject to appropriate regulation by the Central Bank and the Department of Enterprise and Employment and that these supervisory authorities will be equipped with the necessary powers to enable them to make regulation of intermediaries effective. Of course, no one can guarantee that there will never again be a rogue intermediary and the buyer must always beware. However, the introduction of a proper system of regulation is obviously good for investors; equally, it is also good for honest and law abiding investment intermediaries.
I commend the Bill to the Seanad and I look forward to hearing Senators' contributions. I would like to point out that a correction to the Bill is required. On page 15, line 34 to line 35, a reference is made to "the Solicitors Acts, 1954 to 1995". The correct reference should read "the Solicitors Act, 1954 to 1994". I ask the Leas-Chathaoirleach to direct the Clerk of the Seanad to make the correction under Standing Order No. 100.