The Central Bank Bill, 1996, provides for a range of new measures relating to the powers and obligations of the Central Bank. The main Acts relating to the bank are the Central Bank Acts, 1942, 1971 and 1989. The last major revision of Central Bank legislation was the 1989 Act which, as well as updating the charter of the Bank itself, considerably extended the powers of the bank to supervise banks and other financial institutions and introduced a deposit protection scheme for depositors.
The present Bill includes provisions relating to payment systems, bureaux de change and investment intermediaries as well as dealing with a number of other matters in Central Bank legislation which require updating and amendment. A limited number of amendments are included to ensure compatibility with certain defined provisions of the Treaty on European Union, which took effect with the start of the second stage of economic and monetary union on 1 January 1994.
However, the Bill does not address the legal issues arising from the move to stage 3 of economic and monetary union. Although extensive preparatory work has been done on the legislation required in connection with the move to stage 3 of economic and monetary union it would be premature to finalise it at this stage or in this Bill. Article 108 of the Treaty requires each member state to ensure that, by the date of establishment of the European System of Central Banks, the ESCB, at latest, their central bank legislation is compatible with the Treaty and the statute of the ESCB. With stage 3 of economic and monetary union commencing on 1 January 1999, this will be early 1998. It has been decided to wait until strictly necessary before legislating for stage 3 of economic and monetary union. The European Monetary Institute has been consulted and they have agreed with this approach.
Currently, the Central Bank has no role in the approval of payment systems nor a direct right of supervision and intervention. The growth of international trade, the size of daily settlements, the increased use of electronic payments and the volatility of trade flows have caused individual central banks to take steps to address the various risks arising in their own domestic payment systems, in particular the risk of default, breakdown and liquidity shortage which would have grave implications for the security and stability of the banking system.
Similar steps are now required in Ireland, particularly for large-value transactions. The current payment system, which has served well to date, is not properly equipped to respond adequately to the increasing pace of change in money transmission services. Discussions on the restructuring of the current system have been ongoing for some time and are at an advanced stage. The Government is particularly concerned to ensure that payment systems in the State are effective, efficient and open and that the systems themselves do not add to, or cause, instability in the operation of financial markets. In brief, the Central Bank will be given the power, for the first time, to approve the establishment of payment systems and vet their rules. These powers will also apply in the case of existing payment systems.
Apart from those which form part of a bank's operations, bureaux de change have been effectively outside the scope of any official supervision since the abolition of exchange controls some years ago. The need to introduce a supervisory regime at this point arises from our international commitments in the area of money laundering.
The Financial Action Task Force, FATF, of the OECD, the international body set up to combat money laundering, has strongly recommended that those countries which do not currently supervise bureaux de change should do so because of their potential use in the money laundering chain. While we are not bound to follow the views of the FATF in this matter, failure to do so would undoubtedly leave Ireland open to criticism.
The Government has, therefore, decided to include provisions in the Bill to give the Central Bank the appropriate powers of supervision. These provisions are based very closely on existing provisions relating to the supervision of money brokers — Chapter IX of the Central Bank Act, 1989 — and will require bureaux de change to be authorised by the Central Bank with the standard provisions regarding appeal to the Minister for Finance where the bank proposes either to withhold or revoke an authorisation. The degree of supervision of the operations of bureaux de change would largely be a matter for the discretion of the Central Bank under a general framework set out in the Bill.
The Investment Intermediaries Act, 1995, established the Minister for Enterprise and Employment and the Central Bank as supervisory authorities for investment business firms. The Act also provides that the Minister and the bank are the competent authorities for the purposes of the EU Investment Services Directive and Capital Adequacy Directive in relation to those firms which are subject to the Directives.
The Government, on the recommendation of the Minister of State at the Department of Enterprise and Employment with responsibility for commerce, science and technology, Deputy Rabbitte, has decided that responsibility for the regulation of those investment business firms which are currently regulated under the Minister for Enterprise and Employment should be transferred from that Minister to the Central Bank. The Central Bank will, as a result, be the sole supervisory authority for investment intermediaries and the sole competent authority for the purposes of the Investment Services Directive and the Capital Adequacy Directive.
In so deciding, the Government took into account a number of factors, including the need to take strong and decisive action to restore confidence in the investment intermediary system after the Taylor affair and earlier financial scandals; the experience to date in the implementation of the existing regulatory structure under the Investment Intermediaries Act, 1995; the fact that the regulatory regime envisaged when the original legislation was drafted was no longer feasible because of the decision by the Irish Brokers Association to cease to act as a self-regulatory body in respect of its members and the earlier decision by the Insurance Intermediary Compliance Bureau not to take a regulatory role under the Act; recommendations made to the Minister of State at the Department of Enterprise and Employment with responsibility for commerce, science and technology by the authorised officer carrying out an investigation into the circumstances surrounding the Taylor affair; the need to maximise operating efficiency and ensure consistency in the approach to legislation; and, most importantly, the expertise and resources available to the Central Bank for the regulation of financial concerns generally and investment business firms specifically.
It is essential that responsibility for regulation of these intermediaries be transferred to the bank as soon as possible to avoid the wasteful use of resources by the Department of Enterprise and Employment in establishing an interim regulatory system to take over the role envisaged for the Irish Brokers Association and the IICB. The amendments contained in Part VI are no more than the minimum amendments necessary to effect the transfer of regulatory responsibility under the Investment Intermediaries Act, 1995, from the Minister for Enterprise and Employment to the Central Bank.
The Department of Finance is carrying out a review of the Investment Intermediaries Act, 1995, in conjunction with the Departments of Enterprise and Employment and Justice and the Central Bank. That review will also take account of any recommendations made by the Select Committee on Enterprise and Economic Strategy, which, as Members of this House may be aware, is examining the system of regulation of investment intermediaries administered by the Department of Enterprise and Employment, with particular reference to the collapse of the Taylor Group. I look forward to the report of the committee.
It is envisaged that any necessary amendments to the Investment Intermediaries Act, 1995, will be incorporated in the forthcoming Investor Compensation Bill. I should add at this point that the amendments to the Investment Intermediaries Act, 1995, which are contained in Part VI of this Bill, have been the subject of consultation with the European Monetary Institute. The institute has confirmed that these amendments will not adversely affect the stability of financial institutions and are not inconsistent with the requirement for independence of central banks.
Several other matters requiring attention are also incorporated in the Bill. The extension of the supervisory and enforcement powers of the bank is proposed in order to bring them up to date with best current practices. Provision for the accountability to the Oireachtas of the bank is also included.
To save time and to spare Senators a recitation of the obvious, I propose to restrict my remarks on individual sections of the Bill to those of substance or particular interest. First, I would like to point out that Part 1 of the Bill, which is usually a routine set of provisions, actually contains a section that is of some importance, that is section 2(2). This is a section which defines "deposit". Banking business is defined essentially as the taking of deposits. There is, however, no Irish legal definition of what constitutes a deposit. As the savings market becomes more competitive, the distinction between deposits and other forms of investment is becoming more blurred and the lack of a legal definition of a deposit is causing concern. This anomaly caused particular concern during a recent successful prosecution of a finance company by the Central Bank. Section 2(2) provides for such a definition to be incorporated into Irish law.
All of Part II deals with payment systems and the manner in which the Central Bank will implement their new responsibilities in relation to the approval and regulation of payment systems. Perhaps the most interesting provision here is in section 19, which provides that once payments have been debited from a credit institution's account in the Central Bank, on the instructions of the credit institution concerned, the payment becomes final. This is to ensure that once payments have entered a payment system they cannot be revoked. Revocation of a large value payment could result in the unwinding of a number of other related payments within the system and this could have serious consequences for the system as a whole.
Part III provides for the power of the Central Bank to form or acquire a company, and in this regard section 23 provides that, subject to the consent of the Minister for Finance, the Central Bank may become a member of and/or acquire, hold or dispose of shares in a company. The functions of any subsidiary company established or acquired under the terms of this section will be restricted to those of the bank, and any guidelines or obligations applicable to the bank will also apply to such companies.
As regards Part IV, the provision which, I suppose, hits closest to home is in section 24, which provides the Governor shall attend before a Select Committee of Dáil Éireann — currently the Select Committee on Finance and General Affairs — and furnish that committee with any information requested, having due regard to the independence of the bank and subject to any restrictions imposed on the Governor under the Central Bank Acts — for example, the confidentiality provisions of section 16 of the Central Bank Act, 1989. This statutory obligation on the Governor to attend before the committee will replace the informal arrangement which is currently in place and the terms of reference of the committee must be amended accordingly.
As I mentioned earlier, Part V of the Bill deals with the supervision of bureaux de change and I suppose the only thing to be said here is that the Central Bank will have discretion on the level of supervision to be applied. The main objective here is to make sure that bureaux are not used for money laundering purposes — not that there is any suggestion that they are at present — but to bring us into line with the recommendations of the OECD's moneylaundering watchdog, the Financial Action Task Force.
As regards Part VI of the Bill, the various provisions here are purely technical — those required to ensure that the Central Bank will be the sole supervisory authority for all investment business under the terms of the Investment Intermediaries Act, 1995.
Under the heading of Miscellaneous there are a number of sections worthy of comment. Sections 50 and 51 amend the Bills of Exchange Act, 1882, and the Cheques Act, 1959, to confer legal status on cheques marked "account payee" with or without the word "only". The intentions behind these provisions are to help counteract fraud and to also ensure more speedy transfer of cheques to recipients. Section 50 also provides an indemnity to banks arising from any refusal to cash the cheque or to transfer the cheque to another in pursuance of an endorsement on the cheque to that effect.
These provisions were originally requested by the Insurance Industry Federation. The federation wished to ensure that cheques made out to policyholders and transmitted via insurance brokers, etc., must be handed on to the client and cannot be converted in any way to the use of the intermediary. They felt that such a safeguard would considerably reduce the risk of the fraudulent conversion of clients' money.
Senators may be aware that these provisions were the subject of lengthy discussions in the course of the passage of the Bill through the Dáil. Questions were raised as to difficulties which may arise for recipients who, having safely received cheques crossed in the manner prescribed in the Bill, have no bank accounts into which to put them. Following the passing of the Bill in the Dáil, representations were received from the Irish Bankers' Federation which raised, inter alia, complex issues concerning the legality of title to these cheques. I will revert to the House on this matter on Committee Stage.
Under the terms of section 54 the provisions of section 16 of the Central Bank Act, 1989, which relates to non-disclosure of information by the bank, are extended. Various amendments facilitate the disclosure of information in relation to the conveyance of statistical information to the Central Statistics Office; the disclosure by the bank of information received from another regulatory authority where that authority has given permission; the ability of the bank to request information from entities it supervises in response to requests for such information from regulatory authorities outside the State; the bank's obligations under the money laundering provisions of the Criminal Justice Act, 1994, and the conveyance of information to the European Monetary Institute in accordance with the Maastricht Treaty.
Section 56 facilitates the protection of the payments system in the event of a liquidation by requiring that the Central Bank be notified of any petition for winding up before the petition is presented. In a number of countries there exists a provision in law called the "zero-hour rule" whereby a liquidator of a defaulting bank can ask the courts to set aside all financial transactions and payments made by the bank between the time the liquidator was appointed and the previous midnight, "zero hour". Among EU authorities there is a general concern to involve the central banks at an early stage so as to limit the potential damage to payments systems of any such rulings. There is no precedent for such a ruling in Ireland but it is not precluded. The requirement that the bank be notified of any petition for winding up before the petition is presented should ensure the protection of the payments system in such cases.
Section 59 amends section 90 of the 1989 Act, which relates to the supervision by the Central Bank of firms established in the International Financial Services Centre, to allow the bank to enforce its supervision from an earlier date specified by the bank. Under the existing legislation, Central Bank supervision commences when the tax certificate is issued by the Minister. However, several firms operate in the centre in advance of receiving the certificate. This section allows the bank to enforce its supervision from an earlier date specified by the bank — for example, the date on which a firm's application to set up in the centre is accepted. The practice whereby firms are approved in principle and start operations prior to certification has become well established and the supervisory law must recognise that fact.
Sections 66 to 70 delete provisions in Irish law which conflict with Article 104 of the Treaty on European Union which prohibits monetary financing of the public sector by central banks and this is where we reach our reference, however limited, to economic and monetary union.
With regard to section 79, I have to admit that even Homer nods. This section provides for the bank and any subsidiaries of the bank to be subject to value for money audits under the Comptroller and Auditor General (Amendment) Act, 1993. In order to facilitate separate arrangements to make the bank accountable to the Select Committee on Finance and General Affairs, an order was made under section 21 of the Comptroller and Auditor General (Amendment) Act, 1993, which had the effect of excluding the bank from examination by the Committee of Public Accounts. This order had the unintended effect of removing the bank from the list of bodies subject to the value for money audit under the Act. This section provides for the bank and any of its subsidiaries to be subject to such audits.
Section 80 amends section 101 (a) of the Building Societies Act, 1989, to provide for more equitable treatment of certain joint account holders as respects voting rights and the issue of free shares in the context of future conversions of building societies. The need for this amendment arises from experience with the conversion of the Irish Permanent to a plc. There was controversy regarding a number of joint account holders who did not qualify for free shares because of the order of the names on an account or shareholding following death or marriage of a joint account holder, even though the joint account would have otherwise met the relevant qualifying criteria, in particular being a shareholder for two years.
Section 22 is a provision to allow the Minister to transpose into Irish Law the new EU Directive on Cross-Border Credit Transfers which during the Irish Presidency of the EU, I managed to steer through the tortuous conciliation procedure with the European Parliament. I commend the Bill to the House.