I am glad to be here today to debate this important issue. I welcome the opportunity to speak on the recent developments and future challenges in the banking system.
At the time of independence in 1922 there already existed a well developed banking system carrying out business throughout the island. At that time there was also a general agreement on the need for a distinctive currency and for some authority to issue it and be responsible for its integrity. It was also accepted, however, that the new currency would have to command no less confidence than sterling which had been the currency of Ireland since 1826.
Given the upheavals of the time, the Government of the day was cautious about any innovations that might run the risk of undermining the country's trade and business stability. Accordingly, it was not until 1926 that the first moves in this direction occurred with the enactment of the Coinage Act, which authorised the Minister for Finance to issue coins of limited legal tender, and the establishment of a Commission of Inquiry into Banking and the Issue of Notes.
The commission, in its final report in January 1927, recommended the adoption of fixed parity with sterling for the new Irish currency with the issue of legal tender notes managed and controlled by a currency commission. The maintenance of the connection with sterling was based mainly on practical considerations, the principal of which was the dominant role the UK played in the new State's external trade, receiving 95 per cent of our exports and providing 80 per cent of our imports. This link was maintained for almost 50 years until March 1979 when we finally went our separate ways. The commission also considered whether a central bank should be established but concluded that this course was not recommended as an immediate expedient. The Currency Act, 1927, gave legislative effect to these proposals and in September of that year the Currency Commission was established.
In November 1934 the Minister for Finance appointed a Commission of Inquiry into Banking, Currency and Credit. Four years later that commission recommended that the Currency Commission be replaced by a central bank with enhanced powers and functions. The Government accepted this recommendation and set about preparing a Central Bank Bill which was eventually enacted in 1942.
It was not until 1971 that the Central Bank was given responsibilities for the licensing and supervision of banks. However, in the late 1980s the pace of development of the banking industry in Ireland increased sharply and the State was obliged not only to react to these developments but to provide the environment within which an efficient and effective banking industry could develop and to encourage and foster its growth. The Central Bank Act, 1989, subsequently provided for the extension of the bank's licensing and supervisory powers in respect of banking business, the introduction of a deposit protection scheme and the supervision by the Central Bank of certain institutions in the IFSC, futures and options and exchanges and moneybrokers.
Subsequent years saw considerable changes in the regulatory environment both in Europe generally and in Ireland. The remit of the Central Bank's supervisory functions was further extended to building societies, the TSB, unit trusts, ACC and ICC banks, investment intermediaries, stock exchanges, bureaux de change and payment systems.
Arising from our membership of the European Union, much of our legislation in the field of financial services derives from European Law, and reflects, inter alia, the goal of completing a single, competitive, financial services market within the Union. As a consequence, significant changes have been made to Irish law in recent years which have had the effect of liberalising the whole area of financial services at both the wholesale and retail ends of the market. These new laws reflected the changes and developments that were progressively taking place in the range and complexity of the financial products that the banks and indeed other financial institutions were offering to the public.
We have come from a situation not so long ago where the regulatory environment in the area of financial services was, at best, light to a situation where our system of financial regulation is as comprehensive and efficient as anywhere in the world.
Many of the provisions that brought about this change were introduced by way of primary legislation, which provided the opportunity for Members of both Houses of the Oireachtas to debate and discuss the issues to which all of these gave rise.
In passing, Senators may wish to note that many of the more recent EU initiatives in the area of financial services received significant impetus during the Irish Presidency of the Union in 1996, and it is to the credit of all those involved that such considerable progress was made. The Cross Border Credit Transfers Directive, which provides for the issue and settlement of cross-border credit transfers from one credit institution to another and includes a number of consumer protection measures, and the Investor Compensation Directive, which provides for investor compensation in respect of investment firms authorised under the Investment Services Directive, were both adopted following conciliation with the European Parliament at which Senator Avril Doyle presided. Significant progress was achieved on several other dossiers in the financial services field.
The base directives in relation to EU banking law are the First and Second Banking Directives. The 1992 European Communities (Licensing and Supervision of Credit Institutions) Regulations, the purpose of which was to give effect to the provisions of the Second Banking Directive, heralded the introduction of the ‘EU passport' in banking, whereby a credit institution established and licensed in any one member state may supply its services in any other part of the Union without barrier. This single development has resulted in a degree of competition and liberalisation in banking which would not otherwise have been the case. However, in Ireland, we have regarded such challenges as being accompanied by opportunities which we have done our best to exploit. I am glad to say that rather than crumble under the weight of new competition, the Irish financial services sector has reacted in a most positive manner and indeed flourished in the new environment.
The l990s have seen remarkable changes in the financial sector in Ireland, not least in the area of banking. While these banks have been around for what appears to be an age, if we look at the manner in which they have grown and expanded in the last ten years, we can see how much has changed in such a short space of time. At the end of December 1988 there were 37 holders of bank licences in Ireland with total assets of some £25 billion. At the end of 1997 there were 44 licence holders with total assets of some £125 billion. The banking sector is one of Ireland's leading employers. In 1996 total employment in the sector was 23,700 in the Republic, which represented a 20 per cent increase over 1990. In the same year, banks between them spent more than £1.3 billion in the Irish economy. Some £715 million of this went in the form of wages and related payments. Banks paid in excess of £530 million to the Exchequer over the same period through PAYE, PRSI, VAT, Corporation Profits Tax, the bank levy, and other taxes. The combined contribution of banks to the Irish economy accounted for 4 per cent of the country's GNP of £36.98 billion in 1996. Nowadays it has become commonplace to have Irish credit institutions involved in mergers and take-overs in other jurisdictions, something which would have been unthinkable not so very long ago.
So much for the past, what of the future? We are on the threshold of unprecedented change in the financial world, with the recent decision on EMU and the introduction of the euro. Where do the banks stand in this brave new world? We have seen over recent years how policies designed for EMU qualification have helped secure our exceptional economic performance.
The challenge presented to us from 1 January 1999 is to ensure the best return for the economy and for employment from our membership of the euro zone and to deliver on the Government's commitment in its Action Programme for the Millennium to share the benefits of Ireland's EMU participation among all sectors of the work force.
It will be evident that costs associated with the changeover to the euro, and their timing, will vary from company to company according to various factors, including the nature of the company's business. The situation in the case of banks will be no different, although because of the nature of their business the effects will be more immediately and directly felt. It should be borne in mind in this context that EMU should bring significant benefits to the Irish business sector as a whole. Furthermore, such benefits will be ongoing, while of their nature changeover costs will be once off.
In the case of financial institutions, there will be an ongoing loss of revenues arising from the elimination of currency transaction costs and exchange rate differentials between EMU participants. However, this ongoing loss to the financial institutions will be an ongoing gain to business as well as consumers. This should help boost business performance and in turn be of long-term benefit to financial institutions. For that matter, it is a truism to say that in business every threat is an opportunity. EMU will also bring new opportunities for the financial sector and a larger marketplace in which institutions can do business. The introduction of the euro represents a step forward in terms of new products, customers and potential and should not be viewed as merely a threat to be overcome.
Another issue facing the banking sector is the future position of the State banks. As Senators might be aware, the Government has authorised the Minister for Finance to enter into consultations with the boards, management and staff of the State banks with a view to developing detailed proposals on the future structure and ownership of the banks in a way which would recognise the interests of all stakeholders, including the taxpayer. The Minister is currently engaged in discussions with the various other stakeholders in this regard. However, at this time no final decision has been made regarding a disposal of the State's interest in the banks.
Another important issue facing all of industry, including banks, is the so-called millennium bug. I can advise Senators that a recent survey of 11 countries, including Ireland, found that while most believe that their banks will be year 2000 compliant, Ireland is among a small number of countries that actually has a year 2000 working group and that the Irish financial sector is relatively well advanced in its preparations for the new millennium. I think it is fair to say that we now have in Ireland a mature and sophisticated financial services industry, providing an ever-increasing range of services in both the retail and wholesale markets. This has been driven, above all, by the often dizzying pace of financial innovation internationally and facilitated by the contribution of the International Financial Services Centre to our financial infrastructure.
It is perhaps to state the obvious to say that retail financial services are central to the national economy in the widest sense. Their role manifests itself in two ways — in a direct way as firms which are employers of Irish people and purchasers of Irish goods and services, and in their indirect role as the major providers of capital to the business and households, and also as investors in the Irish economy.
It is in the provision of capital for small businesses and consumers that retail financial services hold a unique position and can make a visible contribution to the betterment of our people and of the economy as a whole.
In the last ten years there has been an increasing focus on the area of consumer protection, both at EU and at national level. While it is my colleague, the Tánaiste and Minister for Enterprise, Trade and Employment, who has ministerial responsibility in this area, I am sure she will have no objection to my referring to the Consumer Credit Act, 1995, which was the most obvious manifestation of this interest in Ireland. Specifically, the Act confers powers and duties on the Director for Consumer Affairs in the area of credit agreements with, among others, banks. Senators will be aware that one of the provisions of the Act was the transfer of responsibility for bank charges from the Central Bank to the Director of Consumer Affairs. Section 28 of the 1989 Central Bank Act provided a role for the Central Bank in the control of bank charges other than interest. This section was repealed by the Consumer Credit Act, 1995, which introduced, in section 149, an analogous provision giving the Director of Consumer Affairs this responsibility. Also, section 149 introduced for the first time a fee to be paid by banks when applying for an increase in existing charges or for the imposition of any new charges. The Central Bank still has a vital role to play, however, from the perspective of its functions as prudential regulator of credit institutions in relation to the protection of depositors' money.
As Senators will be aware, recent months have seen the emergence of a number of serious issues concerning the retail banking sector which have been a cause of serious concern, not only to the Government and Members of the Oireachtas but to the public at large. These include reports of a sizable number of bogus non-resident accounts in certain banks in the late 1980s and early 1990s. As far as these are concerned, Senators will appreciate that the pursuit of particular tax cases is a matter for the Revenue Commissioners, who must deal with them on a confidential basis. I can say, however, that on various occasions in the past Revenue has discovered individual cases where false non-residence declarations had been made for the purpose of evading tax on deposit interest. In all these cases, Revenue took action as regards the taxpayers involved by recovering any underpaid tax and imposing interest and penalties as appropriate. I understand that Revenue also raised the matter generally with certain institutions concerned in the early 1990s and was given assurances that steps had been taken to ensure compliance with the legislative requirements.
Before recent media reports of historic non-compliance in this area, Revenue had already commenced a review of the position generally. Its work includes an examination of ongoing controls, procedures and liabilities and, where considered necessary, involves an examination of liabilities in past years. The review covers all financial institutions and will take some time to complete.
Another instance was allegations concerning the role of a bank in facilitating certain offshore investments. In that case the Minister for Finance wrote to the Governor of the Central Bank drawing his attention to the possibility that these developments could have exchange control implications. This is being investigated by the Central Bank. In his letter the Minister also requested the Governor to make a separate report on the implications, if any, for all aspects of banking supervision. In this regard, the Governor subsequently confirmed the Central Bank's inspection, which was conducted in its capacity of supervisor, had concluded, but that he was precluded by law from revealing the findings.
The Governor also reiterated comments made in a previous letter concerning the supervisory issues arising from the McCracken tribunal whereby he advised that the Board of the Central Bank was satisfied with its legal powers which are generally adequate to enable the bank to discharge satisfactorily its statutory functions. The board keeps supervisory procedures under review and tries to ensure that these are in line with best international practice. Nothing in the Central Bank's inquiries into this latter matter had led the Governor to change any of the conclusions he reported last November.
More recently, there have been worrying allegations concerning the alleged application of charges on certain accounts over and above the standard charges which these accounts should have attracted. The Central Bank is undertaking its own investigation into these new allegations. The Minister has asked the Governor whether, following the result of the Central Bank's current investigations, he would wish to revise any of his opinions regarding the adequacy of the legal framework for supervision set out in his earlier letters on the subject. The Governor has indicated that when the Central Bank's current investigations are completed, he will write again.
Despite the fact that they predate the enactment of the Consumer Credit Act, 1995, all these allegations have resulted in an understandable public concern about certain of the activities of particular banks and about the banking industry generally. It is with this concern in mind that the Minister decided to establish a working group of representatives from the Department of Finance, the Department of the Taoiseach, the Department of Enterprise, Trade and Employment, the Central Bank, the Office of the Director of Consumer Affairs and the Office of the Attorney General, the task of which is to investigate the law and practice governing the provision of financial services in Ireland and the impact this has on consumers. In this regard, the group is undertaking an assessment of the laws relating both to the role of the Director of Consumer Affairs and to the role of the Central Bank, including the procedures used to give effect to these roles, with a view to identifying the impact of these on consumers and, in particular, to identify if there are gaps in consumer protection which need to be filled. The group has also been asked to consider what steps may be required to increase the public understanding of the regulatory systems, including the manner of their implementation. I understand the group hopes to complete its deliberations and draw up its report in the next few weeks.
I should also add, on a more general basis, that the terms of reference of the Moriarty tribunal include a remit to make whatever broad recommendations the tribunal considers necessary or expedient for enhancing the role and performance of the Central Bank as regulator of the banks and of the financial services sector generally.
Irish banking has come a long way since the early days of the State, and especially in the last decade. The State has always shown itself ready to respond to developments as they occur and to take the lead in circumstances where the need arises. I can assure Senators that this continues to be the case now and will continue to be the case in the future. I look forward to hearing the comments and views of the Senators.