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Seanad Éireann debate -
Tuesday, 9 Jun 1998

Vol. 155 No. 20

Investor Compensation Bill, 1998: Committee and Remaining Stages.

Sections 1 to 3, inclusive, agreed to.
Question proposed: "That section 4 stand part of the Bill."

The bank referred to in the section is the Central Bank and it has huge reserves. Why must the functions provided for in the section be paid out of moneys provided for by the Oireachtas when the Central Bank is awash with funds and has access to surpluses it will not need in the future? Normally, the Central Bank pays for its own activities. Why is a different method adopted in this section?

If the Oireachtas passes legislation which imposes a cost on the revenue then the Oireachtas is obliged to ensure that the Exchequer makes the contribution which the costs demand. The Central Bank will have other expenses which it will fund.

Question put and agreed to.

Amendment No. 1 is in the name of Senator Costello but is being moved by Senator Henry.

I move amendment No. 1:

In page 12, subsection (3), line 6, after "matter" to insert "referred to".

Senator Costello is a stickler for grammar and he felt it was more grammatically correct to insert "referred to" in the sentence.

In deference to the generosity of spirit shown in the way the matter has been pointed out, I will accept the amendment.

Yet another small triumph for democracy.

Amendment agreed to.
Section 5, as amended, agreed to.
Question proposed: "That section 6 stand part of the Bill."

It is normal practice that regulations would be laid before the Houses of Oireachtas. However, there is a serious deficiency in the way in which the Oireachtas does its work in this regard. Regulations are laid before the Houses regularly which put into effect the generalised will of the Oireachtas by giving specific implementation to general principles. From time to time a Minister or officials, whether innocently or otherwise, may exceed what was intended when regulations are drawn up. The Houses should have a committee to examine all such regulations to ensure they are satisfactory and accord with the wishes of the Houses expressed in legislation. This has disturbed people for a very long time and, given the present elaborate committee system, this is one area where it is for the Houses to take action to see if there could be a regular scrutiny of the regulations and reporting back to the Houses. Maybe there is a committee to do this job but it certainly has not been doing it.

I welcome this procedure. Too often in the past something had to be done because an inadequacy had shown up and invariably new legislation was needed. When legislation is enacted there should be a safety valve in it by way of regulation to address small matters.

I see the difficulty Senator Manning mentioned; this should not be available to the Minister without a committee to oversee it, and I agree with that. However, we should leave the Minister some latitude in legislation. During the recent investigation into the bank scams, when we questioned the Governor of the Central Bank it appeared that he was precluded by law from answering practically all questions which we believed were matters of public concern at the time. I felt there should have been an opportunity for a Minister to say he or she could sign a regulation forcing the Governor to report on a matter, although that might not have been appropriate in the case of the Governor of the Central Bank. However, providing such opportunities in legislation could be beneficial when addressing matters which had not been considered when the legislation was passed. I agree with Senator Manning that a committee could oversee regulations laid before the House.

This issue comes up time and again in legislation and when we deal with regulations. A Bill allows a certain amount of time for things to be altered to cope with changing circumstances, and this is done by regulation. It is good that we do not need to pass legislation every time we need to address an issue germane to a Bill. Nobody objects to the regulations and schedules dealing with matters that need to be changed by order of the Minister.

There are two ways that regulations can be passed: one is the positive, affirmative method where a regulation is brought before the House, agreed and it then becomes operational. There is also the negative method, as can be seen in this section, that is, the Minister signs an order which comes into effect immediately. However, if either House feels that is unacceptable, it can, within 21 sitting days, annul that regulation and reverse it. This is good. However this section states: ". without prejudice to the validity of anything previously done thereunder .", in other words, for the 21 sitting days — which could be two months if the Houses are not sitting — the regulation would be implemented and would be the law of the land and anything happening in that time would not be reversed by a later reversal of the regulation. Although I can see the case for this sometimes, I have never got a proper answer from parliamentary draftsmen on why they pick one way rather than another. There is no urgency in the matters we are dealing with which could not be dealt with by bringing them before the House. Why do they have to be done in this particular fashion?

Regulations become law almost before anyone knows about them. In other words, they are put before the House and become law one day and we know nothing about them until we read about them on the next day's Order Paper. For example, the order laid before the House on today's Order Paper is the Cod (Restriction on Fishing) (No. 5) Order, 1998. That phrase is meaningless codswallop unless it is explained to people. There is an element of a lack of transparency here, which is not a reflection on the Minister or his draftsmen. It should be the exception rather than the rule but it has become the rule in too many Departments.

There is a great deal of merit in what all speakers said. Senator Manning was making the point that regulations are sometimes made before Members are aware of them and that it is then too late for them to seek to annul them. However, regulations are the secondary legislation. The primary or macro legislation is the Bill, which becomes the Act once it is signed by the President and becomes operational when it is signed by the relevant Minister or Minister of State. Many Bills, including this one, are made under EU directives.

Regulations receive the same treatment from the Attorney General's Office and the parliamentary draftsman as does the primary legislation. The only difference is that regulations do not get the same treatment by the Legislature itself because the Oireachtas is not involved in the day to day creation of regulations, which is a matter for the Minister and his or her Department, the Attorney General and the parliamentary draftsman.

However, as someone who has served in different Departments, I have not yet met a Minister who does not take very seriously the fact that he or she must sign his or her name at the bottom of regulations. They ensure they are absolutely certain of the effect of regulations before they sign them. Members can be certain that while these regulations are secondary legislation, they have the same effect in law and get the same respect from the courts as primary legislation does. It is a matter for the courts to interpret regulations.

Senator O'Toole made the point that under the Bill the regulations shall be annulled "without prejudice to the validity of anything previously done thereunder". My interpretation of that situation is that once the legislation is passed, signed by the President and signed into operation by the Minister, decisions will be taken under the Act. It usually takes up to a year to finetune regulations which will be appended to the primary legislation. The phrase in the Bill which states it will be done "without prejudice to the validity of anything previously done" takes account of decisions taken while the regulations are being created but before they are ultimately signed into law and take legal effect. The phrase is intended to cover the valley period between the signing into operation of the Bill and the signing into law of the regulations. I hope that helps the House.

I do not wish to gainsay a word the Minister said and I do not disagree with him. He has spoken very comprehensively and eloquently from the point of view of the Executive. I am sure everything he said about the way in which regulations are devised, scrutinised and treated and the motives of those devising them are as he said.

However, we are speaking here from a different perspective. One of the jobs of Parliament is to keep an eye on the Executive. Legislation owes its authority to the Houses of the Oireachtas. I am not pointing out a deficiency on the side of the Minister or his Department or their procedures, but a very serious deficiency on the part of the Oireachtas. We do not have a scrutinising function. If we are truthful, very few of us ever look at regulations in detail. We do not have time to do so for the most part and, as Senator O'Toole pointed out, the language used in regulations makes it very difficult for most laypeople to understand what they involve.

There is now, more than ever before, a need for some sort of expert advice to be made available to Members of both Houses or to a special committee to enable the Houses to scrutinise regulations as they are made. This would act as an early warning device and would ensure we were doing our job properly. There has never been an Executive in history which did not believe that it knew best and which on occasion was capable of going further than originally intended. I accept that the Executive acts in the interests of good government and the common good, but it is capable, through regulation or statutory instrument, of going that little bit further. It is our job to ensure that this does not happen. I do not say that in bad faith, I am merely highlighting a deficiency which should be addressed during any serious discussion on parliamentary reform.

I wish to provide the Minister of State with a practical example of problems which arise in respect of regulations that do not come before the Houses of Parliament. On a previous occasion I brought to the attention of the House a problem which has arisen because of statutory regulations passed by the British Parliament, where people with post-graduate degrees from the Irish Colleges of Physicians and Surgeons, respectively, were excluded from having their names included on a specialist register by the specialist training authority in the United Kingdom. When Members of Parliament discovered that this was the original intention of the regulations, they were horrified and a number of individuals serving on the British-Irish Interparliamentary Body, such as Kevin McNamara and Robert Jackson, have taken the matter up on my behalf.

Regulations can sometimes have a devastating effect. For example, the matter to which I referred affects strands two and three of the new British-Irish Agreement. Senator Manning made a good point when he stated that regulations may be carefully considered by Ministers. However, I am informed by a number of British Ministers that Treasury solicitors encouraged them to introduce the regulations to which I referred. Regulations which are not given due consideration can have a profound effect. The Minister of State recognised the merit of the points raised by Senator Manning when he stated that regulations should be given careful consideration because they can have long-term effects.

I agree with the Senators' comments. However, regulations can only do what they are allowed to do by primary legislation and such legislation can only be made by Members of Dáil and Seanad Éireann. Regulations involve administrative issues, they have nothing to do with policy. All regulations must be cleared by the Office of the Attorney General which is conscious of the limitations on power to make regulation because it recognises that only the Oireachtas can make the law.

I have been a Member of the Oireachtas for 16 years and there is no doubt that a raft of regulations are passed each year. Members of the Oireachtas are very busy and they cannot be up to speed with every regulation passed. Consequently, there is merit in Senator Manning's suggestion that a committee should be established to examine regulations and, if necessary, make recommendations in respect of acceptance, rejection, amendment or otherwise. However, we are entering the era of information technology and we will be more up to speed in the future because information will become available more rapidly than in the past. I hope that will go some way towards filling the vacuum highlighted by Senator Manning.

The Minister of State indicated that regulation is really a question of administration. Frequently, however, there is no clear dividing line between administration and policy. It is the responsibility of the administration to administer policy and there may be different interpretations regarding how such policy takes administrative shape. I will not belabour the point, however, because it is accepted by all sides of the House. This matter is not the responsibility of the Minister of State, it is the responsibility of the Houses.

The Minister of State indicated that Ministers are very careful about the documentation to which they sign their names. I have no doubt that is the case. However, I am always suspicious of lengthy regulations. I recently had discussions with a member of the Government about a particular regulation which was signed while that person was serving as a Minister in a previous Administration. We discussed at length two paragraphs on page seven of a 16 page statutory instrument which appeared to have a certain effect but which went far beyond the intent of the primary legislation. We agreed he could not have known what he signed at that stage. It was never explained to him and it should have been.

In support of Senator Manning's point there is a watchdog element to the job of parliamentarians. The regulations covered in the Bill could have been circulated by e-mail to every Member of the Oireachtas. This could also apply to the regulation on cod fishing on today's Order Paper and it would allow us to get the views of interested parties. Similarly, it would be of great support to a Minister because when people are busy they do not have time to read regulations thoroughly. We sign documents daily without reading them because there is an element of trust. The Minister, when wearing his science and technology hat, might put forward that information technology be used to have regulations circulated to all Members.

There is great merit in Senator O'Toole's remarks and if I am left in office long enough, I might come forward with good proposals.

The Minister still has four years.

Question put and agreed to.
Question proposed: "That section 7 stand part of the Bill."

Senator Costello is opposed to this section.

Senator Costello's opposition is based on the fact the sections to be repealed are those which placed obligations on insurance agents, stockbrokers and investment intermediaries to hold additional bonds. His view is this is an extra precaution and a bonus which would provide a way for people to have security over moneys they invested with these people as well as the bond under which the company would operate under this Bill. As I said on Second Stage, the amount of compensation is £15,000, which is not a huge sum. There may be a feeling among investors that more of their money is secured than is the case. I referred to an individual who having sold a house invested the money with someone who departed the country rapidly and he lost the money with which he intended buying another smaller home. The reason behind the Senator's desire to delete this section is that there would be yet another bond under which such people would be liable.

I feel strongly about this. It is utterly unnecessary to repeal legislation which requires individuals to have a further bond which is a protection to the investor. Perhaps I am looking for a belt and braces proposal, but nobody will thank us for taking away a protection. I have not read the primary legislation in detail and assume that the reference to a bond is that under other legislation a person was required to have a bond so that if someone invested with him or her and he or she went out of business, the person would then be covered. The Insurance Act, 1989, the Stock Exchange Act, 1995, and the Investment Intermediaries Act, 1995, impose an obligation to hold a bond. That is good, and even nowadays people booking summer holidays feel more comfortable if the travel agent is bonded. To be able to describe somebody as bonded gives an element of assurance, confidence and a real element of insurance.

We can live without this proposal. There is no need to repeal these sections as they do not interfere with the Bill in any way. In the words of Macbeth, this is just "making assurance doubly sure". Will the Minister delete this section and allow the other legislation to stand? More people nowadays are investing money in areas covered laudably by the Minister in the Bill and the fact they can invest with an individual who is bonded, etc., provides great assurance, support and defence. It is a safety net, which should not be removed. I ask the Minister of State to retain the relevant section of these three Acts and not press for the inclusion of this section.

Section 7 repeals a number of investor protection measures in the Insurance Act, 1989, the Stock Exchange Act, 1995, and the Investment Intermediaries Act, 1995. These sections are being repealed because the system of investor compensation proposed in this Bill supersedes the measures in these Acts. The provisions which are to be repealed break into three groups. The first deals with bonds. Under the Insurance Act, 1989, insurance intermediaries must hold a bond for £25,000 or 25 per cent of life business turnover where they handle cash. Under the Investment Intermediaries Act, 1995, investment business firms must hold a bond for £50,000 or 25 per cent of turnover.

The second group covers product producer responsibility for money given to an intermediary for transmission to a product producer. This is addressed in section 28(4) of the Investment Intermediaries Act, which has not been commenced on foot of undertakings given in this House during the passage of that Act. The third group is concerned with the provisions of the Stock Exchange Act, 1995, and the Investment Intermediaries Act, 1995, which ensures that investors must be informed about any investor compensation scheme of which the intermediary is a member.

Bonding was introduced in the Investment Intermediaries Act as an interim form of investor protection pending the introduction of the Investor Compensation Bill. Bonding is an imperfect form of investor protection because it cannot guarantee a specific level of compensation and because it relies on the honesty of the intermediary to have a bond in place for the appropriate amount. In addition, the costs of administration of a bond are the first charge on the bond and can significantly reduce the payout to claimants.

There are arguments for bonding. One is that it provides a form of third party scrutiny and that unsatisfactory intermediaries would be unable to obtain a bond, thus helping to weed out undesirable elements. However, against this is the likelihood that bonds would be issued automatically to authorised entities and that bonders may not see a need for due diligence on applications for bonding because it is an insurance product and the bonders primary concern is to ensure that the cost of bonds is greater than the value of bonds called down. On balance, therefore, the Government has decided that the bonding provision in the Investment Intermediaries Act, 1995, and the Insurance Act, 1989, should be repealed.

Turning to the question of product producer responsibility under the Investment Intermediaries Act, 1995, section 28(4) provides that a product producer who gives a written appointment to an intermediary will be responsible for any money given to the intermediary by a client for transmission to the producer. However, as members of the House may be aware, the subsection has never been commenced. The late Deputy Hugh Coveney, when he was Minister of State at the Department of Finance, explained to the House during the passage of the Investment Intermediaries Act, 1995, that, because of difficulties with the provision which had been identified by the investment industry, the subsection would not be commenced pending examination of the issues raised in the context of drafting this Bill.

In effect, section 28(4) of the Investment Intermediaries Act is now being replaced by section 36 of this Bill. Section 36 provides that product producers, including insurance companies, will be responsible for the compensation payable under the Act to investors who lose money through the default of a restricted intermediary where money was given to the intermediary for transmission to an identifiable product producer from whom the intermediary held a written appointment. I believe this represents an appropriate participation by product producers in investment compensation.

The last of the sections to be repealed by section 7 are section 51 of the Stock Exchange Act and section 50 of the Investment Intermediaries Act. These sections require Stock Exchange member firms and investment business firms to inform investors about any compensation scheme of which they are a member. The sections have, in effect, been replaced by section 38 of this Bill which allows the Central Bank to prescribe the information investors must be given and to limit the use in advertising of membership of a compensation scheme. This approach will allow greater control over the important issues of informing clients of compensation cover and the use and abuse of investor compensation in advertising. I hope this puts the matter in context for Senators.

I have heard the Minister of State but I do not know how clearly I understand him. While I understand the provision regarding the Stock Exchange Act I do not see why the bonds would not be of some value. It is sad that bonders would not try to execute the duties placed on them. I was unaware that, under the Investment Intermediaries Act, product producers, who include major financial institutions with plenty of money, do not have to take greater cognisance of the integrity of those who have written appointments from them. This means they effectively have no responsibility financially for these people. While the provisions regarding the Stock Exchange Act are the most easily explained, I still do not see why it is not a good idea to retain these sections of these Acts, especially those connected with the Insurance Act and the Investment Intermediaries Act.

Is this not a way out for some of those who require bonding? Will they not be presented with an opt-out with regard to the fund to be established under this legislation?

We all want to achieve the same goal but perhaps we are confusing each other with our different approaches. There is a major problem in ensuring that bonding is in place, in cashing them and with the first call on them, which is the administrative cost of executing them, leaving little or nothing at times with the victim who made the initial investment. We are creating a new structure and a new system of compensation whereby the investment firms will create the initial funds and where the product producers will pay retrospectively for the claims made against that fund.

The purpose of the EU directive, which was created by Ireland in 1996 when we held the EU Presidency, is to ensure that everybody knows the position, conforms to the law, are part of this new system and cannot claim two clients. At present, some advertise their product on the basis that they are a bonded company, yet their bond only provides that a certain amount of money is available but only after everybody else is paid. In such circumstances, the client is still the victim and can be left at the bottom of the pile.

We want to streamline matters. My predecessor, the late Hugh Coveney, pointed out the complications in this House and the Dáil. Both Houses accept the position. We are now regularising and streamlining matters to ensure that for the future everybody will know the position and compensation will be in place.

While he has made a good argument in favour of the provisions in the Bill, to which nobody objects, the Minister of State has done nothing to favour the argument for the elimination of bonds. He says that the administration costs would leave nothing in the bond to pay the person at a loss. This is a weak argument and a worrying claim to make. We fought hard for the enactment of legislation in 1989, introduced by Deputy Reynolds when he was Minister for Finance, which has enabled us to advise people buying insurance that bonding provided them with security. There was a long discussion on the question of agents and others selling insurance products and the kind of bonding that was required to protect them. Yet, the Minister of State now appears to suggest such bonding does not protect purchasers. I never previously considered the arguments put forward by the Minister in terms of knowing whether a person is bonded. Is it the case that some people who are selling insurance are not bonded, although the legislation requires them to be bonded?

The Minister said that under section 36 the product producer must be subrogated to the company. How does that process begin? What are the restrictions if a producer from a company in the Bahamas wants to sell a product in Ireland or somebody in Ireland buys it? How does one know where the cover lies? I understood that if a person bought an insurance product, the seller was bonded and the bond itself was a filtering process which ensured that the seller was trustworthy. If a person wants to buy a financial product, the idea was that they would know that the individual with whom they are dealing had to undergo a process to secure a bond and that the individual would not have received it unless an insurance company deemed them trustworthy enough to have cover. There are at least three levels of security in that regard for a person who wants to buy a retail product.

The Minister has not made any argument for the elimination of bonds. He made arguments in favour of the Bill's provisions, but nothing regarding bonds interferes with the legislation. Why should it worry the Minister if it gives security to people that individuals must be bonded and also covered by the Bill's provisions? Will the Minister explain how a person can get away with not being bonded but cannot get away with noncompliance with the proposals in the Bill?

Senator O'Toole made a strong case. However, he attributed to me a number of comments which I did not make — for example, that a bond did not give any cover. I did not say that, rather that bonds gave diminished or reduced cover and, ultimately, the victim could only get what was left when the bond was cashed and the administrative costs and other first charges were removed. Bonding is an imperfect form of investor protection. The only people under the Investment Intermediaries Act who must have bonding are those who handle cash. However, people who sell other insurance products which do not entail cash do not have to be bonded.

Section 47 of the Insurance Act, 1989, states:

If at any time in the first accounting year the aggregate of moneys lodged by an insurance intermediary to the separate bank accounts required under section 48 exceeds £25,000, the intermediary shall effect a bond in a specified form as respects his insurance business to the value of £25,000 in respect of the remainder of the first accounting year.

If the amount does not exceed £25,000 the intermediary is not obliged to have a bond. However, if intermediaries handle cash above that amount, they must have a bond. The Act continues:

Subject to subsection (4), an insurance intermediary shall hold a bond in a specified form as respects his non-life insurance business to the value of £25,000 and as respects his life assurance business to the value of £25,000 or 25 per cent of life assurance turnover, whichever is the greater by reference to the previous accounting year.

Unless a certain figure is reached or the intermediary is performing in a certain area, the bonds are unnecessary. Bonds are an imperfect form of protection which offer no guarantees.

The Bill streamlines the position so that all companies involved are covered. A fund will be created for investment firms and the product producers will pay retrospectively for claims that are made. This will ensure that everybody knows where they stand and there can be no excuses in the future that compensation will not be available to people who made investments in good faith. Ultimately, the system will ensure compensation is available to them because heretofore there was little or none.

I am becoming more confused. I do not understand the Minister's reference to cash. The legislation states that a person must have a bond in the amount of 25 per cent of the turnover of life and non-life insurance business. I do not understand the reference to cash.

A bond is necessary if the amount exceeds £25,000.

The Minister did not explain how leaving that in place interferes with the provisions of this Bill. I would be concerned if it interfered with the Bill, but there is no argument in favour of removing bonding. I would be uncomfortable if I did not take a strong line on this matter because we must ensure that the best possible cover is available to people. The Minister has not put forward any argument which convinces me that bonding should be removed.

This matter was debated on Second Stage. It has been pointed out that the bonding system does not offer much, if any, protection in some circumstances and people could be under false impressions with regard to bonds. The Bill will ensure that for the first time small investors will be protected. The legislation implements an EU directive, but it also gives small investors real protection for the first time.

Investors suffered more losses than gains under the bonding system. In many cases there was nothing left for them after all the other charges had been discharged. In addition, operators do not require bonds unless they are dealing with cash. These aspects were not known to the public and the Bill is a progressive step. It implements an EU directive but it also provides protection for the first time to small investors. This should be welcomed and section 7 is a large element of the overall protection for small investors.

I cannot find anything in the directive which requires the abolition of bonds. It states that every credit institution must also be required to belong to an investor compensation scheme to cover its compensation business. The directive reflects the fact that there may be a double form of compensation. It states that it may be difficult to distinguish between deposits covered by various directives and money held in connection with investment businesses and member states should be allowed to determine which directive should apply.

There is no case whatsoever for getting rid of bonds. Such a move is unnecessary. They do not interfere with the Bill and the measure should stand. If it falls by default in the future, the Minister can come back to the House. It is not necessary to get rid of bonds. They do not hinder the Minister or go against either the spirit or letter of the EU Directive 97/9/EC. I ask the Minister to retain them.

Will the Bill allow cowboys to set up in business without bonds? Does the section mean that if they go out of business, the compensation fund will take over?

No. The purpose of the Bill is to eliminate cowboys.

That is what I hoped.

The purpose of the legislation is to streamline investor protection and to ensure there is a single and transparent port of call from which people can get compensation if required. The Bill puts an onus on the investment firms to create the initial fund and the product producers to pay retrospectively for compensation claims. The legislation will be difficult for those operators but it will ensure that recompense and protection is available to people who make genuine investments.

If bonding is imposed in addition to compensation on investment firms, eventually the investors will have to fund two forms of investment protection, because investment firms will charge some if not all costs of the protection to the investor. They may offset some of the costs against profits but they will definitely charge investors, and if there is also a bond the investors will be charged twice. That means the incentive for the investor will be minimised and opportunities reduced. Our objective is a straightforward system of compensation which will work. We do not want cumbersome impediments placed in the way of compensation, which is why we are eliminating bonding.

As I said at the outset, the answer to Senator Burke's question is no. Investment firms must be authorised and must be members of a compensation scheme. There will be no room for cowboys because they will not last long in either the compensation scheme or the business — they will be eliminated quickly by the Central Bank.

I am not happy with the provision but perhaps the Minister could respond to this query. Article 2 of the directive states that a member state may exempt a credit institution to which the directive applies from the obligation to belong to an investor compensation scheme where that institution is already exempt under Article 3 of directive 94/19 from the obligation to belong to a deposit guarantee scheme, provided that the protection information given to depositors is also given to investors on the same terms. There are, therefore, groups who could be exempt from the Minister's scheme but I am not aware that anyone was exempt from bonding under the previous scheme. This is another good reason for covering this loophole in the directive. The Minister should think again on this issue and perhaps come back on Report Stage. There is a lot of protection for small investors and I would be most uncomfortable about taking away their safety nets.

Senator O'Toole mentioned the directive which has been agreed by member states and which allowed them certain options. Ireland has chosen not to exercise this particular technical option, which is open to banks in certain member states. It is a matter for those banks and member states to decide whether they are exercising those options. Our purpose is to ensure a strong, solid, adequate compensatory mechanism is in place, without confusion or impediments, so that people know where they stand. The Central Bank will oversee this and ensure there are no remissions and that those who perform will contribute to the fund. The investor will not be asked to make part of his contribution available for a charge of any other type, whether bonding or otherwise, so that we will know where we stand. This will ensure that the maximum return on investment is given and the maximum compensation, as far as possible, will be rapidly given when a problem arises.

Question put.
The Committee divided: Tá, 24; Níl, 9.

  • Bohan, Eddie.
  • Callanan, Peter.
  • Cassidy, Donie.
  • Chambers, Frank.
  • Cox, Margaret.
  • Dardis, John.
  • Finneran, Michael.
  • Fitzgerald, Liam.
  • Fitzgerald, Tom.
  • Fitzpatrick, Dermot.
  • Gibbons, Jim.
  • Glynn, Camillus.
  • Keogh, Helen.
  • Kett, Tony.
  • Kiely, Daniel.
  • Kiely, Rory.
  • Lanigan, Mick.
  • Leonard, Ann.
  • McGowan, Patrick.
  • Mooney, Paschal.
  • Moylan, Pat.
  • O'Brien, Francis.
  • Ó Murchú, Labhrás.
  • Ormonde, Ann.


  • Burke, Paddy.
  • Cosgrave, Liam T.
  • Doyle, Joe.
  • Henry, Mary.
  • Manning, Maurice.
  • Norris, David.
  • O'Toole, Joe.
  • Quinn, Feargal.
  • Ridge, Thére se.
Tellers: Tá, Senators T. Fitzgerald and Keogh; Níl, Senators Norris and O'Toole.
Question declared carried.
Sections 8 to 11, inclusive, agreed to.

I move amendment No. 2:

In page 14, subsection (1), between lines 17 and 18, to insert the following paragraph:

"(a) to develop and implement policies relating to the protection of consumers of financial services generally,".

This amendment seeks to expand the scope of the Bill. I hope the Minister understands that it is for the benefit of consumers in that the company will be obliged to give them better information. The more I thought about the discussion on the previous amendment, the more I realised its importance. Consumers are not well informed about the various policies of the major financial institutions. The company could include this area in its brief without too much trouble.

I support the amendment. It may be that the Minister will have difficulty including it but he might at least use the Bill to suggest areas of concern to the public. I support this amendment because it seeks to "develop and implement policies relating to the protection of consumers of financial services generally" rather than just stock market investment.

Many people invest in life insurance policies but there are a number of issues with which the public is not generally acquainted. There are questions regarding disability pensions, for example, which are paid out as a result of investment by individual employees and their employers, and the extremely high handed arbitrary fashion in which insurance companies deal with these persons. I have a case in point but modesty prevents me from drawing the Minister's attention to the difficulties I am experiencing. One of my colleagues was on a disability pension, like myself. This person had nervous difficulties and had just emerged from a mental hospital when she was confronted with a demand that she explain the situation to the insurance company. That unmediated direct intervention in an unsympathetic way promptly sent her back to where she came from. Such cases regarding insurance companies could be multiplied now.

Although this is only remotely connected, if at all, with this Bill, it is worth while drawing the Minister's attention to the fact that there are people who, in one sense at least, can be said to invest in companies, that is, life insurance and other companies, who get a raw deal and are vulnerable and whose rights may be trampled upon by the heavy handed action of insurance companies. This is not the first time I have had to raise this issue in the House. I remember raising this matter when AIDS first emerged and when the insurance companies were behaving in a most irresponsible way in making certain demands upon sections of their market and embarking on policies which were directly inimicable to the health of the country. A colleague from the same party as the Minister, who was in Government at that time, raised this matter with the insurance companies.

Anything which gives members of the public greater protection, rights, access to information and supports them when, as individuals, they find themselves in a situation where they must take on the might and the financial resources of these large and powerful institutions is to be welcomed. I am happy to support this amendment.

Perhaps the Minister could clarify if legislation will be introduced to deal with the insurance industry in particular. It is about time we had a review of this area and that we looked at insurance companies and the way they treat their clients, particularly in light of recent problems. I received a circular recently from my insurance company. I laughed because I am having difficulties with it, yet it has the cheek to send me a circular stating that it has made another £180 million profit. Perhaps the Minister could indicate if we will have an examination of insurance companies and their activities even if this is not directly contemplated by the Bill.

I support this useful and positive amendment. We should realise that we are at the stage in our national development where people who would not have invested in the past are investing money they got from gratuities or from selling their house. One of the main purposes of the legislation is to act as a watchdog and as an educator on behalf of the people. Insurance companies and big financial institutions can always afford the best advice possible. Advertising is at times misleading. There may be occasions when this new company finds that the public needs to be warned about certain practices of which it does not approve but which are not illegal or there may be a case for wider dissemination of information among the public. This amendment will give a proactive role to the new company. I urge the Minister to accept it because it will do no harm and it may do some good.

I support this amendment. Senator Manning mentioned the word "proactive". This amendment should be accepted unless there is a valid reason for not doing so. It does exactly what every Bill should do. It seeks to "develop and implement policies relating to the protection of consumers of financial services generally". That should be included in every Bill which sets up a company such as this one. I cannot see any reason why the Minister should not accept this amendment. It would be a proactive approach rather than leaving it in the hope that someone else will do something about it. It is important to be proactive in this area.

There is merit in what the Senators have said and I appreciate the fact they are focusing on these points. I appreciate their concerns which prompted this proposed amendment.

The issues it raises go far beyond the compass of this Bill and the purpose of the Investor Compensation Company. This Bill deals with investor compensation. It derives from a European directive on that subject, although in terms of its coverage, it goes much further than the directive. The purpose of the company to which the amendment refers is to administer the system of compensation and that is all. The Bill has been drafted to that end.

As Senators are doubtless aware, the task of protecting the interests of consumers, including consumers of financial services, has been entrusted to the Director of Consumer Affairs under the terms of legislation sponsored by the Minister for Enterprise, Trade and Employment and the Department. I am sure there is no criticism of the Director's role implied in the amendment. Last week during the Second Stage debate the Director was the subject of fulsome praise from both sides of the House. I have no reason to believe that responsibility for any element of consumer protection should be taken from the Director and conferred on a body whose sole purpose is to administer a scheme of compensation. For the first time there will be strong consumer representation on the board of the new company. People will be surprised at how strong it will be.

The Senators' concerns may also have been prompted by recent allegations of malpractice in the banking sector. As the Minister of State at the Department of Finance, Deputy Cullen, reminded Senators last week, the Minister for Finance has set up a working group which is examining the area of banks and the consumer with special emphasis on the roles, law and practice of both the Central Bank and the Director of Consumer Affairs. In order to ensure to the greatest possible extent that there is no repeat of these practices, the Director is a member of this group, which is chaired by an officer of the Department of Finance and on which the Central Bank is also represented. It is in this context that the Senators' concerns would be best addressed.

Senator Norris asked about proposed legislation for the insurance industry. Since my appointment in October, I have been working assiduously on the creation of new regulations for transparency within the insurance industry. I hope these regulations will be brought into being later this year. Perhaps we could debate them in this House, if that is the desire of the House, at that time. We will also probably be proceeding with other legislation pertaining to the transfer of responsibility to the Central Bank for the management of the insurance intermediary body, so I hope there will be a number of opportunities in the year ahead for further discussions on the insurance industry.

I want to make it clear that what is proposed in this amendment is in conflict with the Bill. The Bill is to create an investor company which will administer compensation for the victims of somebody who makes investments in this country in the future. We cannot create responsibility in the Bill which is already attaching to the Director of Consumer Affairs. The House would not want that to happen. Consequently, I regret that I must reject this amendment.

Amendment, by leave, withdrawn.
Section 12 agreed to.
Sections 13 to 18, inclusive, agreed to.
Question proposed: "That section 19 stand part of the Bill."

When the company is put in place and the fund is being put in place, will the cost of insurance increase to the ordinary investor? Will another slice be taken out of the ordinary investor's money to cover this or must the banks, the institutions and the investment bodies pay from their profits? From where will the money come for this fund?

Returning to what Senator Manning said earlier about the point at which we have arrived in Ireland and the fact that there is strong macro-economic growth at present, I think there will be much investment in the future. We are confident that, over the next five years in particular and into the next decade, there will be solid investment growth, an increase in the standard of living and an opportunity to invest. Within the magnitude of that investment, there will be an opportunity for the insurance companies to provide the products in the competitive marketplace for investment. Of course there will be some charge within those products for compensation, but under the new regulations which I propose to introduce it will be a matter for the insurance companies to outline clearly the exact deductions to be made from the investment which they are accepting on behalf of a client. I hope that by doing so we will be able to ensure that there is a balance in the charges which will be made and that any increases as a result of this Bill will be modest on the consumer investor.

Question put and agreed to.
Section 20 agreed to.
Question proposed: "That section 21 stand part of the Bill."

Section 21 deals with contributions, which are required under certain conditions, which attach to the company and the ability of the Bill and the regulatory body, which would be the Central Bank, to impose them. How can the Central Bank get those contributions in the event of default?

The reason I ask this is that when we discussed the licensing of the clearing banks I asked the Governor of the Central Bank in what circumstances could a licence be revoked. He failed to outline in exact terms or the circumstances in which a licence would be revoked even though it had become public knowledge at the time that there was a breach, the extent of which still needed to be established, of what the public would expect to be the terms of a bank's licence where the bank stole money from people's accounts. Banks set up accounts to evade tax also.

In section 21 there is an onus on investment companies to pay a contribution and, under the Bill, conditions and interest penalties may be imposed on those companies in the event that the contributions are not paid. How watertight is this? Is this an aspiration or is there a definite set of procedures in the Bill whereby the governing body — the Central Bank — can remove a company from the register of investment firms in the event of the company not complying with the conditions? Will the Minister outline the exact position regarding the ability of the Central Bank to impose the ultimate sanction, if necessary, in the event of companies not paying their contributions? Is it just a case of taking the companies to court at some stage and placing small restrictions on them? Is there a procedure available to the Central Bank in the event of a company defaulting?

Yes. There is a complete difference between the clearing banks and investment intermediaries, and of course the Central Bank is the governing authority pertaining to all banking institutions. The magnitude of the liquidity and reserves in the clearing banks would be much greater, of course, because there are only six banks in the clearing process while there would be hundreds of investment intermediaries and the volume which they would be handling would be much smaller.

The answer to the questions raised by Senator Finneran is yes. I refer him to section 27, which outlines the situation pertaining to failure by investment firms to comply with their obligations. The company must set its contributions after consulting the Central Bank. If an intermediary does not pay his or her contributions, he or she will lose his or her authorisation. If he or she is an insurance intermediary, he or she will not be able to do business with insurance companies under sections 27 and 28. The final sanction will be with the Central Bank, which will have no difficulty revoking a licence or an authority to proceed. Once the bank takes the necessary action, no business will be done with that company. Therefore, the Central Bank has the final sanction and will have absolute power to implement. It will have full authority. It will be able to insist on absolute performance.

Question put and agreed to.
Sections 22 to 29, inclusive, agreed to.

I move amendment No. 3:

In page 23, subsection (1), line 50, to delete "20,000" and substitute "80,000".

I have said before that this is a very small amount. I know these are said to be small investors, but £15,000 is not a huge sum when one considers that small investors may have £50,000 or £100,000 invested, not that I have but I gather there are people in Ireland with a great deal of money to invest both at home and abroad. Could we not do something to increase this figure? This is the lowest level outlined in the directive. I realise there must be some limit, but 20,000 ECUs is a very low level. I would be glad if the Minister could see his way to increasing it a little. I worry that people will think they are well protected under this scheme and may be amazed to find out that they are only protected to the extent of about £15,000. I hope the French Finance Minister was not correct when, at the meeting of Finance Ministers, he warned about Ireland having problems with inflation in the not too distant future.

The question of the level of compensation provided for in the Bill was addressed at some length by the Minister of State, Deputy Cullen, in his Second Stage reply last week. The Bill provides for a figure of 20,000 ECU, which is about £15,000 as opposed to the 80,000 ECU figure proposed in the amendment. The figure in the Bill is that mentioned in the EU directive which has given rise to this Bill, although I accept that the directive permits a higher figure.

This Bill is designed to provide compensation for the small investor. Experience with investor compensation abroad suggests that the figure included in the Bill would cover the likely claims of a large proportion of investors. I accept that not everyone with, say, £50,000 to invest is rich, although they would be richer than I. There could be many reasons for someone being in that position. As the Minister of State, Deputy Cullen, said on Second Stage, we are trying to strike a balance. There must be an element of caveat emptor, let the buyer beware. The fact that compenstion is available should not induce a false sense of security in the small investor. There will always be a risk of loss of an investment. It is important to point out that, in terms of coverage, the Bill goes beyond what is required by the directive. It covers all investment services and life and non-life insurance business. In considering the level of compensation we must also take into account the likely impact this will have on the feasability of the compensation scheme — whether it will actually work.

As was indicated by the Minister of State on Second Stage, the Exchequer should not be brought into this equation. It would be wrong for taxpayers to have to subsidise the losses of investors. The amount of compensation payable will obviously have an impact on the potential of the scheme to operate effectively. If unrealistic levels of compensation are set and the funds, which will have to be financed by the industry, are called on to provide that unrealistic level of compensation, the whole system could collapse. Not only that, but if the funds are unable to meet the demands on their resources there will be calls on the Exchequer to do so. That is neither right nor fair. Apart from the fact that taxpayers would be subsidising investors, I have no doubt that the European Union would see this as an aid which would fall to be considered under the State aid umbrella and that would not be acceptable. As the compensation will be paid for by the industry, this will mean an additional cost to their operations and, whatever we might hope, some at least of this would be passed on to the investor. The bigger the amount, the bigger the charge. We have reached a fair balance in protecting the small investor. On the one hand, investors must not think they can invest without any concern as to how an investment will turn out and, on the other, if something goes wrong they will have access to compensation.

I stress that this right to compensation is something that was not there before. This is something absolutely new. People can go to a company and apply for their money. They need not concern themselves with various legal procedures. They are entitled to the amount specified in the Bill. However, if they have lost still more money, they are quite entitled to pursue their claims for the balance in the normal legal way.

Is it the entitlement of an investment firm to enter a scheme of another EU state? This Bill arises from an EU directive and similar pieces of legislation are being enacted in the parliaments of other member states. If a different level of compensation were available in another EU country could investment firms here join with the bonding company in that other country? In that way some Irish firms would be providing less cover than others.

Heaven forbid that the Exchequer would become involved in compensation. As a payer of hefty taxes I do not wish to see that.

I am interested in Senator Finneran's point, which had not occurred to me. If the limit in the Bill must stand, I hope it will be well publicised. The Minister is right to say caveat emptor. I am astonished to hear the places people invest money they can ill afford to lose. The investment of £185,000 by the Society of St. Vincent de Paul was mentioned previously in the House. The foolishness of that investment was breathtaking. Many people may get the impression that they are better covered than they are. Of course, companies can be pursued through the courts. I will be interested to hear the Minister's response to Senator Finneran's question.

I agree with what Senator Henry said about the Society of St. Vincent de Paul. I was absolutely shocked to realise that people who decently and generously gave money to a charitable society should see their money placed in a high risk investment. I would like to be able to accept this amendment but I cannot do so.

In response to Senator Finneran, once investment intermediaries are registered here under the terms of the Investment Intermediaries Act, 1995, they can operate in any part of the European Union. The big advantage for such companies operating here — and for consumers and investors — is that if there is a better compensation scheme in another member state, they must invest in ours and they may also invest in the better scheme. They will then be in a top-up situation. That is an option. Companies can look further afield, find the best scheme available and provide an investment product which is attractive to their consumers.

Amendment, by leave, withdrawn.
Section 30 agreed to.
Sections 31 to 40, inclusive, agreed to.
Question proposed: "That section 41 stand part of the Bill."

The section states, in subsection (1) "The supervisory authority may require authorised investment firms to effect a policy of professional indemnity

insurance. ". Why is the word "may" used? This gives the impression that some firms would be required to have such insurance while others would not. What type of investment firms will be required to have this insurance and what type will not?

It would be a matter for the Central Bank to decide that and the decision would be based on a number of criteria. The track record of the company would be taken into account as well as the company's annual audited accounts, the number of years for which these accounts were available, the volume of business transacted by the company and the liquid reserves which they held. New companies or smaller companies, perhaps with a high ratio of sales staff, might be asked by the Central Bank to put professional indemnity insurance into position. The decision would depend on the professional judgment of the Central Bank. This requirement could also be imposed at any time, perhaps when a company applied for a renewal of its licence. Many companies, because of the volume of their business, their ethical standards or outstanding operational successes, would not be required to have such insurance.

Question put and agreed to.
Section 42 agreed to.

I move amendment No. 4:

In page 35, subsection (7), line 40, after "explanation," to insert "or".

This is a drafting amendment. The word "or" is necessary because the subsection contains a list of clauses which qualify the word "person". I would have thought this refers to a separate person who "knowingly withholds or omits information" and that "or" is required. The subsection specifies "knowing it to be false" or "recklessly provides an answer or explanation" as offences. Does not somebody who "knowingly withholds or omits information" also commit an offence? Is it not true that "knowingly withholds or omits information" qualifies providing a document "knowing it to be false or recklessly provides an answer or explanation" and that a person must do that to be guilty of the offence? Surely a third offence would be to knowingly withhold or omit information. Is it only those who provide a document knowing it to be false and recklessly provide an answer or explanation who are guilty of an offence?

I should have consulted the Cathaoirleach before speaking on this amendment. I would have thought that to knowingly withhold or omit information was another offence. Otherwise it is only an offence to knowingly withhold or omit information if a person already knows something to be false or has recklessly provided an answer or explanation.

I pay tribute to Senator Henry for her excellent analysis of this issue. We have given the matter much thought and have not been able to decide whether to accept the amendment. We have referred it to the Attorney General for a final recommendation. If such a recommendation is positive we will table an amendment in the Dáil. In that context I ask the Senator to withdraw the amendment, pending the Attorney General's advice. The Bill may then proceed to be considered in the Dáil.

Will the Minister of State have the Attorney General's advice before Report Stage.

Report Stage has been ordered for today.

I accept the Minister of State's assurance.

Amendment, by leave, withdrawn.
Section 43 agreed to.
Sections 44 to 46, inclusive, agreed to.
Question proposed: "That section 47 stand part of the Bill."

Does the section provide that if a solicitor who is acting as an investment intermediary defaults the clients must be compensated by the Law Society rather than by the new company?

That is correct. The Law Society regulates solicitors and manages a compensation fund. A solicitor acting for a client does so in trust and must turn to his professional body for cover.

If there is a case involving fines or penalties will they be imposed by the Law Society or by the new company?

Sanctions against solicitors would be a matter for the Law Society. Solicitors are exempt from the Investment Intermediaries Act, 1995, if they provide investment services as an incidental part of their professional practice. The Law Society maintains a compensation fund under the Solicitors (Amendment) Act, 1994. A client of a solicitor who loses through the dishonesty of the solicitor can claim compensation from the fund. However, it was not clear that the Law Society's compensation fund would cover investment or insurance services provided by a solicitor where those services were provided independently of legal services. This left a potential gap in investor compensation when a solicitor provides non-incidental investment services.

The Bill provides that clients of a solicitor will be able to claim against the Law Society's compensation fund in respect of investment and insurance business where the solicitor is not covered by investor compensation arrangements under this Bill, in other words, there is a dual option. A client will be able to claim against the Law Society's fund if the solicitor is not covered by the Bill.

Is the Minister of State happy that the distinction is sufficiently clear? Will he examine the matter again before the Bill is discussed in the Dáil?

The Senator has raised an important point. I will examine the provision to ensure transparency and clarity. The maximum number of options for compensation should be available to clients. We will have another look at the matter.

Would the provisions of section 41 apply, where a solicitor would have to have a professional indemnity imposed by a bank?

Section 41 covers investment intermediaries. It is mandatory for solicitors to contribute to the Law Society's fund. If solicitors act as investment intermediaries or have an ancillary company to do that on their behalf they will be covered by the Bill.

Question put and agreed to.
Sections 48 to 81, inclusive, agreed to.
First to Third Schedules, inclusive, agreed to.
Title agreed to.
Bill reported with amendment and received for final consideration.
Question proposed: "That the Bill do now pass."

I thank Senators for their positive contributions and co-operation. I assure them that all the matters they raised will be further considered in the Dáil before the Bill passes.

It is a pleasure doing business with the Minister of State and I thank him for being so open with us.

We are very pleased that this important legislation was initiated in the Seanad and that this issue got a good airing. I thank the Minister of State for his decision to take the Bill to the Seanad.

I congratulate the Minister of State on his splendid initiative, which, sadly, is much needed. On Second Stage the Minister of State, Deputy Cullen said this was the sort of Bill one hoped would never be needed. Human nature being what it is, it will probably be needed all too frequently.

Question put and agreed to.

When is it proposed to sit again?

Tomorrow at 10.30 a.m.