The trustees of TSB requested the Minister for Finance to authorise the reorganisation of the TSB last December. The Minister agreed to their request and published the Trustee Savings Banks (Amendment) Bill, 2000, which amends the Trustee Savings Banks Act, 1989, to provide explicitly for the proposed sale mechanism.
The proposal from the trustees, made following a fully competitive sale process, involves selling the assets and transferring the liabilities of the bank to the Irish Life and Permanent Group. The employees of TSB are to benefit from an employee share ownership trust agreed along the lines of the ESOTs in both Eircom and ICC Bank. The offer from Irish Life and Permanent values the bank at £339 million.
The trustees' request and accompanying documentation was examined by Arthur Andersen, the Minister's financial advisers, who advised him that the sale process had been carried out by the trustees and their advisers in an open, transparent and fair manner. Arthur Andersen further advised the Minister that the bid from Irish Life and Permanent plc. represented full value for the bank and recommended that the reorganisation should be authorised. The Minister also benefited from the legal advice of Arthur Cox.
TSB was created by the amalgamation of the TSB Dublin and the Cork and Limerick Savings Bank in 1992. TSBs had been severely restricted in their range of activities prior to 1989. They were required to maintain at least 80% of their customers' deposits with the Exchequer and could only lend to personal customers. In response to the changing situation in the financial sector and in order to deal with the fact that the original purpose of TSBs was no longer widely relevant, the Dáil provided for a broadening of the range of activities of TSBs in the Trustee Savings Banks Act, 1989. Since 1989, the TSB has grown significantly with customer deposits increasing from around £760 million to over £1,775 million at the end of 1999 and the number of employees increased from around 800 to in excess of 1,200 over the same period.
The trustees have, with the agreement of the staff, reached the conclusion that the best interests of all stakeholders in the bank will be best served by moving on to the next stage of the process by changing the status of the TSB and merging with the Irish Life and Permanent Group. This change will give the bank access to the capital markets, a wider product range and a broader set of delivery and distribution channels which are all necessary if the bank is to continue to grow and prosper. Most importantly, it will provide continuity for staff and customers so that they can benefit from ongoing developments in the banking market. This merger will also result in a very strong third competitor in the retail banking market in Ireland and is, therefore, to be welcomed from a competition viewpoint.
Section 57 of the Trustee Savings Banks Act, 1989, provided for the reorganisation of trustee savings banks into companies. This section was incorporated in that Act because it was already clear from developments in the Irish financial markets and from experience in other European countries such as Britain, France and Denmark that trustee savings banks would need to become companies in order to adapt.
The provision for the reorganisation of trustee savings banks was very broadly drawn in the hope that it would cover any likely scenario. It was anticipated that it would only be necessary for the Minister for Finance to bring a draft of any order authorising the reorganisation of the TSB before both Houses of the Oireachtas and secure a motion of approval before proceeding.
Section 57 of the 1989 Act provided for the reorganisation of trustee savings banks into either a company controlled by the Minister for Finance or one not controlled by the Minister. The latter option is being adopted for the current process but under section 57 as it currently stands, it is not possible to establish an ESOP in the TSB as it does not have any shares. It is also impossible to establish the ESOP following the merger of TSB's operations with Irish Permanent because it is not possible to establish an ESOT for a particular group of employees within one company. Therefore, it has proven necessary to have an intermediate step. The bank's assets and liabilities are, therefore, being transferred to Kencarol Limited, a subsidiary of Irish Life and Permanent, at which point the ESOT will be established and then immediately transferred, with the ESOT in place, to Irish Life and Permanent plc.
Existing legislation does not permit the establishment of an employee share ownership plan by a company while it is controlled by another company. Accordingly, section 3 is required to allow for the establishment of the employee share ownership trust in Kencarol Limited while it is controlled by another company.
The employees are in favour of the transaction. Their employee rights, including conditions of employment, are protected by employee rights legislation, especially the provisions of the European Communities (Safeguarding of Employees Rights on a Transfer of Undertakings) Regulations, 1980, SI 306 of 1980. This means that the employment of all employees of TSB Bank immediately prior to the sale is automatically transferred to the purchaser and that the same terms and conditions as they enjoyed with TSB will apply. This is expressly acknowledged in the business sale agreement between TSB Bank, Irish Life and Permanent plc and Kencarol Limited. As pension arrangements fall outside the scope of transfer of undertakings regulations, the business sale agreement provides for Irish Life and Permanent to continue the pension schemes in place in TSB prior to the sale.
The employees will benefit from an employee share ownership trust under which 5% of the shares in Kencarol Limited will be transferred by the trustees to the ESOT in return for agreement to the flexibility agreement, and the ESOT is purchasing a further 9.9% stake in Kencarol Limited for £19.8 million. On completion of the reorganisation, the ESOT's Kencarol shares will be swapped for shares in Irish Life and Permanent plc worth £50.5 million. As with all other ESOTs, the ESOT must hold the shares for a period of three years before it can allocate shares to employees through an approved profit sharing scheme. The maximum tax efficient allocation by the APSS is £10,000 per annum per employee. Senators should note that, while the flexibility agreement envisages redundancies, it is a requirement of the agreement that all redundancies arising from the transaction must be on a voluntary basis only.
Separately from the Bill, provision is being made in this year's Finance Bill on Committee Stage to ensure the benefits of the ESOP due to the employees of the TSB will be maintained after the merger with Irish Permanent. Specific exemptions are being created for the TSB, and also for ICC Bank where the same issue arises.
As amendments were required, the operation of section 57 in its entirety was examined and further amendments were proposed to provide for certainty, in legal terms, in its operation. The net effect is that the existing section 57 is being restated in the Bill in its entirety, but in an amended form. The main amendments are additions to provide for the ESOP, the structure of the transaction and certainty regarding the transfer of assets and liabilities, including property and customer accounts from the TSB to the Irish Life and Permanent group. The other amendments are of a minor nature.
Before turning to the detail of the Bill, I wish to deal with two issues which may concern Senators: the use of the proceeds of the reorganisation and the possibility of branch closures. I will address the use of the proceeds issue first. There are two issues: a legal issue concerning the ownership of TSB Bank and whether, irrespective of the legal issue, the customers should receive a payment as a reward for being customers.
The ownership of the TSB has been the subject of legal advice from the Attorney General. This advice is that trustee savings banks do not have members, are not owned by their depositors and that the relationship between TSB Bank and its customers is the same as the relationship between any bank and its customers. The conclusion of this advice is that the Oireachtas has the power to dispose of the assets and this was fully reflected in the Trustee Savings Banks Act, 1989, which copperfastened the legal position. The customers of other State companies are not shareholders either. Public assets such as these are held by the State on behalf of citizens. It is not open to the Minister to arbitrarily allocate publicly owned assets to a small group of citizens. The only way he can discharge his overall duty is to take the proceeds of disposals into general public ownership.
During the passage of the Bill through the Dáil, comparisons were made between the TSB and building societies where customers received shares on demutualisation. There are a number of fundamental differences between TSBs and building societies. Customers opening a share account in a building society are informed that they become an owner of the society with the right to vote at annual general meetings. Customers of a building society run the society and elect the board of directors. It is their decision whether to wind up the business or to demutualise.
In the case of the TSB, the customers have no ownership stake. There are no annual general meetings of depositors, the customers do not elect the trustees and they have no role in the running of the bank or a decision to sell it. The trustees have taken the decision to request a reorganisation. Customers opening accounts in the TSB do so in accordance with the rules of the TSB which clearly state that they have the right to their deposit and the interest thereon. They are not given any indication or impression that their account confers any ownership interest on them.
The second issue is whether customers in the TSB should receive some payment from the proceeds. The argument made is that they have been loyal customers for many years and they built up the bank. There has also been the argument that the State has not invested capital or given any assistance to the bank or its predecessors. On this latter argument, prior to 1979, almost all of the TSB's funds, and until 1989 at least 80% of its customers' deposits were placed with the Exchequer. The customers received a rate of interest on their accounts which was funded by the Exchequer and the TSB was paid a margin of 1.65% above this to cover its administration costs.
The TSB has, throughout its history, been funded by the Exchequer and customers effectively benefited from State support of their deposits. In addition, as customers had a choice regarding where to place their deposits, the rate of interest on these accounts had to be attractive. Since 1989, the TSB has been allowed to operate on the same terms as any other bank but, until 1992, it was exempted from corporation tax in recognition of the fact that the reserves of the TSB effectively belonged to the public generally. It was only in 1993 that the TSB started to pay corporation tax at a reduced rate and it has only paid at the full rate since 1996.
In reaching his conclusion on this matter, the Minister also took precedent into account. In the case of Irish Life, Telecom and ICC Bank, there were no free shares for customers and the proceeds received by him and his predecessors were paid into the Exchequer. The customers have no ownership stake in the TSB. This is also the situation in all State companies. The Minister for Finance is bound by the precedents outlined and the general legal considerations. He has, therefore, concluded that he must discharge his responsibilities by taking the proceeds into State funds for the benefit of all citizens.
The second issue of concern to Senators and customers of both the TSB and Irish Permanent is that of branch restructuring. In response to this issue in the Dáil, the Minister quoted the following public statement by Mr. David Went, group chief executive of Irish Life and Permanent plc:
Let me start by stating quite emphatically that, as a group, Irish Life and Permanent is committed to maintaining a strong branch network and Permanent TSB will have that. Our plans envisage a combined branch network of approximately 110 branches. In a simple combination of the existing networks of TSB and Irish Permanent, there is clearly an overlap of as many as 45 branches. To deal with this, Permanent TSB will initiate a comprehensive and objective evaluation of all the branches of the combined entity. This will identify those which, in terms of design, size and location, will be best suited to offering the combined customer base the full breadth of products in the most convenient and comfortable locations possible. And let me add, there will be no town which currently enjoys the services of either Irish Permanent or TSB Bank which will be left without banking services as a result of this exercise. [I am sure Members will welcome this.] And indeed we'll continue to review opportunities to open new branches.
I will now deal with the sections of the Bill. Section 1 substitutes a new section 57 for the existing section 57 of the 1989 Act. As there are numerous additions to the section, the advice of the Office of the Parliamentary Counsel to the Government was that section 57 should be restated in its entirety for ease of use. I will go through each subsection, explain its purpose and indicate whether it is an existing subsection or an addition. I will also indicate any amendments made to existing subsections.
Subsection (1) is an existing subsection which defines certain terms used in the section. It has been expanded to include such new definitions as are necessary for the operation of the section. Subsection (2) is an existing subsection which provides that the Minister can make orders for the purposes of this section and that he can also make orders amending or rescinding orders made previously. Subsection (3) is an existing subsection which provides that an order may authorise the reorganisation of one or more trustee savings banks into either a company controlled by the State, referred to as a State company, or a company not controlled by the State. In the current transaction, this is Kencarol Limited.
Subsection (4) is a new subsection which confirms that the trustees have the power to enter into contracts to effect a reorganisation subject to an order. It also empowers them to sell or otherwise transfer shares received by them in any reorganisation to an ESOT subject to an order. The subsection also provides that the trustees are carrying out their duties as trustees in exercising the powers conferred on them and complying with the obligations imposed on them by this section. As such, the personal liabilities of trustees in relation to a sale process are limited as set out in section 22 of the 1989 Act, as is the case with their other duties.
Subsection (5) is a restatement of the existing subsection (4) which provided for the reorganisation of TSB into a State company. It stipulated the matters that the order should take into account. There is one amendment to the subsection in paragraph (g) which prohibits the transfer of the Minister's shares other than to a director of the company. The amendment allows for the transfer of shares to an ESOT. This subsection is not being used in the current transaction but the amendment is being made for the sake of completeness as the 1989 Act is not being repealed.
Subsection (6) is a restatement of the existing subsection (6). Paragraph (b), which provides for the payment to the Minister for Finance of the proceeds arising from the reorganisation into Kencarol Limited, has been amended to take into account the fact that the trustees will have proceeds arising from the transfer of shares to ESOT.
Subsection (7) is the existing subsection (5) which provides that an order may provide for the transfer of specified assets to the Minister. It is not being used in the current transaction.
Subsection (8) includes the existing subsection (7) but there have been additions. It provides that the 1989 Act will not apply to a company not controlled by the State and that it will be subject to the Central Bank Act, 1971. Paragraph (c) has been added to provide that the order may make provision for the regulation of Kencarol Limited in the period during which it has the assets and liabilities of TSB Bank. This is to avoid a gap in the regulation by the Central Bank of the operations of TSB Bank. Paragraph (d) is a new paragraph which provides that from the transfer date the trustees will cease to act as trustees in the business of the bank.
Paragraph (e) is a new paragraph which provides that the trustees shall continue in office to comply with their obligations in relation to the final accounts of TSB Bank prior to the transfer date. Paragraph (f) is a new paragraph which provides that any trustee who becomes an employee or officer of either Kencarol or Irish Life and Permanent shall cease to be a trustee.
Subsection (9) is a restatement of the existing subsection (8). It provides that the order may provide for the conditions of the staff. It is not being used in the current transaction because staff's entitlement and conditions of employment are protected by employment rights legislation and provision has also been made for the staff in the business sale agreement between the trustees and Irish Life and Permanent plc.
Subsection (10) is a new subsection which makes certain provisions in respect of the period after the transfer of the bank's operations to the Irish Life and Permanent group. It provides for the dissolution of the TSB, the distribution of the proceeds of the reorganisation to the Minister, the preparation of accounts by the trustees for this period and vacation of office by the trustees.
Subsection (11) is a new subsection which provides that Irish life and Permanent will be able to use "TSB" in their name subject to the conditions set out in the order. This is required because section 14 of the 1989 Act prohibits anyone other than a trustee savings bank using the name or its derivatives. I agree with the Minister that this is a reasonable, commercially sensible approach and I am satisfied that, subject to the conditions the Minister will place in the order on the use of the name, it will not cause confusion.
Subsection (12) is a new subsection that provides for the technical aspects of the transfer of operations from TSB Bank to Kencarol Limited and on to Irish Life and Permanent. It has been
modelled on provisions in the Central Bank Acts and similar legislation that provide for the transfer of the operations of one financial institution to another.
Subsection (13) is a new subsection that provides for the transfer of TSB's properties to Kencarol Limited and on to Irish Life and Permanent plc. Subsection (14) is a restatement of the existing subsection (10). It is not being used in the current transaction.
Subsection (15) is the existing subsection (11). It requires the Minister to obtain a motion of approval from each House of the Oireachtas for the draft of any order he proposes to make under this section. The Minister will be laying the draft order before each House as soon as possible after the enactment of this Bill.
Subsection (16) is a new subsection that disapplies section 60 of the Companies Act, 1963, to the provision of assistance by Kencarol Limited or Irish Life and Permanent or the ESOT company itself in the acquisition of shares by the ESOT. Similar provisions have been made in legislation dealing with Telecom Éireann and ICC Bank.
Section 2 extends the original provisions of section 64 of the 1989 Act. That section provided an exemption from stamp duty arising from a reorganisation. This exemption is being extended to the second step of the current transaction, the onward transfer from Kencarol Limited to Irish Life and Permanent plc. This is being done because the only reason Irish Life and Permanent plc is going through Kencarol Limited is to facilitate the establishment of the ESOT in accordance with ESOP legislation.
Section 3 amends section 12 of the Taxes Consolidation Act, 1997, to allow Kencarol Limited to establish an ESOT, even though it will be controlled by Irish Life and Permanent plc at the time. This is necessary as it is not possible to establish the ESOT prior to the transfer to Kencarol Limited because the TSB in its current structure does not have any shares. Section 4 is a standard section setting out the Short Title and collective citation of the Bill.
I commend the Bill to the House.