The purpose of the Bill is to provide for an increase in the authorised share capital of ACC Bank and put in place the enabling provisions required to facilitate the establishment of an employee share ownership trust in the bank and the disposal of the Minister's shareholding.
As Senators are aware, the proposed merger and flotation of ACC and TSB banks was reluctantly called off by the Minister in early 2000 following a joint recommendation to do so from the boards of both ACC and TSB banks and the non-statutory board of Newbank. The three boards made their recommendation in the light of the slim prospects for a successful flotation in the then prevailing market conditions. The Minister accepted their recommendation. In doing so, however, he reiterated his view that the status quo was not an option and asked the boards of the ACC and TSB, along with the ICC board, to review all the options for the future. Since then, both ICC and TSB banks have undertaken successful sale processes.
ACC Bank, on the other hand, had a difficult year for reasons of which we are all aware and it is now time to benefit from the lessons which have been learned and move forward in a positive manner. On Tuesday, ACC Bank published its annual report for the year ended 31 December 2000. The bank reported losses before tax of 23 million compared to a profit in 1999 of 24.5 million. The reasons for the loss include the requirement to have a special provision of 21 million for the DIRT bill arising from the audit undertaken by the Revenue Commissioners following the publication of the Committee of Public Account's report on the matter. I will return to this issue.
The bank also undertook a fundamental review of its corporate loan book during the course of last year. The effect of this review has resulted in a provision for bad and doubtful debts of over 14 million. A further factor is the special provision being made in the figure for 2000 of 16 million in relation to the voluntary separation scheme. The provision for 2000 relates to the anticipated departure of 120 staff. The figures, on the face of it, are disappointing but when one strips out the once-off factors in this set of accounts, the operating profit before provision for bad debts rose from 25.4 million to 28.4 million, an increase of 11%. This indicates that the bank is trading strongly, has a solid commercial operation and will make profits going forward. The effect of the restructuring being undertaken by the bank will be to enhance its future earnings potential.
Before addressing the issue of the ACC's business strategy, let me say a few words on the DIRT issue. The provision required in relation to the DIRT settlement is one of the main reasons for the loss in 2000. The board has expressed its deep disappointment to the Minister at the evidence of widespread deficiencies in the ACC revealed by the Committee of Public Accounts inquiry and Revenue audit. The board and management have assured the Minister of their absolute commitment to ensuring full compliance in the future and their determination that the mistakes of the past will never be repeated. The steps taken by the bank include the appointment of additional personnel to its compliance function with input from a bank-wide team of senior managers, centralising administrative control of non-resident accounts and special savings accounts in head office, and the commissioning of a comprehensive review of all procedures from a compliance viewpoint by the bank's new auditors, PricewaterhouseCoopers.
The Minister also introduced a new reporting structure which requires the chairman to brief him on a quarterly basis and requires the chief executive to brief departmental officials on a quarterly basis. The Minister also meets the full board on an annual basis. These new arrangements incorporate the reporting requirements under the State bodies guidelines, which require the chairman of a State body to make a formal annual report to the relevant Minister on the financial returns of the company, its compliance with State regulations where applicable, including the pay of the chief executive, and any developments that the chairman believes should be brought to the attention of the shareholder. The guidelines also require the chairman to make a report to the Minister on the interim results.
I will now turn to the issue of the bank's business strategy. The board and management reviewed the bank's operations in early 2000 and adopted a new strategy which involves moving away from general retail banking in order to concentrate on small and medium enterprise business banking, providing a more focused personal banking service and continuing to serve its original market, that is, the agriculture sector.
The bank is moving away from handling the whole product process in low margin areas to either serving those markets with third party products or withdrawing from them. For instance, mortgages and credit cards require large volumes to be cost effective for a provider in order to generate the necessary administrative efficiencies and minimise the credit exposures by spreading the risk over large books. In both these product areas, the ACC has taken the decision to sell these products, still branded as ACC products, on an agency basis generating fee income.
One area that the bank has withdrawn from completely is that of low margin large corporate lending. In higher value product areas, the bank will continue to offer them on its own book and is developing new products as required.
The review also examined the bank's delivery channels. It found that its Dublin branches were not cost effective because of the nature of the business being transacted. In the light of this finding, the ACC rationalised its branch structure in Dublin and replaced it with a business banking team and a personal banking unit based in head office. Outside Dublin, the ACC found that the branches are an efficient distribution network and one of its strengths. The branches were further boosted by the introduction of mobile, specialist teams of financial planners and leasing experts. Regional business banking centres were established in Cork, Galway, Limerick and Waterford.
Implementation of this strategy involves a restructuring of the bank's operations. The Minister has mandated the bank to continue its course of negotiations with staff representatives on all aspects of this restructuring, including a new employee share ownership plan. The ESOP will be in line with previous ESOPs with a 14.9% stake in the ACC being available to staff, 5% in return for change in the bank and 9.9% for purchase.
Another aspect of the restructuring is that the bank needs to reduce its overheads. This is being done mainly through a voluntary separation scheme, which comprises a voluntary redundancy scheme and a voluntary retirement scheme. The terms of the VSS were negotiated and agreed with the trade unions. When the bank launched its strategy in 2000, it stated that the target figure for departees would be 200 by 2003. This is to be achieved through a combination of normal staff turnover and the VSS. I stress to Senators that the scheme is strictly voluntary. I have already said that provision has been made in the results for 2000 for 120 departures. The bank has also concentrated on staff development, through specialist training. Overheads will also be reduced through outsourcing certain functions and streamlining of processes.
The Minister has also mandated the board to explore all options in relation to a change in the ownership structure in the next 12 months. The bank has appointed NCB Corporate Finance to be its corporate financial adviser to help in this process. The Minister has recently appointed A and L Goodbody to be his legal adviser in relation to the sale of the bank.
One of the main purposes of the Bill is to provide for an increase in the authorised share capital of the bank. The current authorised share capital of £50 million has been nearly subscribed in full and, as things stand, the Minister is unable to subscribe for further shares in ACC Bank which is not a prudent position to be in even if the company has no current requirement for additional capital. If the company requires additional capital the board's proposals will be assessed at the appropriate time. It is the Minister's intention to ensure that the company remains adequately capitalised as long as it is in State ownership. It should be stressed that the bank currently does not have a need for additional capital because its audited capital adequacy ratio stood at 11.87% at the end of December 2000, comfortably above the Central Bank's 10% requirement. Furthermore, its strategy of not pursuing balance sheet growth through mortgages and large value corporate loans should reduce its need for capital going forward. The other objective of the Bill is to put in place enabling provisions to facilitate the establishment of an ESOP and a change in ownership in line with the provisions put in place in relation to ICC Bank in the ICC Bank Acts of 1999 and 2000.
I will now turn to the main provisions of the Bill. Section 1 is the definitions section and is self-explanatory. Section 2 is a standard provision in relation to the expenses of the Minister while section 3 provides for an increase in the authorised share capital of the bank from its current limit of £50 million to £100 million. Of the current limit, £49.95 million has been subscribed so the effect of this section is to allow for the subscription of further capital. I have already stated that ACC Bank is adequately capitalised at present and any request for further capital will be considered at the appropriate time. Section 4 provides for the establishment of an employee share ownership plan which is identical to the provisions made for the ESOP in ICC Bank in the ICC Bank Act, 1999. I have already outlined the principles underlining the ESOP negotiations.
Section 5 provides for the disposal of shares by the Minister for Finance and is identical to the provisions made for ICC Bank in the ICC Bank Act, 2000. Any disposal of shares, other than to a director of the company as nominee of the Minister or to the ESOP, requires a motion of approval from the Dáil. The purpose of this section is to allow the bank and the Minister to move forward and conclude a sale process, subject to Dáil approval. Our experience is that timing is key to a successful process, as when bidders make an offer they do so under the then-prevailing market conditions. If at that point a legislative process is required to be started, it could be months before the Minister would be in a position to complete it. During that period, things could change and the bidder might drop out because of market conditions or other factors such as its own takeover with the new owners deciding not to proceed.
Section 6 provides for the continuation of existing guarantees given by the Minister. This section will be commenced following the sale of the bank in conjunction with the schedule of repeals. The effect of the repeals will be that no new guarantees can be given following the sale, however existing State guarantees cannot arbitrarily be withdrawn and the purpose of this section is to provide for the run-off of these guarantees and the circumstances under which they cease to be in force. The key point is that the bank will be required to pay the Minister in respect of any guarantees the Minister honours. If the bank fails to do so it becomes a debt, recoverable in court. Separate to the legislation, it will be a condition of sale that the purchaser gives a counter-indemnity to the Minister in respect of the outstanding guarantees provided for in this section. The counter-indemnity may be on the purchaser's own account, if the Minister is satisfied with its stature, or may require a third party indemnity. In the ICC sale, Bank of Scotland gave the Minister a counter-indemnity. I should point out that the existence of State guarantees will not benefit the purchaser because the counter-indemnity affects their capital adequacy ratio and reduces their lending capacity.
Section 7 is a standard provision requiring ACC Bank plc to take relevant action to alter its memorandum and articles of association, in the context of the Companies Acts, to make them consistent with the terms of the Bill. Section 8 provides that ACC shall no longer be subject to the requirements applying to statutory authorities under the Registration of Title Act, 1964. This section will only be commenced following a change of ownership and only applies to properties owned or leased by the bank. It is included for the avoidance of doubt as to the status of any such properties and will have no impact on property held as security by the bank in respect of loans. Section 9 provides for the amendment of the definition of a recognised lender in section 23 of the Agricultural Credit Act, 1978, which regulates chattel mortgages. This is done to eliminate the requirement for banks to be recognised separately by the Minister, in addition to their normal licensing requirements, to register a chattel mortgage.
Section 10 provides for the deletion of ACC from section 2 of the Insurance (Amendment) Act, 1978, and will only be commenced following the sale of the bank. Section 11 provides for the deletion of ACC from section 3(2)(b) of the Companies (Amendment) Act, 1990, which provides that only the Central Bank may present a petition to have an examiner appointed to a bank. Once sold, ACC will come under the provision as the holder of a licence under section 9 of the Central Bank Act, 1971. The Office of the Parliamentary Counsel to the Government has recommended that the relevant section of the Companies (Amendment) Act, 1990, should be consolidated, as it currently stands, which is the effect of section 11(1) of the Bill. Section 11(2) is a further consolidation which reflects the deletion of ACC and will only be commenced following the sale.
Section 12 and the accompanying Schedule to the Bill will only come into play if and when the bank is sold. This section provides for the repeal of most of the ACC Bank Acts, 1978 to 1999, and the deletion of references to ACC in other legislation. The purpose of these repeals and deletions is to ensure that ACC, once sold, will operate on the same basis as any other private commercial bank. They will be given effect by ministerial order under section 12(2) of the Bill, though the relevant order will not be made until ACC Bank plc is formally granted a licence by the Central Bank. Section 13 gives the short title and commencement of provisions. I commend the Bill to the House.