This Bill is concerned with the supervision and regulation of the financial services industry in Ireland. The financial services industry plays a major role in the economy, giving as it does direct employment to about 50,000 people and providing the wide range of services and products that are so vital in a modern economy. As the industry has changed and grown during the years, there have been considerable changes in the legal and regulatory framework to keep pace.
In recent years the distinctions between banking, building societies and insurance have become blurred at the edges. Firms in each of these sectors are increasingly active in overlapping markets. Banks have moved into areas of insurance and the provision of mortgages. Life insurance companies are now strongly focused on long-term savings products. A complex mix of intermediaries also operate in the market. As the sector becomes more and more integrated, regulation needs to take a more integrated approach.
The Government has recognised that the regulation of the financial services sector has not been helped by the multiplicity of regulatory bodies with differing regulatory powers and functions. In a small country like Ireland there is a powerful case from both an effectiveness and efficiency perspective for building a critical mass of skills relating to financial regulation in a single location. This is particularly the case because of the increasing complexity of risk management throughout the financial sector.
In the regulation of banking, insurance and investment firms fundamental changes are under way internationally in response which will change the way regulation is done. The skills required of regulators will expand dramatically. We need a centre of expertise in Ireland where those skills can be developed. The Government does not intend to wait until after the Basle II exercise in the banking sector and the Solvency II process in the insurance sectors are complete before recognising and acting on this. We wish to act now to restructure regulation in order that the expertise can be in place as the new regulatory approach emerges internationally over the next four to five years.
The approach the Government has decided to adopt builds on the view of the Oireachtas Joint Committee on Finance and the Public Service, as set out in its report, Review of Banking Policy: The Regulation and Supervision of Financial Institutions, of July 1998. The committee stated it believed a single, independent, regulatory authority should be established and given supervisory powers in relation to all commercial, friendly and voluntary bodies which handle funds or financial transactions, including electronic transactions, on behalf of third parties or other institutions in Ireland. In 1998 the Government agreed, in principle, to the establishment of a single regulatory authority for the financial services sector and established an implementation advisory group – known as the McDowell group – to advise it on how this could be achieved. This Bill has drawn very heavily, though not entirely, on the work of the group.
I am satisfied that the structure adopted by the Government will work well because it will provide a one-stop-shop for consumers, business and the financial services industry by having the regulation of insurance, banking and credit unions under the one roof; facilitate the proper co-ordination of the complementary functions of prudential regulation and consumer protection; place the interests of consumers at the heart of financial services regulation by giving the authority specific responsibilities in this regard and creating a statutory position of consumer director; provide an effective framework for Ireland to meet its obligations under the statute of the European system of central banks; and provide for the operational autonomy and direct accountability of the new authority in relation to the bulk of its regulatory tasks.
I wish to deal with a more detailed description of the Bill. Its main purposes are to provide for the establishment of the Irish Financial Services Regulatory Authority within the overall new structure of the Central Basic and Financial Services Authority of Ireland; to assign functions to the new authority as the single regulator for the financial services sector – this will provide a one-stop-shop by having the regulation of insurance, investment intermediaries, banking and credit unions as well as certain other functions under the one roof; to strengthen the consumer focus of regulation by giving the authority specific responsibilities in this regard and creating a statutory position of consumer director; and to establish the Financial Services Appeals Tribunal.
The broad structure of the Bill is as follows. Part 1 contains the short title of the Bill and provisions for the commencement of the measure. Part 2 provides for the amendment of the Central Bank Act 1942 for the purposes of reorganising and renaming the Central Bank of Ireland. This Part, in addition to amending and repealing the text of the 1942 Act, as appropriate, inserts additional Parts and Schedules into the 1942 Act.
The provisions relating to the regulatory authority are set out in a new Part IIIA of the 1942 Act to be inserted by section 26 of the Bill. Chapter 1 of this new Part provides for the constitution, functions and powers of the authority. Chapter 2 provides for the statutory position of consumer director; while Chapter 3 provides for the appointment of the Registrar of Credit Unions.
A new Part IIIB of the 1942 Act contains certain provisions relating to the Central Bank and Financial Services Authority of Ireland and its constituent parts, including the new disclosure of information requirements. Part VIIA of the 1942 Act, as inserted by section 28 of the Bill, is divided into five Chapters and deals with the Financial Services Appeals Tribunal. Section 29 on page 97 inserts a new Part VIIIA into the 1942 Act and sets out the provisions for making regulations and orders under the Act.
Part 2 of the Bill amends the 1942 Act by amending and inserting additional Schedules into the Act. There are also three Schedules to the Bill. Schedule 1 sets out the consequential amendments to other Acts; Schedule 2 sets out the consequential amendments to the European Communities regulations, while Schedule 3 specifies the savings and transitional provisions which have effect.
At the heart of what is proposed in the Bill is the establishment of a new entity – the Irish Financial Services Regulatory Authority – as a constituent part of a new Central Bank and Financial Services Authority of Ireland, known as "the Bank". The new authority will manage the regulation of financial institutions in Ireland. In essence, it is to take on and develop the financial services supervisory functions of the Bank and, in addition, take on the regulation of credit unions and the insurance sector as well as consumer protection functions.
I wish to deal with the main provisions of the Bill as they relate to the regulatory authority. The authority will be established under the proposed new section 33B of the principal Act and will operate as a constituent part of the new bank. However, it will have its own chairperson, chief executive and consumer director, and up to seven other members, and will have independent functions. The non-executive members will be appointed by the Minister for Finance following consultation with the Minister for Enterprise, Trade and Employment, the chairperson will be appointed by the Minister for Finance from among these members and the chairperson, chief executive and some authority members will also be members of the board of the Central Bank and Financial Services Authority of Ireland. The authority will have its own budget. It will submit its annual report to the Minister for Finance, who will lay it before each House of the Oireachtas and, in recognition of the unique role played by credit unions in Irish society, a separate statutory post of Registrar of Credit Unions is also provided for.
As Senators will be aware, the Minister appointed an interim authority, on a non-statutory basis, on 16 April 2002, the chairperson of which is Mr. Brian Patterson. The role of the interim authority includes the selection of a chief executive for the IFSRA, working with the chief executive-designate and advising and assisting the Ministers concerned and the Central Bank in preparing for the establishment of the regulatory authority. The work of the interim authority will help ensure that a smooth transition to the new regulatory arrangements takes place as soon as possible. The posts of chief executive-designate and consumer director were filled recently on an interim basis after an open competitive process facilitated by independent executive search consultants. It is the Minister's intention that the members of the interim authority will form the new regulatory authority when it has been established under this legislation.
It is essential for the new regulatory authority to be properly and adequately funded if it is to be able to fully exercise its powers and functions. The McDowell group considered this issue and favoured funding by industry. Accordingly, the Bill gives the chief executive of the authority, with the agreement of the authority, power to make regulations to impose levies. However, these regulations can only come into effect if they have been approved by the Minister for Finance. There will be a consultation process to consider the fee or levy structure. If it should happen that the funds raised from the fees and levies imposed prove to be inadequate for the authority to perform its functions, the bank may provide the authority with funds to meet any shortfall.
I now turn to the vital issue of consumer protection. The McDowell group gave detailed consideration to the questions of prudential regulation and consumer protection. It recommended that the single regulatory authority, SRA, should be given statutory responsibility for prudential regulation and for consumer issues relating to financial institutions. The group also recommended that responsibility for approval of bank charges should be transferred to the SRA and that a statutory position of consumer protection director should be established within the SRA.
It is intended that the consumer director will have the lead role in the exercise by the regulatory authority of the consumer functions transferring from the Office of the Director of Consumer Affairs, as well as various other new and existing functions. The provisions contained in the Bill reflect this intention, particularly the requirement that the consumer director will be a member of the regulatory authority.
The responsibilities of the consumer director are provided for in the Bill. In essence, they are to monitor the provision of financial services to consumers and also to exercise important consumer protection powers under the Consumer Credit Act, the Investment Intermediaries Act, the Stock Exchange Act and Central Bank and insurance legislation. The Bill also sets out the reporting arrangements, etc., of the consumer director. In this regard, I draw the attention of Senators to the new section 33V(6), which will be inserted into the principal Act by section 26 of the Bill and which provides that the consumer director can report directly to the regulatory authority on any matter.
The new section 33C(3) to the principal Act explicitly states that the mandate of the regulatory authority is to promote the best interests of users of financial services in a way that is consistent with the orderly and proper functioning of financial markets and with the orderly and prudent supervision of providers of those services. Therefore, the regulatory authority and its consumer director will have a strong consumer mandate which will encompass the following: monitoring the provision of financial services to consumers and monitoring the extent to which competition exists among providers of financial services in so far as it affects consumers of those services; increasing public awareness of the availability, costs, risks and benefits of financial services; issuing and enforcing codes of conduct, regulations, directions, etc., to financial services providers with regard to the conditions under which they provide services to customers – namely, advertising, information to customers, terms of contracts, cooling off periods etc.; control and monitoring of customer charges, other than interest rates, imposed by credit institutions and bureaux de change; licensing of moneylenders, including approval of the interest rates charged; compensation arrangements in respect of financial services providers who cannot meet their obligations to customers; and promoting, in general, the best interests of users of financial services. In addition, a second Bill will provide for an ombudsman to deal with consumer complaints against financial institutions and a consultative panel for consumers of financial services
I will now deal with the post of Registrar of Credit Unions. At present, the Registrar of Friendly Societies has responsibility, among other things, for the general regulation and financial supervision of credit unions. The McDowell group recognised the valuable contribution and the unique role of credit unions in Irish society, about which I fully agree. The annual report of the Registrar of Friendly Societies for 2000 – the latest available – shows that there were some 438 credit unions in Ireland as at 31 December 2000.
The credit union movement is characterised by a large number of quite small, community-based credit unions providing fairly limited services to their members. However, credit unions, as a group, are a significant player in the financial services market. Some individual credit unions have grown into quite large operations which are now significant providers of services of a financial nature. More than 50 credit unions had assets exceeding €25 million according to the 2000 annual report. It has been reported that there are currently around 2 million members and assets of almost €7 billion.
The McDowell group considered that all financial service providers should, in principle, be dealt with by a single regulatory authority and that a compelling case would have to be made for the exclusion of any provider from its remit. In regard to the credit unions, the group recommended that the approach which would best address the unique characteristics of the credit union movement would be to have the existing functions of the Registrar of Friendly Societies, in relation to credit unions, brought into the single regulatory authority. The group considered that this should be done in a manner that would recognise and be supportive of the uniqueness of credit unions and also give comfort that their voluntary character would not be threatened by the establishment of a single regulatory authority, while still addressing the appropriate regulatory and consumer protection requirements that arise.
The McDowell group recommended that these concerns should be addressed by the establishment of a statutory position of Registrar of Credit Unions within the single regulatory authority. The Bill provides for the implementation of the recommendations contained in the McDowell report and is consistent with recommendations of the World Council of Credit Unions that credit unions should be regulated by the same entity as the wider financial sector.
Senators will be aware that the Irish League of Credit Unions has had a concern that by placing the registrar within the regulatory authority structure, there would be an implication that they would be regulated in the same way as much larger financial institutions. This is not the case. However, officials and the Minister had intensive discussions with the ILCU and the Bill was amended in the Dáil to copperfasten the requirement that the authority must deal with them in a manner which has regard to their special nature and the particular legislation that applies to them.
In his statement to the Dáil in July 2002 in relation to the report of the inspectors appointed to inquire into the affairs of Ansbacher (Cayman) Limited, the Minister referred to the constraints on banking regulators arising from the confidentiality provisions contained in EU and national legislation. He stated that it was his intention to make significant change in the area of confidentiality by way of Committee Stage amendments to the Bill. These proposals are contained in section 33AK to be inserted in the principal Act. The emphasis of this section, as inserted into the Bill during Committee Stage in the Dáil, is on the obligation to disclose information to other statutory bodies where there is a suspicion that the law is being broken.
Subsection (3) of this section is the core provision. It stipulates that the bank must report to the relevant authority – for example, the Garda, the Revenue Commissioners or the Director of Corporate Enforcement – if it comes across any information that leads it to suspect that a criminal offence or a breach of the Companies Acts or the Competition Act has been committed. The bank need not report if it is satisfied that the institution concerned has reported the information to the relevant authority. As tax evasion and failure to report money laundering of the proceeds of tax evasion are criminal offences, Senators will readily appreciate the significance of this provision in light of the DIRT and Ansbacher investigations.
I now turn to another element of the group of recommendations contained in the McDowell report. The group agreed that, where functions are being transferred to the single regulatory authority, relevant enforcement powers which relate to those functions should also be vested in the authority. The group considered that the ability of the single regulatory authority to regulate any financial market without being able to impose civil sanction to enforce the same would result in ineffective regulation. The group recommended that, in the first instance, the single regulatory authority should have power to impose sanctions on a financial services provider for breach of the relevant regulatory code. The group also identified a need to set up an appeals system for financial institutions which wished to appeal against the imposition of such sanctions
The group recommended that a tribunal should be established at the outset of the new regulatory arrangements and that this should be facilitated by the inclusion of the necessary provisions for the establishment of the tribunal in the legislation providing for the establishment of the SRA. Accordingly, the Bill contains provisions for the establishment and operation of the Financial Services Appeals Tribunal.
The Bill provides for procedures for hearing and determining appeals. It also provides for references and appeals to the High Court and for other miscellaneous matters relating to the tribunal.
It is intended that the IFSRA will draw the majority of its initial staff from the regulatory departments of the Central Bank and the Department of Enterprise, Trade and Employment, including the Office of the Director of Consumer Affairs and the Registrar of Friendly Societies. The Bill provides for the permanent transfer of staff from the Department to the new authority, subject to their agreement. The staff of the entity, whether working in the IFSRA or elsewhere, will be employees of the reorganised bank, the Central Bank and Financial Services Authority of Ireland. The board of the bank is required, with the agreement of the chief executive of the regulatory authority, to arrange for employees of the bank to be assigned to the authority. These provisions should ensure the authority will operate effectively and efficiently from the outset.
As Senators will be aware, the McDowell report contained a package of recommendations in regard to financial regulation. The Bill deals mainly with the establishment of the IFSRA. The Minister for Finance intends to publish a second Bill later this year to implement the remainder of the recommendations contained in the McDowell report. The main provisions to be included in the second Bill are to establish a statutory financial services ombudsman; to establish consultative panels of the financial services industry and consumers; to address issues arising from the recommendations contained in the report of the review group on auditing; and to make additional provisions for codes of practice by the new authority and the penalties applicable where the codes are breached.
I would like to make two basic points in conclusion. The Bill is concerned essentially with putting in place the basic structures for regulation and part of a package of measures rather than stand-alone legislation. As regards the basic structures for regulation, I am confident that the new structures provided for in the Bill give us the best of all worlds. On the one hand, there is a new regulatory authority – the IFSRA – with a clear consumer mandate, and, on the other, there is an organic linkage to the authority responsible for stability and monetary issues. There is also a structure in the Central Bank and Financial Services Authority of Ireland which facilitates efficient use of resources and mobility of staff. The Bill also provides for clear accountability, both within the new structures and to the Oireachtas. The measures incorporated in it and the proposed second Bill will together lead to more efficient regulation, with a stronger consumer focus than heretofore. I commend the Bill to the House.