Seanad Éireann debate -
Wednesday, 9 Apr 2003

Vol. 172 No. 10

Central Bank and Financial Services Authority of Ireland Bill 2002: Report and Final Stages.

Acting Chairman: I remind Senators that they may speak only once on Report Stage, except the proposer of an amendment who may reply to the discussion on the amendment. In addition, each amendment on Report Stage must be seconded.

Mr. Higgins

I move amendment No. 1:

In page 5, between lines 20 and 21, to insert the following:

"(2) Within two years of the coming into operation of this Act, the Minister shall present to the Oireachtas a review of the operation of the Act which will inter alia, assess–

(a) the impact of the operation of the Act on the Credit Union Movement,

(b) the adequacy of the system for developing a strong pro-consumer financial environment, and

(c) the quality of the reporting arrangements to provide the Oireachtas with timely information in regard to–

(i) protection of consumer savings,

(ii) transparency of information for the users of financial services,

(iii) competition among the providers of financial services, and

(iv) efficient redress for consumer grievances in relation to the provision of financial services.".

On Second and Committee Stages, considerable anxiety was expressed regarding the manner in which the credit union movement would fare within the new arrangement being introduced for the regulation of the financial services sector. The credit union movement was set up with the specific aim of providing for the small saver – for the person for whom the banks would not consider as having sufficient claim to make financial arrangements with a bank. It was established as the bank for the small people. It has succeeded to such an extent that it has grown from small beginnings and to a position where its tentacles are spread across the country. The credit union movement is established in every community, both urban and rural. Its success, in terms of its membership and service, speaks for itself.

The credit union movement is now being brought in under the umbrella of the new agency, the Irish Financial Services Regulatory Authority, which will be under the thumb of the Central Bank. It is important to monitor how the new legislation will affect the credit union movement. The Government has moved away from its original intention to create an independent statutory regulatory body to deal specifically with the credit union movement. It has decided to subsume this body into the new authority. Reports from the credit movement union will come directly to the Central Bank and not to the Oireachtas, as was the original intention.

I am concerned that there seems to be an intention to bring together two conflicting sets of imperatives, namely, prudential management and consumer protection. I refer to observations made by independent authorities such as Dr. Ray Kinsella, an eminent professor at the Michael Smurfit graduate school of business at University College Dublin and a former adviser to the Government on economic and financial affairs. He has set himself firmly against the merging of the two roles and regards it as a total conflict of interests. He has stated that not only should they not be merged, but that they are also mutually incompatible and that the capacity of both bodies to carry out their individual agendas or remits would be damaged.

I am concerned about the capacity of the Oireachtas to oversee the effectiveness of these bodies and I wonder if they will have the resources to do what is required of them. I propose this amendment because of the considerable anxiety within the credit union movement. I ask that a two-year review be carried out to investigate whether the system works and whether the Central Bank has delivered on consumer protection, whether the bank is providing proper consumer information or whether there is real competition in the financial services sector rather than the kind of cartel approach that operates at present, under which there is little difference between anything on offer from one bank as against another. A marginal increase or reduction in interest rates by one institution is inevitably followed by the others.

The Bill is trying to marry too many conflicting imperatives. The large financial institutions are entirely driven by high margins and profit-making. That is understandable because they have a responsibility to their directors and shareholders. On the other hand, the credit union movement is driven by a totally different agenda and set of imperatives, namely, low margins and maximum service to the hundreds and thousands of consumers who are its members. It is based on mutual trust. The small saver can be an active participant and a genuine stakeholder in the movement. I look forward to hearing the Minister of State's reply.

Mr. U. Burke

I second the amendment.

Mr. McDowell

I apologise for my absence from the House last week. Unfortunately, as I was abroad I missed Committee Stage. I want, therefore, to resist the temptation to repeat what might have been said already by other Senators.

I support the notion of a single regulatory authority. The way various financial institutions have been regulated over the years has been unsatisfactory for a variety of reasons. There has been inconsistency and, while some elements worked well, other elements worked rather poorly.

The overall authority of the Central Bank has been wielded in a fashion which people have found unsatisfactory when it comes to consumer protection. The Central Bank would point out, correctly from a legal point of view, that as it never had specific legal responsibility in that regard, it could not be expected to stray beyond its primary duty. I support the notion of bringing the two functions within one body. Like others, however, I assert the need for a measure of independence between the two respective functions. Broadly speaking, I am willing to give fair wind to the structure devised by the Department after such lengthy debate.

In regard to Senator Higgins's amendment, I am in two minds about the whole credit union issue. I acknowledge credit unions have done huge work in recent years. They provide a service in many communities and workplaces which is not provided by others, or they provide it on more preferential terms to people who want to borrow small amounts of money. That service was not being provided for a long period by the commercial banks. It is very praiseworthy that the credit unions have provided this service. Within the movement, however, there is a wide disparity in regard to the different types of credit unions. There are some very small ones in rural villages or small workplaces and there are some very large ones which dispose of a lot of money, including credit unions based in some of the semi-State bodies.

As far as I know, regulation of the credit union movement has been very inconsistent over the years, even lax, as has the regulation of building societies. Within the new body, we should try to benefit from the expertise and regulation generally, which is bound to arise, to apply uniform rules to the credit unions. It should not be uniform in the sense that we should apply the same rules to them as to commercial banks, but at least it should be clear what the rules and regulations are and they should be applied on a consistent basis to all credit unions, irrespective of their size and so on. No system is perfect. Credit unions are not perfect, nor would they claim to be. They have had experience of imperfection in the not too distant past, about which I am sure they are conscious. While it is fair to seek to have a report back within a reasonable period to see whether the additional responsibility being placed on credit unions is onerous, nevertheless it is reasonable for the credit union movement to be brought within the single regulatory authority.

Minister of State at the Department of Justice, Equality and Law Reform (Mr. B. Lenihan)

The amendment suggests that a review of the operation of the Act should take place, the results of which would be presented to the Oireachtas within two years of the Act coming into operation. The Minister for Finance has stated that any review of the legislation should wait until we see how the legislation has operated over a few years.

The Bill provides for the re-organisation of the Central Bank and the establishment of a regulatory authority. It will be necessary to allow sufficient time for the new structures to come into operation before a realistic assessment of their impact can be made. This will allow the regulator sufficient time to make a judgment on whether the legislation needs further amendment. Both the Central Bank and the regulatory authority will produce annual reports which will be laid before each House of the Oireachtas. The annual strategic plan of the regulatory authority will also be laid before the Houses of the Oireachtas, following which the authority must publish the plan.

Coupled with the provisions of section 33AM to the principal Act, which provide for certain officers of the bank to attend before the appropriate Oireachtas committee, this will allow the Oireachtas ample opportunity to assess the operations and activities of the Central Bank and the regulatory authority. The consumer director and the registrar of credit unions will also produce both strategic plans and annual reports for submission to the regulatory authority. Under the circumstances, an effective ongoing review and assessment process will be facilitated by the existing provision, therefore I am not disposed to accepting the amendment.

As previously announced by the Minister for Finance, it is intended to publish a second Bill to implement other recommendations contained in the McDowell report. The Bill will include provisions establishing consultative panels of consumers and the financial services industry. Among the functions planned for the consumer panel will be review of the discharge by the regulatory authority of its functions, including those of the consumer director and the registrar of credit unions.

Senator Higgins raised a number of points of general principle in consideration of his amendment. With his leave, I might postpone the question of consumer protection to a further amendment in his name and deal with the question of the credit union movement, which does not appear to be covered in any further amendment raised by the Senator. Senator McDowell also referred to credit unions. I acknowledge the broad welcome he has given the measure.

There was considerable discussion in both Houses on whether there should or should not be a one-stop-shop in terms of financial regulation. It is understandable that some advocates argue consumer protection should have a distinct priority of its role in a separate authority or that the credit union movement should not be regulated in a Bill of this type. It is important to realise that it is important in a small jurisdiction that we have one effective body which can perform all of these tasks in a complementary manner. We will be addressing these issues during debate on the amendments. The issue which does not appear to be reflected in further amendments is that of credit unions.

It is important to note that there have been detailed discussions between the Minister, his officers and the credit union movement. The Bill as initiated provided that the functions of the registrar of friendly societies, under the Credit Union Act, should be carried out independently by a registrar of credit unions loosely within the overall framework of the regulatory authority. Both the members of the interim regulatory authority, which was established in April 2002 on a non-statutory basis to manage the transition to the new arrangements, and the Governor of the Central Bank expressed reservations about the reporting arrangements for the registrar of credit unions within the proposed authority and the fact that the level of independence proposed for the registrar appeared to contradict principles of good governance.

In the context of these concerns, the Minister felt obliged to look again at the provisions relating to the registrar. He stressed that these were the only reasons he proposed the amendments. Amendments were made in the Dáil which have altered the reporting relationship of the registrar of credit unions, bringing the position more fully within the framework of the new authority. The reporting relationship of the registrar is now similar to that proposed for the consumer director.

The acting secretary to the interim Irish Financial Services Regulatory Authority wrote to the league on 14 November 2002, before its conference in Galway, and the new chief executive designate of the regulatory authority also wrote to the league on 3 December 2002. The letter stated, among other things, that the members of the interim authority should recognise and understand the important role the credit union movement plays in this country, the size and reach of the movement, its 'not for profit' but voluntary nature and that it has broad support among the communities it serves. They should also recognise that the credit unions have different functions and objectives from commercial financial institutions such as banks and building societies, the regulation of the credit union movement must be appropriate to those functions and objectives, highlight that for this reason the Government, in making clear its acceptance of all these principles, is proposing a separate statutory post of registrar of credit unions who will work under the requirements and protection of the Credit Union Act 1997 and want to work with the Irish League of Credit Unions. They have stated they are open to discussing the valuable role the field officers play in assisting the league members and that their only concern with the legislation as currently drafted is the accountability of the registrar of credit unions. The Minister for Finance and I agree with the members of the interim authority on these matters.

During all Stages of the debate, Deputies and Senators expressed their appreciation of the role and contribution of the credit union movement to national life. The officers of the Department of Finance met with the league on a number of occasions in January. A draft text was arrived at, with which the league confirmed it was satisfied. This draft was then submitted to the parliamentary counsel for official drafting with a view to making the amendment on Report Stage in the Dáil.

I stress that the supervision of credit unions by the new regulatory authority should not be viewed as a threat to the movement. It should be seen as a development that will work to the advantage of the credit union movement and member customers of credit unions.

The Bill, as it stands, ensures that the concerns expressed by the Irish League of Credit Unions have been taken into account by ensuring any directions given to the registrar must be within the scope of the Credit Union Act 1997. Legally speaking, that Act is the Ark of the Covenant for the credit union movement. Furthermore, in issuing directions to the registrar under this subsection the regulatory authority shall have regard to the particular nature of credit unions by reference to the conditions for the registration of credit unions set out in the 1997 Act, the objects and common bonds referred to in that section, and the voluntary ethos of credit unions. That is now written into legislation. I reiterate the position of support by the Minister for Finance for the credit union movement. The position of a statutory registrar of credit unions within the regulatory authority will help ensure the strong voluntary and community ethos of the movement continues. This is now clearly acknowledged in the Bill, as it stands.

A note was circulated by the league to the credit unions making it clear that the further amendments proposed in the other House recognised, as they recognise in this House, the distinct voluntary character and social and economic roles of credit unions. They are reinforced by correspondence from the interim board of the authority in relation to the regulation of credit unions. The Bill, as it stands, therefore, will mean that the authority will have to take into account the unique nature of credit unions and decisions affecting them, and credit unions will continue to be regulated under the 1997 Act. That is the letter of comfort the Government received from the league.

Looking at the issue in a balanced way, I agree with what Senator McDowell said, that for the credit unions' own sake it is better that they are integrated into this one-stop-shop because they have important financial responsibilities. In a sense their integration into this legislation through the registrar, the person who will stand on his or her own feet under this legislation, is a clear recognition of their importance in the modern financial services set-up.

Mr. Higgins

I am disappointed that the Minister of State has not seen worthy to accept this amendment. I do not want to misquote him but he said the Minister of Finance was well disposed towards having a review carried out of the working of the legislation and the new regulatory authority "after the passage of a few years." What I am talking about is the passage of two years. Surely after the legislation has been operational for two years that would be a timely juncture at which to carry out a review of how it is working under the different headings. What I have set down in the amendment is a series of areas which would be monitored by the review body to see if the legislation was working and delivering. The legislation is going to go through and we wish it well. The role of credit unions is now de facto part and parcel of the remit of the new agency, though we might differ as to whether it is appropriate.

I welcome the ongoing dialogue between the Department and the credit union movement, and the comfort and assurances given to the movement but essentially I am talking about a review being carried out at a 24 month juncture and a report to the Oireachtas in order that we would know exactly how the Bill was working. If it is working well, "if it ain't broke, don't fix it" but if not, let us address the defects and deficiencies and bring forward amending legislation to plug whatever gaps are apparent or rectify any weaknesses or malfunctions. I am at a loss to know the reason, rather than just fending off the amendment into the dim and distant future, the Minister of State and the Department will not accept the amendment. How long is a few years? How long is a piece of string? What length of time is the Minister of State talking about when he says the Bill will be reviewed "after a few years"? Are we talking about three, four or five years? It is wrong that any legislation which has far-reaching consequences should be allowed to continue in an open-ended fashion under the general heading that a review will be carried out "after a few years".

I take into consideration the fact that the regulatory authority shall have due cognisance of the role of the credit union movement, its uniqueness, etc., but these are all words and are very vague. I would like a root and branch examination by an independent review body or by the Department of Finance of whether the legislation was working and fulfilling its remit. I have set down a list of specific headings which most reasonable people would accept as appropriate from the point of view of gauging whether the legislation was delivering on the purpose for which it was introduced to both Houses in the first place. That is the reason I am disappointed. I ask the Minister of State again about the phrase "a few years". How many years are we talking about? Is it three, four or five years? How will the legislation be reviewed? What kind of gauge, monitor or barometer will be used to see if the various elements of the legislation are working in carrying out its remit?

An Leas-Chathaoirleach

On Report Stage the Minister of State may reply only once.

Amendment put and declared lost.

Mr. Higgins

I move amendment No. 2:

In page 10, paragraph (g), line 18, after “problems” to insert “and the quality and cost of services to the consumer”.

This deals with section 5 which deals with the general functions and powers of the Central Bank. It sets out a list of functions. It states the bank has the following functions: to carry out the efficient and effective co-ordination of the activities of its constituent parts; to promote the development within the State of the financial services industry; where appropriate, to represent and co-ordinate the representation of the bank on international financial bodies and at international meetings relating to financial or economic matters; and to establish and maintain, either directly or indirectly, contact with the monetary authorities.

The paragraph I am seeking to amend is paragraph (g) which provides as follows: “to provide for the collection and study of data that deal with monetary and credit problems and to publish information about that data”. I am seeking to insert after the word “problems” the words “and the quality and cost of services to the consumer”. It would seem a sensible insertion, not alone would it deal with monetary and credit problems, it would also deal with the quality and the cost of services to the consumer. That marries with what I was talking about – consumer protection, value for money, competition in the sector, etc. The amendment is self-explanatory. I would like to hear the response of the Minister of State.

Mr. McDowell

I second the amendment.

Mr. B. Lenihan

The amendment proposes to change section 5A of the principal Act as inserted by section 5 of the Bill which provides for the general functions and powers of the Central Bank. However, responsibility for consumer protection is a delegated function of the bank to the regulatory authority, and the legislation relating to the authority provides a variety of measures that deal with the quality of financial services to consumers and accountability with regard to consumer protection.

First, the regulatory authority is charged with responsibility for taking action to increase awareness among members of the public of available financial services and the cost to consumers, as well as risks and benefits associated with the provision of those services. This includes reference to the quality of financial services to consumers.

In addition, the Bill provides for the appointment of a person to the statutory position of consumer director who will be responsible for monitoring the provision of financial services for consumers of those services, having regard to the public interest and the interests of consumers. The consumer director is required under the Bill to produce an annual report. One of the matters which must be included in the report is the steps taken by the regulatory authority to increase the awareness of consumers of relevant financial services, the cost to consumers, and the risks and benefits involved in using those services. The authority is also required to produce an annual report which must be submitted to the Minister for Finance who must, in turn, have the report laid before each House of the Oireachtas.

Both the consumer director and the regulatory authority are required to produce strategic plans each year, which must specify the nature and scope of the activities to be undertaken and the strategies and policies for achieving those objectives. They must also specify the targets and criteria for assessing the performance of the authority and the consumer director.

The chairperson of the regulatory authority, the chief executive of the authority and the consumer director can all be called before the relevant Oireachtas committee. It is appropriate that the authority take responsibility for matters relating to consumer protection and awareness. The existing provisions of the Bill allow the authority to address the matters raised in the amendment and to be held accountable for them.

I regret therefore that I cannot accept this amendment. Essentially, my argument is on the narrow issue of this amendment. The matters comprehended in it are comprehended in the Bill already under the heading of the regulatory authority.

This might be as good a stage as any to deal with the more general argument which I think the Senator is pressing about the wisdom of combining the prudential regulatory function, a traditional function that has always been performed by the Central Bank, with the consumer protection function which it is now proposed to vest in the regulatory authority. In relation to that issue, which has occupied a good deal of the debate, the Central Bank has always been responsible for the prudential regulation of certain financial institutions operating in the State. The Department of Enterprise, Trade and Employment supervised the insurance industry, while the Director of Consumer Affairs had certain responsibilities under the Consumer Credit Act 1995 in relation to financial service providers, including responsibilities relating to charges and advertising.

Due to legal confidentiality requirements there has been a well highlighted difficulty in the full exchange of information between regulators. The McDowell group felt strongly that separating the consumer issues from the prudential regulator had two important disadvantages: first, it left unresolved the legal problem of passing relevant information from the regulatory authority to the Director of Consumer Affairs, and second, the advantages of a one-stop-shop would be lost in that there would be two official bodies dealing with different aspects of financial services regulation. The McDowell group concluded that, given the requirement imposed by the relevant EU law in relation to disclosure between regulators, the best method of providing for the maximum flow of information between prudential regulators and those concerned with consumer protection was to combine both functions within one authority. The Government considered this issue at some length and decided that this restriction in the exchange of information was unacceptable and because of this it decided to implement the structure before the House.

The question of how best to deal with the issues arising from combining the functions of prudential regulation and consumer protection were dealt with comprehensively in the report of the McDowell group. A number of options were examined to see how best each of them would work. The group examined the issue of protecting the interests of clients of financial institutions at two levels, first, the level of the protection of consumers' interests in the context of the solvency of regulated entities and, second, at the level of the individual consumer in his or her banker-creditor relationship, or his or her relationship with a particular financial institution. The relationship between these levels was looked at particularly from the point of view of the obligations imposed under EU law, in relation to the prohibition on disclosure of information to the relevant authorities on issues for which it has no statutory function.

The ability to disclose information is very important, as was seen for example in the DIRT inquiry. In the end the expert group took the view that the consumers' interests would be best served by combining the functions of consumer protection and prudential regulation in one body. Various alternatives were examined, first, separate authorities for prudential regulation and consumer protection; second, two competent authorities with one having a consumer protection function; or third, a regulatory authority with a subsidiary responsible for consumer protection. They were all ruled out as it was only within the entity which combined prudential regulation with consumer protection that the disclosure of information between the two could be done within the provisions of EU law.

Apart from the issue of the exchange of information, the Government was of the view that integration of prudential supervision and consumer protection had certain advantages. First, it provides 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. Second, Ireland is a relatively small country with a limited pool of expertise in the area of financial regulation. The building of a critical mass of skills relating to financial regulation in a single location is of major importance to the country. Third, it places the interests of consumers at the heart of financial services regulation by giving the authorities specific responsibility in this regard.

The Bill provides for very clear structures. The functions of the financial authority, the consumer director and the registrar of credit unions are clearly set out in the legislation. Each of these must produce a strategic plan outlining their policy objectives. These strategic plans then participate in the authority's strategic plan which has to be approved by the Minister. If there were any suggestion of a conflict in policy objectives the Minister would ensure it was resolved. A simple example of this would be if there appeared to be an overlap in the policy objectives of the Army and the Garda in relation to drug seizures. The appropriate Minister or Government would step in and ensure it was resolved.

Likewise in this area if such a major conflict emerged it would have to be addressed. It is important to stress that this Bill effects a fundamental transformation in the character of the Central Bank. To argue that it is dangerous to combine the prudential regulation function with the consumer protection function because as a matter of history the prudential regulation function was the dominant activity of the Central Bank, apart from safeguarding the currency, somewhat misses the point that in this legislation there is a fundamental transformation in the character of the Central Bank.

I was not able to reply to Senator Higgins's previous interventions but I should say that the ministerial review that has been promised is a review by the Minister of the legislation. From his perspective the top priority is now to advance the second item of legislation dealing with the consultative panels from consumers and from the industry. When that legislation is enacted a number of years will have passed and at that stage he envisages conducting a ministerial review. It is important to stress that full accountability to these Houses has been written into this legislation, not just through the laying down of documents and the formulation of strategic review plans but through the designation of a number of crucial officers in the new authority, and in the Central Bank, who can be called before Oireachtas committees to give an account of themselves. The Oireachtas is free at any time to review this legislation and its operation and implementation, and that is fully written into the Bill. That is my reply to the point raised by the Senator in his previous remarks.

Mr. McDowell

A Leas-Chathaorligh, am I prohibited from speaking? Was my formal seconding my sole contribution?

An Leas-Chathaoirleach

Yes. The Senator formally seconded the amendment but he should have indicated to speak before the Minister. I have no difficulty about it but Standing Orders provide that once the Minister has replied the debate can only go back to the proposing Senator – in this case Senator Higgins. I am constrained by procedure.

Mr. McDowell

That is all right. I will find some other opportunity to say what I want to say.

Mr. Higgins

Perhaps the Leas-Chathaoirleach will apply the same laxity to Senator McDowell on the next amendment as he did to the Minister of State in allowing him to reply.

An Leas-Chathaoirleach

I will keep within the confines under which I operate.

Mr. Higgins

There is a marked degree of glasnost in this House by comparison with the other House. I take the point that the Minister of State is making and I will be withdrawing the amendment. In relation to the Minister of State's comments that this fundamentally changes the character of the Central Bank, we will all welcome that if it happens. Does the leopard ever change its spots? The problem is – and this was quoted ad nauseam in both Houses on Second Stage – that the Central Bank effectively has divested itself entirely of its consumer protection remit, as it said on occasion in the past that it wished. That was for somebody else. It had a central, important role that we all acknowledge which was to ensure the solvency of its constituent members. It ensured that the consumer was protected in that regard by ensuring that the banks were solvent. We certainly hope that the pledge of faith that has been given to the Central Bank in relation to its overarching responsibility in connection with this regulatory authority actually will happen.

I am at a loss to understand why the Minister of State and his advisers refuse to accept the change I seek to introduce, that is to insert "and the quality and the cost of the service to the consumer" albeit that it is already comprehended within the Bill. Why not be doubly sure and doubly safe? This is innocuous enough from the point of view of inserting what would seem to be two further sensible areas of assessment by the authority, that is, to ensure that as well as establishing the monetary and credit problems and examining these, it would also examine the quality and the cost to the consumer. Those are my final comments.

Amendment, by leave, withdrawn.

Mr. Higgins

I move amendment No. 3:

In page 31, line 29, after "designate" to insert "the Director of Consumer Affairs and".

The subsection in question states: "Instead of appointing a person under subsection 1(c), the Minister may designate the holder of a specified office as an official member of the Regulatory Authority. Whoever is for the time being the holder of such an office is an official member of that Authority." What I am attempting to insert there is the Director of Consumer Affairs. Perhaps the Minister would like to reply.

Mr. McDowell

I second the amendment. As it refers to the Director of Consumer Affairs, or Consumer Director as will be, perhaps I can say what I would have said in response to the previous amendment.

The structure being developed is ingenious, although I am not totally convinced it will work. I was never completely persuaded that it was not possible to have the exchange of information to which the Minister of State refers within the structures we had previously. In the light of the legal advice we were given about the application of the European directives to the previous position, I am not totally convinced the new structure gets around this. We can argue law until we are blue in the face and it will do us no good and give us no satisfaction but let us assume for the moment that the structure being put together is legally sound.

It is hugely important that there should be the exchange of information referred to. The most recent example of this was when specific practices within a certain bank were discovered – perhaps not as extensive as we were led to believe at the time but nonetheless they were discovered – which clearly were not in consumers' interests. On the contrary, it was suggested that consumers were being ripped off by the bank. It came to light later that the Central Bank was aware to some degree at least of these practices but did not disclose the information. It made the case that it was not obliged or allowed to under law. Such a position is intolerable. Certainly, if the bank in the exercise of its prudential supervision powers comes across practices which are clearly not in the interests of consumers, there must be some facility whereby that information is shared with the consumer directorate side of the business. In so far as the new structure allows this, clearly it is a good thing.

The Minister of State makes the point that the Central Bank has changed its ethos. I am not sure that it has or that it would be totally a good thing that it would. It has been good at prudential supervision and has generally done a very good job. There have been no rifts in the banking or financial services structure generally going back over a long period, which must be marked as a signal of success. It is the primary function of the bank on that side of the business. What it has not done is the stuff that is not its business, namely, consumer protection.

For consumer protection to work properly, there must be a certain positive creative tension between it and the regulatory side of the business. Clearly, the ethos of those working in both sections of the new structure will be somewhat different because they will perform different tasks. It would be good if there was to be a certain tension between them, albeit within the context of shared information. There is within the structure a tension which, I suppose, will in time have to work its way out and find its own means of expression. As I said when making the point earlier, it is a reasonable goal and deserves fair wind but is not without tensions. We must keep a close eye on how it works out.

Mr. B. Lenihan

The proposed amendment would change the provisions relating to the membership of the regulatory authority to provide that the Minister for Finance may designate the Director of Consumer Affairs as an official member of the authority. I am glad to advise the Senator that the Bill already allows for this possibility. The proposed new section 33E(2) of the principal Act as inserted by section 26 of the Bill provides that the Minister may, instead of appointing a person to be a member of the regulatory authority, designate the holder of a specified office as an official member of the authority. That power, although stated in more abstract language, is already conferred on the Minister in the Bill. The Director of Consumer Affairs is the holder of a specified office within the meaning of the Bill and the current wording of subsection (2) leaves it open to the Minister to appoint the director as an official member of the regulatory authority. In the circumstances, the proposed amendment is superfluous as its purpose is already comprehended by the legislation and there is no difficulty about designating the Director of Consumer Affairs as a member of the regulatory authority. It is permitted under the legislation. On that purely technical issue, I oppose the amendment.

On the wider issues canvassed on this occasion by Senator McDowell, the kernel of one of the objections of Opposition parties to the Bill has been the combination of the prudential regulation function with the consumer protection function. It is important to stress that this is a new Bill. As I said on Committee Stage, it is not a case of "New presbyter is but old priest writ large". The Bill is detailed. It essentially transforms the Central Bank into a new bank which combines with a regulatory authority. Because of the fundamental change in the character of the bank envisaged by the legislation, this is a case of a leopard changing its spots. The Government took a view on combining the functions in order that the issue of prudential regulation, a traditional function of the bank, is restated in the Bill but is combined with consumer protection in the regulatory authority.

I agree that the choice of an appropriate supervisory structure was a difficult one. Senators are well aware of the huge changes that have taken place in the financial services industry in recent decades. The traditional lines of demarcation have become blurred in the provision of financial services, whether by way of credit, loans, current and other types of account operations and international finance. There has been considerable change. Financial institutions of all types tend to offer products and services, directly or through affiliates, that compete against those offered not only by similar types of institutions but also by other categories of service providers. The traditional lines of demarcation have become blurred as we can see in all the markets in the financial services sector.

The Government had to make a judgment call and decided that, by combining both functions in a small jurisdiction like Ireland, a one-stop-shop would have all the information available to it. There is an attraction and cogency to this argument. It is hoped we can establish the authority by May this year. Assuming that happens, the legislation will have provided an opportunity to establish an authority which can put consumer protection at the heart of good banking practice. By combining these functions, one creates that opportunity.

Mr. Higgins

I accept the Minister of State's explanation.

Amendment, by leave, withdrawn.

Mr. Higgins

I move amendment No. 4:

In page 35, line 46, after "instrument" to insert "provided that the Chief Executive has published a report demonstrating that these levies are necessary for recovery of its cost and indicating the performance indicators which are being monitored to ensure efficient and cost-effective operation".

This is an add-on to the existing text. It relates to the powers to impose levies. The Bill reads:

The Chief Executive, with the agreement of the other members of the Regulatory Authority, may make regulations prescribing levies to be paid by persons who are subject to regulation under the designated enactments and designated statutory instruments.

My amendment would add:

provided that the Chief Executive has published a report demonstrating that these levies are necessary for recovery of its cost and indicating the performance indicators which are being monitored to ensure efficient and cost-effective operation.

In other words, there would be transparency in the form of a requirement to justify the levies imposed.

Mr. McDowell

I second the amendment and wish to ask the Minister of State two questions. One relates to the nature of the levies that will be imposed to recover costs. Is it intended to equalise this in some way between institutions or is it intended to make some assessment of the cost of regulating a certain institution or type of institution? I presume, for example, it would not be intended to levy a relatively small building society in the same way as one might a large commercial bank. How is it intended to reach a decision on what class of levy will be imposed on an institution or will the institutional basis be used? Will it be done instead on a class basis by attempting to levy the commercial banks together and allowing them to divide the cost between them?

Is it intended to make a profit? The Commission for Communications Regulation has been quite successful in making a substantial profit in the regulation of the telecommunications sector in recent years. I am not sure this is entirely appropriate. On the face of it, money is being taken from large commercial institutions with reasonably deep pockets but the inevitable result is that the cost is passed on to consumers which adds to the cost they pay. That is something we would not want to support. Is it intended that the levy should simply recover costs incurred by the regulator? What happens in the event of a profit being made in the course of a year? I am aware the section allows for a refund of levies in certain circumstances. Is it intended in circumstances where the amount levied exceeds costs in any one year that the excess will be released back to the institutions which paid it in the first place?

Mr. B. Lenihan

The McDowell report recommended that funding for the operation of the new financial services regulatory authority should come from the industry. Levies to fund the authority will be prescribed by the chief executive, with the agreement of the other members of the authority, by way of regulations. This will be done only after a detailed consultation process. Any regulations made by the chief executive must, in turn, be approved by the Minister for Finance who must lay them before each House of the Oireachtas. In addition, the budget of the regulatory authority, which the levies will finance, will, having been approved by the Minister, be laid before the Houses of the Oireachtas. The essential safeguards written into this legislation are ministerial approval of both the budget and the levies, parliamentary disclosure and preparation by the authority.

The estimate of annual income and expenditure must, under the legislation, specify the amounts expected to be collected and recovered during the financial year concerned from the imposition of levies and specify any other sources from which funds are expected to be obtained during that year to finance the authority's activities. It must also specify the amounts expected to be raised from both sources and the activities the authority proposes to undertake during that year.

The McDowell report emphasised the importance of adopting an approach which achieved a fair and equitable outcome. The approach, as set out, is considered the optimum one to achieve that aim. It is a preferable approach to that suggested in the amendment moved by Senator Higgins. The issuing of a statement, as this amendment proposes, would not achieve a desirable level of active consultation. The procedure outlined, in addition to the accountability provisions elsewhere in the Bill, ensures that the chief executive of the authority is accountable to both the Minister and the Houses of the Oireachtas in regard to the justification for the levies.

As already stated, the annual estimates will be laid before the Houses of the Oireachtas following approval by the Minister. Their accountability will be supported by the fact that the authority must also submit the annual strategic plan and the annual report to the Minister who, in turn, will lay them before the Houses of the Oireachtas. The Minister will also require the authority to ensure that its annual report includes appropriate indicators of its performance.

I am satisfied that the approach outlined in the legislation is more effective than that proposed in the amendment, which would just require the chief executive to produce a statement. Consequently, I regret I will not accept the amendment.

Senator McDowell raised questions in regard to the levies and to whether funding can be achieved in a fair and equitable manner. He also inquired about how the levy system will operate. This is a matter to which the expert group gave much consideration. The first view it expressed was that if a system was to be developed which would be simple and generally acceptable to the industry, it would mean developing a formula for allocating the costs of regulation on an annual basis between the regulated entities. Clearly, this would have to be proportionate. The group felt that this could be achieved by devising a charging structure which would be based on a range of factors. These include the size of the firm's assets, the number of clients, the amount of funds under the firm's control, the value of new business in any one year and the value of commission payments and fee income, or a combination of these factors. A simpler approach could be adopted using factors such as the number of principals and employees in a firm.

The group also agreed that a principle in any charging regime would be the need to ensure that the competitiveness of the financial industry is not undermined by the charges imposed. This applies both to the competitive position of financial services entities relative to each other and the competitiveness of the financial industry internationally.

In light of the wide and varied nature of the body to be regulated, the group acknowledged that a number of different approaches could be adopted by the regulator. Essentially, the matter has been left for consultation under the scheme envisaged in the legislation with the relevant interests. Under the new legislation, which will be published later this year, the consultative panels – both representing consumers and the industry – will be established to deal with the regulatory authority. These panels will be established under the legislation to keep under review the operations of the authority.

The second issue raised by Senator McDowell related to whether the cost of these levies could be passed on to the consumer if they were excessive. It is important to point out that a specific cap on the amount of levies that can be applied to the credit unions is included in the legislation. That amount cannot exceed the cost of their regulation under the Credit Union Act 1997. That is the maximum cost that can be imposed on the credit unions. It is important that this protection is written into the legislation.

In regard to the other financial institutions, the ultimate safeguard is the ministerial sanction that is required for their regulation. I accept Senator McDowell's point that it can be tempting for a regulator to fund to excess. It is the vigilance of the Minister for Finance that must act as a deterrent if this problem develops.

Mr. McDowell

Is it intended to be on a break even basis? Is it intended to cover the costs?

Mr. B. Lenihan

Of course it is intended to be on a break even basis. It is not a cash cow for the Exchequer. There is no suggestion of that written into the legislation. There is an extensive consultation process envisaged in the legislation.

Mr. Higgins

In regard to the two important points raised by Senator McDowell concerning the formula to be used, the Minister of State said that the two options considered were a simple formula or a formula whereby the assets of a particular financial institution would be assessed together with the other elements and that the levy would be applied on that basis. Is he in a position to reassure us that this is what will happen?

He also stated that the cap applies in regard to credit unions, but that the ultimate sanction lies in the hands of the Minister for Finance. What can the Minister for Finance do in regard to the other financial institutions? On each occasion there is an imposition – this is happening in regard to the rather paltry €300 million levy imposed in the December budget by the Minister on the banks – it is inevitably passed on to the consumer. The banks pass it on and it is the consumer who pays at the end of the day. The Minister might use it as a way of garnering funds for the central Exchequer, but consumers actually pay whatever levies or taxes are imposed because banks protect themselves and their profits. Banks seem to have ample and ultimate power to do so.

Mr. B. Lenihan

In regard to the credit union movement, there is a specific cap written into the legislation. As far as the other financial institutions are concerned, the proposal that will be devised in the regulations drawn up by the authority will require ministerial sanction. There is no intention in this legislation to establish a body which will make a profit at the expense of the financial services sector. I appreciate that the Senator canvassed wider issues regarding taxation in the State and the imposition of levies on financial institutions, but such matters are relevant to a debate on a Finance Bill.

As far as this particular measure is concerned – I wish to reassure Senator McDowell who also raised it – this entity, comprising the Central Bank and the regulatory authority, is designed to work on a break even basis. That is the scheme of the legislation. The regulations drawn up by the authority are to fund the services provided by the authority and to extract from the industry a contribution for their funding. A detailed consultation process is laid out in the legislation and this will eventuate in regulations being drawn up by the authority which will require ministerial sanction and which will be laid before the Houses.

Amendment, by leave, withdrawn.

Mr. Higgins

I move amendment No. 5:

In page 45, to delete all words from and including "in the name of" in line 22, down to and including "Authority" in line 26 and substitute "after consultation with the other members of the Regulatory Authority".

This amendment deals with the responsibility of the consumer director and seeks to amend the new section 33S(6) which states:

The Consumer Director may issue codes or impose requirements under an enactment or statutory instrument referred to in subsection (2), but only in the name of the Regulatory Authority and after those codes or requirements have been approved by the other members of the Regulatory Authority.

The amendment seeks to delete all words after "but only" and to insert in their place "after consultation with the other members of the Regulatory Authority". It basically seeks greater consultation with the regulatory authority.

Mr. McDowell

I second the amendment.

Mr. B. Lenihan

The Bill provides that the consumer director may issue codes or impose requirements on financial services providers, but only in the name of the authority and with the approval of the other members of the authority. The amendment proposed by Senator Higgins is that the Director of Consumer Affairs be only required to consult with the other members of the authority in respect of issuing codes or imposing requirements.

The codes and requirements will be issued to protect the consumer. It is important that there be complete agreement from the regulatory authority, in whose name they will be issued. If some institution is in breach of a code of conduct or requirement, the regulatory authority will have to deal with it. Thus, although the Director of Consumer Affairs is a member of the authority, it is fitting that codes or requirements issued by him or her be in the name of the authority. I am, therefore, of the view that the provision, as drafted, should remain and I am unable to accept the amendment.

The McDowell group recommended that the regulatory authority should have the power to impose penalties. The question of providing this power to the regulatory authority is being considered in the context of the No. 2 Bill. As the imposition of penalties will be linked to these codes of practice, it is only appropriate that the codes be issued in the name of the authority and not in that of the consumer director because the power to impose penalties, as recommended by the McDowell report, will be vested in the authority.

Amendment, by leave, withdrawn.

Mr. Higgins

I move amendment No. 6:

In page 46, between lines 30 and 31, to insert the following:

"(e) comparisons against best practice in other comparable countries in relation to the cost of financial services and the range and quality of services offered.”.

This amendment deals with the annual report. The new section 33T(3) sets out in detail what must be included in the annual report. It states:

(3) In particular, an annual report must include information specifying–

(a) how far the Consumer Director has promoted the interests of consumers of relevant financial services during the financial year concerned, and

(b) what steps have been taken by the Regulatory Authority to increase the awareness of consumers of relevant financial services of the costs to consumers, risks and benefits involved in using those services, and

(c) the extent to which competition exists among providers of those services in so far as it affects consumers of those services, and

(d) developments that have taken place with respect to the provision of those services in so far as those developments affect consumers of those services.

These provisions are very laudable and commendable. I am seeking to insert another requirement relating to "comparisons against best practice in other comparable countries in relation to the cost of financial services and the range and quality of services offered", which would be contained in the annual report. It would be wise to examine how our model fares against others.

The McDowell report has been referred to extensively and was the source of this legislation. However, the appendix to the report refers to 24 or 25 different countries, most of which did not adopt the kind of model being enshrined in law in the Bill. It would, therefore, be good to have a review that would be as all-embracing as possible in order to see what is happening in the international market and how we compare in terms of best practice.

Mr. McDowell

I second the amendment. I understand that it deals with the strategic plan to be presented by the consumer director on an annual basis. It seems reasonable to include the provision contained in Senator Higgins's amendment.

One of the difficulties with financial services is that those who use them – I refer to individual consumers rather than institutions – frequently have a limited notion of what they are buying. They rely heavily on the advice of so-called experts – sometimes they are experts – and they frequently possess no information of an objective kind. Information about what happens in other jurisdictions and the products on offer there is often not available to the average consumer. It would, therefore, be reasonable to include an assessment of best practice in other countries in the strategic plan of the consumer director.

Mr. Quinn

The amendment has been discussed previously and it appears to be worthy of consideration, if only to put the minds of the members of the public at rest by demonstrating that we are benchmarking against other countries to see how well we are doing.

Mr. B. Lenihan

The provisions in the Bill set out certain items that must be contained in the consumer director's annual report. The chief executive will be required to specify if any other matters should be included. The chief executive will be the person in the body being established by the legislation who will have the power of initiative in this respect. I have no doubt that he or she will take into account the kinds of issues the Senators have outlined.

It is not appropriate to be so prescriptive in legislation in respect of what else should be contained in the report. International comparisons might well be a feature of the report, but it will be a matter for the consumer director to decide what comparisons or methods might be used to fulfil his or her obligations. For those reasons, I am unable to accept the amendment. However, I was impressed by the tenor of Senators' contributions on this section and I will undertake to bring their concerns to the attention of the appointee.

Mr. Higgins

I thank Senators Quinn and McDowell for supporting the amendment. The Minister of State stated there is no doubt that the chief executive will take the issues we have outlined into consideration. However, I am at a loss as to why he would not enshrine in the legislation the fundamental requirement to gauge and monitor the operation of our strategy as against that of similar strategies in other countries. We pride ourselves on our internationalism and our taking part in what is happening globally, but the Minister of State is turning down the requirement to include, as an integral and vital part of the annual report, an analysis of what is happening in other jurisdictions. I genuinely believe that the Minister of State appreciates the merits of what is being proposed and it should be given serious consideration because it seems to make absolute sense.

Amendment put and declared lost.

Bill reported without amendment and received for final consideration.

Question proposed: "That the Bill do now pass."

Mr. McDowell

Perhaps the Minister of State might indicate when he intends that the legislation will be enforced. I understood from his earlier comments that the Minister intends to appoint the board in a few months or perhaps even sooner.

This legislation is an extremely important departure in the regulation of financial services and the industry is concerned that it should work well. Nonetheless, we should ensure that each function of the new authority will be allowed to have its own ethos. As I said earlier, there will inevitably be tension. I am aware of what has happened in other jurisdictions and the temptation will exist to adopt a softly-softly approach in the coming years in which the old embedded – if Members will excuse the use of that much-used phrase – traditions of the Central Bank will come to the fore and result in a careful approach to prudential supervision. However, there will be reluctance on the consumer side to exert the new powers of the regulatory authority with the force necessary to lend credibility to the new structure. I hope the consumer protection functions are provided with sufficient teeth in the Bill so they can be used in a public fashion, even if this is seen by some as rocking the boat and uncomfortable for certain elements in the financial services sector.

Mr. Higgins

I wish the authority well, just as everybody wishes well any authority set up to carry out a supervisory and regulatory role. It is important that the authority works, despite the fact that we have expressed doubts about the merits of merging its prudential and consumer protection elements. I agree with everything Senator McDowell said.

The Minister of State and I had an argument about when the review would be carried out. It should be carried out after a two-year period. The Minister of State said it would be a after a few years, but any reports the Minister or the Houses receive on an annual basis will, to an extent, be subjective. We need an objective, independent analysis of how the legislation will work. Will the Minister consider two years in place of the "few years" that is specified? It would be a timely juncture at which to carry out the regulation and would give sufficient time to see how the new body is discharging its remit once it is up and running.

Mr. Moylan

I thank the Minister of State and the departmental officials for a very detailed Bill. As the Minister said, it is a fundamental transformation in the Central Bank and introduces full accountability to both Houses of the Oireachtas.

Many excellent contributions have been made at all Stages of the Bill's progression. I thank those on the Opposition for what appeared to be genuine amendments which were well thought out and which the Minister took on board.

In regard to the point made by Senator Higgins on the proposed review of the Act, it is difficult to specify a particular time such as two years. However, I agree that it should be looked at. A marker should be put down for a review time for many Bills that come through the Houses of the Oireachtas.

Senator Mansergh sent his apologies for not being able to attend on Report Stage as he had dealt with the earlier Stages of the Bill. I thank the Minister and his officials for this detailed and excellent Bill.

Mr. Quinn

While some of us were critical of the number of amendments amending other amendments, clearly the purpose of the Bill is aimed at achieving something for which there is great demand. There is doubt in the public's mind about financial services and how they will be monitored. It is questionable whether the Central Bank has always acted in the public's interest as against the interest of other banks. The steps taken in the Bill go a long way towards ensuring that it is acting in the consumer's interest.

I fully support the notion that almost every item of legislation should be subject to review, even if it is only a question of acknowledging that everything is all right. A review should take place within a period of at least two years. I congratulate the Minister and his officials for the work they put into the Bill.

Minister of State at the Department of Justice, Equality and Law Reform (Mr. B. Lenihan)

Senator McDowell raised the matter of the commencement date of the new authority. The date fixed will be 1 May this year.

In response to Senator Higgins, I am undertaking on behalf of the Minister for Finance to write to the chairman of the regulatory authority to accept the spirit of the last amendment he tabled regarding the importance of including in the report comparisons against best practice in other comparable countries in relation to the cost of financial services and the range and quality of services offered. I regret I was unable to immortalise it on the legislative page.

In regard to the general question raised by Senator Quinn on the manner in which the Bill is drafted, I accept it is complex legislation. Senators will have an opportunity to reconsider these matters in the context of the second Bill which will be introduced later in the year. It is an important Bill which deals with other aspects left over from the McDowell report.

Senator Higgins also raised the issue of the number of years after which a review will take place. The Minister's uncertainty in regard to the number of years relates to the No. 2 Bill and when it will finally be enacted through both Houses of the Oireachtas and submitted to the President for signature. It is clearly an important Bill and, in a sense, it is difficult to assess the whole area before both items of legislation are in full operation. It is important to note that a measure of accountability of the new authority will be established from 1 May in regard to the Houses of the Oireachtas and its committees. There is nothing to prejudice or prevent an assessment at any stage of this new institution in that context.

I thank Senators for the interest they have shown in the Bill and for their co-operation in facilitating its passage through the House. It was a priority for the Government to have the measure enacted by 1 May so that we could proceed with the establishment of the authority.

I echo what the Minister for Finance said on Second Stage in the Dáil by paying tribute to those in the Central Bank, the officials in the Department of Enterprise, Trade and Employment, the Office of the Director of Consumer Affairs, and the office of the Registrar of Friendly Societies who are involved in the supervision of the financial sector. Their diligence and hard work has ensured Ireland is an attractive, soundly regulated location for the financial services industry. I wish them well in their work within the new structures. I again thank Senators for the co-operation they extended in facilitating the enactment of the legislation.

Question put and agreed to.