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Tuesday, 30 Jun 1998

Vol. 1 No. 9

Investor Compensation Bill, 1998: Committee Stage (Resumed).

Question again proposed: "That section 19 stand part of the Bill."

We resume the debate on Committee Stage of the Investor Compensation Bill, 1998. The list of proposed amendments has been circulated and I remind Members that Report Stage must be taken later today. I appeal to all to endeavour to complete our consideration of the Bill not later than 1 p.m. today. Is that agreed? Agreed.

We concluded last Thursday on section 19, when we discussed the establishment of a fund under the legislation. Perhaps Deputy Noonan will resume.

I suggested the Minister should consider an amendment to section 19 on Report Stage to make it more transparent. As drafted, it seems that under section 19(5) and (6), the Central Bank may approve a fund subject to whatever conditions, in effect, it sees fit. I suggested that it would be normal in legislation of this kind, while not specifying the detail of the conditions, to at least give some guidelines to the bank. A list of conditions would be attached which the Central Bank would, inter alia, take into account when they approved a fund or imposed conditions or requirements on the company.

I refer the Minister to section 25 where the supervisory authority, that is, the Central Bank, pursuant to an application made by an approved professional body and following consultation with the company, may sanction compensation funds set up by professional bodies. In section 25(4) there is an attempt to give guidelines on how this would operate, the terms and conditions under which investment firms may participate in an investor compensation scheme, the amount of contributions to be made by members of the compensation scheme and procedures for enforcement and compliance.

It seems the Minister is imposing requirements on the professional bodies which he is not imposing on the company. I have three reasons for disagreeing with the Minister's approach. First, it is proper that this legislation should include a section giving some indication of the frame of the conditions and details which the company will apply to investment funds. Second, the Minister does this elsewhere in the Bill as regards funds set up by professional bodies. Third, it is in the interest of the small group of people who will read the record of this debate to have an idea in advance of the conditions which will apply. The Minister should clarify this matter today or consider an amendment on Report Stage.

I take on board the points made by Deputy Noonan. The bank will also be able to impose conditions and requirements on how a fund is to be set up and operated. One reason for this is that the Bill implements the investor compensation directive. There is an overriding requirement that the directive is transposed properly.

The bank is the competent authority for the directive and it is important that it has the power to tailor investment compensation arrangements as necessary to ensure compensation required under the directive can be delivered. The section also provides that there should be no cross subsidisation. I understand the Deputy's point in relation to section 25 but the funds set up by accountancy bodies will be independent. We want to have more obvious direct control over the procedures set down regarding the independence of those funds.

That is why I referred specifically to the conditions being imposed on the professional bodies. The Minister is short-changing the Oireachtas by being more specific about the requirements that will be imposed on accountants and solicitors while at the same time having a position where the Members of the Oireachtas do not know what the conditions will involve. The committee is being asked to pass all Stages of the Bill by this evening in circumstances where the Minister is not saying what conditions will apply to funds set up by the company. I would have little difficulty if the Minister's intention was that the company would set up only one fund. However, under section 19(1), it can be a fund or funds. It could involve two or three funds and in those circumstances the Minister should be more specific about the conditions which will apply. This would be fairer to the committee which is expected to wave through the Bill today and also to persons who will be involved in contributing to the funds subsequently.

Fair play is exercised in respect of the professional bodies. The Minister said this is because the funds are independent. However, these funds will also be independent. Ultimately, the financial institutions will supply the funds. I understand public money will not be used in either case. The Minister should consider a Report Stage amendment along the lines of section 25. He should also indicate how the investment companies will be levied. Whatever other considerations are taken into account, the primary basis of the levy should be the possible liabilities which would be incurred by an investment company. It would then relate directly to the number of persons who have invested in any particular fund who would be in a position to claim the full ECU 20,000 compensation. It must relate in that manner and it is better to include it in the Bill.

I do not want to pin down the Minister or the company with a measure which is inoperable subsequently. However, everybody is familiar with the phrase "inter alia”. The Bill states that the supervisory authority may, inter alia, impose the conditions. This aspect needs to be clarified. Many sections are not much beyond the level of enabling legislation. There is an inference that once the company is set up, it may effectively do whatever the supervisory authority allows it to do and we will be told about it afterwards. There is little accountability, transparency or precision in the legislation.

The Minister may say there are precedents for this type of legislation which is enabling to the extent that none of the detail is supplied. However, my experience of similar Bills and enabling provisions is that the Minister takes it upon himself or herself to fill in the detail by order or regulation. In doing so in secondary legislation, the Minister always returns to the House by way of an affirmative or annulling motion to keep the House in the picture and fulfil the usual accountability obligations of an Executive to a Parliament. Ultimately, the Parliament has the right to positively affirm provisions or annul them, although that is never exercised. Does the Minister understand my point in this area?

The Minister foresees potential difficulty in transposing the directive if he agrees to amendments of this nature. The directive is appended to the Bill and I do not understand how there could be any difficulty in accepting an amendment of this nature. If there is a possible conflict between the directive and the proposal, perhaps the Minister could point it out. Where does the conflict arise?

I did not say there was a conflict. Deputy Noonan inferred that the Central Bank can tell the investment company to do whatever it wants. That is not the case. As the Deputy is aware, the parameters for an investment company are clearly set out. The Central Bank cannot set up demands and criteria which are beyond the remit of the Bill.

The Deputy is correct that a number of funds must be set up. There are different categories and there will be a number of different funds. This matter has been handled in the same way in the Investment Intermediaries Act and the Stock Exchange Act. I am not in favour of proscribing to the level suggested by the Deputy. I want some flexibility built into the legislation in terms of how the company is set up and operates. The contributions made by investment intermediaries backed up by the product producers to the fund must be on a fair and equitable basis in law. I do not anticipate that the type of difficulties suggested by the Deputy will arise. This is a straightforward insurance scheme which needs flexibility as outlined by the Bill. Everything should not be circumscribed.

There is no point having a circular argument.

I will deal with the Deputy's point about contributions under the next section.

What category of funds does the Minister have in mind? Obviously, there will be more than one fund to match certain categories of financial activity. Will the Minister throw some light on this matter?

The first task of the company will be to decide how investor compensation should be restructured - for example, should all investment firms be lumped together to fund investor compensation or should they be grouped separately? An argument can be made for a single scheme in that it would concentrate all the resources of the sector. However, this may not be appropriate.

There is considerable diversity among investment firms and the board may wish to take account of this by establishing funds for distinct groups of intermediaries. For example, one category which might stand alone would be restricted intermediaries who may only sell investment products such as unit trusts or insurance products. Section 36 provides that the product producers will have to foot the bill for investor compensation paid by the company in respect of a restricted intermediary where money was taken for transmission to an identifiable product producer. This will obviously mean the funding basis for restricted intermediaries will be different and the company will treat them as a separate category.

Will the product producers pay the full compensation or contribute towards it?

They will contribute.

Will there still be a need for a fund?

Question put and declared carried.
Question proposed: "That section 20 stand part of the Bill."

This is an enabling section in so far as it states that the bank may provide administrative services but does not oblige the bank to do so. Does the company have discretion to have its own administrative services provided?

It has discretion both ways.

Could the company choose to locate itself elsewhere, fund itself otherwise and have the administrative services provided separately?

It could, but I am trying to keep the administrative cost down to ensure the fund is maximised in terms of its purpose, which is to ensure the fund is large enough to pay compensation if it is needed. One cannot be sure what will be needed until one sees how the fund operates. My intention is to keep the administrative overhead as low as possible.

Will the Minister explain what he means by discretion "both ways"? It seems the section gives the discretion to the Central Bank to provide the service. The discretion of the company only arises if the bank does not exercise its discretion.

Deputy McDowell asked whether the company could set up a structure for its own administrative costs if the bank does not do it and I answered by saying that it could. However, my expectation is that it will be done through the Central Bank. I see no reason the company would not want to avail of it unless there were specific difficulties involved.

However, the company does not have a choice. The bank has the discretion whether to pick up the administration costs. In the preparation of the Bill, there would have been some degree of consultation with the Central Bank. Will the bank provide the administration by way of subsidiary?

I hope this will be done by agreement and I anticipate that is the way it will be done. There has already been consultation.

I asked the question to explore and point out the complete dependence of the company on the bank in terms of it legal responsibilities and the day to day discharge of its duties. The Minister may say that is not necessarily bad, but it should be pointed out.

Does the phrase "the provision of administrative services" mean all employees who will service the company will in effect be employees of the bank or does it allow discretion for the company to have employees of its own?

It allows the company discretion to have employees of its own. Obviously, in the beginning I expect it will be primarily employees of the Central Bank who are involved, but if the investor company feels it wants outside people, it is entitled to recruit them.

That may be included elsewhere in the Bill, but I cannot recall where. It is not in section 20 which seems to state that the Central Bank which will act as supervisor to the company will set up a subsidiary, which will in effect carry out all the administrative and executive work. The company will consist of a number of directors who will meet periodically and anything they want to do will be done by the subsidiary of the bank. In practice, will that happen?

It is possible. I cannot predict that, but the section states "may set up" and not "will set up". The legislation does not require the Central Bank to do it that way. However, it is anticipated that is the way it will be done and there has been consultation on the matter. I expect that to be the structure which will emerge in the early days, but I want to ensure as the fund grows that if the compensation company needs its own advice, it will have the flexibility to obtain it.

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

I wish to explore the Minister of State's thinking in regard to payment or non-payment. Any non-payment is recoverable as a simple contract debt. Did the Minister contemplate making it an offence not to pay?

The opposite to that is they would be "deauthorised" and not allowed. The penalty is in that side of the equation.

Will the Minister of State explain the terminology, such as an "investment firm", a "broker", "intermediaries" and where the balance lies? He mentioned earlier that the intermediaries would probably be the main contributors rather than the investment firms. Section 21(2) states "the investment firms will pay the company such contribution to the fund or funds maintained by the company as the company may specify from time to time." When section 19 was discussed the Minister of State said he believed the intermediaries rather then the investment firms would be the contributors. How does that fit with this section?

I was correct earlier. The basis of the funding contribution is the intermediaries and the restricted intermediaries. They will be supplemented by the product producer. There is no doubt about that.

The Minister of State uses the terms "intermediary" and "product producer", yet the section states "investment firm".

They are the intermediaries. I was at crossed purposes with the Deputy earlier when I referred to the "product producer".

Are the intermediaries investment firms?

Yes, and the product producers are the institutions. I may have misled the Deputy when I used the term "investment firm". I gave the impression that it was the product producer. It is defined in page 8 of the Bill.

"Authorised investment firms" are defined in page 6. Are they the same as investment firms because the definition differs from what the Minister of State said?

The difference is that an authorised investment firm is authorised directly by the Central Bank.

Will they normally be under the supervisory control of the bank?

Maurice O'Connell told us there were particular categories of people. Is an authorised investment firm an intermediary?

Is that different from an investment firm as used in the section?

The investment firm could include an EU authorised investment firm. The directive covers companies throughout the Bill. That is the difference.

Is that the only difference?

It is a technical difference.

How can there be an unauthorised company? Are we not supposed to ensure we do not have unauthorised firms, which caused the problem in the first place?

The function of the intermediaries Act was to authorise companies. Funds and levels of compensation vary from country to country. The EU directive fund will cover every firm including Irish companies which operate abroad and foreign companies which operate here. They are all subject to the law the exists in individual countries, but they are subject to the level of compensation in the country where they operate. In other words, a foreign company operating here could not use the fact that it is contributing to a higher level of compensation in its home country as a selling point here. Compensation would still be at the prescribed level here of 20,000 ECU.

I hope it will close the loophole for those who wish to defraud. Will we continue to have the problems we had in the past? The purpose of the Bill is to ensure we do not.

I wish we could give that kind of guarantee. We are merely setting up an insurance fund compensation scheme for those who may be defrauded in the marketplace. This is a new provision and we have implemented an EU directive in this context. This Bill will specifically set up the Investor Compensation Company which will charge the contributors to the fund and administer it to people who have been defrauded. I hope we can restrict the possibility of people being defrauded through the measures implemented to tighten up the Bill but, obviously, we cannot give a guarantee in that regard. If we could, there would be no need for the fund in the first place. We can not legislate for human nature.

I am not nit picking. Deputy Lawlor has put his finger on my difficulty.

Section 21(1) applies to investment firms, but authorised investment firms are mentioned in 21(2). An authorised investment firm is defined in the interpretation section. Is there a difference between an investment firm in section 21(1) and authorised investment firm in section 21(2)? If there is not, will the Minister amend the legislation to remove the ambiguity? If there is, will he explain the difference?

It covers an investment firm whose authorisation has been revoked. The difference between the two is very technical.

Would there be a problem if section 21(1) were amended to read "the section applies to authorised investment firms"?

There would because an authorised investment firm would be paying its contributions. However, if a licence has been revoked, we want to ensure the liabilities owing are available to be paid out and that what has been contributed to the fund remains. An investment firm includes an authorised investment firm. This is a technical matter.

We want to protect the investment. If a firm is authorised a compensation package is being put in place to look after the investors who have been defrauded. We do not want to fall between two stools. In other words, we do not want to go to the trouble of putting through the legislation to discover that people can lose their investments if a company is not authorised. An old aged pensioner could lose hisor her life savings. If that were to happen we would not have achieved our objective under the Bill.

The truth of the matter is that we are covering in effect only authorised investment firms.

Unauthorised investment firms should be prohibited from operating.

That is precisely the point.

Can firms collect deposits if they are not authorised?

Will the Minister amend section 21(1) to read "authorised investment firms"?

I will come back to it on Report Stage.

Under section 21(3) the company may specify different rates of contributions. That is self evident because there will be various intermediaries, investors and firms. It goes on to state that when the company is setting the amount of contribution it may do so on a different basis for the calculation of contributions for different classes. Will the Minister explain this? I would have thought that no matter what the packaging, the essential element of the contribution would be related to the possible liability of the company to any intermediary or product provider and that would be related to the number of persons in the fund who could claim. The Minister described the procedure as a simple insurance operation. Will he explain the basis for different calculations?

The Minister described this process as an insurance exercise, but that begs a few questions. Are we demanding a premium or contribution from individuals based on the risk or the assessment by the company of the risk from that particular company or that class of intermediary? It is likely that there will be a greater risk from smaller operators. They are more likely to operate closer to the wind than their larger counterparts, but the larger firms are more likely to be able to pay out. Will the premium be based on the level of risk or the capacity to pay? Has the Minister given any thought to this matter or is he leaving that decision up to the company?

We discussed this point at length on the last occasion we met. I will now give a more fuller note which should cover the points raised by the Deputies.

In setting contributions the company will have to decide on the size of the fund it needs to maintain and establish a basis for levying investment firms in an equitable and efficient way. Funding of compensation will be prospective rather than pay-as-you-go. When it comes to setting a formula for contributions a number of possible approaches and factors will come into play. There is a wide variety of investment firms. They include large portfolio managers who would have discretionary control over client funds, restricted intermediaries who generally may not handle client funds and insurance intermediaries. It is likely that no one formula will be suitable for all. In theory, the risk each firm represents in terms of compensation will be related to the number of clients on its books who would be eligible to claim compensation. The maximum total exposure the firm represents for the compensation scheme will be £15,500 multiplied by the number of eligible clients the firm has on its books. That does not, however, cover all eventualities. It does not distinguish between a firm which has discretionary control over client funds and a firm which is not authorised to handle client funds. With a discretionary firm, one would have to count all its clients no matter when they gave their money to the firm. If a firm is not authorised to handle client funds, one might have to settle for taking the average number of clients per year. That approach might not work in other cases, for example, where a firm was just starting up or was in the process of major expansion. I touched on this the last day. There are other possible approaches to calculating contributions. It might be preferable in the interests of simplicity to use a proxy, such as the number of employees a firm has or its annual turnover. However, an element of flexibility is needed to provide, for example, for the firms which do not have any eligible clients but which must be covered by this legislation because they are subject to the compensation directive. To cover such firms, it might be appropriate to build in a flat rate fee that all firms would pay. That flexibility would also allow the industry representatives on the board of the company to make a case for a system of contributions which would be efficient from their point of view.

As a result of these considerations, the Bill leaves open how contributions will be calculated. However, I am confident the Bill sets out the broad requirements and it is neither necessary nor appropriate for this Bill to tie the hands of the company in terms of how contributions are to be levied. I suggest, as legislators, we should be more concerned about the end rather than the means, once the company meets the broad requirements set out for it in terms of ensuring claims for compensation can be met.

The Minister has at least partly answered what I raised so I would like to move onto section 21(4) and subsequent subsections. Here, where an investment company does not comply with its obligations - in other words, if an investment company does not pay its contribution - it will be liable to pay its contribution under section 21(2) and also to pay interest. It goes on to say that any sums due shall be recoverable in court because they are due under contract and are, therefore, like any other debt.

When the Minister replied to Deputy McDowell in regard to section 19, he said the primary sanction was that if an investment firm did not pay its contribution it would be removed as an investment company. He seemed to imply it would lose its licence. There is nothing to suggest here that such a firm will lose its licence but simply that it will be liable for the amount due, that this is recoverable in court and that it will have to pay interest if the amount is not paid by the due date. Where is the sanction mentioned by the Minister for a firm which continues to refuse and takes the company to court?

It is in section 28. When I replied to Deputy McDowell I used the example of the ultimate sanction. One would hope we would not have to use the ultimate sanction.

It appears from what the Minister has said that the formulae for the compensatory calculations are not yet in situ. Who will decide on the various options he has outlined?

As I said the last day, that is a matter for the investment compensation company. There are broad parameters but it will have to look in detail at how it affects the different companies. It represents both the industry and consumer interests.

I would like to think we would give it firm guidelines because it will be too late to do anything about it if we are not satisfied with the criteria it provides.

We had a very long discussion with Deputies Noonan and McDowell on this point the last day. We do not want to prescribe how the company should do this because there are many criteria involved. It would be almost impossible to set this out in a way which would allow the company flexibility to judge each criterion as it arises. We may be forgetting that our aim in the Bill is to set up a compensation fund which has a minimum level of funds and will pay out on time to clients who have been defrauded by companies, with a maximum ceiling of £15,500. The Bill is not going beyond that. I spoke at length the last day about the number of criteria which may be applied in different circumstances for determining how charges should be levied.

Would it be wise to provide that the company would have to return to the Minister after adopting a procedure which he would then have to approve by regulation, to prevent the investor lobby winning out over the consumer lobby in the discussions? We would then see our job completed rather than bringing in legislation and handing it over to people who we hope will do what is right. If we are dissatisfied with what they do or if it does not work we will have to amend the legislation. The Minister should have a regulatory veto over what they do to ensure it meets our requirements.

I take the Deputy's point. However, he is showing a great lack of confidence in the board before it is even appointed or before the company is set up. We are putting representatives of the various interests on the company's board to ensure this will be done in a fair and equitable way.

That was done before and look what happened.

Either we have confidence in the people who will be appointed or we do not; if we have confidence in them it is right to leave this matter up to them, given the balanced way in which the company is being set up.

My concern is that the people representing investor interests are running their own companies and the bottom line comprises 90 per cent of their priorities. The investor representatives, in the debate on how to impose levies, operate and put together the compensatory package, will want to minimise the penalties, in contrast to consumers who will want belt and braces on everything. A balance must be struck between those interests. It would be prudent for the Minister to have a regulatory function, not because he distrusts them but because he wants to be sure they do the job we would like them to do. If we disagree with them at that stage it will be too late for us to take action.

There will be a balance - the Deputy used the word himself - on the board of the company between investors and consumers. There were wide consultations on the drafting of the Bill and everyone knows what is expected of it. There is no value in overcomplicating the situation or anticipating it will not work. I have no reason to expect it will not work.

The Minister should not personalise this.

I am not doing so.

It is not a question of us not having confidence in persons unknown who may or may not be appointed. That is a "hit me now with the child in my arms" argument. The problem is that any board or company set up by law must operate in accordance with the law. Our argument is that the law is not specific enough here. It does not move much beyond enabling legislation. It effectively says to the board to set up a fund and levy whatever amounts it thinks fit on participators. We should go beyond that.

I agree with the Minister that legislation does not normally contain that level of detail. However, it is normal in legislation for the Minister to take for himself the power to legislate through secondary legislation, either by regulation or by order. I find it very strange that while the captains, the kings, the great and the good will all be on the board, we are saying to them that when they sit around the table they are to make it up as they go along.

We are not going far beyond that, and we are failing in our duties as legislators if we do not give more precise statutory guidelines. This is not fair to those who will take up the responsibility because it is too broadly cast. More precision is needed. I do not want to overstate the point, but this is bad legislation, not in intent or principle, but in its manner of achieving its ends.

I take Deputy Noonan's point, which he made at length at our last meeting. The Investor Compensation Company is obliged to pay all valid claims. It will hardly set in train a level of funding that will be woefully inadequate to meet the needs. It makes no sense for those people to put themselves in that position. These are the people in the marketplace who understand the issues and those on the consumer side would be involved in the business also. I cannot conceive of a situation where they would knowingly underfund the compensation fund. That would be a ludicrous approach and would be shockingly bad for the individuals concerned.

That is not my concern. If the directors are selected properly and the bodies appointing them are designated with prudence by the Minister for Finance and the Minister for Enterprise, Trade and Employment I have no fears. However, what we say here will not be taken into account if this ends up in court, and I have no doubt this will end up in court. There will be either an aggrieved investor or an aggrieved company, and if this is tested it must be precisely cast.

In many ways I do not think it is possible to cast this precisely as the Deputy wants, covering all eventualities by listing everything in legislation. Other criteria may need to be used by the investigating company.

I am not saying that. There is an intermediary position between an enabling section which would give the statutory basis for organising this in whatever way is proper and going into detail. That intermediary position is to use a subsection so that when the Minister of State is asked to look at the basis on which to place contributions inter alia he or she can then look at the subsection. That gives the precision necessary without going into the detail to which the Minister of State and I would both object.

Question put and agreed to.
Question proposed: "That section 22 stand part of the Bill."

Section 22(3)(i) states that in making a decision under subsection (2), the company shall endeavour to ensure the company is in a position to meet any reasonable foreseeable obligation under this Act. I asked the Minister of State in our last debate on this for his estimation of the ballpark figure envisaged. Will it be hundreds of thousands, one million or several million pounds? How does the Minister of State envisage the fund being built? Will there be £5 million at the end of the first year or at the end of the fifth year? The Minister of State said it was impossible to give any indication. Deputies McDowell and Rabbitte mentioned companies going broke in the past and that that might be a reasonable prediction of the future. The Minister of State said that the past was a very bad predictor of future activity. However, he is imposing an obligation on the company to put a fund together to meet any reasonable foreseeable obligation. When that has been legislated for, the Minister of State should at least indicate what he sees as a foreseeable obligation regarding the size of the fund even if there is no provision in the section. How much are we talking about? What is a ballpark figure and how does the Minister of State see that building over a number of years?

We have discussed this and we know from recent experience what the level of fraud has been. That certainly runs to several million pounds, so I expect a fund of between £3 million and £4 million. I do not expect a fund of several hundred thousand pounds. I can only base that on our knowledge of the recent past, and hope such events do not recur but we must be alert to that possibility. We cannot be sure.

Does the Minister of State see that fund being established by initial contributions and maintained at that level or will contributions be made by way of annuity? Does he see this moving forward to a point and being topped, or as an ongoing annual contribution which will be open ended as there will always be a draw down at some stage?

My intention is that this will be an annual contribution and that the fund will continue to be built up. Some years in the future there may be a substantial fund with no calls made on it. The Investor Compensation Company could decide to reduce the level of contribution if it decides that is necessary. However, I do not want this to be anything other than an annual contribution increasing the level of the fund. If necessary a special levy could be introduced.

We discussed previously that this company, like others, would have the power to borrow. There are ceilings on the amounts the IDA or SFADCo can borrow which does not seem to be part of this section. Obviously a company will borrow to run itself. Does the Minister of State envisage, in the company's first year, a situation whereby there may be a serious default with the company having to borrow to meet the amount necessary to pay compensation? If so, will there be a ceiling on that amount? As I see it, the company can fund itself by way of contribution, levy or borrowing. If a default occurs early on, does the Minister of State intend that the company be free to borrow to meet its compensation obligations under the Act?

The fundamental difference with the Deputy's example is that the Exchequer will not get involved with this fund. This is not a bill the taxpayer will pick up, unlike the companies Deputy Noonan mentioned, where the Exchequer is directly involved. If, the day the Bill comes into law, there was a major default it would take time to sort the situation out, establish level of claims, etc., and the company would be in a position to borrow if that situation arose. However, it would have to make judgment calls and not borrow at an unsustainable level, something which is not anticipated. However, it could compensate for reasonable levels of borrowing in the initial period - if such were required - by building up the fund reasonably quickly over the next few years through imposing a levy on the industry above the normal annuity.

We have already established that the more probable option is that the administrative arm of the company will operate as a subsidiary of the Central Bank. Does the Minister envisage the company having access to Central Bank funds for compensation purposes?

No, that will definitely not be the case.

Is there specific statutory power in the Bill to enable the company borrow money or will it derive that power under the memorandum and articles of association? It is a curious hybrid company established by statute but incorporated in the normal way by submitting a memorandum and articles of association, etc., to the Companies Office. When an organisation is established by statute it is normal practice to give it a statutory right to borrow. Is that provided for?

It is in section 13(1).

People paying the premium want to know the ball park amount involved. I understand the Minister cannot give an actual figure but some indication of the imposition on individuals paying it is necessary. Will it cost a one or two man outfit a couple of hundred or a couple of thousand pounds per year, or will the figure be significantly more than this? We are also talking about significant charges being passed on to the consumer. We, and those who are following the proceedings, are entitled to some indication of the figure involved.

I have tried to get a ball park figure. However, it is difficult to do so and it would be wrong for me to suggest a figure without any criteria. The figure must be equitable and fair. In saying that some of the cost will be passed on to customers I did not intimate that all the charges are to be passed on. There are 4,000 intermediaries of different sizes. One could say the charge will be £1,000 per year which would give a total of £4 million. However, I do not want to give figures which may suddenly be seen as currency. A figure of £1,000 would raise £4 million per year. However, the intermediaries are of different sizes and it would not be equitable to charge all of them the same amount.

I do not want to tie the Minister to a particular figure but we are entitled to some indication of the likely range of charges. It seems £1,000 is a middle range figure.

This concerns the reason the level of compensation is in line with the figure in the directive. If I introduce more substantial figures I am not sure it would be possible to properly establish the fund.

Question put and agreed to.
Section 23 agreed to.
Question proposed: "That section 24 stand part of the Bill."

I welcome the provision that the board shall establish and maintain procedures to investigate complaints against it by investment firms or investors. The company will be able to comply with this by simply setting up an informal complaints procedure. Has the Minister considered that a statutory complaints procedure might be better? The section provides for the designation of an officer of the company to investigate complaints while the investor or investment company has no recourse to anything other than the goodwill of the company in terms of investigating complaints.

I am not sure a statutory procedure is necessary but the complaints procedure should include some element of independence. There should be an investigator independent of the company to whom complaints can be made.

The company will not adjudicate on the merits of claims. It will simply pay compensation. Section 24 contains provisions relating to complaints against the company by investment firms who will have to pay contributions to the company and by investors who will rely on the company to ensure compensation is paid promptly. It requires the company to establish and maintain procedures to investigate complaints against it by investment firms and investors. An aggrieved investor will have the right to apply to the courts, but it is appropriate that the investor should be entitled to put his or her case to the company in the first instance and that the company should be obliged to treat the grievance seriously.

Is there no procedure for complaining against the supervisory authority, effectively the bank, other than appealing through the courts?

That is correct.

Therefore, a possible complaint against the company might concern a cheque not being signed on time while a complaint about a cheque being inadequate is effectively against the bank and is therefore not provided for except through the courts.

In the case of being defrauded a person must establish a right as a creditor in the first instance.

A person may establish their right to compensation as a creditor but the amount may be in dispute and this is determined by the supervisory authority, namely, the bank, rather than the company.

It is established by the liquidator or administrator if there is one.

There is no requirement that the company must be in liquidation, although in most cases I presume it would be. In this case does the supervisory authority determine the amount?

The normal channels open to any creditor in that case also apply in this case.

This effectively means proceeding through the courts; in other words the complaints mechanism is fairly narrow.

If possible the company should examine grievances in a serious manner and I see no reason this should not happen.

The likely grievances will not be against the company but against the bank which will do most of the determining. To suggest there is a complaints mechanism is misleading.

The scope of the section is narrower than the Minister's briefing notes suggest. The briefing note, which the Minister read, spoke of what the company can do. However, this does not require the company to do anything, but rather the board to act. Listening to the Minister one might think there was some provision which would compel the company to include a complaints provision in its articles of association or at least ensure such provision forms part of the core of the company. All that is required is that at a meeting of the directors of the company, which is the board, the board shall say a particular officer shall be responsible for complaints in the future. It is not the company, as the Minister's briefing note states, but the board which narrows it again.

I understand the board is the company.

The board is not the company. The board is defined more narrowly than that in the definition section. It means the board of the company and not the company. The company is the investor compensation company limited.

I understood it was the same thing under company law.

Why do we have two definitions in the interpretation section if it is the same thing?

To establish the membership of the board, it was felt we needed to talk about the board specifically in the context of how the company was being set up.

There is no requirement in law on the company to set up a complaints procedure. There is a requirement under this section that the board at a meeting may set up a complaints procedure. That is the difference.

The Deputy is correct. If there is something wrong with the definition - I understand there is not - and there is a subtlety which we missed, I will come back to it on Report Stage. For the purpose of clarity and the point the Deputy raised, I will look at it before Report Stage.

Perhaps a financial services authority would be the vehicle to oversee this problem.

Question put and agreed to.

Amendments Nos. 2 and 5 are related and may be discussed together. Is that agreed? Agreed.

I move amendment No. 2:

In page 20, lines 19 to 24, to delete subsection (8).

The provisions I propose to amend deal with the situation where a compensation scheme or fund has difficulty in paying compensation. This might arise, for example, in the case of a large default or a series of smaller defaults coming close together. It is necessary to make provision for such a situation because the office of the Attorney General has advised that it would not be possible under Irish law to require a compensation scheme to pay out unlimited compensation.

Section 25(8), as it stands, provides that a compensation scheme operated by a professional body on behalf of accountants may set an annual limit on payments to investors subject to the approval of the Central Bank. However, the section does not specify what will happen when a compensation scheme reaches that limit.

Turning to section 35(2), this subsection applies both to compensation schemes for accountants and to the Investor Compensation Company. The proceeding subsection (1) provides that compensation must be paid within three months of the establishment of an investor's claim. Section 35(2) goes on to say the Central Bank may, at the request of the Investor Compensation Company or of a compensation scheme for accountants, provide for an extension of the time for paying compensation of up to a further three months. This is in accordance with the provision of the investor compensation directive and is obviously intended to deal with the situation where a compensation scheme comes under extreme funding pressure. However, the directive will apply only to a minority of investment firms.

Let us then look at what would happen if the Investor Compensation Company or an accountants' compensation scheme were faced with extraordinary demands for compensation. They will be obliged to build up reserves but since what we are providing for here is an open-ended commitment to compensation, it is possible to envisage a situation where those reserves would be exhausted and where it would not be possible to build them up to the level required, for example, by an extraordinary levy on investment firms or by borrowing within six months. As drafted, a scheme would be breaking the law if it was unable to pay out within six months.

Where payments under the compensation directive are concerned, we have no option but to provide accordingly. However, in all other cases, as I mentioned, there are limits on the obligations which can legally be imposed on investment firms in terms of funding compensation. Accordingly, I propose to amend the Bill so there will be a single provision dealing with inability to pay compensation.

Section 25(8) would be deleted and the replacement section, section 35(2), provides that payment of compensation may be deferred for an unspecified period but with important safeguards for investors. It will be possible to defer payment of compensation only in exceptional circumstances. The Central Bank will have to approve any delay and the bank will be able to impose conditions and requirements in relation to the delay. Investors will continue to have a right to payment within three months in all but the most exceptional circumstances. Ideally, a situation will never arise where an investor must wait more than three months to receive compensation. However, we must cover eventualities.

I understand the amendments apply to investment companies beyond the scope of the directive and that it is mandatory to pay within three months, if they fall within the scope of the directive. Is that correct?

Under the directive an extra three months is provided in exceptional circumstances.

On Second Stage the Minister said he was going much further than obliged under the directive and was effectively widening the scope of the compensation scheme being applied in this jurisdiction. The Minister is including a provision which states that in certain exceptional circumstances, if there is a heavy hit on a particular fund, the mandatory six months timeframe for the payment of compensation will not apply. I am trying to establish if it is for that quantum of activity which is beyond the scope of the directive for which the Minister is making provision.

That is correct.

I was a little confused by the reference to the advice from the Attorney General. If we remove subsection (8), we are effectively removing the capacity of the scheme to cap what it might pay out in any given year. I do not see how that sits with the reference to the Attorney General's advice. I may have misheard the Minister and perhaps he might recap on that sentence.

It is necessary to make provision for such a situation because the office of the Attorney General has advised that it would not be possible under Irish law to require a compensation scheme to pay out unlimited compensation.

How does that sit with the removal of subsection (8)? That subsection allowed the compensation scheme to cap the amount it would pay out in any given year which seems to sit quite comfortably with the advice of the Attorney General.

The Deputy is right as regards the cap but the subsection did not state the level which had to be paid out.

It gave the company discretion to decide the level at which it could cap it, presumably based on the amount of money it had at any given time. What is the problem with that?

The difficulty is what one gives investors if there is a problem.

The Minister is now giving the company discretion to defer all or part of it for a period of time.

Not the company itself. The bank would have to approve it and it would apply in exceptional circumstances.

Rather than allow a cap to be placed on the annual pay out, the Minister is allowing a deferral. I am at a loss to understand why the Minister is doing that. It does not seem to be in any way problematic.

Amendment agreed to.
Question proposed: "That section 25, as amended, stand part of the Bill."

The issue of professional bodies running their own compensation schemes is important.

I ask the Deputy Chairman, Deputy Lawlor, to take over. Is that agreed? Agreed.

On the issue of professional bodies running their own compensation schemes, my understanding is that chartered accountants are expected to establish their own scheme.

And certify the two bodies.

If they decide they do not want to proceed on that basis will they then, by definition, come within the scope of the Bill? If they decide to proceed will they be obliged to establish a scheme by a certain time?

If they do not have something in place they are automatically covered by these provisions.

Lengthy time limits are provided. For example, an application must be agreed within six months.

I want it established quickly; I do not want a gap to occur.

If they did not do it between now and the end of the year or when the directive comes into effect they will be levied accordingly. Is that correct?

Yes. It is in their interests to proceed.

What was the thinking behind deciding to make separate provision for professional bodies? Why were they not allowed to come within the scope of the general compensation scheme? The Minister of State mentioned chartered and certified accountants as being professional bodies who may establish schemes. Is he also thinking of the legal profession? The activities in which chartered accountants or certified accountants are involved and which would bring them within the remit of the compensation scheme are clear. They would act as intermediaries in one way or another. How does the Minister of State envisage solicitors in general practice acting as intermediaries?

It would be only on an incidental basis. In the case of solicitors such activities would be incidental to their main business. Solicitors are covered under sections 44 to 47.

What is the thinking behind the decision to effectively exempt certain professions from the provisions of the Bill and cover the gap with regard to those involved in specific investment activity by providing that they may establish their own scheme? Why not let it all be covered by the general compensation scheme which envisages a number of funds? Why not provide that the company will levy accountants within the scheme and similarly for solicitors engaging in incidental activity?

I understand the Deputy's thinking. Mine was similar. However, there is a follow on from the Investment Intermediaries Act where they are in a separate category. The two bodies concerned wanted the option to be involved in a fund with the overall body in the UK. I did not see any difficulty with it once it fulfilled the terms of the directive and their ability to pay compensation equivalent to the directive were put in place.

The Minister of State is saying he is proceeding this way because the chartered and certified accountants asked him to establish a separate fund for them.

I am not sure what they intend to do. However, they will proceed in the way I have outlined or they will be covered by these provisions. My interest is the customer and the best way the concerns of the customer can be addressed.

Is the Minister of State likewise assenting to a request from the solicitors?

A separate set of circumstances has arisen there. Perhaps we should discuss this under the relevant section.

Section 25(1) does not include accountants. It refers to an approved professional body, which presumably would apply to solicitors also.

I understand it is defined in the Investment Intermediaries Act.

"Approved professional body" would apply to solicitors also. Would a doctor prescribing tablets who offers investment advice be covered?

Not in practice.

I assume the Department has had talks with the accountants' professional bodies. Is it the intention of the accountants in setting up their compensation funds to restrict compensation to the 20,000 ecu figure or do they intend to provide more open ended cover?

The Minister of State referred to the use of the word "incidental". The later sections make that distinction when dealing with solicitors. However, it was not my understanding that the distinction between incidental advice and non-incidental advice that was a core part their daily activity applied also to accountants. It appears that investment advice is much more central to the business of accountants than solicitors where a distinction can be easily understood. The distinction is made later with solicitors when reference is made to the normal business of solicitors and advice they would give which is incidental to their legal business. However, that distinction is far more difficult to make with accountants. I had not understood it was also to be applied to the accountants' scheme.

We understand that accountants may go for a higher level of compensation but it will be at a level that is equivalent to the standard set out in the directive. The distinction to which the Deputy refers is more obvious when dealing with accountants. When meeting the bodies I made it clear that I would be happy to see them establish a fund provided it met the criteria established in the Bill.

The Central Bank, not the company will decide this. Is that correct?

Yes. The Central Bank is the supervisor.

In consultation with the company?

Do solicitors engage in sufficient incidental activity to justify a fund? Would an adequate fund be built up?

Solicitors have a compensation fund. The Bill will extend it to cover these matters. If the fund to be established was the only one to exist the Deputy's question might be relevant. In such circumstances I would have ensured that the fund would be indirectly covered under the investor compensation company.

A frequent objection to any fund held by the Law Society is the slowness of its procedures and the difficulty in getting payment. Do the provisions regarding three and six months, applicable to the other funds, apply to the funds administered by the professions?

The terms and criteria set down here do not apply to the Law Society. The position on solicitors is different under the Solicitors (Amendment) Act.

A company is to be established under the supervision of the Central Bank which will be expected to establish a number of compensation funds.

Solicitors are not covered under these provisions. I am trying to find a way to include those involved in non-incidental business to their profession. We have extended the provisions in an attempt to do this, but it is not central to the terms of the Bill or the directive.

I know it is not central to the directive. The company to be set up will be expected to establish a number of funds. The Central Bank may authorise the establishment of other funds by professional bodies outside the scope of the company. Under the primary funds administered by the company there will be a requirement to pay out within six months once a prima facie case is established. Does that apply to the funds being set up by the professional bodies?

Is this one of the reasons they wanted their own fund?

On the same point, it is not at all clear that is does not. Subsection (6) states that the supervisory authority will only agree to such a fund provided it will enable compensation to be paid to clients of investment firms in accordance with this Act. That suggests those provisions would have to be part of any fund established by the professional bodies.

I said that earlier. For instance, accountants are covered by it but not solicitors. The volume of solicitor' business is very small but if they operate as investment firms to a large extent they are directly covered by this.

Unless I misunderstood Deputy Noonan, he is asking if the time limits for pay outs would have to be replicated in any scheme produced by the accountancy profession and approved by the banks? My reading of the Bill is that they would.

There is a provision in section 25 (6)(c) for the professional bodies regarding the probity and competence of each of the directors which would suggest there will be provision to remove them from office in extremis. There is no such provision for the removal of directors applying to the company. Has the Minister considered that point since we spoke last?

Under the Interpretation Act, 1937, there is the competence to remove directors. If the Ministers appoints them he or she also has the power and ability to remove them. We have checked that this power exists with the office of the Attorney General as a result of this point being raised before.

The Minister is probably right, but is a provision for their removal not normally included in legislation when putting in provisions for the appointment of directors?

I do not know, but the Attorney General advises me the power exists and there is no need to write it into this legislation.

In the traditional manner we will accept what the AG says.

Acting Chairman

The Deputy knows the trouble that can cause for us.

It was an important point which Deputy Noonan raised the last time we met. We sought a specific answer because if the power had not existed we would have had to do something to provide for it.

Acting Chairman

On this occasion we will accept the Attorney General's advice.

Question put and agreed to.
Sections 26 to 28, inclusive agreed to.
Question proposed: "That section 29 stand part of the Bill."

I would like the Minister to elaborate on the exact liability which will attach to product producers. Many of the intermediaries are tied to a product producer so in many cases where a claim for compensation arises we would look to the product producer to pay rather than the investment company.

Section 29 contains provisions relating to the responsibilities of product producers where an investment firm has had its authorisation revoked or where the product producer has been informed by the Investor Compensation Company that an insurance intermediary has failed to comply with its obligations under this Act. It will be an offence for a product producer to continue to do business with an investment firm whose authorisation has been revoked.

All investment business firms and insurance intermediaries must hold a written appointment from the institutions whose products they sell and the majority of investment business firms are restricted to dealing only with product producers. The purpose of this section is to ensure that product producers cannot accept business from any investment business firm or insurance intermediary which has not complied with its obligations under the Investor Compensation Act. This is seen as an effective way of preventing an investment or insurance intermediary from continuing to do business.

Are the various notifications in writing between the supervisory authority and authorised investment firms, product producers and insurance intermediaries all internal and confidential? Is there any provision for public notice to be given under this section if the bank decides to revoke a firm's authorisation.

We will table amendments on that later.

On Report Stage?

On Committee Stage.

Will the Minister amend section 60? Will there be similar provision or will the remit of section 60 plus the amendments which he will table cover the point I am making about section 29?

The amendments will concern sections 52 and 53.

Is the Minister saying I can raise this point on section 52?

In reading the report of the Committee on economic strategy which sat during the course of the last Dáil which recommended certain amendments to the Investment Intermediaries Bill, the whole business of the relationship between the product producers and those selling their products was looked at. It considered means by which product producers could be obliged to vet the people selling their products and bring pressure on them to ensure they complied with that Act and with this Act.

The committee was not happy that sufficient responsibility was put on the product producers to ensure compliance with the 1995 Act. Perhaps the Minister could do something more general and then tell us how he thinks it would work.

I do not dispute the Deputy's point but it does not relate to this Act. This Act deals with compensation rather than regulation. The point made relates to Part IV of the Investment Intermediaries Act.

This Bill makes a whole range of amendments to that Act.

When I come to the amendments later this will become clearer.

I will bear with the Minister.

Section 21 (1) states that if any of the organisations to which this applies fail to comply with their obligations under this Act, the Central Bank shall inform product producers from whom the investment firm held a valid written appointment. It then lists a series of written notifications. At that point there does not seem to be any intention of informing the public.

The Central Bank decides that an intermediary is not fulfilling its obligations under this Act and so informs the product producer that a body is selling their wares without complying with the Act. At that point there does not seem to be any obligation to inform the public. What is to stop the intermediary from continuing to sell the product even though he is not authorised by the product producer?

At present it must be published in Iris Oifigiúil. We have tabled amendments, which we will deal with later, to ensure that information is put in the national newspapers.

Question put and agreed to.

Amendment No. 3a is an alternative to amendment No. 3. Amendments Nos. 3 and 3a may be discussed together.

I move amendment No. 3:

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

The effect of this amendment would be to increase the limit from 20,000 ecus to 80,000 ecus. Deputy Noonan's amendment seeks to increase it to a figure less than that. The point was made repeatedly on Second Stage that 20,000 ecus or £15,500 is a small amount of money in terms of investment in the 1990s. If we are talking about people who invest a redundancy payment, their life's savings or the money from the sale of a house, we are talking about a low level of compensation. I accept what the Minister will probably say about caveat emptor, but we should have used our discretion to put in a higher limit. As the Minister knows, the directive provides that 20,000 ecus is the minimum permissible and gives member states the discretion to put in higher limits. Perhaps the Minister could outline if it is the intention of other countries to provide for higher limits than those we have provided for in this Bill.

My amendment seeks to double the amount of compensation to £31,000 because the Minister has pitched it at a low level. We did not know what type of fund the Minister had in mind until this morning. We now know he is talking about a fund of £2 million, £3 million, £4 million or £5 million; it is difficult to measure the exact amount. The directive obliges the Minister to bring in a fund of 20,000 ecus, but the scope of the directive is more limited than the scope of the Bill. The Minister has extended the range of compensation but he has not extended the amount. The logic is that he should extend the amount as well.

This is not a charge on the taxpayer but on the people in the business. The company will be self-funding. We cannot predict the future but a fund of a certain size will be put in place. The Minister envisages the company having the power to levy charges if there is not enough in the fund. We should proceed on the basis of what we think would be a reasonably adequate amount.

Some £15,500 or 90 per cent of the amount lost, whichever is the lesser, is not sufficient to meet the required needs. The Minister could at least double it. I know he will say that 80 per cent of investments are less than this, but I do not know what is his definition of investment. If someone gets a redundancy payment or retires and gets a lump sum, they will give it to an intermediary, if they are not buying a taxi plate, and it will be put into a fund. The amounts the Minister is talking about are in excess of £30,000; they are in the range of £30,000 to £50,000.

The Minister is way off the mark with the figure of £15,500. The appropriate amount falls between the benchmarks suggested by Deputy McDowell and me. If something goes bust, the first £15,500 of the investment will be given back. That is a small amount of money and should be increased. As this poses no charge on the taxpayer, we would be acting prudently if we doubled it.

I appreciate the points made by the Deputies. I gave lengthy consideration to this issue before and since the Bill was published. It may be possible at a future date to do something different. However, I must ensure that the fund is established and works and that costs will not be prohibitive. We are moving from a situation where nothing is available to one where £15,500 is available. It may not be prudent to go beyond those figures when setting up this fund. The fund has a better chance of being successful when it is set at the EU directive level of 20,000 ecus. We may have a better understanding of how the fund operates, its costs, etc., in the future. I do not want the individual investor burdened with costs relating specifically to this fund which would make it prohibitive or ensure it does not work from day one.

As regards Deputy McDowell's point about other countries, most of them are not as advanced as we are, so we do not know what they will do.

The likelihood that we will return to this during a time of peace is remote. We will only return to this if there is a big bust and people query the small amount of compensation. They will be disappointed if they get a maximum of only £15,500. We will then be running around in a state of disorder trying to increase the figure. The Minister should increase the amount of compensation and place an order before the Houses of the Oireachtas. It will be easier for his successors to change it if he includes the provision now. It would not make sense to put this effort into a Bill, which is an enabling mechanism, and then have to promulgate primary legislation before anyone could change the limit of 20,000 ecus.

I ask the Minister to consider giving discretion to the company at some stage in the future, provided it observes a minimum of 20,000 ecus. For example, if a company has a healthy fund built up, it might consider compensating people for more than the minimum provided for in the directive.

The expression of subjective views would lead to a lot of confusion. There must be certainty. There will now be a system of compensation in place if a major fraud occurs. The figure is set at 20,000 ecus or £15,500. I do not want a situation where pressure could be brought to bear to do certain things. It is wise to set a figure and that is why we have pitched it at this level. I could say £30,000 or £50,000 is a better figure, and it is to the person who loses money. However, I must ensure that the fund works and that there is a level of compensation in place which is not prohibitive and will not interfere with people's ability to invest. The figure is right. I understand the points made by Deputies Noonan and McDowell but I feel that this is the best figure to get a new fund up and running. I do not accept that we will not revisit this matter again. The question of financial legislation in its broadest sense is on the agenda and it will arise in the context of evolving situations.

I agree that the appropriate amount is debatable and we may be as correct as the Minister of State in terms of where it should be pitched. Whoever is right now, the Minister of State will not be right in the future as the value of £15,500 will erode.

That worries me.

I am suggesting to the Minister of State should allow for regulations to vary the amount. He may be afraid of pressure from interest groups in a case where a company collapses and people are roaring at the Minister to introduce regulations to increase the compensation. The Minister of State can allow for that by providing that the new levels of compensation will only apply from the date of the Minister signing the order or promulgating the regulation. One can provide against such pressure if the Report Stage amendment included such provisions.

I am not completely opposed to what the Deputy is suggesting. There is merit in what he is saying and I considered these points myself. I am not sure that we can achieve this in the context of the Bill. I will look at this again before Report Stage.

The Minister of State has until5 p.m.

There are other issues which the Deputy wishes to raise. We can sit here for an hour and discuss this matter but I am trying to be helpful.

Amendment, by leave, withdrawn.
Amendment No. 3a not moved.

I move amendment No. 4:

In page 24, subsection (1)(a), line 6, after "firm," to insert "including money owed or liable to be recovered in an action or potential action by the client for damages arising from negligent advice given by the investment firm,".

This is a core issue in the Bill with which I have a real problem. In his reply on Second Stage the Minister of State outlined the circumstances in which he envisaged compensation being paid or payable. That is fair enough. The directive uses the word fraud and outlines the circumstances in which money will be paid out. However, I am not clear that the Bill outlines in detail the circumstances in which money will be paid. The specific provision is that if one cannot return money or securities to someone then that is fair enough. I am not sure that that is how people will understand the Bill. We need to tease this out a little further.

It is clearly envisaged that in circumstances in which someone does away with one's money one will be compensated. This is clear for cases in which, for example, someone gives £20,000 which is lodged in a bank account where the capital is safe and where some interest accrues. If the money is not lodged and cannot be returned fraud has occurred and people will be compensated. However, what is the position where, for example, a little old lady who does not know much about shares, equities or bonds gives £20,000 to her accountant and the money is frittered away negligently on shares in a company which prove worthless? That is probably not fraud but is that person entitled to compensation? She has no specific contract with the accountant to put the money into a particular type of investment. He has undertaken to look after her money but has frittered it away and it cannot be returned as specified in the Bill. Is a person entitled to compensation when their money has been negligently or recklessly frittered away?

This arises because the Bill does not use the words fraud, negligence or recklessness. It simply refers to cases in which the money cannot be returned. This is open to confusion and this matter goes to the core of the Bill. This amendment has been tabled for discussion purposes. It refers to money being frittered away as a result of negligent advice. However, my doubts about this section are broader than that.

The Deputy is correct, this matter has been raised on Second Stage and in the Seanad. However, the amendment would extend the scope of the Bill to include cases where an intermediary has been negligent. The purpose of the Bill is to provide compensation for the clients of investment and insurance intermediaries where the intermediary is unable to return money or investment instruments owed to or belonging to a client. In other words, we are talking about compensating clients where they have been defrauded.

Many of the arguments I put forward on amendment No. 3 apply in this case. Amendment No. 3 proposed extending investor compensation by increasing the amount of compensation. This amendment proposes extending the scope of compensation by including negligence. The Government is concerned to ensure that investor compensation will operate effectively as with increasing the amount of compensation. Extending the coverage to include negligence is likely to significantly increase the cost of compensation. The more the system costs the more it will cost intermediaries and investors and the less we can be sure the system will operate effectively. This has potential implications for the Exchequer which must be avoided.

I draw Deputies' attention to section 41 which provides that the Central Bank may require investment firms to hold professional indemnity insurance. We see this as the most appropriate means of ensuring that clients of investment and insurance intermediaries are reimbursed where the intermediary is negligent. If loss arises from fraud investor compensation will kick in. Therefore, I reject this amendment.

My problem is that the Bill does not use the word fraud. It does not say that the intermediary is not in a position to return the money because of fraud. It only provides for situations in which the intermediary is not in a position to return money or its equivalent. I ask the Minister of State to address the example whereby a little old lady entrusts her savings which are then frittered away. Are we saying that as long as the intermediary is in a position to return worthless shares she has no claim to compensation?

The Bill is in accordance with the legal and contractual conditions which apply. The Deputy and I understand the difference between negligent advice and the legal and contractual obligations which apply in a relationship. The latter is more easily defined than subjective negligent advice. Shares could be the hottest property one week and almost worthless the next. The provisions are in accordance with the legal and contractual conditions.

We have a difficulty defining the nature of the contract between an accountant and the little old lady in the example I used. The lady is entrusting her savings to an accountant and the contractual obligation is not clear cut. They have not agreed that he is going to invest in particular shares on her behalf. He has only agreed to look after the money. We have had high profile examples of people who entrusted money to people who undertook to look after it in a non-specific way and the money is frittered away or does not produce any returns. The Minister of State is saying that an investor is not entitled to compensation in such circumstances.

In the example used, the lady would have to establish herself as a creditor as everyone else would have to do where a company went out of business. It is clear that, if the scope of the Bill were to be extended, which is what the Deputy is attempting to do, and I understand why——

I am trying to test the scope because I am unclear as to what it is. If the Bill stated that the intermediary could not return the money because of fraud on his part, then it would be clear. However, the Bill states instead that, if the money, shares or equities cannot be returned, irrespective of how they came to disappear or to be unavailable, compensation is payable. I do not understand that.

There is an obvious difference. It can be clearly established by an assessment whether the owner of a company defrauded his clients or if money was entrusted to a company which made an investment which did not work out. All claimants must establish that they have legitimate claims on the investor compensation fund. The criteria for payment will be narrowed to that of a clear case of fraud. That is the intent of the Bill and there is no doubt in my mind about that.

That is not stated in the Bill.

A person must establish why they are making a claim on the investor compensation fund and, in those circumstances, the basis of the claim will become obvious. If it is based on negligence or bad advice, it will not succeed. Compensation will only be paid on the basis of someone being defrauded.

If that is the Minister's intention, it should be stated in the Bill.

I understood the scope to be wider, which means I have misread the Bill. I thought that, if an investment company went broke through bad investments, an investor would have a claim on the fund even in circumstances where there were no instances of fraud. An example would be where the entire investment was put in the Japanese property market which recently collapsed. Is that not the case?

A firm siphoning clients' money and using it for its own purposes rather than the type of investment the Deputy has cited is what is covered in the Bill.

Deputy McDowell is right in saying that is what the Minister has in mind but that it is not what the Bill states. As I understand it, it refers neither to fraud nor to the circumstances which led to the inability of the company to repay the investor. In that case, I take it that, whatever the circumstances which gave rise to the inability to pay, even if no malpractice was involved, the investor would have a right to compensation under the terms of the Bill.

The first two points the Deputy made are correct. Regarding his third and final point, if a company goes into liquidation, all its creditors have rights under various laws to establish their position with a liquidator or administrator and the latter can establish the validity of their claims using that same legislation. This fund is not being established to cater for the broad parameters stated by the Deputy. That is the best way I can put it.

Where is the line drawn between that broad interpretation and funds which disappear as a result of fraud? The Minister of State defines the scope of the Bill as dealing with funds which disappear as a result of fraud, yet he is not prepared to state that in the Bill. I would have thought the scope was wider.

I accept the point the Deputy makes but it encroaches on company law which has its own broader set of criteria to determine the claim of an individual seeking recourse for a wrong they believe has been done to them. I did not intend for the Bill to be interpreted in the manner the Deputy has interpreted it. He asked where the scope of the Bill is defined; the only place is in section 30 which states: ". . . in accordance with the legal and contractual conditions applicable . . .". It is a matter of interpretation and I am led to believe that the wording would be understood as someone having done away with the money.

I accept that is the general thrust of the Bill but I am trying to establish whether there are circumstances where it could be envisaged that it would go beyond that.

That is an important point. It would depend on the case made and the precise detail of the contract which would then be open to interpretation. Contracts are drafted in different circumstances and would have to be adjudicated upon on the basis of each case.

That is helpful. However, I am trying to get the Minister to state on the record that the fraud test is not the only one and that there are others which could possibly entitle a person to compensation.

The only test specific to this legislation - there are possibilities under other legislation - is what I read from section 30.

In section 30(1)(a), which defines "net loss", there is mention of money owed to or belonging to the client or held on their behalf. "Net loss" is defined as being ". . . investment instruments, the value of the investment instruments being determined, where possible, by reference to their market value . . .". In the example I gave, the money has been frittered away and the investments are worth nothing. The client has lost money because of what has been done with the money they gave to the adviser. However, it may not have been lost by virtue of fraud but because of negligence or recklessness. I am unsure whether that person has a claim under the Bill.

If a client gave discretionary authority to a company to invest the money and then lost it under the circumstances outlined by the Deputy, then that is tough on them. They took their chances, took bad advice and made a bad investment. Unfortunately, that is the bottom line.

Does that mean that, even in the circumstances I outlined, where the relationship is not equal because the client relies completely on professional advice and the intermediary does something reckless with their money, such a person is not entitled to compensation?

Taking the extreme of the Deputy's example of an unequal partnership it could be stretched to the point where it could be considered as fraud if it was shown that the advice was clearly negligent or fraudulent. In that case, compensation would be payable, but only if it could be established as fraud rather than bad advice. However, I do not want to give the impression that this legislation will allow for compensation for the consequences of bad advice. That is not the case; it is clearly related to fraudulent activity on the part of the intermediary.

I understand what the Minister intends the scope of the Bill to be but I do not see where that appears in the Bill. I do not believe it does and that is where I have a difficulty. There is a grey area which the Minister is not attempting to define in the Bill.

If there is a legal weakness - and I do not accept there is - I will deal with it on Report Stage. I am not aware there is one but, if there is, it should be dealt with. It is not my intention to put bad legislation in place. I am following the legal advice available to me. I am not legally competent to do that but I will return to this matter.

Is the amendment being pressed?

I would like to return to the matter on Report Stage.

I will try to have a more specific answer on Report Stage.

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

Am I right in saying there is no requirement, in the case of a company, to put it into liquidation?

I presume it would be envisaged that that might happen if a determination was made that a company was unable to meet its financial responsibilities.

It is not obligatory but one would expect them to do so.

Question put and agreed to.
Sections 32 to 34, inclusive, agreed to.

I move amendment No. 5:

In page 28, lines 39 to 42, to delete subsection (2) and substitute the following:

"(2)(a) Subject to the approval of the supervisory authority and to such conditions or requirements as may be specified by the supervisory authority, the Company or a compensation scheme approved of under section 25 may, in exceptional circumstances, postpone the making of a payment under section 34.

(b) The supervisory authority, when giving approval or prescribing conditions or requirements for the purposes of paragraph (a), shall have regard to the requirements of Article 9 of the Investor Compensation Directive.".

Will the Minister explain on Report Stage whether it will be possible to apply similar provisions to funds set up by professional bodies? Will he return to the cross over issue? The Minister's amendment removes the obligation to pay compensation within six months in certain extreme circumstances.

I think the Deputy is concerned specifically with solicitors.

I also seek clarification on the question of accountants.

I will deal with that question later.

The phrase "compensation fund in accordance with the Act" is very general in comparison with the specific six month cap on the time limit for payment. I will raise this matter on Report Stage.

Amendment agreed to.
Section 35, as amended, agreed to.

I move amendment No. 6:

In page 30, between lines 10 and 11, to insert the following subsection:

"(4) Nothing in any contract shall limit or vary the liability of a product producer under this section.".

The purpose of this amendment is to ensure that product producers cannot evade their responsibilities under the Investor Compensation Act by including restrictive clauses in a contract given to an investment firm. Product producers must give a written appointment to any intermediary who gives them business. In the case of restricted intermediaries a product producer will be obliged to help fund compensation paid out where an intermediary defaults. This is a technical amendment.

Amendment agreed to.
Question proposed: "That section 36, as amended, stand part of the Bill."

Can the Minister of State explain how the subrogation mentioned in subsection (3) will work?

Subsection (3) provides that a product producer will be able to claim back from the company any money which the company manages to obtain on the liquidation of the investment firm while a product producer has reimbursed the company for compensation paid out. This point was raised previously. The Deputy is asking if money is found within a company after liquidation would that money be available directly to the creditor if they had already got compensation or would it go into the compensation fund. Obviously the fund would be compensated in the first instance. This is not a scheme to be paid on the double.

My understanding is that product producers will be part liable and the fund maintained by the company will be part liable. If money is available from the intermediary where does it go first?

It will go to whoever has paid out, either the Investment Compensation Company or the product producer.

What if both have paid out? It seems that the product producer has the primary liability.

The Investment Compensation Company would have paid out first so the money would go there.

That seems reasonable.

Question put and agreed to.
Sections 37 and 38 agreed to.
Question proposed: "That section 39 stand part of the Bill."

It is obviously envisaged that companies or intermediaries could join compensation funds in other EU countries. Would that be in addition to participation in the Irish scheme or instead of it? If a French scheme, for example, offered higher compensation would it be open to an Irish intermediary to join that scheme?

Yes. A firm can top up, so to speak. If the compensation level in another country was much higher and an Irish company operating in that country wanted to make sure it had the same level of compensation, the company could pay into that country's compensation scheme.

A company might be more likely to do that if the charge was lower. Would a British or French scheme offering the same level of compensation as the Irish one but charging less be open to Irish firms?

No. All Irish companies are covered by this compensation fund.

Question put and agreed to.
Section 40 agreed to.
Question proposed: "That section 41 stand part of the Bill."

It appears that this section allows the Central Bank to oblige intermediaries to have professional indemnity insurance. Is it intended that the bank will impose such an obligation or is this merely a theoretical enabling provision? Does the bank intend to impose an obligation on intermediaries of any kind to take out professional indemnity insurance?

They probably will.

Will this apply to all intermediaries?

No, some would not need it. For those who would, the Central Bank would oblige them to have professional indemnity insurance. In recognition of this the section requires the bank to take account of this fact when requiring investment firms to hold indemnity insurance.

If a person sets himself up as an investment adviser will he be obliged under this section to take out professional indemnity insurance?

Question put and agreed to.

I move amendment No. 7:

In page 34, lines 6 to 11, to delete subsection (1) and substitute the following:

"(1) The supervisory authority or any employee or officer of the supervisory authority or a subsidiary established by the Bank for the purposes of section 20 or any employee or officer of the subsidiary or an authorised officer for the purposes of section 9 or any member of the Board of the supervisory authority or any member of the Board of the subsidiary shall not be liable in damages for anything done or omitted in the discharge or purported discharge of any of its functions under this Act unless it is shown that the act or omission was in bad faith.".

At present section 42 provides for an exemption from liability for damages for the Central Bank, its officers and employees and for the compensation company and its officers and employees. Section 20 of the Bill provides that the bank can establish a subsidiary to provide administrative services to the Investor Compensation Company. It proposed to extend the exemption from liability which will be available to the company and the bank to include the subsidiary set up by the bank.

I wish to explain why it was felt justified to extend exemption from liability to the Central Bank, the Investor Compensation Company and the bank's subsidiary. The Bill establishes the Central Bank as the regulator for investor compensation. It is already the regulatory authority for investor business firms and Stock Exchange member firms and has been provided with similar exemption from liability under the Investment Intermediaries and Stock Exchanges Acts. The logic behind the exemption is that the bank might be sued by a client of an investment firm which defaulted on the grounds that the bank as regulator should have prevented the default.

It is not appropriate that the bank and, thus, indirectly the Exchequer, should be the ultimate compensator for a default by a member firm. Good regulation can effectively reduce the incidence of fraud but it cannot guarantee to eliminate it entirely. Without the exemption proposed making the bank the supervisor for investor compensation could expose it to substantial liabilities. It is necessary to guard it against such a risk.

The Bill also provides for the establishment of the Investor Compensation Company because some structure is needed to oversee the funding of investor compensation. We are providing for investor compensation because it is in the public interest and we are establishing the company to organise the funding. We will be asking people representing the industry and consumers to serve on the board of the company. It is appropriate that the company, the board and its employees and officers should be exempt from liability on the same terms as the Central Bank where they carry out their responsibilities in good faith.

With regard to the Minister's amendment, it is clear that once exemption is provided for the bank, the company and their employees it should apply to any subsidiary company set up. However, it is an outrageous provision. If an investor loses money and goes to the compensation company but cannot be paid compensation due to the negligence of the company, the investor should have the right to sue. I understand the Minister of State's arguments about the bank being sued because it did not exercise its supervisory functions correctly but section 42 (1) refers to " . . . anything done or omitted in the discharge or purported discharge of any of its functions under this Act . . .". If liability is to be applied it could be for the discharge of functions under the Act.

I do not wish to focus on employees or directors of the company. If we wish people to participate in the board of the company voluntarily they should not have to face the possibility of litigation if it can be avoided. However, the body corporate is different. If somebody is negligent and, as a result of that negligence, a person fails to get compensation to which they were entitled they should be able to seek compensation through the courts.

The exemptions provided for go too far. They ensure that no matter what the company does it is not liable. No private concern would get away with such provision.

I am slightly confused by the Deputy. A person is entitled to compensation under the legislation once the criteria are met. I do not understand the Deputy's point that if somebody is negligent such compensation might be unavailable. Either a claimant is entitled to compensation or not.

If a person is entitled to compensation under the legislation but only on the decision of the administrator of the company or the liquidator. In circumstances where there is an argument on the matter it must be tested in the courts. Ultimately, all law must be tested in the courts. However, as I understand it, the Minister of State wishes to include a provision to make it impossible to test if the case being made by the person seeking compensation is that they would have been entitled to compensation if the claim had been processed properly by the company.

That is not the case. There is recourse to the courts under section 35 (7).

I know that but I cannot see how that provision meshes with this. What is being exempted from court action?

The provisions were in the other Bill. It is a general provision related to providing a public service. The Deputy suggests that the Central Bank should be open to be held accountable directly in connection with this Bill and the compensation fund. Either somebody is entitled to compensation under the Bill or not, irrespective of what others may do. Either the argument stands up on the basis of the adjudication of the liquidator or the administrator or not.

The Minister of State is saying the bank will not be liable to compensate somebody for damages while not imagining circumstances in which damages might be occasioned.

If somebody is not satisfied with the liquidator's or the administrator's decision, for whatever reason, they can go to court.

What happens in a case where there have been a series of failures and a claimant cannot be paid compensation because the company has not made sufficient provision to pay the compensation? The person wishes to seek compensation in court because the company did not provide for foreseeable events.

If it was done in bad faith——

Not bad faith, just bad judgment. Bad faith is exempted.

That is protected and is meant to be protected. If there is a problem delays are built into the process to put matters right in terms of the funds available.

The Central Bank is an august body. However, it is not accountable to a parliamentary body for the exercise of its primary functions. This Bill proposes a provision which, if anything goes wrong, will not allow it to be subject to court action. This is a belt and braces provision with a vengeance.

Do I take it that the bank is not liable currently for a failure to discharge its duty under other Acts?

The same protection exists under the Stock Exchange and Investor Intermediaries Acts.

Amendment agreed to.
Section 42, as amended, agreed to.

As it is now 1 p.m. and consideration of the Bill has not been concluded, I propose we continue without a sos until 4 p.m. Is that agreed? Agreed.


Amendment No. 9 is an alternative to amendment No. 8, amendments Nos. 22 and 23 are cognate and will be taken together by agreement.

I move amendment No. 8:

In page 35, lines 35 to 42, to delete subsection (7) and substitute the following:

"(7) A person who, in purported compliance with any provision of this Act or any regulation made thereunder -

(a) provides an answer or explanation, makes a statement or produces, lodges or delivers any return, report, certificate, balance sheet or other document false in a material particular, knowing it to be false, or

(b) recklessly provides an answer or explanation, makes a statement or produces, lodges or delivers any return, report, certificate, balance sheet or other document false in a material particular, or

(c) knowingly withholds or omits information, shall be guilty of an offence.".

I accept there is a need to amend section 43(7). This takes on board the point raised by Deputy McDowell in his amendment No. 9.

Amendment agreed to.
Amendment No. 9 not moved.
Section 43, as amended, agreed to.

Amendments Nos. 10, 11, 14, and 15 are related and will be taken together by agreement.

I move amendment No. 10:

In page 36, line 30, to delete "in an incidental manner" and substitute "in a manner incidental to the provision of legal services".

This is a drafting amendment. It amends section 44 to make it clear that a solicitor is not an investment business firm where he or she provides investment services which are incidental to the provision of legal services rather than simply in an incidental manner. The background to amendment No. 11 is that solicitors are not investment business firms for the purposes of the Investment Intermediaries Act, 1995, where they provide investment services only on an incidental basis. That exemption which is contained in section 2(7) of the Intermediaries Act is being restricted by section 44. The restriction would allow solicitors to be exempt from the Intermediaries Act where they held written appointments only from credit institutions or from investment business firms. That would not allow them to act on the basis of a written appointment from the manager of a collective investment scheme, in other words, they would not be able to act on behalf of clients where it was a question of putting money into a unit trust, for example. This is unduly restrictive and I am proposing that the section be amended accordingly.

Amendment No. 14, in effect, restates for the purposes of the Investor Compensation Bill the conditions under which solicitors are not considered investment business firms for the purpose of the Investment Intermediaries Act, 1995. The section is being redrafted to align the wording with the wording of section 2(7) of the Investment Intermediaries Act, taking account of the amendments to that section included in the Investor Compensation Bill. The purpose of amendment No. 15 is to align the provisions of section 47(1)(b) which deals with insurance intermediaries with the provisions of 47(1)(a) which deals with investment intermediaries. A solicitor who is doing incidental investment business may not hold himself or herself out as an investment intermediary, for example, by advertising that he or she is an investment intermediary. The effect of the amendment is that a solicitor who holds himself out as an insurance intermediary by, for example, advertising that he is an insurance broker or agent, must contribute to a compensation fund operated by the investor compensation fund under this legislation.

Is it the current position that the Law Society compensation fund covers investment activities generally operated by solicitors, which is incidental to their legal work?

And the Minister is extending that to ensure that work which is not incidental is included under the funds being set up under this legislation?

The Law Society compensation fund will cover that if the solicitor has not signed up under this fund.

Amendment agreed to.

I move amendment No. 11:

In page 36, line 47, after "l989" to insert "or

(iii) a manager of a collective investment undertaking authorised to market units in collective investments to the public,".

Amendment agreed to.
Section 44, as amended, agreed to.

I move amendment No. 12:

In page 37, paragraph (a), lines 6 and 7, to delete "Investment Intermediaries Act, 1995" and substitute "Investor Compensation Act, 1998".

This amendment corrects a reference in the definition of "investment business firm" in section 45. The definition of an investment business firm around which this section is based is the definition in the Investor Compensation Bill, not the Investment Intermediaries Act.

Amendment agreed to.
Section 45, as amended, agreed to.

I move amendment No. 13:

In page 37, subsection (1), lines 28 to 36, to delete all words from and including "solicitors" in line 28, down to and including line 36, and substitute the following:

"a solicitor who-

(a) is an authorised investment business firm, or

(b) is, or who holds himself out as being, an insurance intermediary,

shall, as a condition of being issued with a practising certificate, effect and maintain, in respect of-

(i) the provision of investment business services as an authorised investment business firm, or

(ii) activities as an insurance intermediary,".

This is a drafting amendment. Section 46(1) inserts a new section in the Solicitors' Amendment Act, 1994. The purpose of this amendment is to align the drafting of the new section with the drafting of the 1994 Act by referring to solicitors in the singular.

Amendment agreed to.
Section 46, as amended, agreed to.

I move amendment No. 14:

In page 38, subsection (1), lines 14 to 43, to delete paragraph (a) and substitute the following:

"(a) A solicitor in respect of whom a practising certificate (within the meaning of the Solicitors Acts, 1954 to 1994) is in force shall be an investment business firm-

(i) where the solicitor provides investment business services or investment advice in a manner which is not incidental to the provision of legal services, or

(ii) where the solicitor holds himself or herself out as being an investment business firm, or

(iii) where, when acting as an investment product intermediary in a manner incidental to the provision of legal services, the solicitor holds an appointment in writing other than from-

(I) an investment firm authorised in accordance with the Investment Services Directive by a competent authority of another Member State, or an authorised investment business firm (not being a restricted activity investment product intermediary or a certified person), or a member firm within the meaning of the Stock Exchange Act, 1995, or

(II) a credit institution authorised in accordance with Directives 77/780/EEC of 12 December, 1977, and 89/646/EEC of 15 December, 1989, or

(III) a manager of a collective investment undertaking authorised to market units in collective investments to the public,

which is situate in the State or the relevant branch of which is situate in the State,

and shall be required to be authorised as an authorised investment business firm pursuant to the provisions of the Act of 1995.".

Amendment agreed to.

I move amendment No. 15:

In page 38, subsection (1)(b), line 46, after "intermediary" to insert "or who holds himself out to be an insurance intermediary".

Amendment agreed to.

Amendments Nos. 16 and 17 are cognate and may be taken together by agreement.

I move amendment No. 16:

In page 39, subsection (2)(a), line 15, to delete "(4)" and substitute "(1)".

Amendment agreed to.

I move amendment No. 17:

In page 39, subsection (2)(b), line 22, to delete "(4)" and substitute "(1)".

Amendment agreed to.
Section 47, as amended, agreed to.

Amendment No. 24 is consequential on amendment No. 18. Both amendments may be taken together by agreement.

I move amendment No. 18:

In page 39, before section 48, but in Part V, to insert the following new section:

"48.-The Central Bank Act, 1989, is hereby amended in section 16(2) by the insertion of the following paragraph after paragraph (t):

'(tt) made to the Investor Compensation Company Limited or to a subsidiary established by the Bank for the purposes of providing administrative services to the Investor Compensation Company Limited,'.".

Deputies will be aware of the stringent nature of the provisions of EU law which impose a duty of confidentiality on the Central Bank. In the area of investor compensation the relevant provisions are contained in the investment services directive which is closely linked to the investor compensation directive which this Bill will implement. The investment services directive allows the disclosure of information by competent authorities - in this case the Central Bank - to bodies which administer investor compensation schemes. The Bill appoints the Central Bank as the supervisory authority for investor compensation. It also provides for the establishment of the Invest Compensation Company Limited and of a subsidiary of the Central Bank which could provide administrative services to the compensation company.

Clearly the bank will need to be able to communicate information to the Investor Compensation Company and to the subsidiary company. To ensure that this is possible Amendment No. 15 amends Section 16 of the Central Bank Act, 1989 to provide that the non disclosure provisions of Section 16 will not apply to any disclosure of information by the bank to the investor compensation company or to a subsidiary set up by the bank to provide administrative services to the company. This is an obvious necessity and has been alluded to by Deputy Noonan earlier.

Amendment No. 24 is a technical amendment to the long title of the Bill which will be needed if this amendment is accepted.

I am obliged to the Minister for making this amendment. I wonder if he may have unwittingly created difficulty for himself. Is there now an obligation on the members of the board of the investment company to maintain confidentiality as there is on the Central Bank?

We are not providing for that specifically.

On the face of it, information disclosed to the investment company and members of the board including consumer representatives can be disclosed to the public and there is no liability or obligation attaching to those board members not to do that.

That can be dealt with in the articles of the company.

Amendment agreed to.
Section 48 agreed to.
Question proposed: "That Section 49 stand part of the Bill."

I want to make the point about bringing insurance and the regulation of insurance within the ambit of the Central Bank within the ambit of the supervisory authority. We are now in a position where the investment company has certain responsibilities in relation to insurance brokers but for the moment the supervisory authority, the Bank has no responsibility for the regulation of the insurance industry. Responsibility lies somewhere between the Department of Enterprise, Trade and Employment and self regulation. The Minister for Enterprise, Trade and Employment has indicated her intention to bring insurance companies within the ambit of the supervisory role of the Central Bank. Perhaps she could indicate to us where that is, because clearly this produces an in between situation where the Bank has some responsibility but still does not regulate which is less than satisfactory.

I understand the Department hopes to publish that in the third quarter of this year.

Question put and agreed to.
Section 50 agreed to.

I move Amendment No. 19:

In page 43, paragraph (b)(iv), to delete lines 44 to 49 and substitute the following:

"(k) notwithstanding the obligations imposed on liquidators and received under this Act, a person appointed as a liquidator or receiver of a company in respect of any activities relating to the liquidator or receivership, or".

Section 51 provides that a liquidator or receiver of an investment business firm or of a stock exchange member firm will not be an investment business firm for the purposes of the Investment Intermediaries Act. It is considered that this provision should be extended to liquidators and receivers generally because it would not be appropriate to require a liquidator or a receiver to obtain authorisation from the Central Bank where their activities as a liquidator or receiver include for example selling shares owned by a company which was being liquidated or was in receivership. Amendment No. 19 provides accordingly.

Amendment agreed to.
Section 51, as amended, agreed to.
Question proposed: "That section 52 stand part of the Bill."

Under the heading "TABLE" on page 41 under "investment instruments" there is a list of instruments. These things change by the day and new product is coming on the market all the time. We have a very sophisticated financial services industry and all sorts of new things are coming in including hybrids. I note the Minister has taken power to increase the definition by regulation but in the circumstances of the financial services industry at the moment, it would better if that discretion was vested in the bank in the supervisory authority, rather than in the Minister because the response of the bank would be more immediate than the response of the Minister. By the time the Minister finds out there is a new product on the market which should be included in the scope of this section, it will probably be gone too far, whereas the bank is in a position to know immediately. It would also be wise if at Report Stage the Minister vested some power in the supervisory authority to widen the scope of the definition in this table and in this section.

I understand your point, but it is not appropriate for the bank to be in a position to amend legislation particularly primary legislation. The definition is couched to be as embracing and as inclusive as is possible.

I am not saying that at all but that the Minister should have included at the end of the table "Any other such instrument, hybrid or otherwise which in the opinion of the bank is being traded".

No. The Minister consults the Central Bank anyway. It is not a question of suggesting that they would not be in contact with each other.

In the real world it will not happen fast enough. The bank is not sure what is going on at the moment. It is running to keep up with the pace of new instruments and products that are coming out all the time. Many of the new products are hybrids. The Minister has a reference to hybrids instruments involving two or more investment instruments. All that is needed is a phrase "or any other such instrument which in the opinion of the bank is a hybrid". Then thebank is not legislating and the Minister is covered.

I understand the point the Deputy is making.

The real point I am making is that somebody will be in the business of selling new products, but when the venture goes wrong, they will go back to the compensation company only to find that the product they were selling was outside the scope of the definition section. In that case nobody will be compensated. This can be avoided in there is a catch all provision at the end of the table. The draftsmen were clearly concerned that everything would not be caught within the scope of it. It is quite detailed in that it goes on to a page and a half of small print defining everything that is in the notes already.

As I understand it, it implies everything else as well. The definition includes all of those things but there are certain things it cannot include.

If it included everything the Minister would not have taken the power to extend that regulation.

The reason is that it is in the Investment Intermediaries Act. We can name those.

The Investment Intermediaries Acts are becoming like the Constitution.

If a person is authorised to operate, they are authorised under the fund irrespective of some of the definition.

Question put and agreed to.
Sections 53, to 55, inclusive, agreed to.
Question proposed: "That section 56 stand part of the Bill."

This section relates to the publication provision. It provides that: "the supervisory authority shall publish notice of revocation of an authorisation of an authorised investment business firm in the Iris Oifigiúil and in one or more newspapers circulating in the State . . .”. “Circulating in the State” is very wide. The Limerick Leader circulates in the State but one would not necessarily know that if you did not live in Limerick. Do we not need a better means of communicating?

We read that to mean national newspapers and not as interpreted by the Deputy.

What definition is used by the Department of the Environment and Local Government in legislation governing planning applications?

I will find that out for the Deputy. I want to get this right. I want people to have the information. I am not trying to prevent anything. I take the Deputy's point.

Some of the intermediaries would be local. If an intermediary is operating in Dundalk, placing an advertisement in the Limerick Leader or The Examiner is not much help to him.

It is the bank's call.

I am cross-referencing.

I suppose I should not anticipate the debate.

Question put and agreed to.
Question proposed: "That section 57 stand part of the Bill."

Section 57 refers to firms authorised in other EU States. Is it sufficient that a firm is authorised in an EU State? Can firms authorised in Britain operate here or are they required to seek authorisation?

If they are covered by the directive, which is an EU directive, they have a passport to operate within all EU states.

We are getting into a grey area. Most of these sections refer to the Investment Intermediaries Bill and amendment of it and talk about authorisation under that Bill as opposed to what we are dealing with in the core of this Bill.

There could be a position where somebody tied to a British based insurance company authorised in Britain would have to be separately authorised in Ireland.

It is as I stated. If somebody is authorised and covered by the directive they can operate here just as an Irish firm going to the UK is authorised to operate there. That is why the directive was put in place. One has the freedom of operating in an almost single market.

So one can be authorised in Britain to operate in Ireland and throughout the rest of Europe.

Under the directive.

Are you then subject to regulation in Ireland? Does one have to obey the provisions of our Act or does the British Act apply?

We dealt with this matter in other legislation also. One is always operating under the laws of the country you come from.

So authorisation can be granted in Britain but if one operates in Ireland one is operating under Irish law?

You are based under UK regulations but your licence to operate is based on the fact that you operate under the EU directive. In other words, the country of origin has implemented the investor compensation directive.

I do not wish to get technical but I want to be absolutely clear that somebody authorised in Britain but operating in Ireland is governed by our regulations?

They are not?

Not if they are authorised by the UK. They operate under the legislation of the country of origin. What allows them to operate here is if the investor compensation directive is in place in that country. The same will apply to Irish companies operating abroad. They will operate under home based regulations and legislation. We have come across this before in various Bills.

There is a difficulty with the regulation of the financial services sector generally in relation to who regulates. We have so many companies operating transnationally. Whether they should operate under the laws of the country of origin or wherever they are operating raises major questions. Perhaps I am getting myself into too much of a tizzy about this. I am not sure how many non-authorised intermediaries operate in Ireland. Perhaps if the Minister had a figure on it——

The Deputy is talking about regulations. That is not covered by this Bill; it deals with compensation. The Deputy raises a much wider question which may be a debate for another day.

Perhaps the Minister might supply me with the information of how many intermediaries operate in Ireland but who are authorised in other EU states?

We have a list. The bank would have been informed of their operation here. It does not mean they are operating businesses here. We will supply the Deputy with that information.

Question put and agreed to.
Section 58 agreed to.

I move amendment No. 20:

In page 49, line 9, after "section 26" to insert "or 63".

This is a drafting amendment. Section 59 of this Bill amends section 28 of the Investment Intermediaries Act, 1995, to make it an offence for a product producer to do business with an investment product intermediary unless the intermediary has been authorised under section 10 of the Act or is deemed to be authorised under 26 of the Act. As drafted this would preclude the product producer from doing business with a certified person, in other words, an accountant who provides only investment services which are incidental to the provision of accountancy services. This was not the intention and the amendment provides accordingly.

Amendment agreed to.
Section 59, as amended, agreed to.

I move amendment No. 21:

In page 49, before section 60, to insert the following new section:

"60.-Section 31 of the Act of 1995 is hereby amended by the insertion after subsection (5) of the following subsection:

'(6) (a) Where the appointment in writing of an investment product intermediary is discontinued, the investment product intermediary shall ensure the publication of a notice to be known as a "notice of discontinuance", being a notice that the appointment in writing has been discontinued, in one or more of the newspapers circulating in the State within fourteen days of being informed by the product producer of the discontinuance of the appointment in writing.

(b) Where an investment product intermediary the appointment in writing of whom has been discontinued does not publish a notice of discontinuance in accordance with the requirements of paragraph (a), the product producer who discontinued the appointment in writing shall ensure the publication of a notice of discontinuance in one or more of the newspapers circulating in the State.'.".

Section 60 of the Bill amends section 31 of the Investment Intermediaries Act and imposes a requirement on a product producer to publish a newspaper notice where a written appointment with an investment product intermediary has been discontinued. This section was recommended by the Select Committee on Enterprise and Economic Strategy which examined the collapse of the Taylor Group of investment companies. The purpose of the section is to try to ensure that the public is aware that an intermediary may no longer do business on behalf of a product producer.

It has been represented to us that written appointments can be terminated for purely commercial reasons and that it might be more appropriate to allow intermediaries the option of inserting the appropriate newspaper notices rather than have a notice about them placed by the product producer. Where the intermediary does not publish a notice, the product producer will be obliged to do so. The end result will be the same. We are simply adjusting the way in which the result may be achieved.

The Minister is aware that individuals involved in the business are concerned about this section. Their primary concern is that the wrong impression can be given when, in entirely innocent circumstances, an appointment is discontinued and a notice to this effect appears in a newspaper and gives the impression that some sort of skulduggery is involved and there is nothing in the notice that allows that to appear. They also make the point that because of the time lag involved, it does not safeguard against fraud and does not, therefore, meet the intention of the committee's recommendation.

That is precisely why I am proposing this amendment - to allow for discretion so the intermediary can place a notice in the newspaper explaining why it may not be, for legitimate reasons, continuing an arrangement it may have had with a company.

Are we then leaving ourselves open to the possibility that because we do not prescribe what the intermediary will put into the notice, it can be couched in terms more innocent than it should be? An intermediary may advertise and state "I am doing this and this but, by the way, I am no longer doing this product." This would not transmit the message we originally wanted transmitted.

We must presume everyone is genuine. The reason for the notice is not to confirm that someone is or is not a fraudster, but to convey that an intermediary is no longer doing business with the company. He or she may elaborate on the reasons. This measure is aimed at the consumer. An argument could be made whether they will read the newspaper. As politicians, we know how hard it is to get people to take in information, for example on referenda. I do not accept there is no information - there is always a great deal of it. It is a question of whether people want to read it.

Question put and agreed to.
Section 60 deleted.
Question proposed: "That section 61 stand part of the Bill."

Submissions about notification have been made by representatives of the industry working party. It states the section cannot work because if notices are placed in newspapers about discontinuance of appointments-

We have moved on from that section, although I will be happy to come back to the Deputy's point on Report Stage.

I did not realise that, as well as making the amendment, the section would be deleted. Are there merits in what the industry is saying and is it met in the amendment?

I have listened to the views of the industry. I would never be dismissive of those who understand the marketplace. However, I am trying to strike a balance between what is good for the industry and getting the information to the consumer. I proposed the amendment to meet some of the concerns. There is concern that the time lag of 14 days, to which Deputy McDowell referred, could allow a person to be defrauded. There may be some merit in that. These matters are subjective. If a person wishes to defraud another person he or she can do so in 24 hours. I will consider shortening the 14 day period.

That is not the point I am pursuing. I am pursuing the point raised by the chairperson of the working party that the section is inoperable because persons will not put notices in newspapers if they believe they will be sued. It is impossible to distinguish notifications indicating discontinuance of appointments for business purposes.

That is not fair. I have tried to be more than fair to the intermediary by allowing him or her to put a notice in phraseology which allows for the fact that many people will end relationships for reasons other than fraud, for example, commercial reasons. If the intermediary fails to put in the notice, the product producer is liable by law to do so. I am being fair in meeting the concerns of the industry.

It would be better if the obligation to put in the notice rested with the supervisory authority, the Central Bank, as it seems to be the only body which cannot be sued.

That could have major implications for the intermediary. I have tried to strike a balance. What could be fairer than asking the intermediary to put in the notice so that people are aware he or she is no longer doing business with a company? In doing it the other way it could be presumed there was a fraudulent reason for the break in the relationship.

It improves the situation. The Minister is not being criticised on the grounds of fair play, but on the grounds of the inefficacy of the provision.

This is about informing the public.

If the Minister is sure it will work, I will accept it.

I hope it will. I am trying to give people information. There is no perfect way of doing this but this is one of the ways we can do it, given the range of options open to us.

Question put and agreed to.
Sections 62 to 67, inclusive, agreed to.

I move amendment No. 22:

In page 53, lines 28 and 29, to delete "amended in subsection (1) by the insertion of "28(5)" before "30"." and substitute the following:


(a) in subsection (1) by the insertion of '28(5)' before '30', and

(b) by the deletion of subsection (7) and the substitution of the following subsection:

'(7) A person who, in purported compliance with any provision of this Act or any regulation made thereunder-

(a) provides an answer or explanation, makes a statement or produces, lodges or delivers any return, report, certificate, balance sheet or other document false in a material particular, knowing it to be false, or

(b) recklessly provides an answer or explanation, makes a statement or produces, lodges or delivers any return, report, certificate, balance sheet or other document false in a material particular, or

(c) knowingly withholds or omits information,

shall be guilty of an offence.'.".

A comma should be inserted following (5) in line 2 of the amendment.

Amendment agreed to.
Section 68, as amended, agreed to.
Sections 69 to 75, inclusive, agreed to.
Question proposed: "That section 76 stand part of the Bill."

The former section 75 imposes a duty on auditors to bring to the attention of the supervisory authority any breaches of the Stock Exchange Acts. This provision could be applied in other areas where we are giving auditors of a body, in this case, the Stock Exchange, a responsibility to ensure that regulations or the provisions of an Act are enforced and to bring a breach to the attention of the regulatory authority. I am more interested in the principle than the specific application of this to the Stock Exchange.

This ensures that extra information is made available to the bank. The amendment was proposed by the Select Committee on Enterprise and Economic Strategy in the context of the Intermediaries Act and is being inserted in the Stock Exchange Act to ensure consistency in the powers available to the supervisory authorities under both Acts.

Question put and agreed to.
Section 77 agreed to.
Question proposed: "That section 78 stand part of the Bill."

Section 78 amends section 52 of the Stock Exchange Act, 1995, and provides for the substitution for subsection (5). Will the Minister give an outline of the original section?

Section 52 of the Stock Exchange Act enables the Central Bank to impose requirements relating to the safe keeping of client money and investment instruments. Section 52(5) ensures that in the event of insolvency of a member firm no liquidator, receiver, administrator, official assignee, examiner or creditor of the member firm will have any rights over client money or investment instruments until all proper claims of the client against such money and instruments have been satisfied.

However, there may be cases where the actions of a liquidator may benefit the clients of a member firm. In such cases it is appropriate that the client should make a contribution to the costs of the liquidator.

Question put and agreed to.
Sections 79 and 80 agreed to.
Question proposed: "That section 81 stand part of the Bill."

Section 65 of the Stock Exchange Act deals with breaches of conditions or requirements imposed by the Central Bank on a Stock Exchange or member firm. Two alternative mechanisms are provided, i.e., proceeding through the courts or referring the matter to a determination committee.

Section 80 amends section 65(7) to delete the words "may dismiss the application or . . .". This amendment is intended to clarify the powers available to a determination committee and does not reduce the powers available to a committee. Section 80 also inserts an amendment to subsection (8) which provides that the appeal by an approved Stock Exchange or a member firm against the determination of a committee set out in the subsection must be lodged within two months of the date of the determination of the committee.

Question put and agreed to.

I move amendment No. 23:

In page 60, before the First Schedule, to insert the following new section:

"82.-Section 70 of the Stock Exchange Act, 1995, is hereby amended by the deletion of subsection (7) and the substitution of the following subsection:

'(7) A person who, in purported compliance with any provision of this Act or any regulation made thereunder-

(a) provides an answer or explanation, makes a statement or produces, lodges or delivers any return, report, certificate, balance sheet or other document false in a material particular, knowing it to be false, or

(b) recklessly provides an answer or explanation, makes a statement or produces, lodges or delivers any return, report, certificate, balance sheet or other document false in a material particular, or

(c) knowingly withholds or omits information, shall be guilty of an offence.'.".

Amendment agreed to.
First and Seanad Schedules, agreed to.
Second Schedule agreed to.
Question proposed: "That the Third Schedule be the Third Schedule to the Bill."

Will the Minister confirm that the directive included as a Schedule to the Bill is unamended?

The Bill stands alone, but the directive is set out for information purposes.

Third Schedule agreed to.


I move amendment No. 24:

In page 5, line 9, after "AMEND" to insert "THE CENTRAL BANK ACT, 1989,".

Amendment agreed to.

Will the Minister refresh me on the amendment to the Title?

It is an Act to enact the Central Bank Act, 1989.

Is it subtitled Investor Compensation Act?

Yes, it is titled the Investor Compensation Bill, 1998. I am including the Central Bank Act.

Was the amendment to the Central Bank Act cleared with the European Central Bank or the EMI?

It is provided for in the directive.

Title, as amended, agreed to.

That concludes our deliberation of the Bill. I thank the Minister and his officials for their co-operation. I also thank Members for their input to an important element in the consideration of a Bill which will go a long way towards building confidence in financial institutions. The joint committee will consider a draft report on the regulation and supervision of financial institutions tomorrow.

The Select Committee adjourned at 1.50 p.m.