Dáil Éireann díospóireacht -
Tuesday, 14 Feb 1984

Vol. 347 No. 12

Private Members' Business. - Protection of Investments.

Mr. O'Kennedy

I move:

That Dáil Éireann calls on the Government to take immediate action to protect the interest of members of the general public who place money on deposit with finance houses, provident societies and similar institutions.

It would be appropriate if initially I read the motion in my name and the amendment in the name of the Minister so that the House is aware of the position it is considering having regard to the Government amendment. The motion in my name proposes that Dáil Éireann calls on the Government to take immediate action to protect the interests of members of the general public who place money on deposit with finance houses, provident societies and similar institutions.

The amendment in the name of the Minister proposes that Dáil Éireann notes that deposit taking institutions are subject to statutory regulations and that it is the intention of the Government to take such further steps as they may consider necessary to strengthen control in this area.

The purpose of the motion in my name is threefold: first, to evoke a response from the Government, secondly, to raise in public debate in the Dáil, the most appropriate forum for it, issues of this nature so that not only those who may have been affected by recent developments in provident societies are safeguarded but that those who invest in the future are aware of issues and constraints that may arise and, finally, to create a reassuring climate for investors generally and to restore confidence in the investment climate, especially in what was seen as safe haven investments.

I welcome the fact that the Government have, even in the terms of the amendment, already indicated a response in that the Minister obviously conscious of the fact that we are subject to statutory regulations in deposit taking institutions indicates that it is the intention of the Government to take such further steps as they may consider necessary to strengthen control in this area. There is an express indication that the Minister feels it is necessary to strengthen control in this area. There is an express indication that the Minister feels it is necessary to strengthen control and that the Government are considering further steps in this area. On that basis, obviously, I am anxious to hear, to the extent that the Minister can at this stage, what kind of steps he has in mind to protect deposits of this type and, if necessary, to strengthen the controls under the Provident Societies (Amendment) Act, 1958.

When a circumstance arises where investors in provident societies encounter problems like those which emerged recently in the Private Motorist's Provident Society, one must face the fact that hardships arise. Of course one can say that people should be more aware, more cautious and should ensure in every case that their investments are not only potentially profitable but secure in every sense. I wish to make it clear that I want to avoid political implications in this matter in the interests of what I hope can be achieved here this evening. Nonetheless, it is fair to say that there has been a trend in recent years to invest in what are called safe haven investments as distinct from investment in industry because of the unfavourable climate, not just here but for investment in industry generally and also for tax provisions.

Those who are well informed can distinguish between investments in bank deposit accounts, building or provident societies. However, for a certain type of investor who just wants to have a safe and secure return for his investment they are all of a kind. It is probably true that the more prudent and cautious the person is the more he will concentrate on outlets of this nature without necessarily distinguishing between them. That has been the case in examples we saw recently in relation to the PMPS. I am not trying to wring tears from anybody but the Minister must be aware of the profile of the investor in this case. I am told that there are approximately 9,000 depositors and we have all been approached by individuals. Like other Deputies, I have been made aware of genuine hardship cases. I do not want to imply that people who invested elsewhere are different from those in this instance but I will give two examples of the kind of person I am speaking about.

I am personally aware of a young farmer in the mountain regions of north Tipperary who has a farm of approximately 40 acres. By the standards of that region he is very progressive and has invested £12,000 in the PMPS. He is a young married man with three children and could not be described as anything but a prudent, hardworking young man. I am also aware of a disabled person who has three unemployed children between the ages of 18 and 24. He invested the proceeds of an accident award, over £20,000, in the society. I must ask the House and the Minister to take it on trust that these two cases have been brought to my personal attention. I am not saying that there are not other similar cases but we owe them some response here. I know there are difficulties for the Minister in this regard and I am also aware that the consequences of a decision in a particular case can give rise to issues in relation to other similar cases. However, we must measure each case separately. I am not making a case in respect of any one society but the public will be particularly aware of the circumstances relating to the PMPS as it has even been discussed on television. Rather than leave it in that kind of limbo we should at least have an opportunity of raising the matter here. I welcome the response from the Government even though it might be said that perhaps the Minister might have indicated, without having to await a motion from this side of the House, that he was contemplating looking at the statutory provisions already in existence and that it was his intention to take such further steps as might be necessary to strengthen controls in that area. It would have been well if the Minister had done that without the necessity to put down this motion. I do not want to make much of that. He has given us that indication now. That is important. I will be anxious to hear what the Minister has to say.

When circumstances of this nature arise, the first responsibility is the responsibility of the Government. I am not trying to pin it on the Minister on the basis that they now have responsibility in this area, that we do not, that we can make all the promises and they have to deal with the consequences of the promises we make. That would not be appropriate or right. Nevertheless, the Government have responsibility for the actions they take in any case. In relation to the PMPA company the Government took immediate action which was seen to be firm and effective. I do not want to go into all the details, but that action secured the position of policy premium holders and ensured that the insurance industry was protected and vindicated. The Government had their own reasons for that action from information which is not available to me. Incidentally, I do not think that it is necessary that I should have that information.

That action had a stabilising effect on the insurance industry generally and on policy-holders in particular. Something similar is worthy of consideration in respect of what one might call a sister society having regard to the profile of investors generally. It seems we are talking about small depositors. Perhaps the two cases I mentioned are not representative in the sense that many depositors would deposit sums smaller than the figures I mentioned. They are people who have been prudently putting aside their savings with a view to finding a secure haven for their investment.

There is another factor which we must take into account. People are being encouraged to save and invest in Irish companies. Many people respond on that basis and those most likely to respond are members of the older generation who have prudently put aside savings and would like to be seen to continue to make a contribution to Irish companies. The evidence is that, in most of the societies, small investors, many of them retired people, tend to look in this direction, as distinct from young investors who for one reason or another might be prepared to take a chance on the stock market and in other areas.

This is not a matter which concerns the Minister immediately but, when we are talking about the investment climate generally, it is important that we should present a more reassuring front to the outside world. There has been a considerable deal of speculation in oil shares. In a bigger stock exchange that might not be of such considerable importance but, in a stock exchange of the size of the Dublin Stock Exchange, it tends to dominate dealings. It does not necessarily promote the greatest degree of confidence in our stock exchange when we see such fluctuations as we have seen in recent times.

We also have equities and gilts and securities of this kind. If we have fluctuations of the kind I have mentioned on the stock exchange, and what appear to be collapses of the kind I have been referring to in provident societies, there is cause for a certain degree of concern. Only the Government, through legislative action, can take the necessary corrective measures. I hoped that by raising the matter here this evening we could have endeavoured to create a healthy and secure climate for investment, particularly in the service sector of our economy. It is becoming quite clear that it is only through investing in the service sector, in addition to the manufacturing sector, that we will be able to generate the necessary jobs and job opportunities.

The Minister will be familiar with the difficulty in attracting manufacturing industry to Ireland at this point. He will acknowledge that in other countries where they coped better with the worldwide recession than we did — and that may be due to demographic factors as much as anything else — growth in the service sector, as distinct from the manufacturing sector, has maintained a level of employment to cope with the impact of the recession. We should be encouraging security for those who invest in that sector, in provident societies, banks and financial institutions generally. That is why I framed the motion in terms of finance houses, provident societies and similar institutions. The climate for investment in these societies must be healthy and in so far as the Government can ensure it, it must be seen to be as secure as any other prospect the State can offer. Where there seems to be a risk, or hardship, or insecurity, the Government have a particular responsibility to step in and take action.

There is another type of action which can be contemplated in cases of this nature, that is, legal action. Of its nature, legal action does not solve problems. As a lawyer I have to acknowledge it can only do what is available to it within its area of responsibility. It can only come to a judicial conclusion and make a decision on that basis which may have consequences in terms of the investment climate which it is no function of the Judiciary to consider. Their function is to make a decision between the parties on the question at issue. It is likely that legal action is contemplated in cases of this nature. Depending on the indication the Minister can give us this evening, I hope it may not be necessary to pursue to a legal conclusion action which may be contemplated. I am not suggesting people should not consider their legal rights. In the event that the Government may be able to give some indication of what their proposals may be, actions which may already be under consideration might be stayed until such time as we can see the outcome of those considerations.

If these figures are correct and if upwards of 9,000 small depositors are involved, we can see that in a small integrated society such as ours not only are those 9,000 small depositors immediately affected but their experience will be communicated to others who might intend to invest in what are generally perceived by that type of person as safe places for investment. This would make them even more cautious and more reluctant and it could well be that the funds necessary to maintain and develop the programmes of provident societies, building societies and even banks, might not be as forthcoming from the public as they otherwise might be.

It is important and necessary to note that people have a responsibility. If not fully informed, people should seek the best possible advice before making investments. I would hope that this debate and the manner in which it will be conducted will make potential investors conscious of the need to get the best possible advice when they are contemplating investing their lifesavings or the greater portion of them. The Government of the day cannot pick up the tab in every case, no matter how unfortunate the consequences. I would not suggest the introduction of a new principle whereby in circumstances of this nature the Government would always pick up the tab. It is important that people should inquire very closely and should be influenced not just by the level of interest payable but also by the security, in so far as it can be ascertained, of the investment they are making.

The fact that the Government took certain action in relation to the PMPA cannot be ignored when one looks at the situation of the PMPS. I should like to see a strengthening of the legislation involved. In the public mind a question is being asked: what is the difference between a policy-holder who is secured and protected and the small investor who has taken a prudent step, as he sees it, by investing in a society? In the public mind there is not any great distinction in that both parties might have thought they were being prudent. Where there is a connection between the insurance company and the society it can be fairly argued that action taken in respect of one suggests to the depositors in the provident society that the Government might contemplate some protection in respect of them as well.

It is not appropriate that I should go into details in respect of any one society and what the assets might be. I know that the liquidator examines all the circumstances and I do not intend that the Dáil should constitute itself to be a committee of inquiry. A committee of inspection has already been set up and has been in contact with the liquidator. The Minister can communicate with the liquidator and find out all the information available. He knows the extent of the liability and the prospects for the viability of this and every other society. I suggest that before coming to a conclusion the Minister should examine all the possibilities in the greatest detail. It may well be that there is considerably more for distribution to depositors than is being publicly suggested. It is not my business to know that information at this point but it is the Minister's business, although whether he would feel free to give that information publicly in the Dáil is another matter.

If there is a need for more immediate and direct intervention by the Registrar of Provident Societies and if the legislation which regulates these societies is not as effective as it should be in ensuring such intervention at an early stage, then the Minister would have the full support of this side of the House in any action he would propose to deal with it. With the changing climate for investment it may well be that legislation which seemed adequate in 1978 is not either effective or adequate in 1984.

I hope the Minister will see that the purpose of this motion is not to put the Government in the hot seat. It has the three-fold purpose I mentioned: firstly, to evoke a response from the Government; secondly, to raise the matter in public debate here in a calm and restrained way so that people will become conscious of their own obligations; thirdly, to endeavour to assure the public that we have a healthy and safe climate for investment, particularly at a time when investment in the service sector is becoming more important.

Where there are hardships of the kind I have mentioned, we have responsibility. I know the taxpayers' capacity is not unlimited to meet hardships of all kinds but the Minister will find that investors in these societies are people who need to be protected and who otherwise will suffer considerable hardship and might have to be helped through social welfare. They are trying to be independent through saving for old age or providing a secure basis for developments taking place on their farms, in their homes and elsewhere. I would hope for a positive and sympathetic response to our motion. I wait to hear in greater detail what the Minister has in mind when he elaborates on the terms of his amendment.

Minister for Industry, Trade, Commerce and Tourism (Mr. J. Bruton)

I am glad to have this opportunity of discussing this matter in the House. I acknowledge the responsible manner in which the motion has been put forward by Deputy O'Kennedy. My amendment is put forward because I feel that if Deputy O'Kennedy's motion were passed as it stands it would infer that there are much wider problems in the financial sector than in fact there are.

An Ceann Comhairle

I take it that the Minister is moving his amendment.

Mr. J. Bruton

I move amendment No. 1:

To delete all words after "Dáil Éireann" and substitute the following:

"notes that deposit-taking institutions are subject to statutory regulations and that it is the intention of the Government to take such further steps as it may consider necessary to strengthen control in this area."

In dealing with the subject matter of this debate I propose to deal with the following subjects in order: firstly, the banks; secondly, the building societies; thirdly, the Post Office, ACC and other State guaranteed bodies; then trustee saving banks, credit unions, industrial and provident societies, financial brokers, insurance and then insurance brokers. I will have something to say under each of those headings.

In regard to the general question of deposit-taking institutions, they are required to be licensed under the Central Bank Act, 1971, unless specifically exempted from the need to hold a licence. The exempted institutions cover a broad range including the Agricultural Credit Corporation, the Industrial Credit Company, the Post Office Savings Bank, the Industrial Savings Banks, building societies, the industrial and provident societies and unit trusts. Before dealing with the exempted institutions I will mention the position under the Central Bank Act for those that are not exempted, basically the banks. At present there are 41 licensed banks operating here. Before being licensed, applicants for a bank licence must satisfy specific requirements laid down in the Act which require among other things (1) an adequate capital base, (2) a suitable management structure and (3) a clearly defined set of objectives. Ongoing supervision of these banks by the Central Bank is to ensure that the banks remain liquid and solvent and remain in accordance with the initial requirements for the granting of a licence.

I will now move on to the exempted institutions which are not subject to the controls I have just mentioned under the Central Bank Act. I will deal firstly with building societies. They are incorporated and regulated under the Building Societies Act, 1976. They may take deposits but in fact their principal means of raising money is by the issue of shares to their members. However, such shares may be cashed readily in accordance with the rules of the various societies and, in fact, they are the same as deposits. The societies lending is restricted to loans to members on the security of a mortgage. Since powers of control and supervision of building societies exist at the moment covering such matters as advertising and taking of deposits, making of loans, the prudential ratios to be maintained by the societies and the suspension of their operations, we can say that fairly good controls exist in regard to building societies.

The next category are the Post Office Savings Bank, the ACC and the Industrial Credit Company. All the deposits with those institutions are in fact State guaranteed. The next category are the trustee savings banks. These are long standing banking institutions dedicated to the promotion of thrift and the fostering of savings among the public. The bulk of the savings with the trustee savings banks are in fact placed with the Exchequer and therefore they are safe. The licensed banks and the specialised credit institutions I have just mentioned hold between them £10.3 billion and they are well regulated bodies with a record of soundness and stability. The difficulties that have been mentioned in this debate should be seen against the context of a very large mass of well regulated bodies with whom the vast bulk of savings are deposited.

I will refer now to the position of credit unions. Credit unions, as the House is aware, perform a very valuable social function. Apart from the application of a principle of self-help they provide money on loan to persons who stand little chance of obtaining credit from the more conventional lending sources. Too few people realise how important is the contribution which credit unions make as a source of national savings. The importance of credit unions can best be illustrated by the fact that in 1969 approximately £6½ million of investors' money was held by credit unions and by 1981 this figure had risen to £130 million. This achievement is proof of the dedication, skill and commitment of the many people involved in the credit union movement.

However, there is no point in denying that the bigger the volume of money being handled the bigger is the element of risk. It was to this end that the scope of the powers of the Registrar of Friendly Societies were extended under the Industrial and Provident Societies (Amendment) Act, 1978, with regard to credit unions to enable him to do the following things: (1) inspect the books and other documents of such bodies; (2) investigate their affairs; (3) call a special meeting of the members; (4) appoint a person as director and (5) direct the suspension of acceptance of deposits, loans or shares and of payments. In order to assist the registrar in implementing these controls the annual returns from credit unions, which are furnished to him, are carefully examined by the registrar and certain ratios extracted from them to identify societies where problems might arise and where as a result a timely inspection of the society would be desirable. Under the 1978 Act the first inspection of the books and records of a credit union took place in 1980. Since then 35 credit unions in all have been inspected and follow-up action has been taken, particularly in the form of discussions and other contacts with the credit unions, to get them to put themselves in a better condition. It is intended to carry out inspections of a further ten unions in the foreseeable future.

I now move to the difficult area in this discussion, that is concerning the Industrial and Provident Societies. The Act governing these societies, as the House is no doubt aware, is the Industrial and Provident Societies Act, 1893. These societies are bodies corporate and may be formed for carrying on any industry, trade or business including dealings of any description with land. The 1893 Act has traditionally been used for the registration of co-operative enterprises and has nothing to do with the banking sector; but in the absence of any specified co-operative criteria in the Act, societies which could not in any respect be regarded as genuine co-operatives have in fact been registered under this legislation from time to time. Industrial and Provident Societies were, for reasons which one would need to go back to the time in question to determine, exempted from the provisions of the Central Bank Act, 1971. It indeed continued to be legitimate for people to use the industrial and provident societies legislation to carry on a banking business.

The only specific controls that exist in regard to this in the 1893 Act in relation to the banking operations of a society were that a society could not (1) have a withdrawable share capital and (2) had to display a very limited form of financial statement in their registered office twice a year. Such meagre requirements, when compared with the very stringent controls which I have just indicated are exercised by the Central Bank and also under other legislation such as that applying to building societies and credit unions, one would have to regard as not being very adequate. The reason for the exclusion of these societies from the 1971 Act was that it was desired not to interfere with the traditional acceptance by some agricultural co-operatives at the time of deposits from their members. Often the problem of inadequate capital resources in these co-operatives was alleviated in part by the acceptance of deposits from members. In any event, deposit-taking activities generally constituted a relatively unsubstantial part of the business of the co-operatives.

It has to be admitted that the exemption of the societies from the requirements of the Central Bank Act of 1971 provided the opportunists with a chance to ride a coach-and-four through the controls applicable to the normal banking sector. It led to the registration of societies whose principal business was the acceptance of deposits and the making of loans. Such a situation, whereby the public could deposit their money with societies and not enjoy normal adequate safeguards for their investments was totally unacceptable and could not be allowed to continue. There was concern also about the solvency of some of the societies; though some showed book net assets they had made inadequate provision for bad debts.

To rectify that situation, the Industrial and Provident Societies (Amendment) Act, 1978, was enacted in November of that year. The problem which I have outlined was tackled in two ways by the 1978 legislation. First, the possibility of any new societies being formed to carry out banking business was eliminated — it dealt with the problem of those in existence before 1978. Number two, existing deposit-taking institutions under the Act were given a period of five years during which they had to exercise one of the following three options: one, to attempt to meet normal banking criteria and qualify for a banking licence under the Central Bank Act — in other words, they would have to go back and meet all the requirements I outlined earlier; two, to re-finance their deposits by other funds, for example, bank loans; or three, to wind down their deposits by disposing of assets.

A number of societies opted for number one, to become normal banks, but none of them was able to satisfy the registrar or the Central Bank that they could meet normal banking criteria in a reasonable time. Accordingly, no society was granted permission to advertise for deposits. Therefore, it has been illegal for any deposit-taking industrial and provident society to advertise for deposits since November 1978 when the Act came into force. A small number of infringements occurred and were dealt with by the registrar in the normal way.

The remaining two options open to the societies were to re-finance their deposits out of other funds or to wind down their deposits in a period of five years. Obviously, the ability of any society to avail of these options in an orderly manner depended to a considerable extent on the quality of management and on the society's overall financial position.

In this respect it will be recalled that at the time of the passing of the 1978 Act real fears were expressed concerning the management and solvency of some of those societies. Unfortunately, these fears have proved to have been fully justified in a number of cases. Of a total of 16 societies, six have been the subject of various court orders; four are in liquidation, one being at present in provisional liquidation; one is in receivership; and one is the subject of a direction by the registrar under section 16 of the Act.

The reasons for the difficulties of these societies vary according to individual societies. They include managerial weakness and in one case fraudulent conduct by a promoter who is at present serving a term of imprisonment in the UK. It is difficult to estimate the likely level of deposit losses. In the kind of circumstances which have arisen in some societies it will be appreciated that the task of the supervisory authority is particularly difficult. I do not doubt that the registrar and his staff carried out their difficult assignment as well as they could but the reality of the assignment must be understood clearly.

Obviously, they were dealing with a number of situations which at the end of the day left liquidation as the only real option. Naturally, that option would be contemplated only when all other means had been exhausted. Throughout most of the five-year period, the Act itself, and this is important, was being challenged in the courts on constitutional grounds by certain societies. It may well be asked whether such action was intended, at least in part, to achieve maximum delay in the implementation of the Act.

Mr. O'Kennedy

It says something for court procedures when a matter of that kind can take five years.

Mr. J. Bruton

I will give the Deputy more details on that. Warnings were issued to the public about the dangers of investing in industrial and provident societies. Of course, it was debated in 1978 when Deputy O'Malley introduced the legislation. Therefore, it can be said that people were warned and were put on notice, particularly since November 1978, of the dangers of investing in those societies — I am quite sure they were warned before then.

The constitutionality of the 1978 Act was challenged promptly in the courts. In 1981 Miss Justice Carroll found in the Minister's favour — the Minister had defended the Act in the High Court. That decision was appealed to the Supreme Court and in May 1983 the Supreme Court upheld the High Court decision. When the Supreme Court gave their decision they quoted the following extract from the earlier High Court judgment:

Miss Justice Carroll had also concluded that the reason for the prohibition in the 1978 Act was because the societies were operating a substantial banking business outside the control of the Central Bank without regard for the principles of sound banking practice and the general public who placed money on deposit with them was at risk.

A very clear warning from a High Court judge in regard to depositing with such societies was issued. That statement by Miss Justice Carroll received widespread publicity in the media in May 1983.

It will be acknowledged that a problem in relation to deposit-taking provident societies was identified and appropriate action was taken by the Minister, Deputy O'Malley, in 1978. It consisted principally of a mopping-up operation, because at the time the action was taken a prohibition had been inserted in the Act that no new industrial and provident society could be established. The unfortunate closures that have taken place in recent times were therefore not the result of any new development but the outcome of a rot that had commenced many years previously. That rot was identified and action was taken by the Government as far back as 1978.

This is important in putting the whole discussion in its proper context. It is not something which has suddenly burst on us anew. I spent a lot more time on the industrial and provident society than the relative importance of these societies in the total financial sector would justify. The amount of money involved is relatively small by comparison with the total amount on deposit in the Irish financial system. It is important that the House and those who reflect on what is transacted in the House realise that we are talking about a very small part of the total financial system on which timely action was taken by the official agencies.

Mr. Flynn

At the most vulnerable part.

Mr. J. Bruton

Yes, I realise that many people have sustained losses in the recent collapses. It is a natural reaction for us as public representatives to seek help for these people. However, the Government must take a broader view. The funds are not available to the Exchequer in the present climate to underwrite all these societies. Even if they were, there are substantial arguments of principle as to why the State should not guarantee the safety of investors. I note that Deputy O'Kennedy did not urge such a course on the Government. The fact that those principles were set aside in 1977 regarding the Irish Trust Bank does not invalidate them. The reality is that people who invest in their institutions do so in response to the lure of higher returns on their investments.

Mr. O'Kennedy

That is not so.

Mr. J. Bruton

Generally the higher the return the higher the risk. People should not be cushioned from the need to be careful about their investments. Deposit-taking institutions must not be allowed to evade the standards of common prudence expected of them. To have compensated depositors in failed institutions who had already taken a relatively high return would be unfair to the mass of careful savers who were more selective in where they put their money and to the financial institutions who had acted with greater care than had been displayed by the institutions which found themselves in difficulty.

An Leas-Cheann Comhairle

The Minister has five minutes left.

Mr. J. Bruton

I do not think Deputy O'Kennedy took his full time.

Mr. O'Kennedy

I do not know if it is because of the nature of the debate but I would be quite happy for the Minister to avail of those ten minutes.

An Leas-Cheann Comhairle

That is a matter for the House.

Mr. J. Bruton

I am not trying to waste time.

Mr. Flynn

Keep the pace you are going at, man. It is very nice.

Mr. J. Bruton

It would be inappropriate that deposits in certain institutions, deliberately set up in the seventies to evade the Central Bank regulations, should now be compensated. While the record of regulated institutions is good it is appropriate that the situation should be kept under review and any weaknesses that appear tightened up.

The legislation concerning licensed banks, which I referred to, is governed by the provisions of the Central Bank Act. This is being reviewed at present by the Minister for Finance. The matters receiving attention in this context are the various ways in which funds may be raised from the public. Certain fringe institutions other than those legally entitled to do so, raise money for various purposes and thus largely escape official regulation. They may, for example, be providing brokerage services for insurance, financial or property investments of one kind or another. If such bodies take deposits they are acting illegally but the nature of their fund-raising activity is not always easy to establish by law. It is not always easy to establish that they are actually deposit-takers. This area is being looked at to see if further legislative action is needed. It is necessary to ensure that any action will not interfere with the legitimate raising of capital by normal business enterprises.

I have already mentioned the question of insurance intermediaries or brokers. In so far as there have been closures of insurance intermediaries in the past year and in so far as the loss of funds has been connected with some of these closures, I consider it appropriate that I should also deal with them. Arising from the recommendations on insurance intermediaries in the final report of the Committee of Inquiry into the Insurance Industry in 1976 my Department received representations and submissions over the past few years arguing for the regulation or registration of insurance brokers and intermediaries. In the main these requests have been put forward by insurance brokers and their representative bodies. In examining these proposals the basic criteria must be whether they would provide effective protection to the public and ensure they do not act to enhance the status and protect the business position of existing brokers. It is not clear so far that the proposals put forward would achieve the desired balance in this regard. The matter continues to be examined.

Mr. Flynn

A slight change of attitude.

Mr. J. Bruton

To the extent that the State enforces strict control over insurance companies as such, requiring them to be authorised and to have adequate reserves to meet liabilities and adequate financial strength to maintain solvency, the prospective policy-holder, whether dealing directly with the insurer or via the broker, benefits from the protection which is given in respect of the insurance companies.

There was concern that some regulation of brokers as such was called for. The vast majority of insurance brokers run their business with the highest integrity. The aim of any regulations which might be contemplated would be to ensure that they all do. Sums of money reported to have been at risk in the recent collapses of such insurance brokers are minimal in relation to the total amount invested in the insurance market. I say this in order to put the matter into perspective. I have asked the Department to re-examine the issue of the regulation or supervision of insurance brokers and to put proposals before me which would provide some effective means of protecting the public. Public regulations can usually only provide the background for protecting the public in these situations. It cannot substitute for the use by individuals of their own common sense and acumen in dealing with those with whom they do business. If one is thinking of investing a large sum of money in a life insurance policy, one should only deal with a reputable broker. If in doubt one should check with one of the broking bodies. Where possible, one should make out a cheque for the premium to the insurance company. If there is any doubt about the status of the insurance company one should check with the Department. Copies of the policy documents should be obtained. One should read them carefully and not sign them before having read them. Any moves I make in consequence of this review in regard to insurance intermediaries would require legislative backing and would come before the House for discussion. I am satisfied that the regulations in the area of deposit-taking institutions has proved to be effective. Losses incurred are obviously regretted. However, without wishing in any way to belittle anyone's personal losses, these should be reviewed against the vast size of funds in this sector when endeavouring to guage the overall effectiveness of the controls. There is always a need to keep this area under review. I welcome this debate on the subject and I hope that the suggestions put forward will enable us to strengthen the legislation where necessary and that the publicity given to the issue will encourage continued and increased improvements for people investing their money so that they will take whatever steps they can, by way of prudent inquiry and so on, to safeguard their investments.

Mr. L. Fitzgerald

I have listened with interest to the Minister's contribution to this Private Members' Bill. It is only fair to say that when dealing as legislators with financial institutions we must be extremely careful lest anything we might say or do would in any way promote a lack of confidence in areas that may be in genuine need of a boost in terms of confidence. However, all financial institutions should have our constant vigilance so as to ensure that they are kept on the right track and that they make adequate provision under the various Acts to provide for their depositors or for any other financial commitment that may be incurred.

As the Minister has outlined, the financial operations within any country are very wide-ranging. The commercial and industrial banks deal with the vast proportion of the moneys in circulation in any economy. Therefore, it is right and proper that at all times we should take into account the degree to which our banking institutions are complying with the 1971 Central Bank Act. It is right and proper, too, that we should encourage confidence in their transactions and in their stability. I was glad to hear the Minister say that he acknowledges the need for legislators to ensure such vigilance, thereby encouraging the financial institutions to comply with the provisions of the legislation and to operate at a level which is safe and which is in the best interest of the public generally as well as of the customers of the institutions. We must look on an on-going basis at the existing structures and ask ourselves if there is evidence that any of the transactions that have taken place between the financial institutions and the public have in any way promoted a lack of confidence in the ability of the institutions to continue on a viable and stable basis. We would be foolish to turn a blind eye to operations which might not be in the best interest of the public or to ignore the possibility of there emerging financial institutions in a competitive financial market operating in a manner which could eventually cause their downfall and cause injury to the public. Therefore, irrespective of the type of category of the financial institution concerned or of its size or of the quality or composition of its depositors, it is essential that we make no apology about examining, on an ongoing basis, the viability of the financial institutions.

It is important also that we examine the methods by which we promote public awareness as to the degree of stability or otherwise that exists in our financial institutions. We must not take for granted that the public generally have available to them the facilities to enable them to assess the stability of any institution because such operations are very complex. In general the ordinary potential investor does not know how to seek out the kind of information he would need to have before entrusting his money to these institutions, and that is why we must accept the need to keep under constant scrutiny the whole range of operations of these institutions. We must be seen to be endeavouring at all times, by way of Acts of the Oireachtas and of ministerial statements and discussion here to inculcate prudence in investors. I am glad the Minister has accepted this need.

A number of factors have made our task much more difficult and one of these is related to the attempts on the part of an increasing number of people to establish financial-type institutions or to expand the level of operations of existing institutions of different sizes. This sort of situation creates great difficulty for the ordinary depositor or potential investor. It can create a good deal of confusion and can lead to prompt decisions which a prudent person would not make otherwise. Therefore, we may have to break through the complexity of the system. We have a duty to promote savings so that projects throughout the country can be financed and to that extent also we have a duty to simplify the operations for potential investors and to direct them as objectively and as constructively as possible into making investment decisions which are safe and which are in their best interest as well as in the best interest of the country. That is a very fine balance to achieve and one that presents a difficulty for any Government.

In the past few years we have witnessed difficulties which arose out of the level of operations of some small financial institutions which the Minister has told us do not come within the scope of the Central Bank Act of 1971. Because there are institutions which do not come within an Act which by and large is regarded both domestically and internationally as being very effective, we must be increasingly vigilant. As one of the Deputies on this side has said already, because a certain financial institution or a certain category of financial institution represents, first, a small amount of finance in terms of the total finances in circulation in the economy or because it represents a small group when all the different units of that category are taken together, I do not think that that should be used in any way as an argument for us to say that we do not need to give to that area the same attention as we should give to other areas. It is of the utmost importance that we here should be seen to be promoting those very people who are the minority in such cases. I refer to the industrial and provident societies. I accept that the Industrial and Provident Societies (Amendment) Act, 1978, the historical background to which has been given comprehensively by the Minister, was a determined and an effective attempt to deal with the matter given the circumstances of that time. It dealt unequivocally with what was regarded as a loophole in the Finance Acts which enabled small financial institutions to grow at a rate and to a level that was not in their best long-term interest. The Minister gave figures of the breakdown of the 16 societies. I am not sure if the institutions mentioned as subject to court procedures or to liquidation can be attributed directly to levels of operations outside their scope, levels that were never envisaged as feasible or practical for institutions in their category, but I suspect there is a direct correlation. If I am correct, it proves we must keep a close eye on the operations of financial organisations irrespective of size. We heard that four institutions went into liquidation, that one is in receivership and one is under scrutiny. It is sad that the history of the 16 institutions is not a good one and if we can say that from the point of view of legislators, then certainly it is not a happy one for the many thousands of depositors throughout the country and outside the country.

I wish to refer to one of those institutions that recently was in some difficulty, namely, the PMPS. While I would not presume at this stage to go into great detail as to what could or should have been done for unsecured creditors, nevertheless, I must explore this area to some extent and do so against the background of the Insurance Bill, 1983, that was introduced by the Minister's predecessor on 19 October 1983. I wish to refer to a principle enshrined in that Bill that we have a duty to look at and see if it has application in any other area.

The banks as financial institutions are subject to strict controls and on-going scrutiny by the Central Bank. By and large they have performed effectively and well. However, we must look at the growth of other institutions such as the one that came to grief recently and see how they have expanded to levels outside the framework set up to enable them to operate legally. The Industrial and Provident Societies (Amendment) Act, 1978, was brought in with specific functions to control the level of such institutions and it gave them three options.

The first option was not successfully followed and, by and large, the third option was the one that had to apply. However, we find there was extreme difficulty in the application of that Act and this was for a number of reasons. Perhaps one of the reasons was that the level of operations was so great in the case of some of these institutions that it was not possible for them on the best advice available to wind down within the moratorium. I am not suggesting that they should not have wound down: on the contrary, I concur unequivocally with the view that having been given the moratorium of five years they should have complied with it. It is regrettable that despite the best publicity at the time and the public warnings that were given depositors were caught. To put it in layman's terms, their fingers were badly burnt. That was very sad.

I have listened to an outline of the position from some of those depositors and I have been sympathetic. It is very easy for us and for the financial analyst to say that a depositor sniffs out the best deal but when one comes across people who have invested their life savings in an institution and who find themselves on the eve of retirement almost penniless it is not easy or simple to say to them that they made their choice and they must take their chance. We have to look a little deeper.

I am not for a moment suggesting that we look to the public purse. In the light of our financial and economic circumstances I would be one of the last to recommend that the public should pick up the tab. I do not agree that should be the case, particularly given the type of operation we are dealing with and its relative insignificance in terms of the overall financial scene. Nevertheless, there is a need to look at the legislative framework that is being reactivated with regard to other institutions and see if there is any scope for us to bring in amendments to give some kind of security to unsecured depositors in financial institutions. This is particularly so in the case of financial institutions that do not fall within the scope of a definite and specific banking Act.

I concede that when the 1978 Act was introduced it was to deal with operations that were banking operations to all intents and purposes but were not acting legally as banking institutions. They did not have the mandate by way of legislation to operate as banking institutions but their level of operations put them into that category. The 1978 Act was an effective measure to put right those problems but because of certain factors, some of which I have referred to, it was not successful in all cases. The best of Acts need to be revised and updated with the passage of time.

I wish to look at a principle inherent in the Insurance Bill, 1983, and to tease out some of the implications therein. I wish to quote from a speech made by the then Minister for Trade, Commerce and Tourism, Deputy Cluskey, when moving Second Stage of the Bill on 19 October 1983. He stated:

The House will recall at the time of the Equitable episode the view was accepted that, while arrangements should be made to compensate people who had claims for injuries or damage to property, those who had simply paid premiums and were going to be out of pocket only in respect of the unexpired period covered by the premium, could be left to fend for themselves. With the greatly increased cost of insurance, I feel that a different view ought now to prevail on this question and that people who have paid premiums should, in the case of a company being wound up, be entitled to present claims in respect of the unexpired period of their policies just the same as other claimants on the Compensation Fund. That principle is now enshrined in this Bill.

That principle is that unsecured creditors in insurance companies are getting a degree of cover not out of the public purse but by way of reactivation of legislative machinery and amendment. Rather than putting a freeze on the operations of a company for a fortnight or a month to enable people getting insurance cover to transfer to other companies — with the inherent difficulties, inconvenience and reluctance of other insurance companies to accept them — the principle is that they continue to receive cover for their vehicles until the expiry date. That practice will continue on an indefinite basis under an administrator. Part of that principle is to ensure that those who could be left to fend for themselves in terms of the unexpired period covered by their premium would now be covered, in other words, there would be no financial loss accruing to those people. I realise the second part of my deliberations could be challenged as an over-simplification, but nevertheless it is one of the implications in that principle.

When we take numerous categories of people affected by, for example the PMPS, or four of those societies which went into liquidation, or six companies which are subject to court proceedings and another under scrutiny, and when we take the instability that seems to pertain to that sector of financial institutions, it can be realised that we have a duty to look into the legislative structures to see if we can put forward amendments that will give some degree of security to unsecured creditors. As I said, I am not aware if this machinery is in existence or how easy or difficult it would be to enact this legislative machinery, but I am putting it to the Minister that we need to look urgently at the potential for enactment in the absence of machinery, or at the potential for amendment if there is machinery there which needs updating and amending.

There is a question of equity involved here and the Minister should accept that. I accept what he said about the problems for the public purse, but there is a guarantee for unsecured creditors in one sector by virtue of legislation and I suggest that the Minister look at the possibility of a guarantee for other sectors, and the sector we are dealing with this evening warrants attention from him.

I would like to deal briefly with warnings to the public of challenges to various Acts and techniques and methods legislators use to make the public more aware. It is easy for us to theorise or postulate as to what could, should or might be and what we as legislators have done to warn people or advise them. We are dealing with human beings, and irrespective of the quality or size of their investment we have to do everything to promote prudence on their part. If they are imprudent we have to ask ourselves if we have fallen down in some area. In the case of the PMPS, many people were reaching retirement age and had invested their funds, transferred funds in some cases, to this wholly-owned Irish institution. They may have been inspired by a sense of patriotism because many of these people are anxious to promote anything that is wholly Irish owned. There are many people who, fired by a spirit of patriotism or nationalism, would like to promote or assist in the development of wholly-owned Irish institutions. From speaking with a number of people I am convinced that those who decided to transfer funds from more stable and reputable institutions to the PMPS were motivated by this spirit of nationalism. We cannot be seen to be discouraging this in any way. On the contrary, we need to give encouragement to that very commendable attitude. We need to ask ourselves if all our public pronouncements, ministerial statements, which are essential, and our laws, are sometimes passing over the heads of the ordinary punter.

There is another dimension to this. I understand a substantial number of the 9,000 depositors in the PMPS lived outside this country, some as far away as Australia, New Zealand, the United States, South America and Europe. Although these people might have received advice from home from time to time, they may not have been au fait with the ministerial directives, Acts of the Oireachtas and public warnings regarding the viability or otherwise of financial institutions and investing in them. Many of these people invested in this institution and I have evidence of three people who invested all their funds with the intention of retiring to Ireland in the next two or three years. Their dreams have been shattered. That is very sad. We have a duty to provide a degree of security for such investors which does not at present exist.

I want to refer to the way in which provident societies are administered. I do not want to be seen as casting aspersions on the Registrar of Friendly Societies. Due to the complexities that have grown into the system, perhaps he did a reasonably good and effective job, but when one considers that his visits to that company were as regular as quarterly — I think he is obliged to make quarterly visits of inspection to these provident societies — one comes to the conclusion that his powers were not great enough. Perhaps there was some machinery inhibiting him from carrying out his job as effectively as he might or should have done. In itself perhaps that contributed to this unfortunate situation.

I would request the Minister to examine this whole area of control or power vested in the Registrar of Friendly Societies ensuring that, if necessary, it is updated with the greatest possible speed.

I would ask the Minister to consider the principle inherent in Deputy O'Kennedy's motion.

Debate adjourned.